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Disaster!

July 4th, 2007 at 02:03 am

I was enjoying a nice relaxing afternnon at home when the phone rang. The nextdoor neighbour of our rental property asked "Do you know that there's a big tree fallen on top of your house?" [our rental property]. It was news to me. So, we all jumped into the car and drove over to our property to inspect the damage. The tree was bigger than the house and had just missed landing on the house and flattening it completely. As it is, few large branches have gone through the roof, and the lounge room was full of debris.

Luckily the tennants weren't home at the time - they usually park their car where the trunk of the tree landed. As no-one was home at the time I'm a little disappointed that the tree didn't drop two metres further to the left, in which case it would have entirely demolished the house. The house is insured for aroung $385,000, which would have gone a long way towards building a nice, new house on the block. As it is, I guess that the house is probably repairable, so we'll just get the inconvenience of getting repairs done and end up with the same 50-year old house as before.

Apparently the tree fell over in a strong wind gust around 2pm this afternoon. All the heavy rain in the past month has made the ground very wet and spongy, so any strong winds are likely to make lots of tree uproot. When we got to the property at 4:30pm and saw the damage I called the local State Emergency Service (SES). The SES volunteers arrived within 15 minutes and will clear off the branches embedded in the roof and cover the gaping holes with a tarpaulin (to keep out any rain).

When we got back home at 5:30pm I called our insurance company to lodge a claim. The assessor should inspect the property tomorrow and let us know if the tenant can stay there while repairs are made, or has to move out, and the extent of the damage. Our insurance also covers loss of rent, but I've no idea what happens if the tennat decides to just give four weeks notice and move our (their 6 month lease expired last month).

I'm also not sure if the insurance will cover the cost of getting the main body of the tree removed, or just the actual house repairs. Best case we'll be out of pocket for the $100 excess. Worst case we'll also have to pay for getting the tree removed, landscaping the damaged rockery, lose some rent while the property is getting repaired, etc. etc. That's why, since no-one was home at the time, I'd have preferred the tree to land square on the house and demolish it completely.

Financial Projection - Property

July 2nd, 2007 at 05:02 pm

Sydney prices for established homes in the more desireable suburbs have tended to increase by around 6% in the long term. After the boom in prices between 1998-2003 we've now had several years of flat prices. According to Australian Property Monitors there will be a 5% increase in property prices in the next 12 months. This agrees with the recent increases observed in average home sales prices in the two suburbs where we have our home and rental property. There have also been reports that the boom in Western Australian house prices over the past three years (driven by the commondity/mining boom) has come to an end, so I expect house prices in WA and NT to be flat or decrease in the next 12 months and house prices in Sydney to increase by more than 5% - perhaps as much as 10%. This will be good news for my net worth as DW and I have equal shares in around $1.4m of real estate with about $0.7m of mortgage debt. With a mix of variable and fixed rate loans, our overall mortgage interest rate is currently around 7.25%, so an increase in house prices of 10% would boost our home equity by 12.75%.

Copyright Enough Wealth 2007

Update: Property Portfolio

June 19th, 2007 at 04:35 am

After a couple of months of exceptional gains in the reported average sales price for the suburbs our houses are in, this months figures show a drop back to the long-term trend (as I'd expected). This won't be reflected in my net worth figure until the end of July, but will knock about $30K off my net worth figure at that time.

It's been twelve months since our last annual review of the amount of rent being charged for our rental property. But the "new" tenants have only been in the house since last December so I think I'll wait until the end of the year before increasing the rent. We had raised the rent from $400 per week to $410 late last year, but this encouraged the previous tenants to move to a nearby house that was available for a similar amount (but also had a pool). As we had trouble quickly finding a new tenant just before Christmas, we decided to advertise the property at the previous $400 rate in order to find a tenant as soon as possible. This means that come December we won't have raised the rent for two years, and during this period rents for houses in this area have increased by over 10%. On the one hand if you don't raise the rent for a long while it's very hard to increase the rent back up to the market rate if your tenants stay on. On the other hand if you increase the rent every year and tenants are encouraged to move out, you can easily lose more rent from the vacancy rate than you get from the rent increase. Rents in Sydney are fairly low as a percentage of the property value, although with vacancy rates very low at the moment, rents have started to rise quite rapidly.

When You Don't Need to Pay Off Debt.

June 17th, 2007 at 04:24 am

Mighty Bargain Hunter recently posted about paying off Mortgage debt sooner rather than later. The point being that a mortgage is like any other debt and in the early days of a loan the interest cost eats up a huge amount of each repayment, so making some extra payments can have a huge impact in getting the loan paid off sooner.

However, while it is true that most people want to pay off their home loan as soon as possible, or at least before they retire (so they don't have to fund loan repayments out of their retirement income), it's not true of all mortgages. In particular many people will borrow to invest in a rental property, and, at least in Australia, most of the long term benefit of this type of investment is expected to come from eventual capital gains, rather than the rental income. For example, rent yield is taxable income, but at around 3%-4% of the value of the property, it will be less than the tax deduction provided by the interest on the property loan (say 8%). This means that you will be losing money on the investment property on a cash flow basis, at around 4% of the property value each year (this is known as "negative gearing"). But this interest is tax deductible, so 30%, 40% or more of this amount is effectively being paid from money you'd otherwise lose to income taxes anyhow. The payoff comes (hopefully) when the property is eventually sold for a capital gain. As the Capital Gains Tax rate for assets held over 12 months is half the normal marginal income tax rate the total return on the investment property (rent plus capital gains) can be slightly less than the interest cost and you will still end up ahead due to the tax savings. Many property investors therefore choose to use "interest only" loans for the purchase of investment properties, and would choose to use any spare cash flow to pay interest on an additional investment property rather than pay off principal on one of their investment properties. Not to say that this is the best option for all investors, or even most real estate investors, but it just goes to show that paying off the morgage as fast as possible doesn't apply in all situations either.

Enough Wealth

Surrounded by Million-dollar Suburbs

May 27th, 2007 at 07:27 am

The area in which we have both our home and our investment property (coloured green in the diagram below (adapted from a recent SMH article) is surrounded by suburbs where the average house price is now over A$1m. This is quite reassuring as in Sydney it seems that the higher-priced suburbs have been the most resilient in the recent property downturn, and over time experience the greatest gains. Apparently while it is hard for the average worker in Sydney to afford a house with average prices approaching the half-million dollar mark, executives working for investment banks are awash with cash and snapping up any multi-million-dollar houses that come up for sale.



Enough Wealth

Update: Property Portfolio

May 14th, 2007 at 04:31 am

Our Real Estate "Portfolio" consists of just two houses in adjacent suburbs. With the ridiculously high property prices in Sydney, it's amazing we even managed to end up owning two properties. The first one was an investment property we bought soon after we were married, at which time we were both living rent free in my parent's old house (they've moved to a "retirement" farm up north, and are in the process of renovating the old family home in order to sell it and help fund their retirement). We were lucky to buy the investment property just before the last Sydney property boom really gathered steam, but even so it consumed all the equity DW had from selling her unit and an equal sum from me to meet the deposit.

The Sydney property boom gave us a significant boost in equity, and this, combined a promotion and increased salary allowed us to purchase our current home. We had previously been toying with the idea of buying an investment unit in Queensland or New Zealand (both of which has since had property booms, so would have been good investments), so when my parents decided to renovate and sell their Sydney house it wasn't too much of a stretch to buy another house - with the minimum deposit needed to avoid paying mortgage insurance, and taking out a 25-year loan.

Soon after moving into our own home the Sydney property boom ended. Fortunately the suburbs where our properties are located only declined 5% or so in value, before levelling off. The past current months have shown good increases in the median sale price for houses in both suburbs, so it looks like prices may be starting to pick up again. Despite prices being very high, and almost unaffordable as a multiple of average weekly earnings, there is an undersupply of new housing construction in Sydney, and a shortage of new land zoned for development. This has started to force rents to increase, which is encouraging people to look at buying their own homes, even though mortgage interest rates have increased 0.75% since the start of 2006.

Our property portfolio is shown below:



A plot of monthly changes in estimated house valuations clearly shows the recent "boom and bust" housing cycle in these suburbs of Sydney:




Enough Wealth

Net Worth Up $45,141 in April

May 1st, 2007 at 03:15 am

My Networth as at 30 April totalled $1,116,129 (AUD), an impressive overall increase of $45,141 (4.21%) for the month. My stock leveraged stock portfolios increased by a net 5.10% during April, and the estimated valuations for my share of our home and investment property increased 2.10% compared to last month, continuing the mild uptrend that began last month. The property gains were slightly offset by our mortgage loan balances increasing by a net $1,082 (0.30%) due to our monthly redraw of $3,500. We're continue redrawing some of our advance mortgage payments each month to help meet our mortgage repayments while DW is on maternity leave for another two months. Unlike last month's big drop in the valuation of my retirement account, this month my retirement account balance went back up $10,919 (3.37%).

So far this year my Net Worth has gone up by $83,346 (8.07%), which is 59.53% of my goal for the entire year.

Enough Wealth

Real Estate Appears to be Picking Up

April 24th, 2007 at 05:56 am

Owning our own home plus an investment rental property (albeit with large mortgages) means that my net worth is dependent in large part to the vagaries of the Sydney property market. The latest average house prices for the adjacent suburbs where our home and investment property are located shows considerably higher averages prices for house sales than were reported for the previous month:



Combined with the recent strength in the Australian stock market it looks like this month will give a boost to my net worth. Hopefully todays CPI figures will mean the interest rate on our mortgages doesn't increase again (our house is a variable rate loan, and the rental property is a 5-year fixed rate loan, with four years left to run). It may also help breath some life back into the property market - new house construction is running below the required rate to meet increased housing demand, which is starting to make rents increase. Any confidence that interest rates have now peaked will encourage both investors and home buyers back into the market, which should form the basis for the next increase in house prices in Sydney. Housing in Sydney tends to run in a 7-10 year cycle, and it's now been almost three years since the last peak in house prices.

Of the three goals I set at the start of this year (see side bar), my Net Worth and US Stock Portfolio goals are on track, but unfortunately my goal of getting down to my ideal weight by 30 June is not progressing as well as I'd planned.

In some ways diet and saving plans are similar - you pick your ideal behaviour and make an effort to stick to it until it becomes habitual or "automatic" behaviour. Unfortunately it seems easier to eliminate "junk spending" than it is to eliminate "junk food". I think the problem is that while you can arrange for your "essential" expenses (utility bills, home loan etc) to be paid automatically and can therefore focus on eliminating spending entirely (eg. "no spend" days), some basic level of food consumption is needed to maintain health. Food intake can't just be set on autopilot - every time you eat there is the chance you'll choose junk food instead of a more healthy food. I find that I'm most successful in sticking to a healthy eating plan if I have a fixed menu of healthy items for my breakfast, lunch and dinner - that way I CAN completely exclude eating anything that isn't "on my list".

Ah well, time to start writing down what I eat every day and tracking it on my diet spreadsheet...

Enough Wealth

Net Worth Update

April 3rd, 2007 at 03:45 am

My Networth as at 31 Mar totalled $1,070,988 (AUD), an overall increase of only $4,210 (0.39%) for the month. My stock leveraged stock portfolios increased by a net 3.52% during March, and the estimated valuations for my share of our home and investment property increased 1.42% compared to last month, which is encouraging. The property gains were slightly offset by our mortgage loan balances increasing by a net $1,084 (0.30%) due to our monthly redraw of $3,500. We're redrawing some of our advance mortgage payments to help with our repayments while DW is on maternity leave.

The biggest negative for the month was a sharp drop in the valuation of my retirement account, which wasn't recovered fully by the stock market recovery - possibly some fee or tax liability was paid out during the month. The retirement account balance ended down $6,628 (2.00%) for the month. I'll have to check all the transactions for the month online to confirm exactly what was going on, but the online transactions are a pain to analyse - having half a dozen investment options (mutual funds) in my retirement account, each and every transaction is split into a separate transaction for each investment option. The easiest method is to download the relevant date range and import it into excel, then sort by transaction type and description and total up all the related items for each date to work out the total amounts being deducted for fees, insurance premium, fee rebate, tax etc.

Enough Wealth

Rental Property Blues (cont.)

March 14th, 2007 at 07:09 am

Oh, the joys of being a landlord! Aside from having to accept a lower rent in order to find a tenant for our rental property last year ($400 a week, rather than the $410 we'd been getting from the previous tenant or the $420 a week I thought we should be able to ask based on average rent rises for this suburb over the past few years), after spending a couple of thousand dollars getting new carpet and lino laid, the new tenant had a couple of plumbing repair requests immediately after moving in, and then last month wanted the TV antenna fixed. I hadn't been expecting the TV costs as the previous two tenants hadn't complained, and the last one even had a large screen TV - perhaps he only watched DVDs? Anyhow, an inspection from the TV antenna service apparently found that not only was the cabling damaged but the existing antenna wasn't really suitable for the location (I have to take his word for it as it's not feasible to get several quotes for a job that should only cost a couple of hundred dollars max), which accounted for the poor reception the tenant was reporting. Long story short, a new digital/analogue antenna, cable run, sockets and a couple of hours work resulted in a bill for $395 - just about 1 weeks rent!

As I earn a higher salary than DW, I pay all the rates, repairs, land tax etc. on the investment property which we share equal interest in, and DW just makes half the loan repayments. So all these extra costs are starting to be a pain in my hip pocket. With the DW on maternity leave since last August, we're already having to redraw the loan payments we had made in advance over the past five years to meet the fortnightly payments (actually, I could afford to make the loan payments myself, but I'd rather use the redraw facility so we are still sharing the loan costs 50/50). Hopefully there are no more repair bills in the immediate future.

One brighter note is that after a couple of years of flat to declining house prices, the latest monthly average prices for the suburb have gone up 2.9%! There's a fair amount of "noise" in the monthly average sale data due to the mix of properies being sold, but at least it offers some hope that we may be getting back towards the long-term trend rate of around 6% pa growth in house prices for this area. We certainly need some capital gains on this property in the long term, as the rental yield is only 1.44% (before expenses), and the current interest rate on the investment loan is over 7% - although we only owe $238,000 on the property.

Land Tax Sux

February 3rd, 2007 at 02:18 am

One of our myriad state taxes is land tax. It's not that I hate land taxes per se, it's just that the state government keeps changing the rules, making it impossible to budget or plan for this tax. For example, our past bills (with no change in the properties we own and pay land tax on) have been:
Year Tax Due Taxable Exempt * Tax Rate
Land Value Land Value Formula

2001 $695.00 $240,000.00 not provided $100
+ 1.7c per $1 over $205,000 threshold

2002 $848.00 $264,000.00 not provided $100
+ 1.7c per $1 over $220,000 threshold

2003 $814.00 $303,000.00 not provided $100
+ 1.7c per $1 over $261,000 threshold

2004 $372.00 $333,000.00 not provided $100
+ 1.7c per $1 over $317,000 threshold

2005 $1,332.00 $333,000.00 not provided 0.4c per $1 up to $400K,
0.6c per $1 on next $100K,
1.4c per $1 above $500K

2006 $0.00 $349,000.00 not provided $100
+ 1.7c per $1 over $352,000 threshold

2007 $451.30 $372,667.00 $407,000.00 $100
+ 1.7c per $1 over $353,000 threshold

* Land used for principal place of residence (ie. our home) is tax exempt

Apart from a short lived attempt to remove the tax threshold (which was repealed after one year due to all the "small" landholders who just had a tiny tax bill due on the land associated with a investment apartment), the rate has been fairly constant but the thresholds were adjusted based on average state property values, whereas land values in Sydney tend to change more erratically, and outpace the threshold increase over time. The government reintroduced the old tax rates and threshold for 2006, but didn't index the threshold in 2006, which has brought our one investment property back over the threshold.

Due to sudden jumps in land valuations under the old method of reviewing land values every 3-4 years, a new method has been introduced that provides a valuation each year, and averages the past three years valuations to smooth out any tax increases.

Year Property #1 Property #2
Valuation Valuation *
2005 $333,000.00 $387,000.00
2006 $349,000.00 $406,000.00
2007 $436,000.00 $428,000.00
Avg: $372,667.00 $407,000.00

At least this allows me to make a rough guess of what the land tax bill will be for the next two years, assuming
a) rates stay same and threshold goes up 5%pa
b) land valuation only goes up 5%pa for the next 2 years (due to the property slump)

Estimated Values and averages:

Year Property #1 Property #2
Valuation Valuation *
2006 $349,000.00 $406,000.00
2007 $436,000.00 $428,000.00
2008 $458,000.00 $449,000.00
Avg: $414,333.00 $427,667.00

2007 $436,000.00 $428,000.00
2008 $458,000.00 $449,000.00
2009 $481,000.00 $471,000.00
Avg: $458,333.00 $449,333.00



My estimates for 2008 and 2009 are therefore:
Year Tax Due Taxable Exempt * Tax Rate
Land Value Land Value Formula

2008 $836.67 $414,333.00 $427,667.00 $100
+ 1.7c per $1 over $371,000 threshold

2009 $1,261.67 $458,333.00 $449,333.00 $100
+ 1.7c per $1 over $390,000 threshold


We'll see if this comes anywhere close to the actual bills. As there is a state election due next year I wouldn't be surprised if the rules are changed again!

Net Worth Update: Jan 07

February 3rd, 2007 at 02:15 am

The past month provided more good gains in my stock portfolio and retirement account, offset only slightly by a small drop in the valuations of my real estate assets:
* Average property prices were slightly down, dropping my property equity by $4,146 or 0.58%. We also had to redraw $3,500 from our home loan prepayments to meet our repayments as DW is on maternity leave and not earning any income at the moment.
* My stock portfolio equity went up another $19,568 (5.50%) this month and my retirement account also increased significantly, although it was boosted a bit by some extra contributions being deposited by my employer this month - up by $12,561 to $324,598 (up 4.03%).

My Networth as at 31 Jan now totals $1,058,372 (AUD), an overall increase of 2.48% for the month.

As discussed in a previous post, I'm looking into either buying Index Put options to protect against significant losses if the market drops, or else selling off some of my stocks to repay my margin loans and eliminate my gearing while the market is at the current high level. I'm leaning towards the Put Options idea as I don't want to realise capital gains this financial year, and most of my margin loans have had the interest prepaid until 30th June, so I should keep my investments until then (and keep my fingers crossed that the market goes up a bit more until then).






Rental Property Blues (cont.)

December 11th, 2006 at 03:46 am

Finally a new tenant has been found for our investment property - the rent was lowered back to the previous rate ($400 per week), so this means that we haven't raised the rent for a couple of years now. It's more important to have a tenant than hold out for an extra $10 a week. The new tenants have only signed a 6 month lease, but will stay on thereafter on an ongoing basis (4 weeks notice is required to terminate after the lease period ends). I'm hopeful that they may stay for several years as they have no kids (yet) and seem happy enough with the property and location.

My wife seems to have lost a bit of interest in being a "landlord" now that the property market has been stagnant for a couple of years, and because having no tenants for over three months was stretching our finances a bit. She was also a bit shocked by the costs of plumbing repairs and getting the place recarpeted and new kitchen lino last year (even though I meet all the "miscellaneous" costs of this investment - we just split the loan repayments 50:50).

The "experts" in the local papers are predicting rents will increase 5%-10% in Sydney over the next 12 months due to more people renting due to high property prices and a drop off in the construction of new housing due to the lack of capital gains in the past couple of years. We only just took out a 5 year fixed rate loan for the investment property last year (the variable rate is already higher than the fixed rate we got, so this will probably work out well for this 5 year term), so we won't be looking to sell the property for at least 4 years. Hopefully by then rents will have picked up and interest rates dropped a bit which should rekindle interest in property investment and trigger some price appreciation. The long term rate of price appreciation in Sydney is around 6% pa, so hopefully after two years of flat or decreasing prices, we may see a gain of 20%-30% from present levels by the time we want to sell the property in '11 or thereabouts.

If we do sell the investment property I'll be happy to invest in property via listed property trusts in future.

My Property Portfolio Update: Nov 06

December 1st, 2006 at 04:39 am

Argghhh! POP! There goes the bubble (again).

I knew it was too good to be true when the mean house sale prices for the suburbs where my home and investment property are (in Sydney) went up 3.8% back in July - so I was more or less expecting the -1.3% drop in Aug, and relieved by the more reasonable 0.7% increase in Sep. The bubble appeared to have finished deflating, with prices being fairly stable since Jan '05, and a small rate on increase (3%) seemed quite likely for the next couple of years, followed by a pick up again to the long term average of around 6% (for Sydney since the 1930s) as lack of new construction pushed up rents and made property investment returns more appealing again...

Not so! The Oct price estimate for my properties (based on the Sep sales median prices) is down -2.6%, and the long term graph looks more like prices are bumping along the bottom, than any sort of modest recovery. Yet another 0.25% interest rate rise was announced last Wednesday, so things are looking decidedly grim for Sydney real estate at the moment, with buyers expecting another 0.25% increase early next year. It's just as well that we don't intend to sell our investment property until the next peak in the property cycle at the earliest - maybe 5-7 years away.

Looks like I won't be hitting NW A$1m this month, or soon, but the culprit seems to be "Mr Property Market" rather than his more manic relation "Mr Stock Market".


personal finance, real estate

Rental Property Blues (cont.)

November 30th, 2006 at 06:33 am

A couple of month after our last tenant moved out, and we're getting a bit desperate - with the wife on unpaid maternity leave, getting no rent will mean the mortgage payments eat through the extra that we'd paid off our mortgage at an alarming rate. Finally, the estate agent called today to advise that she has someone wanting to rent - but only on a short (4 month) lease with an option to then continue on a month-by-month basis at the end of the lease, while their new home is being built. She'd already rung the wife, but just wanted my OK to lease the property for this term.

With Christmas soon upon us (and hardly anyone moves house over the holidays), if we didn't take this tenant the rental property could be empty till the end of January. So, better to take a short lease and hope that the building takes longer than expected and they stay a while, than hold out for an "ideal" tenant.

Anyhow, the worst* that can happen is that we are looking for a new tenant again in four months time, and have to pay another week's rent to the agent to find us another tenant.

*OK, the worst is actually that we have a "tenant from hell", who trashes the place and then moves out without notice owing some back-rent, and disappears interstate. (I've had this happen before...)

Real Estate: Rental Squeeze predicted

November 29th, 2006 at 02:35 am

The Australian property research company BIS Shrapnel has predicted a 5 per cent drop to 142,500 new homes in 2006-07 following on from a 4 per cent decline in 2005-06. This is expected to lead to a surge in rents over the next five years because of a housing shortage across the country - rents in Sydney are forecast to rise 5 per cent this year and by as much as 40 per cent in the next five years. Higher interest rates and higher prices have impacted affordability and demand, and this has resulted in a decrease in new housing starts (to below the level of underlying demand). Eventually the increasing rent returns will coax investors back into the market and stimulate construction - and the next 'boom' will start.

Our rental property in Sydney has been vacant for a couple of months since the last tenant moved out, so obviously a vacancy rate of 2.5% overall doesn't necessarily affect individual properties. However, an overall increase in rents should make our property easier to rent out, reduce out personal vacancy rate, and allow us to increase the rent to keep pace with the overall rent increase. Currently the rent on our investment property is set at $410 per week. An increase of 40% over the next 5 years would provide us with an additional $8,500 per annum income, which will help us service our $68,600 pa mortgage payments. With the wife on maternity leave, and planning to work part-time until our youngest starts school, any decrease in vacancy rate and increased rent for our rental property will be helpful. With no tenant and only one income we have had to start making a $6,000 a month "redraw" (out of the extra payments we had made off our home loan) in order to meet the payments each month.

real estate

Property portfolio update: Oct 06

November 21st, 2006 at 05:29 am

As mentioned previously, the "estimated value" of my properties dropped back towards more realistic values this month. It's best to view the trend data in a plot of prices over time to spot any such "spikes" or "dips". Nearly every suburb has areas with a few unusually expensive houses (water views or large blocks that can be sub-divided), which push up the median sales price when several of them get sold in a month. Similarly, sales of a new release of "town houses" will push the median sales price down for the month that a development is completed.

Overll the price plot shows that the housing bubble seems to have finished "bursting" in the suburbs where my properties are situated - I now expect that prices will track between the inflation rate (~3%) and the typical long-term rate of house price appreciation (6%) over the next few years.

New housing construction has been below demand for the couple of years (see previous post here), so I expect some upward pressure on prices to appear in 2-4 years time (the start of the next "boom").





This chart from Quartile Property [link] shows the past 25 years of median house prices in Sydney including two market peaks seen in 1989 and late 2003.

Real Estate - How to pick the bottom of the "Property Cycle"

November 21st, 2006 at 05:18 am

What causes house price "boom and bust" cycles? How do you pick the bottom? In "The Wealth Power of Property" Fred & Brett Johnson* discuss the underlying causes of the "boom & bust" housing cycle. Property prices generally oscillate (in real terms) with a period of between 8 and 11 years, and the cycle is driven by excessive construction (greater rate of increase in available housing than the rate of increase in demand) causing oversupply and a decrease in the real (inflation adjusted) price of housing until construction drops off and the surplus stock is consumed. The next "boom" commences when shortage of supply starts to drive up prices, followed by an increase in construction as it becomes more profitable for developers. While it can be obvious that a property boom has ended, it is harder to determine when the market is poised for another period of higher rates of growth. Generally the tail end of a "bust" is accompanied by loss of convidence in real estate investing, tales of woe appearing in the papers, and predictions that they'll never be another run-up in property prices...

Picking the bottom of the cycle is easier if we use objective data to plot the cycle and see where we are. The data needed are monthly median house prices, an adjustment for inflation (CPI data), and Quarterly building approvals. As an example here is such data plotted for the Sydney residential property market:



The housing boom of 1998 was very sharp, triggered by the stock market crash of '87. House prices in Sydney doubled in a couple of years, and then stagnated through the '90s.

The boom in 1999-2003 was longer, and had a slight "pause" mid-way through before gathering pace again. As repayments are more sensitive to interest rates than house prices, the lower interest rate environment of the late '90s helped prices reach a higher level in real terms and as a multiple of average weekly wage than in previous cycles.

The current slump in house prices appears to have now bottomed out, and, based on the very low level of housing construction, could start to pick up again sooner than many people think. Although house prices in Sydney are still high relative to the average wage, more home buyers are dual income families, and so can better afford higher repayments. The shortage of land available for development (based on Sydney's geography and lack of state government spending on infrastructure) could easily spark another round of price increases when interest rates start to trend down again.

* Fred & Brett Johnson own the property investment company "Quartile Property Network" which has been investing in Sydney real estate since 1953.

Still waiting...

November 20th, 2006 at 05:27 am

Our rental property has now been vacant for almost a month now... there's nothing to do but wait for the right tenants to turn up. The property is over 40 years old, and pretty much in "original" condition, so we're only asking for a modest amount of rent for this suburb. Unfortunately, whilst the small cliff that the house is perched on gives wonderful valley views [link], it also puts off prospective tenants that have small children.

We're soon going to have to start "redrawing" the extra payments we'd made on our home loan over the years in order to make the loan payments while the wife is on maternity leave and then goes back to work part-time. I hate to think how much longer it will take us to pay of our home loans for every week we're missing out on any rental income. I always told the wife I prefer investing in the stock market...

Rental Property Blues

November 19th, 2006 at 03:41 am

Our rental property has been vacant for 1-1/2 weeks now. Hopefully the real estate agent will get us a new tenant before too long - it's alarming how quickly the balance in our joint bank account drops with the fortnightly loan payments coming out (our home + rental property) if there's only the money going in from me and the missus, and no rent. We had a really good tenant for the first 5 years after we bought the property in 2000, but the most recent tenant was only on a 6-months lease, and as soon as the lease expired they moved to a slightly better (and more expensive) house in the same suburb. I'd like the next tenant to sign a 12-month lease as we could do with some certainty of income - the wife started her maternity leave last week (offspring #2 is due in the next week or two), so we'll be using up the prepayments we had accumulated to make our home loan payments over the coming year.

The property has been advertised for three weeks, and there've been some inspections by prospective tenants, but no takers so far. It shouldn't be too hard to rent out though, as vacancy rates have been dropping for the past year and our rental is in the bottom 25% for the suburb. We set the initial rent at the bottom end of what the agent had recommended, and I now just do an annual rent review based on the rent statistics published each quarter in the NSW Rent & Sales Report. I plot our rent vs. the average to check when an increase is justified:

Estimating Net Worth - Real Estate

November 17th, 2006 at 06:00 am

I have quite a lot of real estate assets - they actually make up a larger percentage of my portfolio than I'd really like (due my wife and I starting out buying a rental property while living with my parents, then later on buying our own place). As they form such a large part of my investment portfolio, I like to be able to update the relevant asset and liability values each month, so that my net worth figure is a reasonable estimate.

The land valuations available via the council rates notices or annual state government land tax calculation are not really much use, as they are based on land value only, and are also only updated on a multi-year cycle.

My method for getting a reasonable monthly figure is to use the bank mortgage statement for the outstanding loan balance at the end of each month, and a simple algorithm for estimating the current valuation of each property. The algorithm is based on the MEAN value of sales in the relevant postcode area (obtained each month from the "suburb snapshot" available by postcode area on the homepriceguide.com.au website for example,2086). I use a simple multiple of the mean price, based on the ratio that applied when I initially purchased the property. For example, my rental property cost 0.9156 x the mean price for the area, so each month I estimate the current valuation as 0.9156 x the latest mean price value.

This allows me to update both house prices and loan balances, and track my progress against what I expected for my property portfolio - paying off the loans over 20 years and property values increasing by approx. 6% per annum in the long run:
It is interesting to also track the percentage change in prices each month, as this clearly shows the "boom & bust" of the Sydney property cycle - as it applies to the specific areas where my properties are.

What goes up...

November 15th, 2006 at 06:04 am

Well, the Reserve Bank has done to expected and raised interest rates by 0.25%, and talk has now turned to anticipation of another increase in November.

Of course, no-one really knows what will happen - just before the previous rate rise the consensus opinion of the "experts" was that rise would be the last. Reading the commentary in the financial press is a bit like watching a herd of cattle stampeding this way and that.

In reality, interest rates are not particularly high, now just approaching the level they peaked at in the last rate tightening phase, and probably not likely to go much higher. With the US economy slowing and the Chinese economy overheating, it's quite possible that in another year we'll be fearful of a resources-bust lead recession!

Anyhow, with housing construction at very low level, vacancy rates dropping and prices levelling out in the eastern states, it's probably a good time to start looking around if you intend to buy a rental investment property before the next housing boom starts.

Personally I'm a bit over-weight in property, with a large home loan balance outstanding (variable rate) and a considerable outstanding mortgage remaining on an investment property (which is on a five year fixed rate interest only loan). But it's still interesting to look at how unit prices are tracking in the suburbs of Sydney - some recently completed units near Epping Station caught my eye. If the price is right these may be attractive once the new rail line through Nth Ryde is soon completed.