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NOBLE UPDATE

AUGUST 2017

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When considering any form of investment it is it is importantn to understand the relationship between risk and return.

One of the key elements in considering how to become financially independent is to understand the role of inflation.

There still exists in the minds of some people the idea that real estate doubles in value every 7 years. This misunderstanding came about in the decade of the 1980's when inflation averaged about 8%.

Using the rule of 72 goes like this: divide 72 by the rate of inflation, e.g. if inflation is 8% then 72/8 = 9. This means that it will take 9 years for the value of property to double at this rate of inflation. Similarly if money is placed on deposit at 7% interest and the interest is allowed to compound, the money will double in 7 years.

In recent times governments around the developed world have treated inflation like a mortal enemy. This is because the baby boomers, the largest bubble in the population in the past century, are retiring. Retirees are often on fixed incomes which fail to keep pace with living costs due to inflation.

The most recent statistics show that property has increased by around 2% in excess of inflation since 1955.

That is a great track record over a very long period and why it is still a very popular form of investment.

 


 


 

Internet Only Operators

 

There has been a real estate agent bombarding the public with advertising on radio in recent times.

Is trying to save money by listing with someone whose whole offer is built around low fees?

 

Let's consider the disadvantages;

1. No local knowledge of the real estate market. Years ago a licensed agent friend of mine from Mundaring argued with me that his son's block of land could not possibly be worth 40% less than others which had sold on the other side of the park.

2. There is no 'pool of buyers' looking in your locality who missed out on other sold homes, as their properties are from everywhere.

3. In order to show a prospective buyer through they need to drive 40 minutes to an hour to get there. Most buyers won't wait that long.

4. No local knowledge of amenities in the area when buyers start asking questions. I have always thought buyers treat their questions like baseball.... Three "I don't knows" and you're out.

5. It is true that they can get alot of information from the web, but will rarely have been through the properties that they list as comparisons to your own.

 

Selling since 1984 has taught me there is no substitute for local knowledge, which is why we rarely list a property outside of our core area of Rockingham.

 


 

 

 

The Constant Question: Is Now a Good Time to Buy?

The answer is not too difficult to arrive at and is based on the perennial idea from Economics of supply and demand.

Currently (May 2015) we have much higher stock levels of homes for sale compared to 2 years ago.

We also have record low interest rates.

Values have recovered in most areas of WA from the lows of the GST.

Therefore this is one of the best times to buy in many years (at least since 2005/2006).

So don't wait until you hear the media talking about the rise in demand or prices.

There is not going to be a real estate bubble in WA.

The headline news is usually referring to Sydney so make sure what you hear is relevant to your situation.

 


 

I'm Thinking of Selling, How Many Appraisals Should I Get?

 

We have always recommended that you get three appraisals.

This is because there is often a big difference between the resulting values with two.

By getting a third you should pick up an indication of price as two of the three should be similar.

What should I look for?

Let's face it the asking price can be anything so insist on receiving a suggested selling price as well as a listing price.

You should have the selling price of at least 3 properties in comparable locations with similar features as well as three homes currently for sale as that is your competition.

Why can't I just list with the highest asking price?

When you enter the sales market there will be a pool of buyers who haven't found their ideal property yet who may respond to yours.

They are already fairly savvy about values so if your price is too high they will move on. It is very difficult to get them back.

Remember ideally you want two buyers competing for your home in the warly days of listing. That way you are far more likely to maximise your price.

 


 

The Need For Courage in Real Estate Buying

 

Probably the most common question I have heard in 26 years of selling real estate is, “When is the best time to buy?”.

The simple answer is “Look at what everyone else is doing and do the opposite”.

At the moment some buyers are waiting..........and waiting.........and waiting.

They are doing what foolish people have done before and waiting until the market turns to a seller’s market before they buy. They will react when they see everyone else rushing in to buy.

The only problem with their thinking is, it fails to recognise that the first people to detect the change in the market will be sellers, because they see the lift in enquiries and inspections first. So they tighten up on their negotiability. And that means buyers have to pay more.

Your best guide is;

1. Study the market and determine what seems like a bargain.

2. Investors should look for a property which will return around 5% gross.

3. Recognise the direct relationship between risk and return.

4. Move on the property before the market changes.

5. Factor in the repayments at 1% higher interest rate than today for safety.

6. Can you afford to retain the property at that level of interest rates? Then you have nothing to fear. And you have just beaten the lemmings who are waiting.

Want to discuss this article? Email Ross at rosscutten@noblerealestate.com.au.

 


 

Perth's Most Affordable Rentals

 

According to RPData, Australia’s leading source of statistics on real estate, the Rockingham Kwinana area has the most affordable rentals around Perth.

Median Rent House

  • Golden Bay $280 per week
  • Parmelia $280 per week
  • Hillman $280 per week
  • Orelia $280 per week
  • Cooloongup $280 per week
  • Leda $290 per week
  • Rockingham $300 per week

Median Rent Unit

  • Shoalwater $210
  • Rockingham $250
  • Safety Bay $250

That is 7 of the top 10 houses and 3 of the top ten units measured by affordability.

The great news for those contemplating investing is that it is those rates of return make it easy to keep rental property occupied and also for new investors returns are commonly in excess of 5% gross return. This is the return investors have traditionally demanded before return to the market after a downturn, so that is good news all round.

 


 

The Single Most Common Mistake Made by Buyers and Sellers

 

We are all aware of the fact that human beings are social animals but we can often be blind to how that influences our buyig and selling decisions.

That is the only conclusion possible when people consistently follow the herd mentality and all buy or sell at the same time.

How does this work in practice?

We have periodic buying booms when there are too many buyers chasing too few properties, convinced that if they don't buy now they will never be able to. The nett result is rising prices.

Then there are times where there are too many properties chasing too few buyers. This leads to a softening of prices.

The biggest fallacy is that they (buyers and sellers) will be able to pick the bottom or the top of the market. History has shown they won't.

The best time to sell is when everyone else is buying and the best time to buy is when everyone else is selling. If you get out of step then you wait.

Think of the effect on prices if half of all the properties for sale currently went off the market!

I realise this may not be possible due to lifestyle changes for example if you have a rapidly growing family, but if you have the choice then follow the above guide, particularly if you already own or are buying an investment property.

 


 

"You're much better off renting than buying"

“Reserve Bank advocating Australian average homebuyer would be financially better off renting.”

Don’t know of a single case where, long term, a family is wealthier through renting. If you read an “experts” opinion that Australian house prices are overvalued, you need to check two things:

1) If you do not want to live where the comparisons are taken from, the idea has no meaning.

2) It is also meaningless to compare Sydney or Melbourne to Perth or the Perth median price to the specific suburb you wish to live in.

So often when the “experts” say “Australia”, they mean the East Coast. In the RBA Paper titled “Is Housing Overvalued?” they stated:

• Average house prices in Australia since 1955 have risen by 2.4% above inflation.

• Since 1955, year on year, the costs of owning a property and the costs of renting a property are about the same for the first eight years, after which owning becomes a more profitable option. They then made the mistake of saying if houses grow more slowly (than their historical average) as some forecasters predict, the framework used in this paper suggests that the average homebuyer would be better off renting (keep in mind that in the same period during which Sydney and Melbourne prices have increased by 50%, Perth’s have increased 15%).

Would you really be better off?

1) You would have missed the capital gains. For over half a century capital growth has beaten inflation, which you miss if you rent.

2) You can’t improve your accommodation, as any improvements belong to the owner.

3) It is hard to get a rental term longer than 12 months so you are looking at a potential 7 moves with associated costs of time and money.

4) The choice of rental property is very limited, meaning that the home you want in the school district and closeness to your work etc may not be available just when you have to move.

5) In order to beat buying, you have to: a) Be disciplined enough to never touch the money you saved by renting. Australians have a history of spending money not “committed”. b) Find as secure an investment as your own home which is not eroded by inflation and beats it in excess of the 2.4% growth above inflation of property since 1955.

6) Nobody buys average property but everyone pays average mortgage rates. One of the great joys of buying residential property is that averages mean so little. Inner capital city properties have little in common with suburban regional towns.

7) I can recall a time when owners were jealous of others who had a Commonwealth Bank house loan fixed at 13.5% interest. We currently have 50 year lows for interest rates.

8) Australia’s population growth dropped during the last year by 17%...... Another way to put this changes your reaction...... We “only” grew by 7,000 PER WEEK instead of 8,000. That is about 360,000 souls. Check the rate of growth where you are looking to buy.

9) There has been a shortage of construction in Australia for years.

So what does John McGrath, arguably one of this country’s most intelligent Real Estate Agents think? He disagrees with the bank and here’s why;

1) (He uses Sydney so I have adapted to local conditions) If you take Perth’s median price as the starting point, the growth above inflation is equivalent to $13,000 per year. Can you match that with the amount you may save in renting vs buying?

2) Moving costs associated with renting.

3) A report by RP Data in 2013 showed it was cheaper to buy than rent in 692 suburbs across Australia based on a principal and interest loan of 5.4%. Some banks are currently offering loans below 5%.

4) According to the Bureau of Statistics, around 70% of Australians own their own home, either doing it outright or with a mortgage.

People simply wouldn’t be doing it if renting was the better way to go. How about the opinion of yours truly? I agree with all of the above and have a slightly different approach:

1) To adapt the pyramid designed by Abraham Maslow to explain his hierarchy of needs.... Humans satisfy their needs in the order of – Food, clothing then shelter. In our modern world, that shelter is only available by renting or buying. Here’s my point: a) We all have a limited working life. Even if the pension age has been lifted to 70. b) We are fortunate to live in a society which pays an aged pension. c) All the people I know who live comfortably in retirement own their own home. d) The RBA has made the same mistakes that many people I have talked to make...

2) The human life span is out to 80 years and increasing, so when it comes to owning your own home, you must think in longer time frames.

3) The ‘average’ person will succumb to temptation and spend whatever money it is they have supposedly saved.

4) There is a direct relationship between risk and return. Whatever you choose to invest in has to not only outperform the capital growth of a home, it has far more risk attached. Check the current value of the ASX200 or gold or (you fill in the blank) against their peak value. The web headline from the Sydney Morning Herald 13/10/2014 reads “ASX on cusp of correction after horror six weeks”. 23/07/2014

5) Six year high 5543. 16/10/2014 5212 = 6% loss in 3 months. Highest ever 6828 in November 2007, or 23.6% loss over 7 years”. Median house price November 2007 $415,000, June 2014 $540,000. According to Noel Whitaker, one of Australia’s leading writers on money and superannuation, the most tax effective thing you can do once you have bought your own home is to repay it as quickly as possible. Just why, well that’s for another time....

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