What would you do if you were a buyer ?

Richardson and Wrench (Mosman) maintains a blog (www.rwm.com.au). In its latest blog, the blog provided some data about the Mosman property market.

Number of transactions nearly halved between 2007-2008. Both median ($2.4M) and average price ($3M to $2.9M) crept down a bit but nothing especially alarming. In the last 3 months of the year, 14 houses were sold in Oct, 12 in Nov and 9 in Dec.

The blog also estimates that there are 4900 houses in Mosman and, in strong strong markets, 10% of houses would turn over. The agent is sort of bullish by arguing that there will not be a lot of new listings this year. In addition, the agent further notes that RWM has not been asked bythe  banks to value a lot of distressed properties.

Looking at Real Estate.com, there are currently 171 houses on the market, mostly left over listings from 2008. Imagine, if you have the regular number of new listings in 1H 09, how many houses would be for sale in Mosman ?

Draw your own conclusion (and good luck)....

An expat spotted in Balmoral

Hurray !!!!!! An expat was spotted in Balmoral.

The latest issue of the Mosman Daily (22nd Jan) wrote about an auction for a duplex within walking distance to the Balmoral Beach. Two things caught my attention. An expat bidded on the property. It was sold for $3.51M.

Apparently, 8 parties asked for the contract during the marketing campaign. 4 bidders rocked up and only 2 were bidding. It feels like the market is slowly thinning out.

Funny enough, the article did not talk about if the expat won the auction. I wonder if the expat argument is a concoction from the marketing saavy agents. To be perfectly frank, if an expat has made it, I won't be competing with them for a $3M+ property within the next 100 years. However, if an expat is coming home and is looking for a $1-2M house, he probably hasn't made it yet. Considering the current environment, would any expats really want to come home ? Just look at the latest AFR !!! There are not a lot of jobs out there at the moment.

Another bit of information that caught my interest was the property was last sold for $1.2M in 1991. The auction yielded the vendor 6.5% p.a. return. Considering it is tax free, not too shabby. However, if we ignore the special tax treatment, the return is only OK but not exceptional. Now imagine you had $1.2M in 1991 and you put it to work with a good fund manager, assuming 14% p.a. return, that sum would be worth $11M today. Even if you take into account of the taxes you have to pay, where would you rather put your money ? Admittedly, both the world markets and the Sydney property market have had their day in the sun. Still, where would you rather put your money ? A market that has already tanked and is higly liquid. Or a market that hasn't quite tanked and is very illiquid and there are a lot of fees to be paid on the way out ?

Nevertheless, I suppose most of us would not mind to be the winner of that auction. Having $3.5M to spare and can spend it however you want without regard to whether you need to make a return on that sum or not.

Looks like it will take until 2010...

Today I was in the city and I had nothing to do. So I decided to do a little survey. I wanted to find out how much I can borrow ?

A few stories here:

a) From what I understand, Westpac has a home finance manager in every branch. I went to 4 branches and their home finance specialists were all booked for the day and their schedules were packed. 

b) While I was talking to the banktellers to see if I could make an appointment, two of them told me that the housing market is going up (low interest rate and prices have fallen).

c) One of the chatty tellers told me that his bank (ANZ) has been tightening the amount it is willing to lend. In my case, ANZ would only lend me a sum based on my base salary. 

Just like the stock market, it is often people with different views that make the market. Put it another way, if enough people believe that pigs can fly, pigs can really fly for the duration of the "collective illusion". I can't help but wonder if this will end up being a protracted mess now. For a start, banks are still lending and folks are looking to borrow. 

The only good news is my peers in the finance industry can now borrow only what their base income afford them.

If one wants to time the market perfectly, suspect the catalyst is if banks start demanding bigger deposits.

A new tactic by the agents ?

I have been watching these two properties closely.

One of them went to auction late last year and was not sold. We spoke to the agent before the auction so we roughly knew what price the vendor was expecting. After the failed auction, the property is for sale but the indicative price is 20% higher.

Another one is a terrace which has been sitting on the market for over a year now. Late last year, the vendor cut the asking price by around 20% but still no taker. Yesterday, I noticed that the vendor incresaed the asking price by 10%.

I wonder if these are indications that the vendors are suddenly seeing more potential buyers ? Or maybe they are pushing the asking prices up so they can do a "bargain sale" of 10-15% off and still come out ahead ?

Guess the morale of the story is, as a potential buyer, one really needs to find his/her own data. I feel a bit like Spooky Mulder in the X-Files - Trust no one....Haha.....

A few anecdotes

This market is baffling to say the least. Got a few anecdotes here:

a) A house in the LNS area was only bought in late 07. Now it is back on the market and the vendor is asking for around 10% more than what s/he paid for the house. Makes you wonder why do people flip their houses ?

b) Saw 3 houses that were sold late last year and they are all available for rent today. Either the expats bought them or their owners deem it sensible to negative gear houses worth $2M or so.

c) There is this apartment block for sale. One of the units is currently available for rent. Working backward, that unit is yielding only around 4%. It reminds me of how the property market is different from anything else we know. Typically, when you buy in bulk, you get a discount. In the Sydney property market, you pay a premium for buying in bulk.

Whichever way you look at it, prices are still holding up. The vendors are not budging.

Here is an objective look at the current mess

Just like everyone else, I am totally confused about the current financial mess in the world.

The link below may help to shed some light on what is going on (or what is to come):

http://www.platinum.com.au/images/ptqtr_1208.pdf

It is the link to the Dec 08 quarterly report of Platinum Asset Management, an international equities fund.

For the more adventurous souls, check out the blog below:

http://brontecapital.blogspot.com/

It is a collection of thoughts and not in any particular order but some topics he raised are quite interesting and relevant to the current environment.

Do you deserve to make money ?

First, thank you for reading this blog. Today, okmijn42 posted the first ever comment. At the very least, now I know I am not a madman muttering to himself.

I often wonder if we are about to witness the end of the age of entitlements. Investment bankers believe they are entitled to earn millions before they turn 30. Hedge fund managers believe they are entited to earn "2/20". The Gen Ys believe they are the complete package right from day 1.

To be perfectly fair, a lot of people, in my opinion, are fully justified in what they have achieved. Macquarie Bank/Nicholas Moore deserves to be so successful because they created the entire infrastructure fund concept. Regardless of what we think, its Sydney Airport deal was ingenious. On the other hand, the likes of Babcock and Allco do not "deserve" to be as successful because they simply copy the concept. The flip side is a lot of investment bankers do not deserve to be so highly paid because they simply copy the one "play book" again and again. Put it very simply, one suspect a lot of bankers are trained to be very good with Powerpoint and Excel spreadsheets ONLY. In hindsight, it makes you wonder why did Macquarie choose to go after Qantas and London Stock Exchange ?

In the funds management industry, apparently 90% of funds lag their benchmarks. Why should a fund manager deserve to be paid his bonus (let's say he out-performs his benchmark by 5% but the benchmark is down 50%  i.e. a lot of unit holders still got wiped out) ?

In my time, I have read a lot of investment books and I have the privilege of observing closely a few good/great investors in full flight. I have discovered the key to the stock market kingdom !!! Shhhhhhhhhhhh.... To be successful in the stock market, it comes down to psychology and luck. The stock market is a very efficient discounting machine. The big gains are typically made when the environment is utterly dismal. This explains why psychology is a critical ingredient. The next part is luck. After all these years, if I have to choose between being good or being lucky, I would prefer to be lucky because being good doesn't guarantee the stocks will work. The key is how do you make sure you are consistently lucky ? It comes down to hardwork and being half intelligent and sensible. These are the "ingredients" you need to be at the right place at the right time more often than not.

What does this post have to do with the Sydney property market ? I often ask myself do I deserve to own a decent place in LNS ? I have been asking myself this question a lot lately because prices haven't really changed and the quest just seems as remote as ever. A few ideas here:

a) I suspect I have a more comprehensive framework than a lot of folks out there. My idea that property prices may fall is different from consensus. I am hopeful that my bear arguments are more logical (but may well not be right) than the simple bull arguments (supply and demand + property prices have always gone up).

b) I am prepared to buy if and when prices collapse. In my personal experience, my best stocks have been the ones that everyone hates. I suspect the day I buy the house people will be telling me you are truly mad.....

c) My better half was telling me that we have seen over 100-150 houses over the past 2-3 years. She has even compiled this monster spreadsheet of all the property transactions in the LNS since 2006. I suspect now we just have to make sure we work hard in order to be lucky. It is quite likely we will see another 100 houses and turn up at a lot of auctions. And then one day, we will find a place that we like and the vendor will struggle to find other interested parties. Then things will get interesting.

Nevertheless, there is a very good chance that my framework may end up to be flawed. And then the LNS property market will keep on going up and up - just look at Wollstonecraft. Afterall, the age of entitlements is coming to an end and no one, including yours truly, deserves any easy pickings. See the similarity with the stock market here ? Being good will only get you so far. One does need a lot of luck as well :)

Time will tell.

The emu effect

In case anyone thinks it is wishful thinking on my part, the Australian stock market is half right to portend that we are facing one big mess.

In my job, I follow the results of a lot of international companies. Trust me it is very ugly out there. In fact, I have not seen anything as bad in my time in the financial market and I have seen a number of bear markets. Late last year, it felt as if the world just stopped. Take the semiconductor industry for example, a lot of companies saw 30% qoq sales decline in Q4 08. The US car makers saw 40-50% sales decline in Q4 08. Even businesses in China are starting to feel the impact. Lots of stories about factories shutting down in Southern China, the export/manufacturing centre. Retailers in China are seeing weaker demand as well. Property prices in HK have declined 20-30% vs. a year ago.

Do you think if Australia can stay above the fray ? In case, we think we are "better" than the rest of the world. Check out the link below:

http://www.pmcapital.com.au/document_download.asp?documentid=B59D89F918B43A1E

PM Capital is an international equities fund. I am especially interested in slide 15. When I first saw it, I was astounded. The bottom line is Australia has had the benefit of more than the commodity tailwind. We have been borrowing and borrowing to fund our little indulgences in life as well.

Let's hope we don't have to pay the piper anytime soon.

Are you a hedge fund ?

I was reading an article earlier today talking about how the local banks are tightening their lending standards by "lifting" their loan to value requirements to say 90%.

Let's see....The major investment banks got themselves into trouble because they have an asset to capital ratio of as much as 30. It is not too shabby for an average Australian home owner who borrows 90% of the value of the asset. Put it another way, the leverage ratio is 9 to 1. Throw in the tax free capital gain concession, life is pretty darn good.

If the asset price goes up by 10% p.a., ROE is close to 100%. However, leverage cuts both ways. If the asset price drops by 10%, the leverage is enough to wipe out the equity. If it drops 15%, negative equity kicks in.

I always find it amazing reading those property magazines profiling some guys/gals somewhere having 7 properties and living happily ever after. Those articles never discuss how much debts they still owe. I often wonder if they have indeed sold some of their properties and are happily retired.

All hail the Australian government. A job well done. The First Home Buyer Grant just keeps the gravy train rolling. It ensures there are always exits for property speculators/investors. It certainly protects the economy from the negative equity spiral.

But does it ? If you are a first home buyer and you have struggled mightily to save a decent house deposit and the grant gets you over the line, how confident are you in your ability to save the necessary repayment for the next 30 years in order to service the mortgage ? 

In short, the clever country is producing a lot of small hedge funds inadvertently. To make it more interesting, mismatch of duration of assets and liabilities can be quite pronounced at these "funds". If the perpetual price appreciation myth is no more, the whole pyramid may well come tumbling down.

So far NO good

I know it is still early in the year but I am secretly relieved that my Saturdays will remain pretty free for the next 6 months. So far, there really have not been a lot of new listings, let alone interesting new listings. Moreover, asking prices are not budging either. Fortunately, there is a silver lining to everything. It looks like the mythical expats have not come back home and hoovered up all the older stocks from 2008. 

I came back to work last week. Nowadays, AFR can't stop talking about how grim the job market is out there. Today (Wednesday), AFR even reported that some graduates have had their job offers rescinded.

A storm is seemingly brewing on the horizon. Rising stocks in some suburbs. Rising unemployment. I wonder who will blink first ? I can promise you it won't be me. Doesn't matter how low interest rate goes, it won't change my budget. Ask any buddies of yours who work in the finance industry this question - are they expecting any pay rise for the next 2-3 years ? I am not. 

Investment psychology

Today at work, I was reminded that making money in the market is just very hard work. If you care about your clients, fund management is one of the most stressful jobs out there - 24X7 non-stop pressure. To be successful in running money, a lot comes down to psychology as well. Outperformance comes from courage in the face of uncertainties. One needs to be a contrarian.

Yet, it is the exact opposite when it comes to the Sydney property market. It is one of the most popular "trades" or "investments" out there. Today, I saw this blog on Domain. The MD of a major real estate agent argues that, because stock markets have collapsed everywhere, the property market should perform that little bit better as funds get diverted into properties in Australia.

How strange indeed !!! In fact, the correct response (when it comes to making money) is to allocate more funds into the asset class that has fallen. It is the harder decision (in terms of the usual feel good factors) but it is the right decision. How much upside is there from an asset class that hasn't fallen much at all (vs. stocks that have fallen by over 50% in some cases) ?

By the way, don't forget that properties are illiquid assets. Normally, illiquidity translates into discount on the asset. In contrast, Sydney properties are priced at significant premium.

I have another dilemma.......Instead of buying a property and earn 4-5% yield, in some extreme cases, I can buy small stocks trading at 1-4X PE (growing and balance sheet is bullet proof i.e. market cap = cash on hand). As long as these companies are not fraudulent, I figure I stand to make more money buying these stocks long term vs. buying a house in Sydney.

The Sydney property market doesn't feel rational at all.

Black Swan

I have been working in the finance industry for over 10 years now. Through the period, I have seen and experienced several vicious bear markets. I have seen stocks falling by over 99%. Yours truly did have a few of these quality stocks as well. I have also seen property prices falling by over 60-70% in other countries as well. This leads me to the next question. Why do we think the Sydney housing market will come through the current financial mess unscathed ?

I often wonder if this is a case of a "Black Swan" waiting to happen ? 12-18 months ago, not many people could have predicted the sub-prime mess in USA would blow out into a global financial crisis. In the context of this crisis, why is it so difficult to believe that the Sydney property prices can easily fall 30-40% ?

A lot of commentators point to falling interest rate as a potential safety valve. You can ask people in Japan what has been happening to property prices in Tokyo since the bubble years. How about supply and demand ? An anecdotal observation is consumers have more babies during boom times. Migration (international or domestic) is driven by where jobs are. My point is property is a confidence game. 

The sentiment in Sydney at the moment smells like USA 12-18 months ago. At the time, a lotof  people thought the problems would be contained. They were optimistic for no other reason than they were optimistic. Does this ring a bell ? I can hear a Black Swan silently flying into Sydney....

There is nothing logical when it comes to house prices !!

What is the key difference between the Sydney property market and the stock market ? If anything, the Sydney property market is inherently more restrictive. The transaction costs are much higher. The holding period is a lot longer. The opportunity to make a monumental mistake is arguably higher. The only upside to owning a property is there is no capital gain tax applicable. 

BUT I suspect the key problem with the property market is how does a seller set the price ?

Even though, we are talking about a high value transaction here, the whole price setting process seems like a magical black box to me. This is how it works. The real estate agent looks up the database of comparable sales in the area. He considers factors like land size, condition of the house, the need of the seller, how many rooms etc etc...... This is a perfectly subjective process. The price is to a large extent set by the price a previous buyer was willing to pay for a similar property. 

Here is a real life example. Take Wollstonecraft for example,  it is becoming quite a frustrating suburb for me personally. What is noticeable nowadays is there are plenty of houses over $2M (even over $3M) in the suburb.  It all started when a house (4/5 bedrooms and big land) on Cable Street got sold for $2.8M. I was at the auction that day and what stood out was the agent played the 2 bidders against each other very well. I would go as far as to call the auction a "war" between the 2 bidders. From that point onwards, I notice that prices for the bigger houses easily jump over $2M. Take one current listing for example, the asking price is now $2.35M after a failed auction. Before the auction, the agent was suggesting $1.9-2M. What is also discouraging is the house next door was sold for $1.65M around 2 years ago. Close to 50% price appreciation in less than 2 years is quite impressive I must say.

Another example is Mosman. Why is it that prices go through the roof whenever it is close to the beach or has some sort of a view ? I have no problem with that, after all it is supply and demand and people do like the life style of living close to a beach. What I don't understand is why is a view overlooking Middle Harbour also push prices through the roof ? There is only 1 Sydney Opera House and I Harbour Bridge in the world but plenty of ocean view eveywhere.

My point is valuing property is hardly a precise science. There are too many emotional factors involved. Conversely, based on what we know, there are hardly any arguments to suggest that property prices are currently under valued.

Is this sensible ? Risk management in buying a property ?

I saw this blog from a buyers agent (published in Nov 08):

 

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I am working with some clients at the moment that were initially looking to sell their current home and upgrade to a larger home to match their growing family.  They didn't have not had any luck selling their home (at the price they felt it was worth) so were feeling dismayed about not being able to move in to a larger home. 

With the drop in interest rates and taking in to account what they could rent their current home for in the current market, it turned out they are able to buy the larger new home and still hold the current home.  They are now really excited at the prospect of bing able to buy a great home that they couldn't have afforded before due to its price coming down and holding their current property to sell in a few years time when the market picks up.

They did their sums and are turning the current financial doom and gloom in to an opportunity.

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The blog is especially interesting because it brings into focus a key bull argument for the property market i.e. falling interest rate. It also brings into focus that the property market may be stalling a bit for some sellers. The blog got me thinking....Would I follow this strategy ?

The answer is NO personally but a lot depends on your risk tolerance. First, let's see why it is a good idea. The ONE reason why you would want to follow the strategy is if you strongly believe in the property market i.e. it will go up and up and up. In that case, the rent pays for your holding cost and, if you are truly astute (your property is positive yielding), your tenant will help you to pay down your mortgage as well. In short, you are strongly increasing your leverage.

However, leverage cuts both ways (up or down). It brings me to the key idea of this post. I remember in the years past when I was snoring in the lecture hall in the back row, a finance professor said again and again one of the core tenants of risk management is matching the duration of assets and liabilities. Incidentally, I suspect this is also the reason why some of the high profile investment banks got unstuck recently. 

Applying the concept to the Sydney property market, I would argue that some folks have probably taken on a lot of risks without aware of it. In the simplest term, a bank will foreclose a property if interest payment is not being made. In most cases, the interest payments are funded by the wages of the household. We also know that most people do change jobs every few years. Thus, we can probably assert that there is cash flow uncertainty (bonus may change/disappear, two income household becoming single income etc etc...) for every household. In contrast, a 30-year mortgage is a very long term liability with minimal flexibility. This is a case of pretty bad asset/liability mismatch.

So far, this mismatch has caused minimal problems for the society and households (very vibrant economy and ever increasing house prices). Still, do bear in mind that good times do not last forever. 

Now imagine if you are the home owner advised by the buyers agent. Let's say you have a comfortable 3 bedroom house worth $1.2M. And you are looking to upgrade to a $2M 4 bedroom house in Mosman. Let's say you have paid off a reasonable chunk of your mortgage and you only owe $600000 in your own home and have another $400000 saved in the bank/shares. If you could sell your home, you would only need to borrow another $400000. You can still be quite comfortable because you would have 50% capital in your new $2M mortgage. Let's say you follow the strategy of the buyers agent, you still owe $600000 in your original house and then you take on another $2M in mortgage (or $1.6M assuming you have saved another $400000 somewhere). Suddenly, you find yourself with total debts of $2.2M. Imagine one day you find out you are having another kid or maybe your tenant has lost his/her job ?

Food for thought.

 

 

Is it conceivable that the Sydney property market may fall 30% ?

Looking back at 2008, the one important lesson is never say never. I remember watching this film (Dumb and Dumber). There was this quote that got stuck in my mind. Someone told Jim Carey something along the line that you have a one in a million chance to win. Jim Carey responded enthusiastically: " Yes I still have a chance".

The same may apply to the Sydney property market. See the article below:

http://www.theaustralian.news.com.au/story/0,,24747381-25658,00.html?from=public_rss

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Below is an excerpt from the Australian article:

THE home of a Sydney property developer in one of the country's most prized streets has sold at mortgagee auction for $4.1 million.

This is a 40 per cent discount on the original asking price of about $7 million

Avi Hershco's three-apartment property in exclusive Bellevue Hill was sold to an eastern suburbs buyer on Tuesday night, in a further sign of problems besetting Australia's top surburbs.

He had handed over the property to the bank, along with his development of six luxury residential units in Beresford Road, Rose Bay.

Mr Hershco said he had planned to rip down the three apartments on the Kambala Road site, where he lives, to build a home. But those hopes were dashed when Suncorp Metway called in loans on his properties.

"I am not bankrupt, but the bank wants the money and they are also under financial stress," Mr Hershco said.

"Suncorp Metway pulled the plug a month ago."

In March, Mr Hershco said, he had an offer of about $7million for the Kambala Road block, but it collapsed at the last minute.

He bought the Kambala Road site for $4.3million in 2005. The site has three multi-storey apartments, one of which he lives in, as well as some land and a tennis court. It went to mortgagee auction in Double Bay on Tuesday.

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Below is the link to the property:

http://www.realestate.com.au/realestate/nsw/eastern+suburbs/105352179

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Now imagine how much your dream house would cost in 2008 if it goes back to the 2005 price level ?

What is wrong with this picture ?

If one visits Realestate.com.au today (2/1/09), it is interesting to observe that there are 152 properties asking for more than $2M each. I must admit, even though I am in the finance industry, a $2M house is well over my budget.

In my personal experience, $2M is seen as "pocket change" these days. The Mosman real estate agents remind me of this one famous quote from the super model Naomi Campbell.

I am sure there are many more successful and intelligent people out there than yours truly. But sometimes I wonder how much leverage would someone take on in order to enter the pearly heavenly gate of Mosman ?

A disclosure here....I am working on anecdotes here. I was told 2 stories about the property market in the Eastern Suburbs 2 months ago. Bankers (about my age...early to mid 30s) put down a deposit of $500000 to buy houses worth $3-4M. A couple (both law firm partners) put down a deposit of $500000 to buy a house worth $5M.

Imagine if you are the banker here. Your mortgage rate is say 6% and you have borrowed $2.5M. Your base salary is $300000. Your interest payment alone should be close to $150000 a year. We all know what is the top marginal tax rate is and we can work out that there is not a lot of the base salary left after paying the interest, let's alone repaying the capital. Thus, to afford a comfortable lifestyle, you, the banker, needs to count on healthy yearly bonuses in years to come.

To make it more interesting, let's assume you, the banker, have 2-3 kids. Or you wouldn't need a 4/5 bedroom house. It is no secret that it costs more than $20000 p.a. to send a kid to a reputable private school these days. Hmmm I hope you, the banker, are married to another hard charging banker/lawyer/business executive.

Now if we turn to the second example, we know that a junior law firm partner probably makes $4-500000 a year. A more senior partner easily makes over $1M a year. Needless to say, a household income of $2M can easily work down a $4.5M mortgage. But it gets more interesting if the household income is only $1M. Interest payment alone on a $4.5M mortgage adds up to $270000. Still a fairly comfortable situation but the quesiton is how long would it take to pay off the mortgage entirely ?

My point is margin for error is low in both scenarios. If I have to take out a 30-year mortgage, by definition, I will be working until I am 65. Doesn't strike me as especially fun. But I must be old fashion. Apparently, 30-year mortgage is the norm these days.....

Why lower North Shore property prices may drop 30% ?

A lot of people will say I am crazy..... I have not really pulled the number out of thin air. Just to illustrate my point, a 30% general price decline is not really that outrageous. 

Remember in the first blog, I used 4% gross rental yield as the current yardstick ? I arrived at the 4% range by going to www.realestate.com.au and look up the rental section. At the moment, there are currently a few houses which were for sale as recent as last month. Take the house on Congewoi road in Mosman for example, it is currently asking for $2000/week (for rent). We are looking at gross rental income of $104000 p.a. for the property owner. The original asking price was $2.75M and more recently, the asking price was lowered to $2.5M. We can work out that the gross rental yield is around 4.16%. While we do not know if the property will actually be leased at the asking rate, the information is useful because it does reflect the thinking of the real estate agents concerned.

How do I arrive at the 30% price decline target ? Let's assume, a property is worth $100 and it currently yields gross rental income of $4. What if the property owner suddenly demands 5% or 6% or 7% in rental return ? The property would be worth:

5%        $80

6%        $67

7%        $57

Mortgage rate at present is around 6-7% from the major banks.

We can see that the cost of fund is currently higher than the return available. If one were a rational person, owning a home at this point in time should be seen as a consumption item, not an investment.

To be absolutely fair, the rental yield argument hasn't worked for quite some time. It is because property is widely perceived to be an appreciating asset. Using the $100 property example above, we can illustrate the leverage if rental yield drops to say 2%.

3%     $133

2%     $200

If one wants to be bullish, one can certainly argue that Reserve Bank is poised to push interest rate to a very low level. However, I would like to point out that no one can properly forecast interest rate. If one were to take on a very long term obligation (say 20-30 years), even being able to guess the interest rate movement over the next 3-18 months is not going to be especially helpful.

In summary, despite my concern about the un-economical nature of home ownership, I suppose I would be happy to pick up a property after a 20-25% price correction (or roughly 5% rental yield). I am happy to do so because it is a personal consumption/lifestyle choice.

Hello world - Background and the hypothesis

My background is just like a lot of people looking for a reasonable property in the lower North Shore in Sydney. I am a "finance professional" and my wife, who used to be a banker, is staying home looking after our 2 young kids. We are in the early/mid 30s. We are looking for a 4/5 bedroom house in the typical lower North Shore suburb (Wollstonecraft, Waverton, Kirribilli, Neutral Bay, Mosman etc etc....)...

I am writing this blog because I find the process utterly frustrating. And am looking to create a forum to share tips and insights into the sydney property market.

The obvious quesiton is what is the "value add" here as there are volumes written about the Sydney/Australian property market. Not to mention we already have blogs from real estate agents and even buyers' agents. My gripe with all the "experts" out there is they are all cut from the same cloth. There is no original thinking from anyone.......

Here is my hypothesis on the Sydney property market, in particular I am focusing on the lower North Shore. My hypothesis is the LNS property market may fall as much as 25-35% over the next 2-3 years.

These are my rough arguments (I will expand on these points as I post more). My quick and dirty yardstick is gross rental yield of 4% for a reasonable house in the area is inadequate. It is adequate in the context of an ever rising property market. However, once people become disillusioned with their price appreciation expectation, why should 4% suffice ? I won't be surprised if LNS market may have peaked for the next 5-10 years. In this instance, I am falling back on the customary arguments of housing affordability, rising unemployment etc etc....I wish to add another observation if I may....Has anyone notice that the banks are now assuming consumers are after 30-year mortgages ? I figure, once a mortgage takes longer than 10-15 years to pay back, there is not a lot of difference between a 30-year mortgage and a 100-year mortgage.

In the future posts, I will further expand on various points. Feel free to comment and offer the counter arguments.