Surely property will collapse soon right? my old mate at the pub said he bought a house in the late 90’s for $350k. Said he’d get about $2.3mil on the market right now. Essentially doubled in value every 5 years. on that trajectory if he were to hold it for another 50 years, it’d be worth, drum rollll,,,,, $2.3billion!!!! But what is really ironic about this whole thing is, the place only gets $1220/week rent. Which @ property value of $2.3mil, when you subtract, fee’s, taxes, maintenance, insurance, & periods of lost rent…. Is only actually a return of…. Wait for it…. 1.0003% So how do Property P/E’s work? well no science here, is done on debt levels. How can I confirm this? Well wages averaged $37k p.a in the 90’s. Today the wages are $70k p.a. So if wages have only risen by X 2, how have house prices risen by X 5? Well debt levels have week exceeded the X 5 multiplier. It’s almost like playing a pokie. When you earn an extra $1k you can borrow $10k, so debt levels have soared. So all well and good yeah? But when interest rates move, which will happen soon. That 1% return is all but gone. So how do u improve the return, you put rents up, but when your rental market are the ones on $60k p.a and they are competing against immigrants coming to the country happy to work for less, how do you provide the pay rise to the renter when there are others lining up to take their job for less money? Confusing right, or seems pretty obvious! This property Ponzi scheme is getting close to melt down, and when it does, it’ll be the best thing that us ever happened to this country. The last 25 years has been some drunken debt fuelled bender, the era of the property investor is about to come to a fashionable and dramatic end. The collapse will happen from the bottom up. As interest rates rise, the ability to borrow will be reduce to smaller amounts, investors won’t be able to be opportunistic because they will be getting squeezed. This will considerably reduce demand, once the cheaper properties stop moving, the next up the food chain can’t sell, and can’t pay more to move up the ladder, and before you know it, this whole thing will tumble. I don’t think it’ll fall by a lot, but I’d go to say at least high 20% with no growth for 10 years. So if you have a $2mil house I’d predict by 2025 it’ll be worth around $1.5mil and not return to those precious highs until around 2035. A good property market should still be providing yield that is better than interest rates, but it isn’t, this should be a red flag for those buying right now.
