Probing property investor’s bubble psychology

By Martin North, cross-posted from the Digital Finance Analytics Blog:

Continuing our series of updates from our latest household surveys, today we look at the latest investment property trends. Looking at solo investors first (using the DFA segmentation) we see the main drivers to transact relate to the continued potential for appreciating property values and the tax efficient nature of the investment. We also see an expectation of higher returns than deposits. This all explains why property investment is so hot. It is, from an investment perspective, for many, the best game in town. The average age for a first time property investor continues to fall, and now stands at 38 years, partly reflecting the rise of first time buyer investors, as we featured recently.

SoloInvMar2015

Turning to potential barriers which may stop investors transacting, current prices are not seen as a critical issue – only 18% said this was a turn-off. Whilst 45% had already transacted, there is still significant potential for further purchases, especially in the Sydney and Melbourne markets. We also see that whilst there is some recognition of potential changes to regulation (relating to LVR hurdles, interest only, and gearing), less than one third of investors are worried by this. Finally, only 15% were worrying about potential budget changes, we saw a spike after the budget last year, we may see the same again in our post budget survey.  Nearly half expect to select an interest only loan.

InvBarriersMar2015

Investing via a super fund is still a minority sport, though some investors are getting advice from internet forums, or mortgage brokers. We estimate about 3.5% of SMSF have an investment property in their fund, and a further 3% are actively considering this investment route.

SMSFAdvisorsMar2015

Those who are thinking of a SMSF transaction continue to be attracted by tax efficient outcomes and appreciating property values. These drivers match the broader investment sector quite well as we showed above.

SuperInvMar2015

Finally we look at portfolio investors. This is becoming an ever more important sector, because the capital gains and income from current properties are being used to leverage further investment, to create a self-sustaining (some would say critical mass) proposition. The proportion with a holding of 10 properties or more is steadily increasing. Again, these investors are driven by tax efficiency and appreciating property values and also an expectation of better returns than deposits.  One trend we detected in this segment is the rise in the number of portfolio investors who now see property investment as their main source of income, it has essentially become their job.

PortfolioInvMar2015

Next time we will look at some of our other segment findings.

Comments

  1. Tassie TomMEMBER

    Second graph – Barriers to investment – reason: “can’t get financing”.

    It has steadily decreased to less than 1% of potential investors.

    I think this says something about lending standards!

      • Mining BoganMEMBER

        Yeah, just like that nice Neville Chamberlain did.

        That’s it, I’m calling Godwin on myself. Time to step away and go for a walk.

      • A mate’s dad used to say their labrador was a great watch dog. It would watch the burglar walk in, watch him pick up the TV, then watch him walk out with it.

        Seems apt.

      • ” It would watch the burglar walk in, watch him pick up the TV, then watch him walk out with it.”

        Not without first demanding a pat from the burglar…which also seems apt in this context.

      • Mining BoganMEMBER

        My sister’s lab only treats you as a burglar if you don’t throw the tennis ball for her. The lab, not my sister.

        Reckon they throw tennis balls around the APRA office?

      • “Reckon they throw tennis balls around the APRA office?”

        They’d have to have a machine to do so – it’s all chasers and no throwers amongst the employees.

  2. “because the capital gains and income from current properties are being used to leverage further investment, to create a self-sustaining (some would say critical mass) proposition. The proportion with a holding of 10 properties or more is steadily increasing.”

    This is truly beautiful!

    • It is. I was worried that mega leveraged types won’t get what’s coming to them for their profligacy when the time comes.

    • it got better too Flawse

      One trend we detected in this segment is the rise in the number of portfolio investors who now see property investment as their main source of income, it has essentially become their job.

      soon to be the only job in town, err apart from baristas

      • “One trend we detected in this segment is the rise in the number of portfolio investors who now see property investment as their main source of income, it has essentially become their job.”

        The only way to make an income from a negatively geared property is to borrow against the (unrealised) capital gains, right?

  3. SoMPLSBoyMEMBER

    It is very interesting how a $25k superannuation rollover facilitated by an Auth / Rep obliges an ASIC approved ‘statement of advice’ which examines, risk profile, asset allocation and delineates ALL fees before determining advice is compliant with ‘Best Interests’ and a reasonable belief that the client will be in a ‘better’ position.

    This permits the client to make an informed decision.
    Why is there no equivalent regulator track for IP’s?

    Are they really suitable for everyone?

  4. Only 18% think price is an issue???

    So the people currently driving our economy are completely blind and ignorant to basic investing 101

    It is worse than I thought…

    • It’s better than I thought! I’m thoroughly enjoying this. The fallout will be remembered for decades. In the meantime, I’m happy saving USD and waiting.

    • Totally expected when people view property as a financial asset not as a home. The higher the price, the hornier they get.

      Makes a mockery of simple supply/demand analysis when the demand curve might actually slope upwards for half the purchasers ; )

      • the hornier they get.

        Ah! Explains a lot! That’s why they buy Harleys for which the only reason for doing so, as previously opined, is to make you sound like your cock is twice as big as it actually is.

      • Yes, thanks Moderate Mouse. This data, your commentary, and the anecdote from PM yesterday (Sanctuary Island ‘homeowners’ bleating about their multi-million dollar ‘investments’ – a firestorm of demand.

      • It is just the sheer ignorance of the whole thing that shocks me the most – you know I doubt most of the people engaging in this type of levered investment even read the basic business news…

        (Sure, sure there are a few pollies doing it…but…there you go…)

      • I was surprised by that too. To be fair I guess most asset classes are fully priced to over valued, and you are punished for keeping your money in safer assets. Plus the government has your back if you invest in property!

        That being said, I wouldn’t buy Australian property with my worst enemy’s money!

  5. Some times there is too much talk and we just need to be reminded of the reality.

    Take Horsham, most of the time its verging on desert, El Ninio has been away for a while, but is now back – it sits here

    https://www.google.com.au/maps/place/4+Oliver+Ct,+Horsham+VIC+3400/@-36.0497304,144.0146192,8z/data=!4m2!3m1!1s0x6ace5adf800c5cf3:0xb6386ad7e624ccbb

    In the middle of ABSOLUTELY NO WHERE – not just Australia, but planet EARTH.

    Compare –

    Horsham – $685k
    http://www.realestate.com.au/property-house-vic-horsham-118131567

    Horsham $850 k

    http://www.realestate.com.au/property-house-vic-horsham-119070987

    Now compare them to these – selected all for requiring no work, similar price – many have up to 20 acres or more. All are within less than an hours drive of a major city and airport. Often within 5 minutes of intercity transport.

    There are thousands of these all over Europe – with a population 3 times the size and an area 1/10 of Australia.

    Seriously people – what the fuck is going on is criminal beyond all words.

    http://www.prestigeproperty.co.uk/property/164722/French-Chateau-Haute-Garonne-31-France/

    http://www.prestigeproperty.co.uk/property/175408/French-Chateau-Dordogne-24-France/

    http://www.prestigeproperty.co.uk/property/168531/French-Chateau-Calvados-14-France/

    http://www.prestigeproperty.co.uk/property/165534/French-Chateau-Pyrenees-Atlantique-64-France/

    http://www.prestigeproperty.co.uk/property/170613/French-Chateau-correze-19-France/

    http://www.prestigeproperty.co.uk/property/175608/French-Chateau-Landes-40-France/

    http://www.prestigeproperty.co.uk/property/172555/French-Chateau-Tarn-81-France/

    • All the old cockys have sold there farms/desert to the chinese and moved into town.

      Horsham is fondly referred to by the locals as Horseshit!

    • I’d be a little careful of the French chateau comparison (though you usually get a reasonable chunk of land to go with it).

      Maintenance and repair costs are a pig, and you’re usually subject to strict heritage laws (eg stupid expensive shingles for the roof).

      So there’s often a lot of implied debt with these chateax.

      • All properties I selected had no work being required. Hence the price.

        There are THOUSANDS and THOUSANDS of properties for well under half a mill usually around the $250k mark is it takes the second $250k to bring them up to speed.

        Think about that for a second – $500k for an 11 bedroom FULLY renovated chateau on 20 acres 20 minutes from the ski fields or the city.

        Or a 3 bedroom AV Jennigs in the Victorian desert.

        Just fucking astonishing.

      • @Optimus

        +many. Most people point a finger to London, NY, Tokyo and say look, we are cheaper not realising the majority of the population lives in cities that are significantly cheaper. Moreover, even “rural” properties here are ridiculously expensive.

      • Optimus, be really careful with French RE valuations, its very common, from what I’ve been told nearly every property, to find the advertised price is much lower or even a fraction of the real price as to avoid very heavy taxes. the final price is negotiated in cash.

        doesn’t change the fact RE prices here are stupid so I do agree

      • Why not compare Lyon, Marseille, Birmingham, Valancia with Brisbane, Perth, Christchurch and Toronto.

  6. TheRedEconomistMEMBER

    Seems to the only game in town..

    Looks to be a full time job of sorts for some ex footballer WAGS

    http://www.dailytelegraph.com.au/newslocal/the-hills/nrl-wags-glam-up-suburbia-with-their-business-three-birds-renovations/story-fngr8i1f-1227265090344

    Bought late last year for $975,000

    http://house.ksou.cn/p.php?q=Castle+Hill&sta=nsw&id=445584

    Auction was this Saturday… but seems to have sold prior after front page on local Paper

    http://www.century21.com.au/property/319755/

    Someone must have come in with something over $1.2M as I reckon it would have owed them conservatively $1.18m. See approximate numbers below.

    Purchase Cost – $975,000

    Stamp Duty/Legals – $45,000

    Real Estate Fee on Sale – $25,000

    Holding Cost (4 months X 5%) – $15,000

    Full Renovation – $120,000.

    This is the new economy…. Flippers are back in town.

      • TheRedEconomistMEMBER

        Ronald

        Interest only in a $1 million loan at 5% is $3.5k per month. They held the place roughly for 3-4 months.

        I went past the place during the first open house and it was packed.

        I guess if it the Reno is already done punters are keen to pay the cash. But it make others vendors think I can get a million dollars plus there poorly presented place.

  7. Doesn’t this sort of stuff more or less prove the lie that housing is being driven by fundamentals? it’s purely an asset bubble.
    An interesting question to ask investors would be “why do you believe your property will appreciate in the future?”

  8. Hold on! That’s not what Reusa. told me an investor looks like?. I think the picture of a renter must have gone up in error.

    This is getting to be a laugh. Remember when we were being told IO miners were a great buy with great yield…remember… Too Funny

      • Mining BoganMEMBER

        I remember my superiors telling me that. Didn’t like it when I disagreed.

        Six months later they told me that they were always planning on the $70 price. Didn’t like it when I disagreed.

  9. Alby 100% correct ‘re bag of cash buying property in France and Spain. It’s quite daunting for the English to be walking around with 100-300 k Euro prior to the circus of purchase.

  10. A small 2 bedroom free standing house went for sale a few weeks ago in my parent’s street. $1,001,000. Crazy.

    The For Sale sign came down, and then went back up again a week later (with a different agent)

    The Mother’s Mafia (i.e. the retired neighbourhood ladies) went and had a sticky beak at the open for inspection (again).

    New owners had put a new coat of paint in the kitchen. Oh. And they mowed the lawn.

    New asking price $1,100,000

    Yes the flippers are back.