There's lots of talk of a bubble in real estate prices in all sorts of media at the moment, isn't there?
…and I think it's seriously detrimental to your wealth creation plans if you let the journalists influence you into not taking any action.
Let me ask you a question…
Will property be more expensive in 5 years time?
I'd say that if you bought well located properties in most of the major cities, you're pretty safe in regards to capital appreciation.
I'm always amused when I see people in the last stage of negotiation walk away from the deal because they might be $2,000 apart.
Does it really matter if you paid too much for your investment property?
Let me tell you a couple of real life scenarios.
About 7 years ago, a friend of mine asked me to come along to an auction, more from a point of view of moral support.
He was looking at purchasing a property as his principle place of residence.
The suburb was Ivanhoe, which is about 12kms from the Melbourne CBD (a quality blue-ribbon area).
I asked him what his limit was, and he said he was going to go up to $700,000 and not a cent more.
I'm always curious as to why people pick limits that are round numbers.
Anyway, the auction began in ernest and my friend, nervous as all hell got involved around the $675,000 mark.
Three bidders at that stage were competing for the property and the price quickly got to $695,000.
…Bidding slowed, and now there were only 2 left.
My friend and another couple.
I was interested at that point to see if my mate would stick to his original plan of only going up to $700k.
The bids were now down to $1,000 bids…
It was obvious to me that the auction was reaching its completion, and then something unexpected happened.
The young couple put in a $10,000 bid.
Hmmmmm… That certainly put the cat among the pigeons.
My friend turned to me with sweat consuming his brow and said, “Let them have it…”
It seemed to me that he was a beaten man. In the auction world, a big $10,000 bid like that is called a knock-out punch.
We're now at $705,000, and remember, he was looking at this property from a point of view of a principle place of residence… So I suspect there was a little bit more emption attached to this than a run of the mill investment property.
He consults his wife of course, and they agree that they're over their limit and maybe they should just give up.
He turns to me and for the first time asks me what I think.
I asked him how long he was going to keep the house…
He said, “Probably 10… 20 years.”
I then told him if he really wanted it, and he loved the area, then what's the big deal if he paid $20k, $30k, even $40k more?
This seemed to reignite his enthusiasm.
I told him to put in a $500 bid.
Here's why…
When someone tries to knock you out with a big knock out punch, the last thing they want to see is you still standing with a smile on your face.
It's very cheeky, and an act of confidence when you respond back with a tiny bid after his massive attempt to knock you out.
The young couple came back with what they thought was the right thing to do, and that was a $500 bid.
My friend looked at me and said, “What now?”
…I said, make a $10,000 bid.
You should have seen his face.
I can only imagine the thoughts running through his head. Here we are at $716,000 with his previous flimsy limit of $700,000 and I've asked him to up the ante with a $10,000 bid.
Thinking… Thinking…. Thinking… and the auctioneer counting it down, I reminded him that this was a long term investment and in 10 years time it'll be so insignificant that he'll kick himself if he lost this auction for the sake of just $10,000 (or thereabouts).
With great doubt and trepidation he shouted out, “Seven twenty six!!”
You could see, even from our distance, the young couple's face turn white.
They had nothing left in the tank and my friend's actions proved to them that they would have to keep going and probably pay $30 or $40,000 more if they wanted the property.
The auctioneer counted it down and my friend had himself a brand-new home.
As I mentioned earlier, this was 7 years ago.
The reason why I tell you this story is two-fold.
He recently got a valuation on the property for $1.4 million, and to think he could have missed out on this deal for a mere $20 or $30,000 dollars.
Ok, he could have bought something else and maybe have made the same amount of money, but the reality is this was a well-located house in a better than average street in the suburb.
The second reason I'm telling you this story is that you can pay too much for real estate and still make a bundle of money if you have a long term buy and hold philosophy.
That's why I find all of this current noise about property bubbles and whether it's a good time to buy real estate really amusing.
You ask any pro who has been in the market for a minimum of 10 years about when a good to buy is.
…and he'll simply tell you, “Whenever you can.”
So if you're in a position to invest in real estate right now, then it's a good time to buy.
Think about it, an extra $20,000 is around $29 per week in extra mortgage payments (based on 7% interest rates).
Now I'm not saying to you that you should go crazy and simply pay the asking price on any invest property, but if you like it and its well-located, then in 10 years time, think about… You're not going to be upset that you paid $20,000 more.
Ok, when I say, “well located” – here's what I mean…
If you purchase anything in a major city within a 15km radius and I can guarantee you that even if you pay 5-10% more than the market value today, in 10 years time you'll be a clear winner.
Sure, everybody's circumstances are different and I understand that sometimes there could be some issues with funding the extra $26 per week… However, it's an investment in yours and your family's future.
So the moral of this story is don't be too concerned about what you're reading and hearing in the media.
It's all short-term perspectives.
The long-term reality is real estate will be more expensive in 10 years time.
..and what that simply means to you is the earlier you begin, the better it will be for you financially in the future.
Get out there and get serious.
Signed with Success,
Jon Giaan
Knowledge Source
P.S. Share your stories on our web site of how you paid more for property and sweated on it at the time… Only to find out that in time it was the best decision you ever made.
P.P.S. Or, tell me I've got it completely wrong, that you should always negotiate hard, follow your budget, have a clear valuation strategy, and that is the way to invest in real estate.
Gerry G says
Afternoon Jon.
I am sending this to aformer manger of mine. Here’s why:
in 1995-ish he was looking at land in Williamstown (Melb) and each week the ‘crazies’ would pay $150k for a block quoted at $137k+. Week after week he kept pulling out and he would return to find the quoted price had gone up past the price he had bailed at the week before. In the end, he bought a block for $167k off a quoted price of $150k!
Almost word-for-word I told him what you told your friend and that’s why he bought.
That block’s worth over $650k now.
Now, it needs to be said that if it’s too expensive and you don’t have the money, you don’t have the money – pull out. but if you have the money but you think it’s just that little bit too much, buy it!
Gerry.
Gerry G says
Oh and Jon – should have said . . .
In May you said go on a Greek holiday – I went in mid June for 4 and-a-bit weeks. After only a $1500 return airfare, my money went from $1.00 to e0.70 (reduced by 30%) but! . . . I was able to buy things that were approx 1/3 the price of Aus. I had a dinner for 4 for e37 ($50) – and it was good; casual, but good. More than we could eat. Stayed in an island hotel on the top floor for only e100 a night (4 people) with an ocean view – only 20m to the greenish, clearest sea you’ve ever seen.
Greece is recessed and they are happy to bargain.
Get over there.
Great advice, Jon. Thnaks.
Gerry.
Bert says
Hi Jon,
very interesting your story, i was in a simular situation just before the property boom in Perth, i bought an older house in the suburb of Armadale as an investment for $ 109.000, it was run down , ugly, gardens like a jungle, and my wife was NOT impressed, what she thought was a “waste of money”, confirmed by her friends, and after 2 weeks the Hot water system broke down ,didnt help either, never than less i was confident that in 5-10 years time it would make us money. HOW WRONG WAS I, it more than trippeled in value in just 2 years.
we recently subdiveded and sold the back block for $105.000, its still been valued @ 278.000 with a weekly rent of $270…. i cant wipe the smile of my face
Bert
sean says
Hi Jon,
I would like to communicate with you directly regarding purchasing investment property, I have a million plus dollars to spend and no idea what to look for as a good investment.
Cheers,
Sean.
Gazzer says
A nice story, but that was 7 years ago, just when properties started to shoot up. The situation is different now and if anyone thinks property is going to double in the next 7 years they need to get a grip on reality.
John Rybinski says
Ditto Gazzer !!!
Got no idea why and how I m getting your Emails I have no asked for it, but I cannot help answer this one.
This is the biggest load of BULLS!!T ever, WE ARE in a bubble and big time it is people like you that keep pumping this idea into gullible mind.
Today price’s are been prop up by credit and low interest rates that are not sustainable,
All our bank have huge exposour to the market (50% +) and will be in dire strait if any major fall in price’s was to happen, even the FED know it hence all that money paid to stimulate buyers (our leaders have guaranteed the bank’s with taxpayers money ) so they all have an interest on price’s staying up, and the bank have to keep lending (but they are now starting to back of), How long can that all last .
When all this fake economy end and things get back to where they should be it will all end like all buble’s before this one
No need to ask anyone that has been in this business for the last 10 years they would have been in a boom all this time so what would they know about a bust.
Just look of the housing market in US, UK, Europe price are down 30% and more and still going down ,even china has started to go down.,
Where will you be when the SH! T hit the fan,
I have been in the industrie all my life and I can tell you that the burst will happen sooner than later, as sure as the sun rise everyday, I hope you will be there sending ideas to people on how to get out of the trouble you put them in,
Australia is not immune, it has simply been delayed.
Take the rose tinted glasses off and look at the world around you
Regards
Chippyto
ADRIAN says
GDAY JON 7 YEARS AGO I PURCHASED MY FAMILY HOME. I MADE AN OFFER OF $295,000 IT WAS REJECTED THEY WERE ASKING $330,000 I MADE ANOTHER OFFER AT $300,000 TELLING THE AGENT IF IT WAS REJECTED AGAIN I WOULD WALK AWAY. TO CUT THE STORY SHORT AFTER I ENDED UP PAYING $305,000 AND THE PROPERTY IS NOW WORTH CLOSE TO $600,000.
NOEL says
GOOD EVENING JON HAVE READ EVERY EMAIL SENT TO ME AND I SHARE YOUR
VIEWS. I’VE BEEN BUYING AND SELLING PROPERTY FOR ALMOST 20 YEARS ,
WITH MY EXPERIENCE SOME DEALS WERE NOT AS GREAT AS OTHERS HOWEVER IT IS A TIME FACTOR. A GOOD EXAMPLE IN 1986 I INVESTED IN MY MUMS OLD FEDERATION HOME IN THE SUBURBS OF SYDNEY NEEDED A LOT OF REPAIRS I DECIDED TO DO A MAJOR RESTORATION COSTING ME WITHOUT A JOKE ALMOST $200,000 AND NINE MONTHS LATER . BY THE WAY THE PROPERTY WAS ONLY WORTH AROUND $140,000 AT THE TIME. BUT MY VIEW WAS A PLAN TO SELL IT DOWN THE TRACK, I EVENTUALLY SOLD THE PROPERTY IN 2008 FOR $1. 02MILLION . SURE IT TOOK A WHILE BUT IN MY VIEW THIS HAS BEEN MY SPRING BOARD TO INVESTING IN MORE REALESTATE
SO AS YOU SAY JON I BELIEVE ANYTIME IS A GOOD TIME AS LONG AS IT IS RIGHT FOR YOU. NOT A BAD PROFIT WITHOUT HAVING TO ACTUALLY WORK FOR IT AT THE TIME.
Tim says
Hi Jon,
Works well till you hit a Global Financial Crisis with margin calls, depleted equity and altered lending standards and can’t hold the properties any longer. Fire sales leave you well out of pocket with stamp duty and exorbitant loan costs and this is compounded further if you have been silly enough to pay over the odds for your property in the first place. Only ones to gain from this are the banks and another real estate investor like you and Dymphna Boholt waiting to take advantage of your misfortune
Keith Goonewardene says
For all those doubters stay away from the property market you are clearly out of your league. Property is boring and it is long winded. If you are in it for a quick buck good luck. Think of property as a wealth creator for a 100 years from know. Don’t be selfish create now for generations to come.
Al Hewson says
100724
Hi Jon,
Thx for your email. I know how John R. feels, and to reinforce this view I watched “Keiser Report Ep 56” recently. I like most of what Max K says, and he reckons Aus and NZ are the last world r/e bubbles to burst (see graphs and figures).
However I am a skeptic of the ‘Skeptic’, and totally agree with most of your repliers.
krconn says
Hi Jon
I have followed your emails closely and when I read the last one re the property purchase I had a smile on my face.
Back in 2003 I was retrenchened after 18.5 years I didn’t get a lot of money out of it so wanted to use it wisely. On a Sunday drive my wife and I happened to pass a sign advertising blocks of land. Saw the agent but was told that the best blocks had gone. Next release was happening in a week. Returned on the following Saturday and was told that the subdivision of the next release would be on the following Monday. The agent took us in his 4WD over unmade roads to an area that seemed well away from the main roads. Saw a block of land that was really large (by our standards) but was $30K over our budget. After sweating on it over night we went back the next day and put a holding deposit down. We didn’t sleep for two weeks worried if we would be overcommitting ourselves. Bank refused our finance (more sleepless nights) but a broker came up with an offer from another bank. Got that through, built a house and we are now in the most sought after area in the Outer Eastern Subs of Melbourne. Real Estate boards are going up with “SOLD” already on them and at prices that we would not have dreamed of 7 years ago. Like your friend, if we had not risked the extra $30K then we would not have made the effort to move and re-build.
kris says
I think the important factor here is cash. Sure, stretch a little more to buy that great property as it will be worth it in the future, just make sure you have the income in the short to medium future to cover all costs without reborrowing.
Regards
Caughtout
Pam says
I don’t agree that all property will double in 7 years. People say that it does, but it doesn’t always happen.
I bought an apartment in Sydney in 2004. It is located in a good suburb within 10km of the CBD and is walking distance to transport, schools, shops, cafes etc. The price has not moved since I bought it and it has been 6 years. Perhaps I had paid too much for it in 2004 but I don’t think so as the valuation at that time was higher than the purchase price. It would be difficult to even sell now in 2010 at the 2004 purchase price. If anyone is looking to buy a well located apartment in Sydney, please let me know as I have a friend who has one in the same block and is willing to sell at 2004 purchase price + 10% (to cover costs).
Karen Schmidt says
I am surprised by Pam’s purchase in 2004 not shifting in value, perhaps it was not in the right area…. My husband and I purchased a property in Katherine (2 bed unit) in 2006 for $115,000 and sold it 12 months later for $140,000, that is nearly a 20% increase in value! It pays to do the research into where you are buying…. for anyone who doesn’t know, Katherine has very good rental returns, or atleast it did when we had property there. We only sold to get a deposit together for our principle place of residence otherwise we would still like to have that investment.
Good luck, Karen
rob says
My now wife twisted my arm into buying a 2br unit in Nth Melb in 2000 for $160k.
The price tortured me because my parents at the same time sold the 35 year family home for $115K. That had 2x double garages, a single garage, a triple carport, 2 single carports, fruit trees, a full length cement cricket pitch,lawn to kick a footy, 2 driveways, 3dbr, sep lounge, sep dining, sep “pool room”, study, sep kitchen, huge laundry, 2nd sep wc…
$160k was doing my head in.
Spent 15K on the unit we lived in for 5 years, now valued at $560K. It went up by the exact amount as my take home pay in that 10 years.
Joseph K says
I think the article is very good.
One note of caution though … my bank manager met with me yesterday and wants to get valuations for all my properties … even though they were all valued 18m ago … he said if the values have dropped then the loan limit will need to be reduced … he gave an example – one investment property was valued at 400K, he said if it had dropped to 350K, then I would have to come up with 40K cash in order to keep the loan at 80% or less LVR … this is an interesting reality check…even though you are easily meeting all your payments and “serviceability” is fine, the bank would send you a Letter Of Demand giving you 30 days to come up with the cash … by the way, this is one of the big 4 banks in Australia.
This won’t wipe me out because I have lots of cash and several unmortgaged properties, but I am concerned what will happen to investors already riding close to the edge.
I will be still continue to invest (just not in Melbourne right now because that feels too risky to me). What hasn’t been reported in the press much lately (because so much of the talk has been about the exciting Melbourne boom) is the extraordinary bargains in other areas such as North Qld, country NSW, some parts of TAS.
Warren B says
You sent me an e-mail recently in which you told me the story about your friend and how he made $700,000 in seven years for paying more than he wanted for a property that he brought at auction and based upon this experience you are giving advice to all and sundry that you cannot go wrong in the long term in real estate in Capital Cities in Australia.
Now I am taking a wild guess you but I would say that you are under 40 years of age. The reason I say that is it your advice and belief structure is based upon one of the foibles shared by the inexperience and that as “ As it was in the beginning, it is now and shall be for ever more ”.
There are not a lot of Mariners left that steer their vessels by looking entirely at the wake.
Real estate prices are driven by a two simple forces – population growth and community wealth. History is strewn with not hundred but thousands of examples of when real estate values have dramatically decreased in the short (years) and medium (decades) term and sometimes for periods in excess of a 100 years. (.i.e the fall of Rome and the Black Death)
Yes it is absolutely true that based on all the history available to us that over the long term (the period of recorded history-10000 years) real estate in most parts of the globe is currently at their highest levels. (Exceptions are places like “Tenochtitlan” the Mayan capital in Central America) but with 6 billion people and $1000 trillion in wealth it is easy to understand why this is so
However, there is two crucial factors that any person under the age of 40 should be aware of, and they are
1. That we, as a human species, are nearing the solstice of our population growth in our occupation of this planet and predictions are that this will occur this century and most likely in the lifetime of the generation born between 2000 and 2005.
2. With global warming, humanity will face economic stress on global wealth the likes of which has never been eclipsed in the recorded history of human socialization.
Any person with a grade 12 knowledge of biology is well aware of the curve for population growth and demise in any species countering favorable growth conditions and there are no exceptions for our species. The science also tells us that the exact point at which the triggering event occurs is unpredictable but the demise phase is both rapid and catastrophic.
And the last chilling fact is that in the absence of both of the above factors, history reveals that property growth, over the last 400 years in England has averaged 1% per annum.
No I am not an alarmist or a doomsdayist, just an “old dude” offering a word of caution
Lyn Bowker says
We purchased a house in 1999 for $425.5K within 15km from the city of Sydney.
After 11 years and renovations that have taken just as long we are selling the house this year and look at this stage like achieving at the very least $1.5M. So I guess that supports your story!
However the reason I’m commenting is that I’m taking only a half share of the proceeds of the sale (less my share of some residual debt), and I would be very happy if I could do something quite different this time (and in Melbourne this time).
I’m not averse to doing it elsewhere however I feel I need to purchase something to live in and Melbourne is where I’m heading to be closer to my son, daughter in law and my grandson.
This time I need to buy in Melbourne, do some cosmetic work to the house and sell it to make some more money – and I probably really need to do this twice!…n order to then afford the house I’ll live in until I die.
Luckily we’re not selling here until around early November. it will give me time to suss out the options. One thing is for sure, I certainly do not (yet) have enough money to buy my final dream home…maybe I’ll find the answer while I’m in France and Italy early next year having the holiday I have always longed for!
Thanks for giving me hope Jon!
Scott says
Agree with the old guy, it’s population and economic growth in a regional way that drives prices. The supply and demand of property. Australia currently has 3-4% GDP growth, of that 2% is population growth, 1% is productivity growth from the IT industry and the other 1% capital.
The bubble theory is that the M3 money supply (the lending of banks) is growing faster than economic growth, this is true, 4% economic growth and 23% growth in the M3 from 2007-2008 for example. Inflation at 4.6%, does not measure house prices. House price inflation was 18%. Think about it.
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Cheryl says
Your comment:
I’m drawing from HIA data. There are 8.57 million households in Australia and pulling the rate of ABS national account figures, the average disposable income is $95,089 per household.
Whoa! who has $95,089 DISPOSABLE INCOME! I EARN $40k and my disposable income in zero!!
This shit doesn’t help anyone, there are so many of us struggliing
Drew says
I Like how people think prices will continue to go up forever, and brag about how much more their property is worth today compared to what they paid for it.. But reality check! there comes a time when the property values max’s out and your stuck with a lemon that sucks away your life savings.. I am in that boat now, although my first property made heaps of money really quickly, the really expensive one I have now is barely able to hold its value, and I would be lucky to even get my money back, so please don’t brag about how you bought a property in 1980, because buying property property now is nothing like 1980, it is 20x more expensive now, its not a game anymore!
Keratin hair treatment Sydney says
Its True, you can overpay now and still have double the value in 6 years…not all the time though.
Antonio domingez says
This is all horse poop.