Recently someone asked me about investing in Real Estate in Sydney Australia. It was a good question so I did a little research and wrote a reply. I have expanded that reply into a rather longwinded blog. Let me know what you think.
It is tough for me to comment on Sydney real estate when it is so difficult to predict our own real estate future here in Canada. However after reading a couple of articles on property prices and conditions in Sydney it seems that the situation is not much different from Vancouver.
The big issues are home prices vs local income (affordability) and ownership costs vs rental costs. If the home ownership costs, including taxes, maintenance and other related costs are far higher than the cost of renting then renting may be the better if more conservative option. If the price of home ownership is above the affordability of a large percent of the local workforce, like it is in Vancouver and Toronto, that may well be an indicator of a bubble with home prices. If the bubble can be sustained long enough for incomes to catch up then it is no longer a bubble but if it keeps expanding without structural support then it will do what most bubbles do.
Based on many years of experience in construction, property investing and as a real estate agent, I believe there is a correction coming in those hot markets where the affordability index is way out of whack. That being said, real estate is a long term investment and in most cases while prices may dip they usually will catch up again over a 10 to 15 year period. However if a property is not affordable to start with the buyer may not be able to hold on long enough and stands to lose some or possible all of their investment.
Some personal examples:
I built a home in Qualicum Beach on Vancouver Island during the real estate frenzy of the late 70s. My home was going up in value almost as fast as I could build it, I could have sold it for many times what I had invested. By 1981 the bubble burst and my home and others had lost up to 50% of the price compared to the peak. Many people lost their homes, many contractors lost their businesses and it took many years for prices to come back. But today, 34 years later, the home that I sold in 1981 is back on the market for 3 times what it was worth at the 1980 peak and 6 time what it I sold it for in the trough that followed.
In 1998 I bought a foreclosure in Tsawwassen for $273,000.00 and spent about $10,000 in basic updates and cleanup. The market stayed flat 5 years and if I had needed to sell I would have lost money after paying commissions and other costs. However between 2003 and 2010 when I sold, the market for that house doubled and I was able to sell it in one week for $623,000.00.
If I had held on for another year to 2011 I could probably have gotten $700,000.00, however If I had bought that house in 2010 for $623,000 and sold in 2012 I would have lost $80,000.00 (selling price minus commission and other costs) because the price had dropped back to around $645,000.00. This year it is apparently back to $699,000.00! I have no idea what will happen in the next 12 months but the affordability index for Vancouver is very scary.
With the market being as hot as it is in some cities today, purchasing for the short term is more like gambling than investing and in gambling one should only bet as much as one can afford to lose.
On the other hand there are areas in BC such as central Vancouver Island where homes are very affordable again. There was a small bubble that occurred between 2006 and 2010 but that has since deflated back to 2007 prices. The nicely renovated home with great ocean view I bought in Ladysmith in 2010 for $395,000.00 has now dropped to about $350,000.00 but I don’t care because I made out very well on the last home and I have no intention of selling for many years. As I said, real estate is a long term investment.
A little perspective:
“Land prices are high, it is said, higher than anything would warrant. ’Why, the workingmen cannot afford to pay at the rate demanded for these tiny outside lots,’ asserted one man recently. The same thing was said here twenty years ago, answer the pioneers; others of us know that it was repeated ten years ago and five years ago, and our children and our children’s children will hear the same tale of woe decades hence.” - RJ McDougal, BC Real Estate, 1911 - See more at: http://thedependent.ca/featured/land-destiny-history-vancouver/#sthash.RgbBnwxm.dpuf