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“Hey The Frugal Samurai, what do you think of the 60 minutes report?”
What 60 minutes report?
“You know, the one about house prices dropping 40%?”
Oh… you mean this one (here)?
“That’s the one”.
Yeah nah, forty percent? That’s gotta be a typo.
But no guys, it’s not a typo – it’s a very real and very “legitimate” story.
Suffice to say, this story made sensational headlines in the media and property industry at large.
Ah us Aussies – we love a good story about our real estate markets don’t we?
Put any emotional words with the words “Australian” and “property” and it’s guaranteed to sell.
So is that what the 60 minutes article is? A sell?
Well, as we stand right now, according to Corelogic RP Data (here), the Australian housing market has dropped 1.9% YTD (year-to-date) and Sydney (which is where most of the 60 minutes piece focused on) has dropped 3.5% YTD.
Not quite 40% is it…
You see, for our housing markets to drop by THAT much, there are a number of things which need to happen:
It’s the economy, stupid!
No seriously, the number one factor for a drop in house prices of that magnitude would be an enormous fall in economic conditions.
As in a severe recession or even depression.
Neither our central bank or government has even suggested this will occur in the short-medium term.
Uh oh, here come the unemployed…
I don’t just mean Wazza, Bazza and Gazza losing their jobs – I mean every second person losing it.
Mass unemployment and layoffs, with mortgage arrears (people can’t pay) through the roof and not a single household unaffected in some way or form.
Buuuuut, according to the ABS we’re creating more jobs than ever (ABS website here).
Unless there is a sudden and exceedingly high interest rate rises, so much so that home owners can’t keep up with repayments – most people are doing just fine thanks.
Although rates will inevitably rise (sooner rather than later if you listen to the experts), a sudden, unexpected shock isn’t on the horizon.
However banks (the bastards), are starting to raise rates out of cycle – citing “funding” costs (which, in layman terms means not enough profits).
Remember walking past that really, really, really tall apartment tower and 3/4 of the lights are off? Chances are no one’s purchased them and hence it’s oversupplied.
Now multiple this across every single suburb in every single town and city and you’ll probably reach the scenario of a 40% drop due to over-supply.
But you know, apart from a few select pockets in our capitals, this isn’t occurring across Oz.
It’s just so typical of the media to create sensationalist articles and stories ain’t it?
I mean, the more I re-watch the segment, the more annoyed I become.
In fact a couple of the experts came out straight after and denounced 60 minutes for editing out their more realistic scenarios.
No one is denying that housing values are not rising anymore around Australia – but remember that there are thousands of markets and sub-markets around the country, you can’t just blanket property under one market (as 60 minutes has done).
BUT never say never, prices rise and they fall – that’s just the way economic and asset cycles work.
I do however, remember a real-life case in which prices DID drop by over 40%.
I will never forget that day.
It was early 2009 – in hindsight, at the bottom of the GFC, and my Dad and I were attending an auction of a 4 bedroom townhouse – a future family home maybe?
Mind you we had scoped this property out for a while now, given there were similar sales in this complex.
It was a bank mortgagee sale (foreclosure) and the agent had advised us the owner purchased it for $675,000 in 2006.
The auction was scheduled first thing in the morning and I remember distinctly that it was one of those cold, rainy, windy days better spent playing husband and wife with your significant other.
When we got there, there was only four people – The agent/auctioneer, an Indian gentleman, my Dad and I.
We registered to bid, and found out we were the only party registered – the other gentleman was a neighbour.
The auctioneer kicked it off after the usual formalities…
“…let’s start gentlemen, are there any bids?”
Silence from the crowd, the rain continues to pelter down.
“OK, here’s what I’ll do” (the agent is clearly in a hurry), “the bank has the reserve at $315,000, are there any bids above that?”
For the uninitiated, the agent basically is saying – here’s the minimum price the bank wants, pay a $1 more and it’s yours.
More silence, the agent looks at Dad, Dad looks at him, I scratch my nose, the Indian gentleman looks at his feet.
Now I had no clue about real estate or auctions or silent Indian gentlemen at this time – but to me, something going for $675,000 then to $315,000 now for the exact same thing seems like a bargain.
But I always thought Dad knew best growing up, so I deferred it to him. If he didn’t want it, something must be wrong with it.
We left without making a single bid.
A week later, the property sold for $325,000.
In 2018, that same property is worth $1.1m, with a rental income of over $800 per week.
You go and work out the numbers here!
Dad would say afterwards that it was because the property was poorly located with the driveway facing the main road (he was worried about my Tokyo Drift driving skills).
But what about as an investment Dad!
This story is one of the most memorable and transformative of my life – there are so many learnings and take-aways which I will always remember, chief among them is that when there is a tremendous buying opportunity and you know it so, just pull the trigger.
So 60 minutes, even though I know your story is 99% sensationalized – an itty, bitty, tiny part of me wishes for it to come true.
Watch me buy then.
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