Economy,  Real Estate

How Does Sentiment Affect Real Estate Prices?

October 9, 2019
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Reading Time: 3 Minutes

ARGH!!!

“Shakes head vigorously”

Brrr, bloody real estate.

Really doing my head in.

You see guys, I’ve got too much choice available at the moment.

After our latest hunting trip back from the West Coast, I’ve drawn up about a dozen or so properties which I aim to make offers on.

Image result for everything the light touches
“Look TFS, everything the light touches is on your shortlist”.

Mind you, not to acquire a dozen, I reckon one, hopefully two max.

The problem at the moment is that with choice, I don’t really know where to begin.

It doesn’t help that the bargain hunter in me is wanting to low ball the Baby Jeebers out of any deal…

In fact, I’ve already blown two out of the water, making some ridiculous offers.

Hmm, looking back – it’s a bit laughable actually.

One which was asking “300’s” and here I go offering $220,000.

Or another one wanting $185,000 and me submitting $115,000.

Yeah I know, I know – a waste of time right?

SO FRUSTRATING NO ONE WANTS TO SELL AT FIRE SALE PRICES. WHY IS LIFE SO HARD. 

Although it did work for us last time, grabbing something for $210,000 when comparable value is probably in the low 300’s (read here).

Just have to keep on plugging away.

Truth be told though, I’m a little bit scared.

Why?

Because I think the market will turn, and turn soon.

This differs from my outlook 6 – 12 months ago, when it was very much doom and gloom (but I was SO happy, oh you should have seen me guys, API AS LARRY. Could NOT stop grinning like a Cheshire Cat).

Image result for kid in a candy store gif
How I felt EVERY day.

You remember right? Labor to win the federal election, negative gearing to change, credit conditions near impossible, banking royal commission etc. etc.

Fast forward to now, and well… they’re all just media headlines and forgotten memories.

Man! You make money when there’s blood in the streets, and I can see the blood slowly drying at the moment. DAMNIT.

Oh and there’s a few tailwinds coming through too!

Like?

Well rates are now at unbelievable levels – you’re seeing mortgages and home loans with a “2” in front of them.

What’s more, there’s the increasing likelihood of the Reserve Bank continuing to cut rates (which I think they will).

There’s also talk of negative interest rates (you will get PAID to borrow) and quantitative easing (when money is literally pumped into the system, LIQUIDITY YO).

I doubt we’ll get THAT far – but if we do, you just have to look at what happened to the US when it did.

A decade long bull market fueling stock and asset prices.

Image result for trump
This also happened.

Won’t it create a bubble?

Umm… probz yeah, depending on what the banks do with their credit.

Ain’t that dangerous?

Umm… probz yeah.

BUT, and it’s a big but, my own personal strategy is to buy inexpensive properties in metro areas with decent yield and amortize (pay down) the shit outta them.

Making hay while it shines people!

If the market booms and pops… well, here’s hoping we’ll have sufficient equity to buy more, buy buy BUY, BOOM SHAKE SHAKE, SHAKE THE ROOM!!!

Ahem… sorry, got carried away thinking of an economic downturn.

Also, here in Oz, most of us like shares, but all of us LOVE property.

Doesn’t matter if you are a renter, owner or investor – you cannot get away from the housing conversation.

A nation of property nuts, one side wishing for prices to drop so they can get in. The other side wishing for prices to rise so they can buy more.

Kinda sad when you think about it.

So?

So coming back to poor old me… I don’t fare well when times are good.

You can’t low ball when times are good.

You can’t have agents telling you what to offer when times are good (read here).

And you can’t bloody make money when times are good.

The big money in real estate, like every other asset class, is made when you buy, not when you sell.

This is especially true when you factor in compounding, 30 year mortgages and differing interest rates.

Huh?

What I mean by this is, let’s say you purchase a property for $400,000.

A standard 80% loan is $320,000.

Interest rate at 3.5% on a 30 year mortgage.

Here is the nitty gritty:

Apart from noticing the font and table variations (if you are an OCD sufferer, please forgive me, it is past midnight and I need sleep ZZZzzz), you’ll notice that total interest is a touch over $197k with total loan costing $517k.

Now let’s say you purchase the same property in a rising/heated market for $450,000. A $50k increase.

Assuming same 80%, loan amount is now $360,000.

And the numbers:

Assuming rates stay the same and you don’t refinance it and make minimum repayments yada yada yada…

The key note though is that the total cost of the loan is now about $65k more expensive, on top of the extra $50k which you had to fork out.

All this for the SAME property.

And that’s what is really funny about real estate.

The physical property itself does not change. Just a bit of bricks and mortar.

But the sentiment does.

And sentiment affects prices.

And prices affects wealth.

And wealth affects sentiment.

Shit.

I best get a move on then.

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P.S. If you want to find out more about how to invest in property – check out this article written by my good friend Si from the UK!

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