It’s a seller’s market

In the context of the Australian residential real estate market and specifically, the Perth market I was asked by an esteemed national accounting firm today for my buy, sell or hold opinion.

Following the discussion, I followed up with this email,

“In today’s meeting I gave you that current valuation case for residential property being expensive or at least fully valued, in citing a net earnings yield of 2% equating to a Price/Earnings Ratio of 50.

My other negative points included fixed or perhaps growing expenses (including rising interest rates).

Poignantly, should interest rates double, your client may still be able to service the debt, but others around him (especially those buyers of property in the past 2 years) may feel debt payment strain. This leads to a rise in listings and lower prices due to increase stock. Water does find its natural level.

On the other side of the financial statement, residential properties don’t have same ability to increase revenue in the manner or potentially the velocity in which a corporation can.

Invariably, higher residential prices have heralded new dwelling development which also increases stock.

But most subjectively, when you find clamouring buyers driven by scarcity and fuelled with low interest rates, it is identifiably a “Seller’s market” and not the other way around.

It may not be a time to ‘dump’ all holdings as it depends of your cost basis, the utility the property provides or the associated debt and holding costs but there are times to trim and sell assets when they are fully priced.

When it comes to residential real estate, a seller should greet moments when liquidity and buying interest is abound and forgo perfect timing, as the real estate market doesn’t afford you ’natural’ price discovery and quick settlement periods, unlike the stock market.

Catching the ‘fat’ part of the trade is perfect.
Preserving capital is paramount.”

August 24, 2021
by Rob Zdravevski
rob@karriasset.com.au

#property#realestate#Perth#Australia

Your house is on a P/E of 44 (continued)

Here is an article to save and check back on next year.

https://www.afr.com/property/residential/sydney-house-prices-to-soar-21pc-nab-20210726-p58cuu


I just don’t know how they can value and predict the whole of residential housing prices in Sydney with any analytical integrity and honesty.


Is it just based on estimates from biased parties?


Do they realise that a 20% rise is an astronomical spread above the cash rate for an asset which is already trading on a Price/Earnings Ratio of ~ 44?


Maybe it’s because residential property is government (tax) subsidised ?
Don’t tell me that equities are in a bubble or even overvalued.
Pfft !

#sydney#property#realestate

Higher taxes should not be surprising

I don’t know why lobby groups are surprised by higher taxes especially when you consider the support and subsidies that the industry has received for decades.

https://amp-abc-net-au.cdn.ampproject.org/c/s/amp.abc.net.au/article/100141640

House For Sale on P/E Ratio of 100

A 10 year old 4 bedroom free-standing brick house, sitting on land of 620 square metres, in my little town of Dunsborough, Western Australia has sold for $820,000 and it’ll be soon offered for rent at $650 per week.

Gross rental income will be $34,000
and I figure annual costs will be;

$2,300 in municipal rates/taxes
$1,500 in maintenance
$1,000 for house insurance
$1,900 in rental agent fees
$19,000 in interest payments

Total Costs will be $25,700
So Net Income is $8,300 or an Earnings Yield of 1%

This property is on a Price/Earnings Ratio of 100.

Just so my calculations figures didn’t go negative…..
I didn’t include any tax owed in the rental income earned.

Perhaps the ’negative gearing’ of the interest costs will offset that?

Also, let’s not count the $33,500 government stamp duty the purchaser will pay.

October 19, 2020
by Rob Zdravevski
rob@karriasset.com.au

Why your house has a P/E Ratio of 34

My friend is selling his house for A$1.4 million.
The property is tenanted (in a tight vacancy market) in Perth, Australia for $1,000 per week.

He receives $52,000 per annum,
but at the very least he pays away;

$4,000 in municipal rates/taxes
$2,000 in maintenance
$2,000 in house insurance
$3,000 in rental agent fees

To embellish this figure, we won’t deduct interest paid on the mortgage payments nor taxation owed on the rental income……let’s say ’tax offsets and deductions’ make it neutral.

This leaves his him with net income of $41,000, which is a net earnings yield of 2.92%.

So the buyer of this property, at the very best, can be seen paying a Price/Earnings Ratio of 34 for this piece of real estate.

October 16, 2020
by Rob Zdravevski
rob@karriasset.com.au

Why your house has a P/E Ratio of 34

My friend is selling his house for A$1.4 million.
The property is tenanted (in a tight vacancy market) in Perth, Australia for $1,000 per week.

He receives $52,000 per annum,
but at the very least he pays away;

$4,000 in municipal rates/taxes
$2,000 in maintenance
$2,000 in house insurance
$3,000 in rental agent fees

To embellish this figure, we won’t deduct interest paid on the mortgage payments nor taxation owed on the rental income……let’s say ’tax offsets and deductions’ make it neutral.

This leaves his him with net income of $41,000, which is a net earnings yield of 2.92%.

So the buyer of this property, at the very best, can be seen paying a Price/Earnings Ratio of 34 for this piece of real estate.

October 16, 2020
by Rob Zdravevski
rob@karriasset.com.au

Activity Increasing On The Home Front

In our little coastal hamlet town of Dunsborough in Western Australia’s south-western corner, I am noticing increased activity in homebuilding and real estate sales. As AUD borrowing rates are under 6% and cash deposits are closer to 3.5%, I started thinking that the sector may find some support.

Anecdotally, at least, electricians, plumbers and concreters are telling me that they have been steadily busy over the past couple months and quoting on a growing amount of jobs. Builders are saying that their orders books are growing and some are cautiously close to calling it a “back-log”.

Real Estate Agents have seen mere inquiries turning into written offers. Their representatives are back selling homes and I have seen many “SOLD” stickers on boards outside houses as I drive around.

This prompted me to make some calls to friends in the Eastern cities of Melbourne & Sydney to ask about their property observations, which have also turned out to be positive.

When questioned about the prices some of the houses were selling for, the answer has been similar. The vendors have tempered their expectations by meeting the market, buyers have stopped placing bids at ridiculous “fire-sale” levels and the prices achieved seem to be closer towards the 60%-70% level of the sellers original wish, which seemed to be “anchored” to prices seen 5 years ago.

I can’t say if property is cheap or if the prices are fair, but it does tell me that confidence is returning. Often that is a recipe, in order to “make a market” in the first place!

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