Latest / Money Grows on Trees / #276 - Australian Property Is OVERPRICED

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#276 - Australian Property Is OVERPRICED · Money Grows on Trees

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Is Australian property overpriced? Look, absolutely. Absolutely.
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Does that mean there's no opportunities in the marketplace? No. It means
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you can still find opportunities. Does it mean that you'll miss out? Not necessarily. I'm
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a peasant until I buy property. I'm not an adult until I buy property. All my friends
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are buying property, property, property, property, property, property, property, property, property, property. If
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you're just getting in for that particular reason, probably
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not ideal. Can you grow your property portfolio at
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the same rate if you're buying it for arguably twice
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as much as what it's worth when you first started? And the answer would be, I'm Lloyd
0:31
James Ross, seven-figure investor and entrepreneur, and I've helped thousands of
0:35
business owners and professionals turn financial stress into
0:38
success. If you're stuck in old money habits, overwhelmed by investing
0:42
or unsure where to start, this is for you. I'll give you the mindset
0:45
and strategies to take control, grow your wealth and achieve
0:49
financial freedom. It's time to make your money work for you.
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Australian property is overpriced. And
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on this episode, we're going to dive deeper into what metrics
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from what sources dictate this exact statement.
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Because if you've been living under a rock, you may not think it's
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overpriced. But if you live in Australia and you've been living in Australia, even
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if you own property, you know well and truly, you
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know deep in your heart and your soul, it is overpriced. So
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let's look at what that means. How do we know it's overpriced? What's
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it overpriced compared to? And how does that impact you as
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a homeowner, as an investor or as a citizen of
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this country? And of course, we have seen in recent months,
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that overpriced markets such as Canada, USA,
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New Zealand are all now falling fairly rapidly. In fact,
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Canada has come off 30% since 2022 highs.
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So every storm runs out of rain or trees don't grow out of the sky,
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so to speak. So I think we're going to see a bit of a reckoning in
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our own market. It may not seem like it's going to collapse, but it could just go sideways
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for 10 or 20 years too, right? Anyways, how do we know that
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it's overpriced? Well, a couple of things very briefly. The
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first thing is looking at property prices
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when compared to gross annual incomes, the average
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annual income of people who live in the country. So for example,
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a fairly reasonable price to pay, pound for pound, if
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you look at all the other countries in the world, A
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reasonable price to pay for a home is
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about four to six times annual income. For example, if
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I'm earning $100,000 a year, which is the average wage in Australia, a
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reasonable price to pay for a home would be in the vicinity of
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$400,000 to $600,000. Does that make sense? It's four to six times income. What
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that allows you to do is borrow money without taking 50% of
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your income to pay the mortgage back and wrecking yourself in
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cashflow, minimizing your risk, but also it's a
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reasonable price to pay for a property investment where you can earn income
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and it doesn't tip into negative gearing territory, meaning
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the assets losing money drastically. And so based
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on that one metric, if you look at Sydney, Adelaide,
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Some parts of Melbourne and certainly the Gold Coast where I live, those
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are the main cities where the price
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to income is about nine times
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annual earnings. So for example, if you're earning $100,000 a year, you're
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looking at a property average that's priced about $900,000 to a
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million dollars. Now if you look around, you'll know that's true. In Sydney,
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it's more like 13 times earnings. So
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in Sydney, it's even higher. So you see the Sydney
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market is very richly valued. But I would even anticipate two of them,
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the Gold Coast is more like 11 times, because I live here and I can see that. And
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so if you look at that metric alone, it is overpriced
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compared to other countries that have more like four to six times annual
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earnings for property price. Does that make sense? Now, can you find properties
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in Australia that match that? Yes, you can. Just
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in the major cities, it seems to be extremely unaffordable, historically,
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based on that one metric. However, if you go to places like Townsville, where
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my brother lives, You could buy houses there for $600,000. You
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may not have the same income there as someone who's living in Sydney, but
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you can still buy homes for $600,000 in those locations, perhaps
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even a little bit less. Now, will that continue? It depends on
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how many people are moving there, the job opportunities, et cetera, in the market, but
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there are places you can still buy houses for that
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price. And in some of the capital cities, depending
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if you can pick the deals out of it, you can
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also buy properties for pretty good deals in some of
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the major cities. And I was looking in Melbourne the other day, you can actually buy three
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bedroom apartments right where Crown Casino is
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in the heart of Melbourne. You can buy three bed apartments there for $960,000. And if you look
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at the Of
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course, they're not brand, brand new, but if you look at the
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comparables as to what you can buy on the Gold Coast, it's about 2 million for
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the same thing. So I think some areas of Melbourne, because of
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the crime rate there, because of what happened during COVID, a lot of people are
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leaving Melbourne, ending up on the Gold Coast. and it's
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pumped the prices up here, but it's also made prices down there a bit more affordable. So
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if you're looking for deals, you can find them in places like
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Melbourne in specific locations and areas, right? Now the same
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can be said for Perth. And Perth is probably priced more like six
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to seven times annual earnings. So if you're looking for a city that's a bit
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more affordable, there's probably better deals in Perth as well.
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However, you do have to contend with the fact that it's five hour flight to
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the East Coast. So that's probably also what driving the
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affordability there as well. So you're going to
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have to give up some of the locale and the proximity to get some
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of these better deals. But it does show you that there are still
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affordable houses available in Australia if you're prepared to make
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the move in the sacrifice. However, on
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the metric of annual income compared to the pricing, it's
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overvalued. Got it? It's overvalued. Another
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metric we look at to see if it's overvalued or undervalued are the yields
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that residential property, we're just talking about residential for the time being, that
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residential property is overvalued are
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the gross yields that the property will produce. So
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for example, A fairly valued residential
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property would produce potentially between 4.5 to
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5.5% gross yield. The gross yield is the annual gross rent. So
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for example, if it's $50,000 a year in rent and the purchase
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price is a million dollars, the gross rental yield is 50,000 divided
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by a million. That's how you work out the gross yield. and that would make
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it 5%. So if your property investment is producing 50 grand
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a year or $1,000 a week in income and you buy it for a million bucks, it's
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seen to be historically reasonably valued, not
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cheap, not expensive. However, when the yields
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start to fall, it means that the property price has gone up
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and the rental yield or rental return hasn't caught up yet. And that's what's
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happened in Australia over the last few years, it's done this. And
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if you look at yields now, they're around about two and a half to 3%. So
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it's about half of what they used to be. So on that metric of
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gross yields at two and a half to three and a half percent, it
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just shows you that the prices have gone up, but the rental hasn't caught up. And
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if you have an asset where that's price that's not
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supported by the income, then it can tell you
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on the back of a fag packet, on the back of an envelope that it
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seemed to be currently overpriced. Now, will the rents
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catch up? Potentially. Do they have to? Not necessarily. But
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do all properties in Australia have that yield scenario? No. There are people
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that specialize in finding properties that actually
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have high yields. But the thing with high yields is you're going to find it in
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a place where the growth is not as robust. So people try
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and kind of outsmart and they think, oh, I'm going to go and buy a property that's got a high gross yield. I'm
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like, well, that's fine, but you're probably not going to get as much growth. So you have
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to contend with a sweet spot and some balance. But there are still some deals
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you can find where you can get multiple dwellings producing income, you
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can add on an extra dwelling, you can add on
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a room, you can redevelop, you can spruce up,
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increase the rent, but you can still find properties that
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have higher yields than three to three and a half percent, you can. But
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by and large, across the country, the
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gross yield is at a point that would show
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you that historically it's overvalued. Okay,
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particularly when you have interest rates. So when people bought
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property, when rates were zero, the RBI rate was zero or 0.1. the
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debt was cheap, so they were buying property at the low interest
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rate. Now, if you discount that back, the value, the cash flows from
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the property back to a net present value today, based on a lower rate, the
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actual value of the property is more. But now rates have gone up and you discount that
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asset, the cash flows back at a higher rate, the asset
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is worth a lot less. So at retail rates now,
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say five or six, six and a half percent, You
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can see that a property that's only pulling in three and a half percent, if
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you're paying the mortgage rates of six to six and a half percent, you
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can see how it's heavily negatively geared. And you can see
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that the asset is not pulling in enough cash to
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warrant or justify the price paid. And
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so cash generation and yields are another way
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to identify whether a property seems to be overvalued. And
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by all accounts, it seems to be based on the gross yields of residential in
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certain cities, it is overvalued. Just quickly,
9:42
if you're ready to take control of your finances but feel stuck on where to
9:45
start, I have a solution. My book, Money Bias Happiness, simplifies
9:50
investing and wealth building with practical steps to help you achieve financial
9:54
peace. Get your copy via the link in the show notes and let's get your
9:57
money working for you. Now back to the episode. Another
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metric we can use too is replacement cost. And to replace
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a lot of property at the moment with high inflation and high
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labor costs of construction and materials, it
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is fairly expensive to replace. So it's
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even expensive to build as well now compared to what it
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used to be. So in that metric, it's also a little bit overpriced as well. So
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we're seeing that it's nothing It's not yet quite like Japan was
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in the late 80s and early 90s where it was 18 times earnings
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to buy a place in Tokyo But at 9 to 13 to 14 times
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the city it is getting up there and I I If
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people are spending 50% of their household income on the mortgage repayment, which
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they are, that's another metric that tells us that historically it
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is overvalued because normally it would be 30%. So
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if you're looking for, and again, it depends on how much you
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borrow and how much cash deposit you put in, but that's another metric that
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tells us that it's overpriced. And the
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reason for it being overpriced, and I've done other videos on this particular topic, go
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back, they've been very, very popular topic episodes. The
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reason for that is because we're having two things happen at once. One, there's an undersupply happening,
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or static supply or no supply. And there's also heightened demand
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from the mass immigration that's happening. So we're seeing, it's
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kind of like architraved. It's kind of like, it's been designed to
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continue to be propped up. Now that will have a fine art life. It
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will change. It will change. We just don't know when.
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So it's like, I love this saying by Warren Buffett. He
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said that if you're investing in a speculative market
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where it seems to just be going up and up and up, it's a little bit like Cinderella
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who's at her dance with the prince and she's dressed in,
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you know, she looks
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amazing. And at midnight, is it? Her
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chariot's going to turn into a pumpkin? Or at midnight
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when the clock strikes midnight, you're going to turn into a pumpkin. But
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in the Cinderella story, she can see the clock. But when you're speculating
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in markets like this, you can't see a clock. There is no clock on the wall.
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So you're actually playing a game where you just don't know when it's going to end. So
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it's like holding the hot potato. So when the music stops, we
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will see some shifts to the historical. Based
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on history, we will see some shifts in the affordability of the Australian
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property market. And I don't know if I'd want to be holding
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a lot of leverage property when that happens, because if you have a lot of leverage and it falls in
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value, you also amplify your losses. And this is what happened in the GFC. And
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had someone in the comments mentioned the other day saying, you know, you don't know what a recession is
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like. I think they must think I'm younger than I am. But
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I'm actually 42, and I remember the GFC. I was getting offered to
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buy apartments in Service Paradise for $57,000. I mean, I've
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seen what can happen. A friend of mine who is one of the prolific developers on
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the Gold Coast, he went broke. Another one who's very prolific
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went broke. In fact, lots of developers went broke. Lots of
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people went broke. Lots of businesses went broke. There's this famous street
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in Main Beach, which is the highest price suburb
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in Queensland. And it's called Ted Avenue. And back in
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the GSC, we called it Debt Avenue. No one wanted to buy there. And
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so those times can return. And I just think that if you're 35 or
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younger, you may not have seen a recession of what can be like when
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property actually falls. But it can fall, just so you know. So
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if we're at historical highs based on those key metrics that
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I just used there, then we
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know that the market's overpriced. So can you grow
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your property portfolio at the same rate if you're
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buying it for arguably twice as much as what it's worth
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when you first started? And the answer would be, from what we understand about
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investing and history of markets, no. You can't expect
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the same returns if you're buying at the peak of the market. Now,
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because there's a lot of bubble talk all over social media on X,
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obviously on my channel, but if you look, if you ask people,
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even those who are in the market will agree with you that it's very
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highly priced compared to what it typically should be. So I don't
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think it's even up for debate, which is probably why these videos get
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so much attention, because I think people are looking for some sort
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of evidence that they're right, thinking, oh my god, it's actually really expensive. So
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if you're someone who's looking to get into the market, just understand that
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it looks very highly priced. It's certainly not an asset class
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I'm aggressively looking at at all. However, and by,
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just so you know, I'm not like, I don't just deathly
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hate property. It's a sensible asset at sensible prices.
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But what I'm not all for is buying overpriced anything.
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I don't like to even buy overpriced coffee. I like
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to find value in the marketplace. And right now, there doesn't
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appear to be a lot of value Broadly
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across Australian cities when it comes to property residential property
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assets It just doesn't appear to be an undervalued sector. It
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appears to be a very overvalued sector. So
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I don't want to be Fishing in that pond because
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all I'll be doing was pulling out a fish that's not of any value So
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what you want to do is you want to look for? Pockets in the economy
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in the in the country in different asset sectors and
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you want to look for value So I look for value in underpriced public
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company securities I look for value in small businesses. I
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look for value in starting businesses. And you can still find
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value in the real estate sector too if you're prepared to put in
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the work and find the mispriced bets. But
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to make money, you must find an asset that's valued at
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X and buy it for less than X. To
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make money, you must do that in investing. So whether
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it's property or or businesses or shares,
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that's what you must decipher. Would there be any instance
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where buying an overpriced property would still be worth it? I
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think the answer is yes. If you don't have to
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borrow a lot of money and it's not putting you in a, in
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a, it's not like handcuffing you to a horrible life, to
16:03
a horrible job that you hate just to pay it off. If it's not doing that and
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you already have assets that are producing income and you're already doing what you love and
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you have, and you've got the capacity, then
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buying a home to develop
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a lifestyle that you love is a good idea. It
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makes sense, particularly if you're going to live there forever. It
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shouldn't matter then. That would warrant potentially overpaying,
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right? Because if you don't need to worry about the gains and
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you've got the cash and you just want the lifestyle, of course. I'm
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sure a lot of people buy out of that and that makes some sense. But I'm
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certain too that most people don't buy like that. I
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think it's a good question, but under the right circumstances, sure. Warren
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Buffett's got this wonderful metaphor he uses, which I love. He says, in investing, you've
16:49
got to identify the old saying, a bird in
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the hand is worth two in the bush. You have to identify how many birds
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are in the bush and what are the odds and chances and
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likelihood that I'm going to get the birds out and by when. Because
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if there's no birds in the bush, you're
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not going to get anything from it. And by no birds, I mean things like crypto and
17:09
so forth. There's no cash flow in there, right? So you don't know, you can't get
17:12
any cash flow from it. So you don't even know what it's worth. So you can't even buy that bush.
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That's why I don't touch it. But if you look at property, you're
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like, well, there's you know, this rental yield of 50 grand a year, but
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it's going to take me 25 to 30 years to get all that money back the birds
17:26
back in my hand. Maybe that's not a good place. Maybe if I
17:29
bought a laundromat for 250 grand, and I pulled out all the
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birds in two and a half years, that makes more sense. Are you with me? So like how
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many birds are in the bush? And then what's the What
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time frame do you have to wait for to get them
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back? And that's a pretty good metaphor for what
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you should be looking for when it comes to investing. What you don't want
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to be doing is saying, well, everyone else is in property. Property is
17:53
just going to go up forever. It's going to go up as it does in the past. I get told my parents and parents, buy
17:57
property, buy property, buy property. I'm a peasant until I buy property. I'm not an
18:00
adult until I buy property. All my friends are buying property, property, property, property, property, property,
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property, property, property, property. If you're just getting in for that particular reason, probably
18:09
not ideal. Will there be other opportunities? Yes.
18:13
Or look for another way to grow your wealth while you're renting at
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the same time like I do. It's okay. It doesn't
18:19
also have to be forever. I know people who have bought
18:22
their first house when they're 50, but they bought the one they wanted in the
18:26
right way that doesn't make them house poor. It's not a race.
18:30
What is important is that you're doing it sensibly for all the
18:33
right reasons, not just to keep up with the Joneses or because of FOMO.
18:37
So steady, hasten slowly, be very careful. I
18:41
know a guy, this car we have here, we went to Fraser
18:44
Island and long story, it needed a detail. Took it to a guy, he
18:48
had 505 star reviews on Google. And I was like, that's the guy, he's in Southport and
18:52
he details cars called Squeaky. Go check him out. And I took
18:55
my car there and it's a house and he details three cars at the back of
18:58
his house. He probably makes, I don't know, I'm just guessing, 7,000 a
19:02
week. Cause it's 400, 500 bucks to get your car detailed. He's probably doing
19:05
three a day. So do the numbers. And he lives there. So
19:09
I would say that. You could overpay for
19:12
a property there if you're generating a business from it. And obviously, it makes more
19:15
sense because the actual asset is producing more.
19:19
So if the asset can produce more cash flow, you ought to be prepared to
19:22
pay a higher price for it. That's what makes it more valuable. What
19:26
makes an asset valuable is its propensity to give you the birds out of the bush to
19:30
pay you the cash. So if it pays more, it's worth more. That's how you determine
19:33
what it's worth. But most people are buying with no cash. It's
19:37
not worth much, my opinion. We rent an
19:41
apartment and we run five, in
19:44
partnership, five businesses from there, from our apartment
19:49
in my cupboard. And I talk about this in my book, Become Time Rich. It's
19:52
a famous cupboard. Now, if
19:57
we owned it, we'd have to pay $300 a week just in
20:00
body corporate fees and rates and insurance. So even
20:04
if I owned it outright with no debt, it'd still cost me
20:07
$300 a week. Then you add in view tax. And that, by
20:10
the way, that's inflationary. And so it even costs money now
20:14
to live in a debt-free house or apartment, and apartments are worse. So
20:19
it doesn't make a lot of sense for us to own. It just doesn't.
20:23
It's so much better to rent for us based on the rental
20:26
yield, the cost of it, what we run out of there, the
20:30
size of our family, all those things make it prima facie better
20:33
to rent. If that shifts and changes at any point in time, like there's
20:37
a correction in the market, you need a bigger block, then I'd address it then.
20:40
But I'm not going to be doing it just because People
20:44
think I'm a peasant because I rent in Australia. I could care less what people think. That's why
20:47
I love this channel. Is Australian property overpriced?
20:51
Look, by the main metrics, absolutely.
20:56
Absolutely. Does that mean there's no opportunities in the marketplace? No.
21:00
It means you can still find opportunities. Does it mean that you'll miss out?
21:04
Not necessarily. These things have a tendency to go in
21:07
waves. The market moves in big waves. What
21:10
if, just speculating, what if you
21:14
can't see the future? What if the
21:18
Labour Party gets out of power because people are fed up? And what if the
21:21
coalition or One Nation just goes whoop and just takes
21:25
leadership in the next two years? And what if
21:28
immigration is cut to 100,000? And what if all that demand that
21:32
you're relying on for price movement changes? And what if it all disappears overnight?
21:36
What if, what if, what if, what if? You can't read the future. So
21:39
how do you know that won't happen? And who's to say that
21:43
over the next 20 years it just goes sideways? Look
21:47
what's happening in Canada. Look
21:50
what happened here in Australia in 2008. Look what happened in Japan. Look
21:55
what is happening in New Zealand. Look what's happening in the United States. If
22:02
I had to bet that it was going to be 20 times earnings in the next 10 years, I
22:06
wouldn't take the bet. So I hope that gives you some insight into
22:09
what, how to kind of on the back of an envelope,
22:14
think about the valuation of property and understand that
22:17
it's not always a bad deal. it can be in a very good
22:21
deal. And if this channel ever gets to the point where I'm like,
22:24
holy crap, I just bought the best product, you should see
22:27
this deal, then pay attention. Because
22:31
I would then feel like I'm getting a ton of value. So just to caveat this, I
22:35
don't hate property. I hate overpriced property like
22:38
I hate overpriced anything. I just like finding deals, okay?
22:42
I like finding better value, all right? So I hope that makes sense. If you've enjoyed the
22:46
episode, look, I'd love you to leave a comment. If you've got a question or
22:49
a comment or a very vehement opinion, feel
22:52
free to put it below in the comments because I will come back here and reply to them. I
22:56
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