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PIPA Property Report – Time-In or Timing the Market

In this special monthly video update, PIPA Chairperson, Peter Koulizos analyses every capital city market over the past 15 years to determine whether time in the market or timing the market produced the best capital growth.

Great update from PIPA Chairman on the property market, worth a watch!

Transcript of the above video:

Hi and welcome to the PIPA property report. My name is Peter Koulizos. I am the chairperson for the Property Investment Professionals of Australia. The purpose of these reports is not only to educate people in the property investment industry in particular our members of PIPA, especially the qualified property investment advisors, but also to inform and educate the general public, property investors, property buyers, about property so that they can make better decisions when the time comes. So tonight I’m gonna be looking at time in or timing the market. In other words, are you better off just buying and holding in a place or are you better off trying to chase the next hotspot, buy something, leave it for a little while, sell it, then look for the next hot spot, do the same, then look for the next hotspot. So that’s what I mean by time in or timing the market. So what I’ve done is developed a spreadsheet to try and explain how it can work with an example. So what I’ve got now, I’ve gone to the ABS and got information about house price increases in all the different capital cities. I started in 2013 and went to 2019. So what I’m doing is looking at, are you better off holding a property in one of these capital cities for 15 years, or are you better holding it for five years in one of these capital cities, selling, buying in another capital city for five years and then doing the same. So I’m looking at a 15-year time span, the choice is either buying a house 15 years or buy and sell buy and sell buy and sell every five years. So let’s have a look at time in the market. So this spreadsheet looks at what would happen if you just bought and held in one of the eight major capital cities. So I’m assuming you’re gonna purchase a $400,000 house and hold. So over the 15-year period from 2003 to 2018, Melbourne was the best performing capital city with an increase of 147%, then Hobart with an increase of 122%, Darwin, 118%, Perth 106%. So all these capital cities have property, which more than doubled in that 15-year time period. Adelaide 94% just under doubling in price. Canberra 88, Sydney, 85 and poor old Brisbane down here, 81%. And so what I’ve assumed is, you’ve got $78,000 that you start with, let’s go back to my assumption, sorry. So deposit is 10% of the purchase price. Purchase cost and stamp duty and so on at 5% of the purchase price, a little bit less than that, I’m just using round numbers. Because you’re buying in different capital cities, I’m assuming you’re gonna use a buyer’s agent and pay them for their good local knowledge. That’s gonna be two and a half percent of the purchase price. LMI which stands for lenders mortgage insurance ’cause if you’re putting in a deposit of less than 20%, you’ve got to pay lenders mortgage insurance. So that’d be about 2% of the purchase price. Selling costs are 3% of the selling price that’s what you’re gonna give the real estate agent to sell, then you’re gonna pay marketing fees. You get a marginal tax rate of 45% and the capital gains discount applies, ’cause you’re holding onto the property for more than one year. So you only pay tax on 50% of it. So if you’re buying this $400,000 property in Melbourne, you need $40,000 for the deposit, $20,000 for your purchase cost, that’s your stamp duty your conveyancers and those sorts of things. $10,000 for the buyer’s agent. $8,000 for lenders mortgage insurance. ‘Cause your loan to value ratio, that’s what LVR stands for. Loan to value ratio is 90%. You’re borrowing 10, you’ve got a deposit of 10%, like you’re borrowing 90%. So you bought the place in December 2003 for $400,000, it increased by 147%. So we multiply it by 2.47. Means in 2018, it was worth $988,000. The simple math calculation, $988,000 takeaway $400,000 it means you’ve made a gain of $598,000. And all I’ve done is, put in the same scenario, but in different capital cities. So you’re buying a $400,000 property in each of those capital cities, same purchase cost, same buyer’s agents fees and so on. And so in Melbourne, if you did that for your $400,000 house, you would’ve made a profit of $588,000. In Hobart, $498,000. Darwin, $472,000. Perth, $424,000. Adelaide, $376,000. Canberra, $352,000. Sydney, $340,000 and Brisbane $324,000 profits. It’s still a pretty good, even though it’s at the bottom of those, still pretty good profit over 15-year time period as it increased by 81%. So that’s just time in the market. That’s almost like set and forget. So what’s it like timing the market? Trying to put it in the best performing capital cities, every five-year period. So what I’ve got across here, is all the capital cities. And then looking at their performance. So in Sydney from 2003 to 2008, property prices actually dropped by 5%. In the next five years from 2008 to 2013 that went up by 41%. And 2013 to 2018 went up by 38%. Melbourne, 34% from 2003 to 2008. 34% again, coincidentally from 2008 to 2013. And then 38%, 2013 to 2018, very steady performer in the 30 percentile range what feature that five-year period. And the reason I’ve got some in red and some in green is, so this one in red in Sydney, that means that was the worst performing capital city for that five-year period, and if its in green, it’s the best performing capital city. So we’re looking at Sydney 2003 to 2008, minus 5%, the worst. Darwin, positive 91%. That’s a huge increase for five years. That’s the best performing, that’s why it’s in green. Then we go to Sydney. The next five years, Sydney is actually the best performing capital city at 41% with Hobart, the worst at 11. And then 2013 to 2018, Hobart is the best. So it goes from being the worst in 2008 to 2013. The best in 2013 to 2018. And then Darwin drops by 15% in that same price period. So I’m assuming again, we’re buying a $400,000 house, you got the $78,000, you got your deposit, your purchase costs and so on. And so Darwin increased by 91%. So we multiply it by 1.91, which gives us a final value of $764,000, which is a capital gain of $364,000. Take away our selling costs. Then we’ve got capital gains tax. Remember we are eligible for the capital gains discount and we finish up with $668,837. So not bad. We started off with $400,000 and after all of our taxes and fees have been paid, we finish up with $668, excellent results. Then we reinvest that money into the Sydney property market. But now because we made a profit, we can afford to spend more than $400,000. We’re actually gonna spend $560,000. Because $56,000, 10% is the deposit. Then the purchase costs, then the buyer’s agents fees, lenders mortgage insurance, again. So we put it into the Sydney market, which increases by 41%. Our final value is $789,600. Capital gain of $229,600. Selling costs, capital gain tax that’s what we left with, $725,890. And then we put it into the Hobart property market. And this time we’re buying at $607,000 house, as you would expect as property prices increase and we make profit, we can buy more expensive homes. It increases coincidentally by 41% in Hobart. And that in 2013 to 2018, means the final value is $855,870. Capital gain of $248,870. Selling costs, capital gains tax, we’re left with $786,904. If we look at, I’m just showing you the sales, this I can say the sum that I did. So all I’ve done here is, start with whatever money we’re left with after the 15-year period, which is $786,804, take away what we started with, which is $400,000. So we’ve made a total capital gain of $386,804. That’s the best that we could have done if we either fluked it or we were really smart and we knew which capital cities were gonna do this. But now that’s the best case scenario. Now let’s look at the worst case scenario, if you got it all wrong. So let’s say in 2003 and 2008, you invested in the Sydney property market. A similar $400,000 house. And it dropped by 5%. So we multiplied by 0.95 means it’s only worth that $380,000. So it’s dropped 5% in value. Capital gains, were unfortunately we’re not paying any capital gains tax. ‘Cause we made a loss. There’s our selling costs, we’re actually gonna get, assuming I’m not gonna get into the tax implications here, but assuming we can offset it against some previous capital gains in the past, we would get some money back and you finish up with $380,165. Not a good start ’cause we had $400,000 in 2003 and we finish up with less than that after five years. Then we put it into the Hobart property market. And this time we can only afford to buy a $318,000 property, because number one, we finished up with less, and number two, we’ve got all of these cost, purchase cost, buyer’s agent fees and so on. So $318,000, it went up by 11%, means that the final value of the house is $352,980. Thankfully we made a capital gain of $34,990. Selling cost, capital gains, is only $1,910. We’re left with $340,480. Still below what we started with back in 2003. And then we put it in the Darwin property market. But now ’cause we’ve lost even more money, because of those buying and selling costs, we can only buy something that’s worth $285,000. It drops by 15%. So we multiply it by only 0.85. Then it’s worth $242,250. We made a capital loss, that’s why I’ve got it in red and brackets. Generally in accounting, you’ll either see it in red or a minus sign or brackets. Selling costs are those, capital gains tax, we get some money back from the ATO, finish up with $249,443. So after all of our research, unfortunately we got it a little wrong, we made a loss of $150,557. As we started with $400,000 back in 2003, we finished up $249,443, a loss of $150,557. Please remember I’ve only picked the very best and the very worst scenario. But there are eight capital cities, three different time periods, there are over 500 different outcomes that would leave us with a profit or a loss somewhere between plus $386,804 minus $150,557. For over 500 different options. The point I wanna make here is, see the best that we could have done, so if we either fluked it or we were really smart, and we did this and we made $386,804 look at where it sits. So, we would have done better than just leaving it in Brisbane or at the Brisbane property market for 15 years or the Sydney property market or the Canberra, Adelaide market, or would have done just a little bit better if we left it in Adelaide property market. But if we left it in Perth or Darwin or Hobart or Melbourne, we would have made more money. So I find that very interesting because doing all your research in the beginning and having a long term aim, more than 50% chance of outperforming somebody who was smart enough to pick the best performing capital cities that we have in every five-year period, but because of the huge transaction cost to buy and sell property, in the end they didn’t do as well. The other positive thing for me is, even though Brisbane and Sydney didn’t do so well, the eight possible options, we all made profit. The least amount of profit, you were gonna make is $324,000. If you tried timing the market, there were 500 plus options and you had a certain chance not a certain chance, you had a chance of losing money here. Who wants to invest money over a 15-year period and finish up with less than what I started. So for me, the moral of the story is, generally the best way to make money in property is to buy and hold. Not the only way, but it’s the best way. In my opinion, you can try and look for the next hotspot. I’d encourage you to do that. But look for a hotspot and keep it there for a long period of time. ‘Cause as I’ve demonstrated here, with this timing worksheet, because of these huge buying and selling costs. So we’ve got stamp duty at 5%, we’ve got selling costs, we’ve got capital gains tax that you have to pay. You’re losing a lot of money. Now you might say Peter that this is not fair, because you haven’t included capital gains tax here. My answer is, I haven’t sold it. I don’t need to sell it. I can still access the equity here to go buy myself another property. That’s about all that I have, for this particular PIPA property report. That’s just my opinion. I would strongly encourage you to speak to your qualified property investment advisor, QPIA, and ask them not just for their opinion, but their advice and also ask them to demonstrate to you. Ask them, what do you think? Am I better off buying and holding in an area of doing all that research at the beginning and just sitting on it? Or am I better trying to look for the next hot spot every few years? So, thanks again. Thanks again for taking the time to listen to this property, PIPA property report. Remember this is not just for our members or qualified property investment advisors, it’s also for the general public, property investors, homeowners, so that you can better inform and educate yourself. So you make the best decision for yourself when the time comes. Thank you for your time.

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