Unusual investment property situation; looking for feedback on my advice (Australia)

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fabada
Posts: 6
Joined: Fri Jun 19, 2020 3:22 am

Unusual investment property situation; looking for feedback on my advice (Australia)

Post by fabada »

Slightly unusual situation. Looking for feedback on my advice to a friend.

So my friend is in her mid-30s, comfortable job, almost owns her own apartment outright, saving responsibly etc. Her parents, migrants who came to Australia from China 25 years ago, are slightly less financially savvy.

Despite that, they had a successful small business, the parents have now separated and own their own houses outright. They are more or less retired, both in their early 60s. My friend one days hears that her mum has put $500,000 - a significant part of her retirement savings - into a 'chicken venture'. As in, literally farming chickens. She is - quite rightly - shocked. A family meeting is called, they discuss the 'investment' and mum agrees to instead give my friend the money to invest in a house on her behalf, with the ultimate goal of my friend one day living in it 10+ years down the line if/when she wants a larger place. Mum doesn't really *need* stellar returns or rent payments - this is viewed by her as an investment rather than a retirement meal ticket... and she doesn't want it invested in the stock market, which she views as too volatile. [If that's the case, Vanguard should open a line of chicken farm ETFs]

So, unless anyone knows how to convince Conservative Asian Parents that the stock market is actually pretty safe/reliable in the long-run, the money will be used to buy a house.

Mum will give her daughter - my friend - 500-700k with which to buy a house that my friend might one day live in. So, my question is basically how much of a mortgage to take out/how much house to buy.

My friend lives in a state capital (not Sydney or Melbourne) which - like the rest of the country - has experienced pretty rapid housing price growth lately. I'm inclined to advise her to wait 6-12 months given the price rises seem unsustainable/ripe for bursting.

But should she 'just' take out a 300k mortgage and find a $1m place? Or, given the down payment is so significant and interest rates are still pretty slow, should she take out more like 500-700k with more land (that will therefore appreciate better than her current apartment)?

My friend's income is likely to hover around 150k pre-tax for at least the next decade or so, and she already owns her PPOR. She could pretty comfortably afford a $1m+ mortgage, but I personally don't like the idea of that much debt... and it feels like the relationship of [house price:rent you're able to charge] breaks down as the house price increases.

Anyway, I don't really truck with property, but I'm inclined to say she should go for a more expensive place, something closer to a 'dream house' in an excellent location - particularly given that she may one day be living in it.

Any and all comments welcome - thanks very much.
Valuethinker
Posts: 48954
Joined: Fri May 11, 2007 11:07 am

Re: Unusual investment property situation; looking for feedback on my advice (Australia)

Post by Valuethinker »

fabada wrote: Mon Aug 02, 2021 9:32 am Slightly unusual situation. Looking for feedback on my advice to a friend.

So my friend is in her mid-30s, comfortable job, almost owns her own apartment outright, saving responsibly etc. Her parents, migrants who came to Australia from China 25 years ago, are slightly less financially savvy.

Despite that, they had a successful small business, the parents have now separated and own their own houses outright. They are more or less retired, both in their early 60s. My friend one days hears that her mum has put $500,000 - a significant part of her retirement savings - into a 'chicken venture'. As in, literally farming chickens. She is - quite rightly - shocked. A family meeting is called, they discuss the 'investment' and mum agrees to instead give my friend the money to invest in a house on her behalf, with the ultimate goal of my friend one day living in it 10+ years down the line if/when she wants a larger place. Mum doesn't really *need* stellar returns or rent payments - this is viewed by her as an investment rather than a retirement meal ticket... and she doesn't want it invested in the stock market, which she views as too volatile. [If that's the case, Vanguard should open a line of chicken farm ETFs]

So, unless anyone knows how to convince Conservative Asian Parents that the stock market is actually pretty safe/reliable in the long-run, the money will be used to buy a house.

Mum will give her daughter - my friend - 500-700k with which to buy a house that my friend might one day live in. So, my question is basically how much of a mortgage to take out/how much house to buy.

My friend lives in a state capital (not Sydney or Melbourne) which - like the rest of the country - has experienced pretty rapid housing price growth lately. I'm inclined to advise her to wait 6-12 months given the price rises seem unsustainable/ripe for bursting.

But should she 'just' take out a 300k mortgage and find a $1m place? Or, given the down payment is so significant and interest rates are still pretty slow, should she take out more like 500-700k with more land (that will therefore appreciate better than her current apartment)?

My friend's income is likely to hover around 150k pre-tax for at least the next decade or so, and she already owns her PPOR. She could pretty comfortably afford a $1m+ mortgage, but I personally don't like the idea of that much debt... and it feels like the relationship of [house price:rent you're able to charge] breaks down as the house price increases.

Anyway, I don't really truck with property, but I'm inclined to say she should go for a more expensive place, something closer to a 'dream house' in an excellent location - particularly given that she may one day be living in it.

Any and all comments welcome - thanks very much.
Nightmare scenario.

She should avoid the obligation of having to live in the property in the future. Maybe she says now she will and in 10 years says things have changed and it is no longer suitable.

I would not take the higher leverage. I have been totally wrong about this, so far, but I see Australia the same way as I see Canada. A housing market, which, due to particular factors (money from the Pacific Rim, government policy to stimulate housing, extremely loose monetary policy, loose home lending conditions) is in a bubble, far above historic norms regarding price to income (high) or rental income to price (low "yield" or "cap rate").

Now the problem is I don't know Australia well, but I do know a lot about Canada. So I may be reasoning by false analogy. Australia has more direct economic exposure to the Asian superpowers (Canada exports forest products & minerals, to an extent, but its largest export is tar sands oil shipped into the US market). Both countries import a lot of capital from East Asians seeking a "safe" home for their money - and this is tied into higher education and immigration policies which have historically made it relatively easy for their children, at least, to secure national passports. But whilst this is a very important factor, especially in Vancouver, we'd be wrong to think that Canadians haven't leveraged up and jumped on the bandwagon -- if the bubble blows in Canada, it will hurt a lot of people.

But I am a total bear on housing markets in the 2 countries. As in, this cannot go on, it will not go on, and a pronounced slump, even of Depression levels, is likely. Neil Monnery's Safe as Houses: 1200 years of housing prices is the best general read on this that I have found - covers the Australian boom of the late 1800s, and the slump of the 1930s and 40s. Robert Shiller's website also has links to some international data on housing prices, I believe.

The counterargument is there is no sign of interest rates going up, which is the usual factor which tips a housing market into slump.

So my solution would be the less heavily leveraged place. And I would make that argument based on rental yield ie net rental income/ value of property. Usually cheaper places have higher net rental yields. Because the people who live in them are people who cannot afford to buy. The luxury rental market is very vulnerable because in a downturn those tenants will trade down in rentals or be able to buy. Rents in central London (Westminster) fell by 16% in the March 21 on March 20 time period (probably rising again, now).
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