#276 - Australian Property Is OVERPRICED

Is Australian property overpriced? Look, absolutely. Absolutely. Does that mean there's no opportunities in the marketplace? No. It means you can still find opportunities. Does it mean that you'll miss out? Not necessarily. I'm a peasant until I buy property. I'm not an adult until I buy property. All my friends are buying property, property, property, property, property, property, property, property, property, property. If you're just getting in for that particular reason, probably

not ideal. Can you grow your property portfolio at the same rate if you're buying it for arguably twice as much as what it's worth when you first started? And the answer would be, I'm Lloyd James Ross, seven-figure investor and entrepreneur, and I've helped thousands of business owners and professionals turn financial stress into success. If you're stuck in old money habits, overwhelmed by investing

or unsure where to start, this is for you. I'll give you the mindset and strategies to take control, grow your wealth and achieve financial freedom. It's time to make your money work for you. Australian property is overpriced. And on this episode, we're going to dive deeper into what metrics from what sources dictate this exact statement.

Because if you've been living under a rock, you may not think it's overpriced. But if you live in Australia and you've been living in Australia, even if you own property, you know well and truly, you know deep in your heart and your soul, it is overpriced. So let's look at what that means. How do we know it's overpriced? What's it overpriced compared to? And how does that impact you as a homeowner, as an investor or as a citizen of

this country? And of course, we have seen in recent months, that overpriced markets such as Canada, USA, New Zealand are all now falling fairly rapidly. In fact, Canada has come off 30% since 2022 highs. So every storm runs out of rain or trees don't grow out of the sky, so to speak. So I think we're going to see a bit of a reckoning in our own market. It may not seem like it's going to collapse, but it could just go sideways for 10 or 20 years too, right? Anyways, how do we know that

it's overpriced? Well, a couple of things very briefly. The first thing is looking at property prices when compared to gross annual incomes, the average annual income of people who live in the country. So for example, a fairly reasonable price to pay, pound for pound, if you look at all the other countries in the world, A reasonable price to pay for a home is

about four to six times annual income. For example, if I'm earning $100,000 a year, which is the average wage in Australia, a reasonable price to pay for a home would be in the vicinity of

$400,000 to $600,000. Does that make sense? It's four to six times income. What that allows you to do is borrow money without taking 50% of your income to pay the mortgage back and wrecking yourself in cashflow, minimizing your risk, but also it's a reasonable price to pay for a property investment where you can earn income and it doesn't tip into negative gearing territory, meaning

the assets losing money drastically. And so based on that one metric, if you look at Sydney, Adelaide, Some parts of Melbourne and certainly the Gold Coast where I live, those are the main cities where the price to income is about nine times annual earnings. So for example, if you're earning $100,000 a year, you're looking at a property average that's priced about $900,000 to a million dollars. Now if you look around, you'll know that's true. In Sydney, it's more like 13 times earnings. So

in Sydney, it's even higher. So you see the Sydney market is very richly valued. But I would even anticipate two of them, the Gold Coast is more like 11 times, because I live here and I can see that. And so if you look at that metric alone, it is overpriced compared to other countries that have more like four to six times annual earnings for property price. Does that make sense? Now, can you find properties

in Australia that match that? Yes, you can. Just in the major cities, it seems to be extremely unaffordable, historically, based on that one metric. However, if you go to places like Townsville, where

my brother lives, You could buy houses there for $600,000. You may not have the same income there as someone who's living in Sydney, but you can still buy homes for $600,000 in those locations, perhaps even a little bit less. Now, will that continue? It depends on how many people are moving there, the job opportunities, et cetera, in the market, but there are places you can still buy houses for that

price. And in some of the capital cities, depending if you can pick the deals out of it, you can also buy properties for pretty good deals in some of the major cities. And I was looking in Melbourne the other day, you can actually buy three bedroom apartments right where Crown Casino is

in the heart of Melbourne. You can buy three bed apartments there for $960,000. And if you look at the Of course, they're not brand, brand new, but if you look at the comparables as to what you can buy on the Gold Coast, it's about 2 million for the same thing. So I think some areas of Melbourne, because of the crime rate there, because of what happened during COVID, a lot of people are leaving Melbourne, ending up on the Gold Coast. and it's

pumped the prices up here, but it's also made prices down there a bit more affordable. So if you're looking for deals, you can find them in places like Melbourne in specific locations and areas, right? Now the same can be said for Perth. And Perth is probably priced more like six to seven times annual earnings. So if you're looking for a city that's a bit more affordable, there's probably better deals in Perth as well. However, you do have to contend with the fact that it's five hour flight to

the East Coast. So that's probably also what driving the affordability there as well. So you're going to have to give up some of the locale and the proximity to get some of these better deals. But it does show you that there are still affordable houses available in Australia if you're prepared to make the move in the sacrifice. However, on the metric of annual income compared to the pricing, it's

overvalued. Got it? It's overvalued. Another metric we look at to see if it's overvalued or undervalued are the yields that residential property, we're just talking about residential for the time being, that residential property is overvalued are the gross yields that the property will produce. So for example, A fairly valued residential property would produce potentially between 4.5 to

5.5% gross yield. The gross yield is the annual gross rent. So for example, if it's $50,000 a year in rent and the purchase price is a million dollars, the gross rental yield is 50,000 divided by a million. That's how you work out the gross yield. and that would make it 5%. So if your property investment is producing 50 grand a year or $1,000 a week in income and you buy it for a million bucks, it's seen to be historically reasonably valued, not

cheap, not expensive. However, when the yields start to fall, it means that the property price has gone up and the rental yield or rental return hasn't caught up yet. And that's what's happened in Australia over the last few years, it's done this. And if you look at yields now, they're around about two and a half to 3%. So

it's about half of what they used to be. So on that metric of gross yields at two and a half to three and a half percent, it just shows you that the prices have gone up, but the rental hasn't caught up. And if you have an asset where that's price that's not supported by the income, then it can tell you on the back of a fag packet, on the back of an envelope that it seemed to be currently overpriced. Now, will the rents catch up? Potentially. Do they have to? Not necessarily. But

do all properties in Australia have that yield scenario? No. There are people that specialize in finding properties that actually have high yields. But the thing with high yields is you're going to find it in a place where the growth is not as robust. So people try 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 like, well, that's fine, but you're probably not going to get as much growth. So you have

to contend with a sweet spot and some balance. But there are still some deals you can find where you can get multiple dwellings producing income, you can add on an extra dwelling, you can add on a room, you can redevelop, you can spruce up, increase the rent, but you can still find properties that have higher yields than three to three and a half percent, you can. But by and large, across the country, the gross yield is at a point that would show you that historically it's overvalued. Okay,

particularly when you have interest rates. So when people bought property, when rates were zero, the RBI rate was zero or 0.1. the debt was cheap, so they were buying property at the low interest rate. Now, if you discount that back, the value, the cash flows from the property back to a net present value today, based on a lower rate, the actual value of the property is more. But now rates have gone up and you discount that asset, the cash flows back at a higher rate, the asset

is worth a lot less. So at retail rates now, say five or six, six and a half percent, You can see that a property that's only pulling in three and a half percent, if you're paying the mortgage rates of six to six and a half percent, you can see how it's heavily negatively geared. And you can see that the asset is not pulling in enough cash to warrant or justify the price paid. And so cash generation and yields are another way

to identify whether a property seems to be overvalued. And by all accounts, it seems to be based on the gross yields of residential in certain cities, it is overvalued. Just quickly, if you're ready to take control of your finances but feel stuck on where to start, I have a solution. My book, Money Bias Happiness, simplifies investing and wealth building with practical steps to help you achieve financial peace. Get your copy via the link in the show notes and let's get your

money working for you. Now back to the episode. Another metric we can use too is replacement cost. And to replace a lot of property at the moment with high inflation and high labor costs of construction and materials, it is fairly expensive to replace. So it's even expensive to build as well now compared to what it used to be. So in that metric, it's also a little bit overpriced as well. So we're seeing that it's nothing It's not yet quite like Japan was

in the late 80s and early 90s where it was 18 times earnings to buy a place in Tokyo But at 9 to 13 to 14 times the city it is getting up there and I I If people are spending 50% of their household income on the mortgage repayment, which they are, that's another metric that tells us that historically it is overvalued because normally it would be 30%. So if you're looking for, and again, it depends on how much you borrow and how much cash deposit you put in, but that's another metric that

tells us that it's overpriced. And the reason for it being overpriced, and I've done other videos on this particular topic, go back, they've been very, very popular topic episodes. The reason for that is because we're having two things happen at once. One, there's an undersupply happening, or static supply or no supply. And there's also heightened demand from the mass immigration that's happening. So we're seeing, it's kind of like architraved. It's kind of like, it's been designed to

continue to be propped up. Now that will have a fine art life. It will change. It will change. We just don't know when. So it's like, I love this saying by Warren Buffett. He said that if you're investing in a speculative market where it seems to just be going up and up and up, it's a little bit like Cinderella who's at her dance with the prince and she's dressed in, you know, she looks amazing. And at midnight, is it? Her chariot's going to turn into a pumpkin? Or at midnight

when the clock strikes midnight, you're going to turn into a pumpkin. But in the Cinderella story, she can see the clock. But when you're speculating in markets like this, you can't see a clock. There is no clock on the wall. So you're actually playing a game where you just don't know when it's going to end. So it's like holding the hot potato. So when the music stops, we will see some shifts to the historical. Based on history, we will see some shifts in the affordability of the Australian

property market. And I don't know if I'd want to be holding a lot of leverage property when that happens, because if you have a lot of leverage and it falls in value, you also amplify your losses. And this is what happened in the GFC. And had someone in the comments mentioned the other day saying, you know, you don't know what a recession is like. I think they must think I'm younger than I am. But I'm actually 42, and I remember the GFC. I was getting offered to

buy apartments in Service Paradise for $57,000. I mean, I've seen what can happen. A friend of mine who is one of the prolific developers on the Gold Coast, he went broke. Another one who's very prolific went broke. In fact, lots of developers went broke. Lots of people went broke. Lots of businesses went broke. There's this famous street in Main Beach, which is the highest price suburb in Queensland. And it's called Ted Avenue. And back in

the GSC, we called it Debt Avenue. No one wanted to buy there. And so those times can return. And I just think that if you're 35 or younger, you may not have seen a recession of what can be like when property actually falls. But it can fall, just so you know. So if we're at historical highs based on those key metrics that I just used there, then we

know that the market's overpriced. So can you grow your property portfolio at the same rate if you're buying it for arguably twice as much as what it's worth when you first started? And the answer would be, from what we understand about investing and history of markets, no. You can't expect

the same returns if you're buying at the peak of the market. Now, because there's a lot of bubble talk all over social media on X, obviously on my channel, but if you look, if you ask people, even those who are in the market will agree with you that it's very highly priced compared to what it typically should be. So I don't think it's even up for debate, which is probably why these videos get so much attention, because I think people are looking for some sort

of evidence that they're right, thinking, oh my god, it's actually really expensive. So if you're someone who's looking to get into the market, just understand that it looks very highly priced. It's certainly not an asset class I'm aggressively looking at at all. However, and by, just so you know, I'm not like, I don't just deathly hate property. It's a sensible asset at sensible prices. But what I'm not all for is buying overpriced anything. I don't like to even buy overpriced coffee. I like

to find value in the marketplace. And right now, there doesn't appear to be a lot of value Broadly across Australian cities when it comes to property residential property assets It just doesn't appear to be an undervalued sector. It appears to be a very overvalued sector. So I don't want to be Fishing in that pond because all I'll be doing was pulling out a fish that's not of any value So

what you want to do is you want to look for? Pockets in the economy in the in the country in different asset sectors and you want to look for value So I look for value in underpriced public company securities I look for value in small businesses. I look for value in starting businesses. And you can still find value in the real estate sector too if you're prepared to put in the work and find the mispriced bets. But to make money, you must find an asset that's valued at

X and buy it for less than X. To make money, you must do that in investing. So whether it's property or or businesses or shares, that's what you must decipher. Would there be any instance where buying an overpriced property would still be worth it? I think the answer is yes. If you don't have to borrow a lot of money and it's not putting you in a, in a, it's not like handcuffing you to a horrible life, to

a horrible job that you hate just to pay it off. If it's not doing that and you already have assets that are producing income and you're already doing what you love and you have, and you've got the capacity, then buying a home to develop a lifestyle that you love is a good idea. It makes sense, particularly if you're going to live there forever. It shouldn't matter then. That would warrant potentially overpaying, right? Because if you don't need to worry about the gains and

you've got the cash and you just want the lifestyle, of course. I'm sure a lot of people buy out of that and that makes some sense. But I'm certain too that most people don't buy like that. I think it's a good question, but under the right circumstances, sure. Warren Buffett's got this wonderful metaphor he uses, which I love. He says, in investing, you've got to identify the old saying, a bird in

the hand is worth two in the bush. You have to identify how many birds are in the bush and what are the odds and chances and likelihood that I'm going to get the birds out and by when. Because if there's no birds in the bush, you're not going to get anything from it. And by no birds, I mean things like crypto and so forth. There's no cash flow in there, right? So you don't know, you can't get any cash flow from it. So you don't even know what it's worth. So you can't even buy that bush.

That's why I don't touch it. But if you look at property, you're like, well, there's you know, this rental yield of 50 grand a year, but it's going to take me 25 to 30 years to get all that money back the birds back in my hand. Maybe that's not a good place. Maybe if I bought a laundromat for 250 grand, and I pulled out all the birds in two and a half years, that makes more sense. Are you with me? So like how

many birds are in the bush? And then what's the What time frame do you have to wait for to get them back? And that's a pretty good metaphor for what you should be looking for when it comes to investing. What you don't want to be doing is saying, well, everyone else is in property. Property is 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 property, buy property, buy property. I'm a peasant until I buy property. I'm not an

adult until I buy property. All my friends are buying property, property, property, property, property, property, property, property, property, property. If you're just getting in for that particular reason, probably not ideal. Will there be other opportunities? Yes. Or look for another way to grow your wealth while you're renting at the same time like I do. It's okay. It doesn't

also have to be forever. I know people who have bought their first house when they're 50, but they bought the one they wanted in the right way that doesn't make them house poor. It's not a race. What is important is that you're doing it sensibly for all the right reasons, not just to keep up with the Joneses or because of FOMO. So steady, hasten slowly, be very careful. I know a guy, this car we have here, we went to Fraser Island and long story, it needed a detail. Took it to a guy, he

had 505 star reviews on Google. And I was like, that's the guy, he's in Southport and he details cars called Squeaky. Go check him out. And I took my car there and it's a house and he details three cars at the back of his house. He probably makes, I don't know, I'm just guessing, 7,000 a week. Cause it's 400, 500 bucks to get your car detailed. He's probably doing three a day. So do the numbers. And he lives there. So I would say that. You could overpay for

a property there if you're generating a business from it. And obviously, it makes more sense because the actual asset is producing more. So if the asset can produce more cash flow, you ought to be prepared to pay a higher price for it. That's what makes it more valuable. What makes an asset valuable is its propensity to give you the birds out of the bush to

pay you the cash. So if it pays more, it's worth more. That's how you determine what it's worth. But most people are buying with no cash. It's not worth much, my opinion. We rent an apartment and we run five, in partnership, five businesses from there, from our apartment in my cupboard. And I talk about this in my book, Become Time Rich. It's a famous cupboard. Now, if we owned it, we'd have to pay $300 a week just in

body corporate fees and rates and insurance. So even if I owned it outright with no debt, it'd still cost me $300 a week. Then you add in view tax. And that, by the way, that's inflationary. And so it even costs money now to live in a debt-free house or apartment, and apartments are worse. So it doesn't make a lot of sense for us to own. It just doesn't.

It's so much better to rent for us based on the rental yield, the cost of it, what we run out of there, the size of our family, all those things make it prima facie better to rent. If that shifts and changes at any point in time, like there's a correction in the market, you need a bigger block, then I'd address it then. But I'm not going to be doing it just because People think I'm a peasant because I rent in Australia. I could care less what people think. That's why

I love this channel. Is Australian property overpriced? Look, by the main metrics, absolutely.

Absolutely. Does that mean there's no opportunities in the marketplace? No. It means you can still find opportunities. Does it mean that you'll miss out? Not necessarily. These things have a tendency to go in waves. The market moves in big waves. What if, just speculating, what if you can't see the future? What if the Labour Party gets out of power because people are fed up? And what if the coalition or One Nation just goes whoop and just takes leadership in the next two years? And what if

immigration is cut to 100,000? And what if all that demand that you're relying on for price movement changes? And what if it all disappears overnight? What if, what if, what if, what if? You can't read the future. So how do you know that won't happen? And who's to say that over the next 20 years it just goes sideways? Look what's happening in Canada. Look what happened here in Australia in 2008. Look what happened in Japan. Look

what is happening in New Zealand. Look what's happening in the United States. If I had to bet that it was going to be 20 times earnings in the next 10 years, I wouldn't take the bet. So I hope that gives you some insight into what, how to kind of on the back of an envelope, think about the valuation of property and understand that it's not always a bad deal. it can be in a very good

deal. And if this channel ever gets to the point where I'm like, holy crap, I just bought the best product, you should see this deal, then pay attention. Because I would then feel like I'm getting a ton of value. So just to caveat this, I don't hate property. I hate overpriced property like I hate overpriced anything. I just like finding deals, okay? I like finding better value, all right? So I hope that makes sense. If you've enjoyed the

episode, look, I'd love you to leave a comment. If you've got a question or a comment or a very vehement opinion, feel free to put it below in the comments because I will come back here and reply to them. I reply to them in person, every single one, or I try to do every single one for sure. You'll notice that on our channel, on our episodes, I will reply. That's me replying. So be kind. But if you don't

wanna be kind, I'll still fight you. So it's fine. Do whatever you wanna do. And don't forget to hit the subscribe button and share this channel with others who want to learn about investing, entrepreneurship, money. That's what the channel is all about. That's what our podcast, Money Grows on Trees is all about. If you're listening on Spotify, hey, thanks for tuning in. If you're listening on Apple podcast, thanks for tuning in. If you're listening on or watching on YouTube, thanks

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