HOW TO MILK THE HOUSING BOOM FOR ALL IT'S WORTH
The house price boom underway in Brisbane following as normal Sydney and Melbourne’s means that virtually anyone who owns a house virtually anywhere in Brisbane is in for a significant capital gain windfall over the next 2 – 3 years.
The smart ones though will take that further and realise multiple windfalls by leveraging the way booms work, the fact that they always start at the bottom and work their way up, which they will achieve by buying in at the start or just in advance of the price take-off in each price bracket and selling again as soon as they have realised a solid capital gain in that bracket.
This they may do multiple times as the leading edge of the boom makes its way up the market from where it is now still at the entry point level until it reaches the very top end and runs out of puff in 2 – 3 years’ time.
Milking the boom that way sounds simple enough and in truth it is but you do have to have the intestinal fortitude to go for it. What can help your bravado is a very clear understanding of how house price booms work, their anatomy if you will.
Here then is The Anatomy of a House Price Boom
1. All house price booms are bottom up affairs. They start at the lower end of the market and gravitate up from there
2. Brisbane house price growth over the last several booms trough to peak has averaged close to 80%
3. 30 – 40% of housing price growth in a boom is realised in the first 6 – 9 months of the market taking off
4. It takes 12 – 18 months for each market sector (price bracket) to realise the full extent of its boom price growth
5. It takes between 2 - 3 years for the boom to run its full course up through all price brackets
6. Booms start closer to the city centre and radiate out as buyers are priced out of the market closer in
7. When booms start prices seem cheap and when they finish seem dear (they move from too low to too high)
8. As the boom gathers steam momentum will ultimately drive prices higher than they should
9. Once the boom runs out of steam, prices will settle around 10% off their peaks (e.g. Sydney & Melbourne today)
Some other points of note
Houses sell much quicker and for more money as buyers panic buy | banks become more amenable to lend as prices rise | vacant land prices go up by more than built houses | apartment and townhouse prices get taken along for the ride but don’t appreciate by as much
How to ride the market all the way to the top in greater detail (again by numbers)
1. If you have an entry level house within 10k of the city where the market is white hot sell it. Entry level today is up to $800 within 5k of the city and up to $600k between 5 – 10k of the city. Depending on the product and where it is, you will get upwards of 30% more today than what you would have 2 years ago and for vacant land up to 40% or more. Unless you are terribly unrealistic your property will be sold within 30 days and if your home is your principal place of residence PPR) the capital gain will be entirely tax free.
2. As soon as your sale is unconditional (or if you don’t have an entry level house to sell), buy into the next market bracket up from entry level in the same area as it will be the next to take off (i.e. $750k to $1m under 5k from the city and $500k to $750k further out). Whilst the property you have just sold may go up another 30 or even 40% more over the next year or so before the market fully peaks, dollar wise that growth will be far inferior to what you will realise by riding the boom fully by buying and selling all the way up. The maths on that are below
3. Within 6 months of you settling on this next purchase, it will be worth substantially more than what you paid, most likely about 30% more. You then have the choice of selling it then and paying Capital Gains Tax on your net gain or waiting for another 6 months to lapse to get the gain tax free (which by then could be as much as 40%) remaining mindful that even with that 40%, there will probably be a further 20 or 30% growth left for the ensuring 18 months to 2 years if you choose to hold.
4. If you take a good capital gain early by selling again before or even long before the normal 12 month hold period is up you will be out of pocket by the amount of capital gain tax that will apply but the flip side of that is you probably get at least 1 extra bite of the buy and sell cherry in the fast rising market which may prove far more bountiful than the tax payable
5. Repeat steps 1 & 2 above in each subsequent higher bracket in the same area until you are the close to the top bracket for the area.
• You could feasibly buy and sell 3 – 4 properties over the 3 year growth period and pay no capital gains tax at all as long as you lived in each of them for a minimum of 12 months (but of course confirm that with your accountant).
• Over the same period of time you could feasibly have bought and sold between 6 and 8 properties following the market upwards realising significant capital gain on all of them but therein would have to pay capital gains tax on the full net profit amounts of all of them (unless you lived in one for at least a year in which case it should not be taxable or if you kept 1 or more for a year in which case you would be taxed on 50% of the net capital gain).
• A $700,000 house that appreciates 80% over a normal 3 year boom period becomes $1,260,000, a $560,000 gain (tax free if PPR - principal place of residence). Both Sydney and Melbourne have averaged close to that in their recent booms and we did likewise in our last major one from 2002 – 2004.
• Following the ‘ride the market’ strategy above and living for at least a year in each of the 3 properties bought and sold (as you principal place of residence) over the boom period and realising an average of a 30% gain for each on each occasion will see you in a house worth more than $1,500,000 by booms end having realised a $800,000 gain.
• Following the same strategy turning the properties over more regularly, say 6 times over the same 2 year period averaging 25% capital growth each time (entirely doable following the example given) would see you in house worth nearly $2.670,000 by booms’ end of which you would have capital gains tax obligations for the 4 middle sales totalling $1,260,000 somewhere in the order of $500,000 assuming a 40% tax rate which would leave you in a net position of $2,170,000, a healthy $1,470,000 gross or $1,200,000 improvement on your $700,000 start point
Obviously things may not run entirely to plan but even if you only get either scenario 50% right, you will still be either $280,000, $400,000 or $735,000 better off. They may also not run to plan in the fact that you outperform what I have described and average far better cumulative growth percentages as you ride the boom all the way to the top.
SOME Q & A
Q. But will this boom be the same as all previous?
A. It should be, all previous booms have been
Q. But aren’t there different factors at play this time?
A. There are always different factors at play. They doesn’t stop water from finding its level, they just vary the course
Q. But what if China’s economy implodes, what if the Labor gets in to remove negative gearing, what if, what if…?
A. There are always what if’s. If the what if’s will stop you sleeping at night, you should not attempt to leverage the boom. As long as you have a house at or somewhere near the start (which we are in) and you still have it at the end, you should be between 60 – 100% better of. You won’t make that at the bank or in your super.
If such a level of capital growth over the next 3 years seems unlikely today (which for most people it would as it always has and always will), remember just how unlikely it seemed in 1980 that by 1982 Brisbane average house price would have nearly doubled, ditto between 1986 and 1988 and again between 2001 and 2004. Also consider how just as unlikely it was to people in Sydney and Melbourne 4 years ago that their markets were about to appreciate by around 80%.
As with all previous Brisbane house price booms, it is been principally that normal cyclical catch-up growth in our feeder capitals (that has made our house prices again seem so glaringly cheap comparatively) that has triggered it and probably will continue to do so.
Regardless of how you choose to ride this latest (and we hope greatest) boom, whether you try to milk it for all its worth through leveraging or choose a more passive approach, I hope to have some fun and make some serious money.