Will Western Sydney properties skyrocket from $600k to $6 Million?
When Nathan Birch started buying Mount Druitt properties for $200,000, people said he was stupid. Those properties are now selling for $600,000. They’ve tripled in price. So what does it take to get these properties from $600k to $6 million?
It’s a simple explanation about what’s happening with the currency right now, with your dollar.
Matter of interest
When those properties were $200,000 in price, interest rates were at 8%, so that was a $16,000 per year interest bill. About $320 a week.
At today’s price of $600,000, with a 3% interest rate, it equals $18,000 in interest a year. About $350 a week. So the cost of ownership is only $2000 a year more on a property that’s tripled in value. It’s the cost of money that’s going down, which is making the difference.
A point of difference was once the entry cost of getting into the market. Back when the properties were $200,000, you needed to save a deposit, say $40,000. Now at $600,000, people are still saving deposits of 5, 10 or 20%, but they’re also getting first home owner grants of $7-14,000 and a builder’s grant of $25,000. First home owners get a stamp duty exemption and access to a deposit scheme.
The property market has been manipulated. Values have tripled, but interest rates are much different and the costs of holding a property are very much the same.
The difference to get into the market would be $40,000 versus $120,000, however when you consider no stamp duty, a deposit scheme where you only put in 5% and the government covers the rest of it, there is a lot of stimulus help there.
That’s still a long way to $6 million
When we’re looking at the $600,000 property, how could it get to $6 million?
If the interest rate at the Reserve Bank of Australia (RBA) is at 0.1%, say that goes down to negative 2%, which has already happened in other countries around the world.
It might sound stupid, but if you had have asked your grandparents if a house in Mount Druitt would ever be worth $600,000, or if they thought the government would give you $50,000 to buy a property, they’d say you had rocks in your head.
So, if you were to get a loan on a $6 million property at 1%, it would cost $60,000 a year. Working downwards from that scenario:
- A $600,000 property at 3% is $18,000 a year.
- Say it was a $1.2 million loan at 1.5%? That’s about $18,000 a year.
- A $2.4 million loan, paying 0.75% in interest? Still $18,000 a year.
- Try again with a $4.8 million, with an interest rate of 0.375%…you get the idea.
Manipulation is the key
Imagine you could put down a 1% or 2% deposit on a property. If they’re manipulating the deposit to get into the property, it means it’s easier to get the property. If they’re manipulating the interest rate downwards on that property, it’s cheaper to hold onto that property. So if interest rates went down and down and holding costs stayed the same, the more upside there is.
If the bank was offering an interest rate of 3% now on $600,000, which is $18,000 a year, and the interest rates went down to 0.3%, that means the price could multiply by 10.
Change is in the air
It’s very important to understand what’s happening to the money supply and to lending policy.
We are going to see a massive change in finance law and the way that you can borrow money and the way in which the banks will assess people. This will throw more rocket fuel into a property market. We’re going into a very high inflationary timeframe and a good way of printing money is by manipulating the parameters of it.
So is the property market in a bubble? There’s always been a bubble. But it’s not property, it’s your money that’s in a bubble.
If you think holding cash in the bank is the best thing to do, go ahead. But looking at what you can buy, every week it’s less and less. Inflation is gobbling it up.
So was there a possibility that 20 years ago you could buy a house for $200,000 and it’s now worth $600,000? It happened. Now that it’s at $600,000, could it go to $6 million? It’s very possible.
How? The banks just need to keep printing more money in the form of stimulus cheques.
On the upside
Properties at the cheaper end of the market have a far greater upside.
If you look at properties around Sydney, people are paying $1 million, they might need $150,000 in salary to do so.
However if you buy a property at $100,000 today, you need very little to pay off a $100,000 property; around $3000 per year in interest. That’s $60 a week in interest repayments. Who can afford to pay that? Everybody. If you’re getting $300 a week rent, you’ve got a lot of cash left over.