Forum Replies Created
Hello all. Long time no speak(been a year or so since my last message i think).
On this i think a determining factor is the servicability of that 1.7m of property. If he is forking out 100grand/pa of his own money to pay the interest on that property then i feel he isnt in such a good position. but if the property is sustaining itself comfortably then i reckon i would be happy to be him.
If it sustains itself then he has done well to acquire that property(even with minimal equity) and stands in a good position to benefit quite well from capital growth in the long term with a highly leveraged position.
The leverage he gains from this property i feel puts him in a better position than one who has has a high net worth but in not as leveraged position (one again assuming the property “comfortably/safely” covers it’s costs).
Regards
David
sektor
You assume that the RBA raised rates to slow the property market and not the rest of the economy. Please consider the possibility that it wants to do the opposite. I think that if you consider all the facts then this can be seen. As the RBA governor said this week the real estate market was already turning before the rate rise so there was no need to do it for that reason. However raising rates was a perfectly reasonable thing to do if you look at the rest of the economy. This includes factors like
1 the improving global economy
2 the very strong domestic economy (I realise that there was a drop in ec growth earlier this year but this was due to several freak occurances that on their own wouldnt do much but together had a big effect on the export sector. These included SARS, terrorism and the drought. The rest of the economy was largely uneffected and things have returned to normal. Thats why unemployment is still so low. More recent data has shown that the economy is actually still roaring.)
3 possible inflation and wages growth pressure due to the strong economy and a very tight labour market.
4 consumer credit growth(not just in housing)
You may consider that it is too early to expect the global economy to recover or inflation to take off but the early signs are saying so. And if they are saying so then such an expansionary stance by the RBA is absolutely unnecessary. If everything says that the economy is improving then you dont leave rates at 30 year lows you bring them up to neutral and enjoy the ride. If the RBA says 5.5-6% is neutral then it is perfectly reasonable for them to move them up to 5.25%
Cheers
DavidP.S
I am not ruling out the possibility that the RBA considered the housing market when making its decisions. This has caused alot of disbutes as people have said that it is not the RBA’s job to control the housing market,just inflation, and it should butt out. I think those people should reread their high school economics text books as in high school you learn that the RBA has three basic roles. One is “to ensure the wellbeing and prosperity of the people of Australia” (cant remember the other two, sorry). I interpret that to mean preventing recessions by allowing sustainable growth. Economic history buffs would know that just about the best way to start a recession is to allow the property market or other asset markets to crash. (Please trust me on this one. I live in Japan at the moment and it is now in it’s TWELTH YEAR of recession because of a crash in property and other assets). Therefore it is very much the RBA’s role to cool the market now rather than allow a crash in the future. Also who else would control it? The gov’t is never going to shatter “investor’s” hopes by cooling the market in an election year. Thats why the RBA is independant. It can make rational economic decisions without having to be populist.I agree with those here that think this article is a bit of rubbish. I have several reasons.
Firstly,as Robert Kiyosaki says, it’s not the product its the plan. Anything can be made to look good or bad depending on what you do with it. I think this is along the same lines as what still_in_school said.
Secondly, to consider which is better in a general sense(which i think should never be done anyway for the previously stated reason), you must compare both markets at similar stages, not at opposite stages as is the case now. Shares have done ok in recent months but the period before that was very ordinary so if would be fair to say that the market is recovering after a fairly solid correction. Property however is at the top of the cycle. Therefore it is impossible to compare the two. I remember reading general ivestment books about three or four years ago where, relative to shares, property was rated down about the same level as fixed interest. This was before property really went crazy and at the height of the tech bubble.
Thirdly, you can say anything using the right statistics!
Cheers
DavidI happen to disagree with Bill Moss’s assessment of the market. He says that property crashes occur when the market fundamentals are out of kilter. I would have though that average rental yields of 3% was slightly out of kilter. And if rents are dropping in some areas then vacancy rates are too high in those areas no what matter the numerical figure is.
Also I find the name of this topic quite interesting. Isn’t asking “Is the bubble going to burst?” the same as questioning whether something that goes up will ever come down? I would have though that what goes up must come down and a bubble is by definition full of air and must burst.
Cheers
DavidHi again
Celivia
I think that what was done in the US was that deductions were capped at a certain amount and the amount was dependant on your personal income. I have a feeling that no deductions are allowed if you earn over $100000. Not sure about that though. PeterM is right though in that rents would increase as they did in the US and even in Aus when Keating temporarily got rid of it.
PeterM
I agree with you on both fronts. Rents would increase quite alot and what more can you expect from the govt. Getting rid of neg gearing would have a massive effect on the market in the short term. Prices would also drop dramatically I believe as negative gearing “investors” bail out. I guess I blame neg gearing alot for the current bubble. If it were different then yields would never have been allowed to go as low as they have(or prices so high). If you read the RBA submission to the productivity inquiry then you get a good impression of the effect it has had on yields compared with other countries. Supply of rental properties would definitely drop as a result of such a change with quite harsh short term consequences but in the medium to long term I think more full time or as the RBA put it “Professional” investors would play a part in supplying property as yields increase and in the long term the market would sort out a new equilibrium(Although possibly with higher rents. My prediction would be a combination of higher rents and lower prices). I dont argue that this would not cause pain but would pretty successfully solve the affordability crisis I think.
Also just about the govt thing, any person or organisationwas invited to send in a submission to the inquiry and I think all state govts did so.
This article explains a bit about the whole idea.
http://www.smh.com.au/articles/2003/11/28/1069825991624.html
Cheers
DavidHey guys
I think in the proposal you are talking about the gov’t has suggested restricting the superannuation option to just couples in their 20s and 30s and also the amount to just $20000. On top of that it recommends only allowing it for purchases under about $500000. I think that it is quite conscious of the fact that the FHBG didn’t really end up helping the people it was intended to help as the regulations weren’t tight enough.
Also it doesn’t was to try and stimulate demand any more than necessary as the RBA mentioned in its report to the productivity commission.
Soon the productivity commission is going to give its report into the first home buyer affordability problem and personally I think that 90% of the problem is cyclical, meaning that when the market comes back down to earth there will not be such a problem. And I think that the gov’t may believe this and just be doing these things like holding this commission and trying to talk down interest just to keep the public satisfied that it is doing something while prices are high without really intending to do much. (Also it doesn’t want interest rates heading north in an election year but thats another matter).But I do think part of the affordability problem is long term and if Australia is to maintain it’s high home ownership reputation then I think two things have got to change. Firstly stamp duty is simply too high and must be lowered and secondly negative gearing in it’s current form must go. I think it keeps prices at an artifically high level and rents at an artifically low level. So I believe neg gearing needs to be changed to be more like the american style. Keeping deductions in the same asset class is quite important I think. Obviously such a change would be very painful as it was in the US and for a short period in Aus but I think it has to happen and would be much better in the long term.Sorry got a bit sidetracked there but it’s just my two bobs worth regarding what should be done.
Richmond I think you are right in that it would open a can of worms regarding superannuation and perhaps set a bad precident. The way the gov’t is talking about doing it sounds pretty reasonable though i guess although I didn’t support it. I just think that it and many other ideas being thrown around by the gov’ts and the media are ideas that just come up in a boom and that in reality the market will sort itself out.
Yes thats right I am an economics student!
cheers
DavidTerryw
I am thinking along those lines. Will there be any problems if I then use that income to get a loan in Aus?
Thanks
DavidBill
Yes please pass it on! I have been asking around over here for a ages trying to find someone with a common interest in property and pretty much come up blank so I would really appreciate it if you could pass it on. I have a thousand and one questions and ideas to run by someone over here so getting in contact with someone with experience would be great.
thanks again
DavidWas wondering what the story was Bill. Saw you have been getting a fair rap in the forum recently so have been following your posts a bit and was starting to wonder whether you were allergic to sleep or something. You seem to post very late at night. I am two hours later here in japan so I can keep up but it did catch my attention a bit. Wasnt even a twinkle in my parent’s eye in 1969 so cant really comment on where your habit originated from but is an interesting story.
Sure I can look into it. The mate of mine is overseas at the moment so it may take a while but will see what I can do. Got a feeling that the mortgage broker and possibly the bank were both foreign but not sure of that. Yeah you are right about the mortgage broker and checking up on them. Even if you have to refinance when going home I guess the low rates at the beginning of a loan could turn the first years of a normally neg geared ip into a pos geared one. Also if you are looking at principle and interest loans then you could really cut into the principle by using the interest you save to bring it down before going home.
Bill
What do you think about non-unit Sydney and Melbourne? I realise that units would be worse but going by yields arent houses etc severely overvalued too? Just from what I read in the RBA report about average yields compared with overseas it would appear that prices are stupidly high. I understand that with the tax treatment in aus yields should be a bit lower than the us or uk but not as low as 3%. I would have thought that anyone looking at an ip with a yield of 3% has got rocks in their head unless the expected capital gain is enormous and immediate.
cheers
DavidI am sure my scholarship is tax free. Have you had or do you know about the Monbusho schoplarship? Thats the one I am on. As far as other work goes, about half is cash in hand and the rest I am not taxed unless maybe it goes before I see it. This job is only once a week and the pay is a round number so I assume not. It is pretty casual as I dont even get any paper work with it. I have been told by many of my friends on the same program that we are not meant to pay tax and even if tax is withheld we can claim it back. I havent been in this situation as yet so and not sure about it. Might be wrong but hope to avoid the situation all together.
Regarding the finance here, a friend has got finance for a NZ property from a bank here with 1.6% variable and a min deposit of 25%. Also the loan had to be for at least the equivalent US$200k. You need to be earning Yen to get the loan and have an address in Japan. He got this loan through a mortgage broker here and they said that it is standard practice to allow clients to use their address for the loan if the client moves overseas.
However yes the exchange rate is a big variable that would have to be taken into account. It is probably the one major thing that would make me baulk at borrowing here, particularly with the aussie dollar as it is at the moment.Thanks for the reply Bill.
I am a bit reluctant to fully disclose my situation to the accountant until I find out a bit more about where I stand. I have had no experience with him as he is Dad’s. We are planning to go and talk to his financial planner when I go home in a few weeks who has drawn up Dad’s retirement plans before we approach the one who does his books. I dont know if this hesistence is warranted or correct but we have both been knocked over by this a bit as we only found out about this problem this week and our plans will have to be changed quite a bit if there are any problems like this not to mention the couple of grand I will have to find.
Also Bill do you have any idea how I would go trying to get a loan while working overseas? Most of my income is proveable although not all but I was just interested how the overseas bit would affect things. Not too worried about that though as I dont think the market is right at the moment.Also I dont have the money and am reluctant to make my first move from overseas anyway. However the 1.6% interest rates available here are quite attractive I must admit
]Have got a feeling that Sweden has some sort of equity sharing system and perhaps other countries do too. The aim of this system is to make property cheaper but I would have thought that it would made prices higher. Economically supply and demand determine prices and so if you increase demand by paying for half of the house then prices would increase dramatically. If the equilibrium price is $100000 as that is what the average person can pay and what vendors will accept and then the bank, managed fund etc says they will match that then wont the new equilibrium price be $200000 when vendors get wind of the new situationas buyers will still have $10000 to spend? Perhaps I haven’t explained it very well but that is what I think should happen economically.
Hey Bill
Hope this is what you are looking for.
Please note that this is not my own deal but one of a close friend of mine and as a result the numbers are a bit rough.
Here goes
This person already owned a block of classrooms in a built up area close to Sydney but nolonger had a use for them. Considered selling them off and had them valued at $300000. Decided instead to renovate and turned them into offices for $50000. These are now pulling in $110000 in rent per year with all tenants signed up for 15 years.
I dont know what was paid for with debt and what the closing costs were but I have tried to work out how an outsider could have done this deal to be as profitable as possible. I have very little knowedge about commercial property so please bear with me. I thought that $30000 or 10% of the initial cost of the property would be ok for closing costs. So with a total cost of $380000 I could take out a loan for 50%(I heard that the banks are much tougher on commercial. Is that right?).So i put in $190000 and have interest payments of $15000pa.As for the new equity I have heard that for commercial property the price is much more directly related to the rent than with residential so I thought 8% would be ok. With $110000 rent the price could then be $1375000. I also thought $10000 could be ok for costs per year whatever they may be. With 8% interest I could afford to draw out about another $550000 or $600000 for later investments and still get a 20% cash on cash return on the initial investment of $190000.
Sorry for the generalness of this post but I thought that somebody could get something out of it or at least tear apart my assumptions so I could learn something. Good luck
David1) What was the prime motivating event in your life that created a focus on the need to invest?
My mother passed away 5 years ago. I was the oldest of 4 kids at only 15. My father was a typical 7am til 7pm farmer who suddenly became a single parent and anyone who knows anything about farming knows those two things just dont go together. Therefore he is now retired and trying to live on the proceeds of the farm sale as he no longer has the time or particularly the motivation to work on the farm. Financially he should be fine i hope but it just goes to show that you never know what cards your going to get. We never thought Dad would not want to farm but you never know whats coming. So i guess I want to be able to help if needed financially and also I recognise that I also must make sure I can handle anything in my life (disability etc). I am not saying for a minute that money brings happiness but it certainly can make things easier in alot of cases. My focus on this and my interest in finance was brought together after reading Rich Dad Poor Dad. I cant emphasize enought how much of a life changer that book was to me.
2) What have you in fact done about it since then, and rate your achievment.
I read Rich Dad Poor Dad in febuary and am now on property investment book number 13. Also am looking at sites like this one all the time. However I am at uni overseas so I am not really able to buy anything yet and even if I could I think I would not have with the market as it has been. So my focus at the moment is just on educating myself and saving money.
3) Based on your current performance, how long will it take to reach financial independence? (Whatever this might mean to you)
I hope to return home in 5 years with a reasonable amount of cash to start investing so from then 5 to 10 years hopefully. Maybe a bit optimistic but gotta aim high I guess.
4) What are you currently doing to improve your plans?
Books, looking at this site and searching on sites like realestate.com for opportunities. Also keeping an eye out for news and stuff about the market in the online media.
5) What is your ultimate goal; and will it make you happy?
uuuuummmmmmm……..cricket……..tv….get the drift? Seriously though I want to be able to not worry about money. I guess that is very general and very relative but that is about as specific as I can get at the moment. I hate having to buy the cheapest or searching the supermarket shelves for 20mins just to save 2 or 3% on something. Also to be able to say to Dad with absolute confidence that I can provide anything you need.
6) Which is more important: The goal or the journey?
Both. I believe security for me wouldnt come from having lots of money or whatever but from knowing that if something happened and I lost everything that I could do it again and get back to the same point. I guess that is following the line that your best asset is your mind. There is no such thing as a risk free investment but if you know not only how to build a business/portfolio but how to fix/rebuild it then you are secure. Therefore I havent reached the goal unless I have gained the knowledge by taking the journey.
hope that makes sense.
cheers
DavidBill
By the way, where abouts are you based? I think I saw somewhere you are in Cowra. Is that right? Just that I am from Wagga and to start with would only be interested in (able to afford) country properties for a while. Havent started yet though as am 20 and study overseas for a while. No probs if you’d prefer not say.
DavidHey all
Bill
Are you saying you think one should only have one offer in at one time? How long do you think is a reasonable time to allow the vendor to accept or decline the offer? Also what do you think are reasonable and unreasonable clauses(outs) to put in an offer?
Many thanks
DavidI think Jenman has a positive role to play in the real estate game without taking everything he says. I dont agree with all that he says (eg I think there are both unethical and ethical wraps) but through looking for and throwing light on dodgy individuals and practices within the industry he may be able to force some change regarding these and if that happens I guess he has done his job. Maybe some people come under his wrath when the dont deserve it, I really dont know. But he can play a positive role even if that is the case. There are a few dodgy “gurus” going around during this boom, including the major development companies that have wealth creation seminars which are extremely self-promotional. They also use terms such as “wholesale prices” to get people in. I think there definitely needs to be more regulation in this area as average “investors” have proven in this boom that they will take what is fed to them at these seminars too much.
p.s My personal opinion after reading quite a bit about him is that Henry Kaye is really a crook. Sure maybe some people have made money through him but that is obvious. Any idiot could have made money in this boom. I just think you should never ever take investment advice from someone trying to sell you something.Crashy,
Must be honest, I dont really agree with your interpretation of the economics of this. I have a few problems with what you said. Please prove me wrong but at the moment I have these problems.
1.Property is the passive side of the investment cycle. That is, people will pile into real estate when shares perform poorly. However, investors do not generally sell property and pile into the sharemarket because property is performing poorly.Ok I can see where you are coming from with this one. But I do think there is something to say for what is in fashion with investments and neg gearing has definitely been in fashion over the last few years. Also probably this time lots of people may not be able to afford to keep their real estate investments if rates keep rising.
2.Property falls because the sharemarket takes off, causing interest rates to rise. Also because investors simply jump on the faster bandwagon.
I cant agree with this one at all. There are a hundred reasons why the real estate market is doomed and only one of these is the bull stock market i believe. eg over extention by households, record low yields, record low affordability etc. I guess I am saying I think the property market can crash on it’s own. I also dont think the bull stock market automatically means rising interest rates especially if property is headed south. Will explain this more in the next point. I do see your point with the faster bandwagon comment though. That has gone from tech stocks to neg gearing to….. That what you mean?
3.A property bust doesnt cause a recession, but a recession does cause a property bust. Economic recovery and / or sharemarket pickup also causes property bust.
I think you would be surprised. If you look over the last century you will be amazed how many of the recessions we have had that have been started by a drop in property. That is why property indicators are used as the main leading indicators for the economy. eg housing starts or approvals. When these drop off economists get worried about where the economy is headed. Thats why I think there is no way the RBA would raise rates if property is falling. Only if they think it needs to fall because it has gone way too far.(perhaps this time?). Yes it can work the other way. A recession can cause a real estate bust. I also think a sharemarket pickup could cause a slowing in property. Although this time it is taking a long time and I think investors might not move until property slips rather than the sharemarket inproving as it has been 6 months since the sharemarket improved and property is still booming. I guess an ec recovery could cause a property bust too although a strong economy has been one of the main reasons for the boom.
Anyway thanks for the reply and please feel free to take this apart again.
David
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