Not assumptions, propositions. Propositions based on (in the case of the first) overwhelming evidence, and (in the case of the second) logical deduction.

I think you need to check your thoughts against facts, but that aside… Such extension of mortgage terms actually does very little to improve affordability. Look at the repayments on a 30 year mortgage compared to a 40 year mortgage. Then compare the total cost of interest over the life of the loan. Then consider a hypothetical 1000 year mortgage. Why not rent? More on this below.

I thought that everybody knew that story was a beatup and has been repeatedly, thoroughly debunked. Start here for details: (http://www.abc.net.au/mediawatch/transcripts/s1857681.htm)

Current statistics show over 50% of renters currently classified as suffering ‘housing stress’ which is defined as rent costing in excess of 30% of income. Yields can not currently even rise to the 8+% required to make property investment sustainably profitable without turfing the majority of renters onto the street (rent > income), thus lowering demand, thus lowering rents.

Similarly with my hypothetical 1000 year mortgage, you might argue that people choosing to rent would increase demand, raise rents, raise prices and the landlord would still win because his property would be worth more. How much more though? Rents can’t continually rise by more than incomes. If rent is ultimately constrained by income there is no reason to expect the price/earnings multiple to perpetually increase. Trees don’t grow to the sky and all that.

So rents are constrained over time by incomes. Prices are more flexible than rents. An abnormally high p/e ratio is more likely to be adjusted via the p part of the equation than the r.

Once again I need to ask you relative to what? What is the basis for your assumption that:
* House price growth is exponential?
* Past performance (which has relied on what is ultimately an unsustainable trend in debt) is indicative of future performance?

Do you see that when house prices are at, say 4x average earnings, they are more likely to double over the following ten years than when they are at 8.5x average earnings? Once again, this is consideration of price relativity to something other than time.

And supposing they did rise by 10%pa over the next 10 years, what then? Prices would be 14x average income and rental yields would average 1.8% (both assuming 5% annual inflation and that rent doesn’t take more than 30% of 50% or renters income). Would your expectation of future growth rate be diminished?

Another 10 years and prices would be 22x average income and rental yields would be 1.2%.

At what point does it become silly to expect prices to double just because… time passes by?

Correct! I wouldn't be at all inclined to extrapolate the last 20 years of price change along an exponential trend-line for the next 20 years.

In a nutshell (or nutcase, if you're referring to me), here is why. The last 20 years of house price growth have been entirely dependent on a particular trend in household debt. Specifically, the trend of exponentially increasing indebtedness compared to household incomes. If this (second) trend continues, households will eventually have more debt than they can ever repay, more debt than they can pay interest charges on with their entire income. That’s not going to happen. Therefore I don’t expect this second trend to continue. Without the second trend, the first trend (house price growth) cannot continue.

This chart perhaps explains my point more clearly:

Chart courtesy of Steve Keen (http://debtdeflation.com/blogs/)

I'd agree up to a point. 'Strong growth' can only ever be a relative term. It might have exhibited stronger price growth than other properties in the past. This may well indicate it will continue to outperform other properties in the future. Or it may simply indicate that it is overpriced and future growth will be subdued (it is impossible to know which until after the fact). It might have performed well against shares, but then you'd be looking more at volatility and fundamentals (p/e etc) than 20 year price trends to predict the future. It might have performed well compared to gold/beer/wheat/tungsten… and perhaps you could frame an argument about likely future growth around that.

What doesn't make sense at all is to simply look at time and price (eg prices double every ten years), without reflecting on the movement of other variables that were required to enable the price to change (such as my example of debt).

Imagine the people who bought property in Melbourne in the late 1880s (see chart in my previous post). They might have read books by snake-oil salesmen with words such as "land prices never fall" and "land prices double every seven years". They then would have lost 50%+ of the value of their properties over a couple of years and found that 20 years later, prices had not octupled as promised, they had merely regained their original level! To add insult to injury they soon thereafter would have found the world engulfed in a war on a scale never before seen which subdued property growth again until the roaring twenties. I expect we all know how that ended though…!

Incidentally, in both periods, the 1880s boom/1890s bust and the 1920s boom/1930s bust, bank credit rose exponentially (as per the household debt/income chart) and unsustainably against gross domestic product, then declined in almost mirror fashion. I'll try to find a chart… ah, here we go:

RBA: TWO DEPRESSIONS, ONE BANKING COLLAPSE, 1999

Here's the US, showing the great depression (and the debt bubble that led to it):

And here's Sydney house prices (relative to wage see, not time):

I've traced the actual path of private debt versus GDP onto that to illustrate my point.

Cheers, F. [cowboy2]

Oh dear. It can be embarrassing to see old threads rise again. I feel like I'm in Sean of the Dead (great movie btw, very, very funny).

I'd like to retract some of my cycle theory cockiness. I'm far less convinced today that the market is as cyclical as I'd thought. I still think we're on track for a 'cyclical low' of ~$300k 2005 dollars in 2012 though, so.. who knows?

From tip 4:

Could you please elaborate on these two points? Thanks!

Oh, and please explain how one can use one's mindset for risk-mitigation?

F. [cowboy2]

"Where  you see the worst case scenario many see the best."

Correction: I see a range of potential outcomes, but limit my maximum expectation ("the best") to one that is possible. If other people choose to believe in a scenario that is impossible, that's their choice. I'd call this kind of thinking delusion, but if you're happy to see it as healthy optimism I'll not argue with that!

F. [cowboy2]

You've defined your problem as:
* I am a slave to my mortgage

You have defined your goals as:
* Want to work less
* Want to decrease my debt

If you sold both investment properties and put the remaining capital into your PPOR, you’d reduce your debt from $581,000 to $131,000. That satisfies the second goal.

The first goal is a little more difficult, but if you used the above strategy to tackle your first goal, you’d reduce your mortgage costs from around $25,000 per year to around $11,000 per year. This saving of $14,000 might enable you to take extra leisure time. Alternatively, it could pay off your PPOR in less than 6 years, then you could cut down on work (or save this $25k per year).

If the good folks here are correct when they tell me that house prices double every 7 to 10 years, you’d have one $520k to $675k asset and $120k in cold hard cash (growing by $50k+ pa and more each year thereafter) by age 55. And if they’re wrong about the growth in house prices, at least you won’t have wasted money by holding 2 negatively geared investments for a decade!

Disclaimer: None of this is intended to be financial advice, but if it is taken as such, feel free to sue me in the future. I was only trying to make sure you got a well-rounded set of opinions, rather than just “good debt is best”!

Cheers, F. [cowboy2]

What a strange and immature response.

If anything I've written is demonstrably wrong, feel free to refute it. You have many tools available to you; primarily rational reasoning, logic, empirical evidence. Sarcasm, exaggeration and deliberate misinterpretation of my words makes you look inept and petty, while doing no harm to my proposition(s).

Here’s an example. I might say to you:
“Make no mistake about it Devo my boy, an unsustainable trend in debt is the driving force of our economy today and will be the most influential factor in our economic future over the next decade or so (either by its continuation or by its absence).”

You might try to refute this statement, but you’d have a hard time trying. That debt growth is following an unsustainable trend is proven beyond doubt. That without this unsustainable trend our economy would be in recession is adequately arguable on empirical grounds, and certainly stronger than any counter-argument. Thus, the (continuation or absence of this) unsustainable trend will decide whether we will have an economy of growing or declining productivity in the future.

Given that the very definition of unsustainable is that it cannot be sustained, I’ll leave you to make your own assessment of the probabilities of various futures.

Don't forget that a back-of-the-fag-packet calculation can indicate roughly the percentage impact on house prices that a slowing of debt growth to a sustainable rate would have. Do report back when you're done!

Hi Lostie. Everything you need to know about this subject can be found on Steve Keen’s Debt Deflation blog here:
http://debtdeflation.com/blogs/

SK is a mathematician and professor of economics, so some of his work is very technical, but his argument is sound and his blog itself is an easy read. Check through the comments and you’ll find I’ve tried to make my point over there too (probably better so than here). There are also plenty of clever people reading there, so anything you don’t understand can be sorted out with a quick question. Oh, and PM me – I’ll link you to an interesting site.

If you don't feel like checking out those sites, I'll break it down to "the short" as you requested:

The past 30 or so years of house price growth has been dependent on an unsustainable trend in debt growth. This trend is reaching it's limit. Anybody who is basing their expectation of house price growth over the next 30 years on their experience or knowledge of house price growth over the last 30 years is deluding themselves.

Cheers, F. [cowboy2]

Gidday Bonnie,

I was just hoping you might be back to give us an update on the sale of your houses. How's it going? Have they sold? Did you get more/less than you expected?

In anticipation,

F. [cowboy2]