Welcome WinstonWolfe. I agree. Except I believe further cycles are inevitable. I just think there is a very long way to the bottom from where we are today.

Ausprop, it is quite easy to show that our GDP net of household borrowing and adjusted for monetary inflation has actually been negative for some years now. Then add in the fact that much of the GDP growth over the last 5 years has been an unsustainable illusion resulting from excess consumer and housing spending on the back of the ‘wealth effect’ and predicated on the infinite expansion of debt and historically low interest rates, and, yes, our economy is in bad, and worsening health!

F.[cowboy2]

I’d think more like 7-10 years… It took ten years to get so low after all. Don’t forget there are 2 ways for yields to rise. I suspect we’ll see a bit of each.
Cheers, F.[cowboy2]

Only that they will no longer have the political ‘balance of power’.
What guarantee do THEY have that WE won’t change the Negative gearing / CGT / Means testing / property taxes / pensions etc, once we have all the power? (I’m 30 FWIW)

Yep, noted, and accounted for in my original calculations.

Tell me about it! I’ve had some shares fall from ~220% what I bought them for to as low as 125%!! It’s been a good lesson in seperating my emotions from my investment decisions. The portfolio is still sitting on 31% paper profit since December though, not counting profits already taken (~+15%). Today should be kind to gold, oil and farm commodity related stocks though.
Good luck,
F.[cowboy2]

Another good point, W4L! The REAs and their spokesliars are constantly informing us that “demand at the upper end of the market is strong, houses in {insert posh suburb} are selling for higher prices than they were a year, or even two ago”.
Well, pinch my tail! If median prices have fallen, yet sales are strong and prices rising in the luxury price bracket, what does that tell us about the sub-median priced houses?

F.[cowboy2]

A good point here gmh… interest rates are still low by historical standards.

This is why I have a ‘bit of a cack’ when people tell me that over the ‘long term’ house prices always double every 7-10 years. “What’s long term?” I ask. Apparently it’s around 30 years. So what is the average standard variable interest rate over the last 30 years? It’s 10.4%.

Grab a monkey! That’s pretty high, sure, but so is the ‘long-term’ (30 year) average of 7% house price inflation per annum (although adjusted for inflation and increases in size/luxury a touch over 1%)…

So I’m 30 years old, if I’m investing for a comfortable future at 60, do I spend $300,000 on a house expecting it to double, double, double to $2.4 million in 30 years? Of course I’ll need to factor in 10.4% average interest rates and remember that they’ll need to get higher than that at some point in order to balance the current low rates… It will rent for a hefty 4.2% gross yield or $240pw…

Hang on! If interest rates average 10.4%, then a quick ‘back of the fag packet’ calculation shows an average $600 pw interest cost! Yeah, ok, I know that’s not a very accountanty calculation, but it’s still some $360 less than the average interest cost!

Hmm, IO loan will cost average $18,700 out of pocket per year, minus the tax, plus rates, insurance, pm fees, repairs and property tax, say $15,000?

Let’s be super-generous and assume 6% pa rent increase. After 15 years this baby is paying its way!

Big picture is – after 30 years:
$2.4 million house
$300k debt
~$227k surplus rent after income tax and interest compounded @ 10.4% are applied
~$500k capital gains tax

After selling costs, capital gains tax and debt repayment I’d have around $1.6 million in cash with no way to wedge it into the tax-free super heaven…. darn.
Of course I could have put exactly the same amount into superannuation, in a safe cash option and ended up with $1.3 million, available at any time to be withdrawn tax-free or left at a low (<15%) interest rate for as long as needed!

All told, either option is going to come out roughly equal, yet one is a VERY LOW RISK strategy, and the other carries a MUCH HIGHER RISK

Ok, I can almost here the groans and sighs… “Interest rates are not going to get to 10.4%, so the loan will be cheaper (better) and interest on deposits will be lower (worse)”.

This situation is not normal. It represents an absence of sensible risk-pricing brought about by excess money creation. I could discuss this for hours, but I digress.

If you believe that this imbalance of risk pricing and easy money will continu, then fine, but don’t come to me crying that your investments didn’t double every ten years. And don’t come crying when the governments’ new IR laws prevent the 6% annual wage increases that would be required to sustain 6% per annum average rent increases. And most of all, don’t come crying to me when in 10 years the proportion of working adults of voting age and without access to affordable housing is greater than the proportion of adult Australians with a house or two or six or 130 – because they’ll be angry. And they’ll be bitter. And they’ll have more than enough political power to place crippling taxes at entry, exit and annual points of house ownership beyond the requisite ONE… or perhaps two, if they’re feeling a bit sentimental for the oldies. You get the drift. It’s a zero sum game.

If you’re going to play the game, at least be realistic and creative about it.

Cheers, F.[cowboy2]

In regards to the residential real estate market, generally speaking, yes* and yes*. Especially with the now added bonus of zero tax on monies out of super during retirement, compared with the losses incurred when selling an IP.
“Oh, but gearing is so much better in property!”
Yup. Works both ways though, and its clear where Eastern seaboard house prices are headed! Plus the example above is presumably a geared share fund (I’d guess at CFS geared Australian) which is, well, geared.
“Oh, but real estate is the best performing investment class in the last 20 years!”
Almost right. It’s actually listed property, but if you pick the investment class with the highest recent valuation growth right at the peak of the biggest bubble in financial history, average the returns out over a cycle or two, chances are it will look like a good long term investment.

* and * There are, and will continue to be both people and houses that are exceptions to the rule, who do their own thing and do it well. But the now estimated 400+ thousand Australians currently in negagive equity would not appear to be amongst them. Some could not sell for more than 85% of what they paid, and at the same time have lost both their deposit, stamp duty, and tens of thousands of dollars a year in interest payments… [blink]
But they’ll be alright, houses double every 7-10 years, that leaves just… uh, 3 1/2 years to go! And the real estate industry has been saying that the new boom is just beginning! Oh goody.
Fast forward ten years of unimproved house prices and do the maths. Super is looking pretty good, huh?

F.[cowboy2]
This post is generally bull in nature and should not be considered specific investment advice. Or whatever. Sue me.

Sure, here comes an interest rate related misery story. This was related to me over lunch yesterday, and I’ve embellished it only with interest rates and repayment approximations. The rest is as was. It happened to the brother of a close friend ([rolleyesanim] yeah, I know). She was amazed how trapped he had become…

2BR townhouse purchased, mid-south(?) Sydney 2002. Purchase price $365000, 10% deposit plus costs. 3 year fixed interest rate at a touch over 6%.

Forward 3 1/2 years.

Fixed interest period has run out. Repayments jump up from around $800 f/n to over $950 f/n. Further interest rate rises would cause financial pain.

Option 1) Lock in another fixed interest period
Option 2) Sell up and rent for half the price

Young fellow explores option 1. Rates offered by current (non-bank) lender are high, so he tries another lender – 3 yrs @ 6.71% – not too bad. Application approved subject to valuation… which comes in at $295,000…[eh] Panic yet?

Time to at least think about option 2. Estate agent appraises the house at $330k asking price, but “you’ll need to consider offers around $310-315k”.[crying]

Cripes! Back to the current lender to talk things over. They’re refusing to negotiate their high fixed rates, and he explains that he’s considering selling up, at which point he’s told in no uncertain terms that he “requires our permission before offering the house for sale”! Wha….?[grrr] He’s told this is a no-go unless he can convince a bank to give him between $10 and $20k in unsecured personal loan, depending on sale price…

…but the story does look like having a happy ending. The lad has just left for the greener pastures of Birmingham, England and a salary of 60,000 pounds as a mid-level public servant (!! what’s that in AU?!). Fortunately their parents have offered to make up any shortfall and the house is now on the market.

Is this likely to be a one-off, or are similar situations occurring in all the eastern cities?

And finally, to cement my position as the doomiest and gloomiest “valued forum member”; as I already stated, I am expecting further rate rises this year and next, and barring significant changes to the world economy more after that. The result may very well be large numbers of people realising that debt has them ‘tied to the wheel’ of 9to5. The words “wage-slave” will not be used in jovial conversation, and the literal meaning of mortgage will be well understood…[biggrin]

Cheerios, F.[cowboy2]

Welcome to the forum. My question may seem a bit harsh to a newcomer, but I’ll push on anyhow…
Leaving aside the clear ethical and potential legal implications of this statement, I wonder if you could enlighten me as to how a 50-odd year old with moderate savings outside super and their PPOR will “retire with more money than [they] will ever need” if they purchase 6 properties?
I can’t foresee any scenario under which this statement, if followed, would bear the promised fruit.

Cheers, F.[cowboy2]

Agreed in part, but I don’t see any direct link between metals & oil. Nor do I see a direct link between metals and staples, which are also inflating rapidly.
The recent falls in commodities have all been due to speculation and actual tightening. Last night for example, the ECB & IRB raised their rates, the US Fed is expected to (continue to) do the same. The result – falls in almost all metals & oil.
The only way I can see oil falling significantly (as in below $50) is if the US actually steps up its tightening, causing a slowdown in their economy and consequently in China etc. Oil above $60 and climbing is the result of growing demand.

Regardless of what the government wants, I don’t see easing of monetary policy as an option unless inflation is no longer a problem. And at current world interest rates it is a problem. Lower interest rates would only increase demand.

You may well get that today. I sold the last of mine for around $23!
Cheers, F.[cowboy2]

<EDIT> Just noticed that South Korea and South Africa also raised their interest rates last night. In the face of all this, any country that does not raise their rates proportionally should see their local currency collapse. This would result in dramatically higher import prices and = inflation…
Interesting that Britain is steadfastly refusing to admit to inflationary pressure (they’ve held their rates again). Perhaps they’re scared that lowering their rates last year will be seen as a mistake. One to watch though, if they continue to buck the global trend.