Which one? This one:
http://www.paritech.com.au/paritech-site/education/beginners/images/investment-clock.gif
Puts us (if this is the reawakening of the bear market for shares rather than a healthy correction) at 2 o’clock, so in order, we can expect:

Falling commodities prices
Falling overseas reserves (!!!!)
Tighter money (high interest rates)
Falling real estate values

Then we hit the ‘depths of depression’.
Then things get better. Gradually.

Note, I’m not saying this is my prediction, just interpreting one of the most common “investment clocks”.
Cheers, F.[cowboy2]

I would say it’s not quite that simple. If this money that you say is due to flow back into real-estate is the product of debt (and / or debt-funded bubbles), the markets historically have demonstrated an interesting, though brutal way of absorbing excess liquidity…

I gather you believe that there is some kind of contrarian ‘buy signal’ for residential real estate at this point of time? Do you disagree that currently (East coast specifically):

– The majority believe that house prices never fall, they can only stop rising at worst.
– The majority believe that house prices in the near future (anywhere from 1 to 5 years) will resume their steady upward march at rates in excess of inflation?
– The majority would rate the chances of interest rates exceeding >10% within the next decade as near impossible?
– The majority believe that in the long term, buying a house is a good investment?

Now surely a contrarian would look at these 4 indicators (and many more) as forecasting bad things for house prices? Compare that to 1991-3.

– Nearly everybody knows somebody (or of somebody) who has either had their house repossessed, sold at a loss or cannot afford to sell at a loss. Those that don’t are bombarded with hard-luck stories in the newspapers and current affairs.
– Many home-owners are prepared to lock in 5 years at 12.9 percent because they think there is a decent chance interest rates are about to rise again and they’ll be forced to default on their mortgages.
– The majority consider real estate investment to be speculative and risky.

Perhaps a contrarian might consider manufacturing… [eh]

F.[cowboy2]

If you’re carrying out a business, then interest costs would absolutely be legitimate deductions.

Interesting topic, and one that I’ve studied in detail. I have many thoughts on the matter, but will share just a few.

1) There is no doubt that the gradual retirement of the boomers will have a significant impact on many aspects of society, business, politics and economics. Immigration will not change the absolute certainty that many parts of the country are facing a decline in the number of people of the currently accepted ‘working age’ – 15 to 55. This is supported by a large report I read a couple of weekends ago – if I recall correctly it was by Demographia consulting the fed gov’t. At least 3 states will have a net loss of these ‘working age’ people for a couple of decades. As an example, SA is projected to lose 4,000 per annum from 2012 if memory serves. So point one, this is a real issue. Things are going to change.

2) Who will step up to the leadership plate? If we look at the leaders of the business world, politics and to a lesser extent education and intellectuals, the vast majority are men aged 50+. I don’t doubt there are plenty of bright and brilliant young men & women entirely capable of taking these roles, but I wonder whether the transition of a new generation of leadership styles, ideas and ethics will cause some turmoil…?
The boomers will retain their voting majority for some years to come; what are potential leaders to do? Pander to their needs and wants, regardless of how this hurts the rest of society, or take the hard decisions and feel their wrath? I’m musing particularly on health-care, welfare, concessions and tax benefits, and of course, the environment.

3) These ‘cashed up boomers’ we hear, and or talk about are just one small part of a generation who will collectively be carrying more debt into their later years that any previous generation. This will absolutely have a number of consequences, the magnitude of which will be either negated or magnified by financial and economic developments over the next 1, 2 and 5 years. Will we still be playing envy politics and having inter-generational war talk if interest rates double in five years? I don’t think so. What if we enter a hyper-inflationary period where the cost of living (food, health & basic needs) doubles over a few years, then doubles again? The younger workers who are carrying lower debts will have some of their problems eased by rising wages, but anyone fully or partly retired will find their cash fairly irrellevent. Sure, given the past, 5 or 6 average houses should still provide 1 average income worth of rent for anyone who has paid them off in full, but many of those boomers who have recently begun investing have huge debts and no hope of being debt free…

I have the overwhelming urge to finish this with ‘for your kind consideration’, but fear I may step on kenneth’s toes. Any thoughts?

F.[cowboy2]

Not a personal story, no. Just the big picture generalisations and oversimplifications I’m so very average at. Here goes:
The Reserve Bank crapped itself, opened the liquidity floodgates, and at the same time reduced the cost of borrowing money. Growth in currency jumped from ~10% in 1987 to a peak of 15% in 1989. The broad M3 measure of money supply increased from 10%pa to 19%. Interest rates were reduced, with standard variable rates falling from 15.5% to 13.5% in just 6 months. Much of this cheap and plentiful money flowed into the perceived safety of real estate. The increased demand for real estate led to unsustainable increases in house prices, which self-perpetuated as an orgy of additional borrowed money tried to wedge itself into already over-inflated assets. The end result of all these excesses? The recession we had to have.
Notice I called it the recession we had to have, without quotation marks? That’s an indication of my lack of sarcasm. When we, collectively, spend more than we earn, the economy has a historical habit of biting back our excesses in a most brutal fashion.

Hope this helps somewhat,
Cheers, F.[cowboy2]

References:
M3 Monetary Aggregates – RBA http://www.rba.gov.au/Statistics/Bulletin/D03hist.xls
Housing Loans – Indicator Lending Rates – RBA http://www.rba.gov.au/Statistics/Bulletin/F05hist.xls

May I just ask why then are you, in your own words, “concerned that her relatives could just come along and put it on the open market.”
I can see how somebody reading that could get the impression that you are keen to do a a fair deal, but not prepared to give somebody else the chance of doing an ‘even fairer deal’. As in paying more for the property.

Cheers, F.[cowboy2]

Don’t know about the legalities of it all, but from a moral point of view, surely his obligation lays with the creditors whose loans he has defaulted on?

Yes, but then the investor will be assessing the value of a variety of investment options, and negatively-geared property will be that much less appealing.
I’ve had an offline comment suggesting that my scenario is ignoring the income tax payable annually on the interest from a cash/secure investment. This is true, but I’ve done the sums for myself, using salary sacrificing into a cash/secure superannuation fund, and the results are mind-bogglingly nice. I’ll need to run the scenario past an accountant, but it would appear that the gov’ts new rules for superannuation have increased the attractiveness of low(er)-risk investments enormously.
Food for thought.
F.[cowboy2]

Isn’t 4.4% gross yield (on $650k):
a) rather unappealingly low?
b) very optimistic?
There are plenty of deluxe 2b apartments in Southbank available for $350 – $450pw fully furnished with balcony and city views. Additionally, the Melbourne apartment market is still in massive oversupply. My measure of this is the number of ‘serviced apartments’ I have to choose from when I’m working in the city… believe me, there are a lot.

Does your ‘bunch of other properties’ contain any better deals? I’m not having a go, and I do in fact intend to purchase a city apartment within the next few years.

Cheers, F.[cowboy2]