Okay Sir, I'm interested. You do mean 10% per month, right? What's backing the "company guarantee"? I checked over the website and it looks like more of a concept than a company… what's the most recent tangible net asset value of the company?

Cheers, F. [cowboy2]

Just the usual credit-fuelled speculative bubble, in my humble opinion. Note that I never claim "over-supply", just "sufficient or better". [wink]

Look up an article on the RBA website by Luci Ellis (under Research). She explains very neatly how an increase in dollar demand pushes up prices. Pay not so much heed to her final speculative thoughts though. I think in light of recent developments in the US (and looks like the UK too), her conclusions there may need a re-think.

And please, please, please, if you intend to be a successful investor, expand your reading way beyond the Kiyosaki/spruiker books!

Cheers, F. [cowboy2]

It's a price index. The average value of a US house and an Australian home have been set to 100 in 1890 to enable comparison.

What it shows is that in real terms (adjusted for inflation and quality improvements), house prices went up and down, but did not exhibit a rising trend in either country until the middle of last century. Since then, US house prices doubled (then recently began to decline) and Australian house price tripled. Why did they start rising in real terms and just keep rising for so long? Because of this:

We've experienced a 50 year credit bubble. It's unsustainable – that is, it cannot continue to grow forever.

Cheers, F. [cowboy2]

1. Stay out of debt
2. Get a 'recession-proof' job or the nearest thing (police/fire/teacher/ambo/nurse etc)
3. Build up a cash-buffer – start with 6 months of living expenses, then shoot for 12 months. Once you've got 2+ yrs worth you'll feel pretty secure no matter what the future holds.

Cheers, F. [cowboy2]

Sigh.

Wouldn't the length of a year, averaged over the full millennium cycle, actually be 52.1774285714286 (this is accurate since it recurses to zeros beyond this point) weeks?

Every fourth year is a leap year unless it happens to be 2100, 2200, 2300, 2500, 2600, 2700, 2900 or 3000. So I make that 758 normal years and 242 leap years. That's a total of 365,242 days. So at $200/wk, you'll have to charge $869.62/month. You've spoken of "accurate" calculation, but I haven't seen this figure mentioned yet!

Just curious, do you intend to reduce the rent next year to compensate for the relative shortness of the annual lease?

Cheers, F. [cowboy2]

Not at all! I'd love to go. I'm just not prepared to spend $695 on it. If I'm investing that kind of money, I like to know my investment will be CF+ from day one! [wink]

It's just an opening bid anyhow. I might go a little higher…

Cheers, F. [cowboy2]

Dunno. Next is probably prices up, down or sideways. Forget next. The near term is unpredictable. What this can do is inform your expectations of future property prices, so that your projections remain within a broad band labeled 'possible'. Many people I speak to have long term (ie mortgage-length) expectations that are simply absurd.

Cheers, F. [cowboy2]

"So, am i missing something here?  How can this continue?"
No.
It can't.

Historically, periods of falling real house prices prevented house prices from spiralling ever further from wages. More recently, this hasn't happened. Instead the gap has been filled with ever increasing amounts of debt. There's a limit (somewhere) to how far that can go, too. Here's some charts for you:

Source: Nigel Stapledon, Long Term Housing Prices in Australia and Some Economic Perspectives.

Cheers, F. [cowboy2]

Apologies. Checking my reply, I see how you read it as condescending. All I meant was that the answers to your questions are contained in the text that you are questioning. Your failure to comprehend is just as likely to stem from my failure to clearly communicate as from a deficient intelligence on your part.

No. You’ve failed to comprehend the words “real” and “index”. The chart simply represents the scale of growth after inflation, not in dollars, but as a simple index with a 100pt base in 1926. I’ve not adjusted this to suit my argument, it is straight from the AMP source here:

http://www.melbourne.arrive.com.au/files/Articles/Olivers_Insights_House_Prices_080605.pdf

I’ve simply converted the figures from log scale to normal, and overlaid the 2.35% trend to represent average annual house price growth after inflation.

Well, I (and many others with a basic grasp of elementary economics) most certainly do suggest the recent boom is highly abnormal. In terms of growth beyond what is supported by income, rent or inflation, it is unprecedented. In terms of the increase in mortgage debt that has sustained it to date, it is unprecedented. In terms of the magnitude of further debt growth required in future years just to keep house prices from falling (some $100 billion additional dollars of debt per year), it is unprecedented.

No arguments there. Short term movements are entirely unpredictable. It’s only the long term that must conform to any kind of constraint.

My main point is as follows:

House prices cannot forever grow at a rate much higher than the rate of income growth. They can do so for short periods, but the shortfall will be made up with debt growth far exceeding income growth. This cannot last. Periods of such excessive growth inevitably must be followed by periods of lower growth. Expectations for the future following such extraordinary periods should be adjusted downward. They’re not; they rise. This is the basis of an irrational bubble mentality which leads to irrational bubble behaviour which always ends with a bust.

You may view this perspective as unusual or abnormal. I think it’s pretty measured and uncontroversial. None of this is to say that investing cannot be financially rewarding. But anybody speculating on 7% to 10% capital growth per year in a period of sustained 2% to 3% inflation and expecting interest rates to remain well below 10% is frankly deluded.

Cheers, F. [cowboy2]

Precisely. And it is exactly that inflation, actually zero real growth between 1973 and 1998 (see below), which is responsible for most of the "house prices double every 7 to 10 years" meme! The rest coming from the recent, unsustainable credit-fuelled bubble period.

This was all an illusion of growing prices caused by inflation which was above 10% per annum for much of the 1970s/1980s. Good for property investors, as you said, providing they don't suffer catastrophic losses from the associated high interest rates.

These days, the RBA is tasked to keep inflation between 2% and 3%. If it does its job, it is simply impossible for house prices to rise at 7% to 10% per annum over the next 30 years. If it fails, you’ll see much, much higher interest rates. Remember that mortgage interest rates averaged 8.5% during the 1970s and 13.3% during the 1980s, while house prices grew just 12.6% per year on average over the 20 year period.

Simply put, the recent period of growth far exceeding general inflation is unprecedented in history both in size and length. The closest comparisons are the land boom of the 1880s and the roaring ‘20s. But the recent bubble is much, much bigger. Both earlier events were followed by entrenched deflation, not inflation. It remains to be seen whether the financial wizards manage to steer us down a different path this time.

Cheers, F. [cowboy2]