Forum Replies Created
- Originally posted by foundation:
Oh dear, one of my pet hates – the investment clock!
Why? Because every investment clock I have ever seen is either broken or has been broken! The very concept requires that the primary variable is time, with every event on the clock being intrinsically linked to a previous one…1) The London School of Economics ‘Economic Clock’ has events in this order:
+ Falling interest rates
+ Recession
+ Rising share prices
+ (Rising) real estate
+ Rising interest rates
+ Falling share pricesWhen what we’ve actually seen is:
+ Falling share prices
+ Falling interest rates
+ Rising real estate
+ Rising share prices
+ Rising interest rates
+ Falling house pricesSo where does that place us?
Falling Share Prices???
This just tells me there is a close correlation between shares and property.2) The European Property Clock+This diagram illustrates where Jones Lang LaSalle estimates each prime office market is within its individual rental cycle as at end June 2003.
+ Markets can move around the clock at different speeds and directions.The relevance is the distinctions between different countries where some had had their boom and others were about to.
Given that the four positions on this clock are:
+ Rents falling
+ Rents bottoming out
+ Rental growth accelerating
+ Rental growth slowing
and the only direction options are forward & backward, how could any market move in a different direction?
ie:
+ Rental growth slowing
+ Rental growth accelerating
+ Rents bottoming out
+ Rents falling
and how could this possibly relate to the Australian rental market where rents only ever go up?Sorry, I thought you believed rents were about to fall? Anyway, it was referring to office rents, not residential rents. The fact still remains that different geographic areas move at different speeds which is why speculators/arbitrageurs attempt to pick the next growth area.
Cheers
JeffWould it not be that part of the role of government is to provide a roof over everyone’s head? Property investors reduce the burden on the Government and therefore the burden on all Australians and the economy. My philosophy is property investors are providing a service.
The increase in property prices is not just from property investors (especially when they buy low cost housing to make their cashflows work). The demand is also coming from the “new rich”, families up grading their homes, second holiday homes or beach shacks, growth in population, the rise in single parent families (check out the latest survey on Australian women), immigration etc etc.
Interest rates are still the highest in the industrialised world:
– NZ 6.5%
– Aust 5.5%
– US 2.5%
– UK 4.75%
Putting rates up adds strength to the currency and hence, pressure on the sales and profitability of exporters. When you can’t sell the stuff you may as well cut the staff.With a strong currency, imported goods become cheaper. Less pressure on inflation from lower prices and better quality of living. Great??
However, somewhere along the line you have to pay for all these imported goods and that can only be done by exports – so, we go around in one big circle.
Interest rate rises have a somewhat delayed effect to housing. RBNZ have increased the OCR by 150 basis point over approx 18 months and we are only just seeing some signs of a slowdown. Part of this delay is attributed to the number of fixed rate loans and competition between banks.
Here are a couple of links to the Property Clocks and how the “time” can vary between geographical locations. It’s worthwhile taking note of the sequence of events
http://www.afsd.com.au/article/aip/aip32a.htm
http://www.joneslanglasalle.com/news/2003/08Aug/office_clock_Q2_2003.pdfCheers
JeffHugo,
I think you need to decide if you are to be a property investor or not. If you have some emotional attachment to the property then this will ultimately effect your investment decision.
You need to set your goals and determine if property investing will help you achieve those goals. It isn’t for everyone.
Things you will have to look at are:
– what the property will rent for?
– what additional tax will you pay on the rent?
– what will your interest costs be on the new PPOR?
– what will be the exit costs if you sell now?
– what will the exit costs be if you rent it and sell later?
– would you purchase further investment properties?While I’m not in favour of basing my decisions on indices you would seriously need to determine the real value of your property as an investment. If the property rented for $X, how much would you pay for it as an investment? If it is less than $300k I’d look at selling it because of all the reasons CrownOfGold has mentioned.
Cheers
JeffRemember any loan interest on your IP’s, is tax deductible and this must be taken into account when determining the best investment for your $150k.
The disadvantage of paying these loans off is that if you required money at a later date for personal reasons, any re-financing would not be deductible.
I would suggest you first look at any non deductible loans first (eg mortgage on PPOR, car finance etc).
Otherwise you should look at further investing. If you can achieve yields of better than the interest rate on your IP’s then you will be better off.
The sort of money you are talking about would even allow you to step up to commercial property where you can still achieve 10% net yields.
Just remember to keep some of your funds aside for a rainy day eg cash and term deposits or shares etc. If you are unsure, see a certified financial planner to see what’s available.
Cheers
JeffI agree Jo (Monopoly), it is not how much money you earn but what you do with it when you get it.
When I was in London in the late 80’s I saw many traders, merchant bankers, computer programmers etc etc earning phenomenal money as employees and just blowing it – sports cars, overseas trips, expensive restaurants, gadgets and even gambling. For what they earned they had very little to show for it and without their jobs they would have had to undergo a drastic lifestyle change.
As for credit cards, that’s a money management issue. If you can’t manage a credit card how can you expect to manage the rest of your finances. Become disciplined and make your money work for you.
Cheers
JeffMichael,
I agree with your comments.
I guess if you built and sold a large block of $250k apartments in an area where the median is $500k then the median has to come down.
I would like to see evidence of houses in Belgrave South being purchased in 2003 for $457k and then sold for $268k in 2004 – you can’t blame that on interest rates can you?
Cheers
JeffOriginally posted by byronent:why would half the rent go too tax?
Because Hugo owns the property outright, there is no deductible interest, only the basic outgoings and depreciation. Hence the bulk of the rent will be taxable at the appropriate tax rate.
Any loan to purchase another property to live in cannot be offset against the income of the IP.
However, if Hugo were to rent the property and borrow against it to purchase other IP’s then the loan would be deductible.
Any income derived from the $300k is going to be taxable whether it be interest, rent or dividends.
Are you borrowing to purchase the other property you wish to live in? This is the other factor affecting your decision.
Cheers
JeffAn interesting article!
Oil to hit $80?
A supply disruption could send crude prices to $80 a barrel, according to OPEC’s Secretary-General.
March 3, 2005: 7:22 AM ESTKUWAIT (Reuters) – Oil prices may temporarily spike to $80 a barrel during the next two years if there is a major supply disruption, OPEC’s Acting Secretary-General, Adnan Shihab-Eldin, was quoted as saying by a newspaper on Thursday.
“I can stress that the probability that the price of a barrel of crude rises to $80 in the near future is a low probability,” Shihab-Eldin told leading Kuwaiti daily al-Qabas in an interview in Vienna.
“However, I can’t rule out the rise of a barrel of oil to $80 in the coming two years,” he said.
“But, if the price rises to this level for one reason or another (for example a shortage of supplies from a producer nation by one or two million barrels per day), it’s not expected that this spike will last long.”
Prices around $50 or $60 a barrel, if they continued for two years or more, would increase investment to expand supplies and curtail demand, pushing down prices in the end, he added.
“This is an essential law of economics,” Shihab-Eldin noted.
Crude oil rose to a fresh four-month high over $53 per barrel on Wednesday as refinery problems in Texas propelled gasoline up to an all-time peak.
Shihab-Eldin has said that OPEC saw a growing consensus that a $40-50 range for U.S. crude was sustainable, backing up comments by Saudi Oil Minister Ali al-Naimi last week that prices could stay in that range this year.
Structural change in oil markets
Shihab-Eldin also told al-Qabas that it was in the best interests of the OPEC oil producers cartel and the rest of the world that there be no big or sudden jumps in price levels but instead a balanced and gradual rise.“It’s clear that there are some structural changes in oil markets that took place in 2004 which led prices to rise,” Shihab-Eldin said.
The most important of these changes is rising demand for oil in China and Asia, which accounted for nearly two thirds of the annual increase, and also a deceleration in the production rise from non-OPEC oil producing nations, he said.
This, he said, has prompted the Organization of Petroleum Exporting Countries to temporarily set aside its price band of $22 to $28 a barrel “until it finishes studying the structural changes in coming months and specifying a new price band.”
OPEC’s reference basket of seven crudes last stood at $46.17.
Shihab-Eldin said consumers in many industrialized nations pay for refined oil products, such as petrol, prices that translated into much more than the equivalent of $80 per barrel for crude oil.
“The price reaches more than 200 ($265) per barrel in some European countries,” he said.
“This price is subject to the tax disparity between the United States and Canada on the one hand and some European nations on the other hand, where tax on oil products rises to about 80 percent.”
Cheers
JeffSuperman,
The article provides good info on what drives values, reference to capital city analysis, geographic differences, methods of assessing fair value, differentiation between owner-occupiers and owner-investors etc etc.It is good reading but I noticed it was dated 19 November 2002
Cheers
JeffI thought the oil crisis was in the 70’s. The sharemarket crash was Oct 87 and property followed that. Those were the days of excessiveness, fraud, insider trading, receiverships, redundancies, bankruptcies etc etc.
I was buying all through that time. Prices went up, came down and went up again – as long as the cashflow was coming in it didn’t matter.
Cheers
JeffOriginally posted by foundation:And conversely a lower demand, as those houses are now homes to ex-renters.
Once again, if the flood of additional ‘investors’ didn’t have an impact on rents, why would an exodus?
Cheers, F.[cowboy2]
Home buyers are not all ex renters so it is not necessarily directly proportionate.
If the flood of investors created a number of vacant tenancies then that would be an oversupply and it would impact on rents. If there are no, or few vacancies, then supply is merely meeting the demand.
Emotions and perception also affect the rental market as well. People have preferences to certain areas for numerous reasons (schools, transport, shopping, security, beaches), hence demand may increase in one suburb and not in others. Not all renters are transient either, when rents rise it may be more of a mission to move than to just pay the increase.
Unfortunately we do not have a perfect market and all things are not equal. Rents will rise more in one area than another – thats just the market.
Cheers
JeffOriginally posted by foundation:On the supply/demand issue,
Oil prices are factored into CPI, and can therefore influence wages. However, the price of oil is set by the market – higher demand = higher price.When OPEC cuts production or the war in Iraq reduces supplies then market forces are being directly influenced – lower supply = higher prices. Any monopoly or oligopoly can directly influence prices.
Wages are also subjected to the forces of supply and demand – not enough builders = higher wages.
I don’t see that demand for rental properties has significantly increased of late, or why it will in the near term. Demand for investment properties caused house prices to inflate much faster than wages, but that demand has largely expired. Rents have been unnaffected during this time, so I fail to see how falling demand for investment properties or falling house prices would push up rent.In property investment there are both investors and speculators. With rental properties we would want income to cover most costs therefore the properties we buy aim at supplying that market segment who are renters – one criteria before you buy is what they can afford. This in itself would put an upper limit on the value of houses investors are buying.
Speculators on the other hand are prepared to forego the income in order to take advantage of anomalies in the market. These anomalies occur because there is a large proportion of the housing market that are not investors but owner/occupiers. They buy on emotions, perceived values and the like, fundamentals just go out the window. Affordability and disposable income are prime drivers and not the return on investment. Do these owner/occupiers lose if the market retreats? No, because they intend living there and don’t intend to sell.
So, when you take away some of the investment properties and they become “homes” there will be a lower supply of rental properties available – lower supply = higher prices. It is a perceived change in the nature of the product that changes the value.
On interest rates – I personally wouldn’t fix interest rates beyond 2 years, although if I was in the 22% of high income earners ($80k+) who feel they will have trouble paying the mortgage (AAP 01.03.05) if rates increase by 0.5%, it might save some stress.[blink]Cheers, F.[cowboy2]
This would depend on what rates are on offer. As much as we try to pick the highs and lows we can never be sure so to remain flexible it would be wise to maintain a mix of variable and short to medium term fixed rates, or better still, cap the rates.
Cheers
JeffIn less than 18 months NZ has had about 6 increases in the Official Cash Rate (presently 6.5%) however, a large percentage of mortgages are fixed due to the discrepancy between fixed and variable rates. There has also been competition between banks for a bigger slice of the mortgage market and some good 2 year fixed deals have been had. It’s worth having a look at http://www.interest.co.nz if intending to invest in NZ.
What Steve says about making a deal is imperative. Adding value, increasing cashflows and capping or fixing your loans can only be better for your pocket. You may wish to free up some cash for any impending opportunities that arise.
There is a bargain in every market whether it be found (right place at the right time) or made (add value).
Cheers
JeffBrad Sugars is the author of “Billionaire in Training” among others. His business is Action International which is basically business coaching and mentoring. He’s managed to franchise it out around the world and by all accounts is pretty successful.
Cheers
JeffOriginally posted by pgrim:Hi
Not sure if this is the right place to ask b ut what is “Xcol” when talking about finance.
ThanksSounds like “cross collateralisation” meaning more than one property being offered as security for one loan. Not too sure
Jeff
Brenda, that’s a good strategy. While downsizing your overall portfolio you are increasing your equity and your cashflow at the same time.
I tend to sell off any non performing assets first and retain the income producing ones. In 2003 I sold my beach house because I wasn’t using it very often and very little income was being derived from it. I bought another commercial property leased to an oil company (lease expiry 2012 with a ratchet clause). I also fixed some of my loans for upto 3 years. It has good positive cashflow.
While I am not concerned about any market correction in property I do have a good buffer in that the oil companies will have to go broke first. If I did have any doubt I would not get rid of the golden goose to reduce debt but the luxury items first.
Cheers
JeffWhat sort of development are you doing Mini – residential or commercial, single unit or multi?
I’ve got a dirty great hunk of land I have to do something with so I’ll be interested in a few progress reports.
Cheers
JeffI assume your property for sale is in ‘NZ.
Have a look at http://www.homesell.co.nz and http://www.privatesale.co.nz
I have not used either so cannot tell you anymore than this.
Hope this is of some help
Cheers
JeffOSienna, you are pretty much right with your figures so I guess on that basis you’d be stupid to sell the property. In my example I was referring to increased equity through leverage only and not assuming one would sell in which case yes, you would have to take into account the exit costs. While a tenant is slowly paying the mortgage you may as well retain the property until such a time as there is sufficient equity to cover the fixed costs you have mentiond. Try some recalcs on a 20% increase in the value of the property or on say a million dollar property.
And I agree Foundation it is not always wise to extract equity from an IP, sometimes it is best to consolidate however we all have different comfort levels
Cheers
JeffOriginally posted by OSienna:Is this some kind of voodoo maths or have I missed something?
10% deposit on $100K property is $10K
10% increase in property value = $110K
10% of $110K = $11KHow did you get the figure of $20K?
If you put down $10k on a property of $100k you need a loan of $90k
Property value increases to $110k, deduct loan of $90k, balance of $20k equity.
Therefore your original $10k has doubled
Your new percentage of equity is $20k/$110k or 18%
Cheers
Jeff
