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Hello Steve and the Forum
Thanks for an interesting article. The whole situation with property reminds me of the technology boom in the late nineties. At tha time the whole perception what is reasonable in the market got distorted to the degree of ridiculous. Shares of Internet companies showing losses were doubling in price every couple of months. Reputable analysts kept explaining that this is new economy and that old valuation methids for stocks should be abandoned. PE ratios of 50, 70 and even 100 were normal at that time, again, perfectly explained and justified by expert economists. They kept predicting fantastic returns for the years ahead. When the market stumbled for the first time at the beginning of 2000, analysts started talking about “moderate growth” for technology stocks. The ending – we know it now. “New” economy became “old” one, with common sense and reason coming back. While Nasdaq Composite Index fell from about 5000 to 1200 in couple of years.
What does it have to do with property? Look for yourself. Analysts find reasons for recent property boom. In Sydney it is immigration, about 1000 people a month or so. And it was undervalued “for years”. And the economy is booming. And so on. In Johannesburg property also skyrocketed. There is no immigration (more people probably are leaving the country), but local economists find suitable reasons too. What about reasons for property prices increasing in Shanghai, Moscow, the whole of USA, Latvia? This boom has affected the whole world. And everywhere economists and analysts find logical explanation why it is happening. But very few in fact understand what is really happening. Often reasons are not visible until well after the fact. Often there are no reasons at all. Over the last 100 years, property appreciated at the rate of 5 – 8% per year on the average. In the last four-five years property trippled in price. Has the value trippled as well? I doubt it. Booms have happened many times before, and always ended up with sad consequences of various magnitude. Take property boom and bust in the USA at the beginning of nineties. Federal reserve had to bail out banks uncontrollably exposed to property. The reality always returns to common sense and some sort of fundamental value, often overshooting to another extreme for a while.
I don’t want to get in line with others and try and predict what should happen now. Couple of things are fairly predictable though. Interest rates move in cycles, and now are at the bottom. They will have to go up. Many people, coined by Steve mum and dad investors, are exposed to negatively geared property. When interest rates go up – they will suffer, and at least some of them will have to sell. People are easily subjected to panic, and seloffs may be quite dramatic.
They say that the most successful investors are contrarians. They buy when everyone sells and vice versa. I am going to wait and see what happens after three or four interest rates increases. Good things come to people with patience.
This topic interests me as well. To my surprise, property investors in Australia seldom talk about setting up a structure such as family trust/company. It adds hassle to the process, true. But in the long run there are numerous benefits.
Problems:
1. Setting up trust/company costs money (tax deductible)
2. Running costs are added – annual accounting, for example
3. Capital gains tax on companies is higher (though not significantly)
Benefits:
1. Company tax is lower than highest bracket of individual tax. (30% vs. 48.5)
2. Your assets are distanced from yourself, therefore protected from litigation.
3. More things are tax deductible in case of a company.
That’s my thoughts. Hope it’s helpful.