Forum Replies Created
Land appreciates
Infrastructure depreciatesSo if you have a higher % of depreciating assets, a higher yield is needed to offset.
Our house finally listed last Thursday! The US started to slow a bit early this year, but in the last month [lmao]. We have 21 offers as of today, that’s 4 days. Yes you read that correctly [biggrin]. My wife and I are obviously thrilled and hoping the escrow goes well.
We listed slightly (say 2%) under market value so as to inflate demand. But with this many people, this much demand, I think the US has a bit to go. Maybe 6 months more of mania? 6 more silly months until noone at all can afford? Possibly these the dying thrashes of the market, like a fish thrown on the deck of a boat? But wow, 21, we listed low to get maybe 5, so we could better bargain for a short lease-back. That’s SoCal for you.
Originally posted by dmichie:superman – so your point is that the affordability situation in Brisbane is actually worse than the Demographia figures suggest?
BTW, I had already made this point in another post:
Sydney is even less affordable when you consider that mortgage interest is tax deductible in the US, US interest rates are considerably lower, and US personal income tax rates are lower (meaning you have more after tax dollars to meet the mortgage repayments)Yes, I do actually recall you (or someone) mentioning the US tax deductibility before. But the loan rates and terms are equally pertinent to affordability. Sydney costing more than LA isn’t that astonishing. I was interested in pointing out that even the 10.1 to 6.0 gap can be withered away to favour US (LA specifically).
As for predicting the future, yes I’ve always struggled with my prescience [blush2]. I too have always found the past easier to see than the future [exhappy].
Now I need to pipe in…
Brisbane: 6.0
LA County: 10.1Naive view: Oh Brissy is not that bad, check out LA. Brissy is affordable by international standards; overprice, overshmice.
WRONG! WRONG! WRONG!
The facts: average home loan rate is currently 6% which can be fixed for 30 years! You heard that correctly! Furthermore home interest is deductible against state and federal payroll taxes (but not social security taxes, etc.).
Take median family income and state tax deductions will be in the 4% bracket
http://www.ftb.ca.gov/aboutFTB/press/Archive/2003/03_59.htmlTake median family income and federal tax deductions will be in the 15% bracket
http://www.irs.gov/formspubs/article/0,,id=133517,00.htmlSay on $445,400 loan, at 6% that’s $26,724 interest. (Simplified to ignore slightly higher rates on HELOC to get 0% down).
Subtract standard deduction $5000, (ignore other possible deductions to counteract previous assumption), $21,724 tax deduction, just cuts into lower brackets, but lets take the 19% (15+4) as near enough. So $4127.56 tax savings. Now $26,724 – $4127.56 = $22596.44 which is the real cost of our loan.
Now if I conservatively say 7% for interest rates in Aus that same interest would buy $322,806. (N.B. yes all principal payments ignored). But look how quickly we’ve equalised! Now LA is only $20k more than brissy. At 7.5% interest (possible after next rate rise), cities are equal. But LA doesn’t have the same risk exposure to rising rates! Sure variable loans exist and are becoming more common, but US has historically had slightly lower rates than Aus to boot.
Finally LA is actually cheaper to live in! Yes you hear how much it is, but this is based on rents, you are not renting if you are the above median scenario. Food, gas, cars, entertainment, electronics are incredibly cheap, so there is more disposable income to make payments. Now… at the median point the tax advantages were reasonable… just imagine how big they get if you are in the top brackets! Interest deduction is limited to $1,000,000! What can you buy with $1,000,000 worth of interest payments?
Point to all of this… Brisbane is at least as unaffordable as any US city.
For purposes of disclosure [biggrin] I live in LA with the intention of returning to Brissy.
Resiwealth, you forgot to mention age and children as factors that influence bank accounts. Also, you lucked the best 20 years in both stock and property returns! If you’d underperformed the indexes by even a few %, but started 20 years ago with $100k and say 1k per month, 60% gearing, you would have at least 3 million in assets today, by UNDERPERFORMING! You have done well, congratulations, but don’t get cocky, remember you live in Australia where no one likes a tall poppy. If you want to be a horn tooter, come live here, it seems to be the American way. But at the end of the day who’d you rather have a beer with?
Lunch time, [specool]
The endeavour to avoid LA-style is noble! I live in LA and UGH! There is a lot to be said for centralisation… I think living here has made me appreciate how important it is that Australian cities don’t go down the same path.
I have purchasing experience in the US. I have lived here for 4 years with my wife. A little over a year ago we jumped into the Californian market and bought in Lakewood, a city in LA County. Since I’m buying from within the US, I’m sure my experience is quite different from what you are chasing, but I’ll mention a few things.
For one, just about all transactions have two agents: the buyers agent and the sellers agent. But your agent (the buyers) is effectively free, because the two agents split the 4-6% commission (national average is now 5%) paid by the seller. The seller can negotiate that commission with their agent, but say they go to 4%. That would mean any buyers agent representing their client would be less motivated to push that property. So I’m planning on selling maybe this month and I will be going with 5%. This is a possible plus for you, a free buyers agent! But they paid a percentage of the value you pay, which is a definite conflict of interest, so you need a good agent.
As for when we bought, we only had 5% down and this was a huge problem. We put in 7 offers on various properties before getting lucky on our 8th. On the day that I found our home I saw 4 at lunch and put an offer on 3 of them, my wife having never seen them (that’s trust). Every time we were rejected it was because our offers were coming up against higher deposits, I.e. 10% and 20% offers. The reason this makes a difference is, it is less likely their pre-qualified loans will fall through. On one of those properties we got lucky and to give you an idea just how lucky… the day I saw that home was its first day on the market and my offer reached them that same day: 5%, full asking. They accepted the next day at lunch, but within the hour they had a 20% down offer $10k over. Having already accepted my offer in writing the sellers agent called my agent and begged her to be sure I was able to pay. For the 4 weeks of escrow the sellers were working against us, hoping to pull out for any reason because of the higher offers! So it was the 8th home we’d put an offer on and we only pulled it off by 1 hour. So… gist of it is low down will be hard! Try have 20%.
I assume there were stories like that in Brisbane during the peak of it. Things have settled a bit here now, but coming into spring they say it is picking up. I hope so this time round I’m selling. [biggrin]
As for getting loans… sh*t, I had a difficulty getting a loan from WITHIN the country, because my visa is non-permanent. So I fancy that would be difficult.
I don’t know anything about the returns on the other side of the country… but to be honest this sounds an awful lot like a “grass is greener on the other side” story. Sure Aus does cost more, but I read a lot about the market here and the concern is that it is going to decline. I’m trying to sell early before it does. Rates have gone up 6 times so far… in every consecutive RBA meeting. That’s 1.5%, but you know what? 10 year treasury bill yields (basis for mortgages here) have not yet moved. Greenspan says it’s a conundrum… I think it’s just lag. Yesterday the move began, 0.12% yield increase in 1 day, biggest increase since… 4 years or something?
Another thing… buying in NZ, as seems to be commonly mentioned on this forum , might make more sense. The AU and NZ economies are more closely aligned. But another factor buying in the US the dollar. Here is the history of the AUD against USD since floating (for trivia are you aware before floating the AUD was fixed ABOVE the USD, cool eh).
http://www.rba.gov.au/Statistics/HistoricalExchangeRates/index.htmlNow the reason I mention this is, if you download the full history (5MB) you will see that the AUD tends to vacillate within the 60-80c range. We are at 78.8c today, were at 79.8 on Monday. So you might be doing well if you purchase now and believe that the dollar will fall. But if you purchase in 3 months and the dollar is back at 70c at that point, you will be exposed to more downside risk. Read up about Warren Buffet shorting the USD. However, personally I think now is a good time to buy the USD.
The AUD is being driven up by resources demand (and our higher rates in cash accounts). China is the reason for most of this demand. If China slows AUD should go down and your return might well improve, but point is, it’s far more complicated now that you have exchange rates in the equation.
Here is a good article, 05/11/04 insight:
http://www.amp.com.au/au/3column/0,2338,CH4669%255FNI9451%255FSI56,00.html?via=AMPAUAlternateLeftNav
For spot rates:
http://www.xe.com
For noon rates:
http://www.x-rates.comIf the property is cash negative or needs maintenance down the track and you do all your calculations based on 80c… when it hits 60c, will the extra cost break you? Plus you need to pay $25 for each transfer here (ANZ), $14 back (Wells Fargo). The AUD has to be one of he most volatile currencies in the world! At one point since I’ve been here it was 48.5 and it was pretty much 80c this week. Imagine if you had to pump in $1000 a month at 80c, that would become $1650! Another possibility, you have a better investment opportunity in Aus, but the AUD might be so high at the time, you must take a loss in order to return your money.
Now I say all this because I actually have an option of not selling and instead renting out my place of residence when I return home… but I’ve decided not to. Mainly because I believe the US market is close to it’s peak. Unfortunately with the AUD high it is not a good time for me to send money home, so maybe I’ll be holding off for a bit on the bet that it goes lower; average it over a few transfers, in the mean time invest locally.
But the other reason I’m selling is complexity. The US and Australia have dual tax treaty agreements. Which means you will be lodging a tax return in the US and in Australia. I’ve not read up on earning in the US while living in Aus. I was concerned about the opposite scenario, but… ugh, taxation is ugly. And having to worry about a home (in my case in an earth quake zone) on the other side of the world… REIT’s in Australia are still yielding 6.7% (SLF) [biggrin] I think a margin loan on an REIT would be LESS risky than a US RE investment. 2-3 years down the track when the Aus RE market is looking more sensible, your money is already in the country.
Having said all that… good luck either way [cap]
hundreds of ways to skin a cat eh!Funny you should mention “non deductible”. Over here home interest is a tax deduction! So owning (with a boarder) was only a few k more each year. But now heading back to aus, prices there are HIGHER vs income and interest is not a deduction.
They fret about LA house affordability, but Australian capital cities actually make LA look CHEAP [biggrin]. The economist article linked here a few days back shows how out of whack Australian prices are. So when my US buddies sulk about it, I just tell them about Brissy.
I’ll be renting until I’m comfortable that the imputed rent I earn by owning actually constitutes a valid investment!
Seems supply is dwindling and you might be able to demand more…
http://www.finance.news.com.au/story/0,10166,12485854-14302,00.html
I’ll be back in a year and renting, so my bias is that yields stagnate. I figure at least a year of renting and readjusting to the Australian lifestyle (read 12 months of inebriation and BBQ’s) before we know which suburb we want to live in.
Originally posted by Nobleone:Hi all,
I was a ‘peak oil’ follower until I recently read this article…
http://www.rense.com/general63/staline.htm
… which gives some very reasonable debate material re the abiotic oil argument.
It’s a long read, but I always say that if you don’t read all the facts/theories/ideas etc you really cannot make an informed decision nor make a valid argument…
Any feedback from forumites who read the ‘complete’ article would be interesting.
Cheers, Nobleone. [biggrin]
“Making mistakes is just another another tool for learning.”
WOW!!! What a read. Yup, read it all and followed a few links and it’s compelling; down right convincing. However, not at all surprising, given DeBeers does the same thing (as is even mentioned in the article). I don’t think they even mentioned in there the artificial flawless diamonds now being created for $10US per 3 Carat. They are not “artificial” in that they are true diamonds, but they were not formed naturally. Only way experts can tell the difference is that natural diamons have flaws, these do not.
So now all we need is a means of consuming the hydrocarbons only to produce H2O and elemental carbon and voila; unlimited clean fuel! [biggrin] Or refactor the hydrocarbons into hydrogen and elemental carbon before combustion? I just want my clean air. [biggrin]
Rightio seems this is way off track. So let me throw an good article about rents increasing so I don’t get hammered for an inane post:
http://www.finance.news.com.au/story/0,10166,12485854-14302,00.html
That it is. But, how would the means of determining fundamental value have changed? I suggest that given this pdf was pre-euphoria it might actually be more accurate!
Oh no, there was no mention of oil as a current risk, this is just my own theorizing. And non-CBD isn’t the sticks.
But, yes as you say, oil goes up economy responds, what happens when it REALLY goes up? $100 a barrel, in real terms?
Originally posted by Investigator:Hi Foundation,
I respect your opinion, however, wages don’t actually have any affect on Rent
Good morning Investigator, forgive me for jumping in here, but I’m fascinated by fundamentals discussions and I abhor your apparent oversight.
You are correct to state that supply and demand affects rents. Less rental properties on the market will indeed require the renters to compete. But they can only compete within their means! Supply and demand imposes short term trends on the longer term trend dictated by wage growth. Or how are these people to pay? Keep in mind that there are alternatives, if rents begin to consume 30-40% of the average wage in an area people will move out. This will reduce the demand, reverting the graph back to the underlying wage appreciation trend. If you’re a buy and hold investor wage growth is far more significant to your long term rent increases. If you can predict a supply shortage will affect and area for 20 years (my arbitrary definition of long term), then you are an exceptional investor. Over this 20 years there may well be periods of short supply, but there will also be excess supply. These are only ripples. Wages are the trend.
Another point from your first post, I understood you to imply rents will increase simply because yields have fallen. I agree that there will be additional upward pressure from investors fretting about their low returns, trying to make renters pay for their over commitments. However, there is a balance of power. Renters can move out and they do! If they don’t, they will ask more from their employers to live in the area, voila, wage growth!!!
Finally, “history has proven”, is an example of inductive reasoning. Inductive reasoning cannot offer proof. However I do think your suggestion is quite astute and a possible, if not likely scenario, that unfortunately does not bode well for residential RE investment.
These are returns, i.e. rent + appreciation. So they do not necessarily conflict with the previous values. The disucssion is whether house prices double every x years, so these figures cannot be compounded to this end.
Fantastic link! Problem is over the last 100 years shares have outperformed… and over the last 20, significantly underperformed (N.B this doens’t include the 30% runup in ’04). This makes me a little queezy about RE [confused2] but I want to go home and do some research on 20, 50 and 100 year trends and read this link in detail, thanks again. Man collective googling produces amazing results [biggrin]
point to a decreasing number of people per householdNow that is interesting! So that will, in theory, increase the demand. But I can see a problem here; less people per house-hold, will mean lower inflation adjusted house-hold incomes. That should, in theory, decrease demand. So again the system is balanced. Surely it can get a little irrational, but generally it all makes sense.
Hey here’s another thought I’ve pondered. I think property might be inherently more stable than shares due to a negative feedback loop. Shares have only one type of owner, the investor. Property has investors and owners. Investors in a panic, will sell, flooding the market, further driving prices down, i.e. positive feedback. But the owning contingent, I think, will be more likely to hold in a bear market. As prices go lower, fewer people sell, cutting off supply, i.e. negative feedback. What do you think?
The big problem I see… is property is a fantastic investment that allows you to gear at up to 90% (is that right for investment properties in Aus?). But it certainly has had a good run of late… Shares have an even higher return, before leverage is considered, but generally one can only get 70% (75% on some blue chip stocks) and there is the complexity of staying under the buffer of usually 5%. So the investment that offers higher leverage will has lower pre-gearing returns and the one with higher pre-gearing returns has limited leverage. Shares without leverage are very mediocre. [blink] Oh yes, I’m quite young still, in case you fear I’m overly agressive [cap].
REIT’s geared at 70% aren’t a bad option atm, returning on average 6.5% dividends, I wonder how this stacks up compoared to residential RE. They are extremely different markets, don’t misjudge that! Again, babbling and I should work…
Damn you do your research! Amazing stuff. If we can’t debate property issues, what are we doing here? On that note, seems troll has been redefined:
1. One who’s opinion does not match my own.
So is Myth Busters actually on air in Australia? I’m too long departed to know [confused2]. You even have their catch phrase to the teeth, “busted wide open” [biggrin]. It’s a great show; it’s season passed in my Tivo. [biggrin]
Um, you will no doubt discount me a troll-supporter now, because I agree with Foundation’s posts. But I honestly don’t see a single personal jab in any of his replies, whilst you are flatly undermining his integrity! [blush2] I was taught that the best demonstration of maturity was to walk away from an unnecessary conflict, i.e. ignore the thread.
Back on topic, the nominal 180% increase over 33 years concurs with doubling every 10 years. 2.8^1/33 = 1.031, so 3.1% above say 4% inflation, which is 7.1%, this would double every 10 years. Quick in your head calculation is the 72 rule; 72/return = time to double so in this case 72/7.1 ~ 10y. Please note this is a linear approximation to an exponential, so it only works within a sensible range, say 5-15%.
So there we have it, over the last 33 years, prices have doubled every 10 years. But I would like to finish on a point for consideration:
What would the result be if the range were 1970-2000? The data has been been significantly affected by just a short 3 year period. InterestingAnd to further make that point I found the following http://smbtn.com/books/gb85.pdf , please look at page 85, which is for the US RE market. Now imagine it’s 1935; what would someone who extrapolates from only the last 30 years conclude? Oh but this time it’s different? Like tech was a new paradigm? Also the compound rate of return is 6.5% over 95 years which is 12 years to double. But the last 30 years have had lower inflation, so this 6.5% over 95 is quite inferior to the 7.1% (as approximated above) of the last 30.
I don’t mean to discourage investment, because the only sure way to fail is not to try. However, if we can discuss this rationally we can come to some conclusions that benefit all of us?
Oh seems, that wasn’t the final point… as for the, “I’m better than avereage”, I don’t doubt it!!! I am seroius!!! But the problem is you will be X standard deviations from the mean. So by adjusting the mean, your returns are still affected.
Lunch time here (PST), ciao, peace [blush2] get enough war from Fox thanks, when i can’t flick fast enough
The means RBA controls inflation by removing money from the economy. For larger national debt, a smaller rise is necessary, for the same effect. So no matter what the initial rate (7% or 12%), assuming the same level of debt, a 0.50% would remove more money. But then we can’t really compare like that because we’ve never seen rates of 12%, while being this far under water.
The house hold savings rate mustn’t take into consideration superannuation, so I think it’s a little rosier than it sounds. But what is the limit? Maybe when debt servicing obligations begin to drain on consumption, spirally the economy down; instigating fear, that in turn is conducise to savings. 13 years without a recession is a long time, touch wood, cause I’ll be returning to look for a job over there in a year.
The more optimistic outlook is that the system (I like to call the economy a system, that is how I think about it) will self-right. And by self-right I mean, RE returns must increase and the dollar must go down. How can an ‘export’ economy in good conscience run a deficit? I’m babbling…
thanks to the rise in debt levels, moves in interest rates are three times as potent as they were in the early 1990s.Fortunately I think this is the reason we won’t be seeing 80’s-style interest rates within the next decade or so. Because the RBA (nearly said Fed, I’m stuck in US atm), can now pack a more concentrated punch, i.e. 0.25% increases.
Indebtedness broke the trend the same time the real RE values started to move up, in 1990. It would seem the relationship is; household debt is growing at the rate of (house appreciation) – (wage appreciation), which would explain the exponential growth. Of course, our lax attitudes toward saving, induced by the booming economy, would also be a contributing factor.
So in order to support RE doubling every 7 years indefinitely, this debt must continue to grow exponentially… again… this will not work. Prices cannot appreciate above inflation indefinitely.
Great link!
Yes this is what I often tout as the most likely scenario (in additional to a small initial drop, say 5-10%). Unfortunately 3.45% + 3.1% (average rental return end of ’03) is less than the new rates will be, i.e. negative investment returns (on the geared component) for years to come.
Yes this is the average and yes everyone hopes (or knows) they can do better. I actually take a different road. I always assume my returns will be the average. I aspire for more, but accept that self delusion is human nature and fundamental to our success. That 80% of people people think they are smarter than average (and 92% of statistics are made up on the spot). Well after all, who wants to admit to being below average?
So what do you do? Throw your money at realestate? Beat the dead horse? It does have a huge benefit in that it allows the highest gearing, usually 80% for IP’s. Shares only go to 70% with the added complication of margin loans, but are useless if not geared. Return are 5.2% dividends (incl. franking creidts) + capital gains. I’ve got a bet each way atm. I tell you, wouldn’t be fun if we knew the answers [biggrin]
