interesting troll definition. i think i fit the bill without even knowing it!!! to think i thought i was original!!! doh!!
Yes superman, the TV show that inspired me is on air here. Very funny stuff – The last one I caught involved a jelly filled dummy peeing on an electrified railway line[weird]! When compared to Adam & Jamie’s efforts, I think my occasionally tenuous links between ‘facts’ and ‘evidence’ stack up rather well![biggrin]
I have yet to decide which real estate myth to bust today. I guess that will have to wait until my lunch break!
Cheers, F.[cap]Hi all,
A point for consideration that hasn’t yet come into discussion with respect to this ‘myth’ is the changing nature of the ‘household’.
ABS projections (and I don’t have them at my finger tips) point to a decreasing number of people per household – which in part (+ other factors) goes to show why more places (I was going to say houses) for people to live are required.
Derek
[email protected]
0409 882 958
Property investment advice and researched property in quality locations available.Originally posted by Derek:ABS projections (and I don’t have them at my finger tips) point to a decreasing number of people per household – which in part (+ other factors) goes to show why more places (I was going to say houses) for people to live are required.
How about the statistic about the number of young adults still living at home because they can’t afford to buy a place of their own? That would somewhat negate the above. It’s not uncommon to find kids living at home until their late 20s and early 30s. You then also hear about the ones who have come home to roost, living rent free so that they can save up a deposit.
It’s not always easy to draw hard and fast conclusions from just demographics.
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…
Great thread foundation…
From an investor’s point of view wouldn’t you say that population growth is still an important driver for capital gains? Sure, you show that demand is continually being met by new supply so it may be reasonable to conclude that it is unlikely for median prices over a whole city to be impacted. But if the population grows by, say, 20% then isn’t that 20% more people who aspire to a nice house on a good-size block of land in a harbour-side suburb within 15min of the Sydney CBD? There is no increase in supply of such properties.
So, as an investor, as long as you’ve chosen your properties well you can expect growth in the value of your portfolio to be driven by population growth.
I guess my point is even if you have busted a myth, isn’t it an error in generalisation rather than in substance? OK, median prices may not be affected by population growth, but an investment portfolio is and that’s what we care about?
Good thread.
Smethem and others have summed it up well.
Population growth in an area with limited supply will always appreciate higher than inflation.
Your statements have been very general in nature. I would never compare St Kilda to Cranbourne.
If you buy something today I would expect a little longer than 10 years to double now.
To those who have properties that pay for themselves, then inflation is your friend. The higher inflation the quicker the property will double. However holding costs are higher ie.interest rates.
Yack,
Isn’t inflation a false economy for house prices or for any asset price increase??
A 10% increase in your property value with a 10% inflation rate means the ‘real’ increase in value of your property is 0%…
A 10% increase in your property value with a 10% inflation rate means the ‘real’ increase in value of your property is 0%…If you put down a 10% deposit on a positive or neutral cash flow IP then a 10% increase in the property value would reflect a 100% increase in your deposit, 10 times that of inflation.
We are property investors for a reason, relying on broad general statistics (as foundation so conveniently provides) for our investment decisions would be synonymous to investing in share indices. To do better than the average our information needs to be more specific.
Jeff
ibuycashflow
Thats why i love property. Inflation is your friend. In your example you have doubled your original investment and you now own a greater proportion of the property.
eg. $10k deposit on $100k property – you own 10%of property.
NOW –
$110k property and now $20k equity – you now own 18% of property.My own experience with my single IP in the last 4 years is that CG has been very good, but rental growth has been very limited. Saying that, I haven’t spent anything on the place in the last 3 years, have had 3 tenants and haven’t missed one week (possibly day) of rental income.
The property is an older flat in inner-Melb and rental income is about 4% of market value.
My online investing diary: http://retireyoungandwealthy.blogspot.com/
If you put down a 10% deposit on a positive or neutral cash flow IP then a 10% increase in the property value would reflect a 100% increase in your deposit, 10 times that of inflation.eg. $10k deposit on $100k property – you own 10% of property.
NOW –
$110k property and now $20k equity – you now own 18% of property.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?
Originally 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
JeffThanks for making that clear, Jeff. But we all know that in reality the maths isn’t as straight-forward as that:
$100K for house with 10% down.
Price rises 10% after one year = $110KSo to realise the increased equity I would have to sell the property right?
Factor in the following and the numbers don’t look as rosey anymore:
- Stamp duty paid on property ~= $2,000
- Stamp duty paid on loan ~= $300
- Conveyancing fees for buy & sell ~= $1,000
- Mortgage insurance ~= $1,000
- Building + Pest reports ~= $400
- Real Estate Agent’s selling fees ~= $2,000
- Capital Gains Tax* ~= $1300
- TOTAL = $8,000
* All estimates have been taken from http://www.yourmortgage.com.au (with income in highest tax bracket). CGT does not include any negative gearing deductions claimed (figure would be slightly higher if so)
So what is my net equity now?
$110,000 – $8,000 (cost of purchasing/selling) – $90,0000 (mortgage) = $12,000.
That’s a far cry from $20K!. Mind you, if the above scenario was true, the rate of return on a $10K outlay is still pretty good (power of leveraging).
Note: the above estimate assumes the property is cashflow neutral.
… and of course the power of leveraging works even more effectively in a falling market, which is why I have often suggested that continually ‘withdrawing equity’ in a rising market is a recipe for disaster. If you plan to ride out the inevitable fall, you’ll want to be at your lowest LVR level at the peak, not your highest!
Anyway, I think there’s some confusion here between inflation & gearing/ leveraging. Leveraging adds risk and potential return regardless of consumer price inflation. The reason CPI is good for PIs is that wages (and therefore rents) tend to rise roughly in parallel with CPI, eroding the relative cost of a mortgage and placing upward pressure on HPI.
Cheers, F.[cowboy2]
OSienna, 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 foundation:
Anyway, I think there’s some confusion here between inflation & gearing/ leveraging. Leveraging adds risk and potential return regardless of consumer price inflation. The reason CPI is good for PIs is that wages (and therefore rents) tend to rise roughly in parallel with CPI, eroding the relative cost of a mortgage and placing upward pressure on HPI.Foundation, I could have factored in inflation to make the final figure more realistic but that would have muddied the water a bit. I just wanted to, borrowing from your favourite catch-phrase, debunk the myth about the “doubling of the original $10k” investment [biggrin]
Your leveraging and risk comment would then apply to Jeff’s example about a 20% increase on a $1M property:
Originally posted by Ibuycashflow:
Try some recalcs on a 20% increase in the value of the property or on say a million dollar property.Nice work Foundation and its good to see this thread has progressed despite nearly being chopped off at the knees early by the regular hardhitters.
I have to agree with Foundation that there has been many more forces at work than the infinetly measurable population flows which so many research firms earn big money by producing.
The items in my list aren’t all as sexy as pretty maps with arrows showing population flows, nor can you charge large fees for observing such obvious things – but in my opinion these following factors have all contributed to the recent rise in property prices.
1. The 1999 CGT discount for assets held longer than 12 months.
2. Bracket creep forcing more and more ordinary PAYG employees into paying taxes at higher marginal rates and thereby encouraging them to seek tax relief through negative gearing.
3. The $7000 Federal Governments First Home Owner Grant scheme.
4. Near record levels of employment.
5. The ill fated stock market Tech Wreck.
6. September 11 had a profound impact around the world and left many seeking security – of which property has long been regarded the highest form.
7a. The good old baby boomers seeking security in retirement and investing heavily in all asset classes.
7b. Many baby boomers having surplus income after finally paying off there PPOR mortgage and choosing to invest part of it in property.
8. More aggressive lending policies from banks.
9. The widespread introduction of mortgage brokers – which alowed people to more accurately ascertain the maximum amount they could borrow.
10. Last in my list, but certainly not least, very low interest rates.I am sure I have missed a few. But these forces all combined over the recent boom to push house prices further and faster than most anticipated.
Now if only I had a crystal ball to see them coming.
Good post, grreg, I think you’re right on the money. To your list I would add the rise of 2 income families as it becomes more and more mainstream for both parents to work (and therefore nearly double each family’s debt serviceability, thereby allowing them to borrow more for property investment).
eeshole
originaly posted by eeshole:
To your list I would add the rise of 2 income families as it becomes more and more mainstream for both parents to work (and therefore nearly double each family’s debt serviceability, thereby allowing them to borrow more for property investment).I wouldn’t say that their income, & therefore their servicability, nearly double. In my case, with my wife working, most of her pay has been consumed by Child Care Fees, and I know we’re not the only ones.
Perhaps, in our case, it is because my wife hasn’t chosen to be a careerwoman in a high paying job and I have been fortunate in finding jobs within the mining industry allowing us to continue investing, but our goal is now on other things. I work, now, only until I have to (target retirement from having to work is 2014), and have more recently focussed on educating myself more broadly (shares & poss. business opportunities) to use our saved $$ while they are too insignificatn to buy an IP to grow (or work for us) until such time that we can siphon-off a deposit for the next IP, rarara, and-so-on-and-so-forth.Exhilarating, but a bit slow! I know it tends to snowball, so we take it easy for now.[cigar]
Cheers
C@34
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