I no longer want to be a slave…………….

Hi BJ,

Does your PPOR have an offset account? If so, you should be paying everything you can into the offset account or straight into the loan so that you're PPOR repayments are as low as possible. As Duckster said, the key is paying down the PPOR debt as quickly as possible as it is not tax deductible.

Kind Regards,

Cameron Perry
Director
Perry Financial Strategies
Level 13, 30 Collins St
Melbourne VIC 3000

You could check out the cashflow mortgage product from investors direct:

http://www.investorsdirect.com.au

Can borrow up to 85% at starting lower interest rate and then refinance every 2 years as the properties double.

This should give you some extra cashflow.

I guess there are many many things you can do, especially with a 90K/year job. Here are a few scenarios:

1. Re-evaluate your IPs…how much are they negatively geared? Are they your best options? Could you sell and do better?
2. Sell one IP, reduce your debt on the second IP. Does this turn your one IP into cf+?
3. Invest more of your money. At $90K, you should easily be able to diversify your portfolio. Look at your disposable income.
4. Value-add. Spend a bit of money to increase your IPs values and perhaps pick up another loan.
5. Check who you bank with…I had to go to a few brokers before I could acquire my 4th IP (a block in Tassie).  Our initial "trusty" broker said we couldn't do it,  so we went to someone who said we could…I can give you his  number  if you wish.
6. Put more money into your PPOR.

Just some options…be creative, use maximum equity and "play" with your IPs…

Sigh. Oh dear.

Correct! I wouldn't be at all inclined to extrapolate the last 20 years of price change along an exponential trend-line for the next 20 years.

In a nutshell (or nutcase, if you're referring to me), here is why. The last 20 years of house price growth have been entirely dependent on a particular trend in household debt. Specifically, the trend of exponentially increasing indebtedness compared to household incomes. If this (second) trend continues, households will eventually have more debt than they can ever repay, more debt than they can pay interest charges on with their entire income. That’s not going to happen. Therefore I don’t expect this second trend to continue. Without the second trend, the first trend (house price growth) cannot continue.

This chart perhaps explains my point more clearly:

Chart courtesy of Steve Keen (http://debtdeflation.com/blogs/)

I'd agree up to a point. 'Strong growth' can only ever be a relative term. It might have exhibited stronger price growth than other properties in the past. This may well indicate it will continue to outperform other properties in the future. Or it may simply indicate that it is overpriced and future growth will be subdued (it is impossible to know which until after the fact). It might have performed well against shares, but then you'd be looking more at volatility and fundamentals (p/e etc) than 20 year price trends to predict the future. It might have performed well compared to gold/beer/wheat/tungsten… and perhaps you could frame an argument about likely future growth around that.

What doesn't make sense at all is to simply look at time and price (eg prices double every ten years), without reflecting on the movement of other variables that were required to enable the price to change (such as my example of debt).

Imagine the people who bought property in Melbourne in the late 1880s (see chart in my previous post). They might have read books by snake-oil salesmen with words such as "land prices never fall" and "land prices double every seven years". They then would have lost 50%+ of the value of their properties over a couple of years and found that 20 years later, prices had not octupled as promised, they had merely regained their original level! To add insult to injury they soon thereafter would have found the world engulfed in a war on a scale never before seen which subdued property growth again until the roaring twenties. I expect we all know how that ended though…!

Incidentally, in both periods, the 1880s boom/1890s bust and the 1920s boom/1930s bust, bank credit rose exponentially (as per the household debt/income chart) and unsustainably against gross domestic product, then declined in almost mirror fashion. I'll try to find a chart… ah, here we go:

RBA: TWO DEPRESSIONS, ONE BANKING COLLAPSE, 1999

Here's the US, showing the great depression (and the debt bubble that led to it):

And here's Sydney house prices (relative to wage see, not time):

I've traced the actual path of private debt versus GDP onto that to illustrate my point.

Cheers, F. [cowboy2]

Not assumptions, propositions. Propositions based on (in the case of the first) overwhelming evidence, and (in the case of the second) logical deduction.

I think you need to check your thoughts against facts, but that aside… Such extension of mortgage terms actually does very little to improve affordability. Look at the repayments on a 30 year mortgage compared to a 40 year mortgage. Then compare the total cost of interest over the life of the loan. Then consider a hypothetical 1000 year mortgage. Why not rent? More on this below.

I thought that everybody knew that story was a beatup and has been repeatedly, thoroughly debunked. Start here for details: (http://www.abc.net.au/mediawatch/transcripts/s1857681.htm)

Current statistics show over 50% of renters currently classified as suffering ‘housing stress’ which is defined as rent costing in excess of 30% of income. Yields can not currently even rise to the 8+% required to make property investment sustainably profitable without turfing the majority of renters onto the street (rent > income), thus lowering demand, thus lowering rents.

Similarly with my hypothetical 1000 year mortgage, you might argue that people choosing to rent would increase demand, raise rents, raise prices and the landlord would still win because his property would be worth more. How much more though? Rents can’t continually rise by more than incomes. If rent is ultimately constrained by income there is no reason to expect the price/earnings multiple to perpetually increase. Trees don’t grow to the sky and all that.

So rents are constrained over time by incomes. Prices are more flexible than rents. An abnormally high p/e ratio is more likely to be adjusted via the p part of the equation than the r.

Once again I need to ask you relative to what? What is the basis for your assumption that:
* House price growth is exponential?
* Past performance (which has relied on what is ultimately an unsustainable trend in debt) is indicative of future performance?

Do you see that when house prices are at, say 4x average earnings, they are more likely to double over the following ten years than when they are at 8.5x average earnings? Once again, this is consideration of price relativity to something other than time.

And supposing they did rise by 10%pa over the next 10 years, what then? Prices would be 14x average income and rental yields would average 1.8% (both assuming 5% annual inflation and that rent doesn’t take more than 30% of 50% or renters income). Would your expectation of future growth rate be diminished?

Another 10 years and prices would be 22x average income and rental yields would be 1.2%.

At what point does it become silly to expect prices to double just because… time passes by?

I am beginning to be swayed by your arguments.

I guess it all points to the need to have a balanced portfolio of housing investments i.e. some high growth properties balanced with cashflow positive ones.

You argue a good case. I guess my only reservation is that this "housing crash" has been on the cards since 2003 in Australia and since around 2005 in the US yet hasn't happened yet. Maybe this is because we don't want to believe it or simply that interest rates haven't reached the right level yet?

A litte something i was reading yesterday

House prices have again begun to rise after a "correction" hardly worthy of the name, except, perhaps, in the outer suburbs of the former boomtown, Sydney. Household credit and household debt are growing far too strongly for comfort.

Taking a longer view, house prices have soared, share prices have rocketed, resource company shares have glowed in the dark, but consumer prices are subdued. The graph shows the extent of the dislocation between asset inflation and consumer inflation in Australian markets.

Take a moment to reflect on the magnitudes involved. Each price index is set at a value of 100 in June quarter 1986. By March 2007, consumer prices have slightly more than doubled, implying annual goods and services inflation of 3.8%. Over the same 21 years, average Australian house prices have risen by 450%, the share price index has risen by a similar 480% while shares in BHP Billiton have soared by a massive 1150%.

While the outperformance of BHP Billiton shares may in part, perhaps large part, ascribed to the "China boom", other asset prices have risen by an order of magnitude faster than prices of goods and services.

This is a common theme around the world. China share prices have been rising almost vertically. In the mighty USA, analysts worry about the next share-price correction and the current house-price correction, and in other nations strong asset inflation co-exists with subdued consumer goods and services inflation.

Extreme asset inflation with subdued consumer inflation is a global phenomenon. Is it also a global problem? This is a big question for modern central banks, and we encourage independent directors to ask RBA governor Glenn Stevens and his team for their answer at today's meeting of the board.

thought it had some relevance to foundations good arguments

Ha, i just read it in my daily crikey email, didnt realise he published in the australian as well