- seank wrote:Hi Foundation,
I respect your privacy.
My proposition is that house price movements are driven primarily by debt
So don't you think there are any other factors which influence prices eg.
1. supply and demandYes, but it's market supply and demand that pushes and pulls prices. Supply (new dwellings) has exceeded underlying demand (population growth) despite claims to the contrary by various building industry lobby groups (see here). So this supply/demand is balanced.
On the market supply/demand, increased access to credit has at least tripled the amount people are able to pay for houses over the last decade and a bit. Part of this has come from declining interest rates (some from easier access to credit, some from access to increased levels of credit). As interest rates fell, people apparently maintained their preference for spending a particular amount of income on housing, thus increasing market demand. As the boom gathered pace, this amount increased. Demand rose further.
Supply here is about the number and quality of properties available for purchase in the areas the buyers wish to buy. These properties are primarily existing houses. As it became ‘cheaper’ to buy, people preferred to spend the same amount of money on a higher quality (or location) of house. Because it was impossible for these existing houses to triple in quality (or location
, prices rose instead.There is a very good explanation of this phenomenon from Luci Ellis, for the Reserve Bank.
http://www.rba.gov.au/PublicationsAndResearch/RDP/RDP2006-12.htmlIncidentally, if you do read this, try to fully understand the bit about ‘mortgage tilt’. I think it’s pretty clear that people are absolutely blind to this (lower interest rates don’t necessary mean the overall cost of buying falls).
Quote:2. ImmigrationProviding sufficient additional dwellings are built to house the growing population, there will be no overall impact on house prices. See above. Sure, if they choose to all move to the same areas and buy houses, prices in these areas will have additional upward pressure.
Quote:3. Mining towns? I wouldn’t buy in an area where a boom in mining has pushed prices several times higher than the local non-mining economy can sustain, particularly if there is scope for future building to alleviate this added demand pressure (as in the long run house prices have to reflect the amount people are able to pay for housing). But that’s up to you.
Quote:4. Interest ratesSure. See my answer to question 1
Quote:I say this with no dis-respect but you are always negative in regards to most posts.I don’t see my interpretation of reality as “negativity”. I see unbridled and unfounded optimism based on falsehoods and slick sales pitches as… problematic. All I’m doing in this thread is countering the series of posts where people claimed to be able to see into the future, a future where house prices would rise far, far above the price that anybody could afford to pay.
Quote:Are you saying we shouldn't invest in property?Not at all! Knock yourself out! There’s no doubt plenty of money to be made still. Just base your decisions on thoughtful and realistic assessments of the likely outcomes, not the false hope of unrealistically (impossibly) high future house prices.
Quote:For us novice investors could you share some thoughts/views in regards to investing in property?Sure, just this one. Over the next 20 years, it is highly likely that asset prices will appreciate at a rate considerably lower than the prevailing interest rate.
Cheers, F. [cowboy2]
Foundation,
You make some valid points on this discussion. Would you say the same has happend in other geo's that are more mature than AUS. Or are we fixated on the good old aussie dream that one must own their own home so therefor prices will get to a point that we cant afford and come back a little. I hear in other countries that it take 2-3 generations to own a property, maybe with shared equity loans etc in the future this might happen in Aus and prices keep going up…. any thoughts?foundation wrote:I've given a rambling explanation of my concerns over using simple extrapolation of recent trends to predict house prices over long-term over on this thread as part of a debate with one of our most prominent property analysts. Let me know what you think. My proposition is that house price movements are driven primarily by debt, that recent trends in debt are unsustainable, and beyond a certain limit further price increases will rely on income growth. This is why it doesn’t make sense to expect house prices to forever grow in compound fashion at a faster rate than wages.Cheers, F. [cowboy2]
Foundation, it may not make sense, as you have put it, for prices to grow at a faster rate than wages however you fail to consider one aspect – profit/reward for risk.
If I undertake work on a property, I am exposing myself to some degree of risk, the builder who carries out the work takes a risk (that he will be paid), bank takes a risk I will repay them (interest). This degree of risk (and subsequent reward) mustl far outstrip wages growth and the reward of wages for labour inputs.
If debt is harder to come by, eg credit squeeze, then there are a few possible outcomes: turnover of properties stagnates (due to tightness of funds), prices drop due to lack of funds and ability of geared buyers to enter the market, other sources of funds are found (creative financing).
Scott No Mates wrote:Foundation, it may not make sense, as you have put it, for prices to grow at a faster rate than wages however you fail to consider one aspect – profit/reward for risk.If I undertake work on a property, I am exposing myself to some degree of risk, the builder who carries out the work takes a risk (that he will be paid), bank takes a risk I will repay them (interest). This degree of risk (and subsequent reward) mustl far outstrip wages growth and the reward of wages for labour inputs.
I'm sorry, you seem to have missed how risk/reward works in the real world.
Yes, generally speaking, you take higher risks to achieve greater rewards. But it does not follow that by taking greater risks you will reap higher rewards! The 'greater risk' part is all about a higher failure rate. Apologies if I have misunderstood.
In fact, what we currently have is a gross mispricing of risk. From the lenders to the borrowers, nobody is demanding high enough compensation for their risk. They assume that house prices are secure and in future will grow at an impossibly high rate, thus negating the need for immediate risk compensation (think bank spreads or rental yield or…). History shows that in times of negligent optimism or mania, assumptions of low risk grow even as risk increases. Then the whole shebang falls over.
It's a two way street. Once the players realise the reward isn't there and the risk is greater than they imagined, they stop taking the risks. The bank doesn't just keep handing out the money and saying "Oh I'm taking a huge risk here therefore my rewards must be great"!
Quote:If debt is harder to come by, eg credit squeeze, then there are a few possible outcomes: turnover of properties stagnates (due to tightness of funds), prices drop due to lack of funds and ability of geared buyers to enter the market, other sources of funds are found (creative financing).Well done if you actually read that thread through. But you've missed the point. I'll lay it out here briefly:
– households cannot afford to pay more than 100% of their income on the mortgage
– for house prices to eternally grow faster than incomes, they will need to
– they (households) can't
– so they (house prices) won't.It's that simple. No amount of 'creative financing' can rearrange this truth. That's what the thread was about. There must be a limit to debt servicing as a proportion of household income. When we hit this limit, real debt growth must stop.
keydefender wrote:I hear in other countries that it take 2-3 generations to own a property, maybe with shared equity loans etc in the future this might happen in Aus and prices keep going up…. any thoughts?keydefender, much of the developed world is in exactly the same situation as us. The credit induced house price bubble is global. It's unwinding in the US, Spain, Ireland, England looks shaky…
As to the inter-generational loans, I don't think any country has these. They were briefly available at the height of the Japanese real estate bubble (which incidentally left prices falling for 14 years, currently ~70% below peak), but any talk you hear of them today is likely to be wrong. Besides, we already have 'Interest Only' loans which are functionally identical to 1,000 year loans… You can't get a longer period to repay the principal than forever!
Shared equity loans might help sustain prices at a higher level than otherwise, for a while at least. But they can only be implemented once. Let's suppose every single borrower used a 25% shared equity loan. Sure, now all buyers can afford to pay more for a house. If they all chose to, this would be a structural shift to a higher price level. It wouldn't enable prices to perpetually rise at a faster rate than household incomes.Cheers, F. [cowboy2]
Ok, so house prices won't fly with growth forever above income increases,
Will house prices increases stay (sort of) level with income increases.
E.g. if income goes up 5% pa, so does house prices, also what are the actual house price increases??Chris.
DraconisV wrote:Ok, so house prices won't fly with growth forever above income increases,
Will house prices increases stay (sort of) level with income increases.Who knows? Possibly. But by any rational measure (price v rent, price v wage, affordability etc), house prices are waaay to the high side of historic norms. If they return to trend, house prices would have to fall off in real (inflation adjusted) terms by some 30% to 40% over some period in the future.
There are some reasons to be optimistic that at least part of the current high valuations can be justified and sustained. Several factors have contributed to what may well be a structural repricing. Inflation has fallen to low levels and inflation expectations remain low – that is, people have faith that the RBA will keep inflation below 3%. This suggests (if the expectations are correct) that lower yields may be here to stay. Perhaps not sub 4% gross yields (~2.5% nett), but certainly lower than they were under the high inflation of the 1970s and 1980s.
Also, recent financial innovation and reform have had a permanent impact. More banks led to higher competition which led to cheaper loans. Banks make far less margin over costs today than they did in the past. This should stay, though perhaps the margin will rise as banks react to the problems their recent underpricing of risk has created. This increased competition and increased availability of funds has also encouraged lenders to lend more money to more people. Rather than the old rule that borrower households couldn’t access more than 3x their primary income, they can now access funds that cost 50% of nett household income. This has dramatically increased borrowing capacity.
Consider a household with a primary earner on $60k and a second earner on $40k. In the bad old days of the 70s and to a lesser extent the 80s, this household would have been able to borrow no more than $180k. In addition they would have been required to contribute a $45k deposit (sourced from demonstrated saving) before the bank would lend this money. Today, this household could borrow an amount that would cost over $30k per year in interest alone, with a small deposit which might even be borrowed. This increases their borrowing power by more than 2x, to $375k…. and that’s a conservative estimate. Recent work by APRA has shown that a rather large number of lenders would let a single person on $100k borrow half a million dollars!
Some of this will no doubt go up in fumes here, just as it has in the US, where lending standards and limits have tightened sharply this year. But it would be mad to suggest that in today’s world of global finance a return to the 1970s is likely.
What I’m getting at here is kind of an answer to your question. Yes, it’s possible for house prices to simply track incomes from current levels. It’s also possible that current levels are unsustainably high and will fall back somewhat. But bear in mind when I say “track incomes” that I’m talking very long term. In the short term house prices will most of the time be above or below their long term trend, ie overpriced or underpriced. I should also add that over the near term it’s entirely possible that house prices will continue to outperform, but this will be counteracted by long term disappointing performance.
I can even demonstrate that it’s theoretically possible for all house prices to double over the coming year! Taking rough, round figures, ~5% of houses turnover in any one year (500,000… because it’s a bit higher lately). At the moment (as a result of the recent boom), it takes an increase in total mortgage debt of $100 billion. The total amount spent on housing is more like $160 billion, but $60 billion of this is simply transferred from one mortgage to the next. $160 billion / 500,000 = $320,000. Not too shabby for round figures! Right, so for house prices to double, we’d need to spend $640k per house instead. $640k * 500,000 = $320 billion. Minus the $60 billion of transferred mortgage debt, it would cost us ‘just’ $260 billion in additional debt.
Whoa! Sound high? Not at all. Remember, for house prices to simply stay at current levels, we need to increase our total mortgage debt from $900 billion (current) to $1 trillion over the next 12 months anyway. What harm in bumping it up to $1.16 trillion? After all, we would have improved our national household balance sheets immensely (using the dodgy accounting of former PM, former Treasurer and Ric Batellino, RBA deputy Governor). Instead of having $900 billion secured against $3.5 trillion worth of houses (26% LVR, $2,400,000,000,000 available equity), we would have $1.16 trillion secured against $7 trillion worth of houses (17% LVR, $5,840,000,000,000 available equity).
Wonderful isn’t it?! Money for nothing. Spend $260 billion to ‘make’ $3,440 billion!
Household balance sheets look good, again using the dodgy bubble-headed accounting method (asset values are rising faster than loans). Bank balances look good because they’ve got trillions of dollars worth of assets secured against their loans. What could possibly go wrong? What’s the catch?
The catch is that in order to maintain these new, higher (now doubled) house prices, we’d need buyers to take on an additional $260 billion dollars of debt each and every year for around another 19 years (perhaps a few less since inflation does weird things to this calculation). It’s not money for nothing. It’s ‘equity’ money today that must be gradually transferred to indebtedness over the next couple of decades. If people are unwilling or unable to take on this additional debt each and every year (and clearly they couldn’t), house prices would fall.
Anyway, I’ve illustrated here that over the short term, anything is possible. Over the long term… not so much. Over the short term prices could sky-rocket. I would argue though, that the recent house price boom has been a bubble. Exactly as described above. I don’t believe it’s possible for Australia to take on an additional $100 billion in mortgage debt each year for the coming 15 (taking total mortgage debt from $900 billion today to $2.4 trillion by 2022). I might be wrong, but I just don’t think so. I see people struggling already, and we’re only a few years into the conversion of recent equity gains to their final form – indebtedness.
I don’t know if I’ve answered your question properly, but hopefully this has provided food for thought. Just remember – short term uncertain, long term more predictable.
Cheers, F. [cowboy2]
Woooahh quite a bit of info to read through here!!! Sorry Im been flat out with work and not the chance to check back. What a great site this is though!!! From a quick glance it seems it has achieved what I was generally asking-it seems that a LOT of people have/are jumping into property investing without even doing the sums!!! Herd mentality at work yet again? Thanks all and I'll reply soon
Phil_McRakin wrote:a LOT of people have/are jumping into property investing without even doing the sums!!!Not all though. Do study LA_Aussie's post on the first page. It shows that investors can make money at very low rates of capital growth.
Foundation, I come back to a couple of points that I raised earlier but you have not taken into account:
1) changing demographics – lower earning people will be priced out of inner city areas, those who can afford to buy prime locations will continue to do so, it is not based solely on wages.
2) development will lead to greater densities in the inner city/middle ring, thus improving affordability (next level of income earners)
3) Something will give (ie bubble will burst) however it will continually be artifically inflated by several sources: tax system offering incentives (neg gearing, deprn allowances etc), continued move towards dual income families (adding to their ability to generate household incomes including taking on 2nd and third jobs), foreseeable move towards greater reliance upon extended families (better utilisation of larger older houses with mortages being supplemented by income from the grey army).If you move away from residential property to consider retail assets, lessors generate rent in 2 ways – firstly base rental (the rent that you believe that you can extract from a tenant who is an average/good operator), secondly % rent (rent achieved by a good/excellent operator). If the tenant is consistently paying turnover rent, then you have set your hurdle too low (base rent) and the future new lease will be based on the previous year's total rent. Using this analogy, a centre/shop which performs well will have an increasing rental return – existing tenants consistently pay a higher rental than 'new tenants' and are cheaper to maintain ie you are not covering costs of vacancies, incentives or agent finders fees.
1) & 2) Sure, these things will affect the distribution of prices, but at the aggregate level, nothing more.
3) These would be contributions to what I've called 'structural change'. Each of these things can only happen once. They are cause for a shift in prices (relative to wages), not a continuously compounding trend. We're running out of further structural change options. You can't go much further than the '1,000 year mortgage'. You can't ask for a much smaller deposit than -5% (yes, negative). You can't expect each family to have 3 incomes (unless we move to poligamy!), and banks would be mad to increase the NIC lending ratio from 50% to say, 70%!!!Here's some advice: Talk to the people who are making it happen.
I have a contact list of over 500 property investors and many of them are millionaires.
Some of them have over 30 years of experience.
Some of them are accountants. My accountant has about 11 properties herself.
Some of them are mortgage brokers.
I use their services because they know what I'm trying to achieve.With their help, I now have about $1.7M worth of residential properties in WA, ACT, NSW and QLD.
I'm now semi-retired and I can still afford another half a million dollar property, which I'm getting soon.
All this on a very average income as a self employed tradesman.Contact me and I'll put you in touch with these people.
We are always happy to talk about our experiences.Kind regards,
RusRusDavey wrote:With their help, I now have about $1.7M worth of residential properties in WA, ACT, NSW and QLD.
I'm now semi-retired and I can still afford another half a million dollar property, which I'm getting soon.
All this on a very average income as a self employed tradesman.Quote:About us:
We currently have 6 properties and we don't need to use any of our own money to pay the expenses.
The Investors Club has helped us to get very profitable assets and the right finance to be able to retire early.Jazmin doesn't need to work anymore and I'm living my dream of being a full time musician, touring internationally.
( http://www.nightfever.net.au and http://www.hotelcalifornia.com.au )Which one is it? Retired early? Or Semi-retired self-employed tradesman? How much debt you got Russ? How can you guarantee these 18 year olds that they'll get wealthy from taking on more debt than they could hope to repay? Do you have a crystal ball? Care to comment on this thread? There are obstacles to the coming decades looking anything like the previous decades – can be negated? How?
Quote:We would be happy to show you how you can join us in becoming financially independent through property investing.Why, if you are 'financially independent' are you trying to use commission-based selling to get other people to buy property?
F. [cowboy2]
Still doubtful?
Check this link, all I can say is "wow".http://www.investingintelligently.com/wp-content/uploads/2006/08/a_history_of_home_values.png
Hello again
I regret posting anything here because I hate getting into discussions with negative people. I was only trying to help, while you (foundation) seem to be determined to put everyone off property investing. I’m sure you think you’re helping people too, but I feel you might be scaring them off.
So that people don’t think I’ve been lying, please let me expand on my details:
"The Investors Club has helped us to get very profitable assets and the right finance to be able to retire early." It's true that I’m able to retire, but I haven't retired yet. I'm not sure if I ever will. You have to do something, and, if you can, you do things you enjoy.
I’ve always done things that I enjoy and things that I’m good at and it’s been working so far. I've been a part time musician most of my life and I'm now 40.
I’ve also been a self-employed tradesman (window tinting) for the last 15 years and earlier this year I stopped advertising and stopped subcontracting to other businesses. I still have a few existing clients, but it’s only about 1 day per week. I spend a lot more time with my wife and it’s great!
I still sing and play music and I'll continue to do that for as long as I can. I only make about $600 per week as a musician.
I also help people get investment properties, because That's What I Enjoy Doing.
As it says on my web page, we get a small part of the commissions from TIC, but that's not the reason to be a Support Member. We do it because, we get to meet new friends with common interests, we help them achieve goals and we learn more in the process.
The times when I've helped a friend get some IPs and they suddenly realise the potential of their portfolio, that's a magic moment. What a great feeling when their accountant says they could "cheat the system" and retire early. Much better than sitting around crunching numbers and being pessimistic about property values.
I respect your knowledge and time, but I obviously don’t share your view on future growth. Your main gripe seems to be about affordability and I can see your point. Unfortunately it will continue to get harder and people will need to rethink their options if they want to have their own house.
If you go to a city in Europe and knock on the door of a house, you will usually find that it's owned by more than one person and often tenanted by more than one family. That's one of the ways they get around the issue of affordability. Now, don't quote me on that, coz I haven’t done the research… I heard it from a professional property researcher.
"How much debt you got Russ?" Currently, my debt is about $940,000 so I pay about $80,000 per year in interest and of course there are other expenses. The rents add up to about $66,000 and the rest of the shortfall gradually comes from a line-of-credit account which has a limit of… can't remember, but it's enough to cover a few years of negative gearing. So, I’m supposed to pay the interest on that line-of-credit, but I don’t… I let it compound. Very naughty, but my accountant helped me do that. She has a bunch of IPs too.
Some of my properties are positively geared, but overall I'm negative by quite a bit. So, as long as my (very conservative) mortgage broker says I’m doing fine, then I’ll choose to believe him. After all, he has more investment properties than I do.
Now, let’s consider the capital growth and the fact that my tax rate has dropped to almost zero % thanks to my clever accountant. I’ve found that my portfolio grows in value by at least $120,000 per year. So, by refinancing every couple of years, I’ll never go backwards. How else can you make that sort of passive “income” with low risk and minimal input of time?
In ten years time, my debt on those IPs will still be the same and the rents will have risen to cover the interest payments and other expenses. And if history repeats, which it tends to do, they’ll be worth twice as much and I’ll be a multi-millionaire. Also, I’ll be providing jobs and housing that the government will continue to thank me for.
I’m getting another IP soon. Probably a half $1M unit at the Gold Coast, or maybe in Sydney or Melbourne, because the prices are really starting to move in those places. That will take my debt up a bit more, but it will also take my portfolio growth up to a nice level.
What will I do then? Hmm… I’ll continue to do what I enjoy doing… play music, buy more IPs and help others do the same. You have to do something to keep busy or you just wither and die.
The best time to invest in property is NOW. You just need to overcome some fears and make the decision to do it. (Now I sound like a life coach.)
As for “taking on more debt than they could hope to repay”; Why repay it, when after 5 to 10 years the rents will increase to cover the interest payments, etc? Also, the property will be worth twice as much and you can use that equity to get more IPs. I guess you don’t like the idea of having a big debt hanging around. Well, I don’t like the idea of having to work until I’m over 50. When I go, I’ll leave a bit debt, but I’ll also leave a much bigger property portfolio and I will have had a great time enjoying my financial freedom.
Forgive me if I'm too optimistic for you.
Thanks for your time and please don’t pull this apart and tell me that I’m misguided. As I said, I’m only speaking from experience and from talking to people that are making it happen. We aren’t all experts in property research or finance, so we let the experts do the work for us, to help us make informed decisions.
Check back with me in 5 to 10 years so we can compare our results.
Have a good day,
Rus
By "cheat the system" I mean the system of working 40 hours per week until you're 65 and then getting less than $300 per week to live on.
If you're here, then you probably don't like that system either.I've used property investing as a vehicle to have financial freedom while I'm still youngish.
Join me,
Rus
propertyclub comauRus D wrote:Hello again
I regret posting anything here because I hate getting into discussions with negative people. I was only trying to help, while you (foundation) seem to be determined to put everyone off property investing. I’m sure you think you’re helping people too, but I feel you might be scaring them off.
Check back with me in 5 to 10 years so we can compare our results.
Have a good day,
Rus
Great post, Rus! I loved reading your comments because they echo a lot of my thoughts. Some of the comments on this thread do appear to be negative but it's good to read them. They don't put me off investing as my goals are in concrete.
In defense on the negative comments on the site, I think you'll find that a lot of them are from very experienced investors who have seen the busts as well as the booms, and are trying to protect everyone.
People like Foundation are not trying to put us off property; he is trying to make sure we have our eyes open.
From my perspective, and I certainly fall into this category; a lot of the comments are about warning everyone of the dangers in property investing. It is easy to make costly mistakes, and if we can help you avoid them we will try.
Many people start out in this game with rose-coloured glasses, so we feel obliged to say; "hey; be very careful out there" to the newbies and less experienced.
In my post earlier I tried to show how it can be done with safety. This is not being negative to me, as I am very positive about property; even in this current climate of incertainty (check out other forums and you'll see this).
I get scared when I hear of 100% LVR's, coupled with neg gearing and rising interest rates. That is a recipe for disaster in my opinion, but there seems to be a lot of people wanting and willing to take on such a precarious financial position.
So, take the negative stuff on board, but use it in a positive way; use it to help you make a safer investment plan.
L.A Aussie wrote:In defense on the negative comments on the site, I think you'll find that a lot of them are from very experienced investors who have seen the busts as well as the booms, and are trying to protect everyone.People like Foundation are not trying to put us off property; he is trying to make sure we have our eyes open.
.
I agree with LA,….
To have a crediable, Balanced discussion on Investing you have to discuss the positives and the negatives,….. I don't think any newbie would benefit from discussions that only ever talked about the best possible outcome all the time,… if we only ever ramped up all the benefits and how easy it is to make money that would make us spruikers not investors.
At the end of the day you don't have to aggree with foundation, he is just expressing his opinion and showing us the data he uses to back up his opinion,…. It is up to you what you do after that., But it is always best to look at things from as many different angles as possible, it will help you form your own opinions more accuratly.
I actually think pointing out the weakness's in certain investments is a good idea, it can help people think of possible flaws in there stratergy that they may not have seen otherwise,… and help them build a stronger portfoilio for the future, there are alot of people out there with rose coloured glasses whos portfoilio is nothing more than a house of cards to say the least because they have only ever believed the best possible outcome stories.
Rus D wrote:By "cheat the system" I mean the system of working 40 hours per week until you're 65 and then getting less than $300 per week to live on.
If you're here, then you probably don't like that system either.I've used property investing as a vehicle to have financial freedom while I'm still youngish.
Not sure I'm following you Russ. You and your wife are living of $600pw, right? And the only reason you're able to do this while your investments are costing you $300pw to $400pw (more? Much more?) is by taking out extra loans to pay the ongoing losses on your investments?
Do you really think this (a net income position of $200 to $300 per week) can be classified as "financial freedom"?
"after 5 to 10 years the rents will increase to cover the interest payments"
"the property will be worth twice as much"
Do you have any evidence to suggest that either of these will occur? Or is it simply magical thinking?"In ten years time, my debt on those IPs will still be the same"
How so? You're adding to the debt every time you use the LOC to cover your ongoing investment losses, and this debt will compound. See below."the rents will have risen to cover the interest payments and other expenses"
Why? How? I ran your figure through my simulator with a few assumptions. 8.5% interest rate, 1% cap value in other expenses, inflation and rents @ 3.% pa. It returned a figure showing that your annual cashflow loss will be 50% higher in 10 years than it is today, because of the capitalisation of cost and compounding. Throw in a few more interest rate rises and it could easily double."if history repeats, which it tends to do, they’ll be worth twice as much and I’ll be a multi-millionaire"
Sure, history tends to repeat. But why choose only the bits that suit you? History shows us that when property prices are pressing on affordability limits, they tend to come down (at least in real terms). History shows us that periods of economic boom that are based on rapidly expanding credit are followed by depressions. History shows us that following the last housing boom (a baby compared to the recent one), interest rates went up and house prices rose so slowly over the following 7 years that anybody capitalising interest who started with an LVR of 60% and yields covering 80% of costs would have failed catastrophically. History shows us that during much of the period when the "house prices double every 7 to 10 years" mantra aligns with reality, inflation was above 10% per year.How are you able to cherry-pick the bits of history that (if repeated) would make you a millionaire while ignoring the numerous bits that wouldn't? I guess you call that that the difference between 'positivity' and 'negativity'. I call it the difference between delusion and reality.
"Your main gripe seems to be about affordability and I can see your point."
No, my point is that it takes unsustainable growth in debt to keep house prices growing at what you see as normal rates. If something is unsustainable, eventually it stops. When credit falls to a sustainable rate of growth, house prices will stabilise relative to incomes (if this happens in the far future), or fall (if it happens sooner)."Unfortunately it will continue to get harder and people will need to rethink their options if they want to have their own house."
Based on what? You're a fan of history repeating, right? House prices have never gone beyond levels people can afford and then gone higher and higher! So again, you seem to think that a very select part of history will occur (because it suits your plan to become a millionaire), others will not (because they don't), and the future will also have factors that are historically unprecedented (because you want it to). I'm leaning back toward magical thinking here rather than delusion…"I’m getting another IP soon. Probably a half $1M unit at the Gold Coast, or maybe in Sydney or Melbourne, because the prices are really starting to move in those places. That will take my debt up a bit more, but it will also take my portfolio growth up to a nice level."
I'd love to hear more details. Who is lending you $500,000 when your income is around $30k and you've already got close to a million dollars in debt? Seriously. If it's a bank, I'll have nothing more to do with them. If it's a mortgage clearing house, I want to ensure I'm not holding any of their RMBS through my superannuation."Check back with me in 5 to 10 years so we can compare our results."
I doubt we'll have to wait that long. Here's the thing. I'm in my early 30s. I have two houses. I have no debt. If house prices really do double every 10 years, I'll have well over two million dollars in unencumbered assets by the time I'm 50. Plus I've got various other investments including 6 figures of cash that is currently growing faster than you're earning. But I'm not going to sit on my laurels. I follow a simple rule of buying low and selling high. Right now I'm not buying. But when I was buying, I managed to grab investments that cost next to nothing (to hold) and increased 5 and 6 fold in 3 years. Bought for cash of course, both saved and from investment income. I sold when the gains were good and moved the money into assets that provided an actual return. You know, that "passive income" you spoke of.I have very good reasons to expect most asset classes to appreciate more slowly than the prevailing interest rate over the coming decade or two, so I have no plan to use leverage for long-term investments. Leverage can maximise gains or maximise losses. This is at the whim of the market, not my choice. I'll just let compound growth do its thing, and reinvest all dividends and yields while continuing to put tens of thousands of dollars of additional savings into investments each year.
Enough of me blowing my horn. Here's some real advice for the young folk.
- Save your arse off. Somebody much smarter that me once said something clever about how saving is the cornerstone of all prosperity or something. He was right. Not just for the individual, but for the country. We can all borrow and spend our way to a temporary illusion of wealth (as described earlier in my 'house prices could double next year post). That's all it will be though. Temporary. Unless somebody is doing the saving to counteract the borrowing, we've got nothing more than a ponzi economy. And credit fuelled bubble.
- Keep an eye out for the sucker. If you can't work out who it is, it's you.
- Don't defer life-altering decisions to 'the experts' particularly if they are going to gain financially by whatever action they advise. See also 2.
Back to Russ, sorry if this seems a bit harsh. It's nothing personal, I'm just terrified to think that people might aspire to put themselves in your position.
Cheers, F. [cowboy2]
Hi foundation,
You've won the debate hands down as far as I am concerned.
I do have one question, what are the other investments that you are talking about?
If assets do go down with a recession, it will affect shares as well.
share dividends, even with a large portfolio, don't really give you enough income to live on, unless you are heavily leveraged with installment warrants.
Managed funds also rely on the same asset groups and add fees on top of that, even if they make losses.
Commercial property, in bad times can suffer from high vacancy rates.
That leaves personal exertion, as in employment.
I agree, in dissecting Rus' strategy, that it's based on a huge amount of speculation and debt.
if and when the bubble bursts, the highly leveraged are the first to go.
it's quite possible that people like Rus(with the help of lenders) have added to the speculative bubble.
The bubble is deflating rapidly in the US and there is quite a possibility of an impact of the world economy in the longer term.
The wealth creation path does not rely on debt alone but a sound debt free base of assets, be it a good deposit for a home or attempting to reduce debt as quickly as possible.
, prices rose instead.
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