Is property investing really all its cracked up to be?

From TIC website

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I believe we are in the middle of a crisis that is being ignored by the Reserve Bank. On the one hand we have, for instance, the National Australia Bank reporting a 17.7% jump in cash earnings to $4.4billion. This is all money coming out of your pocket or if you are running a business, it is coming out of your profit and going straight to the banks’ net profit.^[1]

I think that it is time that the national disgrace called the Reserve Bank is called to account for the 6 rate increases over 17 months. It is absolutely crazy.

This blatant and dramatic shift in wealth from you to the banks’ net profit is further bought out by a survey by accounting firm KPMG who have found that the profit of our top five banks alone climbed to a record of $17.9billion^[2] in 2007 which gives an incredible 21.2% return on equity^[3]. Nor is this rapacious stealing of your wealth going to deteriorate. Rival accounting firm Price Waterhouse Coopers has predicted that cash earnings for the banks would grow 11.2% in the next 12 months. A big thank you to the Reserve Bank from our greedy banks! The Reserve Bank, in forcing the highest rates in the world^[4] on us, is not fulfilling its charters 1, 2 and 3. Why aren’t the media commenting on this? Thank God we are in safe ‘bricks and mortar’. It is going to be a tumultuous 12 months for Mr & Mrs Average thanks to a very, very average Reserve Bank.

I’m Kevin Young and I’m cranky.
http://www.tic.com.au/kevin's+blog.aspx?EntryID=6071

Now here is the trap; it is a movement of money from the poor to the wealthy so it pays to be aware of that. There is a trap; the second-hand market is full of properties that you shouldn’t be buying; they could be full of hidden maintenance issues.[^5]
http://www.tic.com.au/kevin's+blog.aspx?EntryID=6070

there will be big debates over whether the Governments are being irresponsible in giving tax cuts to the poor workers. There will be comments that this will be inflationary and that the poor workers can’t be trusted with more disposable income. There will be arguments that the huge taxes on petrol should continue. The world’s highest mortgage impost should continue^[6].

The lessons here in the US are completely the reverse. In fact, the huge annual deficits of the Clinton government have been coming down. The latest figures in this morning’s paper show that the federal deficit has declined in the last 12 months by 35% to $161billion. It sounds like a lot of money but it is down to 1.2% of the economy or about half the average of the last 50 years. This improvement is especially remarkable given the huge costs for the Iraq and Afghanistan war totalling around $200billion.

There is a lesson here because clearly the income from taxes has increased despite the lower tax rates. The lesson is lower taxes increasing incentives, increased growth and provides more not less tax revenue^[7].

Wouldn’t it be nice if our politicians started about the worker and not about ivory tower economics? Let’s hope they start thinking about lowering the huge tax we have on petrol and the huge mortgages^[8]…
http://www.tic.com.au/kevin's+blog.aspx?EntryID=5852

Has the Australian Reserve Bank’s high rate policy worked? No. In 1998, we sat on 4.75% and inflation was in a band averaging about 1.5%; in 2007 we are sitting up on a high 6.5% and in the Reserve Bank’s own words “we are near 3% and rising”. High interest rates are clearly a failed policy^[9]. It is failed policy we can compare to other more sensible, in my opinion, Central Banks who operate under a low interest rate policy.

Again, let’s compare this to the United States which, while we were busy raising rates, they were busy lowering rates and saw a steady decline in inflation^[10]. As it dropped rates down from 2001, there was a steady climb down in inflation bottoming in 2004 and in 2004 the US started to raise rates from the bottom of 1% up to its current 5.25%. Guess what? There has been a climb in US consumer prices in contrast to this rise in interest rates. This inflation has gone from just slightly over 1% to sitting just above 2.25% after visiting 3%. High interest rates lead to high inflation^[11].
http://www.tic.com.au/kevin's+blog.aspx?EntryID=10

“It is worthwhile considering that, before the establishment of the Reserve Bank, interest rates remained fairly steady, unlike the current volatility. Fifty years ago, for example, with a similar rate of inflation the official interest rate was steady for four years at 3.8%^[12].

“The financial markets in the United States expect the Reserve Bank to cut interest rates in response to a lagging economy resulting from a succession of interest rates rises, rising fuel costs over the past year as well as ‘lagging house sales’ fearing ‘busting the housing bubble’.

“In contrast, our Reserve Bank of Australia is determined to increase interest rates even further in Australia when there a clear signs that the economy is beginning to slow and latest housing starts down a massive 3% and a housing bubble that has burst^[13]! Our Reserve Bank of Australia is ignoring this ‘burst’^[14], resulting in inflation and rent increases.

“At a time when first time owners are paying the world’s highest rates (except New Zealand)^[15], property owners in the United States are now enjoying the luxury^[16] of falling interest rates.
http://www.tic.com.au/LinkClick.aspx?filet…114&mid=486

“The RBA has increased interest rates based on the misguided assumption that homeowners were using the rising equity in their homes for consumer spending and that this was having an adverse impact on inflation^[17].

“The RBA’s own extensive national survey of how homeowners used their home equity during 2004 as outlined in its October 2005 Bulletin has found this not to be the case. It found that only 7.3% of equity withdrawals was going into increasing debt,^[18]”
http://www.tic.com.au/LinkClick.aspx?filet…114&mid=486

“Property owners can also consider renting their owner occupier homes. This is because a $100 mortgage is paid after earning $150, paying $50 tax. Of the $100 probably only say $20 comes off your debt. Earn $150 to pay off $20! Doesn’t sound like good business practice.
“The solution is to simply move out, convert the loan to interest only and rent a superior home. Your cash flow improves dramatically. You receive rent in and your now lower mortgage of $80 is a tax deduction. Your $150 above reduces to $80 and then ATO hand you back $24 (at 30% tax rate). You earn and payout only $56. The greater your percent of debt to property’s value the greater your net benefit.^[19]
http://www.tic.com.au/LinkClick.aspx?filet…114&mid=486

This raising of rates is demonstrably a failed gamble to contain inflation. If raising rates worked, for instance in 2001, this Reserve Bank would have seen inflation coming down, down and down as it raised rates up, up and up^[20]. In fact, it has no record of success. It is a failed policy pursued, in my opinion, by a discredited central bank in Australia and New Zealand alone.

Why aren’t we matching Canada which has a 4.5% rate? It is a resource based economy as well sitting right next to America. It doesn’t have the huge balance of payments problems that we have because it is a low rate, low cost economy as a result of the low rate.
http://www.tic.com.au/kevin's+blog.aspx?EntryID=6

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A few comments on Kev's work (refers to added superscripts):
1. No it doesn't.
2. How much from non-mortgage relate fees and charges?
3. Huh? "Return on equity"?
4. No they aren't.
5. Of course, the only properties that can be safely bought are the ones being spruiked by TIC on commission.
6. That 'mortgage impost' is interest, not a tax.
7. Okay, so 'voodoo economics' works. Nope.
8. See 6. above. It's not a tax.
9. Higher interest rates cause higher inflation because interest rates and inflation aren't negatively correlated? That's silly.
10. As per 9. clearly interest rates are the main driver of inflation. Raise rates and inflation rises. Lower them and inflation falls. </sarcasm>
11. In case 10. wasn't completely clear… I cannot believe I'm reading this. "High interest rates lead to high inflation".
12. Real money supply was growing at or below the rate of productivity growth at the time. How about comparing the decades before the RBA took to inflation targetting and the decades after? Average inflation and interest rates were half or less. Oh, but that would be because the RBA dropped interest rates and inflation followed, right…
13. Burst? No it didn't. Watch and learn, amateur.
14. See 13.
15. No they're not. Interest rates are higher elsewhere in the world. Try Zimbabwe.
16. US property owners are not 'enjoying' anything right now. And weren't when the article was written.
17. Did the RBA say this is why they were raising rates? No.
18. "only 7.3% of equity withdrawals was going into increasing debt"???… enough said!
19. What? Let's run the sums. At the moment, for every $100 mortgage payment, $80 goes in interest and $20 to principal. So rent something for $60 instead, and rent the house to a tennant for $60. Now instead of getting $20 in equity from $150 earned ($100 net) and $100 spent, you'll get $20 of equity for $150 earned ($107 net) and $120 spent? Hmm, that doesn't match the maths provided. Can somebody decipher how the investor is ahead in the example?
20. This is simply ludicrous and simple-minded. Where'd he get the idea it works like this?

Oh, and throw in a guffaw over how under the little Bush "the huge annual deficits of the Clinton government have been coming down". Holy crack-a-doodle. Comic genius. Surely? Is this whole TIC thing a bit of a prankie that went horribly wrong and produced massive income streams because 60,000 Australian families (allegedly) couldn't see it was a massive piss-take???

Cheers, F. [cowboy2]

I just read this thread today … very intersting.

Boy in Blue – you are right – the figures are wrong .

A junior journalist misquoted me over the summer holidays almost a year ago.

What is correct is the basic principals of compounding growth and leverage.

And despite all the arguments to the contrary of why it can' happen and how simplistic my argument is, a recent study by Massy University in NZ showed that since 1920 Australian property has returned an average of about 15% per annum – made up of capital growth and rental return.

When my predictions were quoted 12 months ago I was a lone voice, saying the property markets on the east coast were moving into the next phase of the property cycle.

Now – 12 months later –  while many investors sat on their hands waiting for the "sky to fall in" due to higher interest rates, the median house price in Melbourne increased by over 23% and in Brisbane by over 18%.

This means that investors who purchased a property in good capital city locations a year ago (not regional or cash flow positive properties) doubled their intial equity – not allowing for negative gearing – but if your property increased in value by a few hundred thousand dollars does some cash flow shortfall really matter if you have allowed for it in your budgets.

By the way – I'm not just talking from theory – I grew my personal portfolio very substantially without "putting my hands in my pocket for money" – just using equity in my properties. And so did hundreds of clients of Metropole and readers of my book who followed the principles that have worked for years.

What stopped many others was over-analysing and missing the big picture by getting caught up in the detail.

Everyone

I have sat back and watched this forum for some time and received so much info.  The real interesting thing is that these forums are generally for the basic investor to medium investor, now we have professional experts, developers and no doubt financiers making comments.  mmmmm.  Interesting, are we making comments and getting business?

Anyone can make money in anything that they chose provided they stick to it, educate themselves and take some calculated risks.  If that fails make yourself a self promoted expert, write a book and run a seminar.

If that is a cynical approach so be it but in the time this forum has gone on I have restructured my business and increased its income by 50% (about 1mil), made cash available of $200k and paid over $50k of personal debt off.

All I can suggest is take the info review it and see if it is in line with your strategies, chose good advisors (I am in RESULTS and would recommend it and no I am not getting any $$ for comment, I will leave that to radio announcers).  THEN above all, take action.

Every day to don't move forward you are moving backwards.

The analytical capacity of some peoples mind is truly amazing. I would have them on my maths team any day!

If Phil only knew what can of worms he was opening here.

Without a crystal ball we all must depend on other peoples advice and opinions.

My advice for people like Phil who are contemplating entering the world of property investment would be that I would take experiential advice and wisdom over analytical opinion or wisdom any day.

Read, research and talk to people who have had long term experience in the field.

I would surely recommend Jan Somers book More Wealth from Residential Property to anyone who was starting out in property investment. She backs everything up with solid facts based on many years of personal experience and takes a cautious conservative approach to her projections (as LA Aussie did earlier in the thread).

I would also give respect to other Authors in this field and I must point out "with all respect to Foundation" that Michael Yardney's book and articles were an inspiration for me and have motivated me into taking practical steps that have very quickly increased my wealth through small scale development and investment.

Whether it is Somers, Yardney, Lomas, McNight or Joe Bloggs they all have valuable information based on their EXPERIENCE. Of course they are not infallible but so what. Read, Talk, Research, then take action with eyes open and settle on a strategy that suits your mindset and comfort zone.

Cheers, Ian

And despite all the arguments to the contrary of why it can' happen and how simplistic my argument is, a recent study by Massy University in NZ showed that since 1920 Australian property has returned an average of about 15% per annum – made up of capital growth and rental return.

I'd argue the opposite. Regardless of whether you or the junior journalist mussed up the final estimate by throwing in an additional doubling of the figure, it’s the principal you’re applying here that is wrong.

I’m sure you’re aware of inflation, and how it affects prices, including house prices. The period of highest growth in house prices (if we excluded the current price bubble) coincided with the highest period of inflation. By expecting house prices to continue to indefinitely exponentially rise at the rate set down by a period that included this nominal growth but almost no real (after inflation) growth, you must either expect inflation in the future to return to extraordinarily high levels or house prices to completely detach from incomes to the point that they will be absolutely unaffordable to almost every single person in 30 years!

Rather than using the “since 1920, Australian property has returned an average of about 15% per annum” etcetera line to justify this irrational extrapolation of nominal prices, let’s consider real house price growth since the 1920s. The following chart data comes from AMP. It shows real prices since 1926 (I also have real and nominal prices going back to 1860, but this is a good place to start). I’ve placed over it a trend line of 2.35% per annum. That is, the trend adds inflation plus 2.35% each year.

A few interesting points stand out from this chart. The two previous times that house prices vastly exceeded (60% to 100%) the trend, during the late 1920s to early 1930s and the mid 1970s, were followed by extended periods of negative real growth. In fact, after the peak in the early 1930s, prices did not regain these levels in real terms for 30 years. Prices in the late 1990s were lower in real terms than they had been in the early 1970s. So the 2.35% trend should not even be extrapolated and projected from peak levels. And today, prices are significantly above trend, just as they were in 1930 and 1973.

What does any of this tell us? That a rational expectation based on extrapolation of historical trends, should be much lower than 7% to 10% per annum in nominal terms if inflation remains low.

Here’s what happens if we take your tack and simply ignore the inflation based growth and imply an exponential trend from nominal prices over the same period (ensuring the trend passes through the first point in the series and most recent peak):

Sure, it looks like the “doubling every seven to ten years” holds true over the long term. But let’s look a bit more closely. The scale of the previous chart has hidden enormous deviations from this trend (7.35% pa). Let’s look at the same data in two parts, 1926 to 1965 and 1965 to 2006:

Clearly the first 40 years didn’t achieve the 7.35% pa benchmark. Not by a long shot. This growth has been a relatively recent phenomenon, and includes what I can only describe as the unprecedented price bubble of recent times. This growth has been enabled by an equally unprecedented and absolutely unsustainable trend in debt growth, specifically, mortgage debt that is growing much faster than either individual or national incomes. Here’s a quick chart from the RBA:

Something that is unsustainable, must by definition ultimately stop. In fact, it will reverse, just as it did in the 1890s and the 1930s. And when it does (believe me, this will be much sooner than 30 years in the future), not only will house price growth fall far below the optimistic “doubling every seven to ten years” expectation, they will fall! They will fall in real (inflation adjusted) terms, and unless something extraordinary (such as massive wage inflation) prevents it, they will also fall in nominal terms. Regarding that chart, the periods of extraordinary debt growth during the 1880s and 1920s were both associated with extraordinary periods of fast rising house prices. They were associated with unsustainable economic growth (based on rising indebtedness rather than sustainable growth). They both resulted in economic depressions. The situation and conditions today are set up precisely for a re-run of those post-boom periods. The only question remains "have we learned enough from the past periods to allow us to come through this one unscathed"? Given that our excesses this time have been far greater with no attempt made to prevent them, I suspect not.

More later…

Cheers, F. [cowboy2]

And what stopped some of us was the knowledge that missing a little gain now is preferable to locking in catastrophic losses in the years ahead.

I'd argue the opposite. Regardless of whether you or the junior journalist mussed up the final estimate by throwing in an additional doubling of the figure, it’s the principal you’re applying here that is wrong.

F.

Saying that house prices can't go up into the future is like saying a share price can't continue to rise,…

I don't think the price of land is linked to incomes as you would suggest.

Picture the price of land in sydney CBD,… it was affordable housing as 1/4 acre blocks 200 years ago, but valued at $50million a 1/4 acre block is defiantly not affordable there now,…. But if you build a 60storey apartment building then it does become affordable, so comparing the price of land to incomes doesn't give you a true value.

A 1/4 acre block might seem affordable in the 50's but over time as land becomes increasingly expensive it may be subdivided and two dwellings placed on it,…. then years later 4 town houses,… years later three storey apartment block,…. etc.etc.etc.

so it is possible that the pirices of the land can rise faster than incomes while the price of dwellings still remains in the check with incomes.

Oh and ps, refer to my third to last chart. Our population grew between 1930 and 1950 (by 26.5% or a CAGR of 1.2%pa, similar to today). We built insufficient dwellings to house this population growth, so living density (people per dwelling) rose. Yet prices fell by some 60% and took 20 years to regain their former nominal price level.

Coming soon to a town/city near you.

Cheers, F. [cowboy2]

Unless Morris Iemma has anything to do with it. Take away council's planning powers, take away S94 contributions, massive rezoning of areas totally unsuited to higher densities, ruin communities all in the interest of 'easing the housing crisis'.

Hi Foundation,

Interesting theory and statistics. Interesting does not mean anything if the data is unreliable. Would you please tell us your credentials, where you got the data from etc… etc… so we know whether to believe in you.

This is an article from the RBA (ie. very very reliable…) Sure it's 1 year ago, but still is relevant.
It speaks about:
1. how other develop countries (US, Canada, UK, Netherlands, etc) manage housing affordability / how the provide affordable housings to their residents,
2. how these practices compare to Oz
3. Why RBA is not concerned about the sky rocketing property  prices – which mean they're not gonna try to make it come down.
4. many other things, but basically refuting a lot of what Foundation foresees.

Enjoy… 

http://www.rba.gov.au/rdp/RDP2006-12.pdf

Cattleya.

Wow!   Foundations calculations graphs and information just about had me heading for the Gateway Bridge to take a jump.

Michael Yardneys statement:- 
And despite all the arguments to the contrary of why it can' happen and how simplistic my argument is, a recent study by Massy University in NZ showed that since 1920 Australian property has returned an average of about 15% per annum – made up of capital growth and rental return.  
:- got me thinking, so I did a little calculating of my own,  Now I know that I'm not up to Foundations standards and I understand that one suburb does not a winter make – however when I began selling in 1980, I was selling brand new spec homes in Capalaba (an outer suburb of Brisbane located in the Redlands some 20k from the City) for $35,000.   Now if you compound this out at 10% per annum (thats 15 – 5 for rent = 10) for 28 years you get $458,849 which if you go to Real Estate.com you will see is almost exactly what you have to pay for a reasonable second hand home in the area.   New houses are listed in the mid $500's.   I feel a little bit better now and have parked the car back in the garage.

Jon