Is property investing really all its cracked up to be?

I fail to see any previous 'cycle' here that resembles the current 'cycle' (which I'd strongly suggest is actually a bubble, not part of a normal rising trend):

I guess the runup to the early 1970s is close. It was followed by almost two decades of zero real growth after inflation…

Clearly. You've failed to understand what I've written for starters. Try again, to read and understand it. Perhaps chat about it with others. For example, you’ve failed to grasp the concept that houses are always overpriced, underpriced or fairly priced, and the consequences that flow from this realisation. Once you can answer your own questions here, we'll be on a level where we can talk. It’s all in my post.

 
Cheers, F. [cowboy2]

F;

I think you've been hangin' out over at GHPC too long.

Great theories and graphs and academic guff, but at the end of the day, property has averaged between 7 and 10% growth per year for a very long time; world wars, depressions, recessions, bombings and  interest rate spikes nothwithstanding.

And, as this is an AVERAGE, it therefore means that some properties must have performed well above the average at some point in time. Obviously some performed well below.

This can be attributed to poor position, design, quality, demand, and maybe the economic climate had an influence on those properties during these periods as well. In bad times the better properties will still be in demand for shelter.

As an investor with knowledge, we can identify these attributes or factors and and avoid them and buy well. This makes our returns at least the average in the long term.

Does this all mean that, based on your theories, the next 10 years will bad for property?

No it won't; only for certain properties, and if bought by the uneducated with the wrong set of circumstances, such as paid too much, and at the top of the cycle, with too much leverage and poor cashflow.

For others; it will be a great time to buy. Just like it was 30 years ago, or 50.

Apologies. Checking my reply, I see how you read it as condescending. All I meant was that the answers to your questions are contained in the text that you are questioning. Your failure to comprehend is just as likely to stem from my failure to clearly communicate as from a deficient intelligence on your part.

Apologie accepted.   I understand just how difficult it often is to make a comment that covers all aspects of the discussion and not be taken out of context.

No. You’ve failed to comprehend the words “real” and “index”. The chart simply represents the scale of growth after inflation, not in dollars, but as a simple index with a 100pt base in 1926. I’ve not adjusted this to suit my argument, it is straight from the AMP source here:

http://www.melbourne.arrive.com.au/files/Articles/Olivers_Insights_House_Prices_080605.pdf

I’ve simply converted the figures from log scale to normal, and overlaid the 2.35% trend to represent average annual house price growth after inflation.

Thank you – understood now.

Well, I (and many others with a basic grasp of elementary economics) most certainly do suggest the recent boom is highly abnormal. In terms of growth beyond what is supported by income, rent or inflation, it is unprecedented. In terms of the increase in mortgage debt that has sustained it to date, it is unprecedented. In terms of the magnitude of further debt growth required in future years just to keep house prices from falling (some $100 billion additional dollars of debt per year), it is unprecedented.

If you read my comments, I am in fact agreeing with you that it is abnormal.  No argumnet.

House prices cannot forever grow at a rate much higher than the rate of income growth. They can do so for short periods, but the shortfall will be made up with debt growth far exceeding income growth. This cannot last. Periods of such excessive growth inevitably must be followed by periods of lower growth. Expectations for the future following such extraordinary periods should be adjusted downward. They’re not; they rise. This is the basis of an irrational bubble mentality which leads to irrational bubble behaviour which always ends with a bust.

Wow!   I do believe that we are on the same page now.   I also believe that I this is what I was attempting to convey when I suggested that this is esentially the difference between a 'trading' strategy and a 'buy and hold' startegy.   A trader needs to be very well informed and able to pick the right timeing for buying and selling while the long term holder will do well on averages.

Thanks for your measured reply.

Jon

F may have a point …

F, how does it work in Europe / UK where more density in population and older money therefore longer times to build wealth? How does the market work there? what are prices versus income? Is Neg Gearing allowed?

Maybe this will allow us to peak into the future?

Not to mention that SMSF's can now borrow via warrants to invest in property…

Another significant factor in this debate is the constant cuts/reduction in marginal tax rates of recent times. this is only set to continue as tax laws are reformed even further, thus increasing peoples disposal income.

Salary sacrifice to put more money away…. tax free pensions and tax free ETP's after age 60 provide more impetus for investment.

who…me?

I would like to present this interesting article for comment by Ross Gittins | September 5, 2007

Happy reading, Ian

I bet you know that the past 15 years or so have seen unprecedented, almost unbelievable, growth in the debts of Australia's households. It's always easy to find figures on how much we owe and the media always give them much publicity. If you're looking for things to worry about, this one's a prime candidate.

But have you ever thought of yourself as having a balance sheet? Every business has one, of course, but so does every household. It shows the assets a family owns on one side and the amount it owes (its liabilities) on the other, with the difference between the two representing the household's "net worth" or net wealth.

These days it's easier to get figures for the combined balance sheets of all households. And the point of a balance sheet is that it puts your debts into context. So if you're a worrier, keep reading.

A recent paper by two economists from the Reserve Bank, Chris Ryan and Chris Thompson, tells the quite remarkable story of the way the balance sheet of Australian households has transformed since the early 1990s. It's not too strong a word.

At the heart of that transformation is the explosion in household debt. Since 1992, the disposable (that is, after-tax) income of Australian households has grown at a rate averaging 6 per cent a year. But the debt of those households has grown at a rate of 14 per cent a year.

As a result, households' total debt has gone from about 50 per cent of their annual disposable income (which was low by international standards) to about 160 per cent (which is among the highest in the world).

I think what frightens people most about that oft-quoted statistic is that it's gone over 100 per cent. But it shouldn't. The questions to ask are why we borrowed all that money – more than $1 trillion – and what we've got to show for it.

If we'd ticked it all up on our credit cards that would be something to worry about. But though we owe more on our cards than ever, the average balance per card is only $3000.

No, the big reason for the growth in debt has been borrowing for housing. Home loans account for 86 per cent of total household debt, with personal loans and credit cards accounting for the rest. And note that about a third of that housing debt has been borrowed for investment properties, not owner-occupied housing. This is high by international standards and is explained by our extraordinarily generous tax breaks for negatively geared rental properties.

This means, of course, that what we have to show for that debt is a lot of expensive – that is, valuable – houses and units.

We shouldn't be so surprised that our debt exceeds 100 per cent of our income. Think about your first home loan – or your latest. Did you borrow more than your annual income? Of course you did. Many times more. Everyone does. So what?

When you think about it, it doesn't make a lot of sense to compare housing debt with your income. If you suddenly had to pay off all your debt, you wouldn't do it out of your income, you'd sell the house. Not that it's likely to come to that.

No, what you have to pay out of your income is the interest on your debt. Total household interest costs now account for 12 per cent of income, up from an average of 7 per cent in the 1990s. Add a couple of percentage points on top for the repayment of principal.

The sensible thing to compare your debts with is your assets. That's the point of having a balance sheet. While we were doing all that borrowing – which we did mainly because interest rates were suddenly so low – we were pushing up the price and value of homes. The average house price went from more than three times average annual disposable income to more than six times.

Since the early '90s, the value of the total assets held by households has grown by about 10 per cent a year. So whereas they used to be worth the equivalent of 500 per cent of annual household disposable income, now they're equivalent to 800 per cent.

As a consequence, the household "gearing ratio" – the ratio of household debt to the value of household assets – has merely doubled to 17 per cent, which isn't especially high by international standards.

Did you get that? All that humungous debt is equal to only 17 per cent of the value of our assets.

(Note that housing accounts for only about 60 per cent of total household assets. Most of the rest is financial assets, including shares and cash in the bank, but mainly the value of people's savings through superannuation. The value of our financial assets has grown strongly over the years, partly because of the booming sharemarket.)

If you subtract our debt from our assets, you find our net worth is equivalent to more than six times annual household disposable income, up from more than four times in the early '90s.

But let's get back to all that debt. Who owes it? Well, a third of households have no debt at all, while two-thirds of households have no owner-occupier housing debt, either because they've paid off their mortgage or because they rent.

Even so, the share of households with an owner-occupier mortgage has increased from 28 per cent to 35 per cent, meaning the debt is spread over a larger base of payers.

The increase has been greatest among middle-aged households (people trading up to a better house) and the increased share of households with investment property debt is also concentrated among the middle-aged.

The bulk of property debt has been taken on by higher-income households, who have low gearing ratios, low debt-servicing requirements and hold significant financial assets.

"In short," Ryan and Thompson conclude, "the households that have done the bulk of the borrowing appear to be well placed to repay it.

"This is not to say that there aren't some indebted households in vulnerable positions, but their number is relatively low and they account for a relatively small share of outstanding debt"