2006 census says there is NO SHORTAGE

[wylie]

My point, Hired Goon, was that anyone can write anything on any form and who is going to challenge them. Statistics can be made to read from any angle. And if no-one answers the door at that house on census night, is it assumed no-one lives there?

As far as return and risk are concerned, well I don't really know about houses other than my own neck of the woods, but just one which we purchased for $156K ten years ago and which we have spent about $30K on progressively over that time has just been revalued at $690K+.

I know the knockers will say "but it is not worth that until you sell it for that". But the house three doors away, same size block of land, same street just sold for $810K and will be knocked down for a rebuild. Even if prices fall, this house is still a little gem.

So when the knockers talk about a capital gain being only on paper and not "real", I don't listen because this house has proven itself to us.

I am no good at maths, but from $190K ($156K plus $30K progressive reno) to $690K+ seems to be a bit more than doubling in 7 to 10 years. Rent has more than doubled in that time too.

So, we don't care what rate of return we are getting. We don't bother doing any calculations.

If we had not bought this house ten years ago because someone told us that houses prices could not possibly double in the next ten years, wouldn't we have missed out on a huge gain?

Wylie

 

[DavidMc]

I agree. So why are rental yields approximately 1/2 that of risk-free cash? Doesn't that imply by working out discounted future income streams that prices are at least 50% too high?

No it doesn't. This has been answered before. People buy property in reasons for more than just rental yield. You can use this formula for shares and commercial property where no emotion is involved, but not in residential.

Most OO's don't care what the yield is, they just want that warm fuzzy feeling of owning a place. The fact that we are in our current situation shows that this is the case, and the situation in London and New York and our record high levels of spending money on crap shows to me that this is not totally unsustainable. There are a lot of things that can be sacrificed before we all explode, such as taking in boarders, kids sharing bedrooms (like I did when I was young, and I'm only 29!), giving up the McMansion, the new cars and the LCD TV (and the mini LCD TV in the new car).

Many investors also bank on capital gains, so they are happy to take a loss. And before you say it I already know you think house prices won't go up.

 

[HeXa]

meh... regardless of whether "losing" money while waiting for capital gains is a good or bad thing, it still comes down to risk.

I am comfortable with the risk of negative cash flow because I am confident of sufficient capital gains over a long period. Like many others, I also have more liquid assets invested in other places for the short-medium term.

So far my cash injection into properties has yielded a 500% yearly equity return through leverage. That equity has been drawn down and sits in an offset account(safety net).

Even if prices do drop 20%, the property values will still be more than my loans and unless rent drops as well (impossible due to a long term lease agreements I have for the majority of my properties), I can afford interest rates into double figures.

 

[Bill.L]

Hi all,

HiredGoon, here is a typical statement of your that ignores reality.

So why are rental yields approximately 1/2 that of risk-free cash? Doesn't that imply by working out discounted future income streams that prices are at least 50% too high?

The reason I know this is because exactly the same could have been said in the mid '80's when the value of our house at ~$60-$65K yielded only ~6-7% (gross) yet the risk fee interest rate was over 12%!!.

And of course waiting for house prices to collapse from that level would have you still waiting, even though the price of the same house now is over $300K.

bye

 

[HiredGoon]

My statements don't ignore reality. From a pure cashflow point of view, ignoring capital gains (you think up, I think down) it is a fact that you are far better renting and putting the difference into cash. Better investments are even better.

If you buy a negatively geared property you are RELYING on capital gains.

I prefer not to rely on capital gains, and buy things with good yields. My favourite shares started going down (sweet! I can justify buying more) but now the market is going up again (future dividend income costs more to buy) so it isn't justified at current prices. If they keep going up that just makes it even more irrational to buy. I'll wait for the bargains.

I have explained before that the western world has been in a giant credit bubble since the 1960s. Household debt as a percentage has more than doubled since that the late 90s. Saying that this can't keep going up forever is not fear mongering or an opinion, it is a fact. Going for capital gains is gambling that this credit bubble will not burst before you cash out.

And have you calculated what would have happened if you sold in the late 80s then had 10 years of compounding interest (need 7.2% after tax to double in 10 years) then bought back in the 90s when most places were +'vely geared? Seeing as many places saw real losses, depending on transaction costs I believe you would have done better than staying in the market (and far less work)

 

[wylie]

My point with the figures from the house we bought ten years ago is that if we sat on our hands and waited for the bubble to burst, we would have missed roughly half a million dollars gain. What could we have invested in to match that, family of five with one income? We could have borrowed and invested in the share market but we are not comfortable doing that.

We had no cash to put in the bank, so no growth there.

Houses may well be flat, or go down in value, but we are sitting on a huge capital gain which we would not have made if we had not bought when we did. We stretched ourselves to borrow to buy that house, and every other time we have bought a house. Even if houses drop in value by half (don't believe it, but people once believed the earth was flat) we are still way ahead than if we had waited for the bubble to burst.

Even if the "bubble" bursts, surely holding assets (even if they drop by 90%) is better than holding nothing?

I just don't understand your argument.

Wylie

 

[DavidMc]

I have explained before that the western world has been in a giant credit bubble since the 1960s. Household debt as a percentage has more than doubled since that the late 90s. Saying that this can't keep going up forever is not fear mongering or an opinion, it is a fact. Going for capital gains is gambling that this credit bubble will not burst before you cash out.

Why do you think it has to burst? Why can't it just go up and up and up some more and then slowly level out, reach a peak, then hover around that peak?

 

[alexlee]

Why do you think it has to burst? Why can't it just go up and up and up some more and then slowly level out, reach a peak, then hover around that peak?

Heck, it's been going since the 60s, it seems. Who's to say it won't go for ANOTHER 40 years? By that time I would have ridden the bubble so high I wouldn't care.

Given that HG is younger than I am, he's been waiting literally all his life for the bubble to burst. I applaud your patience!
Alex

 

[VYBerlinaV8]

My statements don't ignore reality. From a pure cashflow point of view, ignoring capital gains (you think up, I think down) it is a fact that you are far better renting and putting the difference into cash. Better investments are even better.

If you buy a negatively geared property you are RELYING on capital gains.

I prefer not to rely on capital gains, and buy things with good yields. My favourite shares started going down (sweet! I can justify buying more) but now the market is going up again (future dividend income costs more to buy) so it isn't justified at current prices. If they keep going up that just makes it even more irrational to buy. I'll wait for the bargains.

I have explained before that the western world has been in a giant credit bubble since the 1960s. Household debt as a percentage has more than doubled since that the late 90s. Saying that this can't keep going up forever is not fear mongering or an opinion, it is a fact. Going for capital gains is gambling that this credit bubble will not burst before you cash out.

And have you calculated what would have happened if you sold in the late 80s then had 10 years of compounding interest (need 7.2% after tax to double in 10 years) then bought back in the 90s when most places were +'vely geared? Seeing as many places saw real losses, depending on transaction costs I believe you would have done better than staying in the market (and far less work)

I think we are starting to get to the root of where our ideas differ now. Lets take this piece by piece.

"If you buy a negatively geared property you are RELYING on capital gains."

This is not always true. Without any capital gains AT ALL, my IPs are cashflow positive after tax. In a couple of years they will be cashflow positive BEFORE TAX. And this is with P&I loans. What this literally means is that I have borrowed money to obtain a large asset, and the cashflow from that asset is apying itself off, at no nett cost to me. Over time the asset throws off more cashflow than is needed to pay for itself. Because the asset cost is locked in at a point in time, the cost of owning the asset reduces in real terms as the years go by. Eventually it is mine, regardless. Do I care if the value moves around? It's money for nothing!!!

"I prefer not to rely on capital gains, and buy things with good yields. My favourite shares started going down (sweet! I can justify buying more) but now the market is going up again (future dividend income costs more to buy) so it isn't justified at current prices. If they keep going up that just makes it even more irrational to buy. I'll wait for the bargains."

And why is property any different? You talk about your favourite shares - this implies you are not buying the whole market (or a representative index fund). Neither am I with property. Like shares, I as the investor get to cherry pick which ones meet my criteria. In doing this, it's possible to beat the market (if fact it's considerably easier with property because the cycles are much better defined on a property by property basis). It should be noted that I also own (and am continually acquiring) a share portfolio.

"I have explained before that the western world has been in a giant credit bubble since the 1960s. Household debt as a percentage has more than doubled since that the late 90s. Saying that this can't keep going up forever is not fear mongering or an opinion, it is a fact. Going for capital gains is gambling that this credit bubble will not burst before you cash out."

Ever heard of the concept of inflation? Over time, things cost more, and our incomes rise. The cost of purchasing the asset is fixed at a point in time, though, so becomes smaller in real terms as time progresses. Investors use this to their advantage.

"And have you calculated what would have happened if you sold in the late 80s then had 10 years of compounding interest (need 7.2% after tax to double in 10 years) then bought back in the 90s when most places were +'vely geared? Seeing as many places saw real losses, depending on transaction costs I believe you would have done better than staying in the market (and far less work)"

And as investors, we get that choice. That's the point. Time and time again people have pointed out that the whole market doesn't necessarily double EVERY (or even any) 10 years. But we don't buy the whole, market, do we? See above...

It's easy to see property in a superficial light, and believe the numbers don't stack up to other asset classes, but you have to consider the level to which property can geared, and the certainty with which you can lock in return. The idea is to USE THESE CONCEPTS, together with smart IP selection to generate wealth going forward? And guess what - it works! You may get your precious house price correction of 20% or more, but I doubt it will seriously affect many investors here. In the long term, it won't effect me enough to notice.

 

[WinstonWolfe]

HG, Greig, Nelson...whoever you are.....you are stuck in the past...stuck in the 2006 census. So your argument is last year's man.....

Smart PI'ers put their capital where it is needed most, not today, but tomorrow.......

Over the next 20 years, the average household size is expected to drop from 2.6 to 2.2.

Can you calculate:
- how many extra dwellings that will require?
- and where?
- and who for?
- and who is going to supply them, if not property investors/developers?

 

[BoatBoy]

Biff ,smack , KAPOW

Nice tag team, who's in for the knockout blow.

Dave

 

[Bill.L]

Hi all,

HG, I didn't say late '80's, I said mid '80's.

Can you name any shares that were positive cashflow in the mid '80's that still exist today?? My recollection is that there wasn't any.

If we had sold the house for the $65k and placed that money in one of the best performing share funds of the time (ABC fund of funds) then we would have almost nothing today.
However if we had the property today, we would have had an asset valued at over $300k that cost us only $44K and a yield on our original purchase price of over 28% pa.

By the way we sold that property in 1990 for $110,000.

The value of that property increased by about 1-2% pa above the inflation rate over the last 26 years. It will probably continue to do that over the next 26 years.
If you believe that inflation is going to be negative in the future (ie deflation) then your scenario of house prices falling maybe correct. However I think you will find that deflation is not in politicians interest, whereas inflation is.
If you look at house price inflation (and general inflation for that matter), since the western world went off the gold standard, then you see politicians ramping up inflation whenever there is economic trouble. The discount rate in the US being cut by the fed last friday is a classic example.

HiredGoon, every reason, statistic, etc that you raise sounds eminently sensible as a reason NOT to invest in property. However for many ,many years there have been equally believable reasons why one should not invest. Despite all this the property market has continued to climb. It defied logic in the '70's, it defied logic in the '80's, it defied logic in the late '90's, it is defying logic now, but the reality is that it IS HAPPENING.

So follow the trend.

Game over

bye

 

[HiredGoon]

Wylie - it seems that you bought your house at a good time. That doesn't make NOW a good time to buy.

As for some of you who are positively geared, you are in the minority. 2/3 of landlords by number and the industry overall declared a loss last financial year.

The 2006 census was only released less than 6 months ago. All statistics are in the past, but the census being the most comprehensive and rigorous is a very useful source of data. You guys don't think so, and instead choose to believe your "unbiased" source the HIA. The HIA!!!

"Over the next 20 years, the average household size is expected to drop from 2.6 to 2.2." - according to who? It remained at 2.6 during the 2 censuses between 1996-2006. And it can only achieve those levels if there is appropriate building. If there is less building they can't be reached. It is a circular argument.

>> Why do you think it has to burst? Why can't it just go up and up and up some more and then slowly level out, reach a peak, then hover around that peak?

This is a good, and very complicated question. To get a feeling of where we are, Australian personal debt levels have increased by 16% a year since the 1970s to support current capital gains of 9% a year.

To use Steve Keen's phrase "things can’t continue as normal, when normal involves an unsustainable trend in debt."

Prices have risen much faster than national income, the shortfall being made up by debt (in aggregate over the economy). If 5% of the housing market turns over each year, it could take 20 years for the full amount of debt to be taken out to support the new price level. If prices stopped rising tomorrow, debt would continue to rise for decade or more.

Here is what would happen if we max out our credit, and stop borrowing more than we earn (which we must one day) From Keen again:

Aggregate spending–on both commodities and assets–is the sum of incomes plus the increase in debt. Using GDP as the measure of income, this was $1,001 billion in the last calendar year. Over the same period, private debt increased by $202 billion. Aggregate spending was thus approximately $1,200 billion. Private debt grew by 14.9 per cent in the last year, versus a 7.4 per cent growth in nominal GDP.

If both private debt and nominal GDP were to grow at the same rate as GDP last year, then GDP next year would be $1,075 billion, while debt would rise by $115 billion. Aggregate spending would thus be $1,190 billion–or $10 billion less than spending this calendar year.

In one sense, we are now so much in debt that we can’t afford not to continue borrowing. And yet the more we do borrow, the more severe the shock will be to aggregate demand when the correction finally occurs.

-------

Also, stagnant prices mean those with negative cashflow (2/3rds and landlords overall) will make losses with no capital gains. Their whole business model becomes broken. Would they keep making a loss for no capital gain? Or would they sell, leading to downward pressure on prices until positive cashflow can be obtained?

Basically Australia currently runs a trade deficit & we borrow our way out of recession each year. Sound like a sustainable plan?

 

[HiredGoon]

Prices rose in the last generation for a few reasons. Here are some significant ones.

a) Women entered the workforce doubling household income
b) interest rates dropped
c) lending standards dropped

Unless polygamy starts to become normal, (a) is not likely to be repeated. (b) is still at "historical lows" is on a rising trend and is capped at 0% on the down side (see Japan trying to fight off deflation) and (c) cannot drop any more as we have 100% low-doc interest only loans.

Thus, extrapolating previous gains into the future is unwise.

The USA has seen declines, NZ has seen it's 2nd month of falls. Sydney has fallen overall (supported by the top end of town but still negative) for a few months. Deflation is not just possible, we're seeing it now. Just not in Australia yet

 

[Bill.L]

HiredGoon,

Where is there deflation??? you seem to confuse some house price pullbacks with overall deflation.

When did house prices not rise 1-2% above the level of inflation over the medium to longer term?? (please use examples of since we went off the gold standard).

If you wish to use the Japanese example, be aware that the '80's boom there was backed by low interest rates of around 3%, and virtually no inflation in general prices. Our current situation of interest rates of around 7.5% and inflation of 3%, is hardly their situation.

Another point you continually raise is "historically low" interest rates. we are not at "historically low" interest rates, in either actual or real terms. Use of this term is just following the lead of the media, and getting it wrong.

bye

 

[Norwester]

Hi All,

Just thought I would post this.

I'll leave it to the mathematicians to work out the exact percentages of Occupied versus Unoccupied.............

Seems that all 3 census' in the spreadsheet say that there is no shortage if using the occupied versus unoccupied..........

I think that was the *kapow* the you were looking for BB.........or should it have been *splat*

ciao

Nor

 

[wylie]

HG, in the instance of the house I was speaking about, we did NOT buy it at a good time or a lucky time. We bought it when houses were worth about what we paid. We actually paid over the asking for it because there were four or five contracts on it, all being presented one night. Actually the market was similar to now from memory, in other words, part of the normal cycle of ebbs and flows.

And if two thirds of property investors are negatively geared, so what? What if they are negative by $2K per year. Hardly a big deal. They all have some other income as well.

Wylie

 

[lizzie]

i'm getting tired of this debate.

so - according to hg - the 20 or so long term investors that have entered this particular debate, who have seen numerous cycles of peaks and troughs, governments come and go, policies made and remade, interest rate hikes (up to 24%) and declines (down to 5.5%) and widely read in both positive and negative attributes of both property and sharemarkets as all wrong (despite financially proving their endeavours work)... and he is right.

i do note that no one has bought up the bank deregulation of the 80's - can't really compare the pre and post in the same field as the goal posts moved significantly (as they often to, and we good investors realign ourselves to the new goalsposts so they work for us).

i think this thread has run it's course. hg is just another mbl - but at least he doesn't get personal.

 

[VYBerlinaV8]

As for some of you who are positively geared, you are in the minority. 2/3 of landlords by number and the industry overall declared a loss last financial year.

There is a difference between declaring a taxable loss and having a negative cashflow position. We as investors know this, and use it. You don't actually need to spend more than you made on an investment to declare a taxable loss! Sound crazy? That's the way it is. That's also why in previous posts I've referred to cashflow before and after tax.

I realise that by looking at the overall market picture there seem to be obvious trends and likely events, but honestly, asserting that the "whole market will drop by X amount" is no different from saying "houses double in price every 10 years". Again I suggest that for individual properties, the market can be beaten, and relatively easily.

 

[DavidMc]

As for some of you who are positively geared, you are in the minority. 2/3 of landlords by number and the industry overall declared a loss last financial year.

2/3's have a PAPER LOSS. Not necessarily an actual cash loss. I'm one of those. Running at a paper loss but a cash positive position is the point of maximum tax efficiency for many investors. Do you understand the difference?

Prices rose in the last generation for a few reasons. Here are some significant ones.

a) Women entered the workforce doubling household income
b) interest rates dropped
c) lending standards dropped

Unless polygamy starts to become normal, (a) is not likely to be repeated. (b) is still at "historical lows" is on a rising trend and is capped at 0% on the down side (see Japan trying to fight off deflation) and (c) cannot drop any more as we have 100% low-doc interest only loans.

My guess at the next things that will keep prices moving along for a little while yet...

d) Parents (who are cashed up from the boom) lending money to their kids for deposits. It's happened to many of my friends.
e) Reduce spending on junk before reducing spending on a house.
f) Downsizing houses. Kids sharing bedrooms (as was common only a few decades ago - I was one!). Taking in boarders.

100% low-doc IO loans? I highly doubt there are many of those in Australia, if any. Can you link to a product page? If they do exist they'd be very rare. Even these Low Doc Experts http://www.lowdoclenders.com.au can only get you 95%. Can any brokers comment on this? My mortgage broker tells me there were many more of these in the US and this is the major difference our situation and theirs.

Also, didn't the average Australian increase their net wealth from $250k to $300k recently? What does that enable people to do?