All is well until tommorows online article

[tom32]

Is this ignoring the 'rent' on the mortgage capital though? i.e. mortgage interest. I agree that most people don't think of mortgage interest as rent but I'm curious as to which figure you're comparing to.

Thats the point I am making, if you have the capital to buy a home outright buying your PPOR does beat a U bank deposit even if you completely exclude capital gains at all, so I am comparing the opportunity cost between a U bank and buying a PPOR and find that the PPOR wins even with our really low yields! For clarity Ill do the math fully:

$500,000.00 with U bank earning 6.51% p.a. interest $32,550 - 40% tax = $19,530.00 p.a. income. You will be paying rent somewhere lets say it is about 24k you are paying in rent p.a.

Now you in stead buy a PPOR for 500k and you no longer pay 24k of rent anymore, you now pay 2k rates and 2k of repairs p.a.

Its around about exactly the same even completely excluding capital gains.

Add capital gains over 25years and even someone with a short term bearish outlook would be buying a PPOR if he had the capital. Add in a few lost family tax benifits and it is a gimme.

Now I am nowhere near this position but even at lower amounts saved with some mortgage the maths between buying PPOR and U bank are closer than you think. And if you think houses will not move in price over 25years I suspect you will be found to be wrong. 5 years its possible, 10 years unlikely and as the time frame is increased inflation will take its toll and I would say short of a plague or new currency houses will be worth more nominally in 25years than they are now.

You mentioned deflation before, do you think in Australia our government has the restraint to reign over a period of deflation? We would print our way out. Before you mention Japan bear in mind they have a capacity for a larger population in all things not just homes so of course a shrinking population makes it very difficult to avoid deflation. We do not have this in Australia.

All this does not make me optimistic but I am realistic enough to know that when I have saved a few more bucks I would be mad to go on paying tax to the gov giving up FTB's and at the same time watching my deposit get eaten away by inflation.

 

[tom32]

No it's not. Apart from questions about ongoing govt guarantees, going by history by far the greatest risk with this strategy is that house prices and deposit requirements will appreciate much faster than the vast majority of people can save. I know an awful lot of people who are feeling pretty stupid right now for pursuing this "no risk" strategy that has been very detrimental to their wealth.

I am one of these feeling stupid don't worry.

 

[Aaron Sice]

*snip*
For clarity Ill do the math fully:
*snip*

you missed capital growth in your calculations. that's only a 12m cashflow example.

 

[HomeBuyerStrike]

This forum is meant to assist investors identify the latter. Do you have any contributions on that subject?

The title on the forum is 'Property Market Economics'. I've enjoyed reading some interesting posts from some excellent posters on the topic. All these posts about trolling are in themselves trolling.

Regarding any substantive points in your contribution:
- You're correct, there are yielding properties in the market. My remark was a bit of a generalisation, as was the quip that I would invest myself.
- Cognitive dissonance does work both ways, and I suppose may be related to sentiment. As an aside, forum members considering investing in distressed markets would be well advised to remember that sentiment can work similarly at the bottom of a market as at the top. I personally like to think I have an open mind. Terming opinions different to one's own 'trolling' is certainly cause for alarm.
- I negotiate and work with contracts every day, I don't restrict my treatment of the concept to property. I also deal with risk every day and leverage my options accordingly. Naive parties to contracts are oblivious to the unnecessary risk they are taking on without adequate compensation. Their loss.

 

[tom32]

you missed capital growth in your calculations. that's only a 12m cashflow example.

You do not need it to make it stack up on your PPOR. But sure if you get capital gains you are even more better off buying your PPOR. Over 25 years you will get capital gains too there is no question of it over this sort of period of time. Hence I am out and about looking to buy my first home at the age of 33!

Anyway in case you missed it from my above post:

even at lower amounts saved with some mortgage the maths between buying PPOR and U bank are closer than you think. And if you think houses will not move in price over 25years I suspect you will be found to be wrong. 5 years its possible, 10 years unlikely and as the time frame is increased inflation will take its toll and I would say short of a plague or new currency houses will be worth more nominally in 25years than they are now.

I think even for an absolute hard core bear a PPOR to put your savings if nothing else is a gimme once you have saved a solid deposit.

 

[Deltaberry]

Over 25 years you will get capital gains too there is no question of it over this sort of period of time. Hence I am out and about looking to buy my first home at the age of 33!

Hmm... was that meant to add authority to what you're saying or something like that? **Confused**

 

[Deltaberry]

I've enjoyed reading some interesting posts from some excellent posters on the topic.

You're welcome

 

[HomeBuyerStrike]

Thats the point I am making, if you have the capital to buy a home outright buying your PPOR does beat a U bank deposit even if you completely exclude capital gains at all, so I am comparing the opportunity cost between a U bank and buying a PPOR and find that the PPOR wins even with our really low yields!

I see your point now. It makes sense from a PPR perspective to have as much equity as possible when buying. It certainly narrows the opportunity cost.

You mentioned deflation before, do you think in Australia our government has the restraint to reign over a period of deflation? We would print our way out. Before you mention Japan bear in mind they have a capacity for a larger population in all things not just homes so of course a shrinking population makes it very difficult to avoid deflation. We do not have this in Australia.

With regard to deflation, I agree that Australia has the option to devalue. If you did have cash on hand in this scenario you'd want to buy assets, whatever they might be.

As for Australia's potential for increasing population, you'd have to wonder at the 'quality' of the people you'd attract here in an adverse economic environment. Those people would have to themselves have a low opportunity cost.

I think even for an absolute hard core bear a PPOR to put your savings if nothing else is a gimme once you have saved a solid deposit.

The only issue at that point becomes your potential for short to medium term capital loss. It's less of an issue when you've 100% equity and you can't lose anyone else's money though.

 

[tom32]

Hmm... was that meant to add authority to what you're saying or something like that? **Confused**

Yes, I suppose it was.

I do not have anything like this but even on lower levels saved the tax paid is cruel. The FTBs you give up moreso. You either stick the money in your spouses account who earns less and you give up FTB's or you stick it in your own and you pay big tax on it.

Either way you have to find somewhere the thing is not taxed. A PPOR is about the only place to put it short of buying antique cars etc but these are not going to pay the rent for you.

Edit: and with everything you read 33 seems to be old to be buying your first home but I guess it is not really?

 

[tom32]

I see your point now. It makes sense from a PPR perspective to have as much equity as possible when buying. It certainly narrows the opportunity cost.

With regard to deflation, I agree that Australia has the option to devalue. If you did have cash on hand in this scenario you'd want to buy assets, whatever they might be.

As for Australia's potential for increasing population, you'd have to wonder at the 'quality' of the people you'd attract here in an adverse economic environment. Those people would have to themselves have a low opportunity cost.

This would not worry the government. They would throw everything at deflation. Also keep in mind we have a floating currency, this is quite handy in preventing deflation also. It is like a relief valve if the economy goes to the shitter I don't see the dollar at parity with US dollars and this means it is unlikely we would have deflation over any significant time period.

 

[HiEquity]

The title on the forum is 'Property Market Economics'. I've enjoyed reading some interesting posts from some excellent posters on the topic. All these posts about trolling are in themselves trolling.

Hi HBS

'Tisorright!

On a fundamental point I think we agree. There are large swathes of the Australian property market which today look like a poor investment - low yields, low potential for upside, downside risk remaining, high holding costs etc etc. Thanks for your contribution in pointing out many of the risks of holding these properties. There would be many on this forum who would concur regarding the properties you are thinking of and referring to.

I think our point of difference is that there are also a large number of good investments out there and many of the wealthy investors on this site, when thinking of "the property market", have learnt from long years of training to only focus on these good opportunities. When they hear someone denigrate the "property market" they rail against it because they only see their own lucrative little corner and think "hang on, but I'm making $XXXXXXX over here..."

It's what years of experience gives an investor, so as much as I enjoy debating property economics, I always try to bring the conversation back to those properties where it is likely I can create wealth, rather than those where I most likely can't. Because knowing the economics behind the property market in NW WA, regional NSW or bank branches, industrial units, medical centres, unit developments, suburban shopping centres and CBD office blocks, just to name a few, is potentially far more lucrative than just prognosticating about "average" Sydney middle ring houses...

And there are people on this site whose insight into these and other lucrative Australian property markets can make me an awful lot of money. Such discussions then help me combine my interest in property economics with my interest in making money... making for overall a much better (and more positive) discussion!

And to get back to the point of the thread, it makes you completely immune from the latest online article...

 

[Aaron Sice]

This would not worry the government. They would throw everything at deflation. Also keep in mind we have a floating currency, this is quite handy in preventing deflation also. It is like a relief valve if the economy goes to the shitter I don't see the dollar at parity with US dollars and this means it is unlikely we would have deflation over any significant time period.

agreed - what a lot of economists miss is that governments will intervene at some point.

economics is the study of a free market. when the market hits the fan, it won't be a free market anymore, there's socialisation, nationalisation, stimulus.

always has been, always will be.

it's futile to argue a crash at present in OZ because we have such large buffer zones.

it's like arguing damage to occupants in a car crash, but the car is 6 star safety rated and has bumpers like a park bench.

the economy is a car, with the RBA and govt in the front seats. driving unhindered and flat out will get you killed, and driving too slow will see the car stall.

so yes, there'll be a crash. yes, someone might get injured, but you're not all going to die by hitting the wall at the current speed the RBA has the brakes onto.

in any event, the RBA driving can see out the windscreen and apply the brake a little. the govt can lean over and turn the wheel a little to minimise the impact, even if it is "interfering'.

economics misses most of these point.

 

[HomeBuyerStrike]

Thanks HiEquity, I appreciate your agreeable post and I understand. That's not to say that all of the hostility comes from a position of enlightenment. That however is not our issue.

agreed - what a lot of economists miss is that governments will intervene at some point.

I disagree, economists is acutely aware of this. The problem is the scope and predictability of intervention.

 

[Deltaberry]

A lot of economists are poor, me thinks.

 

[Aaron Sice]

I disagree, economists is acutely aware of this. The problem is the scope and predictability of intervention.

a variable, you mean....?

then i ask prof. keen to hand in his resignation.

 

[HomeBuyerStrike]

a variable, you mean....?

then i ask prof. keen to hand in his resignation.

I'm not particularly familiar with Steve Keen or his work. What's this obsession with variables?

 

[Deltaberry]

He's saying, you should've said instead of having said that you said but didn't say... so you end up saying something which he said is not what should be said.

"The problem is the variability of intervention"

 

[tom32]

So true, who would have thought that in 2008 we would be reffering to Keynesian stimulous and doing something else all together. Keynes actually specifically addressed the idea of wasting money just for economic growth and pointed out why pursue "wastefull mitigations" when their are more productive places to spend it.

Clearly Rudd did not understand his works when he decided on giving money away in cash handouts, insulation rebates and school canteens.

It made me sick everytime Swan or Rudd would talk about Keynes and I am sure he would have been turning in his grave himself.

Keynes was referring to Ports, Rail, Roads etc. Things that will boost productivity and add to capacity when the capacity is required in the next economic boom time.

I guess different economists and schools of economics have come up with different ways of riding out the economic cycle with all of them though agreeing that there is an economic cycle to begin with. Governments then pick and choose from these various policy ideas whichever one has the most political capital. If none do have political capital in the current climate then they just spend lots of money and call it keynesian...

 

[Deltaberry]

Hahahaha that's so funny... That $900 hand out was the biggest waste of money, so is the $43bn NBN, but at least I hold some NBN-related shares and they've gone up like mad cow disease meets rooster chicken duck.

 

[BayView]

Very smart analogy Aaron...

I'm still trying to work out what HBS's motivation is...

a) Is it to educate us that property is risky? I know it is, but there are various ways to mitigate it. Like driving carefully, at the speed limit and wearing seatbelts.

b) Is it to educate us that we are safer putting our money in a Bank? We already know what a lousy nett return that is. Yes; it's better than nothing; but not by much. Super might be a better bet for those who like that idea.

c) Is it simply to discuss what might happen based on the signs he's seen, so that he/she can get the answers he/she needs to satisfy him/her before taking the first plunge? Eventually, you just have to bite the bullet and buy. The people who sit around for years waiting for the right time to buy never do and miss the right time to buy, and often wail at how lucky those rich folk are who did buy.

So, could you please give us your motivation HBS, so we know where your mind is at. Are you wanting to invest/have invested, but got out/want to save us all/just want an economics discussion?