Bulls vs Bears

[see_change]

I'm not sure how relevant the bulls bs bears arguement is in property for one big reason.

In shares you can make money as shares go down. In property you can't .

If your pessimistic about property , you just don't buy , in shares you can short the market.

Cliff

 

[MarkB]

In shares you can make money as shares go down. In property you can't .

If your pessimistic about property , you just don't buy , in shares you can short the market.

SC

What about from a sellers perspective?

Even if people have never done it personally, I suspect that all reading this forum will be familiar with the concept of putting an option on a property - whereby one has the right, but not the obligation, to purchase a given property at a given price in a given timeframe.

So what if the option was reversed (so to speak) and (as owner of a property) one had, the right, but not the obligation, to sell a given property at a given price in a given timeframe.

Not quite "shorting" the market in the sense that there's no guarantee you'll get ownership back.

But it does mean you get higher dollar for your asset (it may even turn out to be top dollar in retrospect). Like what Packer did in 1987 when he sold Channel 9 in Melbourne & Sydney to Bond for $1.055 bn (Bond owned Ch 9 in Perth & Brisbane). According to the BRW, when asked what he would do next (after the sale), KP replied:

"Sport, first I'm going to take three years off. Then I'm going to come back and buy television stations for half the price their new owners just paid for them. Then, son, I'm going to have some fun."

So maybe you can make your money when you sell....

(Packer took $800 million in cash, and a $255m IOU from Bond which, when Bond's empire crumbled in 1990, he exchanged for a 37% equity stake in Channel 9 - this time with stations in Brisbane & Perth, as well as Sydney & Melbourne)

 

[Deltaberry]

Generally very hard to make big money from property from being a seller.

The main reasons are transaction costs:
- Stamp Duty
- Agent Fees
- Capital Cains Tax
- Once you start trading, it's questionable whether you should pay GST?

That's not to say timing the market is not important. But trading property is another thing. Can only do so with OTP

 

[MarkB]

OP

I'm surprised more people haven't pulled you up on the claim that (and I quote) property prices "have always gone up".

That, of course is not true. Real estate prices do not increase year on year with no consideration or regard to the wider economic or financial climate.

I'm not an armchair critic because I have had / still own real estate (@ Bayview), nor am I a perma-bear (@ Deltaberry) - but anyone who tells you that real estate values never go negative has (at the very least) poor math skills.

Generally very hard to make big money from property from being a seller.

The main reasons are transaction costs:
- Stamp Duty

Some could (rightly) argue that it is only when you sell that you actually make money. Capital gain that is unrealised, is just that.

I've never paid stamp duty on the sale of a property! Have you?

But trading property is another thing. Can only do so with OTP

Can only?

Or should only?

The trend is always up, yes

Your graph very conclusively shows that is not the case.

[What I want to know is that how is it even possible for someone with a Bearish viewpoint to have an argument against this when such compelling evidence is stacked against them]

Because...

2. They have vested interests

You mean like a Buyers Agent?

It's also interesting that you chose a graph for a suburb (Tamarama) that has a pretty high median price (around $2m at its lowest points). The upper end of the market has, as far as I am aware, always been more robust simply because - unlike the rest of us - the wealthy hold a smaller percentage of their total wealth in their PPOR.

OP - Despite what it may seem, I'm not trying to knife anyone here. But if you want an investment that only ever compounds and never experiences any negative capital volatility then put your money in the bank.

Because boring old (glacial) cash is the only asset class that never ever goes backwards - at least not in nominal terms... (in real terms, that can be a different story).

I know that cash in the bank is not what you want, but this idea that real estate never goes backwards... for your own sake, please let go if it. If you think like that, then your investing road is going to be filled with potholes.

 

[Deltaberry]

Well in one sense yes, you only make money when you sell.

But here's another way to look at it. A while ago my folks bought this place for $2m. It's worth around $7m now. Rents for around $350k per year, with potential to get up to $500k if they let me run it but they prefer to use some of the space for private relaxation area.

So at this point, they can either sell the property. Here' the math:
- $5m gross profits
- minus $250k agent fees
- minus $1.5m CGT
- Get back around $2m capital plus $3.25m net capital gains
- Total capital they get back will be $5.25m

Ok so what do they do with $5.25m? If they went out and bought another property, they can only get a $5m property (due to stamp duty). It probably rents for $250k. Probably with no upside rental ability.

So by selling, they've gone from a $350k rental and $7m net worth asset (with potential to rent for $500k easily) to a $5m property that rents for $250k.

Or, they can refi $3m out, increase the rent to $500k and buy another $6m asset. How do the maths now look?

- First property now has $3m debt, pays $150k interest
- So first property positively gears by $350k (if we increase rent to $500k) or positively gear by $200k (if we leave rent as it is)
- The debt pays itself down in under 10 years and in the mean time they're exposed to any future capital gains
- They can use the $3m to go buy the same $5m property in question we looked at earlier. At $2m debt, they pay around $100k intest. At $250k rent, they positively gear by $150k.
- So how total portfolio is $12m of assets, $5m of debt, $350k-$500k worth of cashflows. In other words, by using a bit of leverage, they've maintained the same cashflow and how have doubled their holdngs at very low gearing levels (at least compared to the gearing I hear on this forum)
- So when these properties double over time as the $2m property did, the $12m will go to $24m but still with $5m debt
- At 4% CPI, it actually takes a while to double. So what you then need to do is identify sites that have the potential to rent more than what it is currently getting

For properties that have good locations, people never sell. How often you see CBD buildings in Sydney sell? They usually only sell because:
- Guy is going bankrupt/foreclosed
- Guy is old and about to die or has died and his kids sell it to go on holidays
- It's CBD but not a good site, just a derelict site
- Some Chinese developer pays $25m for something worth $10m
- Everytime we buy, it's because of one of these reasons on top

The game is very easy once you understand how it's played.

 

[willair]

Well in one sense yes, you only make money when you sell.

- Some Chinese developer pays $25m for something worth $10m
.

When you look at the 600 plus million spent by Asian-Business people in Melb over the past 2 years on CPI property,makes you think who was the bull or bear ..

 

[Deltaberry]

Ah yes. And now the numbers have it. Melb leading the growth in June Qtr. A bit to my surprise as I would've thought Syd (second) would lead the pack.

But internationally, there are more people in Asia Pacific (around what, 80% of world's population) looking at Melb than they look at Syd. My friend was just entertaining the world's richest developer (from China) a few weeks back here and now he's targeting Melb CBD.

 

[Intrinsic_Value]

I'm not sure how relevant the bulls bs bears arguement is in property for one big reason.

In shares you can make money as shares go down. In property you can't .

If your pessimistic about property , you just don't buy , in shares you can short the market.

Cliff

But doesn't this also make property more 'stable'.

If you believe the theory on shorting and it creates 'price discovery'.
Shorting (in theory) enables faster underlying true 'market value'.

In reality I believe its complete B.S.

Intrinsic value makes a lot of his money from being able to differentiate market pricing from I.V.

In the case of the stock market, I can tell you very honestly, that when shorters get hold of a stock, they can plunge it significantly below I.V

Why?
because the shorters coupled with short term chart influenced (and maybe trading algorathims) trading compound the effect on short term market pricing.