Capital gains.. from where exactly?

[thefirstbruce]

Resonate very much with what you originally said Dunc.

Capital gains need to be defined and understood. To me, CGs are essentially, increased demand from people with the means to pay more.

If you decrease the number of people who desire, or the means to pay more, or both, then you no longer have CGs.


I believe we are on the verge of seeing a wealth shift in the global economy. When living in the USA at various times in the last 20 years, I saw previously wealthy industrious areas decaying. I have seen Detroit, Buffalo, Cleveland, and Pittsburgh cbd's slump into decay. I have seen many areas of Pennsylvania, Ohio, Illinois, and Michigan, that were the automotive, and tool and dye centres of the world, atrophy, as those skills have been transferred offshore to Asia. I saw a town that had the highest % of millionaires in the USA in the 19th century, sitting decaying in the 1980s (Titusville, PA). Aging Americans can no longer afford to pay white Americans to do manual labour. Instead, they employ blacks, Mexicans, and Phillipinos at absurdly low rates of pay, to do the manual labour. And the US Immigration overlooks this, for very good reason.

For those who think property prices are always bound to go up based on history, I suggest you trace property prices back a little further in history. Also consider how much property is worth in a mining town, when the mine shuts down. Or compare regional CGs with metro.

CGs will always always always be a product of supply and demand. Dry up demand, and prices will fall. Dry up the capacity of those who demand to pay ever higher prices, and prices will plummet.

Why haven't prices gone up across Australia in the last 3 years? It is because the Ponzi/Pyramid scheme has run out of new recruits. There simply isn't the volume of people out there who can afford to pay higher prices than were paid in 2003.

Every day I meet people who are struggling to pay rent or a mortgage for a house. Part time employment is on the increase. Casual employment is on the increase. Divorce is still increasing. People are committing to relationships less and less. And those who are out of touch with the masses don't get this. And they don't get the socioeconomic consequences of this.

In many respects, the West is experiencing moral decay and the consequences of that. Those who might deny this most vociferously, are likely to be those most out of touch with the masses.

 

[willair]

I’ve been acquiring Residential Property in Adelaide for years..



Where can the capital gains come from over the next 10 years? I know there's been threads on peak oil here etc.. but are we on the cusp of a massive reconfiguration of our society, as an investor with significant suburban property should I act on my hunch? or have I got it completely wrong?

Duncan,
imho.
As i know nothing about the value of property in South Australia particularly during the last real estate boom,only you will understand
the relationships between sales volumes and prices, and if you think
that the past rapid and substantial increases have come to a halt
then it may be more of a hunch then you think.
From what i have seen over many years it that property booms
happen every 6 to 9 years and i still think that from 2001 till late
2004 in Queensland we have had three booms in that short time
so it may well be the same up this way also..
Only my opinion but i would act on your hunch sell the dogs
and keep the properties that you think will gain in C/G.
good luck willair......

 

[Andrew_A]

Although I can't see the logic in assuming that just because property has grown in the past it will do so equally in the future, I agree that oil isn't much of a factor. At least in the 'we'll all be ruined' sense.

...........................

Peter

Peter I agree in the philosophical sense that nothing is guaranteed except death and spam.

The logic as I see it would be that people are still people and we haven't changed much in thousands of years deep down, so factors that drive human communities are likely to persist.

For those who think property prices are always bound to go up based on history, I suggest you trace property prices back a little further in history. Also consider how much property is worth in a mining town, when the mine shuts down. Or compare regional CGs with metro.

Ok this is an excellent point. Survivorship bias is definitely a factor in these multi century studies.

I guess you should choose a capital city in a politically secure country and think of how many of these in the last hundred years have vanished or had capital depreciation, I can't think of any of the top of my head. I guess world wars, plagues and other black swan events will wipe all the chips from you account now and then, but gosh how secure do you want your investments to be? 100%? Good luck.

I saw a decent quote recently, can't remember how it went exactly but it's something like this.

The best time to invest in an asset class is when those who love it the most, trust it the least.

How far away from this are we at the moment with resi property I wonder?

 

[thefirstbruce]

P.S. Dunc, I see the opportunity in the immediate future to provide affordable accomodation solutions to the fastest growing segment of Australian society, single part time workers. I started by looking at granny flats, and I have seen the demand for those increase unbelievably in the last 3 years. I am now exploring affordable accomodation solutions (i.e. independent accomodation for less than $150p.wk. per single person) on a greater scale. However, the problem I am having is that local councils are a real impedance. Their regulations lag the socioeconomic trendline where I am looking.

 

[ggumpshots]

I’ve been acquiring Residential Property in Adelaide for years.. its gone well.. great capital gains. But what does the future hold for the portfolio as far as capital gains go? I’ve come to the conclusion that at best, nothing. At worst, a slow decline in values.


Most Western societies are perhaps now in their twilight, we’ve been gorging ourselves on Petrochemicals for the last 80 years. We’ve built a society around the idea that oil is endless. The layout of our suburbs, our shops, our schools, our jobs are all predicated on a free and easy supply of oil. The price of petrol is going to skyrocket over the next few short years, its perhaps not inconceivable that we’ll be paying $5 a litre in 2 years time. The effect on the family budget of a doubling in petrol prices is not just related to the cost of fuelling the family cars, it related to almost every single good and service that we consume.


Increases in property prices are based on demand, demand is largely determined by affordability. With petrol prices rocketing upwards affordability drops without a corresponding significant rise in wages. I believe new IR legislation in Australia will see wages DROP in real terms over the next few years. Increases in fuel costs will see a greater percentage of the family budget go towards petrol and funding increases of those goods and services affected by rising oil prices... This will come from the discretionary spending portion of most peoples budgets. Drops in spending on entertainment, doodads and toys will lead to job losses in those sectors. Job losses will create a larger pool of unemployed people, a larger pool of unemployed people keeps wages low.


Low wages, low affordability, less demand for houses, no capital gains.


Whilst driving to work this morning I pondered the idea of liquidating almost all of my property portfolio, keep some units close to the city and sit on the cash for a while.. I can always buy back in if I’m utterly wrong when the next boom starts to kick off.. I have enough insight into the market now to read the trends and I have the confidence to act on them.


I just don’t see any prospect of capital gains in the suburbs in the next 10 years if at all perhaps (on a standard buy and hold). The problems of climate change and a lack of oil are breathtakingly serious.. massive, foundational changes are going to take place in the way humans live in a post-oil world.. Property must suffer surely?

Where can the capital gains come from over the next 10 years? I know there's been threads on peak oil here etc.. but are we on the cusp of a massive reconfiguration of our society, as an investor with significant suburban property should I act on my hunch? or have I got it completely wrong?

Wow,may as well throw yourself off a cliff now and save yourself the misery.

People become unemployed .......so what. There will still be 80 or 85 0r 90 percent of people employed. Will those unemployed be skilled or non skilled.
My bet is non skilled. Those with skills will still have a heap of money.

Transport costs will , from your scenario make it also more expensive to build.
People will want to not travel far. Are your properties located near central work locations?

Yes demand may alter but have you considered hybrids and hydrogen fuel cells for transport?
life is at least three times more expensive here in Japan but since I dont have a mortgage here it probably only twice as expensive !!!!!!!!!
People eventully adjust to change.
If climate change is a worry then property or cash will be irrelevent.
If your properties are duds then admit it , but you seem to be a worst pessimist than Me . Maybe your hunch is corrrect but leave out or the
whatifs and make a more objective decision.
In 10 years time we may have a pandemic more wars certainly a bigger population and who knows where the terrorist saga will go.
There are too many influences to make an accurate guess.
I would say keep dong what you have successfully been doing. Learning the sharemarker/futures /bonds / currencies/options is a who;e new ball game.

 

[Bill.L]

Hi all,

Answer to original question of where will the cap growth come from??


Easy...

Inflation.

It is a bit of a no-brainer for westen governments. The choice between higher inflation and depression will come down to which will more easily get them re-elected. Inflation being the easier.

However, I do not subscribe to the impending doom and gloom scenario that is more often held out as a sure thing. There have been many reasons to believe in impending doom for the last 25 years that I have been investing. As yet the followers of such dogma have lost money. I also do not subscribe to the thinking that "this time it's different".

If oil prices were really going to go to the moon, then we should expect the large oil companies to be investing billions of dollars in projects such as 'oil from coal' and 'shale oil production'. Both of these only costing $30-40 per barrel to produce. The reason why the major players have not committed the money, is because they do not believe/are not yet convinced the price of crude will stay above these levels.

A few bars from an old song sum up what people should do in troubling times....

Do what you do do well boy do what you do do well
Give your love and all your of heart and do what you do do well

bye

 

[Beach Bum]

I remember when petrol in '70's was 18-20c per litre.
At the same time experts in newspapers proudly annouced that by the year 2000 there would be no oil left on this planet. What happened?
take a look at this chart:

http://futures.tradingcharts.com/chart/CO/M

Not long ago oil was below $20 x barrel and the world was awash with it. Could we really have run out in just a few years? Not in my opinion.
There are forces at play (like OPEC) here that are out of our control (and of most countries including ours). We just have to hang on to our rafts and ride the waves.

I see ahead a situation similar to the late 60's to late 70's.
Lots of start & stop, higher interest rates & inflation, and of course a recession.
I won't be selling my real estate though, I've been reducing my LVR for the last 3 yrs and will continue for the next 2-3 till until LVR is around 20-30%.
What I will be selling is all business interests I have as I think it will be challenging to run any type of business in 2-3 yrs time. Even worse for commercial RE imho.

Sell or not to sell really depends on the individual situation.
If you followed a highly geared (leapfrog) strategy for acquiring RE it may be wise to build a safety buffer and even sell some dog IP's (as willair pointed out) to add some floaters to your raft.

As for Andrew_A's question, there's a very easy way to determine when RE is out of fashion, just dig out some old newspapers at the library and look at classified ads from the early 90's. Pay particular attention to the Price (000's) / rent ($) ratio. You will see ads like $220k / $300 rent reasonably close to the city, and 3 bed LUG $100K / rent $170 in South & SW Sydney.
Similar ratios throughout the 70's
Thats my clue that RE is dead in everyone elses eyes.

 

[alexlee]

Thats my clue that RE is dead in everyone elses eyes.

And then would you buy, Beach Bum? I would. 7% yields in Sydney.... I don't believe interest rates will hit close to 20% again, so the 'equilibrium yield' is lower than in the past. Long term property is driven by supply and demand, and supply is limited by where the jobs are. While that means suburbs with no transport links will not do as well as suburbs with trains, that has always been the case. It was the case when petrol was 49.9 cents and it is the case now.

Personally, I think petrol will fall once China goes into recession. If it doesn't, it'll drive the study of alternative fuels. Even if it doesn't, and we do, in fact, run out of fuel, so what? Outer suburb markets will tank as everyone rushes into the inner city. Inner city prices will be driven up to the point where ordinary people can't afford it, and they move back out into the suburbs. As long as the population is still growing, property will go up.

I was always suspicious of areas like Rouse Hill, etc (western Sydney, no transport) at the top of the boom. After a nice drop in both house and petrol prices, they might become good investments.
Alex

 

[doreilly]

Answer to original question of where will the cap growth come from??

Easy...

Inflation.

Exactly. Remember the correct definition of inflation is not price rises, but an increase in the supply of money.

When exactly does anybody expect any government to stop printing excessive money. They can't, too many future obligations and it would be political suicide.

That is not to say that Duncan is wrong however, I believe there will be fundamental changes in the way we live our lives today in the next few years.

If oil prices were really going to go to the moon, then we should expect the large oil companies to be investing billions of dollars in projects such as 'oil from coal' and 'shale oil production'. Both of these only costing $30-40 per barrel to produce. The reason why the major players have not committed the money, is because they do not believe/are not yet convinced the price of crude will stay above these levels.

I assure you oil companies are spending billions of dollars on these projects. I work for one of them. I think the total figure for us was a shade under US$2.8bn this year.

 

[duncan_m]

Thanks! I really appreciate everyones input to this.. I've toggled back and forth from one view to the other whilst reading it.. definitely feeling a little better equipped now with so many different angles and ideas to consider.

 

[Kennethkohsg]

But selling and then buying back real estate is so inefficient!

1) Unless it's the family home then CGT takes up to almost 1/4 (even with the recent drop in the top MTR) - although this is true of other asset classes

2) Agent's commission & associated costs - far better to sell your shares/redeem funds as brokerage is much lower

3) new stamp duty when you buy back in (ouch )

4) in many states still mortgage duty (although if you wait until 2012 it may have been abolished in NSW by then )

5) time in finding an asset as good or better than the one you just sold

Couldn't you just borrow to the hilt against the high watermark valuation and sit it in your offset and live off and service the debt from those loan proceeds plus whatever consulting income/rent you bring in?

Doesn't the equity (and cash extracted through debt) buy you TIME?

If your view is that there's 10 years to run until new growth then I guess you need 10 years of living expenses plus 10 years of debt service...


Cheers
N.

+++++++++++++++++++++++++++++++++++++++++++++++++++
Dear Nigel,

1. As a property investor who has utilised these 2 approaches, I can tell you that borrowing to the hilt with a large property portfolio and trying to wait to live off the equity is a highly risky proposal.

2. We may totally lose the entire property portfolio as a result of the domino card effects arising from a single bank loan recall.

3. I have personally known of an Australian couple who over-leveraged and lost their hard-earned A$32 million property portfolio entirely as a result of some shortfall in cashflow due to unforeseen circumstances.

4. Consequent to that, I then decided to go the other way.

5. Though seeming inefficient as you have suggested, I have found it to be a very prudent and a much safer way of wealth creation through property investing. In fact, my own wealth creation grew much faster utilising this approach, focussing on the velocity of our own money circulation to generate more profits for ourselves.

6. I now focus on whether my bank account balance is actually growing or not, how fast it is growing vis-a-vis the previous apporach of focusing on the size of the property portfolio and how fast we can further expand on the existing property portfolio.

7. For your kind update, considerations and further comments and discussion, please.

8. Thank you.


regards,
Kenneth KOH

 

[ggumpshots]

bill L
so now we have to go put and buy a kit bag in ADDTION TO ACCOUNTANTS LAWYERS AND PMs .sheeeeeeeeeeeeesdh

 

[NigelW]

+++++++++++++++++++++++++++++++++++++++++++++++++++
Dear Nigel,

1. As a property investor who has utilised these 2 approaches, I can tell you that borrowing to the hilt with a large property portfolio and trying to wait to live off the equity is a highly risky proposal.

2. We may totally lose the entire property portfolio as a result of the domino card effects arising from a single bank loan recall.

3. I have personally known of an Australian couple who over-leveraged and lost their hard-earned A$32 million property portfolio entirely as a result of some shortfall in cashflow due to unforeseen circumstances.

4. Consequent to that, I then decided to go the other way.

5. Though seeming inefficient as you have suggested, I have found it to be a very prudent and a much safer way of wealth creation through property investing. In fact, my own wealth creation grew much faster utilising this approach, focussing on the velocity of our own money circulation to generate more profits for ourselves.

6. I now focus on whether my bank account balance is actually growing or not, how fast it is growing vis-a-vis the previous apporach of focusing on the size of the property portfolio and how fast we can further expand on the existing property portfolio.

7. For your kind update, considerations and further comments and discussion, please.

8. Thank you.


regards,
Kenneth KOH

Kenneth

Your $32m people obviously didn't build in sufficient safety margin. I'm half stirring when I say "borrow to the hilt". The extent to which you borrow should ALWAYS be considered in context of your cashflow and the potential downside from vacancies, loss of jobs and loss of IPs...

 

[Brenda Irwin]

Sell or not to sell really depends on the individual situation.
If you followed a highly geared (leapfrog) strategy for acquiring RE it may be wise to build a safety buffer and even sell some dog IP's (as willair pointed out) to add some floaters to your raft.

I have been selling out the dog IP's to reduce debt for 3yrs now. Since the bank owns the greatest portion of the investment, I reckon I'm just selling the cr*ppy bank ones and using the capital gains to pay out the loans on my good IP's.

It makes sense, that if you bought into an IP with a 10% yield and after capital growth, you now have only a 4% yield you are not doing so well. This is especially so, if you hold many other IP's and you are paying 7% interest.

I didn't sell all at once, as the capital gains tax would take too be a chunk of the profits, but a couple of lesser IP's per annum is bearable.

If you think that after the IP's are sold, that they do not continue to work for me, it is wrong thinking. The profits paid down debt on the better IP's. IE: the sold IP's are still working for me.

Just last week I sold an IP which I had owned for 4yrs and which, when I bought it, badly needed a reno. I paid $36k for it. The original rent was $90pw so a 13% yield.

I sold it for $95k, and it still badly needed a reno. The current rent was $115pw so it was making a 6.29% yield. At $115 pw or $5,980 per annum, without increasing the rent, it would take over 15yrs to make $95k in gross rents. Even if you deducted the $36k purchase price and divided $5,980 rents, it would take nearly 10yrs to make that sort of money.

The proceeds from the sale were used to pay out the loans on two other IP's. One was already reno'd when I bought it, and the other attracts a very good rate of rent. So that IP, indirectly, is still working for me, as now I don't have to pay interest on those two loans.

I will be buying back into the market later on, when gross rents yields improve over time with rent increases so I don't miss out on the next lot of capital growth.

 

[see_change]

The extent to which you borrow should ALWAYS be considered in context of your cashflow and the potential downside from vacancies, loss of jobs and loss of IPs...

Nigel

Over the next 3-5 year do you know how the economy is going to go here and overseas . Do you know how you job is going to go ?

We've already seen examples over the last year on the forum of people getting into unforseen financial problems. that's the problem . They're unforeseen.

I see nothing wrong with purdent selling down of a portfolio as the economy is starting to turn. I'd have a bet that Brenda , kenneth and myself ( hopefully ) , outside being in a fairly safe position regardless of what the economy throws at us , will also be able to start buying at times when few others will be able to buy ( and from my observation , that is when the best bargains will occure ) .

If people are maintaining high LVR's , they may find that the banks arn't interested in lending when the market is dead , valuations on existing properties are going down and credit is generally less freely available.

Now , knowing you , you will probably be in a similar position as well , but it is something that should be raised as a serious option so visitiors to this site , don't think that every one believes that a continual cycle of buying , refinancing and drawing down debt is the way that everyone approaches the market .


See Change

 

[Peter Parker]

P.S. Dunc, I see the opportunity in the immediate future to provide affordable accomodation solutions to the fastest growing segment of Australian society, single part time workers.

The need for this is undisputable. All someone needs to do is figure how to make it pay (since many wonderful schemes don't)!

One of Kiyosaki's books refers to government assistance to do up ghettos into affordable and safe housing.

Those in SA might wish to investigate the Affordable Housing Innovations Program, which applies to both rental and purchased homes.

http://www.housing.sa.gov.au/affordable

Peter

 

[NigelW]

Nigel

Over the next 3-5 year do you know how the economy is going to go here and overseas . Do you know how you job is going to go ?

My crystal ball still seems to be broken

We've already seen examples over the last year on the forum of people getting into unforseen financial problems. that's the problem . They're unforeseen.

Were they really prepared for unforseen contingencies? You can insure against many risks. wrt jobs, well unemployment is low and demand for labour is v. high (failing all else...go west young man )

I see nothing wrong with purdent selling down of a portfolio as the economy is starting to turn. I'd have a bet that Brenda , kenneth and myself ( hopefully ) , outside being in a fairly safe position regardless of what the economy throws at us , will also be able to start buying at times when few others will be able to buy ( and from my observation , that is when the best bargains will occure ) .

There's nothing WRONG with it. It's just somewhat inefficient. But perhaps that's the price of taking a more conservative approach. And conservative can be good!

If people are maintaining high LVR's , they may find that the banks arn't interested in lending when the market is dead , valuations on existing properties are going down and credit is generally less freely available.

Now , knowing you , you will probably be in a similar position as well , but it is something that should be raised as a serious option so visitiors to this site , don't think that every one believes that a continual cycle of buying , refinancing and drawing down debt is the way that everyone approaches the market .


See Change

Ah...but if you've got their money first, and you're prudently stockpiling it then you can keep servicing debt till the cows come home AND swoop of those bargains just the same as the debt reducers. However, the debt reducers MAY not be able to regear up to the extent they'd like if lending practices have tightened considerably.

But your points are valid and as I mentioned, prudent gearing is the key. What is prudent depends on many factors both financial and non-financial.

There's a hindu proverb which goes something like "There are many paths to the top of the mountain", to which I'd just add "and some are shorter or longer and more or less dangerous than others!"

Keep climbing! I'm off to mix metaphors

Cheers
N.

 

[see_change]

It's just somewhat inefficient.

Nigel

Given the figures I quoted earlier on , I fail to see why selling properties has to be inefficient ??

For me it would have been inefficient to hold that property untill the next property cycle. Sure I could refinance the property and draw down the equity but on that property it would actually give me access to less money than if I sell. Seriously ...

Purchase price 87500. Sale price 202500 . Assume purchase and selling cost around 15 K ( will actually be less than that ) . Gives capital gain of around
100K . Tax rates have dropped ( we sold it this year ) . Marginal rate distributed through wife ( I think around 40 % ) gives income tax of 20 K , gives 80 K post tax profit .
This is cash in hand , we can invest it in higher risk strategies or what ever because we don't have to worry about what happens if we loose it , but then have a remaining debt because we drew it down from capital.

On top of this we also now have access to the money that we drew down from a LOC to pay for the 10 % deposit and legal fees stamp duty when we purchased the property. So on top of the 80 K cash in hand , we have at least another 12 K extra that we can borrow from existing loan facilities.

Second senario , we refinance . Selling price is 202,500 , but because the market has been moving quickly and is nearing a perceived peak , the valuers are edgy , so guess what ,they don't value it at 202,500. They look at the settlements from 2-3 months ago . Because there are no direct comparisons they ere on the conservative side and value it at 180 - 185 ( if you think I'm joking you obviously havn't had properties revalued during a moving market ...) .
Ok ,. so refincancing in this situation, the chances are that you will be going for 80 LVR , because you're being on the conservative side. 80 % of 185 = 148 K . mmm. You've already got 78,500 borrowed , so you can only increase you loan by 67,500. This is less than the amount you have available by selling the property . If you're going to go for an LVR of higher than 80 % at this stage of the market I'd be suprised.
I've already stated earlier on that the property was borderline cash flow at the purchase price of 87500, so if you are withdrawing your 67500 , you not only have less money available in terms of capital available than if you sell the property, your also having to pay interest on the money that you've withdrawn ( the 67500 ) so affecting your servicability in terms of borrowing further money. Remember the 80 K has no borrowing attached to it. Also you don't have that extra 12 K that you would have paid off on the LOC is you had sold.

Oh , sorry , you're going to fix up your servicability by taking out a cash bond or investing in your money in a fund which generates you cash flow ...

Oops ... which gives you more money to buy your cash bond or invest in funds.

I think selling.

So tell me. Why is selling property so inefficient ? I'd love to know the answer .
I don't see why this way is more conservative . I only see upsides . Less risk and more money to invest and to borrow your phrase , less dangerous....

Please correct me if you see a flaw in my arguements .

See Change

 

[geoffw]

Seech

My thinking on the flock of bats. But, for me, made worse because I could not draw on the equity at all. (Multiples have different rules from singles; people self employed for less than 2-3 years can have troubles drawing on equity).

Thanks for expressing so clearly.

 

[Kennethkohsg]

However, the debt reducers MAY not be able to regear up to the extent they'd like if lending practices have tightened considerably.

N.

+++++++++++++++++++++++++++++++
Dear Nigel,

1. With this new investing strategy, I now have the banks approaching us and proactively offering its loans to us to further invest as a prudent investor.

2. This greatly contrast our previous situation of we chasing the lending banks for more loans in order to further invest, when we were adopting your investing strategy and approach.

3. Thus, I certainly do not agree with your a/m statement.

4. This is especially so when the lending bank is always fully aware of our consistently and ever growing healthy account balance in our bank account.

5. For your kind update and further comments and discussion, please.

6. Thank you.

Cheers,
Kenneth KOH