challenging your assumptions

[NigelW]

How many things that we just "know" are true really are? Are there deeply ingrained assumptions that we make without even realising that they are just plain wrong?

Until a few hundred years ago everybody knew the world was flat and that the earth was the centre of the universe...

Whilst this is a bigger question than investing, perhaps we can just limit the discussion to investing assumptions????

One of my own investing "truths" which I'm starting to question is that the vacancy rate for cheaper property ought to be lower than for expensive property because the potential pool of renters who can afford say $200pw is much larger than the number of renters who can afford $500pw.

BUT is that really correct? My premise sounds logical to me, and surely it should be even more correct during tough economic times...BUT perhaps the converse is true? Maybe if you choose above median price houses in "blue ribbon" owner-occupier dominated suburbs the vacancy rate is lower than cheaper housing because there is a short supply of rental housing available in those suburbs and that configuration (eg a 4 bed 2 bath home with yard) because most investors just won't/can't afford to buy that sort of property?

I remember reading one of the old API articles about Peter Spann. In it he acknowledges that his assumption that property trading was the way to go was challenged by a seminar attendee and he changed his thinking accordingly (altho from memory he admitted he couldn't in fact have held the properties...).

What other "investing truths" that we all accept as gospel don't withstand close scrutiny?

Look forward to your thoughts...
N.

 

[Peter Parker]

One of my own investing "truths" which I'm starting to question is that the vacancy rate for cheaper property ought to be lower than for expensive property because the potential pool of renters who can afford say $200pw is much larger than the number of renters who can afford $500pw.

BUT is that really correct? My premise sounds logical to me, and surely it should be even more correct during tough economic times...BUT perhaps the converse is true? Maybe if you choose above median price houses in "blue ribbon" owner-occupier dominated suburbs the vacancy rate is lower than cheaper housing because there is a short supply of rental housing available in those suburbs and that configuration (eg a 4 bed 2 bath home with yard) because most investors just won't/can't afford to buy that sort of property?

This is quite true in some areas. Property managers from the two regional cities I'm most familiar with have told me that the highest rental demand is for quality 4x2 houses in good suburbs.

One of these places is a major mining centre, and the other is a regional city where there is a lot of new investment and construction going on. The people being attracted are well-paid skilled tradespeople and/or professionals.

3x1 fibro houses are probably the most common housing type in these areas and these newcomers will certainly be expecting something better, hence the demand for good 4x2s.

The main shortcoming I can see is if (i) these people don't stay around long and (ii) they have the financial wherwithal to buy if they do wish to settle. Both of these could mean increased tenant turnover and thus vacancy risks.

Other oft-stated assumptions which others may challenge:

1. Buying in suburbs with high numbers of renters (which you alluded to)

Some books have mentioned this as there is an established tenant base. But I'm with you - I see nothing wrong with buying in a 'better' suburb with a higher proportion of owner occupiers. Property managers have told me that they get tenants quicker than cheaper (mainly renter and housing commission) areas. Also with fewer investors and more owner occupiers, I'd guess that property values would be less volatile.

2. Buying housing that's dissimilar to the predominant housing stock in an area.

Eg a 1970s brown brick monstrosity in a suburb full of cream timber Edwardians or a unit in an outer suburb mainly comprising houses.

Apparently the 1970s place will be harder to sell as people may be looking for a 'character home' in that area. On the second point I could see a suburban villa appealing to (say) an older couple who want to live in the same suburb as their children & grandchildren. This is provided the unit was near local suburban amenities of course.

3. Property always goes up relative to CPI in the longer-term.

(already covered on another thread)

4. Property values almost never fall

5. Households will continue to get smaller, there will always be population growth and we will avoid deflation in Australia (if not, the borrow, buy & hold property paradigm may be doomed)

There are no doubt many others. But it's most certainly a worthwhile exercise!

Regards, Peter

 

[Steve Navra]

Until a few hundred years ago everybody knew the world was flat and that the earth was the centre of the universe...

Hi NigelW

BUT from where I stand the earth does indeed look flat and definitely seems to be the centre of MY universe . . . also whilst I certainly can't feel the earth moving I do SEE the sun, moon and stars actually moving !
& Seeing IS believing, isn't it?

Also, the 3 primary colours are Red, Blue and Yellow . . . aren't they?
(Ahem . . . I once bet everything on this!)

Regards,

Steve

 

[Bill.L]

Hi all,

Steve, As a child I was told not to look at the sun, therefore I have never seen it move!

bye

 

[Garry K]

& Seeing IS believing, isn't it?

This would be true if what our eyes saw wasn't run through an in built filtering system that took years for each of us to individually design ie our brain.

My property rule I should question is:
There is a limited supply of waterfront property.

I notice that a record price has been set in Brisbane of $18M for a waterfront property. The news last night reported that a Victorian (not me ) bought it as a holiday house.

I guess we could build more inland waterways/channels, but I suspect this is becoming more difficult due to environmental issues.

GarryK