declining property prices?

[Arkay]

and once again HG shows his true understanding of the concept, being unable to appreciate that you DO NOT HAVE TO SELL to make a profit.

Are you trading now HG? Are we about to have an on paper vs real profit discussion? Because I'd really like to know how many of the really wealthy in the world actually hold their wealth in a CBA term deposit.

You seem to understand the concept of money as cash in hand only.

Your calculations and concepts focus purely on the yield and /or proceeds of sale, the cash that you can extract on a weekly/monthy basis. Humour us and run a few of your numbers again whilst trying with all your might to include compounding capital gains (even at 5%) into your equations.

Your admission about well located property in prime suburbs surely must lead you to believe that CG is not only a possibility but close to a certainty (barring war or massive natural disaster).

Tell me. If you invest for cash flow only, aren't you then speculating on a) Having tenants and b) Maintained or increasing rental returns.

Whilst you're busy speculating on those fluctuating factors why not add CG to the mix. You might find the numbers do stack up.

Cheers,

Arkay.

 

[rastus2]

By the way - we rent too! That's how we can afford to invest!

Cheers,
Jen

Hi Jen,
Good on you for your charity work.

So if I understand you correctly, both your properties are rental only and you can not claim PPoR on either of them.

That is fine as long as you don't ever sell them (quite likely your intent), but I have to say the biggest gift that ATO gives you is the PPoR CGT exemption status ... along with a little bonus.

Combined with the unpublicized ability to move out of your PPoR house (for up to 6 years), rent it out... claim all the -ve gearing on it, and then move back into it before you sell... thus reclaiming the PPor status... and not having to pay any GCT on the sale. You have one heck of an ability to reap some benefits.

Perhaps your next investment property could be lived in for a period (check with ATO for minimum requirements) before you move out and rent it... just in case you wanted some GCT free profit on sale.

Out of interest, are there many people on this forum using this loophole ?
We did it (by accident) about 8 years ago and are amazed it's not being used widely.

 

[Bandita]

Hi Jen,
Good on you for your charity work.

So if I understand you correctly, both your properties are rental only and you can not claim PPoR on either of them.

That is fine as long as you don't ever sell them (quite likely your intent), but I have to say the biggest gift that ATO gives you is the PPoR CGT exemption status ... along with a little bonus.

Combined with the unpublicized ability to move out of your PPoR house (for up to 6 years), rent it out... claim all the -ve gearing on it, and then move back into it before you sell... thus reclaiming the PPor status... and not having to pay any GCT on the sale. You have one heck of an ability to reap some benefits.

Perhaps your next investment property could be lived in for a period (check with ATO for minimum requirements) before you move out and rent it... just in case you wanted some GCT free profit on sale.

Out of interest, are there many people on this forum using this loophole ?

Hi rastus,

Yes and no to your questions - to get into the property market (in 2005) - we used the FHOG and used the property as our PPOR for the first year. When we purchased, it was a $285k unit in South Melbourne - it was May or June 2005 I believe - as it was to be our PPOR, we received the FHOG ($12k at the time in VIC, no stamp duty concessions) and had to put down about $5-10k altogether of our own funds (at the time, Geoff was on about $50k I think, and I couldn't work for visa reasons) - to secure the property. When we bought it, there were tenants on the lease which was secured until Dec 2005 at $325 per week. So in June 2005, we used the savings from the FHOG to pay Interest Only in Advance on the property - so received all the tax benefits of that interest payment in the 04/05 tax year. Then, kept receiving the rent until Dec 05 and moved in. We stayed there until Jul 06 - during that time we repainted the hideous paint scheme and were able to rent it out at $370 per week (just turned to $380) when we left. So, while we were living there, we paid no interest - and collected rent for about 6 months before we moved in. We then moved out with friends, paying very little rent and were able to buy the next IP and do a reno on it. The capital growth in both will allow us to buy another 2 or 3 (if we stick in the $250k range as we have).

We could move back into the first IP (PPOR) before 6 years to save on CGT - but we plan on holding onto it much much longer than that - it's rent pretty much pays for itself, the capital gains are an incredible bonus which we can use to buy more IP's. You don't need to sell to access the gains in your property - and unless you're buying your PPOR it's silly to sell as the interest on the equity you pull out is tax deductible if you use it for investment purposes.

So, CGT doesn't worry me, although yes, we are in a situation that we could avoid it on the first IP if we sold. But we plan on holding much longer than that

Cheers,
Jen

 

[HiredGoon]

Because I'd really like to know how many of the really wealthy in the world actually hold their wealth in a CBA term deposit.

Cash is terrible long term. However, by not buying shares in July I didn't lose 10% of my capital. If I bought now I'd be ahead vs buying then.

Cashing out at the right time is absolutely critical.

I will jump in again, the question now is when. I think sub prime resets increasing up until early next year will keep me mostly in cash. I may miss out on a 10% rise, but I may also miss out on a 30% fall.

Your calculations and concepts focus purely on the yield

Yes, because prices in a rational market should depend on yields. Betting otherwise is a gamble that you can sell to a greater fool.

Your admission about well located property in prime suburbs surely must lead you to believe that CG is not only a possibility but close to a certainty (barring war or massive natural disaster).

In nominal terms, property will certainly be worth more in the long term than it is today. But I don't care about nominal prices, I only care about REAL (inflation adjusted) prices.

If inflation is 5% and I pay $96 for $100 in 1 years time then I have lost.

While I could buy now and be assured of not making a nominal lost if I held it for long enough, there are holding costs for property over that time, there are opportunity costs of other investments.

There is also the risk that other people will not just accept the story of ever increasing capital gains, do the simple maths, relise property is overvalued and I make a capital loss. I'm not willing to risk that.

 

[steveadl]

For those forumites who are reading this far (it gets more interesting: I'm just getting warmed up - wait until I start quoting the classics), HG is one example of the type of people you're going to meet on your investing road. Intelligent, well-read, able to quote some very clever stats and ideas (I don't know how to calculate the earth's land surface area.......) but doesn't really know what property investing involves.

There will be lots of these people in your future. Colleagues, bosses, teachers, family friends, etc. All I can say is, read and think through it enough that you can honestly say you can see the flaw in their arguments. If you don't, read some more.

Personally, I believe I'm making logical arguments to refute HG's. PM me if you don't think so. Me, I'm confident in my beliefs about property investing (LONG TERM it works) because I've read enough on both sides, and have, hopefully, thought through it.
Alex

OK Alex, point taken. I'll listen to the arguments despite the frustration. Think I'll leave the arguing up to you though, too annoying

 

[VYBerlinaV8]

What don't you believe?

That I am willing to pay more to live closer to the CBD?

That my extra rent is less than running a car?

My total rent is 11440 a year. I can risk my life and rent a 3bdr house in Elizabeth for $145/wk = saving of $3900 a year. After $500 registration costs if it costs $65 a week to run a car I'd be behind.

http://www.caradvice.com.au/642/average-running-cost-of-australian-vehicles/

says $260 a week when you factor in depreciation and other costs.

My $600 bike has lasted for years with 0 running costs, except extra food.

What's unconvincing is how you started off telling all how there's going to be a massive house price crash (what's that other forum name again...?), and then telling us why prices can't rise any further, and then get around to telling us you'd actually really rather live in an inner city location and that we should all develop new houses and properties our expense so you can have somewhere nice and convenient to live (aka "contributing to society").

You freely admit you are not currently a property investor, and completely ignore explanations of how we don't buy the whole market, but insist on finding pretty graphs and stats that, in a macro sense, support your 'theories'. You completely ignore forum members who are prepared to explain how they made substantial profits and built strong wealth positions from property investment.

Alexlee is right - until you actually go and start DOING, you really don't understand. Mate, I thought I knew it all too, until I started buying property and learning all the tips and tricks to tune an investment to profitability. My next property will be my 5th (I've never sold one), and I have learnt lessons on every purchase. I don't expect this will change.

How about starting a thread where you share your experience and 'lessons learned' as a share investor with us, instead of bagging our ideas?

 

[HiredGoon]

and then telling us why prices can't rise any further, and then get around to telling us you'd actually really rather live in an inner city location

Why can't I think that houses are overvalued while still wanting to live close to work?

 

[mrfish]

Why can't I think that houses are overvalued while still wanting to live close to work?

Because it ain't going to happen

 

[VYBerlinaV8]

Why can't I think that houses are overvalued while still wanting to live close to work?

You keep changing your story, and you're arguing just for the sake of. I think it's about time you made my ignore list.

 

[BayView]

"Cashing out at the right time is absolutely critical."

HiredGoon,

I am a property investor, not a shares investor, but this statement seems to be the mindset of the shares investor to me.

If you buy a well positioned property that affords a good rental return, tax deductions, cap gains, and doesn't fluctuate too much with the market (historically they don't anyway). There is no need to ever cash out a property like this, there is no problems buying at the high point in the market instead of the low point, there is no problems basically.

I can simply keep accessing the increasing equity to keep repeating the process, or if the market slows, I don't buy anything but pay down some debt instead.

Your statement, on the other hand, suggests cashing out for what reason? - a crash?, to buy something else?

Why do you have to cash out at all? I think maybe it's the mindset of the share investor who is used to seeing massive increases and drops in the market? Cashing out before the inevitable fall?

I can understand your concerns that there will be a major correction in property, but it is only going to affect those who have to sell. The ones who have healthy LVR's, healthy rent returns won't be affected at all. If anything, they will have bought properties in good locations and their properties will probably still go up in spite of the correction, because, unlike a share, a property is something that people will always need to buy or rent. This is a natural hedge against any major correction across most of the (residential) property world.

A share, on the other hand, is purely a money making exercise for the majority of investors in the share market. If they don't make money; they offload. This seems to me the basis for the massive fluctuations in the market, thus the timing aspect and the term "cashing out" would probably have originated in the market.

So, if you are hesitating to buy property because of the likelihood of not making money, or worse still; losing money, don't be. All you need to do is buy well located, fair market value, Mr. and Mrs. Average housing and sit on it.

 

[lizzie]

gosh - if only i knew now half of what i thought i knew when i was 24 ... i'd be a genius!

okay - lets look at a few things. you want to live close to work. so does everyone else (no one really likes commuting), so therefore if you want to buy close to work, and if you do choose to buy you have to compete against others with money who also want to buy close to work - and the person with the most money will get the property (usually). that is how a price is set. what makes you think the property is overvalued, if that is what someone is prepared to pay for a property to be in the location they want.

but - and this is a big but - not everyone wants to live where you are. you will find that the majority of ip's that people on this forum own are nothing like their ppor's (or where they rent). out of 10 rentals i currently own i would only consider living in one of them (and only reluctantly) - because i bought them to suit the rental demand of those wanting to live in the areas that the houses are and the rental demand exists.

also, fast forward a few years. you met a girl, get married have kids - all of a sudden you little flat in the cbd and the bike doesn't cut it. johnny has soccer, sally has dance lessons, preschool and primary school are in different directions, the kids want a dog, the wife is a stay at home mum .... where do you think you'll be renting then? how will your savings look at that stage? out comes the two carbon producing vehicles and every two years you have to uproot and move everyone because the landlord has other plans.

i know you said you have enough to buy - as long as your savings are increasing enough to cover buying something in a boom period you'll be right as i , for one, don't think property is overvalued. i don't think it's undervalued at the moment either, imo. it's just that property is worth what someone is prepared to pay for it.

i also don't think you've taken all the nuances into your calculations in regards to cashflow from a property. you keep harping on about yield, but yeild is only one factor in dozen that affect the cashflow from investment properties. perhaps you should read a bit more - dolf de roos, peter spann, jan somers - they al give various views on investing in real estate, including the down side.

come back when you've got a bit more experience - then we might take your views seriously. it's great to have a grand dream or vision for how society should run - small communites, everyone riding their bike and growing their veges, no poverty, no substance abuse, everyone with all that they desire - but those of us in the market deal with reality, and it ain't anything like your dream (as sweet as that dream is). perhaps you've been living in "second chance" a bit long.

 

[HiredGoon]

there is no problems buying at the high point in the market instead of the low point, there is no problems basically.

So what you are saying here is that you can't lose even if you buy at any price?

-A house provides a yield of shelter, which you can work out the value of by comparing equivalent market rents.
-You can thus work out a "fair price" to pay for a property, using Present Value:

http://en.wikipedia.org/wiki/Present_Value

If you pay more than this, you are relying on a "greater fool" paying more than it is really worth. This HAS worked to provide capital gains over many years, but I am confident that fundamental values will again be reached one day. It is only then that I will buy.

you met a girl, get married have kids - all of a sudden you little flat in the cbd and the bike doesn't cut it. johnny has soccer, sally has dance lessons, preschool and primary school are in different directions, the kids want a dog, the wife is a stay at home mum ....

I live in a 3bdr house 5km from the CBD. If the rent doubled I wouldn't be in housing stress (30% gross wages) I can easily afford for my wife to take time off work.

I could *NOT* afford this if I bought the house I live in. If I paid the same amount in interest only as I do in rent, I'd have to live significantly further away from town and in a much smaller, crappier place. I could also not save anywhere near as much and have a diversified investment portfolio.

I rent because I can get a better life for the same money.
Other people buy because they think prices are going to go up.
But why would prices keep going up if you can have a better life renting?

 

[wylie]

I rent because I can get a better life for the same money.
Other people buy because they think prices are going to go up.
But why would prices keep going up if you can have a better life renting?

So why not just get on with it, and let us get on with making our choices?

Wylie

 

[Kingbrown]

A few points for HG:

1. You talk about calculating a house's worth by using yields and PV. However, the true worth of a house is what somebody pays for it. In a popular inner city area, this It has nothing to do with yields and PV - it is simply what somebody will pay.

2. Putting a roof over your head (and your families), is one of the primal urges that every person on earth deals with. Personally, I will pay far more for an inner city well located property than what a yield and PV calculation says my house is "worth". At some point in the near future, I will not have a mortgage, and thus I have a degree of security that a renter can only dream of.

3. A few years ago I also couldn't afford to buy a house in an inner city area, and chose to rent inner-city instead. Eventually though, you come to realise all of the monetary, and non-monetary benefits, that home ownership provides. This is a very hard value to calculate using your crude financial modeling. This doesn't make the value any less real. How can anyone create a formula that tells me the value of security, flexability, and well being? You can't.

4. The real value of my mortgage decreases at the rate of inflation, year after year. This effect will only be compounded if a high inflation environment returns.

5. You can "think" that houses are overvalued. Its just your opinion, which doesn't count for hardly anything. As far as "experts", they have an equally bad track record at predicting housing market movements.

6. Your share market ideas are equally flawed. Yes, you avoided a 10% correction recently. However, you have already missed a 7% increase in the last few days. Trying to time the market is a mugs game. You can't do it, neither can I, neither can nearly every person on earth that has ever tried.

At the end of the day HG, you seem to have:

1. No share market investments.
2. No real estate investments.

You can't even provide a home for your family without relying upon another person (your landlord)!

..and you think you can stand up in this forum and say something useful?

No chance buddy.

 

[lizzie]

So what you are saying here is that you can't lose even if you buy at any price?

that is not what was said at all - but if you buy in a location that ticks all the boxes then do not be adverse to paying a good price.

it's not as if any of us are going to pay $500k for a house only worth $300k - that's a stupid assumption and i thought you were more intelligent than to make such a ridiculous comment.

 

[Harris]

So why not just get on with it, and let us get on with making our choices?

Wylie

If he did, then he won't be getting all this undeserving attention !

Why should he change his mindset, get a bit positive and channel his energies into something constructive (like prop investing), when he seems to be getting huge traction within the forum just by being negative and engage in splitting-hair debate.

We are giving him far too much attention (oops.. I just did it as well) than he deserves and he is just marvelling at it.

As Mark said in another post, "starve the troll of attention and he will die" (metaphorically speaking)

So.. finally I am resorting to hit on "ignore" for HG

Harris

 

[lizzie]

i actually find these debates really good - the intelligent replies to hg's comments are gems to be enjoyed. they are what helps me clarify our situation and direction ... and sometimes make me pull up and reconsider.

keep the replies coming, and if it takes an hg to prompt these replies then i'm all for it.

by the way - what is the story behind the moninker of hired (employed/paid by others to perform a task) goon (buffoon/idiot/source of ridicule)?

 

[Mofra]

Trying to time the market is a mugs game. You can't do it, neither can I, neither can nearly every person on earth that has ever tried.

Hence the old adage "time in the market is more important than timing the market".

FWIW I know people who do trade, time the market, structure their risk so they are trading low risk/moderate return, and are doing spectacularly well. These are people who have spent as much time studying the market as a surgeon has spent learning his or her craft, so it is certainly not for the faint hearted. Anecdotally 90-95% of (short term) stock market traders fail & lose money, although the only substantiated figure I have ever seen is an 80% failure rate on futures markets, a zero sum game which also includes hedging losses.

It is true that property prices have declined in many areas - I am fortunate enough to see hundreds of valuations a month, and the majority of "mortgage belt" middle to outer suburbs have seen a retraction (even in cities whose median is flat or rising).

Even under these conditions, there are areas (predominately inner city or coastal) that are rising. I have posted before that I am an over bear when it comes to property at the moment, but that isn't stopping me from searching for an inner city property to buy as soon as I find a suitable one. For my timeframe, I doubt that on an after tax, post inflation basis we are at the inner city market peak for the next 21 years. Given I can also salary package investment debt, a $0 (after inflation) return overtime is an after tax increase.

Each to their own.

 

[Arkay]

I've found the perfect picture for this thread. The great HG/SS debate..

On the left we have CG, on the right CF.. Let the games begin!

Of course the guy in the best position took the photo. He's carefully watching CF and CG to see what they'll do

Cheers,

Arkay.

 

[HiredGoon]

1. No share market investments.
2. No real estate investments.

I have shares, I just haven't been buying much this year.

You can't even provide a home for your family without relying upon another person (your landlord)!

You can't even provide food for your family without relying on a farmer and a grocer!

No chance, buddy.