generational housing problem

[alexlee]

I'm not pretending to know what WILL happen, just pointing out that current indicators point to possible restraints on general growth over a medium to longer term. Smart people will make money in any market, and I'm sure generally prices will increase, by how much?

Those who bought a few years ago did well, and this would reinforce a positive perception about the market, regardless of indicators. The market may be able to replicate previous gains, but it will likely have to overcome these restraints to do so.

Those who bought a few years ago did well. Those who bought 10 years ago did well. Those who bought 20 years ago are doing even better. Those who bought 50 years ago are laughing. Those who bought 100 years ago are dead, and presumably their children are laughing.

The trend is your friend.
Alex

 

[FHB]

what happens if it's not a first home buyer buying that place as even that is unaffordable, it's just someone else moving that little bit closer to CBD.

That's fine, but that someone else has to sell to someone else, who sells to someone else, who sells to someone else, who may well be a FHB. At the end of any chain is an entrant to the housing market who must buy based on savings, income and debt levels, or an investor relying on rent and capital growth.

 

[andy sipowicz]

Hired Goon, Just as a matter of interest, explain to us using this average example, how IP investors/lanlords are in an overall loss making industry:

Buy a house for $300k that loses you $2k per year out of pocket but increases at a 5%pa rate. (yes that's right a LOSS of $2kpa! but keep it in perspective of the example)

In 5yrs the house is worth $382k and you have worn a loss of $10k over those 5yrs. You then have $72k in gains. Plus at this point, the rent has increased over the 5yrs to now cover all costs, and you are now no longer losing this $2k per year, in fact may even be making a small profit. Now hold for another 20yrs and look at the figures again...

And before you answer, a few points which I know you'll latch onto straight away:
- This example has been possible for the last 100+yrs, not just in the last 15-20yrs when the "loose global credit standards" have been around.
- I completely admit and illustrate how a loss is made at first, but for the greater long term gain. In a similar way that a big business will fund a loss for years in a new division until it breaks even.

Hi Steveadl,

The problem with the example you gave is that a large percentage of speculators are not taking a long term view. Many people I know have purchased properties with the plan of selling them off in 3-5 years and retiring filthy rich. I'm sure everyone agrees that LONG term property will increase in value and I don't think you will find any of the members from the other forum would argue that point either.

The second problem is the 2K a year loss. This relys on 1. Person having a salary to negatively gear the property against. 2. The asset not being massively overvalued when the speculator purchased it. Again long term you may be able to average the loss amount down to 2K but that relys on you being able to hold on to said asset with negative equity and the speculator having a long term view.

 

[steveadl]

That's fine, but that someone else has to sell to someone else, who sells to someone else, who sells to someone else, who may well be a FHB. At the end of any chain is an entrant to the housing market who must buy based on savings, income and debt levels, or an investor relying on rent and capital growth.

Exactly the point and at the end of the line with the cheaper property, you will finally have the first home buyer appearing. That's where they come in, and have to work their way up the food chain like everyone else, not complain about why they can't just go straight to the font of the line. (I think you and I are in a fair bit of agreement on a lot of points)

As a matter of interest FHB, are you in fact a 'first home buyer' (FHB) looking around? Sorry if you've already mentioned this previously, just curious

 

[BoatBoy]

Andy I think you are on the wrong forum mate, this is the property investors forum not the property speculators forum.

I dont think we buy overvalued property, we try and buy undervalued, we dont sell and make a few bucks ,we hold and make much more.

At least that's my plan.

Dave

 

[steveadl]

Hi Steveadl,

The problem with the example you gave is that a large percentage of speculators are not taking a long term view. Many people I know have purchased properties with the plan of selling them off in 3-5 years and retiring filthy rich. I'm sure everyone agrees that LONG term property will increase in value and I don't think you will find any of the members from the other forum would argue that point either.

The second problem is the 2K a year loss. This relys on 1. Person having a salary to negatively gear the property against. 2. The asset not being massively overvalued when the speculator purchased it. Again long term you may be able to average the loss amount down to 2K but that relys on you being able to hold on to said asset with negative equity and the speculator having a long term view.

Andy, true - there are people out their taking a short term speculative point of view (I gave an example of one I know of recently in one of my suburbs) which I personally don't agree with. My problem was HG was specifically saying property investing is a loss making business - period.

I do assume of course that the investor can afford the $2k loss - otherwise they would'nt have bought it in the first place. I'm basing this on an investor who actually HAS weighed it up and made that investment.

This $2k is'nt a long term average - I used this figure from an IP I bought last year, which presently only costs me $2k a year, and if left alone would be more than break even in 5yrs. There is no averaging down, it actually costs me $2k from the get go, and will continually decrease each year, so the average would actually be much less over the 5yrs.

And you're right, I believe you do have to have a long term view, which is what my example was about, and why I personally would'nt try making a quick buck and getting out. I could have done that earlier this year, but that's not my strategy.

 

[andy sipowicz]

Andy I think you are on the wrong forum mate, this is the property investors network nit property speculators.

I dont think we buy overvalued property, we try and buy undervalued, we dont sell and make a few bucks ,we hold and make much more.

At least that's my plan.

Dave

Hi Dave,

I wasn't saying anyone here had bought overvalued property, just my first hand experience amongst friend etc.

No I ment speculators. If you buy an asset hoping to make a profit from an increase in the asset price you are a speculator.

Steveadl's example where an asset costs him $2K a year while waiting for the big payout at the end when he sells is speculation whichever way you look at it. An investor takes ownership of a asset for the INCOME it can provide.

 

[andy sipowicz]

Andy, true - there are people out their taking a short term speculative point of view (I gave an example of one I know of recently in one of my suburbs) which I personally don't agree with. My problem was HG was specifically saying property investing is a loss making business - period.

I do assume of course that the investor can afford the $2k loss - otherwise they would'nt have bought it in the first place. I'm basing this on an investor who actually HAS weighed it up and made that investment.

This $2k is'nt a long term average - I used this figure from an IP I bought last year, which presently only costs me $2k a year, and if left alone would be more than break even in 5yrs. There is no averaging down, it actually costs me $2k from the get go, and will continually decrease each year, so the average would actually be much less over the 5yrs.

And you're right, I believe you do have to have a long term view, which is what my example was about, and why I personally would'nt try making a quick buck and getting out. I could have done that earlier this year, but that's not my strategy.

I agree. I think it's the short term view and the lack of capacity to REALLY service the loans that will cause the problem. And I'm afraid to say that from my experience a largish number of more recent purchasers fit this description.

 

[BoatBoy]

Hi Dave,

I wasn't saying anyone here had bought overvalued property, just my first hand experience amongst friend etc.

No I ment speculators. If you buy an asset hoping to make a profit from an increase in the asset price you are a speculator.

Steveadl's example where an asset costs him $2K a year while waiting for the big payout at the end when he sells is speculation whichever way you look at it. An investor takes ownership of a asset for the INCOME it can provide.

I think Steveadl"s bit here:

And you're right, I believe you do have to have a long term view, which is what my example was about, and why I personally would'nt try making a quick buck and getting out. I could have done that earlier this year, but that's not my strategy.

Is the difference between an investor and speculator.

I aint taking a punt on thing's working out, I have put in a lot of effort making sure (as much as is humanly possible) that it will work.

Dave

 

[Arkay]

An investor takes ownership of a asset for the INCOME it can provide.

A CASHFLOW investor might. Relying on capital growth and yield combined with negative gearing doesn't make you less of an investor. This is the problem with your mindset. It's cashflow OR you're a speculator.

A "loss making speculator" could just as easily turn around and tell you you're doing it wrong. You can never SAVE your way to wealth through taxed +ve cash flow (income).

It may not be your cup of tea but at least respect that it can and does work. How far people want to expose themselves to your so called speculation is up to them. I'm certain a conservative negative cashflow investor would call a highly leveraged person a speculator also. As long as the highly leveraged person understands and is comfortable with the risk why are they any less of an investor?

Cheers,

Arkay.

 

[steveadl]

Hi Dave,

I wasn't saying anyone here had bought overvalued property, just my first hand experience amongst friend etc.

No I ment speculators. If you buy an asset hoping to make a profit from an increase in the asset price you are a speculator.

Steveadl's example where an asset costs him $2K a year while waiting for the big payout at the end when he sells is speculation whichever way you look at it. An investor takes ownership of a asset for the INCOME it can provide.

I guess this is where we disagree, as I view it as paying $2k a year to have a $300k asset appreciaiting in value. Sure it's going to be bumpy and some years will do nothing, others will go down 2% then others will go up 15%, but overall, history shows us that 5% growth average is quite a reasonable (if not too low) expectation for property in a capital city. (& 5% on a $300k house means my $2kpa loss - only for the first 5yrs - is making me $15k+pa).

I could put that same amount into shares or another asset and require 100%+pa to achieve the same result (and it would have to be leveraged to get that gain).

Expecting RE over the longer term to rise is not speculative in my opinion. And what happens when the rent overtakes the expenses in 5yrs and starts paying back my initial losses - does that then become acceptable that it is no longer "specualtion" in your view?

 

[steveadl]

A CASHFLOW investor might. Relying on capital growth and yield combined with negative gearing doesn't make you less of an investor. This is the problem with your mindset. It's cashflow OR you're a speculator.

A "loss making speculator" could just as easily turn around and tell you you're doing it wrong. You can never SAVE your way to wealth through taxed +ve cash flow (income).

It may not be your cup of tea but at least respect that it can and does work. How far people want to expose themselves to your so called speculation is up to them. I'm certain a conservative negative cashflow investor would call a highly leveraged person a speculator also. As long as the highly leveraged person understands and is comfortable with the risk why are they any less of an investor?

Cheers,

Arkay.

Exactly, just beacuse an investment does not make a profit from the beginning, does not mean it is not a good investment, or that it is speculating - it just means a longer term perspective has been made.

Take Rupert Mudoch for example - 4yrs ago he launched Sky Italia which haemorreged hundreds of millions of dollars for the first 2yrs, but last year turned the corner and made $150M+. Should he not have made this investment as it was a loss maker at first? Was this a speculative move? No - because he has done the same exact thing multiple times in many countries for decades, and he has a great knowledge of what he is doing.

 

[andy sipowicz]

A CASHFLOW investor might. Relying on capital growth and yield combined with negative gearing doesn't make you less of an investor. This is the problem with your mindset. It's cashflow OR you're a speculator.

A "loss making speculator" could just as easily turn around and tell you you're doing it wrong. You can never SAVE your way to wealth through taxed +ve cash flow (income).

It may not be your cup of tea but at least respect that it can and does work. How far people want to expose themselves to your so called speculation is up to them. I'm certain a conservative negative cashflow investor would call a highly leveraged person a speculator also. As long as the highly leveraged person understands and is comfortable with the risk why are they any less of an investor?

Cheers,

Arkay.

Hi Arkay,

It's not a mindset just a definition and people who purchase an asset purely for the gain in said asset price are speculators. This is not really something that can be debated. This isn't a bad thing and if people are competely aware and comfortable with their level of risk I'm sure they wouldn't care what they're called

I'm not sure how I'm not respecting that it can and does work. I was merely explaining from MY experience the two most common factors that bring people unstuck. If someone is taking a short term view expecting double digit growth in asset values and does not have capacity to service the loans in the long term but are comfortable with that level of risk go ahead, it doesn't bother me in the slightest.

 

[BoatBoy]

That..........

If someone is taking a short term expecting double digit growth in asset values and does not have capacity to service the loans in the long term )

Is speculating.

Dave

 

[andy sipowicz]

Expecting RE over the longer term to rise is not speculative in my opinion. And what happens when the rent overtakes the expenses in 5yrs and starts paying back my initial losses - does that then become acceptable that it is no longer "specualtion" in your view?

Hi Steve,

Buying an asset that you expect to turn cashflow positive in the short term is what real estate investment is about.

The problem that I see (again this is just personally opinion) for example is a house that has sold recently near me for $650K. It is now being advestised for lease at $335/week. How is this investing?

To the other posters - I didn't know using the word speculation would be such a no-no. Sorry.

 

[steveadl]

That..........



Is speculating.

Dave

That's right Dave (& Andy), and nowhere in my example did I say the person can't afford the shortfall, and I also didn't presume massive gains - only 5%pa which is only about 2% higher than inflation at the moment.

 

[DavidMc]

The problem that I see (again this is just personally opinion) for example is a house that has sold recently near me for $650K. It is now being advestised for lease at $335/week. How is this investing?

It's investing if that house is worth $715k this time next year.

 

[steveadl]

Hi Steve,

Buying an asset that you expect to turn cashflow positive in the short term is what real estate investment is about.

The problem that I see (again this is just personally opinion) for example is a house that has sold recently near me for $650K. It is now being advestised for lease at $335/week. How is this investing?

To the other posters - I didn't know using the word speculation would be such a no-no. Sorry.

I just don't consider buying an asset that you believe with a large degree of certainty (based on research) will perform well financially over time (be it profits, capital gains etc.), is speculation. Whether it be buying a house, a business, a share, or a donkey farm p ). If there is proper reasoning and in many cases historical figures to back up the theory the investor has about the asset - no, I would'nt consider it speculation.

This is not to say it may not go belly up at some point if something unforseen occurs (eg. the business fails due to a change in consumer wants, the donkeys all get rabies ), but no I don't consider it speculation. I believe like many businesses out there, RE requires initial losses to be born, but that in itself does not make it speculative.

We are also assuming that there is a debt on the investors head as a result of the property investment. What if he pays cash? Does that turn the RE suddenly from speculative to acceptable? It's still the same asset, so how can that be? The individual investors financial position is secondary in the example to the fact that one can assume with certain sureity that RE will increase as an investment over the longer term.

 

[DavidMc]

I agree, the word speculate is a little too heavy. From various definitions on web dictionaries it implies 'little or no evidence', 'incomplete evidence', 'didn't research properly' etc.

 

[DavidMc]

Buying an asset that you expect to turn cashflow positive in the short term is what real estate investment is about. (

I disagree. Sounds like you're still in investing 'cashflow' high school.

An investor takes ownership of a asset for the INCOME it can provide.

What about someone who invests in fine art? Or vacant land? Or antiques? Or what about LOE?