housing statistics are rubbish thread

[redwing]

Yahoo Finance Thread

A great read here about Housing Statistics which then gets involved into Property Investing and property versus shares from a variety of perspectives..worth the read.

some interesting excerpts below

Almost all of us who invest in property are relying on capital gains to make up for the short-fall we have each month when the mortgage payment comes due, which the rent doesn't cover, let alone maintanence, rates, body corp, agents fees, renovations...

That said, if you buy a property for $200k, and get a weekly rent of $200, and assuming an interest rate of 7.25%, then you're looking at about $14,500 p.a. in interest, plus around $1400 in rates, $1000 in body corporate, $300 in landlords insurance and $200 in agents fees. Let's say you do a renovation once every 10 years for around about 10% (20k) every 10 years, I think more than that is foolish and doesn't really count as investment (the statistics of 20-25% are probably heavily biased by people renvoating their own residences).

Anyway, all of that makes a shortfall of about $9000 p.a. This means you'll need a capital gain of $9000/$200,000 = 4.5% in the first year to realize a profit. Long term growth in property is around 7%, which has a strong economic foundation given that inflation is 3%, population growth is 2% and real growth in GDP per capita is 2%. So supply and demand dictates an annual rise of 7% (demand increases by 7%, supply more or less fixed).

Let's say you only realize a growth of 4.5% in the first year. Property is then worth $209k. In the second year you now only need a growth of 4.3% to make a profit. Also, keep in mind that if the property went up by 4.5%, then the rent probably did aswell. Taking this into account, means that you really only need a growth of 4.1%.

Raphael,

You made the following comment;

"Given that money should flow to the investments of maximum return you would expect that supply and demand across investments should equalize the market, leading to an equal return for property and shares. This is why I think it's fair to expect an equal return out of property and shares."

This only applies to a perfectly efficient market with full access to all available RELIABLE data. This of course brings us back to the initial discussion, namely, the questionable accuracy of property-related statistics and information.

I love your concept of 'friction'. I think you are spot on. Several years ago I worked for an investment bank. I was told by an old hand soon after starting that out role was to generate plausible stories, both positive and negative, to churn the market so as to "shear them on the way in and shear them on the way out". This applies equally to property - the entry and exit costs associated with buying and selling are typically up to 10% of the value of the property - all of which ends up in the pockets of the property hangers-on (ie. shearers).

As an aside, what we are now seeing on the ASX (and all major Western stock indices) is little more than LBO and M&A related churning. There is little in the fundementals to warrant the continued stock turn-over and record-breaking index values. The brokers and bankers have created massive commissions out of thin air. But that is another story....

'

I put together a quick spreadsheet with the following assumptions:

Inflation: 3%
Savings: 60k p.a.
Share growth: 22%
Gearing: 50% (ie. $1 margin loan per $1 investment)
Margin loan interest rate: 8.5%

After 10 years this leads to a total net worth of $750,000 (not taking capital gains taxes into account) in today's dollars.

With property, even with a growth rate of only 7% I could probably increase this to in excess of $2,000,000. The real killer with shares is the gearing ratio, it means that even though the growth of property is lower, the principle that you can invest is alot higher.

In my mind this puts shares at a big disadvantage. What do you think?

I enjoyed the read )