But you didn't answer my question. If you could go shopping in California one year ago or today which would you prefer? Are you saying it makes no difference as it is 100% about property selection?
If property doubles in value every 7-10 years, do rents double approx every 10 years?
- Thread starter CairnsInvestor
- Start date
Holy cow, look at this graph! (it's at the bottom of the page)
http://metaphorical.wordpress.com/2...ou-know-is-wrong/a_history_of_home_valuesjpg/
Umm...can someone find a graph that is almost like a straight line going up at about 45 degrees?
http://metaphorical.wordpress.com/2...ou-know-is-wrong/a_history_of_home_valuesjpg/
Umm...can someone find a graph that is almost like a straight line going up at about 45 degrees?
Holy cow, look at this graph! (it's at the bottom of the page)
http://metaphorical.wordpress.com/2...ou-know-is-wrong/a_history_of_home_valuesjpg/
Umm...can someone find a graph that is almost like a straight line going up at about 45 degrees?
That's from Shiller (Harvard or Yale - I think Yale). Some would argue it is biased - he argues that realestae has overshot fundamentals as well. Here is the link for his source data:
http://www.irrationalexuberance.com/Fig2.1Shiller.xls
That's right; it is good for those already in the market. It always has been from my knowledge.
But, you have to get in at some point to get the good results later.
For me, the rental yield is a factor at purchase, so I am going to source the properties that will yield a good rent return NOW as well as all the other factors that investors look for; cap growth being the main one.
Obviously, the area, and the point in the market will determine the relationship between rents and cap growth. I bought two of my properties when the rents had outstripped the cap growth for a number of years. The rent return was way above the National average. That's why I bought them, along with the promising economic factors of the area (for cap growth).
Since then, the cap growth has outstripped the rents, even though the rents have continued to rise. Now, the rental yield is not as good for anyone looking to purchase the same properties. But I'm sure that at some point the cap growth will slow - it always does, and the rental yield will improve, making the scenario more attractive for the next lot of buyers.
With regards to the rent, I have already explained the relationship between rents and cap growth; it's staggered. Always has been, always will be. If you expect to see them stay parallel over the long-term then you'll be disappointed.
You have to look at what the numbers are like NOW.
Ah, here's a better one, a wavy line going up at 45 degrees .
http://www.investmentu.com/IUEL/2005/20050701.html
.http://www.investmentu.com/IUEL/2005/20050701.html
I don't expect them to stay parallel. They will move all over the place and be disconnected for 5 or even 10 years. But the long term trend of house (I should say land) prices can't be different to the long term trend of rental income or you get to silly yields. I think we are saying the same thing.
Answer to part A; Definitely now as opposed to a year ago, because there are far more areas that are depressed than a year ago. Now it is easier to find a cheap property, but the rental yields are still crap there was such a large spike in prices that even with the house prices goning backwards, they are still way above the rents. No value to me, unless you could buy for a re-development. I couldn't fund the time-frame between the start and the end, and I wouldn't attempt a re-dev in the USA with no prior expereince at all.
But I wouldn't have NOT gone shopping a year ago, just because the trend was backwards. I go shopping when I can, and find the areas that will do well/are about to do well. That's the thing; if I continually look on a macro level, as are most Americans right now, then I would never buy when the time is right.
Right now in the USA no-one is buying except the astute investors (and they are the minority of the minority, hence not many houses being bought). They know that the market is down, it may go down a bit more, but they find areas that aren't down, or they buy in a really good area, knowing that they may take a short-term on-paper loss, and sit back and wait for the market to turn. And guess what will happen? Everyone will be jumping on the bandwagon and start another boom. The investors who are buying now will ride that wave.
You could wait until the market improves and then try to buy, but by then there are a zillion other competitors and it's hard to actually buy at all, unless you offer above the asking price. You may even pay more at the start of the feeding frenzy than the investor who bought now and saw the property go backwards a little bit more before the prices improved.
But, either way you will do well.
Part B: Yes, it makes no difference. Actually; it has some impact, but not like people think. That's why to follow the media hype, buyer sentiment, fundamental models etc is not required for a long term view, which is my view. Buy well, buy when you can.
Like everyone else, I want to make a fortune yesterday, but we have to be realistic. It is mostly a longer term investment vehicle.
When I first started investing, my plan was to research 5 Melb suburbs that I thought would be good long-term cap growth prospects, with the plan to buy after 6 months of research. This soon became too monumental a task and I didn't have the time, and the travelling from Dromana up to my targets was killing me. But what I did see was a big variation in the markets of those suburbs, and it was even down to individual blocks fo streets. So I narrowed the search down to one suburb; Mentone. It is an "overflow" suburb near Brighton, more affordable and lots of amenities. Good long-term prospect.
For example; there is a triangle of streets in Mentone (one of the targets) that have no re-development allowed above 1 dwelling. The blocks are big, near the shops, cafes, beach and schools. Not far to the CBD. The houses are beautiful old period California bungalows, Victorian era homes etc. Really in demand, but high entry level (too high for me at the time). The rent returns were crap as well, but they consistently outperform the averages because of their scarcity, their position and appeal etc. From a cap growth point of view, these houses are oblivious to the rest of Australia.
I ended up buying my first IP at 2 levels down in price, and got a new townhouse in a block of 4 that had been on the market for 6 months, 20% under asking price. It had excellent depreciation and rent demand, the rental yield was 5%.
This was from knowing the area very well, and spotting the value of the property.
So yes; it's property selection, in the micro-market.
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I think you're right, but when someone starts asking about why the rental yields don't keep pace with the house prices, we need to point out why, and also, from my persepective, that it doesn't really matter other than when you're buying.
So, to put it into context with your situation Yield, if the rent returns are poor (I don't know what your criteria for poor is), and assuming you are able to buy now, would you:
a) look for another area with better rental yields,
b) wait until the rental yields improve for that area.
c) don't worry about rental yields at all as the cap growth for the area is strong long term.
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You're still ignoring redevelopment. Haven't you noticed old crappy houses in nice areas tend to have low yields? Then when they are redeveloped (involving a lot of money being put into the property) the yields 'reset'. The long term trend doesn't exist for an individual house because with economic and population growth, no house sits unchaged over the long term.
Alex
I do understand it, but the analogy was incorrect.
I would be building the 50 apartment building, renting them, with the bowling alley underneath, also leased, with a pay per hour parking lot underneath that I retain the recipts for. Probably rent some space to Hertz, Budget, Avis as well.
I think a Starbucks on a long lease in the corner of the building, next to the bowling alley would be rather nice as well.
I understand you - got it. It's like stocks. The whole market might be on a downward spiral but its still possible to pick a good stock. In fact it might be a better time to pick a good stock as most of the buyers have dissapeared!
edit: or alternatively the whole market might be on an upward spiral which you think is completely overvalued - but there are still good stocks around and its worth getting them while you can.
It's not really about current rental yields. All of this is forward looking. If I expect the rental yields in an area to be crap now and crap in the future then I would look for another area with better prospects. So in the context of a forward looking analysis I would choose a).
Looking forward for rental yields to 'correct' either rent has to go up (higher rent or a redevelopment that attracts more rent) OR prices have to come down. I think it will be a bit of both but I think prices dropping will be more heavily weighted. So that is why a) is much more appealing to me than c) - I'd run for the hills from c).
agree - hence I added in brackets "I should say land" ... the physical structure can change as much as you like depending on the commercial viability of doing so.
Hallelujah!!
Marc's a patient guy ...
http://business.smh.com.au/sometimes-we-hate-price-rises-too-much/20071223-1ir1.html
This fits YM to a T, I reckon.
Alex
This fits YM to a T, I reckon.
Alex
Nice article. Thanks. The scary thing is of the economists I know and have met I am more "in touch" with the real world. Try meeting an RBA economist. They think people will borrow less if they put rates up 0.25%. It's all just a mathematical model to them.
To Ross's article though ... I wouldn't say that the fact people hate losing money more than they enjoy receiving money something outside the mainstream of economics though. I think Ross is stretching the truth a bit there. It's called the utility curve and is introduced in first year. I've attached a typical curve.
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Nice article. Thanks. The scary thing is of the economists I know and have met I am more "in touch" with the real world. Try meeting an RBA economist. They think people will borrow less if they put rates up 0.25%. It's all just a mathematical model to them.
And real people simply don't think like that. The fun thing about the property market, especially the smaller residential market: it's mainly made up of owner occupiers who think like, well, humans.
Doesn't the utility curve just state that there is decreasing marginal utility as the volume increases? It doesn't relate to what Gittins is saying at all: he's saying that on an absolute level, people aren't equal in their emotional response to losing money and making money. That makes sense, if you think from the point of view of an ordinary person. See how they react to gains and losses in property and shares. All I've ever heard from people are complaints about how expensive food and petrol are, while no one ever mentions tax cuts even though they obviously increase our take home pay.
Your opinions on property, YM, suggests that you don't have a good finger on the pulse of the average aussie battler.
Alex
The utility curve applies to volume but it also applies to dollars / wealth. A normal person will go out of their way to avoid a 50/50 bet - because the pain of losing is worse than the joy of winning. It is why that story about Kerry Packer turning to the guy next to him at the gambling table - asking him what he was worth - and then saying "I'll flip you for it" is probably true. He was a long way along that utility curve so would be close to the theoretical situation where you might accept a 50/50 bet. It is a central part of financial economics - it especially underpins the theory behind reward for risk.
So I thought him presenting it as something out of the mainstream as a stretch. But the flavour of the article was fair - I'd agree with it.
I think we've drifted off topic! But it's good stuff.
