Last tooth pulled from RBA toothless tiger

[MichaelW]

Just read the article in detail Michael linked to. Hmmmm.....so the guy is trying to compare the cap rate of property to the cap rate of stocks....

What he is overlooking is that the cap rate is based on capital one doesn't own. It is a liability, a bank loan. And property investment's advantage is its higher LVR and safe leverage cf margin loans.

Hoffman would be better to use IRR in comparing two investments.

One has to question the breadth of his reading, that he doesn't understand this.

Winston,

Agree completely. That's why I posted the link for the ABS stats and the perfect correlation to real incomes only and then stated the analysis Hoffman did from that point on was flawed for a few reasons. But, the ABS stats stand on their own and in his defence, he does invite feedback on his analysis. I was actually going to do a full formal response but then decided not to as there's only so many times you can run the same argument for other people's benefit before tiring of the exercise.

I'm sure others will have provided him informed insight...

Cheers,
Michael

 

[ugotadollar4me]

Did you see in the paper last week that the economy is looking really bad.
Did you look in the paper today the economy is booming.
Thats good its booming again hopefully it stays this way, but then I picked up another paper 5 minutes later and the economy aint doing very well again.
O crap what do we do?

I know how about we go and see what tomorrows paper says thats a good idea.


I know one thing I don't bother reading the papers to often and I hardly ever listen to anyone unless its worth listening to.

I heared someone talking about the shortage of rental properties around where I live, didn't take to much notice, but now I am buying another house so I done my own research and there is a s it load of houses for rent some taking upto 2 months to rent and there cheap (true story).
But I heared someone say there was a rental shortage in the area.
I wonder how many people he said that to and I wonder how many people repeated it.

If you ask me there is a lot of talk and just not enough of ones personal research, what ever you here on the tv came from a couple of people that probably don't know nothing about property, what ever you read in the news paper another couple of people put together to make a story, (if they couldn't make something up to put in the paper then they wouldn't get paid.


what you posted in this forum did you do your own research or did you here it from someone else and your just repeating it. Ive already worked out that answer.


I think most people are just with whats happening in the market and we here good and bad.


you know what I think

 

[WinstonWolfe]

Winston,

Agree completely. That's why I posted the link for the ABS stats and the perfect correlation to real incomes only and then stated the analysis Hoffman did from that point on was flawed for a few reasons. But, the ABS stats stand on their own and in his defence, he does invite feedback on his analysis. I was actually going to do a full formal response but then decided not to as there's only so many times you can run the same argument for other people's benefit before tiring of the exercise.

I'm sure others will have provided him informed insight...

Cheers,
Michael

I didn't catch the ABS link you are referring to. But presume it refers to the ~30% av weekly wage spent on rentals in 1901 and 2001.

The stats might be valid but the extrapolations made aren't necessarily so. for the reasons I mention in my 2nd last post relative to the pitfalls of measuring average weekly earnings.

Australia's workforce is increasingly more casualized, meaning a smaller % are employed full time. Further, women tend to seek f/t work in hard times and back off to p/t in good. people are spending more time at uni therefore don't earn a f/t wage until later in life. Many migrants and overseas students obviously swell the number of renters earning less than av. wkly earnings. Older people are being made redundant earlier. These factors, imho, are increasing the % of people who earn less than average wages.

And most likely increasing demand for cheaper rental accommodation.

Finally, the wage or labor price index would be a better measure of time changes in earnings.

 

[steveadl]

"This time it's different" they will say, as they find "evidence" to back their projections.

Not going to get into the whole house price debate, but a quick point of clarification.

House prices have been rising for the last 30-50yrs of your time frame above, so if you're saying that's coming to an end and prices won't be rising any more - wouldn't you be the one saying "this time it's different"?

 

[boz]

Here ya go then:

Property valued properly



Same as it ever was, same as it ever was...

Get it? Any "real" increase in salaries above "nominal" flows through to a similar "real" increase in rents. Rents are a key determinant of affordability as they're the yield investors consider. Assuming constant yields, property prices grow in line with rent increases. They're also the opportunity cost of not buying so impact owner occupier prices as well. So, of course, the % of income devoted to housing has increased. We earn more in "real" terms so have more disposable income which we've put into our housing. Of course, everything else is a heap cheaper so our quality of life has gone up considerably. But people still whinge about putting the same amount of money into property as they ever did. Same as it ever was...

The rest of his analysis misses the mark a bit as he doesn't allow for negative gearing deductions nor depreciating principle debts, but the ABS stats linked above speak for themselves.

Cheers,
Michael

As Michael said income spent in rent is around 30% for very long time, but what about property prices versus rent? 2001 was the last year rent where inline with property prices, here is a chart I bumped in today, it is just up to 2005, would be good to see if now in 2010 rent did catch up with it

 

[kum yin lau]

Hi, anecdotal but real numbers.

House I paid for in 98 rented @$300 pw, cost $225K
Rent today probably $450pw but there's been a big spike in higher end houses in the last few months. Property value today likely to be $600K or higher.

Fast forward to 2005. Property bought in 99 for $88K rented initially $160 pw in 2005 rent was $220 today in 2010 rent will be $280-300

House I built in 2007 originally estimated to rent @$260-280 pw rented in 2008 for $280. Now $300

There's a history of house prices catching up to rents and vice versa, rents catching up to house prices.

It's an example of inefficiences in the economy. As investors, if we spot the dichotomies, that's where we make the gain.

In Adelaide, our rents were very slow to catch up. I was worried house prices may come down.

Now there's evidence rent has spiked. We had 7 applications last week for 1 house that we put the rent up from $280 to $300.

I won't bet any money on house prices coming down fast.

KY

 

[Intrinsic_Value]

Hi, anecdotal but real numbers.

House I paid for in 98 rented @$300 pw, cost $225K
Rent today probably $450pw but there's been a big spike in higher end houses in the last few months. Property value today likely to be $600K or higher.

Fast forward to 2005. Property bought in 99 for $88K rented initially $160 pw in 2005 rent was $220 today in 2010 rent will be $280-300

House I built in 2007 originally estimated to rent @$260-280 pw rented in 2008 for $280. Now $300

There's a history of house prices catching up to rents and vice versa, rents catching up to house prices.

It's an example of inefficiences in the economy. As investors, if we spot the dichotomies, that's where we make the gain.

In Adelaide, our rents were very slow to catch up. I was worried house prices may come down.

Now there's evidence rent has spiked. We had 7 applications last week for 1 house that we put the rent up from $280 to $300.

I won't bet any money on house prices coming down fast.

KY

could the answer then lie on 'whats reasonable' rent.
How do i explain this.
If the actual rent is quite low, then whilst people might grumble, the actual rent is still very reasonable given the utilisation value of the asset. More importantly because the rent is reasonable there is alot of scope to increase future rent.

Property prices are heavily influenced by the pyschology of the market, given bullish conditions and limited supply (and the long turn around time in increasing supply) pricing can be quite elastic.

Rental prices are not so elastic. Because its an expense with no perceived future value, affordability plays a significant influence. If the rent is affordable then there is elasticity to increase future rents. But once rent becomes unafordable, then pricing becomes relatively inelastic.

So maybe the question people should be asking themselves is:
'is the rent reasonable, if i put myself in the mind of a tenant, would i be happy and comfortable to pay that rent'. Note this question requires careful interpretation. Tenants are never happy, the key is do they have the propensity to pay, and does the rent represent value against the utilisation value of the asset.

If the answer is yes, then regardless of the change in buying pyschology, your investment will be supported by the future increase in cashflow ylds (from the future increases in rent).

If the answer is no or limited, then essentially you are relying on the pyschology of crowds to support ever increasing prices for the asset (greater fool theory).

 

[boz]

could the answer then lie on 'whats reasonable' rent.
How do i explain this.
If the actual rent is quite low, then whilst people might grumble, the actual rent is still very reasonable given the utilisation value of the asset. More importantly because the rent is reasonable there is alot of scope to increase future rent.

Property prices are heavily influenced by the pyschology of the market, given bullish conditions and limited supply (and the long turn around time in increasing supply) pricing can be quite elastic.

Rental prices are not so elastic. Because its an expense with no perceived future value, affordability plays a significant influence. If the rent is affordable then there is elasticity to increase future rents. But once rent becomes unafordable, then pricing becomes relatively inelastic.

So maybe the question people should be asking themselves is:
'is the rent reasonable, if i put myself in the mind of a tenant, would i be happy and comfortable to pay that rent'. Note this question requires careful interpretation. Tenants are never happy, the key is do they have the propensity to pay, and does the rent represent value against the utilisation value of the asset.

If the answer is yes, then regardless of the change in buying pyschology, your investment will be supported by the future increase in cashflow ylds (from the future increases in rent).

If the answer is no or limited, then essentially you are relying on the pyschology of crowds to support ever increasing prices for the asset (greater fool theory).

great point,
that is probably why the OECD use average rent income to value property (as well as they do with income)