Living Off Equity - Change of plan after 2020?

[Ebbie]

There's been a lot of talk lately about the bleak outlook for property investors after the year 2020 as a result of reduced population growth and slowing household formation. Some experts think there may be just one more property boom left to run!

I've worked out the gross assets I need to live off equity and at the moment I'm trying to acquire half this amount before the next boom, in the expectation my properties will double in value to acheive the required gross amount.

The second part of the plan was to draw down and spend part of the new increase in equity each year (no more than 5% p.a, being a conservative capital growth figure).

But now I'm concerned I will finally acheive a multi-million dollar property portfolio before the year 2020, only to find I can't live off my equity because the anticipated 5% p.a capital growth won't be there!

Could the LOE strategy be flawed over the long term, and is anyone making alternative plans? Does anyone plan to make their money during the next boom and then exit the Real Estate market before it's too late?

 

[topcropper]

Who makes all these forecasts anyway?

If plenty of boomers are going to be so wealthy then won't they be able to live in a nice place? Won't that mean that coastal and tree change and city property in nice locations will still be worth buying? And of course some boomers won't be wealthy, because they haven't saved or blown it all on booze and the pokies so they will have to live where they can afford. So what's different to now?

I'm very confident in the economics of this resource and energy rich country. People will continue to have jobs and get ever more wealthy. They will continue to spend and save. Things will roll along as per usual.

Immigration will keep our population growing, plus all the young families around me are spitting out kids. I've got 3, and just about everyone I know has at least 3, so no population decline around here.

I'm currently geared into the resource boom, but when it's time to move on, and when property adds up for me as an investment, which it will again, it's back to property. I can't see why it will all change in 2020.

See ya's.

 

[MJK]

This would be a case for a diversified portfolio wouldn't it. There are many forms of investment...residential, commercial, managed funds, LPT's, direct shares etc... Perhaps planning with residental RE only is not flexible enough?

MJK

 

[lizzie]

i was wondering about that myself ... if the population is declining because the boomers are dropping off the twig then housing will decline. but then if the boomers are all dropping and retiring then the share market should theoretically decline as shares are being cashed in the fund lifestyle, medical expenses etc ... so exactly where does one park their money around 2020?

personally i am still going property - but concentrating on smaller housing units like townhouses in the inner circle or on the fringe of the inner but on major train routes combined with near shopping streets. i think, regardless of the future, these types of properties will always be in demand. if there is a population decline, i believe small country towns and average way-outer-ring properties will be the first to go. but this is just personal opinion.

however, by the time 2020 comes - there will be something else in the wind. i wouldn't worry to much, just refine you plan to take advantage of the projected future.

 

[mja]

There's an article about megatrends in this month's API magazine. That's probably where the year 2020 came from. Go Bernard Salt!

-- MJ.

 

[Delta]

Having all your assets in only one asset class, is probably not a good idea (but maybe I am wrong).

To me, some diversification helps me feel better and sleep like a log every night.

I agree with TopCropper - who makes these sort of forecasts and what crystal ball are they using???

 

[alexlee]

I particularly disagree with Bernard Salt's theories. He assumes that retirees will want to move out of the homes they've lived in for decades and go somewhere far away from their children, grandchildren, etc. Try telling a grandparent to buy a place that's too small (or too far away) for kids / grandkids to visit. Boomers are pretty attached to family.

Some will move far away, no doubt. Most won't, if what I'm seeing amongst my parents' generation is any guide. Most boomers would actually prefer to move into townhouses / units in their old suburb, but the fact is a brand new luxury townhouse on, say, Sydney's North Shore will be the same price as an old house on Sydney's North Shore! Given that most boomers have very little super and a lot of their net worth is tied into their homes, it doesn't make sense to sell a house for $1m and buy a $900k luxury unit since that doesn't help their retirement expenses. Getting an old person to move across the city is almost impossible.

Not all boomers will sell at the same time. Even if the first wave of sellers push the price down, the remainder will realise they can't sell for as much as they thought and keep their properties. That will give the young time to form families, and migrants to provide demand.

Who knows what my generation will do anyway? Seems that as my age group enters their late 20's and 30's a lot of my friends are having kids, and usually more than one. That lack of structure in our early 20's (while we flitted from job to job and country to country) might be contributing to a need for family. Certainly the young are demanding more space. Even if I lived alone I would want a 2 bedroom unit. I'm looking at 4+ bedrooms for my PPOR just because I'm probably going to have kids in the future, and I want my own study / office in the house.

I'm still going to be in property. If people panic and sell and push the price down, I'm going to buy more. As long as the population keeps growing (as long as the government recognises that Australia needs skilled immigration) property will keep going up.
Alex

 

[topcropper]

Having all your assets in only one asset class, is probably not a good idea (but maybe I wrong).

To me, some diversification helps me feel better and sleep like a log every night.

Diversification is probably a good idea, however when I'm living on equity I will adjust things to the economic environment.

Property trusts seem to always be a good idea. Nice yields and I think I would generally always have a place for those.

As for property and shares, I would not be afraid to be way overweight one and have none of the other. Markets aren't always rational, so why not take advantage of the irrational.

In October 1987, Bond yields were 14%, so term deposits were paying similar. Not that good really considering tax and high inflation. Average housing rental yields were 10%. Average share dividend yields were 3%. I would not have owned a solitary share in that economic environment. If I was living on equity in Oct 87, I would have a bit of cash, and mostly property. Of course one month later, after the big share crash shares were paying 6%. Still not enough considering interest rates.

The other extreme was March 2003. Bond yields were 6%, so earning interest from cash was a waste of time after tax. Average property yields were 4%, although the crazy Sydney market was paying 2.5%. Average share dividends were 6%. Add franking credits and shares were a no brainer. If I was living on equity in 2003, I would have most of the income coming from shares.

All these figures are from Shane Olivers articles.

See ya's.

 

[House_Keeper]

2020 is a long time away.

Predictions about the future are likely to change many times before we reach that date.

For me, what is important is to have a flexible plan: be able to take advantage of whatever asset class is performing at the time.

Cheers,

 

[Milan]

Even if the total population stagnates, there will still be population pressure on certain segments of the market, i.e. inner city, coastal, or perhaps close to industry. As industrial dynamics change and cluster areas develop, there will be changes in where the population pressure will be. There will still be immigration and interstate migration. The key will be to have the foresight (or perhaps research skills) to predict where these pressure areas will be.

M

 

[Ebbie]

There's an article about megatrends in this month's API magazine. That's probably where the year 2020 came from. Go Bernard Salt!

-- MJ.

Yes, the recent article in API prompted me to post this question but I'd heard it before from various sources. Bernard Salt has been saying it for a while now. In fact Michael Yardney, someone else I look up to, showed some interesting figures to back it up at his annual property update seminar. If things like immigration, household formation, population growth (or decline?) continue as predicted it's not looking too good. I do recall Michael giving his opinion that the government will be forced to change it's immigration policy before then to fix it (please correct me if I'm wrong Michael!), so the predictions were based on current trends.

In response to some of the other replies I will have approximately half of my equity invested in high income share-funds but most of the income from this source will be used to cover the holding costs, and as a buffer. I was counting on the capital growth of the property portfolio to live off - and buy a few nice toys!

 

[Bill.L]

Hi all,

Topcropper,

plus all the young families around me are spitting out kids. I've got 3, and just about everyone I know has at least 3, so no population decline around here.

You have poor TV reception in your area too!! (We also have 3 )

bye

P.S. All the talk about 14 years time, can anybody realistically/honestly tell me what the investment climate will be like by the end of next year??

 

[ram_vemula]

I do recall Michael giving his opinion that the government will be forced to change it's immigration policy before then to fix it (please correct me if I'm wrong Michael!), so the predictions were based on current trends.

The government will definitely have to step in and curb the "boomer bust" and the only answer is to encourage population increase either natural or via relaxing immigration policies. I was reading somewhere it takes 6 taxpayers to fund a pensioner, circa 2020 there will be 1 taxpayer to 1 pensioner, again this is at current trends. Judging by that alone things will have to change due to Australia's mature age average.

Just my 2c.

 

[Aceyducey]

Hell Bill,

If someone could tell me precisely what the reserve bank will do next month I'd make a killing

Investment isn't about making money, it's about managing risks through understanding probabilities.

But then - I could probably define professional gambling using the same line
(amateur gamblers don't understand the risks or probabilities clearly - hence the success of lotteries)

Cheers,

Aceyducey

 

[D.T.]

hence the success of lotteries

I've heard that lotto is a tax on those who are bad at maths...

 

[geoffw]

I've heard that lotto is a tax on those who are bad at maths...

It is- but it does give a little glimmer of hope for many, way out of proportion th their chances of winning.

 

[Delta]

A $25 million lotto win this morning

Speaking of lotteries, someone has just won $25 million:

http://www.news.com.au/story/0,10117,19692152-2,00.html

 

[Delta]

...... If someone could tell me precisely what the reserve bank will do next month I'd make a killing

Investment isn't about making money, it's about managing risks through understanding probabilities.

Aceyducey

I expect the RBA to raise the interest rate by 0.25% next month or Sept. at the latest.

http://www.fnarena.com/index2.cfm?type=dsp_newsitem&n=3CD7720E-17A4-1130-F5BE69890B6186EF


I agree with your view about investments - potential returns with underlying risks that need to be managed. I reckon many people are underestimating risks of rising interest rates at the moment but that is merely my opinion and I could be wrong.

 

[Goldminer]

I would not be too concerned

Even if the birthrate in Australia is in serious decline, there are plenty of migrants wanting to come here . My sister spent 18 months in Europe and she claims every second person is dying to come here. Many asked if she knew any way of jumping the que, others were willing to pay up to 1 million dollars to come here. Going by what you see on TV a lot of people living in India / Asia and Africa would like to come here as well. Take a look around and you will notice. Australia still has a lot of appeal to many people, im tipping our population will be up around 26 to 27 million by 2020.

 

[yadreamin]

Goldminer. There may be millions wanting to come to this great land of OZ...
But wanting to come and being allowed to come is 2 very different things.
We dont know whats gonna happen with migration but lets just say if the bird flu got a good run l would hazard a quess that migration in a lot of countries would come to a grinding halt.