Logic Police Thread - the really DIFFICULT questions ...

[BayView]

To be fair to YM he can't win against you - you are contradicting yourself! On one hand agreeing that prices will weaken because of interest rates rises, and then saying he should be buying now....

To say that the prices will weaken due to interest rate rises is true, although it is also a generalisation. This is the MACRO scenario. As I keep saying to YM and HG, there are plenty of areas that aren't affected by a correction.

But even if the prices weaken he would win either way and that's my point.

If he buys correctly now, he will be in the game when the rents go up (assuming the prices weaken and no investors are buying), but his property may not suffer a price weakening. This has been my experience, and that is what I have tried to tell these two. It is easily possible to keep buying property that virtually never goes backwards in price, despite what the market is doing.

And, because he is in the game now with a property that (hopefully) isn't affected by a correction, then he will have some equity to be ready to go again when there is a correction.

YM is a macro observer of the property market (to his disadvantage I believe).

If you have been following my conversations with him and HG, you will see that I keep telling them that eventhough there are generalised and macro trends in property, there is always somewhere that is booming when the trend is correcting and vice versa. It is happening right here in the USA as we speak. There is a generalised slump across the Country, but there are areas in L.A that are still booming because they are within commute of the city and still cheap (not for long).

All along I have been trying to tell these two (because of my past experience) that NOW is the time to buy if you are able to buy, but you need to do your research, select the right areas, the right property etc.

So, my point with these guys is that no matter what the Macro situation is, you can win either way if you just buy when you are able, and buy correctly.

These two are waiting for the whole world to be correct before they take the plunge. They will be waiting a long time.

 

[JIT]

And, because he is in the game now with a property that (hopefully) isn't affected by a correction, then he will have some equity to be ready to go again when there is a correction.

The really said thing is YM had one of these properties (he called it a 'piece of s**t'!), but has since sold it...

 

[BayView]

You don't embarrass me at all. You embarrass yourself more often.

With regards to property prices increasing the macro picture now is not the worst it's been in 100 years. In fact, since 2000 the macro picture has been fantastic for property prices. There has been unlimited debt thrown at anybody that is breathing to go bid up property prices.

HOWEVER, the sustainability of this macro picture for long term price growth into the future is very, very poor. This debt binge has a limit. That is my point. When it hits the macro picture will be 'bad' for property prices increasing but 'good' for me who will buy. Others around here who are die hard property supporters have actually said the same thing - they are looking froward to the buying opportunities the debt squeeze will bring.

I'll say it again for the 3rd time.

You are assuming that the price correction that you predict will affect ALL property. It won't and never has.

It won't because not everyone needs to sell, but everyone needs a home.
And it also won't because some markets perform outside the macro market as I've said and said.

The amount of houses for sale in any one week wouldn't even be 1% of the total market across the country, and the percentage of sellers in that 1% who are distressed sellers that you are looking for would be probably less than a third of those.

In theory, every house is devalued to the same as the ones that are sold cheaply during the correction, but for those who are already in the market and who don't have to refinance or sell etc, there is no effect.

 

[JIT]

Marc,

I think what you'll find is that YM will reply back saying he agrees with everything you say, but, he still disagrees because macro is connected to micro is connected to the leg bone, knee bone etc., etc...you know the rest! - and he will continue to pray to the gods that one day he might still be right, and won't look so stupid after all!

After this post, he'll probably also say I'm the one that looks stupid, not him!

 

[yieldmatters]

I'll say it again for the 3rd time.

You are assuming that the price correction that you predict will affect ALL property. It won't and never has.

It won't because not everyone needs to sell, but everyone needs a home.
And it also won't because some markets perform outside the macro market as I've said and said.

I'm listening - I get it and respect your point of view but just aren't sold on it. I think these micro markets are more connected than you think mainly because I observed all areas go up together during the period of easy credit so my instinct tells me they will go down together in the period of more difficult credit. This sounds logical to me.

I'll admit this position has softened somewhat since being on somersoft - I believe now some areas are partially insulated but only partially - I still saw that these areas all go up in price around the same time (2000 to 2006) and I believe this happened because a premium for well located property is a relative premium (i.e. relative to poorly located property). So if one drops the other will follow. That's my view anyway.

On a side note: JIT - aside from having a very condesending and annoying tone the other thing that bugs me is if I stick to my position with intensity then I am being stubborn, difficult, not seeing what is right in front of my face, not listening blah, blah, blah. If I change my position I am accused of being all over the place - not consistent blah, blah, blah. So I can't win.

 

[alexlee]

Alex's little essay on the psychology of buying:
The difference, of course, being that we already have property. So actually we're planning to buy MORE when prices come down, and they probably will. But by how much? Will it go back to price levels last seen in 2003? 2000? 1990? Who knows? Who cares?

Another difference is that because I know that property markets can also rebound without particular warning, I'm going to be realistic about my offers. That means making an offer based on recent sales, even though macro analysis suggests that prices may fall further (I don't know why Brisbane has been going up like this for the last 3 years: I genuinely thought Brisbane had peaked in 03, which was why I stopped buying there. Stupid me, but then I kept all my existing ones so I'm not crying TOO much. At least I didn't sell.)

YM, on the other hand, will be looking at the macro indicators, decide that the market still has further to fall, and lowball to the point where sellers won't accept his offers. Which is exactly what happened to him before when Brisbane took a breather.

As for me, I'm running the risk of buying in a falling market and having my purchases fall below my purchase price for a while. Maybe years. Who knows. But another boom WILL come, and that's when EVERYTHING I buy during the downtrend will go up above what I bought it for.

The difference between someone who buys like I do and someone who plans to buy like YM, is that I'll actually end up buying something while people like YM will just keep lowballing below what the seller will accept. A downtrend, ironically, will actually reinforce their bearishness, causing them to offer less and less because their bearish expectations see them move 'ahead of' (below) the market trend. In other words, a falling market will make them think 'See! I was right!' and they'll drag up more and more far-fetched reasons why property will keep falling'. Having convinced themselves that the market will keep falling, they'll keep lowballing.

The problem is, if you constantly offer below the market trend, even if the trend is falling, you STILL don't get a transaction. So when the market bounces back, you miss out on gains because even though you might have called the bust right, you still don't have any exposure to the market when it booms again.

They'll say 'I'll buy when the price is right', but what is the right price? After all, when you drill right down to the lowest level, none of our currencies actually have any value (it's backed by nothing but the govt's promise), so TECHNICALLY, a property can be worth ANYTHING, or NOTHING, in terms of dollars, since the dollars have no intrinsic value.

Me, I'm looking to the micro market and just see what everyone else is paying, and pay around that. If the market then falls further, I'll buy more. If it rises, I'll probably still buy more. Then I'll just have a big portfolio of property that rises long term.

Bottom line, buying in a falling market is actually harder than buying in a rising market, because you have the psychological stress of 'what if the price falls after I buy' when the market really is falling. To have next to no experience and expect to be able to buy when everyone else is jumping out the window is naive.

(I sincerely thank JIT, LA Aussie et al for boiling down YM's comments, since I still have him on ignore.)
Alex

 

[yieldmatters]

After all, when you drill right down to the lowest level, none of our currencies actually have any value (it's backed by nothing but the govt's promise), so TECHNICALLY, a property can be worth ANYTHING, or NOTHING, in terms of dollars, since the dollars have no intrinsic value.

What a load of nonsense. You are far more "out there" than me.

And the fact you remain involved and comment but apparantly keep me on ignore is not only strange but arrogant because it implies only you can add something to the discussion. If you are not interested then don't post on this thread.

 

[JIT]

I'm listening - I get it and respect your point of view but just aren't sold on it. I think these micro markets are more connected than you think......

Like I said Marc, he basically agrees with you, but still disagrees .

...the other thing that bugs me is if I stick to my position with intensity then I am being stubborn, difficult, not seeing what is right in front of my face, not listening blah, blah, blah. If I change my position I am accused of being all over the place - not consistent blah, blah, blah. So I can't win.

Glad I'm starting to bug YOU, because you've been bugging the heck out of almost everyone here, and this the 16th page of your thread! Though we're all partly to blame for that.

Anyway, you've got me all wrong with the above post. Didn't you read my two posts below?:

PS: YM, your case seems to be weakening each week you are posting here on SS. I now have this feeling you might be the first 'D&Ger' here to convert to a 'property bull'! You're agreeing with a lot of good points being made here, which is fine, but you often end your posts off with something like '....but you never know, I might still be right one day'! Great to watch!

AND

Just calling it as I see it mate. Not being critical, I think you're taking in the 'logic' of what's being said here and keeping a somewhat open mind and forming a more balanced and less distorted view of this property investing game.

I think you've made HUGE intellectual progress since you started posting here.

I think you have a much better understanding of how this property investing game works, and how you can make money from it in ANY market.

But, for some reason or other, when you're pushed, you keep sticking to your initial theoretical stance, even despite all the completely logical arguments that 'solve' this so-called 'macro-problem' for you.

In essence, some micro-markets may potentially 'crash', but not ALL of them, and not ALL to the same degree OR for the same duration of time.

Very simple isn't it? Your welcome .

What I've seen from you, particularly in the last few days, is a bit of confusion and inconsistency in some of your posts, and to me, I think this is a sign that you are not quite sure yourself of what your present position on this issue is and that you might be in the process of changing your stance completely, however difficult that may be for you...

Can't be easy, but good luck with it.

Let me know when you're ready to talk about the real practical property investing stuff, ie. the micro-markets!

Peace out .

 

[JIT]

What a load of nonsense. You are far more "out there" than me.

And the fact you remain involved and comment but apparantly keep me on ignore is not only strange but arrogant because it implies only you can add something to the discussion. If you are not interested then don't post on this thread.

I just posted this so Alex could see what you said !

That's funny that you had him on IGNORE all this time - YM must have thought he was having an intellectual conversation with you!

The truth must really hurt YM .

 

[s_t]

Getting off topic and more personal now....

 

[yieldmatters]

Getting off topic and more personal now....

You are absolutely right - I apologise. I was too easily sucked back into those arguments which is ironic as that is the very reason I started this thread - to get away from it. I'll ignore anything too far off topic from now on.

The purpose of this thread was to talk about the big picture logic issues with property (hence "logic police").

Specifically - the argument that "you can't lose on property - it will always rise in value". If you project that statement forward for the long term there are enormous logical problems with it. It simply can't happen. Well it can't rise beyond incomes anyway as somebody has to actually pay for the property.

So far I have had 2 main arguments: 1) Yes I agree but it is so far into the future I don't care. and 2) I operate at the micro level so it won't affect me.

If anybody else has any further input then I think this is a good topic.

 

[JIT]

(I sincerely thank JIT, LA Aussie et al for boiling down YM's comments, since I still have him on ignore.)
Alex

Your welcome, and you owe us one, seeing as we had to sift through 16 pages of this!

If anybody else has any further input then I think this is a good topic.

Any takers?! Not too far away from locking this baby up I think.

 

[alexlee]

Yes, I've managed to get through the thread faster.

To me, anyway, I think property will go up long term because of economic growth, income growth, inflation and population growth. Will the next 10 years be like the last 10? Unlikely. Historically, property has a boom, then flattens and drifts down for years, then booms again.

Which is better, time in the market or timing the market? If you manage to buy and sell at the right times, timing the market gives you better results. I, as a fairly average human, don't have the skills or judgement to do that, so I'll just have to go for time in the market instead. I believe it's folly, especially if you have no experience, to try to time the market. I believe that by buying regularly, in down or up markets, I'll end up having more property than the guy who tries to time the market, and given that I believe property trends up over the long term (with painful periods in between booms, and booms in between busts), the person who manages to hold the most property over time makes the most.

Are there intellectual arguments why property will NOT keep going up? Yes. Is one argument any better than the other? Not really, but reality seems to support my view. And ultimately, we're investors (most of us, anyway). We're not professors or academics analysing statistics and arguing them to death. We're out there buying property and renting it to people.
Alex

 

[yieldmatters]

To me, anyway, I think property will go up long term because of economic growth, income growth, inflation and population growth. Will the next 10 years be like the last 10? Unlikely. Historically, property has a boom, then flattens and drifts down for years, then booms again.

But the last 10 years growth was not based on those factors - maybe partially - but most of it was debt fueled (i.e. will be paid for in a future period). Debt isn't on your list.

 

[yieldmatters]

Any takers?! Not too far away from locking this baby up I think.

Property prices can rise beyond incomes forever ... yep ... um ... OK .... that is impossible. There is a serious problem of logic here that not many want to acknowledge.

SO yes - if you want to lock this "baby" then at best we could declare it unsolved. Nobody has come close.

 

[JIT]

Property prices can rise beyond incomes forever ... yep ... um ... OK .... that is impossible. There is a serious problem of logic here that not many want to acknowledge.

SO yes - if you want to lock this "baby" then at best we could declare it unsolved. Nobody has come close.

I would have locked it up after Alex's last post so you wouldn't get the final word ...but I'm not a Moderator, just an ordinary member, so I can't !

 

[alexlee]

Don't lock this up! I still have more ideas to share, in my arrogant, YM ignoring way!

It's actually 2 issues. A city, by definition, must be able to house its members. Not just the high-earning people, but ordinary people as well. That would SEEM to mean housing prices are tied to the pay of ordinary people. But that assumes over time ordinary people live in the same type of dwelling. Practical experience in pretty much every major city in the world suggests that as property gets more expensive, the type of property an ordinary person lives in CHANGES. So 100 years ago an ordinary person could have lived in a terrace in Paddington. Today, it's a unit 45 minutes from the city.

When I lived in Hong Kong 20+ years ago, a small unit was about 600 square feet. New buildings in Tsing Yi island built in recent years are anthills with <400 square feet apartments. So 600+ sq feet apartments have grown faster than ordinary incomes to the point where no-one on an ordinary income can afford one, so they downgrade their expectations to a 400 sq foot place. I think they're horrible, but people live in them. Why? They have no choice: if they want to buy, it'll have to be one of those.

In Japan the 'starter' cheap unit is about 25 sq meters (including bathroom and kitchenette). Not in the city, in the suburbs. I used to live in one 20 minutes walk from the station, and the station was 30 minutes from the centre of Tokyo (though Tokyo is so big it's hard to tell where the centre is).

If you built one of those in Australia, would anyone live there? No. Why? Because most people can still afford better. They wouldn't live in a 25 sqm place unless they couldn't afford anything bigger, and THAT is the key to this whole argument. When people can no longer afford one property type, it doesn't mean the price of that property type peaks. Assuming the economic and population growth is still there, it means what people define as an 'acceptable' dwelling changes. No one on Manhattan or Hong Kong or Tokyo expects to live on a quarter acre block, and in fact the expected 'normal' property size is falling in those places. I'm sure people in London would prefer a quarter acre block. Why settle for a 1 bed flat on a busy high street? Because they can't afford anything else.

I also lived in a 40 square meter place in Tokyo, a 60 square meter place in London, and now I live in a 3 bed townhouse, probably about 100+ sqm, in Sydney. Why the difference? Because I can afford to live in a bigger place in Sydney. I simply couldn't afford to live in a 3 bed townhouse in London. Much as I liked to: the price and rent had simply grown far above my salary. So what did I do? Decrease my expectations and rented a 1 1/2 bed flat.

Basically, can the price of your standard Australian 3 bed house on a quarter acre block keep rising faster than incomes? YM doesn't think so because that means at some point ordinary people can no longer afford a 3 bed house on a quarter acre block. But what if, like other major cities, ordinary people resign to the fact that they CAN'T afford a house and so live in units, and houses on quarter acre blocks become, then, only affordable by the wealthy? If you continue to have population growth and increasing numbers of wealthy (and ordinary people), this can happen.

There is a difference between ordinary people becoming unable to afford a SPECIFIC type of property (perfectly possible, and is proven in most major cities) and ordinary people not being able to afford ANY property (which isn't possible, because a city can't survive without ordinary people). Though at that point a city usually keeps expanding outwards. So while no ordinary person can afford a quarter acre block within 15 kms of Sydney's CBD like they might have a few generations ago, Sydney is also a lot bigger now.

Given that our 'standard' city dwelling is supposedly a quarter acre block within 25 km of the city or a 2 bedder within 10 km of the city (or whatever the expectation is these days), and loking at what a 'standard' dwelling is in Tokyo, New York, London and Hong Kong (to name 4 cities that I actually know fairly well), if the population and economic growth continues Australia has a LOT more growth left in it.

All of the above just explains how the price of a SPECIFIC property can keep going up long term. There will be recessions, and booms often overshoot. If you can time it perfectly, you'll do better than just buy and hold. I'm not that confident about my skills, though.
Alex

 

[JIT]

Agree Alex.

I asked this question before, will Australian cities such as Sydney and Melbourne, become like the 'Super-Cities' mentioned in this NBER (think of a bunch of Nobel Prize winning Economists) article?:

http://www.nber.org/digest/mar07/w12355.html

This is YM's reply:

It's not a macro argument though. It is about the distribution of incomes being skewed towards particular cities and particular locations that are desirable within those cities - i.e. micro. At the macro level (i.e. when you add up all cities and all incomes) then incomes still need to be connected to house prices which (as everybody is sick of hearing about) is the problem I am very interested in.

And my solution to this is that some less desirable micro-markets will 'crash' to bring the overall macro level picture back into balance.

That's it.

Not that difficult after all .

 

[BayView]

I'm listening - I get it and respect your point of view but just aren't sold on it. I think these micro markets are more connected than you think mainly because I observed all areas go up together during the period of easy credit so my instinct tells me they will go down together in the period of more difficult credit. This sounds logical to me.

O.K, let's agree that some micro markets will be affected partially for the sake of the argument.

A property costing $100k in micro market A goes up in value by 100% over 4 years (above historical trend) because of new infrastructure and amenities, employment, affordability etc.

During this time, the Macro market is plodding along with little growth after a recent boom. In the same 4 years, average growth has been only 3% per year (under historical trend).

Then, there is an interest rate spike in year 4. Everyone stops buying, no-one can sell and macro prices drop by 30%.

The micro market A property is now only worth $140k, an increase of 40% or 10% per year since purchase until the correction, while the macro market has gone backwards by 18% nett since the beginning of our 4 year study.

So, they are definitley connected Yield, but the rates are very different.

But, as I've said already, there are micro areas that won't even be affected by all this, save a massive rate rise that cuts out all but the very cashed up buyers.

This is what I/we have been trying to tell you all along. It is very do-able and only requires the research to find the area, find the right location in the area, and find the right property in that location.

Your knowledge of investing is a great hedge against loss, and/or maximising returns.

So, rather than choose to not invest because all the lights aren't green, improve the knowledge to improve the safety, and then take action. Every day is the right time to buy if you can afford it.

Prices are not going down in the long term, and they only go down for those who need to sell at the wrong time.

 

[BayView]

Don't lock this up! I still have more ideas to share, in my arrogant, YM ignoring way!

It's actually 2 issues. A city, by definition, must be able to house its members. Not just the high-earning people, but ordinary people as well. That would SEEM to mean housing prices are tied to the pay of ordinary people. But that assumes over time ordinary people live in the same type of dwelling. Practical experience in pretty much every major city in the world suggests that as property gets more expensive, the type of property an ordinary person lives in CHANGES. So 100 years ago an ordinary person could have lived in a terrace in Paddington. Today, it's a unit 45 minutes from the city.

When I lived in Hong Kong 20+ years ago, a small unit was about 600 square feet. New buildings in Tsing Yi island built in recent years are anthills with <400 square feet apartments. So 600+ sq feet apartments have grown faster than ordinary incomes to the point where no-one on an ordinary income can afford one, so they downgrade their expectations to a 400 sq foot place. I think they're horrible, but people live in them. Why? They have no choice: if they want to buy, it'll have to be one of those.

In Japan the 'starter' cheap unit is about 25 sq meters (including bathroom and kitchenette). Not in the city, in the suburbs. I used to live in one 20 minutes walk from the station, and the station was 30 minutes from the centre of Tokyo (though Tokyo is so big it's hard to tell where the centre is).

If you built one of those in Australia, would anyone live there? No. Why? Because most people can still afford better. They wouldn't live in a 25 sqm place unless they couldn't afford anything bigger, and THAT is the key to this whole argument. When people can no longer afford one property type, it doesn't mean the price of that property type peaks. Assuming the economic and population growth is still there, it means what people define as an 'acceptable' dwelling changes. No one on Manhattan or Hong Kong or Tokyo expects to live on a quarter acre block, and in fact the expected 'normal' property size is falling in those places. I'm sure people in London would prefer a quarter acre block. Why settle for a 1 bed flat on a busy high street? Because they can't afford anything else.

I also lived in a 40 square meter place in Tokyo, a 60 square meter place in London, and now I live in a 3 bed townhouse, probably about 100+ sqm, in Sydney. Why the difference? Because I can afford to live in a bigger place in Sydney. I simply couldn't afford to live in a 3 bed townhouse in London. Much as I liked to: the price and rent had simply grown far above my salary. So what did I do? Decrease my expectations and rented a 1 1/2 bed flat.

Basically, can the price of your standard Australian 3 bed house on a quarter acre block keep rising faster than incomes? YM doesn't think so because that means at some point ordinary people can no longer afford a 3 bed house on a quarter acre block. But what if, like other major cities, ordinary people resign to the fact that they CAN'T afford a house and so live in units, and houses on quarter acre blocks become, then, only affordable by the wealthy? If you continue to have population growth and increasing numbers of wealthy (and ordinary people), this can happen.

There is a difference between ordinary people becoming unable to afford a SPECIFIC type of property (perfectly possible, and is proven in most major cities) and ordinary people not being able to afford ANY property (which isn't possible, because a city can't survive without ordinary people). Though at that point a city usually keeps expanding outwards. So while no ordinary person can afford a quarter acre block within 15 kms of Sydney's CBD like they might have a few generations ago, Sydney is also a lot bigger now.

Given that our 'standard' city dwelling is supposedly a quarter acre block within 25 km of the city or a 2 bedder within 10 km of the city (or whatever the expectation is these days), and loking at what a 'standard' dwelling is in Tokyo, New York, London and Hong Kong (to name 4 cities that I actually know fairly well), if the population and economic growth continues Australia has a LOT more growth left in it.

All of the above just explains how the price of a SPECIFIC property can keep going up long term. There will be recessions, and booms often overshoot. If you can time it perfectly, you'll do better than just buy and hold. I'm not that confident about my skills, though.
Alex

You can include L.A, New York, San Fran in that scenario as well Alex.

I just had an idea;

I'm going to the dumpster now and stocking up on shoeboxes, and driving out to the Black Stump and buying a couple acres to put them all on and just gunna wait!

I might add some value by painting them or subdividing them into 2 smaller shoe boxes on the same land and add garages.

The land will have views of Ayes Rock (is that politically incorrect now to say that? I don't care anyway. I can't spell Oolaroo) and have river frontage.

Ka-ching!