Natural limits to Capital Gains in IP

[always_learning]

From: Always Learning


I have a question about any natural limits to Capital gains.

We live in reality, we live in a capitalist society. The profits of companies have a big effect on the stock market and wages/bonuses paid to employees. Wages and stock values represent "reality", unless interest rates fall (like recent history), surely the value of even blue ribbon suburbs cannot rise beyond the reality of the market for any sustained period.

I was told by a Sydney North Shore agent, prices will probably rise 10% a year as they have done for the last 10 years ("as safe a Mosman houses"). For me such an "idea" is extremely attractive, if I buy then hold, $3M worth of property ( ignoring the problem of 4% negative cash flow $120K/year and resulting finance problems). As mentioned in a previous post at 10% growth in about 7.6 years prices mathematically should have doubled, I could sell 1/2 my now $6M portfolio and live of the other 1/2 now worth $3M. Is this foolish speculation, or is it a real option that people are using? Is it really possible for the best suburbs to appreciate significantly above the stock and wage market over the long term and grow by 10% per year over a long period? I realize that in real life there are spurts of lower and higher growth, but is the "principle" correct?

Without doubling the money in the economic system and unless wages and/or profits of companies have doubled, how could the future renters or purchasers of the hypothetical "Mosman" house get the money to buy or rent it ?

This is not a question of "is Mosman or north shore a good place to invest", but a much larger "big" picture question. The link between high demand (property in a good area) and economic engine to generate the money to buy such expensive property, IMO these two forces must be linked in some manner.


In the past 7~10 years suburbs with top capital gains have doubled or better, without a doubling of the economy is it possible to double again and again every 7 years?. Capital gains at 10% but economy growing at 3%, can it last forever?


Glenn


<table border="0" cellpadding="0" cellspacing="0" >
<tr>
<td rowspan="4">

</td>
<td colspan="2" align="center">
<p align="left"> Investment Laws</td>
</tr>
<tr>
<td align="right" >1st Law:</td>
<td>"What ever you don't invest you forfeit."</td>
</tr>
<tr>
<td align="right">2nd Law:</td>
<td>"What ever you reap is what you've sown"</td>
</tr>
<tr>
<td> </td>
<td><p align="right">Jim Rohn;</td>
</tr>
</table>

 

[see_change]

Reply: 1
From: See Change


Glen

I know someone who have bought several properties in the North sydney / Mosman area and seen their investment more than double in the last 7-10 years. ( the only unit they didn't do well on was the block on the corner of Pacific Hwy and the gore hill freeway which was built by a certain high profile syd developer ). They are holding all of these still , which are now well and truly positive geared

The principle is sound , but you can't ignore the holding costs , and if you're selling up you might have to pay something called Capital Gains Tax which tends to eat into the profits.

see change

it's better to be guided by your dreams than your fears

 

[gailh]

Reply: 1.1
From: Gail H


Yes, the holding costs are an issue in high growth areas. Plus, the amount that most mere mortals can loan simply won't permit that scale of acquisition. While the principles are basically sound, there is another sound principle to consider, and that is that markets are generally cyclical, and it is better not to buy too much at the crest of a wave.

Gail

 

[DaleGG]

Reply: 1.1.1
From: Dale Gatherum-Goss


HI Glenn!

I believe that a couple of issues come into play. The first is that the government will increase the money that flows into the system and the second is that money changes hands very quickly. That is, those that have money often quickly give it up for other "benefits" and this allows the wealthy people to grow ever wealthier.

I see no reason why the capital growth will not continue although it may slow a little.

Great question!

Dale

 

[Jacque]

Reply: 1.1.1.1
From: J Parker


NOthing to do with answering your question Glen (sorry!) but I love your dancing man!
Cheers, Jacque

 

[evensteven]

Reply: 1.1.1.1.1
From: Even Steven


Glenn
I think you are assuming that property prices are tied to wages and that they can't go up if wages don't go up. I think there is very little connection between property prices and wages. In Sydney property prices have risen much faster than wages for the last fifteen years. Same in Melbourne for the last four years. There's much more driving the demand for property than wages.

 

[WebBoard]

Reply: 1.1.1.1.1.1
From: Sergey Golovin


Keep it simply Glenn, everything doubled for the last 10 years -

Sandwich used to be $2.50 and now $5.00.
Beer on tab was $1.20 now $2.50 (RSL).
Cars, Subaru station wagon was $11,000 now $35,000.
Salaries, average, secretary was $22,000 now $44,000 (never worked as secretary, just reading the ads).
Bank fees......?
Public transport.....?
What about fuel - was ... and now?
Computers and services associated with it.
TV's, as well as video and audio equipment?
Building materials and tools?
Child care and schools?
Look at bridge tall! $3.00! Was $2.00 just last year? Does not look much but...50% increase!

Australian Post office said about 3 years ago - we would keep postage stamps at 45 cents for next 5 years. Sure, only thing they did not mentioned that all other services doubled in value for last 10 years and 45 cents deal represents only 10% of the business.

Surely they are small things but it gives clear indication what is going on.

Serge.

 

[WebBoard]

Reply: 1.1.1.1.1.1.1
From: Kevin Forster



I think there is some merit in the idea that capital gains can have a limit.

Even though looking back may give you a guide to the future but government goals can give a hint to the future.

The inflation targets of the RBA of ~3% per year means theoretically that price increases should be within that range. If it gets too high then interest rates are increased to suppress the rise and reduce the amount of money available. If there was zero inflation, property would grow to a certain level and then stop due to DSR. That's why often in times of low inflation, property is deemed to be second to shares.

Property can go backwards in value in a deflationary environment like in Japan. Therefore there is a limit to capital gain.

 

[Sim]

Reply: 2
From: Sim' Hampel


Hey Glenn, found the problem with your post which was causing your sig to end up way down the page... it's to do with you pasting the HTML into the text entry box.

WebBoard is appending a line break (<BR>) element at the end of each line (even in the middle of your table), so it's forcing everything down the page heaps. The "Convert line breaks to HTML breaks" setting does this, but turning it off will cause problems with the rest of your post.

Try deleting all the carriage returns so that it's all on one line. You should get something like this:

<HR>
<table border="0" cellpadding="0" cellspacing="0" ><tr><td rowspan="4">

</td><td colspan="2" align="center"><p align="left">Investment Laws</td></tr><tr><td align="right" >1st Law:</td><td>"What ever you don't invest you forfeit."</td></tr><tr><td align="right">2nd Law:</td><td>"What ever you reap is what you've sown"</td></tr><tr><td> </td><td><p align="right">Jim Rohn;</td></tr></table>
<HR>
As opposed to this:
<HR>
<table border="0" cellpadding="0" cellspacing="0" >
<tr>
<td rowspan="4">

</td>
<td colspan="2" align="center">
<p align="left"> Investment Laws</td>
</tr>
<tr>
<td align="right" >1st Law:</td>
<td>"What ever you don't invest you forfeit."</td>
</tr>
<tr>
<td align="right">2nd Law:</td>
<td>"What ever you reap is what you've sown"</td>
</tr>
<tr>
<td> </td>
<td><p align="right">Jim Rohn;</td>
</tr>
</table>
<HR>

Hope this helps ;-)

 

[always_learning]

Reply: 1.1.1.1.1.1.2
From: Always Learning


Well what about pensions or salaries of school teachers? have they doubled in the last 10 years? If the inflation rate is 3% per year by the law of 72 (or was it 76) it means doubling on average of all prices every 24 years. What is does inflation rate mean if it doesn't hold true in real life? what is the market "reality"

As for computers, they have not doubled, I can tell you in real and actual $ terms they have dropped in price, even allowing for natural increases in software "weight". Ten years ago when I first started work in IT company, a computer system to run high end business software cost in a productive environment (not test) at least $250K. Now I can get a mass produced Intel box for $45K which does the job.

Basically before I bet the farm on capital gains I really want to understand the true situation.

<table border="0" cellpadding="0" cellspacing="0" >
<tr>
<td rowspan="4">

</td>
<td colspan="2" align="center">
<p align="left"> Investment Laws</td>
</tr>
<tr>
<td align="right" >1st Law:</td>
<td>"What ever you don't invest you forfeit."</td>
</tr>
<tr>
<td align="right">2nd Law:</td>
<td>"What ever you reap is what you've sown"</td>
</tr>
<tr>
<td> </td>
<td><p align="right">Jim Rohn;</td>
</tr>
</table>

 

[Michael Croft]

Reply: 1.1.1.1.1.1.2.1
From: Michael Croft


Hi Glenn, you have forgotten THE MOST IMPORTANT THING IS LAND and they ain't making any more of it! Your computer analogy is a poor one as you well know if we applied that theory to cars, a rolls royce would be smaller than a pin and cost 5 cents.

Anyway look to history as it really does repeat itself. For the last 40 years property values in Australia's capital cities have risen at 8.1% p.a compound, and we are talking ALL property - good, bad and ugly. Since Federation the figure is a fraction under 8% and this includes minor events like world wars, global depressions, cold wars etc etc.

As Jeremy Laws pointed out in another post he anticipates a flat 3 to 4 years followed by more growth and my crystal ball agrees. On average over the long term I think Sydney Harbour property will do very nicely thank you - and I have my money where my mouth is ;-)

Michael Croft

 

[always_learning]

Reply: 2.1
From: Always Learning


Sim,

Thanks for the tip, I see now that that forum software appends html tags automatically.



<table border="0" cellpadding="0" cellspacing="0" >
<tr>
<td rowspan="4">

</td>
<td colspan="2" align="center">
<p align="left"> Investment Laws</td>
</tr>
<tr>
<td align="right" >1st Law:</td>
<td>"What ever you don't invest you forfeit."</td>
</tr>
<tr>
<td align="right">2nd Law:</td>
<td>"What ever you reap is what you've sown"</td>
</tr>
<tr>
<td> </td>
<td><p align="right">Jim Rohn;</td>
</tr>
</table>

 

[Michael Croft]

Reply: 2.1.1
From: Michael Croft


Just something in support of my claims and the link is not as tenuous as it first seems.

Aussies tempted by the beach
AAP
19feb02

AUSTRALIANS are increasingly opting to live in the inner city or make a sea change to coastal areas, new population figures have shown .

The Australian Bureau of Statistics' regional population growth figures found the fastest growing areas in Australia were in the inner city, with Melbourne up 10 per cent, Sydney 8.1 per cent and a 7.6 per cent increase in inner city Perth.

Professor Martin Bell, director of the Queensland centre of population research at the University of Queensland, said the trend towards inner city living was a result of a major generational change.

He said many young adults were choosing not to have children, which meant they could afford to live in the city and had no need for a backyard for children to play in.

"Less and less people are getting into child rearing," Dr Bell said.

"You've got upwards of 20 per cent of women now unlikely to have children, increasing numbers of young singles who are career-oriented and are much more attune to an inner urban lifestyle than they are to a suburban lifestyle."

Capital city growth accounted for 74 per cent of Australia's population growth in 2000-01, with almost two thirds of Australians now living in capital cities.

Capital cities grew by 1.4 per cent, or 169,700 people, in the 12 months to June 2001. The balance of the states and territories grew by 0.9 per cent.

Australians' love of the sea was evident with many coastal regions experiencing population gains.

Lake Macquarie, Wollongong, Shoalhaven and Maclean in NSW all rose along with Mornington Peninsula, Port Phillip, Bass Coast and Surf Coast in Victoria.

The Gold Coast, Maroochy and Pine Rivers grew in Queensland as well as Victor Harbour in South Australia and Broome, Bunbury and Busselton in Western Australia.

Brisbane and Darwin are Australia's fastest growing cities.

But the ABS found Sydney and Melbourne experienced the largest population growth during the year to June 2001.

A total of 55,849 extra people were living in Sydney to take its population to 4,140,820 while Melbourne's growth rose by 55,250 people to 3,521,957.

Overall, Australia's population increased by 229,500, or 1.2 per cent, to 19.4 million during the year to June 2001.

 

[Mr. Fabulous]

Reply: 2.1.1.1
From: Mark Laszczuk


Michael,
Thanks for letting me know what I am doing and thinking as a young professional. Ha, just kidding. Talking to people in my age group, the trend is indeed there regarding having kids, but it's more like "We're not ready to have kids yet (says the 25 - 30 y.o. couple), but we definitely plan to have some one day." This is what A LOT of people in the age group referred to in the study are saying, at least in my experience. People want careers/travel/lifestyle first, family later, unlike the generations before us. Feminism probably has a bit to do with it (that's a good thing, by the way ladies). And where do my partner and I stand on this issue? Well, we're not ready to have kids yet...

Mark
'no hat, some cattle'