This is the crux of your whole argument YM. One single word. It has been done to death on the forum showing how it works if you manage that issue.
Cheers
Shane
No House Price Growth for 350 Years
- Thread starter Tim
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This is the crux of your whole argument YM. One single word. It has been done to death on the forum showing how it works if you manage that issue.
Cheers
Shane
I've tried too. It is just soooooo illogical.
Don't get it. If I buy a cash flow neutral property today on 100% finance, interest is not costing me anything above the rent return. In ten years time rents will have gone up with inflation but the loan balance hasn't and the property is now substantially cash flow positive. It didn't cost me anything to buy it in the first place and now it is paying me every week.
And please don't say "you can't buy property like that".
If you can't find them you're not a property investor.Don't get it. If I buy a cash flow neutral property today on 100% finance, interest is not costing me anything above the rent return. In ten years time rents will have gone up with inflation but the loan balance hasn't and the property is now substantially cash flow positive. It didn't cost me anything to buy it in the first place and now it is paying me every week.
And please don't say "you can't buy property like that".
Yes - you will make money but it is not a free ride on inflation. In your example your rental return is ABOVE your real interest rate. It is better than neutral - in an economic sense it is positive. Theoretically if nothing changed both the house price and the rent will increase with inflation so whatever yield you get now is infact a "real" yield. You only need a rental yield that is equivalent to your real interest rate to break even. e.g. 8% interest less 3% inflation = 5%.
Having said that I would want to do better than breakeven to take on the risk. But that is a different argument.
Tell me how to "manage" variable interest rates and we could make a lot of money (and we wouldn't need to buy houses to do it!)
I've tried too. It is just soooooo illogical.
noting of course that a couple of days ago you said you had come over to the dark side and agree that with negative real interest rates then leveraged investors do get a free ride?
not dissimilar to the topic of this thread - I don't care to count how many times Alexlee and myself have explained why a median priced property of today has no correlation to a median priced property of 10, 50 or 100 years ago.
Yes - absolutely correct. Negative real interest rates is a free ride. Wealth is being transferred from savers (i.e. banks) to debtors.
Hi all,
YM, you are still wrong. It is not a myth, and I proved it with a spreadsheet a while ago.
Also, if we have a period like the '70's again, then you can expect negative interest rates as 'they' go about saving the economy. Around '74 we had inflation of 15% and interest rates of only 10%.
Why do you always assume that interest rates are positive in real terms?? They were not in the '70's here, and they are getting close to negative in many parts of the world right now.
bye
YM, you are still wrong. It is not a myth, and I proved it with a spreadsheet a while ago.
Also, if we have a period like the '70's again, then you can expect negative interest rates as 'they' go about saving the economy. Around '74 we had inflation of 15% and interest rates of only 10%.
Why do you always assume that interest rates are positive in real terms?? They were not in the '70's here, and they are getting close to negative in many parts of the world right now.
bye
Negative real interest rates is a win - agreed.
In the case of regular (i.e. rational) interest rates where lenders demand compensation for inflation it is impossible to get a free lunch. Ask any economics / financial professional as I can't do any more than I have to convince you. We have done 10 rounds on this.
Ha! Yes - responsible savers are not welcome in the western world. I might have to move.
Dunno where you are going to go. China is doing the exact same thing right now - especially if you assume (quite reasonably) that the official inflation rate is somewhat underdone at the moment...
Adds a new twist to "government for the people"...
Geez, Ausprop, give me a break!!!!! I have never seen -ve real interest rates in my life and I first borrowed and started paying interest some 50 yrs ago. Nor, I'm sure, did my Dad who was born in the 19th century and survived two world wars and the Great Depression. (How long have you young twerps been studying life?)
The distinct possibility that we are about to enter such a period is, you must admit, a "black swan" event. In the post to which you refer I said I was changing my mind because of what I could see happening. What do you do what the facts in front of you change?
Interesting that in the UK official inflation (CPI=5.2%, RPI=5.0%) now exceeds the official bank rate (4.5%). The UK also had real negative interest rates for the whole of the 1970s. Free ride? How long before real negative interest rates come to Oz?
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But it is the mortgage rate that is relevant - not the RPI. The mortgage rate against CPI could be negative but I doubt it. In Australia it is positive by a healthy margin (as it should be).
When mortgage rates were regulated (pre 83 in Aus?? I don't know) then it would have been more likely.
AND you should compare the mortgage rate to the increase in wages not the cpi. The property is more likely to increase in value in line with wages (ie ability to pay) than cpi which is influenced by factors beyond our shores, such as price of oil. Australian employers may not be able to pass on such costs. This, of course, is a decreasing of living standards but who can be sure that won't happen?
Agree - wages (income) is the key factor for increasing property values over the long term. It always needs to be paid for eventually.
Not sure what it has to do with my argument against inflation as a free lunch though ...
Having said that I was a fair way off topic - thanks for bringing it back to house price growth.
Quite a bit of goalpost moving here. The original claim was with regard to real interest rates. I've always thought that was best expressed as official interest rate minus official inflation. Now it appears you mean mortgage rates minus wage inflation. Hard to keep up.
Anyway, ignoring the wage isssue I'll accept the mortgage rate argument. Even on that basis you should not assume that negative real interest rates are somehow precluded by economic theory. Rates are set by lenders and borrowers. Of course there will be times when lenders will lend at a rate lower than inflation - what else are they going to do with the dosh if they don't wish to spend it at that moment in time.
Some figures from the UK for the 1970s. There was no government control of morgages then in the UK like in Oz.
Figures are year, inflation, MORTGAGE RATE.
1973 9.2 8.5
1974 16.0 11.0
1975 24.2 11.0
1976 16.5 10.5
1977 15.8 9.5
Mortgage rates here, table A2
https://www.york.ac.uk/inst/chp/hsa/spring06/pdf&ppt/holmans06.pdf
Inflation rates here:
http://www.statistics.gov.uk/downloads/theme_economy/RP04.pdf
Who's to say it won't happen again? Free lunch on inflation?
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It is whatever you think is the most reliable way to measure increase/decrease in standard of living. That is what you base your decisions on. None of us pay official interest rates on our borrowings, and none of us can go to the supermarket and insist on paying only the official CPI increase on the price of our wheeties compared to last month.
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