POP! goes the bubble

[Sunfish]

I still can't get my head around how property with a 3.5% net yield and a 7% holding cost can be considered "income producing".

If it has IO finance it will way over ten years before it gives a yield. After as many years as that takes you can cash out your gold and invest in a genuine investment giving a reasonable return.

The biggest plus though is that with precious metals you have the best chance of riding out the next decade of global crises and still be in the game. He who loses least, wins.

 

[Vesuprop]

What does gold do? Just sits there wasting space, and no yield, ever.

I'm fairly certain that if you lent it to some Russians you'd get a yield.

 

[hobo-jo]

You can earn interest on a Gold deposit in Vietnam, but I don't think the rate is very high. If Gold is every remonetised to any significant degree then the day may come where westerners have the opportunity to earn interest on their Gold

 

[Deltaberry]

I still can't get my head around how property with a 3.5% net yield and a 7% holding cost can be considered "income producing".

Precious metals. 0% yield, 7% holding costs (I've factored in interest rates like you have).

At the end you're banking on capital growth - nothing wrong with that. But let's not all start talking about yield and holding costs mainly made up of borrowing costs.

 

[Indifference]

Precious metals. 0% yield, 7% holding costs (I've factored in interest rates like you have).

At the end you're banking on capital growth - nothing wrong with that. But let's not all start talking about yield and holding costs mainly made up of borrowing costs.

Is this an attempt at sarcasm or are you serious?

Precious metals only have a holding cost IF you leverage.... most precious metal buyers I know do NOT leverage into physical holdings. I am also quite surprised that you have missed the reason WHY people hold metals... It is a hedge against inflation. Inflation erodes cash just like it erodes debt over the years.

And why oh why is this always a "shooting match" between PMs and IPs???? A seasoned investor holds both, because they understand the value each provides to their portfolio.....and they buy them at different times due to the cyclic nature of the markets.

For the record, the "capital growth" you refer to investors banking on in PMs, is actually DEBASEMENT of the currency and INFLATION..... fiat currency is NOT the only way to determine asset values & I suggest that it actually maligns what is really going on if you use it as the only measure.

I have zero borrowing costs for PMs and I buy them knowing that they have 0% yield and that the "capital growth" is in fact currency debasement & inflation, which is WHY I hold them.....

 

[Indifference]

I think we're in for an early 90's to mid 90's period of growth, however if someone's keen on PI and willing to do some legwork on a small area and become an expert on that area, like going to heaps of opens, looking at what sells in a flat market, how people have added value, what land is worth per sqm, what rents in their chosen area etc they could still buy under market and have some good chance of longterm growth. Buying under market value is not available in many other asset classes.

You must be joking???

Buying under value is most certainly "available" in other asset classes. How do think traders make a dollar ???? Why do you think PE ratios are published for stocks??? You can even determine if commodities are "undervalued"..... Fund managers do this daily! You can even buy currency "undervalue" & this is how FX traders make a living....

I'm really not too sure how you came to that conclusion, but it couldn't be further from the truth....

Oh, and before you say that "undervalue" and "market value" are different beasts.... When you buy an IP under "market value" it is actually the "market value" because that is what the "market" was willing to pay..... not to be confused with Vendors price expectations or a REs "opinion"....

BTW: if you believe that there has been a POP in the PMs, I'll concede that a major correction has occurred, however, look at the 200 day moving average (yes, this is how us silly PM type people look at it) & what do you see..... No POP.... no really, have a look. It is still going up.... where is the POP.... and keep watching it over the next 12 months....

 

[pieman]

You must be joking???


I'm really not too sure how you came to that conclusion, but it couldn't be further from the truth....

I'm talking about the average investor dufus. How many m + d have any idea about the slightest thing your talking about? But with property most people have an understanding about how they would invest in it

 

[redwing]

Where to from here

I recently read that the Swiss have bought billions of US Dollars and the US money market funds withdrew funding from the Euro banking system, this caused a massive selling of hard assets such as gold and silver (both priced in US $) i.e the sudden sell off was a flight to US Dollars

Where to from here though

 

[Deltaberry]

Is this an attempt at sarcasm or are you serious?

Precious metals only have a holding cost IF you leverage.... most precious metal buyers I know do NOT leverage into physical holdings. I am also quite surprised that you have missed the reason WHY people hold metals... It is a hedge against inflation. Inflation erodes cash just like it erodes debt over the years.

And why oh why is this always a "shooting match" between PMs and IPs???? A seasoned investor holds both, because they understand the value each provides to their portfolio.....and they buy them at different times due to the cyclic nature of the markets.

For the record, the "capital growth" you refer to investors banking on in PMs, is actually DEBASEMENT of the currency and INFLATION..... fiat currency is NOT the only way to determine asset values & I suggest that it actually maligns what is really going on if you use it as the only measure.

I have zero borrowing costs for PMs and I buy them knowing that they have 0% yield and that the "capital growth" is in fact currency debasement & inflation, which is WHY I hold them.....

It's not sarcasm - no need to overreact.

My point was just to illustrate how silly it is saying that IPs have 7% holding costs and PMs have nil. It's comparing apples and oranges.

Leverage is by choice. Just because most IPs are leveraged does not mean you have to leverage to buy it. My parents' portfolio consist of many unleveraged IPs - the holding costs is anything but 7%. In fact due to the fact that they're unleveraged, the rent is actually greater than the holding costs.

Re PMs, most people I know don't hold/hoard, we trade. And we trade futures with significant leverage. Different game to what you're doing. But that's because a lot of people who play PMs who I know are young (ie sub 28) and consist of ex-traders (eg Goldmans, Optivers). PMs move in cycles as all commodities. I'm not sure if it's a wise hedge against inflation. Do you think you'd really be hedging inflation buying Au at $2000/oz (if it gets there) or are you speculating? If you buy at $2000/oz and inflation is 3%, are you saying that after 10 years Au would be at least $2700/oz+? Food for thought.

 

[Indifference]

I recently read that the Swiss have bought billions of US Dollars and the US money market funds withdrew funding from the Euro banking system, this caused a massive selling of hard assets such as gold and silver (both priced in US $) i.e the sudden sell off was a flight to US Dollars

Where to from here though

Well, many traders and fund managers suffered dearly in recent weeks due to the stock market pummeling.... as they are generally highly leveraged, they had many sequential marginal calls in order to hold their positions, otherwise they would have to opt out and realize their losses. So, these people have to use the cash & liquid reserves to hold their positions. This is largely why we saw a huge metals sell off and the metals price plummet accordingly. The markets haven't recovered though....... so what now????

Well, IMO, hard decisions lay ahead. Continue liquidating cash & assets to hold positions in the vain hope of a market rebound, or realize the losses and move remaining capital to assets with more positive outlook. I think we will see some more scrambling to hold tight prior to the realization that Santa Claus is not going to appear and save the markets and pay off the huge global debts. Once the markets realize that the current debt cycle is untenable and places capital at undue risk, we will se a move to preserve capital in other assets. The metals will shoot up strongly in this phase of the cycle.

 

[Sunfish]

I'm talking about the average investor dufus. How many m + d have any idea about the slightest thing your talking about? But with property most people have an understanding about how they would invest in it

You don't sound all that sophisticated yourself.

I'm a family man and I understand such markets better than I do the RE market which makes no sense to me.

 

[pieman]

You don't sound all that sophisticated yourself.

I'm a family man and I understand such markets better than I do the RE market which makes no sense to me.

Absolutely sunfish, thick as a plank mate, my point exactly. If I can make a few bucks, I'm sure anyone can.

 

[redwing]

March 2008 Gold was at $1000.00
November 2008 Gold was at $715.00

-29%

It climbed back up again and reading some of the gold-bugs sites it seems they are prepared for the worst

 

[Shadow]

Is this an attempt at sarcasm or are you serious?

Precious metals only have a holding cost IF you leverage

Same goes for property.

Half of all owner-occupied property in Australia is unleveraged.

When making a comparison between asset classes, you need to compare them using the same leverage.

Of course, owning property (whether leveraged or not) means you don't have to pay rent, which is a big saving for most people.

On the other hand, you can't live in gold, so you still need to pay rent. You also need to pay for somewhere safe to store the gold.

 

[Aaron Sice]

Same goes for property.

Half of all owner-occupied property in Australia is unleveraged.

When making a comparison between asset classes, you need to compare them using the same leverage.

Of course, owning property (whether leveraged or not) means you don't have to pay rent, which is a big saving for most people.

On the other hand, you can't live in gold, so you still need to pay rent. You also need to pay for somewhere safe to store the gold.

exactly my point about why Aussie RE will have (HAS HAD!) a soft landing in the current crises.

on the other hand, you can't eat stocks....

 

[hobo-jo]

exactly my point about why Aussie RE will have (HAS HAD!) a soft landing in the current crises

Would you say we are at or have passed the epicentre of the current sovereign debt crisis? If not, then you would agree its too early to confirm a soft landing in property?

 

[Aaron Sice]

Would you say we are at or have passed the epicentre of the current sovereign debt crisis? If not, then you would agree its too early to confirm a soft landing in property?

it depends what you're measuring the soft landing against, and who wears the brunt.

i mean, if everyone leveraged were to falter, it would appear that those hardest hit would be a sliding scale from 10% lvr up to 110% lvr.

however, if half the mortgages in oz are unencumbered, it appears that at least half the market's participants are safe.

so even if house prices tank, half the "house owning population" will be little affected.

well, it would have been until NAB started selling CDOs.

but to answer our question, no i definitely dont think we are anywhere near being over the debt crisis. in fact, i think the real sh_t is about to hit the fan.

 

[Aaron Sice]

....and to further clarify, i take a more humanist approach when it comes to houses.

i worry about what happens to those that default and how the act of default affects the economy, not just the price of houses.

cheers.

ps i owe you an update!

 

[hobo-jo]

however, if half the mortgages in oz are unencumbered, it appears that at least half the market's participants are safe.

Right, but it's not those sitting on the unencumbered PPORs with no intention of selling that will be setting the market price for property, it will be the changeover price between the current buyers and sellers.

ps i owe you an update!

Indeed! I have been meaning to follow up

 

[Indifference]

however, if half the mortgages in oz are unencumbered, it appears that at least half the market's participants are safe.

so even if house prices tank, half the "house owning population" will be little affected.

well, it would have been until NAB started selling CDOs.

Aaron, could you please explain what you mean by this? My feeble intellect is struggling to comprehend an "unencumbered mortgage".... these things are by definition mutually exclusive.... well, at least I thought they were.

Anyone with a mortgaged property will be affected. Only those who own property outright, Ie. unencumbered, will be safe as long as they ride out the financial storm. Did you perhaps mean "half the properties in oz are unencumbered...." ?