cloclo said:
Thats because everything else does the same! i.e:I nearly bought a Holden Hq in 1972 for $2000. I also bought a fibro house in Guildford NSW for 17K and a bag of chips was 15 cents. Lets see what has happened in 34 years:
1972 2006 increase
Holden HQ 1972 $2000 commodore $32000 16 times
Bag of chips 15cs more than $2.50 16.6 times
Fibro House 17K about 300K 17.6 times
My point is that my fibro house has roughly followed the trend of other items, which means that all things relative, everything , including houses should continue to increase as the cost of living creeps up.
The only difference is that the house is still standing whilst the other items have disappeared ;which made the house a terrific investment at the time!
This shows that the house has (just) managed to protect you against inflation. That's assuming your living costs are a standard CPI basket; if they include many things that have exceeded CPI then you could still have lost.
If you were to have bought the house with $17k cash and had no tenants or holding costs then you would have preserved your capital but not made you anything in real terms. Doesn't sound like much of an investment does it?
But had you borrowed to buy it, put a tenant in and had to pay the holding costs (which is the usual thing people around here do), the exact same property would have done really well, despite its apparently unspectacular growth rate.
What's transformed a mediocre investment into a good one?
Two things:
management (ie letting it out to contribute towards and eventually outstrip the holding costs) and
financing*.
Another thing I think is really important, and it's seldom mentioned in the IP books because it's accepted as part of the economic 'furniture' (except for short periods in the 1930s, c1961 and c1990) is inflation.
This is because even if our property doesn't go up, if we've got a loan for it the real value of the debt owing falls by CPI even if no principal payments have been made (IO). Assuming the house holds its value (rises by CPI on average each year) then those two things are enough for a geared property portfolio to work (especially if rents balance outgoings or eventually do so).
To me the preconditions for IP investing as we know it to work are as follows:
1. Our economy has inflation (central bankers hate deflation as much as hyperinflation and will do anything to prevent it)
2. Over the long term our IPs appreciate at the inflation rate to stay the same in real terms (higher is nice but not a neccessary condition - to get the same growth you just need to buy more IPs!)
3. Affordable IP finance is available
4. There is a continued rental and sale market
5. The concept of private property continues to be accepted
The '7-10%' average growth figure seems to have entered the common IP lore and is widely quoted.
However there is a danger that such repetition clouds other issues, such as (i) insufficient appreciation of the good and bad effects of inflation, and (ii) insufficient appreciation that geared IP investing can still work even if prices appreciate by no more than CPI in the longer term.
Peter
(*) An old API article quoted Jan Somers as saying that financing was critical to IP investment performance, and I think I now know the reason why she said that.
