I have just purchased another investment property. After all the excitement has calm down, I realized that real estate represents the majority of the my asset. Since I am in the insurance business by day job, alarm bells about risk/diversification start going off crazy in my head. So wanted to go back to the roots and examine if real estate investment is ok long term. Here is my thoughts, some feedback from you guys would be awesome
First, looking at the demand/supply side of things.The basic needs of people are Food/Clothes/Transportation/Shelter. In the old days Food/Clothes eats up most of the income, thats why housing in the 70s seem so cheap compare to income. These days food and clothing are mass produced so cheap. Even at the exotic end, someone on minimum pay ($2500 p/m) can still afford to eat at Tesuya ($500) or buy Armani suit (<$1000). Transport means cars, which can be expensive, but to get a decent usable 2nd hand car only $5000, a very good jap/korean car for $50000, plus the general social attitude of flashy_car=waste_of_money, its not going to be huge.
So after all the other 3 basic needs are satisfied, all the rest tend to go to shelter. On the demand side, its almost limitless, people will always want to live a bigger house in a better suburb (I personally hate that idea, enough is enough, but I am in the minority...). House is a "dream", there is an Australian version, an American version, Chinese and pretty much everywhere in the world! On the supply side, no one has yet to invent mass production of houses. Habitable land, cost of raw materials, huge labor effort, high capital requirement and strict government regulation combined means supply will in most cases remain steady.
Second is to do with support. "Do not let house price fall" is one of those rare goals that has the Government, Business and ordinary people are all aligned! According to ABS, 67% of people either own or owning a property, thats majority of voters. Lots of big business directly or indirectly depend on the housing market, banks, developers, retailers etc. Government wants voters and tax so falling housing market hurts. This is lead to the extraordinary incentives various governments (Oz/US/Europe) give to prop up the market after GFC. There is NO other industry that gets this much support!
Third is to do with income-generation. You can rent out property to get rent. Apart from shares/bonds/cash, there aren't many other investment assets that can generate income while having capital gains, eg. gold, antiques
Fourth is to do with leverage. I can easily and safely gear up to 95% LVR (or 1-20 leverage) in property and still sleep soundly at night. Shares would be max 80% (1-5) while dreading the margin call. Cash and bonds have no leverage.
You can probably tell by now that I am biased towards real estate investment. So my own reflection is not reliable. Please please point out my flaws
On the risk/mitigation side, I can see the following
Big property price boom - ironically this is my biggest fear, a huge boom like the sub prime breaks the supply shackle, really hurts people that rents and getting on the wrong side of government and central bank policies. To mitigate that probably sell down a few properties in times like this, but hard to tell... Ideal market would be steady growth at or a little higher than CPI
Maintenance cost: having good PM, landlord insurance, pick low maintenance property to start with
Deflation - unlikely, but thats why I try to build up a cash reserve at the same time to hedge this risk (cash is king in general anyway)
First, looking at the demand/supply side of things.The basic needs of people are Food/Clothes/Transportation/Shelter. In the old days Food/Clothes eats up most of the income, thats why housing in the 70s seem so cheap compare to income. These days food and clothing are mass produced so cheap. Even at the exotic end, someone on minimum pay ($2500 p/m) can still afford to eat at Tesuya ($500) or buy Armani suit (<$1000). Transport means cars, which can be expensive, but to get a decent usable 2nd hand car only $5000, a very good jap/korean car for $50000, plus the general social attitude of flashy_car=waste_of_money, its not going to be huge.
So after all the other 3 basic needs are satisfied, all the rest tend to go to shelter. On the demand side, its almost limitless, people will always want to live a bigger house in a better suburb (I personally hate that idea, enough is enough, but I am in the minority...). House is a "dream", there is an Australian version, an American version, Chinese and pretty much everywhere in the world! On the supply side, no one has yet to invent mass production of houses. Habitable land, cost of raw materials, huge labor effort, high capital requirement and strict government regulation combined means supply will in most cases remain steady.
Second is to do with support. "Do not let house price fall" is one of those rare goals that has the Government, Business and ordinary people are all aligned! According to ABS, 67% of people either own or owning a property, thats majority of voters. Lots of big business directly or indirectly depend on the housing market, banks, developers, retailers etc. Government wants voters and tax so falling housing market hurts. This is lead to the extraordinary incentives various governments (Oz/US/Europe) give to prop up the market after GFC. There is NO other industry that gets this much support!
Third is to do with income-generation. You can rent out property to get rent. Apart from shares/bonds/cash, there aren't many other investment assets that can generate income while having capital gains, eg. gold, antiques
Fourth is to do with leverage. I can easily and safely gear up to 95% LVR (or 1-20 leverage) in property and still sleep soundly at night. Shares would be max 80% (1-5) while dreading the margin call. Cash and bonds have no leverage.
You can probably tell by now that I am biased towards real estate investment. So my own reflection is not reliable. Please please point out my flaws
On the risk/mitigation side, I can see the following
Big property price boom - ironically this is my biggest fear, a huge boom like the sub prime breaks the supply shackle, really hurts people that rents and getting on the wrong side of government and central bank policies. To mitigate that probably sell down a few properties in times like this, but hard to tell... Ideal market would be steady growth at or a little higher than CPI
Maintenance cost: having good PM, landlord insurance, pick low maintenance property to start with
Deflation - unlikely, but thats why I try to build up a cash reserve at the same time to hedge this risk (cash is king in general anyway)