Research Discussion Paper - Property Owners in Australia: A Snapshot

[coffee]

Came across this on the RBA site

RESEARCH DISCUSSION PAPERS
Property Owners in Australia: A Snapshot
Marion Kohler, Anthony Rossiter
May 2005

Property Owners in Australia: A Snapshot

BTW link is a PDF file

Geoff

 

[Peter Parker]

Heaps of statistical stuff that were beyond me, but some interesting points nevertheless:

* The 17 percent figure (proportion of households that own non-PPOR property) seems high until one realises that this includes holiday or second homes. I read somewhere else that a surprisingly large proportion of households own holiday homes (10%)? so this is significant.

* Claims that income determines that affordabilty to buy IPs which is not fully correct. Though income helps when applying for loans and may set a ceiling, more important are expenditure habits (which determines the number of -ve geared IPs supportable) and property yields (if these are high then more IPs can be serviced).

Most households should be able to support at least 3 IPs returning 7% gross yield, but most households with IPs only have 1 or 2. This indicates that there is a significant proportion of households with fewer IPs than they could potentially support (though it does provide a buffer for interest hikes). Though 7% yield is high by today's standards, it is not unusual over the last 5-10 years.

It would have been interesting to look at household financial habits as well as income. For instance if there is a big difference between job income and living expenses then the resultant high savings rate may indicate an 'economically productive household' (to borrow Thomas Stanley's term) with a higher propensity to invest. There may be a correlation between this and portfolio size/wealth (high income low savings % is low wealth; low income high savings % is moderate-high wealth; high income, high savings % is high-very high wealth).

* It was interesting that IP ownership peaked around 60 and declined afterwards. This is even though income-producing assets would normally be highly prized during retirement and worth keeping.

It is not clear whether this peaking is due to IP owners switching to more passive managed investments on retirement or because they had no IPs to start with. Or it could be people selling their holiday house or family home (ie nothing to do with what you or I would call an IP).

Page 18 says it's common for people to sell IPs as they get older.

* 'wealth required for downpayment is more important than income in transition from renting to home owneship'.

This is very likely true due to our low savings rate.

But the facts re the differing cost of renting vs buying largely depends on where we are in the property cycle and when people surveyed bought their PPOR. In 1997 buying was a bargain in the capital cities (low prices AND low interest rates). In 2003-4 it wasn't.

Occasionally it's cheaper to buy than rent (particuarly when rental yields exceed interest rates). At other times buying is a bit dearer but you've got equity growth and a place you can call yours. Then there's times (like now) when rental yields are far lower than interest rates and you're financially better off renting (only if you invest the surplus).

Rgds, Peter

 

[Aceyducey]

What this report demonstrated to me is that the majority of investors treat investment properties as bank savings. Effectively storing your money in a bank has been substituted with storing your money in an IP. When people need that money they sell the IP and then live off the proceeds (in retirement).

This leads me to two points:

1) The majority of property investors do not consider property investment as a business for generating wealth early in their timetime, they consider property investment as an alternate form of saving for retirement. Thus most people have not yet internalised the concept of investing as an alternative source of income and wealth generation to wage slavery.

2) The measures used to determine savings levels in Australia need to be reviewed. Australians are actually saving a lot more money than bank balances would indicate!

Cheers,

Aceyducey

 

[TheBacon]

Australians are actually saving a lot more money than bank balances would indicate!
Aceyducey

Interesting, care to elaborate?

Cheers

TheBacon

 

[Aceyducey]

Bacon,

That was in my first paragraph.

IP investing is being used by most 'investors' as a form of saving for retirement.

 

[TheBacon]

Would I be right in saying then that you would prefer to see net worth to debt ratios (possibly excluding PPOR and personal items, e.g. car) instead of savings to debt ratios?

I would think this a more realistic assessment of whether or not we are going forwards or backwards. However for MOST Australians, their only savings are in their bank accounts or super accounts.

Perhaps the lack of SAVINGS reflects the increased knowledge that ones money is better off put to use in a property, in shares or managed funds, rather than in a savings account? I am not sure to what extent increased financial awareness should contibute to a decline insavings ???

Cheers

TheBacon

 

[Les]

Expanding on TheBacon's thoughts

G'day TheBacon,

Would I be right in saying then that you would prefer to see net worth to debt ratios (possibly excluding PPOR and personal items, e.g. car) instead of savings to debt ratios?

That's an interesting point - you moved me to "chip in" here. I would've thought that the TOTAL funds would need to come into the equation somewhere.

And, using your idea of NOT including PPOR, cars, furniture, etc. then you sound like you're talking of Jan's "Nest Egg" value (i.e. your Nett Worth, MINUS what you would need to exist - home, transport, furniture, etc)

So, if we use "Nest Egg" here (rather than "Nett Worth")
e.g. If we purely use "Nest Egg/Debt" as a ratio, it doesn't include the TOTAL $$ involved. At one end, we could have a Nest Egg of $200k, but owe $160k - which gives a 1.25 ratio. (or Nest Egg Worth of $40k) Also, in reverse, an 80% LVR....

But, if we had $2.0m in IP's, but IP debt of $1.6m, then we still have a 1.25 ratio, BUT a "Nest Egg" of $400k instead of $40k.

So, somewhere along the line, we do need to consider the total amount involved. Seems to me the ratio itself is of limited value (except, perhaps, as a guideline figure - e.g. "DON'T go less than 1.25, otherwise you might be too "highly geared" kind of thing).

Regards,

 

[Brizzy Boy]

Hi Acey,
I was just wondering in regards to point #1 in your post.
The majority of property investors do not consider property investment as a business for generating wealth early in their timetime, they consider property investment as an alternate form of saving for retirement. Thus most people have not yet internalised the concept of investing as an alternative source of income and wealth generation to wage slavery.

Could it be that the majority of the property investors that were used as an example within the discussion paper started to invest in property at a later stage in life, like myself, I was nearly 45yo when I started, this does not give me the time line I require to create an alernative source of income and wealth generation so I am stuck at present as a slave to earning a wage, whilst trying to build a property portfolio to be able to sustain my proposed lifestyle needs when I retire.
This may require that I sell some of my IPs to fully payout and own others still held within my portfolio thus making them cf+, again by selling some IPs as I have mentioned would put me back into the older age group that would be selling IPs as discussed within the paper.

As I said I was just wondering, what are your thoughts?

Regards
John

 

[Aceyducey]

Brizzy,

Steve McKnight bought more than 150 properties in 3 years. Peter Spann went from checkout chick to independently wealthy in 10 years.

That's simply two high profile examples.

You started at 45yrs. What is holding you back from retiring wealthy within 10 years?

It's not the market - it must be your choices.

The paper makes it clear that the majority of people invest in their 30s and 40s - they don't start in their 60s.

Hence they have plenty of time to build wealth - yet they choose not to, instead treating property as a store of cash for retirement.

Note I'm not saying this is right or wrong, it's simply their choice.

Cheers,

Aceyducey

 

[Brizzy Boy]

Thanx Acey,
could always rely on you for a quick reply, have read both books mentioned and had just listened to Peter Spann a couple of weeks ago at BIG meeting.
Have only been investing now for about 16 months and building 3rd Ip currently, other 2 have a gross ROI of over 7% so after tax returns this % should go up. Have just worked CG out 1 Ip 31% the other 44% the 3rd being built currently showing 24%, remember that bought my first IP December 20th 2003.

So the only thing holding us back is servicability, as my wife and I are on a combined gross income of less than 80K py and still paying PPOR. This handicap will not hold us back just make things a little slower. We plan to buy another IP once the third has been completed later this year.

By reading posts on this forum a number of members and they seem to be growing are investing from a young age (my daughter 22yo and has her first IP). This is why I wondered if the subjects discussed within the paper were late starters as I am.

Kind regards
John