Shares v Property

[Kevmeister]

multi has hit the nail on the head with this comparison. Your leverage with shares is greatly reduced compared to property. You might be able to borrow 70% LVR on shares compared to 90-95% LVR on property.

So if you have $20K you might be able to get $67K worth of shares at 70% LVR, but you could buy a $200K house at 90% LVR.

So you have $200K earning money for you instead of $67K.

But your true returns are measured against how much money you put into the deal ($20K). Even if each has the same percentage gain the increased leverage of property gives you a bigger cash-on-cash return. For example, 20% growth on shares gives you $13.4K on shares, or $40K on property.

But even then it's not that simple because you have a loan to service (in both cases) in order to get this gain, and in the case of property you had substantial buying costs to take into account to compute your cash-on-cash return. For comparative purposes you might assume that both investments are cashflow neutral. In the case of shares the dividends match the interest, and in the case of property the rental income matches the interest/expenses.

So you get something like a 67% cash-on-cash return with the shares, but a staggering 200% return with property.

But, for what it's worth, let's *never* forget that leverage works against you if the market drops. A 20% drop in your shares represents a cash-on-cash loss of 67% (ie. you've lost 2/3rd of the money you put in). A 20% drop in your property represents a 200% cash-on-cash loss (ie. you've lost double the money you put in).

 

[multi]

Oucchhhh!

Property market drops 20% !!!! How terrible!!! Can you please tell me when exactly has such a drop happenned in Australian history?

All I can remember is 5% of overall market drop early 90s, caused by 18% interest rates and abolition of negative gearing. Well, in Sydney prices dropped up to 12%, but lets not forget it grew 42% previous year.

And can you draw any parallels in the property market that resemble Anset, OneTel, HIH, Enron and dozens of smaller players that went to the wall over last years?

On the leverage - can you really expect any sizeable returns on stocks that fall under 70% margin lending?

And remember - providing you have got proper knowledge - leverage NEVER works against you in property, only in shares.
Though this is theoretically possible to get margin call on home loan - but on the other side nowadays you get many lenders who provide "evergreen" loans - i.e. ones that never get reviewed.

Sit tight, don't make sharp movements, make your repayments and you are allright. You never have to loose your night sleep with property as you do with shares.

Human mind is an interesting thing. People get scared death by one only in the whole history price drop caused by shonky economic management, but completely forget all those Black Mondays, Tuesdays, Wednesdays etc of share market.

Originally posted by Kevmeister
But, for what it's worth, let's *never* forget that leverage works against you if the market drops. A 20% drop in your shares represents a cash-on-cash loss of 67% (ie. you've lost 2/3rd of the money you put in). A 20% drop in your property represents a 200% cash-on-cash loss (ie. you've lost double the money you put in). [/B]

 

[Aceyducey]

Canberra house prices 1991-1994......

There have been other drops of more than 20% - though in a single year this is rare

Both shares & property recover from drops...however I must admit I've never seen a property go bankrupt


Both shares & property have advantages, it's not an either or decision.

Investment decisions should be governed by which asset class is giving the best return right NOW, what your risk profile is, how much do you have to invest, your goals, your knowledge and expertise and the bloke down the pub who always seems to pick it right.

Cheers,

Aceyducey

PS: Maybe not the last one.

 

[multi]

Aucey,

Did you work as financial adviser or it is that you communicating with them too much? You talk exactly as a member of this tribe who drives smelly rusty cars and teaches others how to retire at 45.

Look, I reveal one little secret. I wasted years of my life working for the sharebroker and had an access to years of trading data. Of course, I could not stand a temptation to analyse it. And my analysis has shown that the best client managed just 67% of their trades right.

To do 33% miss in property - you must be pretty much brain damaged.

I repeat - good times or not, opposite cyles or not - the basic rule is that you can not get decent leverage on the stock codes that might bring you the best return.

With property, most of the time you get 1:5 leverage, and every man and his dog would lend you 70% on property.

And do you like it or not, but in shares you have to try 5 times harder to achieve the same return as you would on property.

On the topic of Canberra - I would be pretty sure that Launceston or Burnie would have dropped even more.

Investment in Canberra is a tricky thing, pretty much speculative of what next PM would do. If you invest there, make sure that you vote against me because if I (God forbid) ever become a PM, the first thing I do will be sacking all bureaucrats in Gov departments and hiring new staff in rural towns ($20K average salary) making them work on-line (what the point of them sitting in Canberra after all?)

Then you will see "bankrupted property" for sure.

In other words, you must know for sure what you are doing before investing in areas with negative population growth (TAS,SA) or zero population growth (QLD), or in areas where economics basis is mostly artificial (ACT).

 

[Aceyducey]

Originally posted by multi
Aucey,

Did you work as financial adviser or it is that you communicating with them too much? You talk exactly as a member of this tribe who drives smelly rusty cars and teaches others how to retire at 45.

Nope, never been a financial advisor, though been a CFO on one occasion (only because no-one else would take the role - it's not my core skillset).

I've spoken to financial advisors 6 or so times in my life & not had a good impression on their abilities.

But my car is old and rusty

I find it amusing to be placed in the position of defending share investment, considering my strong property bias....but then I try to be realistic about it - go where the most lucrative investments are to be made, property is a vehicle not a lifestyle choice.

Look, I reveal one little secret. I wasted years of my life working for the sharebroker and had an access to years of trading data. Of course, I could not stand a temptation to analyse it. And my analysis has shown that the best client managed just 67% of their trades right.

What does right mean?

It's not about the % of trades you profit on, it's the level of profit you make.

I repeat - good times or not, opposite cyles or not - the basic rule is that you can not get decent leverage on the stock codes that might bring you the best return.

Leverage is not everything.

I won't buy overpriced property with low yields simply because I get better leverage.....

If the property is going to take 5-8 years to turn me a profit I'm better off putting my money elsewhere.

(that's not to say you can't still buy reasonable properties, but it's harder & there's more competition for them)

Investment in Canberra is a tricky thing, pretty much speculative of what next PM would do. If you invest there, make sure that you vote against me because if I (God forbid) ever become a PM, the first thing I do will be sacking all bureaucrats in Gov departments and hiring new staff in rural towns ($20K average salary) making them work on-line (what the point of them sitting in Canberra after all?)

Then you will see "bankrupted property" for sure.

In other words, you must know for sure what you are doing before investing in areas with negative population growth (TAS,SA) or zero population growth (QLD), or in areas where economics basis is mostly artificial (ACT).

I don't find investing in Canberra THAT tricky.....the returns have been quite good also. With over 60% of the workforce employed in private enterprise the city is no longer so affected by changes in Govt employment.

You'll be the first Prime Minister killed by a mob if you try to pay beaurocrats (or any one else) $20K per year anywhere in Australia - I hope you're not serious, cause if you are that casts a lot of doubt on the weight I should put on your views on property.

BTW QLD doesn't have neutral pop growth - but you can check that with the ABS yourself.

Cheers,

Aceyducey

 

[Kevmeister]

Originally posted by multi
Oucchhhh!

Property market drops 20% !!!! How terrible!!! Can you please tell me when exactly has such a drop happenned in Australian history?

multi, you completely missed the point I was making. I was simply pointing out that the core benefit of property over shares is somewhat due to the additional leverage you can achieve. But leverage also works against you when the market drops.

I leave it up to others to point out or debate whether there have in fact been 20% drops in the market (Acey notes some), and it is also up to the individual to decide whether they consider the prospect a likely or unlikely event.

 

[abcdiamond]

Quote by Multi:

because if I (God forbid) ever become a PM, the first thing I do will be sacking all bureaucrats in Gov departments and hiring new staff in rural towns ($20K average salary) making them work on-line (what the point of them sitting in Canberra after all?)

Are you aware that Fed Government employees get paid the same no matter where they are located ?

 

[MarkB]

Originally posted by abcdiamond
Are you aware that Fed Government employees get paid the same no matter where they are located ?

ABCD

Within each agency this may be true (ignoring for a moment any living allowances being paid).

But between agencies there are quite large discrepancies.

Each agency has its own Certified Agreement these days and some are much more generous than others.

MB

 

[always_learning]

Just my observation but it appears that most people seam to be buying/trading shares when they near or at there most expensive point, not when they are cheap! ie lots of trading at the top of a bull market and much less at the towards the bottom of a bear market.

Yes it is impossible to guess the top of a bull market or the bottom of a bear market!

 

[MarkB]

Originally posted by always_learning
Just my observation but it appears that most people seam to be buying/trading shares when they near or at there most expensive point, not when they are cheap!

AL, good point.

The observation has been made - and it is true - that when most people see a sign up in a store that says "everything 50% off", they will invariably go looking for bargains.

Yet when a similiar thing happens to the equities markets (or even just a stock) it seems that most people give them a wide berth and avoid them like the plague.

It is only when the market is booming and you have to pay a full price (or even a premium) that most jump in.

MB

 

[Aceyducey]

Originally posted by always_learning
Yes it is impossible to guess the top of a bull market or the bottom of a bear market!

Does anyone have a source for the number of retail customers in the share market for every deay over the last ten years....

I'd like to test the theory that more people enter the market when shares go up and more people leave when shares go down.

Could be very interesting

AND could be an indicator of when shares are too high or ready for a boom.

Personally though I follow the skirt length theory of stock prices - it's nicer to look at.

Cheers,

Aceyducey

 

[Bill.L]

Hi all,

I'll put my hand up and say that I buy when prices are rising, and not when they are falling. In fact I prefer my stocks to be near or at a 52 week high WHEN I purchase. This shows that there is underlying demand and the stock is likely to go higher.
Have a look at the new yearly highs section in the financial press, there are quite a few stocks that have been in that column for months.

Paul_s, I do know that Bond Corp, and Bell Resources were in the top 10 20 years ago, and 18 years ago you had Adsteam, Fai, Elders IXL etc up there in the top 10. At the begining of 1980 you had several gold stocks going ballistic and everyone just had to have them in their portfolio. Things had changed a little by the end of 1980

bye

 

[DaveP]

I just like the idea of being closer to the pulse of things by having my own properties.....
Rtaher than pay some organisation in shares only to have to pay high managers fees and the odd big payout.

On the positive side of shares it does provide you with a little more flexibility if you want to liquidate. (however the smart ones get a line of credit or similar on property if they need that)

DP

 

[multi]

Originally posted by DaveP
I just like the idea of being closer to the pulse of things by having my own properties.....
Rtaher than pay some organisation in shares only to have to pay high managers fees and the odd big payout.

On the positive side of shares it does provide you with a little more flexibility if you want to liquidate. (however the smart ones get a line of credit or similar on property if they need that)

DP

Exactly mate. I aalso have never heard that anybody could add value to their shares by painting them

Liquidity with the advent of LOCs and Lo-docs ceased to be an issue at all.

This is just perhaps human dedication to the rituals. Sort of 95:5 rule.

Media is brainwashing that you have to follow the scheme kindergarten - school- uni/colledge- work - bowling club - cemetery and 95% follow the ritual.

The remaining 5% get brainwashed by the same media that you have to invest mostly in shares/managed funds and 95% of the 5% follow what they are told.

The remaining 5% get "biased towards property", but 95% of them worship false Gods named "Negative Gearing" and "Positive Cashflow", ignoring completely the fact that there is only one true God named "Return On Investment".

People just seem to hate money! They do not like freedom! And the only reason is - they were told to by somebody who resembles an authority.

 

[PEI]

An interesting article from the Australian yesterday.

The table shows that there have been 13 periods of over the past 70 years where Australian house prices have fallen, after discounting for inflation. Several of these falls have been substantial. However the past three periods in particular have been masked by high inflation which kept nominal prices flat or rising.

The fact that sale prices are rarely discounted for any capital improvements also help conceal real falls. The figure for 1989 to 1993 is a national figure the rest are Sydney.

Period Real House price falls % Associated with recession
1934 - 35 -36 Yes
1937 - 38 -32 No
1942 - 43 -41 No
1945 - 46 -3 Yes
1947 - 48 -12 No
1951 - 53 -14 Yes
1958 - 59 -7 No
1961 - 62 -12 Yes
1965 - 66 -8 Marginal
1974 - 77 -22 Yes
1981 - 83 -15 Yes
1984 - 87 -11 No
1989 - 93 -18 Yes

At this stage it's still more likely the that the bubble deflates gently, rather than bursts. But vulnerability to rate rises is already not far short of the late 1980s levels, when rates when rates were more than 10 percentage points higher.

Back then, average household debt amounted to about 50 percentage of disposable (after tax) income. Now, debts are 130 percent of income. Although rates were much higher then borrowers had much greater capacity to absorb rises.

The one thing that stands out a lot to me here is that a lot of people argue that the prices can not fall and the circumstances are different to the rest of the time the market has fallen. Clearly points out that people are still willing to pay inflated prices and over expose themselves. Sounds very much like the forums regarding the NASDAQ before prior to the devaluation.

 

[multi]

There are many theories as to the origin and purpose of the Egyptian pyramides.

Do you know that there is special unit in Egyptian police that looks after the authors of those theories so they do not modify pyramids to suit their theories?

What is exactly the basis for discounting house prices for inflation and renovations?

Houses rarely bought for cash (From people I know only one does this paying up to $2M in cash for a property).

Inflation is known to erode your mortgage, so then if you want "real price" than mark it up for this erosion.

If you want to dicount for renovation - be consistent and mark up for tear and wear (depreciation).

And what exactly those figures are based on? Median prices?

If median price is going down, in most of the cases it means more cheaper houses sold and less expensive ones. I have seen it dozens of times - price of my property goes up, statistics report decline in median prices.

There is nothing more or less in this article that somebody with money who paid the blockhead who wrote this article was very interested of scaring off people from the property.

Aim? To push them towards sharemarket, i.e. the place where money go from low key bums to their rightful owners.

Originally posted by PEI
An interesting article from the Australian yesterday.

The table shows that there have been 13 periods of over the past 70 years where Australian house prices have fallen, after discounting for inflation. Several of these falls have been substantial. However the past three periods in particular have been masked by high inflation which kept nominal prices flat or rising.

The fact that sale prices are rarely discounted for any capital improvements also help conceal real falls. The figure for 1989 to 1993 is a national figure the rest are Sydney.

Period Real House price falls % Associated with recession
1934 - 35 -36 Yes
1937 - 38 -32 No
1942 - 43 -41 No
1945 - 46 -3 Yes
1947 - 48 -12 No
1951 - 53 -14 Yes
1958 - 59 -7 No
1961 - 62 -12 Yes
1965 - 66 -8 Marginal
1974 - 77 -22 Yes
1981 - 83 -15 Yes
1984 - 87 -11 No
1989 - 93 -18 Yes

At this stage it's still more likely the that the bubble deflates gently, rather than bursts. But vulnerability to rate rises is already not far short of the late 1980s levels, when rates when rates were more than 10 percentage points higher.

Back then, average household debt amounted to about 50 percentage of disposable (after tax) income. Now, debts are 130 percent of income. Although rates were much higher then borrowers had much greater capacity to absorb rises.

The one thing that stands out a lot to me here is that a lot of people argue that the prices can not fall and the circumstances are different to the rest of the time the market has fallen. Clearly points out that people are still willing to pay inflated prices and over expose themselves. Sounds very much like the forums regarding the NASDAQ before prior to the devaluation.

 

[Aceyducey]

Originally posted by PEI
The table shows that there have been 13 periods of over the past 70 years where Australian house prices have fallen, after discounting for inflation.

The figure for 1989 to 1993 is a national figure the rest are Sydney.

Interesting, but because most of the figures are for Sydney I don't really consider it a true reflection of what has happened.

Cheers,

Aceyducey

 

[PEI]

I agree, this article was written by the finance sector with the possible intentions of getting interest in the share market. however the article is still interesting and relevant. You had the property sector who had interests in the property market issuing the same sort of articles when it was coming of it's low point and everyone was buying shares in the 90s. That did not make them irrelevant either. You cannot have the blinkers on to one asset class. People were also shouting in the late 90s shares!, shares! property is no good. It is this very philosophy that inflates prices to the prices they are in the first place. Uneducated investors just keep buying and buying, no due diligence, just purchase on the promise that their property will double in value over the next 5 years. Not if they have paid to much for it in the first place and the market is at the peak of a boom. Most of these investors are of course getting negatively geared at the wrong time. It is these investors that will get caught out, sell first and come out with a lose. Educated investors would of have course have done their due diligence, covered themselves should interest rates incline and at this time buy properties that are showing a profit.

I'm personally sick to death of the inflated prices of the property market at the moment. I can't see how anyone can deny that the prices are presently inflated. Look at the P/E ratio/rental return. Eastern seaboard is out of control, people are buying in country areas that are just barley making a profit. These same areas probably haven't moved prior to this boom in the past 15 years. They have now increased in value, yields have gone down the very reason to purchase in these areas in the first place. People by wrong stocks, over capitalise, get greedy and buy anything when the stock market is booming and the same happens in the property cycle. When the increase in interest rates come there will unfortunately be problems for many people who have over capitalised and paid too much for their property.

I love property and will still be investing, but! carefully in positive cash flow properties and ones that show the potential to increase value through renovations. However the time will come again when negatively geared properties are a wise choice and the stock market is worth investing in.

Come on property crash. I'm waiting for the bargains.

 

[multi]

Originally posted by PEI
I'm personally sick to death of the inflated prices of the property market at the moment. I can't see how anyone can deny that the prices are presently inflated. Look at the P/E ratio/rental return. Eastern seaboard is out of control, people are buying in country areas that are just barley making a profit. These same areas probably haven't moved prior to this boom in the past 15 years.

Come on property crash. I'm waiting for the bargains.

Which property market?

Regional towns? Yes, they are GROSSLY overinflated (courtesy of "Positive Cashflow" false God worshippers). Say, in Port Augusta January this year you could buy full brick double duplex (this is 2 3bed flats on 1 title) for $18K. In May you would pay $60K for similar, now you look at $100K for the same.

Will it take long to get back to $20K? I do not think so. Should anybody buy there? Yes, if only you are mentally disabled.

Units in capital cities? You have got to have rocks in your head to see obvious oversupply of them. Yeah, we are yet to see spectacular crash in this sector. Should you buy when it is crashed? What a waste of money.

Thing is SYD and MEL are currently experiencing acute shortage of land with no new supply available. As simple as that. Combined with stable pop growth it means that property (land, houses) will increase in value NO MATTER WHAT.

You can not do worse crime to yourself than to miss your last chance to acquire last affordable land that eventually will bring you a fortune by wasting your borrowing capacity buying units or regional property for mythical "negative gearing" or "positive cashflow".

Borrowing capacity is far too precious asset you can afford to waste on mediocre investments.


Want an example?

June 2000. My friend asked if he can join me on my regular trip to buy property in one of the capital cities.

I have bought waterfront house, asking price was $290K, negotiated it down to $270K. Rent was $250 a week, or around 4.5%. My friend bought in the same suburb, but 2 ordinary houses, one for $120K and the other $130K. Combined rent was $375 a week.

All the way back (100 miles or so) he was buzzing how intelligent he is buying two cash flow positive for the price of one that will bring me clear loss. Needless to say, I did not want to hear anything about him after that.

Couple of months ago I have bumped at him and he was proud to announce that his properties valued at $210K and $215K, or $175K increase over 2 years.
He was going to use $90K he was entitled to redraw to buy 2 more houses in the same suburb.

I tried to avoid talking about mine, but without much success. I had to admit that mine is recently valued at $950K ($680K increase) and I have actually revalued it 3 times in 2 years and have bought 3 similar houses for the equity in this one.
Those 3 I revalued once and bought 3 more using equity in them.

Say at the beginning there were same money, same place, only buying decision was different.

Questions to you:

1. How much more net worth I have generated comparing to my "positive cashflow" friend?
2. Did I really have to worry about rental return?


In brief: Prices in "eastern states" are not "out of control". It is just land over there has become scarce just like waterfront land did before.

 

[OPM-addict]

My superfund just released my account information.
2.5 months after the end of the finacial year. I gained 1.2% in my fund. Up from 0.5% last year.

Bugger, I spent more on a weekend away than what I earnt all this year in super.

Is it my mistake or didn't we have a property boom.

Where my uncle.............

OPM

"Love the country, loathe the Politicans