should i hold or sell with loss??

[thefirstbruce]

Les, three points:

1.
you got me thinking about how much of house growth is due to CPI, so I plotted Sydney median house price growth against inflation. I had felt inflation wasn't responsible for the greater part of capital gain, rather population pressure in capital cities, competition for a scarce resource, and increasing investor activity. Indeed, the last boom saw investor activity jump from 25% to 40%.

Further if inflation was the primary driver, then you could invest in any regional town and expect similar growth to the capital cities.

The data I used shows between 1992 and 2003, inflation accounted for 2.5% of 8.1% average annual growth, that's 30%.

However, from the graph it appears the higher inflation levels of the 70s and 80s accounted for more. One might argue that the government and RBA are getting better at regulating inflation, and it is unlikely we shall see high inflation or interest rates again. If so, then we might expect inflation to continue to play a smaller role in house price growth.

So maybe the point is that if one rests on past trends, without understanding that they maybe changing, then one isn't likely to realize full potential gains.


2.
A second point regarding inflation fueled capital gain involves the relationship between interest rates and inflation. The second plot highlights that it is hypothetically a reasonable strategy to buy when the gap between interest rates and inflation is low, or even better still, negative, as was the case in the mid 70s. In such a case, inflation certainly is facilitating cash flows by eroding interest more quickly, and increasing non inflation adjusted equity.


3.
Your point about using inflation's devalued dollars to fund new IP purchases I suppose is what has created so much debate in this thread. If inflation is running at 3%pa, then after 3 years, it would deliver me a 9.3% increase in non inflation adjusted growth. And if I only need a 10% deposit for a second IP, then maybe I can be lucky enough to buy one that hasn't increased to the full extent of inflation, due to market inefficiencies. And if I was smart enough to buy positive cash flow intially, that surplus cash will have assisted in getting that 10% deposit.

So what I am alluding, is what a lot of us might attribute purely to inflation, needs to be looked at more analytically. I am sensing there are many other factors that might contribute to your snowball.

We at least need to be mindful that 2/3 of growth since 1992 has been attributable to factors other than inflation, which might explain why Bill and AD are both partially right. How much inflation, and its relationship with interest rates, contribute to growth in the future, remains to be seen.

 

[Bill.L]

Hi Bruce,

An interesting analysis, but a couple of points about the last boom and using median prices.
With using median house prices, there is always a bias as the median house today is likely to be bigger and have more features than the median house of 10-20-30 years ago. Also included in sales figures to get the median house price, are sales of houses that have been renovated/upgraded/extended. But no allowance is made for the higher cost base of these.

A big part of the last boom has been not only the lower interest rates, that have made houses more affordable, but the realization that interest rates would stay fairly low for an extended period.
This article from the RBA, shows the change in lending rates from '91 to '99 (graph 3)

http://www.rba.gov.au/PublicationsAndResearch/Bulletin/bu_apr99/bu_0499.pdf

On a 25 year loan P+I of $100,000 the monthly repayment would be $1203 with interest rates of 14%.
On a 25 year loan P+I of $100,000 the monthly repayment would be $706 at 7%.

For the same repayment as the initial $1203 per month, a person can borrow $170,300.
This is a 70.3% increase and could in itself be a large part of the recent boom.
Now if we take 70% of the rise in price out of the recent rises, we are left with not much more than 3% pa in appreciation, mostly due to inflation.

The 2 requirements I have stated that could drive the next boom are either a drop in interest rates OR a rise in inflation.

To look at the bigger picture, we would probably need to go back 35-40 years and look at when interest rates were at similar levels to now. We could then work out how much of the cap growth had been due to inflation, or other factors. Then ask ourselves how much are these "other factors" likely to contribute to cap growth in the future.
For example, can the rate of increase from single to dual household income continue into the future??

bye

 

[thefirstbruce]

Hi Bill,
Point taken about the improving quality of home.

Re median prices, I think there is a lot of room for misinterpretation of them. i.e. the ABS split established house prices and new dwelling starts in their indices.

You make an excellent point bringing it all back to DSR and lower interest rates, and and I'll mull that over.

However, would you feel as comfortable buying IPs in the bush rather than the city in 1995, based on inflation affecting a dollar the same in the bush as the city?

Personally, I don't see current fiscal and monetary policy allowing interest rates or inflation to take off. What's your take on it, and can you suggest why a govt would allow high inflation. Personally, I feel oil prices and the paradox of China's impact on the global economy has thrown too much uncertainty and fragility into things.

 

[Bill.L]

Hi Bruce,

I don't see, the current policies bringing either higher inflation, or lower interest rates(like 3% for borrowings a la Japan), hence why I would cut my losses if I owned Georges average house in average suburb. (I am trying to keep it on the topic of the thread)

Buying in the bush in 1995, depends on where. Some areas will not go up by inflation because other factors such as declining population have a larger over-riding effect. In our area, and many centres that have constant or growing population, the growth has been above 8% pa since 95. Probably related to interest rate cuts, more investors etc. The prices of even these went up by close to inflation from the 70's to the 90's though.

bye

 

[Panic]

Hi all,

Acey thanks for the flame.

Now, could you please explain your position of how inflation is not any good for the purchaser of property with borrowed funds.

If my assumption that you can pay off a loan that has stayed the same size, with deflated dollars is incorrect, please explain where, using an example.

bye

Great post,
Thanks TFB for your analyses, just want to add my 2c to the inflation CG discussion.
From past experience:

1. High inflation "eats" borrowings, i.e. in Serbia people could buy apartments at X price today with checks (money not even in a bank) and see the amount owed come close to 0 within few months - This proves Billl's point
2. High inflation makes housing unaffordable! - once the hyper inflationary process is over. Then the standard of living "buying power" is so low, that no-one can afford to buy property, causing prolonged stagnation periods.
3. CG during hyper inflation is usually proportionate to the inflation, negatively adjusted for few points. What really happens is due to hyper inflation the value of the currency erodes instantly and asset sales take place in other currencies which are stable. In real terms property goes backwards a bit. This proves Acey's point.

Thx
V

 

[thefirstbruce]

Thanks Bill. Agree with George cutting his losses if it is to be a low CG and low inflation 5 years ahead.

Re cg and inflation, one thing is for sure, and that's the ATO don't mind taxing you on the inflated dollars of CG, rather then inflation adjusted CG.

Panic, you are right. if inflation was all that was needed in PI to grow equity, we would all high tail it over to Argentina and buy up. Unfortunately, you have to have someone to rent who can keep paying the inflated dollars, and then someone who will buy the property off you for the inflated dolllar price. And as you say, anyone with money is usually dumping local assets and getting into foreign currency.

 

[Oscar]

Interesting thread.

Being a leveraged investor, I will take growth anyway it comes. Whether by CG, inflation, over valuation, whatever. In the long run you're after growth - what is the value in trying to cut it all up?

 

[thefirstbruce]

Bill have a look at this graph.

The graph shows affordability vs actual price.
Since the early 80s, the two plots have separated.

There are several explanations for variance.

1. The national median wage does not reflect that Sydney median wage may have grown quicker than the national average.

2. Affordability does not reflect the activity of investors as much as owner occupiers. Investors can use their property equity to pay more than an owner occupier.

3. Investors tend to be wealthier and older than first home buyers, so can 'afford' to pay more.

4. House affordability is eroded by personal debt on consumption. DSR refers to all debt, not just mortgage debt.

5. Affordability has been increased recently by lenders increasing DSR from 30 to 40%, and the freer availability of lo docs.

From this, I favour booms being driven by increased investor activity moreso than owner occupier affordability alone. I can't see owner occupiers being able to afford to drive prices higher. Not unless interest rates come down significantly. I can't get my head around there being high inflation in the near future. It would have to be high anyway, to drive wages up to a point where rents could be improved enough to increase property yields, or affordability could be effected significantly.

With the recent focus on self funded retirement and the higher profile of property investment in the public's mind, I believe the next few years property growth will depend more on whether investors can get better returns outside property. Owner occupiers, esp first home buyers just don't have reserve debt servicing capacity.

 

[Bill.L]

Hi Bruce,

On the graph shown, is the "house price" the median house price?? Even for established houses, many will have undergone upgrades/extensions. Taking that out of the picture will make the graphs come closer together.
If we were to look at household income, which would take into account the increased participation of women in the workforce, then the affordability graph may be steeper.

I fully agree that the increased number of investors, especially those approaching retirement have tended to raise prices/lower yields, but for how much longer will that continue, with the first of the babyboomers now 60 years old. The absolute numbers in this category may continue to grow for a while, but the rate of increase is slowing. Similar for women into the workforce.

The very changes in interest rates from the 12-13.5% in the early 80's to 7% now will also help explain the different shapes in the graphs.

From my perspective, many of the great drivers of the last few booms have run there course, if we don't get inflation (or much lower interest rates) then the next boom could be a lot further away than most would care to think.

I can also see that there is a huge possibility for a breakout in inflation, but I'm not prepared to bet the farm on it!

bye

 

[thefirstbruce]

Bill, the house prices used are established house indices for capital cities. The indices were then converted to dollar figures using three established median prices to confirm accuracy.

I take on board your point about renos, but I question how strong a factor that is. Most houses remain unrenovated. I am not sure if established homes includes townhouses, which would also pull median price down, as there has been a growing trend towards higher density development over the last 15 years.

I agree dual household income allows greater debt servicability. However, I wonder if this has been countered by the higher divorce rate and single parent dwellings. I further wonder whether the higher number of people on sickness pensions cruels household income. Though most of them I guess were on job search before. I suppose that the young aren't leaving home until 25 now also skews household income upwards.

Re the data used, the DSR30 house price was derived by multiplying median Australian wage for each year, by 30percent (DSR), then dividing by that year's nominal interest rate, then dividing by .8 (to derive a price where the buyer has contributed a 20% deposit).

median wage * 0.3 / interest rate / 0.8


Re inflation, I just can't see it happening. The only serious driver of that would be oil. However, considering most households are maxed out on debt, I think they will reign in consumption to staples, and drop discretionary. Certainly, the domestic economy is stuffed from all accounts. It is only resources and associated infrastructure that's making things look good.

Further, enterprise bargaining agreements and other initiatives I believe will hold wages back, except in resources. In addition, if inflation is allowed to run, then interest rates would have to haul it in, and that would seriously hurt everyone with high household debt- like most of Oz, even the poor first home buyer. Gee, even new property investors would cop a hiding.

So my belief is there are too many pressures against allowing inflation.
I think the RBA would be reticent to drop interest rates in the short term, due to concern about investors coming back into property.

I don;t agree with your comment about high interest rates in the 80s, as the DSR30 affordability house price is a function of wage, dsr, and interest rate. And wage and interest rate reflect inflation.

If anything, I think you might be on the mark with your comment the other day about a more competitive lending environment via low docs, 40% dsr's, 100% loans.

Gotta sleep....

 

[Ausprop]

"Certainly, the domestic economy is stuffed from all accounts. It is only resources and associated infrastructure that's making things look good."

wow that's a quick way to dismiss decades of increasing economic growth and well being. We have never had it better, why would you say the economy is stuffed? does it matter whether the food on the table is paid for by resources or high tech? (not that the IT in this country is insignificant, but there is a perception that it is). Take a country like Norway - you could say their economy is stuffed as it is just pumping oil?

 

[thefirstbruce]

"Certainly, the domestic economy is stuffed from all accounts. It is only resources and associated infrastructure that's making things look good."

wow that's a quick way to dismiss decades of increasing economic growth and well being. We have never had it better, why would you say the economy is stuffed? does it matter whether the food on the table is paid for by resources or high tech? (not that the IT in this country is insignificant, but there is a perception that it is). Take a country like Norway - you could say their economy is stuffed as it is just pumping oil?

Ausprop, you are taking a long term historical perspective, whereas I am referring to the short term outlook, as this is what will influence property prices. In support of what I say I provide the following quote regarding the latest Australian Chamber of Commerce business survey.


Steve Ryan, St.George Chief Economist, commented:
“Small business confidence moderated slightly in the June quarter. While many in small business
see the outlook in their own particular industry as flat, their outlook for the economy in general
has turned down noticeably. Higher fuel costs could be a big factor behind this, because small
business has also seen a very sharp jump in their selling prices, while their profits have
deteriorated. It is much more difficult for small business to hedge their fuel costs than medium or
large business. The outlook for small business employment is the only obvious area of strength in
the survey.”

 

[ren-A]

...and what's GeorgesA going to do now???

Well, George - you started this marathon! What have you decided to do?

 

[tigerGT]

GeorgesA since joinging this Forum has read two books on IP wealth creation etc, I have been fortunate enough to have listened to all your opinions and suggestions. I have also had a very kind forum member send me the forecasting calculator and I have used it religiously to forecast different economical situations...

As for the Economy, I dont see the strength in it.

As for my house, well thats another story... I have decided that holding is not the right thing for me.... The longer I hold the more I will loose. Many long term CTG people will disagree with me here... But I am confident in saying this as my house isnt exactly ordinary.. Its in a bad location and has all the "NOT TO DO's" in it so I will never achieve the CG that other houses in the area will sustain.

I yesterday approached a realestate agent and will be handing it over for him to sell. There is a buyer for every property and Im sure there is on for my house too. I will loose between 10 - 15k but this is nothing in the long run and how much i stand to make by selling and re investing...

I thank all of you for this continued thread which has been a educaional joyful journey to read!!!

Cheers

 

[Panic]

Hello GeorgesA,

I'm so happy to see that there are still people who think with their head. Good on you mate, bravo!

And remember, dont look back on this as a bad experience. The learning that you got from this is worth much more then the 10-15K you may lose. On top of that this proves that you will be able to distinguish good and bad deals down the road much clearly and will know when to take profits or losses.

Its all part of the process

Thx
V

 

[Kennethkohsg]

As for my house, well thats another story... I have decided that holding is not the right thing for me.... The longer I hold the more I will loose. Many long term CTG people will disagree with me here... But I am confident in saying this as my house isnt exactly ordinary.. Its in a bad location and has all the "NOT TO DO's" in it so I will never achieve the CG that other houses in the area will sustain.

I yesterday approached a realestate agent and will be handing it over for him to sell. There is a buyer for every property and Im sure there is on for my house too. I will loose between 10 - 15k but this is nothing in the long run and how much i stand to make by selling and re investing...

I thank all of you for this continued thread which has been a educaional joyful journey to read!!!

Cheers

***************************************************
Dear GeorgeSA,

1. Whatever you have decided, learn to live with its consequences. There is no "right" or "wrong" way and only you yourself will best know the truth as to what was and is indeed in your own best interests if you are prepared to honestly review your decision a few years subsequently after the Sydney property market has unfolded itself.

2. What kiind of things odo you expect to see first or/and does it take for you to "re-consider" your decision again?

3. How do you ensure that your RE agent get you the best price offer under the prevailing market condition? Have you read up all the related posts on this topic? Or if you want to need to further discuss this aspect or/and need the members' inputs to understand the process thoroughly, I think it will be good to separately start a new thread apart, from the present one.

4. I am happy and glad that you have enjoyed your learning process and have successfully adapted the members' inputs for your own decision-making.

5. Congratulations!

6. Have a happy and more profitable property investing journey ahead of you in the near future!.

regards,
Kenneth KOH

 

[alwayscurious]

A wise man will make mistakes...

And learn from them. This lesson(s) that you will learn will be invaluable.

We can't always control or affect the circumstances - but we can control our attitudes and responses to them.

I think you have a great attitude and you will go far!

Keep us posted on the result - you may end up better off than you thought!

Cheers
AC

 

[tigerGT]

twist

Hi,
As you all know I bought it for 346k and spent money on it for reno, stamp duty etc... I dont know if i mentioned it but there was another house on the same side of the street as me but closer to the housing commision that was also for sale. His house was a 2br also but it was unrenovated ( a much older person lived there). The house also had a easment down the side which you are not permitted to build over. It was also closer to the housing commision houses down the bottom of street. Now this house just sold for 295k ( thats 15% loss in last 2 years). I was so upset.

I am still going to try and sell however I dont know if i can get 335k even now. I will try though. I will wait till his SOLD sign has been removed first so that people interested in my property dont enquire about his house too.

Anyway so this is what is happening now.. If i dont sell then i will be looking at raising rent up to 230 from 215 and re drawing 20k to build a granny flat returning around $145 in the back. This should help untill i sell at a price im happy with but initially i want to try sell it first and re invest. Will keep everyone up to date.

 

[Ajax]

GeorgesA,

you said to that you are in the top tax bracket (paying tax of 50%). This would mean you were earning more than $70,000pa in 2004/5 and if in 2005/6 more than $95,000p.a. If I was in this situation I'd hold, change the loan to interest only and accept the substantial negative gearing benefits (I acknowledge you are still down each year in cashflow but eventually there'll be capital gains to outweigh this). Maybe order a Residex report on Chester Hill-see what they are predicting in capital growth/rental yield. Easier to hold with a bit of research to support your decision.

You may have to wait a few more years for the property to start performing-but you have the income to take a longer term view.


Ajax

 

[agent 86]

I will wait till his SOLD sign has been removed first so that people interested in my property dont enquire about his house too.

George,

Do yourself a favour and take an evening stroll.

After all its only an advertisement for the RE agency.

If you listed with them they sure wont be pointing out the low price sold for.

A86