This Time it's Different!

[Bill.L]

Hi all,

I started this thread to get peoples opinion on how property investment has changed. Making the assumption that the current boom is over, I have grabbed the calculator, played with a few numbers and come up with the following concerning the two latest booms.

From the peak of the boom in 1981 to the peak of the boom in 1990, our average house gained about 10.5% pa. This in a period of overall rising interest rates and inflation at about 8% pa.

From the peak of the boom in 1990 to the peak of the boom in 2004, our average house gained about 5.5% pa. This in a period of overall falling interest rates and inflation at about 3% pa.

Now the one common theme that is most noticeable to me is how the cap growth was always about 2.5% above the inflation rate, despite the totally different interest rate regimes ( but an overall lower rate today than 24 years ago).

Does this mean anything for the future??

Does this mean that if inflation remains at 1-2% over the next 8-14 years, then cap growth could only be 3-4.5% pa over the entire period (and likely concentrated in the boom at the end)???

Any thoughts??

bye

 

[Nigel Kibel]

the future

Its very hard to predict what will happen. If we look at past history the market on average has increase since federation by around 8-10% on average. There are factors at play that may change the trend. We need to look at what drives the market. Presently the economy is strong, we have record employment and plenty of money coming from the GST and company profits. The market is likely over the next few years to remain strong, especially in lifestyle type properties where the wealthier retirees are currently purchasing. For example most areas near the sea or really anything with waterviews have increased dramatically over the past few years.

The danger that lies ahead as by 2020 we will have double the number of people over the age of 65 and only around 5% of people entering the workforce compared to today. The governments answer to this is to tell us to have more children, cut taxes and allow an extra 20,000 skilled migrants per year. This will not be enough. When you consider that according to the latest CPA report the vast majority of Australians will be downsizing there lifestyle by around 69%. If this happens we will have to see a decline in the economy well before 2020. The government must provide more incentives for people to save money.

Im sure that one way or another we will work through these issues. At least the government is aware of the problem. Property like most other things is driven by demand and supply. If people have less money then there will be less supply. That will effect prices in the future. In the short term it is my view that we will see another boom perhaps not as strong as the one we have just had before the end of the decade. This time the lead may welkl come from Queensland. I think Melbourne will also improve but I would not expect to see any great growth out of Sydney for a few years. It is always hard to predict the future, lets face it how many economists ever get it right.

 

[thefirstbruce]

My parents had a stack of rental property from 1972 onwards. I used to spend saturdays mowing rental property lawn after lawn.....

I saw my parents' yields hardly move from 1989 to 1998, and when they began sequentially offloading property, I saw prices not move that much between 1990 and 2001. I also saw the share market take off in the early 90s. So I don't believe property is the be and end all of investment.

I think there are many different forces affecting what might happen to property prices in the next 10 years.
- many of the younger generation find it difficult to save a deposit.
- there is more peer pressure to have a new shiny car ($20000+), a mobile phone ($50/mth), designer clothes, multiple $3 cups of coffee, restaurants, ipods, cd collections, etc etc. consumerism today seems to a much more compelling beast. YOung people in urban environs don't seem to have the same opportunity to make fun for free. everything costs.
- many in the workforce now are not in permanent or full time work, yet the stats count them as fully employed. not being in work full time has an unnsettling psychological effect, where one might not be prepared to take on a life commitment to a mortgage.
- the increasing number of lower paid casuals must suppress the rise of rental yields. renters will look for cheaper ways to rent...more sharers in share houses rather then rent flats.
- people are getting married later, having kids later, buying houses later.
- margin loans didn't exist 10 years ago.
- people are feeling more comfortable about owning shares and being in managed funds. and they have seen many shares return 100% in 2004, while property stagnated.
- many retiring baby boomers will be asset rich and cash poor. and/or will not leave much of an inheritance for their kids, or help them get set up with their own homes.
- superannuation will take ever growing chunks of our free choice away from us. that money might have traditionally gone towards a mortgage. now it can't.
- the nature of our economy is changing. we will continue to grow as a services economy. manufacturing will decline. imports are bound to increase. there seems to be less upside for exports.


I think many will consider having a lot of capital tied up in a house with poor returns, will start looking more aggressively at alternative opportunities to get wealthy in the next 10 years. Working, and 'investing' overseas must feature heavily in that.

 

[Garry K]

Hi all,

Now the one common theme that is most noticeable to me is how the cap growth was always about 2.5% above the inflation rate, despite the totally different interest rate regimes ( but an overall lower rate today than 24 years ago).

Does this mean that if inflation remains at 1-2% over the next 8-14 years, then cap growth could only be 3-4.5% pa over the entire period (and likely concentrated in the boom at the end)???

Any thoughts??

bye

Hi Bill

That's one reason why property is often considered a more passive investment.
You buy and hold.
Results are not necessarily outstanding, but reasonably reliable.

Using you above numbers (which appear correct to me), the following scenario might evolve:

Purchase home now $300,000 and hold for 10 years.
Inflation @ 2.5% pa sees real value increase to $384,000.
Add another 2.5% pa growth (total 5%) sees value at $488,000
Assuming 5% rental - now $15,000 pa, in 10 years after adding 2.5% inflation = $19,200. But 5% return on $488,000 is $24,400.

So, even with "average (low) returns", you have gained $104,000 in capital and $5,200 in income.

Again, not outstanding, but better than doing nothing. (assuming holding costs are nuetral).

I hear the premier of NSW is saying that Sydney's infrastructure cannot support propsosed population increases.

Baby boomers from down south who thought they would caravan holiday to SEQ for months during winter will find that those fantastic sea side parks they used to visit are dissappearing, they have to book ahead and the park fees have skyrocketed. They consider moving to SEQ.

I see 2 trends:
SEQ (coastal) as becoming one big urban area.
Areas /Cities with A1 health facilities (hospitals etc) becoming valuable. Health will be the driving issue for many baby boomers.

GarryK

 

[agent 86]

Baby boomers from down south who thought they would caravan holiday to SEQ for months during winter will find that those fantastic sea side parks they used to visit are dissappearing, they have to book ahead and the park fees have skyrocketed. They consider moving to SEQ.

I see 2 trends:
SEQ (coastal) as becoming one big urban area.
Areas /Cities with A1 health facilities (hospitals etc) becoming valuable. Health will be the driving issue for many baby boomers.

GarryK

GarryK,

Probably a bit off topic from Bills original post but I couldn't agree more.
The pressure on SEQ to cope with it will be enormous.
I think of SEQ as "a Las Vegas by the sea".

Bill L,

Great post by the way.

A86

 

[WillG]

Hi all,

I started this thread to get peoples opinion on how property investment has changed. Making the assumption that the current boom is over, I have grabbed the calculator, played with a few numbers and come up with the following concerning the two latest booms.

From the peak of the boom in 1981 to the peak of the boom in 1990, our average house gained about 10.5% pa. This in a period of overall rising interest rates and inflation at about 8% pa.

From the peak of the boom in 1990 to the peak of the boom in 2004, our average house gained about 5.5% pa. This in a period of overall falling interest rates and inflation at about 3% pa.

Now the one common theme that is most noticeable to me is how the cap growth was always about 2.5% above the inflation rate, despite the totally different interest rate regimes ( but an overall lower rate today than 24 years ago).

Does this mean anything for the future??

Does this mean that if inflation remains at 1-2% over the next 8-14 years, then cap growth could only be 3-4.5% pa over the entire period (and likely concentrated in the boom at the end)???

Any thoughts??

bye

Hi Bill,

Interesting points you make. I assume your growth rates are compounded. Do you have similar calculations for buying during a 'low' and comparing against the next 'low' ?

If your scenario holds (and it may well do) then 'timing' will have a large impact on when you buy properties - You should only start buying a couple of years after a boom has cooled off.

I know people who have bought during/at 'highs' and sold during lows/mids to get their money back. A couple more years and they would have doubled their money.

I believe that the greatest asset a 'buy & hold' property investor must have is patience. It isn't difficult to know when the property cycle is high or low but it takes patience & skill to buy when nobody else is buying (often dring lows)

 

[Bill.L]

Hi all,

Thanks for the great replies so far.

For added information, the house I was talking about was a particular house that we owned, that happened to be very average. When we bought it it was a median priced house, but the same property today is well below the median value for Melbourne.

I used the peak of the booms as that is when we bought and sold. With the assumption that the current boom has ended that gives us three points, which contain two complete cycles. Also the bottom of the cycle in the mid 80's was at a higher price than the top of the boom in 81 (because of inflation, and just a less severe slowdown). The bottom of the cycle in the mid 90's had a lower price by $10-15k than the top of the boom in 90.

The yield of the property in 81 was 8.2% but interest rates were 13.5%.
The yield of the property in 90 was 5.6% but interest rates were 17.5-18%.
The yield of the property in 04 was 4.2% but interest rates were 6.5%.

Garry, I think you hit the nail on the head. Even with low inflation of 2-3% pa then by the peak of the next boom the price (if the top of the next boom was 10 years away) of this house would have increased to around $427000.
If you had a spare $100,000 to invest then the return per annum magnifies to over 10% pa on the cap growth, while having the property pay for itself (holding costs).
10% pa compound growth on $100,000 in a low inflation environment would not be a bad little earner.

This whole thread is partly in response to the assertions made in another thread that the ability of people to make money buying property now is limited.(as in like the 91 year old)

Now let's picture that inflation kicks up to 5-7% in the next few years, or we add value to the property, or we have the ability to pay off the loan....

bye

 

[NigelW]

Hi all,

Thanks for the great replies so far.

For added information, the house I was talking about was a particular house that we owned, that happened to be very average. When we bought it it was a median priced house, but the same property today is well below the median value for Melbourne.

If you had a spare $100,000 to invest then the return per annum magnifies to over 10% pa on the cap growth, while having the property pay for itself (holding costs).
10% pa compound growth on $100,000 in a low inflation environment would not be a bad little earner.

bye

That's the point isn't it Bill, how much of your 1981 dollars did you use to buy this property? Admittedly those same dollars are worth more now... but today you could buy a 400k property with about $40k...on a 95% lend

Leverage of course cuts both ways...but we aren't on the edges of our seats because there's no Mr Market

Property for max gearing and ability to value add, shares for best % returns and liquidity and sufficient cashflow to grease the wheels of growth...

Cheers
N.

 

[Apocalypse]

Median/average prices have increased by certain percentages, and inflation has done this and that, but comparisons are always tinged in grey as an "average" house for many years was 3br/1bath, maybe 10-15 squares; now is probably more likely to be 4+br/2bath/double garage etc etc - there's a lot more cash outlayed into houses now - relatively...

Whist maybe not able to say compare apples with apples, perhaps there should be acknowledgement that the apples are maybe different varieties...

Areas /Cities with A1 health facilities (hospitals etc) becoming valuable. Health will be the driving issue for many baby boomers.

Spot on. In 15 years time the sea change phenomena will invert itself and become a sick change. Start positioning in low maintenance, easy access, close to health facility properties.

 

[Patosan]

Great thread Bill,

As you say it does show that there's money to be made from IP ... duuuuh.
Even the low 1 to 2% above inflation is powerful in time, then there's the rental income and paying with future valued dollars.
They are average figures ... this is good for those who study the market, for they can use timing and time to beat these numbers easily.

People are always worried about the future prospect of this or that ... so things will be different. Well I'm not so sure.
Fears about various troubles have existed in markets for as long as time ... there's always a solution.
... even if we can't see what it could be now.

So will it be different this time ... probably not too dramatically.

 

[Aceyducey]

The sea change is largely occurring amongst families with wage earners in their 40s.

So I do not expect it to become a 'sick change' in 15 years - though nicely coined term

However the preponderance of elderly will certainly mean that there will be a LOT of money in medical and health related services and products!!!

Cheers,

Aceyducey

 

[pennyk]

However the preponderance of elderly will certainly mean that there will be a LOT of money in medical and health related services and products!!!

Having worked in the health area for many years selling both products (wheelchairs and other equipment) and services (occupational Therapy), I can say that while there SHOULD be money to be made in it, people are very reluctant to spend that money. and government funding is minimal and scattered. There are also a lot of providers and a lot of competition. So, at present, there are actually quite a lot of rehab businesses going out of business. Maybe it will improve, but it seems to me that there is just a squeeze of what people are willing to pay, and to pay for. Also, it depends WHO is paying. Often children dont want to spend too much money on their parents, cause it's coming directly out of their future inheritance. and people will shop around to get a cheaper product. Where the govt pays for services, their rates are basically so low that you are subsidising the cost of services. and they expect more than people who pay 3 or 4 times the rate expect in terms of follow up, reports etc. So, they are not worth doing business with!!

So, I wouldn't buy shares too quickly in medical supply companies - you could get burned...

Pen

 

[Aceyducey]

Penny,

But when the current crop of 50-somethings retires, I don't believe they will be skimping on their own health. And they will control the assets.

Of course, this is all opinion and supposition - we'll have to wait to see how it unfolds.

Cheers,

Aceyducey

 

[thefirstbruce]

Pennny, as a physiotherapist having worked in public hospitals, nursing homes, and private practice, I agree with you entirely.

Acey, there might be a lot of money to be made from baby boomers chasing pain relief, but my view is it will be from another snake oil potion. It won't be from legitimatized medicine, because there is no medicine to reverse senescence and death. The sooner the public realize that simple truth, the sooner we might all psychologically grow up and adopt healthier lifestyles. There is no medicine that will grant a healthier long life then keeping your arteries and your conscience clear, starting at birth.

The one business I have felt will be successful in the future is no frills funerals- a coffin made from recycled cardboard, and ashes sprinkled on a permaculture garden. I hear entry into the funeral business is getting more difficult with legislation and training and govt hurdles. Even more reason to make entry now more lucrative. Maybe I should skip the child minding centre idea and focus on the funeral thing. Now, all I need is a good entry and.......exit strategy....

 

[Aceyducey]

Acey, there might be a lot of money to be made from baby boomers chasing pain relief, but my view is it will be from another snake oil potion. It won't be from legitimatized medicine, because there is no medicine to reverse senescence and death.

hmmm - is there a problem with selling fiction?

The beauty industry does it exceptionally well.
So does the entertainment industry.

Even the science of Medicine struggles with the fact that psychological fictions make a degree of difference between some patients getting well versus others that do not. A lot of this difference arrises from attitude, drive and belief...all 'fictional' in a sense as they place a level of hope or faith in thing that may have no factual basis.

And 'legitimacy' in Medicine has become somewhat of a grey area, torn between large companies with financial interests in defining legitimacy as the output of their labs versus practitioners from very different Medical traditions, all of which have some effectiveness.

In any case there are many legitimite and tested treatments that are effective in extending life and pushing back senescence and death.

Some are technology driven, the latest cancer drugs, artificial hearts and eyes. Some are revived techniques such as acupuncture and tai chi. Others are purely psychological, pets in nursing homes, books and courses on positive attitudes and motivation.

Many of them offer profitable returns in an era of an aging population without the need to sell snake oil (even when sometimes the snake oil seems to actually make the difference).

Opportunities surround us - if you have the eyes and the attitude to see them.

Remember that it is often said that those who work in an industry are often the last to see the opportunities in it as they have become so used to the status quo.

Cheers,

Aceyducey

 

[thefirstbruce]

>hmmm - is there a problem with selling fiction?


continuing the analogy, fiction books are in the fiction section, not the non fiction section.


>The beauty industry does it exceptionally well.
>So does the entertainment industry.


I'd say it is highly likely the more successful the beauty industry, the higher the divorce rate.




>Even the science of Medicine struggles with the fact that psychological fictions make a degree of difference between some patients getting well versus others that do not. A lot of this difference arrises from attitude, drive and belief...all 'fictional' in a sense as they place a level of hope or faith in thing that may have no factual basis.


Acey, you are being selective now. Come up to one of the nursing homes I go to every week, and get a dose of non selectivity. Further, hope has scientific credibility these days, burying your head in the sand doesn't.



>And 'legitimacy' in Medicine has become somewhat of a grey area, torn between large companies with financial interests in defining legitimacy as the output of their labs versus practitioners from very different Medical traditions, all of which have some effectiveness.


Acey, there is a market for hope, a market for wishful thinking, and a market for medicine that gets results reliably. And a market to clarify which is which.



In any case there are many legitimite and tested treatments that are effective in extending life and pushing back senescence and death.

Some are technology driven, the latest cancer drugs, artificial hearts and eyes. Some are revived techniques such as acupuncture and tai chi. Others are purely psychological, pets in nursing homes, books and courses on positive attitudes and motivation.

Many of them offer profitable returns in an era of an aging population without the need to sell snake oil (even when sometimes the snake oil seems to actually make the difference).

Opportunities surround us - if you have the eyes and the attitude to see them.

Remember that it is often said that those who work in an industry are often the last to see the opportunities in it as they have become so used to the status quo.


Acey, the examples you use above are overwhlemed by examples from the counter argument. Most of us will go broke consuming placebos and snake oil, then be a burden on the state. Of course, you could always ask the tax payer to pick up the cost of acupuncture, crystal therapy, gestalt therapy, rolfing, and feel good massage daily for every oldie in a nursing home. I can tell you you'll get a statisticlly significant outcome every time, but you'll outspend GDP everytime. At the end of the day, it is a cost/benefit exercise, and for the really hard bits, like knees without cartilage, I haven't seen an alternative therapy yet that works, yet there is no shortage of good willed but naive therapists of some sort prepared to take your money. I have to spend a lot of time educating clients in basic anatomy and pathophysiology, to explain why the acupuncture or the other physio's electrotherapy machine or the homeopath remedy won't stop their knees from hurting. I have to educate them that the most successful option is to get artificial knees. But by then, they have blown the money that could have paid for the Total knee replacement.

I see the opportunities in the industry Acey, which I alluded to before- increased self responsibility for health from a young age. There are some things money can't buy Acey. A Shaolin priest or Hindu Yogi will tell you the same.

 

[Bill.L]

Hi all,

I don't see the "sick change" happening that quickly.

I know of many older /elderly people who move to where they want without the thought of medical resources nearby. The ones in our area who have made the "sick change" to the local town are often in their late 70's and have a specific ailment.

This leads me to think that the BB's in their late 40's and 50's will have another 20-30 odd years before this becomes a major force. Too far into the future for me to start thinking of investing in this.

Nigel, in 81 I think we needed either 20% or 25% as the deposit, plus legals and stamp duty. A bit hazy now, but I can remember it was high.

Apocalypse, when we bought that house a 3 bed 1 bth bv on 670 sqm block, it was the median house. A 4x2 was expensive (and out of our reach financially). If people today were to settle for the same type of house, in an average to below average suburb (which that area of Mulgrave always has been), then the howls of how hard it is now would not be heard.

It is expectations that have changed over time for both home buyers and investors, that think times are tougher and it can't be done because of the extent of this boom.

As a note of caution to the gunnas, who are gunna wait for the perfect bottom when yields improve and someone rings the bell, we were gunna do just that in the mid 90's by buying back into the same area that we had sold, but somehow our circumstances changed, our mindset changed, and before we knew it the next boom had started in ernest. Luckily we caught the wave in other areas, after another change in circumstances.

bye

 

[MarkB]

I lifted some stats from the ABS on the House Price Index (not prices), which includes data by capital city, and CPI, quarter on quarter from June 1986 to December 2004.

Some comments (based solely on what the numbers and the graph indicate):

- Over the period (1986 to 2004) Sydney and Brisbane are the two best performed markets

- Hobart appears to be the worst performed (again, over the entire period)

- Darwin slumped (86-90), surged (90-96), slumped again (96-00), and surged again (00-04)

- While Darwin surged in the early 1990's, every other capital was sluggish.


Fyi.....

Mark

 

[thefirstbruce]

sorry am having an xls graphics obsession this week

 

[Olivia]

Sea Change no more.
It is Tree Change now.

Coast to expensive.

It's all happening in the small pretty towns of NSW.

But to late, I brought them all up already and now selling. I'll sell you some if you want.

ka chiiing!