This Time it's Different!

[MF35]

Bill.L,

Re your comments about Yield:
"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%."

Just wondering how this property managed to go backwards in yield so much after purchase? As I understand it at a very basic level yield is a calculation of income from the investment (rent) as a percentage of the purchase price.

So is it the case in your example that you are including holding costs (interest repayments etc) in the calculation some how? I'm no expert, just trying to work out why the yields went backwards. At a basic level over that period of time I would have though the rent on the property would have increased proportionately to the purchase price and therefore the yield would increase. I could be wrong?

MF

 

[Bill.L]

Hi all,

MF35,

The yield number is a % of the current worth of the property. On the original purchase price the yield did indeed go up, but in terms of being able to compare that property with others, you need to use the current value of the property with the current rent, and likewise for any point inbetween.

In 1981 the rent was $70 pw, purchase price $44,000 = yield 8.2% gross.

In 1990 the rent was $120 pw, value of prop $110,000 = yield 5.6% gross.

In 2005 the rent is $200 pw, value of prop $250,000 = yield 4.1% gross.

In 1981 you could get 10-11% for money in a bank account.
In 1990 you could get 15% for money in a bank account (17.5% if you wanted to invest in Pyramid )
In 2005 you can get 5.5% for money in a bank account.

bye

 

[see_change]

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!

I'm still here....

See Change

 

[markpatric]

Seems to be happening in Brisbane also, acreage properties appear to be still on the rise!.
Also Bundaberg is still selling well, can`t speak for Rocky or anywhere else.

 

[contrary]

Bill, with respect to peak to peak/ trough to trough/ cycle returns :

Logically the excess return on property above inflation should average over time to equal the % rise in average real income during this period. Or another proxy is GDP growth over this period. Which is not surprising - if house prices over long periods exceeded GDP or income growth they would no longer be affordable. Over decades it would get ridiculous.

Your point is a good one : if people consistently buy and hold then they should do well on their levered property investments over the whole cycle IF you assume the economy continues to have a surplus level of growth (usually does but not a given - eg Japan, maybe us with aging population sometime).
- I would hazard to guess that the average property buyer or investor is like the average share investor and significantly underperforms the average over the cycle. Their timing is usually bad : they buy close to peaks and sell at or soon after troughs. It is the nature of animal spirits and peoples horizons : you want to buy at the peak, at the trough you want to sell : it is no fun holding a neg geared IP for 5 years without any CG. People get disheartened by year 3-5 and like in a boom innaccurately project this into the future and sell. They then go doh a couple of years later and buy at the peak again (or thereabouts)... ah well.
- the buy and hold strategy relies on continued sustained positive GDP growth. The higher this is over the period the better. This is an important assumption if you are a dollar cost averager/ buy and hold person : your retirement and whole investment strategy hinges on this assumption so you'd better notice if the cycle is not a grower due to demographic or structural shifts and think about changing your strategy if this is not the case. It is uncommon but not unheard of for an economy to have sustained periods of negligable growth (eg Japan and Germany in the last decade). Property investors who have DCA/buy and held in these countries have been badly caned.

 

[eMark]

Hi Bill

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

GarryK

Very good point for so many reasons.

One being that the baby boomers have had the ability to 'service' their 'needs' with relative ease. They will continue to expect this in the future. Access to HEALTH related areas will be a huge drawcard.

 

[Bill.L]

Hi all,

Contrary,

I don't dispute what you say is possible, but ask, What are the odds??
To me anything is possible in the investment field and it is up to us to weigh up the risks.
With the potential for another boom 5-10-15 years down the track, compared to a Japanese type meltdown, what odds do you place on either event happening??
I'm prepared to bet that there will be at least one more boom before we get to the probability of the meltdown.

Of course you have not factored in the effect of inflation, that is very favourable to the buy and hold person who bought on leverage. What are the odds of us having higher inflation into the future??

bye

 

[MF35]

Hi all,

MF35,

The yield number is a % of the current worth of the property. On the original purchase price the yield did indeed go up, but in terms of being able to compare that property with others, you need to use the current value of the property with the current rent, and likewise for any point inbetween.

In 1981 the rent was $70 pw, purchase price $44,000 = yield 8.2% gross.

In 1990 the rent was $120 pw, value of prop $110,000 = yield 5.6% gross.

In 2005 the rent is $200 pw, value of prop $250,000 = yield 4.1% gross.

In 1981 you could get 10-11% for money in a bank account.
In 1990 you could get 15% for money in a bank account (17.5% if you wanted to invest in Pyramid )
In 2005 you can get 5.5% for money in a bank account.

bye

Thanks for the explanation Bill. So as I understand it you are actually comparing the yield here at any one time if someone was to purchase the property at that time, thus giving them that particular yield. (As you've set out above). So this shows us how attractive the property might be to an investor looking to purchase it at that time based on yield (without taking into account into CG projections etc). But doesn't actually show the real yield of the property to the person who purchased it in 1981 and held it.

The person who purchased in 1981 having paid 44k and held it now receiving $200 a week, with loan outstanding assuming IO over the period of a relatively small amount (about 40k) comared to current value (250k). So the Actual yield on this property for this person would be:
- $10 400 (rent p.a.) / $440 (1% of purchase price) = 24.64% (the actual gross yield).

So what I'd actually have in 2005 is a property yielding 24.64%, that I purchased for 44k and had increased 468% in value over the 24 years, or 19.51% p.a., with about 40k outstanding on the loan, and minus holding costs over the period.

Increase in value figures based on the maths;
250 000 - 44 000 = $206 000 (actual rise in value).
206 000 / 440 (1% of purchase price) = 468.18% (% increase over 24 years 1981 to ).
468.18 / 24 (years increase occurred over) = 19.51% (p.a. increase in value).

And when comparing this against cash at the bank, where interest earned is treated as the yield, there would be no actual increase in the underlying value of the money/asset on top of the yield. But you'd have significantly less holding costs.

Hopefully my logic and maths are correct in relation to the actual performance of this investment if it had been purchased and held over that period of time. Just trying to make sure I'm on track at a basic level at least in assessing such things. I understand there would be more calculations that would need to be done in relation to how holding costs effected everything over that period to get a more accurate representation when comparing investments.

Thanks for your help,

MF.

 

[TomL]

You would then be referring to using IRR (Internal Rate of Return) for comparing investment opportunities. Much better than using a basic yield - even better than CoC (Cash on Cash return)

I used to do this, and at a fundamental level still look at irr's loosely.


Personally I'm now subscribing to something better - speed of capital.

T.

 

[Bill.L]

Hi all,

MF35,

I don't quite agree with all your maths. Why did you use 1% as your starting amount?? At the time about a 20% deposit was required, plus you had a bank manager who had to think you were a good customer with a history at the bank.

The compound rate of growth over the period was about 7.5% pa.

If you had bought with only a small deposit, the property would have been negatively geared. Therefore you had to put in extra every year to cover the holding costs. ( This is something that is overlooked by most when comparing growth rates over time.)

In 1990 the rent of $120pw would not have covered the interest costs at the time, of the original purchase price of the house!! Even though the "value" of the house had risen 250% in that time!!!
ie purchase price $44,000 in 81, in 1990 rent $120pw = $6240 pa
house value in 1990 $110,000, interest on original $44,000 @ 17.5% =$7,700 pa.
This is why we sold the property in 1990, it did not make sense to us to hold when we could get $16,000 pa from interest at the bank. (plus we had other uses for some of the money)

bye

 

[NigelW]

Hi all,

MF35,

This is why we sold the property in 1990, it did not make sense to us to hold when we could get $16,000 pa from interest at the bank. (plus we had other uses for some of the money)

bye

That makes sense Bill. if you could lock in at these sorts of interests rates with bank a/c risk ie practically zero then it's a good proposition. I think I remember my parents doing something like that for a few years...I was still in short pants at the time

Cheers