Wanted: experienced property investors!

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From: Liz Skinner


Hello all...
Being a 23 year old physio beginning to pay off first home and very very interested in investing in property for the long term, I am very excited about the prospect and beginning to pay off non-deductible debt etc etc and doing all the right things, but all my friends love shares! I think they are okay in their place, but i have heard all the common arguments as to why i should not invest in property. I know that most of them are myth/not exactly true, but there are some that concern me (even though i remain steadfast in my support of property as an investment). I wonder if i can draw on the experience of many years and ask the stars of the forum and property investment world (you all know who you are - The Wife, Sim, Rolf etc etc to name but a few) to put these questions to you all so that next time my friends ask i know what to say...
I also find it hard to source answers to questions like these:
1. What about the declining growth of the population with the average woman only having 1.6 children? What effect will this have on property demand in the long term?
2. The prices of property in the long term cannot keep going up because people cannot afford to service the debt (i.e. house prices in melbourne for example will not continue to increase even in blue-chip growth areas because people won't be able to afford to buy properties). I.e. if property grows as it has done in the past (theoretical doubling every seven to ten years - in case you have not realised along an exponential scale and we are reaching the end of the exponential curve), in about twenty or thirty years melbourne house prices(or even in just good growth areas) will be astronomical for the average worker, even if wage rises increase with inflation.
3. House prices drop and there is no guarantee that house prices will keep going up
4. WHen interest rates go up, no one will be buying property and the affordability of property will drop and therefore prices will drop, and will not be able to increase dramatically again even when the cycle turns and interest rates drop again (maybe six or seven years whenever...) as previously mentioned, the house prices will be limited by peoples ability to borrow...
... I am very interested to see what better heads than mine think of the above points...
Cheers all
Funky
 
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Reply: 1
From: Mike .


Hi Liz,

I think you would have a hard time convincing some of this forum's long term investors who have been through 2 or 3 property cycles that it will meet the same fate as a dot-com stock. I think property cycles and economic cycles are here to stay.

In point 1. you referred to the declining growth in population but only supported this with the declining birth rate. Have you forgotten that immigration bolsters the population figures? What happens if the government changes policy and actually makes having families more affordable. Could we see a rise in the birth rate then? Don't worry, population growth can be manipulated by the government. One of their important concerns is jobs growth. No point in having more babies if they leave school and go straight on to the dole.

Property demand is also influenced by other factors such as supply of new housing and the stock market. When the stock market is falling investors scramble to put their money into property.

In point 2. you mentioned affordability. This can also be manipulated by lowering or raising interest rates. Although property prices are high at the moment people can still afford to service the low cost loans. Again this situation is cyclical.

I don't think there is any need to add more but I'll close by saying, "Don't sweat it!"

Regards, Mike
 
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Reply: 2
From: Tibor Bode


Liz,

Just a couple of points regarding to your comments.

While I would not be bothered about what my friends think about property, if this is what I want (maybe expand my list of friends via interests clubs like freestylers or others), ask any of them have they ever read from Dolf de Roos "Real Estate Riches". I think he clearly explains his belief that why property is better than any other form of investment (not counting being in business). Just think how much the bank manager will lend on their own shares to them. 60%, 70% 80%, 100% or more? I don't think so. But the same manager will easily lend on property. Have they ever though of it why? This is the leverage bit. If they buy $100000 worth of shares how much does it worth? I know it is a silly question, but it is worth $100000. If you buy a property for $100000 how much it is worth? Maybe $80,000 (you bought badly) maybe $120000 or more (you bought well). You can ask some more experienced investors how frequently they have done it. Now, how much value you can add to the shares. None, zilch, 0. Ho much value you can add to a property. Loads, it is up to your capabilities (or advisors).
Your return will depend on other people's competent / incompetent performance. It could be HIH or ENEON or One.Tel (now valued 0), but property at least in any well populated area never became 0.
Regarding to the shrinking population. The net growth still exceeds the net decline by about 100,000 per annum and in future it will grow as our government will need young people when the boomers will hit retirement big time. Also another point is population trend. More and more people are living alone, hence number of households are increasing. I think this will be the case up to 2030, from which point onwards (if immigration will not replace the dying ones)
it might decline. Maybe a bit of homework using some future projections by various government and private agencies can give a clearer picture.
Also living trends. More and more people are moving from the country side to the cities. What does it say? Maybe that growth is still achievable in big cities and good regional centers. Small villages / town are obviously not the place to look primarily.

Hope it helps to partially alleviate your fears about property investment. The latest Jan Somer book "More wealth from residential property" has also gives some excellent answers.

Good luck with your journey.

Tibor
 
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Reply: 3
From: Simon St John


On 6/29/02 3:18:00 PM, Liz Skinner wrote:

>1. What about the declining
>growth of the population with
>the average woman only having
>1.6 children? What effect will
>this have on property demand
>in the long term?

It may change the style of house/accomodation people are seeking but children still grow up and want to leave home! There will always be demand for good quality, well located property.

>2. The prices of property in
>the long term cannot keep
>going up because people cannot
>afford to service the debt
>(i.e. house prices in
>melbourne for example will not
>continue to increase even in
>blue-chip growth areas because
>people won't be able to afford
>to buy properties). I.e. if
>property grows as it has done
>in the past (theoretical
>doubling every seven to ten
>years - in case you have not
>realised along an exponential
>scale and we are reaching the
>end of the exponential curve),
>in about twenty or thirty
>years melbourne house
>prices(or even in just good
>growth areas) will be
>astronomical for the average
>worker, even if wage rises
>increase with inflation.

Take a peek at earnings growth in the past 50 years. Who would ever have predicted that the home my parents build for 20,000 in the 1960's in Brighton would now be worth $1m?

>3. House prices drop and
>there is no guarantee that
>house prices will keep going
>up

Take at look at some of the historical statistics. House prices have trended upward. The housing market is less volatile than the stock market your friends are so into!

>4. WHen interest rates go up,
>no one will be buying property
>and the affordability of
>property will drop and
>therefore prices will drop,
>and will not be able to
>increase dramatically again
>even when the cycle turns and
>interest rates drop again
>(maybe six or seven years
>whenever...) as previously
>mentioned, the house prices
>will be limited by peoples
>ability to borrow...

When rates go up, that's the time to start buying. It's the time more people cannot afford to borrow and are locked into rental. If you are able to buy at that time, you'll be buying when house prices are actually falling precisely because affordability is declining. At to the turn around, again take a p[eek at growth in avg weekly earnings over the past two cycles.

>... I am very interested to
>see what better heads than
>mine think of the above
>points...
>Cheers all
>Funky

These are just a few quick observations from a novice......others will eleborate and offer alternative views I'm sure.

Keep asking questions!

Cheers,

Simon
 
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Reply: 4
From: Rolf Latham


Hi Liz

I agree with all the caveats you have listed, expecially where those views are from well meaning friends and relatives. Also statistically all you have said sort of holds BUT.

1. Have a bo peep at the number of new cars registered in Australia over the last 10 years and have a look at the growth in those 10 years.

2. There is a scary trend for single parent and and indeed just single person families. Yeah Yeah I know I sound like the local pastor but the reality is whereas families stuck together, the rate of families breaking up has increased dramatically.

3. In the past where earnings were lower people were not willing or indeed able to pay for the privay of a 1 bedroom or studio unit. The overall desirability of small apartment living seems to have increased and will continue to do so if the same demographic trends continue.

4. And here is an obtuse idea, but no stats to back it. Many European countries with much better identification systems than OZ have large numbers of residents that are not supposed to be there. What if the true population growth rate is 3 to 5 %.

On the downside yes markets are cyclical. You have to be ABLE and prepared to holf long term but I ask you as a young person what do you think of the front page stats of the Sydney Morning Herald yesterday:

Likely rtn for conservative funds 0.9 %
Typical fund minus 4.5 %
high griwth fund -8.5

Property + 14.2
Oz Shares - 4.8
Int shares -24.8

In the long term your super will undoubtedly be a great and secure investment - if you want to retire in 32 years. Why in the world would one commit to a strategy with that sort of horizon.

If you manage your risks, and IF property behaves as it has done in the past then I would guess you could do worse than putting your $ into a property investment. The risks as I see them are:

1. Loss of income from your job/business
2. The level of gearing available
3. Interest rate exposure
4. Variable rental market
5. Legislative changes


And in about that order too I reckon.

Ta

Rolf
 
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Reply: 4.1
From: Liz Skinner


Hi all,
Thanks for your opinions - I must say I agree with all of what you have all said (don't worry i love property and also agree that my friends and their volatile share market are a little bit nutso for writing property off as an investment) it is just good to hear reassuring information from people who have had much more experience in matters than myself. I have read Jan Somers' books (all of them in fact except the story one) and have plenty of books and have been studying up the business/property pages etc etc, so thanks for your suggestions there too.
Rolf, I have seen those figures about the returns in the share market, and i know that they are part of the cycles that everything goes through, it is just interesting that my friends who invest in the share market stay so committed to it and ignore property while in the same breath telling me that they are lucky their shares have tripled in value ... does that not make sense to them?? THey say, no shares are the way to go and make money, but then tell me it's just luck that they have picked the Tabcorps and such and not the HIH's of this world. For mine, i cannot wait to buy my first property, then second then third etc etc - so keep the ideas coming everyone, it's just more fuel for my fire in my discussions - I LOVE IT!!
Cheers,
Liz
 
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Reply: 4.1.1
From: J Parker


Hey Liz,

Nothing wrong with doing both shares and property!
The old, tired debate, "Property versus Shares" is something the media keeps churning out to sell papers and magazines (not to mention share trading programmes, property investment seminars and managed funds, among others!)

Dabble in both and make up your own mind about comfort zones, risk management and profits. Everyone is going to have a different opinion, but, in the end, it's you putting your money where YOU WANT TO. Good luck and let us know what you do and how you go with it!!
Cheers, Jacque :)
 
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Reply: 5
From: Michael G


Liz,

Some things to think about...

- More and more people are preferring to live by themselves. That is, people per household is shrinking, but that means more property is required for them.

- single parent living is not such a taboo anymore and divorces are up, again this indicates more housing required.

- I once read in a newspaper of two mates co-buying a property. This indicates more disposable income available for more expensive places. Also shows people are willing to explore new methods to acquire property that is rising in price (instead of arguing about the price).

- A story in last weekend's paper indicated that the number of cars on the road in Sydney by 2020 (I think that was the year) will increase by 500,000 and the Sydney population will increase by 1 million.

- If there is a property located in a specific place (beach, river, close to CBD, etc), then supply is going to be rather limited while demand is free to increase.

- Consider the value of money itself. Every year inflation reduces the value of every dollar by 2-3%. Look at bread, milk, etc. Supply is practically limitless, but for some reason the price of these items have steadily increased over the years. This can be for a number of reasons. Cost of materials, cost of labour to acquire these materials, cost of fuel to transport these materials, etc. Milk is still made of the same stuff that your parents drank. But the "purchasing power" of the dollar has shunk so that you need more dollars to buy the same amount of product (one reason people need pay rises, not so they can buy more, just so they can buy the same).

So consider that place your grandparents bought, better still, consider the cost of the labour and material to build that home, and compare it will doing the same thing now. Actually if we have any quantity surveyors online here, maybe they could give us some stats on this.

Just a thought...

Michael G
 
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Reply: 5.1
From: Andrew S


The figures that Rolf quoted
"
Likely rtn for conservative funds 0.9 %
Typical fund minus 4.5 %
high griwth fund -8.5

Property + 14.2
Oz Shares - 4.8
Int shares -24.8
"
raise a point for me that I have always found is generally overlooked. It is a commonly accepted fact that when investing in shares (or property) you have to expect to have some negative return years. The greater volatility of shares means that these negative years are more negative than you might expect for property.

The point that I have always found that is not well recognised is that when you have a bad year, eg -25% for int shares above, then you need an even better year to make up for it.
A 25% loss in one year needs a 33% gain to break even. The more negative, the worst the effect. If you lose 50%, then you need to gain 100% to break even.

I'm not saying don't invest in shares, but to recognise the significant impact that the greater volatility can have.

Regards,

Andrew

- "Don't look at things and ask why, look at things and ask why not!"
 
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