What will happen to property prices / rents if interest rates increase?

[Les]

G'day Suggo,

LB, ....every post from now is "In your opinion" then I will give each comment you make from now that consideration and disregard them entirely!!

Fair suck of the sauce bottle, Suggo - unless one is a licensed adviser, it is very prudent to post "opinions only".

I tend to make a point of stating this when answering any new poster who may not know me, or who I am, or may not know the limits of my knowledge.

Is it not wise to do this?

Regards,

 

[jahn]

Les
Woud a licensed advisor give out free info on the forum ? and wouldn't they have one of those you- beaut disclaimers on the bottom of their post ?
BTW, I think it is very hard to have a conversation and only talk facts. Probably very boring also. Everyone is biased to the degree of their own level of learning, so they form their opinions.

The previous statement is in no way meant to be taken seriously or as guidance, as it is only my opinion
jahn

 

[Bill.L]

Hi all,

Gee LB,
I wonder why you draw the critisisms. I asked a simple question about where you get your yield figures from, that you have quoted several times, and we find that they are your OPINION, and not based on any fact.

I try to base my opinions on statistics drawn from various sources and can and do quote the sources.

bye

 

[Aceyducey]

Originally posted by L Bernham
Heres a story of how one post written in a fleeting weak moment of impatience in reply to a post made with the sole purpose to demean my character and discredit my opinion can come back to haunt you time and time again.

L Bernham,

It's a simple matter of nettiquette - if you are writing something that gets personal, go away from the PC & come back 1/2 hour later. If you still want to post it - do so.

BTW: you didn't post this in response to a post made with the sole purpose of demeaning you...etc as you wrote above.

The post you responded to was AGREEING with your point that when using unreal numbers you can prove anything.

This wasn't a personal attack on you made to demean your charactor, it was actually SUPPORTING your view.

L Bernham, perhaps you need to be a little less focused on your ego. After all, none of us have ever met you!

FYI:
The post you responded to (from ABC Diamond) stated:

Yes LB, You are right,

The things that can be proved by using imaginitive figures, graphs etc.

Amway used to prove future income for its targets using creating thinking and figures, but again, ALL TRUE, and couldnt be discounted.

What will a loaf of bread cost in 1,000 years at the same rate of inflation ?
I used 10% pa to get my property correct under your calcs. so a loaf of bread (currently 1.50) will cost .....
$407,538,931,470,994,000,000,000,000,000,000,000,0
00,000.00

Will someone please check my figures ??????? surely that can't be right !! I'm INVESTING in BREAD !!

Thread was: http://www.somersoft.com/forums/sho...+understanding+of+ordinary+financial+concepts

Cheers,

Aceyducey

 

[suggo]

Yes Les it is!
I think Bill summed up my reason for that post!

 

[L Bernham]

Ya ya ya.

hope we've finished and I can go on now.

My apologies to all those Ive offended by not providing references to support my opinions and all those unprovoked personal attacks on other forum members. I have trouble finding statistics to support what I think will happen in the future though as I lost my 2010 almanac.
Before I get berated for admitting to trying to predict the future I suggest thats what we all do when we invest. You invest if you think the future will provide a postive return and sell when you think it will be flat or negative. What methods we use to predict this is many and varied. some use historical returns, other looks at current yields, others look at market sentiment - EAch to their own.

Its good to get a positive discussion using people observations and past experience. Even someone who has never owned an IP can still add valuable input and I dont think its right for those who have owned more IPs to suggest their opinion is more relevant than anothers.

Cheers
LB

PS A guy went to the optometrist and was told he needed glasses. He asked the doc if he himself wears glasses. Doc said "no my vision is perfect" So the guy said "How can you who has never worn glasses in his life tell me I need glasses?"

 

[Bill.L]

Hi all,

LB, You still cannot support your simple claim that

""Yields will get back
to normal historical averages ie 8 -10% " "

can you!!

The reason being that you made up the figures and it is NOT the historical average at all. I gave you the example of an AVERAGE house(that is more yield than cap growth) had only been at 8% once in the last 22 years and that was when interest rates were around 15% and Keating had killed negative gearing!! Please make your opinions have SOME reality about them.

bye

 

[brains]

Bill,

One house does not make a national trend.

Originally posted by Bill.L
Hi all,

LB, You still cannot support your simple claim that

""Yields will get back
to normal historical averages ie 8 -10% " "

can you!!

The reason being that you made up the figures and it is NOT the historical average at all. I gave you the example of an AVERAGE house(that is more yield than cap growth) had only been at 8% once in the last 22 years and that was when interest rates were around 15% and Keating had killed negative gearing!! Please make your opinions have SOME reality about them.

bye

 

[Bill.L]

Hi all,

Of course your right Brains. One house could not make a national trend.

But when it is a fairly average house in a fairly average suburb, the type of places I invest in, then the past performance is a very good guide.
Of course there is a range of yields for different types of housing. I'll stick my neck out and say that waterfront properties probably have had lower yields while cheap ex housing commission dumps next to factories have had a higher yield.

A national trend evens out all the lumps and bumps. Taking the performance of an "average suburban house" though I feel is a better guide to performance than one of the extremes. I also feel it is a better indicator than using the "median" as the median has changed over time.

Your houses in Morayfield as an example would they be "average" for the suburb? If so in 20 years time, if you had tracked their performance, would you not use that as your guide for what happens to that type of housing??

bye

 

[brains]

Yes - but only in that suburb, not in the whole country.

Originally posted by Bill.L
Hi all,

Of course your right Brains. One house could not make a national trend.

But when it is a fairly average house in a fairly average suburb, the type of places I invest in, then the past performance is a very good guide.
Of course there is a range of yields for different types of housing. I'll stick my neck out and say that waterfront properties probably have had lower yields while cheap ex housing commission dumps next to factories have had a higher yield.

A national trend evens out all the lumps and bumps. Taking the performance of an "average suburban house" though I feel is a better guide to performance than one of the extremes. I also feel it is a better indicator than using the "median" as the median has changed over time.

Your houses in Morayfield as an example would they be "average" for the suburb? If so in 20 years time, if you had tracked their performance, would you not use that as your guide for what happens to that type of housing??

bye

 

[Aceyducey]

I agree with Brains here

(quick someone provide CPR to Brains, his heart has stopped!)

The average house in Liverpool is very different to the average house in St Kilda to the average house in Latham.....

And when one area ages & becomes less desireable, another area increases in desireability - so slums move towards the metro centre, then out again over a long period of time. Check areas like Redfern & Alexandria in Sydney

The outcome really is only valid for the specific suburb, though you may be able to extend the results to other similar suburbs but with reduced probability of correctness.

Cheers,

Craig

 

[Bill.L]

Hi all,

Brains, Acey, I couldn't agree with you more. I personally hate "national averages" as they are so meaningless. I probably have not explained myself clearly enough.

I was trying to elicit from LB where he got his figures from as I thought they were incorrect. I gave one example and am still waiting for LB to give at least one example.

bye

 

[L Bernham]

LB, You still cannot support your simple claim that

""Yields will get back
to normal historical averages ie 8 -10% " "

Bill
When I make a statement like that, isnt it obvious that its my opinion. I feel in my last 100 odd posts Ive given enough reasons as to how I draw that assumption. I've already said that unless I quote my source it is more than likely MHO. From what I;ve seen I'm not the only one that does that. How many times have I seen people suggest that prices will plateau or that yields will stay at all time lows. Why arent you on their case to verify their source?

I have plenty of reasons why rental yields will once again get back to 8-10%. IF you care to ask me I'll give you a few of them.

Like one lumberjack said to the other "is that a chip on your shoulder or are you just pleased to see me"

cheers
LB

 

[Aceyducey]

Originally posted by L Bernham
I have plenty of reasons why rental yields will once again get back to 8-10%. IF you care to ask me I'll give you a few of them.

LB,

You seem to have missed the point again.

That is precisely what Bill is asking - what are your reasons?

And why pick the figure of 8-10%?

Why can't yields remain low indefinitely?

Cheers,

Aceyducey

 

[L Bernham]

Acey asks " what are your reasons?"

Okay here are some- (from The Economist May 31 issue)

In recent years, home prices in the United States have outpaced rents, pushing the p/e ratio to record levels. Estimates of p/e ratios for Britain, Australia and the Netherlands point to an even more pronounced bubble, suggesting that house prices in all three countries are at least 30% too high.

All this means that the return from investing in property has slumped. These p/e ratios are based on average rents, but over the past year or so rents on new lettings have fallen by 20-30% in New York, San Francisco and London. In London and Sydney gross rental yields (rents divided by price) have fallen to around 4%, from 7-8% a few years ago. In these cities it is now cheaper to rent than to buy.

The p/e ratio helps to expose the fallacy that house prices are rising because of growing populations and fixed supply, because these factors should affect the rental as well as the owner-occupier markets. The fact that prices are rising much faster than rents suggests that homes are being bought in the expectation of capital appreciation rather than underlying fundamentals. That is the definition of a bubble.

Some analysts argue that lower interest rates justify a higher p/e ratio. The same argument was made in the late 1990s for equities. But if rates are low because inflation is low, then future rents will also rise more slowly. Future rents should therefore be discounted using real interest rates, not nominal rates. As argued above, real interest rates in America or Britain are not particularly low. "

and this

"The optimists still maintain that previous house-price booms turned to bust only because central banks sharply raised interest rates, so buyers could no longer afford to service their mortgages. This time, with inflation so low, interest rates are unlikely to rise significantly, they say. Perhaps; but Japan and Germany show that low interest rates are no protection against a decline in house prices.

All that is required to burst the bubble is a change in sentiment. Just as investors in the stockmarket eventually decided that enough was enough, at some stage would-be home-buyers will refuse to pay ridiculous prices. In many countries, first-time buyers are now finding it impossible to get on the bottom rung of the property ladder because they cannot scrape together the deposit. In Britain, mortgage lending to first-time buyers has fallen sharply this year. As demand at the lower end dries up, the whole market could quickly turn. And if prices start to dip, one good reason to buy—the expectation of capital gains—will disappear, pushing prices even lower."
**************
Anyway, what this (and the remaining 10 pages of quality empirical research) shows is that as house prices fall, they tend to overshoot on the downside. this is because property prices become undervalued due to the inclusion of a risk premium to compensate for potential capital loss (ie when markets move up we question when will it end, when it moves down the same question is asked). No-one rings a bell at the bottom or the top of a market. Its up to us to decipher when we could be close. The smarter investors reap the rewards.

SO I have estimated that this will occur when rental yields are between 8 and 10%. As this is what investors and banks will demand to cover interest payments. As there will never be a shortage enabling landlords to put up rents, prices will instead come down to provide this yield.

The market is cyclical but there are always optimists buying at the top thinking that maybe this time its different..

Cheers
LB

 

[L Bernham]

A bit more if you still interested

from http://www.maspl.com.au/australianshares.asp
(please note they are presenting a case for investing in shares - view in which I dont subscribe however you will find their their statistics re property are accurate)

"...The fact that, rental yields are the lowest in a decade and rental vacancy rates are relatively high, support this view. But perhaps the most worrying statistics are shown in the graph below. It plots the relationship between the rental income that people are receiving from investment property, compared with property prices over time. This relationship is called a ‘price earnings ratio’ and is used as a measure of value.

As you can see the price earnings ratio has reached a very high level compared with historical levels, especially when compared to the last boom in 1988/89. "
*********
So if P/Es were to get back to even the level they were at at the TOP of the last boom property prices would need to drop by 30% to get there. If they were to get to a historical average they'd fall even further.

Please dont be put off by P/E's as a measure of valuing shares only. What they are is a measure of an assets price to its earnings. If anyone thinks they are irrelevant then it must also be a coincidence that in all previous property busts (other countries included) P/Es were at an all time historical high.

Cheers
LB

 

[Bill.L]

Hi all,

Thank you LB for providing that analysis of your thoughts. I don't agree with the sentiment though.
P/e ratios are important, but they should not be considered in isolation. The effect of interest rates on what level the P/e ratio is, is very real, and to ignore it is probably naive.
Yes the P/e's are higher than 89-90 but they should be, as interest rates are less than half of what they were then.

When referring to stocks as overpriced according to the P/e's, that had happened by '96 when Greenspan made his famous "irrational exuberance" speech. The dow was at 6700 and doubled from that point. Come to think of it, I don't think it's been that low since.

bye

 

[Aceyducey]

Yes thanks LB,

I agree with Bill's point.

No one should buy shares based on P/E alone. Many other factors come into play. Same with property.

Timeframe is also a major factor - if you are buying shares to hold for a long period of time, P/E can be totally irrelevant - you don't do that much worse by buying shares at the peak of a boom compared to the trough of a bust when you look at the return over 20 years. Ditto with property - hold it through several cycles and minor price changes are largely irrelevant.

It is also important to remember that there are no 'right' or 'wrong' levels for P/E ratios. The P/E ratio is a relative measurements for comparing assets at a fixed point in time. It is not as good as predicting corporate performance over periods of time as conditions change. So while you could use it to help decide between investment alternatives at a specific moment in time (we do, along with many other factors),it is dangerous to use the P/E ratio alone to guage what will happen in the property market over time.

Every industry has a different average P/E level and while as a general rule P/E ratios rise in a boom, this does not provide investors with good guidance for when or what is likely to occur when a boom ends.

So L Bernham, you've picked an interesting factor to use to justify your argument, but it's only one factor - like picking the Melbourne Cup winner based on how many people are betting on the horse.

BTW: Is this the first Melbourne Cup reference in the forum?I haven'tseen any others to-date this year so had to squeeze it in.

Cheers,

Aceyducey

 

[brains]

Can someone enlighten me on the relevance between interest rates and p/e ratios? I didnt think there was any.

I dont mind if its opinion or fact

 

[NormH]

as interest rates come down then housing becomes more affordable, as housing becomes more affordable then more people move into the market. This in turn tends to push up the price of the housing as more people compete for the same thing. As housing prices climb due to this pressure, there is no pressure to force up rents and these tend to respond slower anyway.
As property gets more expensive, rents(income) remains flat, then your return on investment goes down.

ie in Adelaide (traditionally low capital gain city) then you can on average, get about 7-10%, this has plumetted in the last 12 months and we are now seeing returns of 4.5 - 5.5% as rents have remain static but housing prices have jumped.

Sydney on the other hand where people tend to get better capital growth generally returns 5 - 6%, but lately these have been driven down to 3 - 4% due to the jump in prices.

Yes I do invest in both markets and have done so since about 1985, these are my observations but I believe not far off.

regards

Norman