keithj’s example was over a 110 year period, he provided the example that previously the property was on the fringe and now is a highly sought after inner suburb. I’m not denying that such a house could increase in value relative to other properties further out from the city. What sort of premium does that justify? It should be represented as suburb x (further out) + x%. Prices simply cannot be justified at current levels in the other metrics we have available to measure them (e.g. comparison to wages, other assets, etc).
IV, IMHO this is spot on. No doubt there is still a lot of “old” money in the housing investment arena, but there have been a lot of newcomers in the last 10 years (indicated by the increasing number claiming NG tax benefits). What happens when they realise that the gains of past won’t be had in the future? Will they exit their positions? I suspect so. They played leap frog to the top and if things turn south then they will start leap frogging each other to the bottom.
A lot of the old money (e.g. boomers) could possibly want to exit their property positions to fund their lifestyles (infact of late I have seen a few posts on Somersoft with children buying their parents properties), with a recent correction in the share market their super and share accounts have taken a hit…if they start selling along with the new money who aren’t making the expected gains all hell could break out loose here just as it has in other countries with recent property bubbles.
I wouldnt have put it in such strong words.
Basically what is the purpose of owning residential investment properties:
to generate a future return, from increasing rents/capital growth or both
I think there is substantial evidence to support the theory that in the long term residential property makes an excellent investment vehicle for wealth creation.
The problem is this is the
long term. To arrive at the long term, one must first get through both the
short and
medium terms, both of which do not automatically give the right to adequate returns.
In my opinion the long term involves multiple cycles, with eventual higher highs and higher lows.
So the essential question that i keep asking is under current conditions, with current rents, current prices, current place of australia in australia's economic cycle, would i be prepared to wear sub-adequate returns in both the short and medium term cycles (which could mean 10 years or more), to hold to the long term.
What are the risks?
What is the potential capital erosion in the medium term (and remember capital erosion in the current climate could just mean medium term price stagnation, given negative gearing). Another way to look at potential capital erosion, could i justify my investment, if property prices remained the same for 10 years, and rents just went up by inflation. What would be the erosion of my capital under such circumstances?
the answer to these questions depends very much on the individual. There is no right and wrong answer.
Issues to consider for the individual investor could include:
(a) how many properties do i own relative to my wages;
(b) whats my total debt/equity ratio;
(c) are my residential properties cash flow positive or negative at current market prices;
(d) what proportion of my total wealth is tied up in residential property;
(e) do i have adequate skills in alternative asset classes, such as shares, trading, investing in bonds, currency etc.
For my own situation:
(a)-(c) i own too many properties for this part of the cycle. On current market prices the portfolio is marginally cash flow negative/positive (havent checked recently) on leverage of around 50%.
(d) around 50% of gross value of investments is in residential property (again too high for this part of the cycle)
(e) yes i am very comfortable investing in other asset classes, mainly shares both in australia and internationally. Therefore i am not prepared to wear potential medium term losses on my capital to get to the long term.
Note though that this does not mean that i will offload
ALL my properties. I have no intention of doing a Steven Keen, i need at least one property to live in, and given my net assets i would be very comfortable keeping another one as an investment property with a long term view.
If property continues to perform well in the medium term, i still have skin in the game, and i still have a 'roof' over my head.
If property doesnt perform well in the medium term, i have sufficient 'outside' wealth to take advantage of any potential situations that arrise.