Will Property ever Boom again

[tcocaro]

Correct... to say otherwise points to a lack of understanding on the topic. Property is inflation proof because the higher the rate of inflation then by definition the more expensive it is to replace your house and therefore by extension the price of your house would rise by the exact amount of inflation.

Then market laws of demand and supply take affect i.e. if no-one wants your house in your suburb then it doesnt matter if the cost of replacing that house went up you could still loose money BUT!! you loose less thanks to infaltion.

anyways... inflation isnt my friend I am a developer I am the guy replacing the house so to speak.

In fact, inflation is our friend as it errodes the value of our mortgage and is a contributing factor to our property's capital gain and rental increases.

Ofcourse market economics play a role to the increases
but without inflation we wouldn't be going anywhere fast

 

[tcocaro]

evand I agree with you for once, most people say my house went up in value by 20% and they never refer to MDC i.e. taking into account costs but thats no big deal for the average unsophistacted investor.

Property is different from most other investments because of leverage.

If people could leverage other investments as much as they can property then investing in property as an investment choice will drop.

In short someone who says they made 20% but really made only 10% as you put it still rought made a 100% return on investment in your scenario; house $500k, $50k deposit, profit $50k i.e. 10% (after costs).

So not sure your point. I think what your trying to say is most investors say I made a 10% return when really they made close to 0% if they take into account costs. In this scenario all they did was endulged in forced savings. But basically this is what everyone on this forum is about trying to find an investment that returns better than 0% after cost.

We are talking about how people say my property has gained in value say 20%.
(Now, thats just on paper as they wont know the value till they sell it)

But they never say it has gained in value 20% minus 10% expenses. Its like on-paper house values are real but expenses arent.

In fact, its the opposite, the costs are real, the house value isnt.

Inflation makes everything lose value every month, every year.

 

[Deltaberry]

The first cost they ignore is the stamp duty they paid hahaha.

Oh I bought a property for $300k. It's now $315k. Oh cr@p, my stamp duty was $15k too.

 

[evand]

yes, we agree on this. The money in property investing is made with leverage. I have borrowed 106% many times and you cant put an ROI multiple on that because i only put in $100 cash deposit. Well you can but it would be huge so its an academic figure.

But the problem is all the expenses people entail a long the way dilute the overall performance.

But. If its considered forced savings then fine. Ive never been into forced saving tho. I'm into just making money.

evand I agree with you for once, most people say my house went up in value by 20% and they never refer to MDC i.e. taking into account costs but thats no big deal for the average unsophistacted investor.

Property is different from most other investments because of leverage.

If people could leverage other investments as much as they can property then investing in property as an investment choice will drop.

In short someone who says they made 20% but really made only 10% as you put it still rought made a 100% return on investment in your scenario; house $500k, $50k deposit, profit $50k i.e. 10% (after costs).

So not sure your point. I think what your trying to say is most investors say I made a 10% return when really they made close to 0% if they take into account costs. In this scenario all they did was endulged in forced savings. But basically this is what everyone on this forum is about trying to find an investment that returns better than 0% after cost.

 

[MichaelW]

As for the article, the only way that Sydney prices will continue to outpace other capitals is if wages are higher there. I'm not convinced that there's a huge difference, except perhaps at the top end.

Just being pedantic, but its not wages that are the limiting factor but incomes. Incomes can be derived from a lot more sources than salaried wages. That is why Sydney is a star performer in the good times as a lot of Sydney's income is derived from non-wage sources such as dividend streams, bonuses, capital gains, business earnings etc.

In the good times, Sydney does very well for this reason.

Cheers,
Michael

 

[Sunfish]

In fact, inflation is our friend as it errodes the value of our mortgage

I must have debated this with you half a dozen times BV.

Inflation does NOT inflate away your mortgage. At least not in normal times. The interest you pay on your mortgage is "inflation + lender's profit". The more the inflation, the higher your mortgage. The lender always makes his profit.

Why would anyone lend you money if they were going to get back less than they gave you? If they DON'T get back less, how do you win?

 

[evand]

Well SF.

I brought this up with a financial advisor friend of mine and he didn't have a clue what i was talking about.

The inflation component is built into the interest rate.

I must have debated this with you half a dozen times BV.

Inflation does NOT inflate away your mortgage. At least not in normal times. The interest you pay on your mortgage is "inflation + lender's profit". The more the inflation, the higher your mortgage. The lender always makes his profit.

Why would anyone lend you money if they were going to back less than they gave you? If they DON'T get back less, how do you win?

 

[Ausprop]

Why would anyone lend you money if they were going to back less than they gave you? If they DON'T get back less, how do you win?

for a couple of reasons but a lot of the time you are borrowing money that people don't even know they have lent e.g. uncleared cheques, or dormant savings accounts earning 1%.

but the main point is that it is the occupier of the asset that covers the cost of the interest. deflation of the mortgage is very real and cannot be ignored. it's just a question of what your OVERALL holdign cost is and part of that equation is debt deflation. If you can get a neutral cashflow property you are giggling

 

[oracle]

I must have debated this with you half a dozen times BV.

Inflation does NOT inflate away your mortgage. At least not in normal times. The interest you pay on your mortgage is "inflation + lender's profit". The more the inflation, the higher your mortgage. The lender always makes his profit.

Why would anyone lend you money if they were going to back less than they gave you? If they DON'T get back less, how do you win?

If that was true SF, why does a property bought 10years ago with 100% loan and always on variable rate would be easy to make repayments today? Because your income and the value of the property will rise at compounded rate of (inflation + couple of points) whereas the loan interest doesn't compound even if inflation is high.

A 10% variable rate (inflation + profit margin for banks) running for 10years on $10,000 loan will still amount to only $1000 in interest payments today, yesterday and 10years ago. But that cannot be said for the value of property, rents and your salary rising compounded every year at the rate of inflation + couple of points.

Cheers,
Oracle.

 

[Sunfish]

Oracle, I am a simple man who believes in simple logic. Why would someone lend you money knowing they are going to be short changed in the repayments? I know there is an anomaly with people buying US Fed notes at -ve interest rates but neither you nor I have the same status as the Fed.

 

[BV]

I must have debated this with you half a dozen times BV.
Inflation does NOT inflate away your mortgage. ?

Hi Sunfish

Mate and how come you haven't convinced me yet?
Am I a slow learner or your thinking is different to mine?

Here is an example for you.
Lets say I borrowed $200K 20 years ago and bought a property which is now worth $600K

During the 20 years I was paying interest only so my loan is still $200K. Would you say that the $200K I owe the bank has the same buying power today?
I'm not a mathematician but I think the numbers speak for themselves.

 

[Sunfish]

Mate and how come you haven't convinced me yet?
Am I a slow learner or your thinking is different to mine?

I think you've covered the two possibilities. But LOGIC says I'm right. Never studied voodoo so you may yet have a case.

 

[BV]

But LOGIC says I'm right.

SF
I don't know about that.
Beauty is in the eyes of the beholder......

 

[wisty]

If that was true SF, why does a property bought 10years ago with 100% loan and always on variable rate would be easy to make repayments today? Because your income and the value of the property will rise at compounded rate of (inflation + couple of points) whereas the loan interest doesn't compound even if inflation is high.

A 10% variable rate (inflation + profit margin for banks) running for 10years on $10,000 loan will still amount to only $1000 in interest payments today, yesterday and 10years ago. But that cannot be said for the value of property, rents and your salary rising compounded every year at the rate of inflation + couple of points.

Cheers,
Oracle.

Because the RBA doesn't track housing prices (only rents) into their CPI. So they don't jack up rates in a housing boom. Inflation has been artificially lowered by ignoring housing, and temporarily lowered by Made in China (which will only get more expensive).

But that might be changing, if only to give them an excuse to lower rates as housing falls.

 

[oracle]

Because the RBA doesn't track housing prices (only rents) into their CPI. So they don't jack up rates in a housing boom. Inflation has been artificially lowered by ignoring housing, and temporarily lowered by Made in China (which will only get more expensive).

But that might be changing, if only to give them an excuse to lower rates as housing falls.

Mate I was just highlighting the fact that interest on your loan when on variable rate even though tied to inflation it is always calculated on the constant/fixed sum of money that you borrowed.

Whereas your salary, rents and property prices are all tied to inflation and are rising at compounded rate. So given enough time to let the magic of compounding kick in your salary, rent and house price growth percent(%) can be a lot higher than the percent (%) of dollars you paid in interest for the loan.

Hope that helps.

Cheers,
Oracle.

 

[oracle]

Oracle, I am a simple man who believes in simple logic. Why would someone lend you money knowing they are going to be short changed in the repayments? I know there is an anomaly with people buying US Fed notes at -ve interest rates but neither you nor I have the same status as the Fed.

SF, it has nothing to do with banks losing out or you losing out. It simple maths that since the interest rate on the loan is tied to the constant fixed sum of money you borrow the magic of compounding doesn't happen with your repayments.

Whereas, your house price, salary and rents are all tied to inflation and keep rising at compounded rate.

To give you an example if inflation is running at 8% and variable rate is 10% on $10,000 loan the interest amount will be $1000 always.

But if you purchased cashflow neutral and the rent you received was also $1000 and unlike the banks you couldn't charge profit margin on top of inflation and could only increase rent at 8% each year after 10 years the rent would have increased to $2158.92. So even at a slightly lower rate of 8% rent increases due to the compounding effect after 10years you can pocket $1158.92 extra even after paying your regular mortgage payments or alternatively use the extra money to pay off the principal amount of the loan.

Cheers,
Oracle.

 

[evand]

You have forgotten to add the inflation component of the interest you have paid over 20 years. If the bank had a type of loan where that could be capitalised onto the loan instead of paid monthly for 20 years, you'd be shocked.

*Lets say that part only equals 3% per annum.

3% OF $200K = $6K.
$6k x 20 years = $120k.

You still only owe $200k because you have already paid $120k in the inflation component of the loan over 20 years.

If they had a loan where you capitalised that onto the loan, after 20 years the loan would be $320k.

I'm surprised that people find it difficult to grasp this concept.

There is no such thing as a free lunch when it comes to banks. We all know that.

Hi Sunfish

Mate and how come you haven't convinced me yet?
Am I a slow learner or your thinking is different to mine?

Here is an example for you.
Lets say I borrowed $200K 20 years ago and bought a property which is now worth $600K

During the 20 years I was paying interest only so my loan is still $200K. Would you say that the $200K I owe the bank has the same buying power today?
I'm not a mathematician but I think the numbers speak for themselves.

 

[oracle]

You have forgotten to add the inflation component of the interest you have paid over 20 years. If the bank had a type of loan where that could be capitalised onto the loan instead of paid monthly for 20 years, you'd be shocked.

*Lets say that part only equals 3% per annum.

3% OF $200K = $6K.
$6k x 20 years = $120k.

You still only owe $200k because you have already paid $120k in the inflation component of the loan over 20 years.

If they had a loan where you capitalised that onto the loan, after 20 years the loan would be $320k.

I'm surprised that people find it difficult to grasp this concept.

There is no such thing as a free lunch when it comes to banks. We all know that.

That would only be a concern Evand if property and rents didn't increase by the same amount as inflation did over the 20year period.

I think you will find people very well grasp this concept. The party will stop the day only your mortgage interest rate raised in line with inflation but property prices and rents didn't. You should have also included the increased rent payment + CG in property over the same period and see whether it was all worth it or not.

As long as over the long time period prices and rents rise in same proportion as inflation the party should continue whether you like it or not. And you will notice the Government, Banks and RBA are all in favour of the party to continue and will do whatever it takes to let it continue.

Cheers,
Oracle.

 

[evand]

But we are not discussing whether its a concern or not, but whether it exists. Let alone other factors like rent etc.

I get your point but thats a separate issue.

That would only be a concern Evand if property and rents didn't increase by the same amount as inflation did over the 20year period.

I think you will find people very well grasp this concept. The party will stop the day only your mortgage interest rate raised in line with inflation but property prices and rents didn't. You should have also included the increased rent payment + CG in property over the same period and see whether it was all worth it or not.

As long as over the long time period prices and rents rise in same proportion as inflation the party should continue whether you like it or not. And you will notice the Government, Banks and RBA are all in favour of the party to continue and will do whatever it takes to let it continue.

Cheers,
Oracle.

 

[Sunfish]

Hi Sunfish

Mate and how come you haven't convinced me yet?
Am I a slow learner or your thinking is different to mine?

Take your pick, I don't mind. You are even entitled to say I'm as thick as a brick. Again, I don't mind because your beliefs are of no concern to me.

I just challenge this mantra of yours in the hope others with open minds may think about it. I believe it is a load of rubbish, and some others may see this too.