Word of caution for the newbies.
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I would love a $ for every time I have read "property doubles every 7/10 years" on this forum.
How does one know what rate of capital gain occured 2000 years ago?
Was paper money around then? Nope, I suspect currency may have been gold, or grain, or camel urine.
I read something once that the long term interest rates since time began was about 7%. There is a fundamental reason why 7% is the figure, and I can't remember what that reason was. However, if the cost of borrowed paper money, or gold, or grain, or camel urine etc was 7%, then the rate of return, from capital gain and income should in theory, average more than that, otherwise why would anyone borrow paper money or gold or grain?
Interest rates 2 thousand years ago was apparently about 7% or a bit higher or a bit lower, so I can't see why capital gain plus income over 2000 years would not be greater than 7%. So maybe you could come up with a figure of say 4% income and 5% capital gain?
Not 7% or 10% I know, and there is a big difference.
All just pure speculation here.
See ya's.
Erm, quite. A perceived good opportunity may not actually turn out to be one so, yes, failing to pull the trigger can also save you money!
Perhaps you meant to say that failing to pull the trigger can cost you money?
That just comes down to personal opinion on individual deals. Remember, a newbie is not buying the market. They are researching earnestly and trying to find out all they can about that one property they intend to buy.
If they do their research and believe that a particular property they have found has great growth prospects ahead due to fundamentals, your suggesting to decide not to buy that property in case the world comes crashing down in the next year before it continues on again. Even though the individual factors for that property may all be positive eg. inner city property, large land component suitable for development, increasing rental demand and return etc.
Now let's look at the bad scenario of them buying said property and the price coming down 20% over the next 2yrs (despite all their research pointing to the contrary). Their loan repayments haven't changed, they are not teetering on the brink of financial oblivion, and they will have the property after that 2yr period increasing again with the same or smaller debt.
Ideally would it be nice to have waited 2yrs and buy at the bottom just before prices start swinging up again? Of course, but that requires them to ignore the research results they found earlier that pointed to this property being a great performer. What if it didn't drop 20%? What if it levelled off for 6 months, then resumed it's climb? Then they potentially miss out all together if it goes past their price range and are left with less options in the future.
That is the sort of choice newbies are faced with. I know what I did.
Just because somebody made money behaving in a particular way over the last 30 years is meaningless when the path is unsustainable at the macro level. Follow the money trail for people who have created wealth from property - it comes from other people's unsustainable debt growth.
Therefore simple maths tells me the last 30 years will not repeat itself - something will have to give for people to continue to make money from holding property moving forward. It could be higher density that drives land value up moving forward so I'm not saying it's impossible.
What I am saying is the "calm down - I've seen it all before" advice is poor advice. People should think for themselves and be forward looking in their analysis. Especially young people who want a simple answer on how to get rich and are impressed by older people's good fortune.
Therefore simple maths tells me the last 30 years will not repeat itself - something will have to give for people to continue to make money from holding property moving forward. It could be higher density that drives land value up moving forward so I'm not saying it's impossible.
What I am saying is the "calm down - I've seen it all before" advice is poor advice. People should think for themselves and be forward looking in their analysis. Especially young people who want a simple answer on how to get rich and are impressed by older people's good fortune.
The CBA warned of further increases later in the year due to the ongoing US credit crisis. The CBA is supposed to be the least reliant on foreign wholesale funds. If they are hurting from what's happening OS, then the whole Australian lending industry will be moreso.
Australian property prices have never been this exposed to foreign credit conditions, and global credit conditions have never seen a period like this before. The USA is maxed out on household debt with little capacity to leverage into deeper debt. Their economy is softening with serious structural reasons for not being able to sustain growth. Credit crisis and POO and food and general inflation are all converging towards unprecendented times in western democracies.
I don't consider history is a good indicator of what will unfold in the next 5 years in Australia.
Australian property prices have never been this exposed to foreign credit conditions, and global credit conditions have never seen a period like this before. The USA is maxed out on household debt with little capacity to leverage into deeper debt. Their economy is softening with serious structural reasons for not being able to sustain growth. Credit crisis and POO and food and general inflation are all converging towards unprecendented times in western democracies.
I don't consider history is a good indicator of what will unfold in the next 5 years in Australia.
9) Disposable income rising faster than wages. The graph below shows disposable income increasing at an average of 6%pa for the last 15 years. This is above the average wages increase (of 4%pa) and also above CPI (@3%pa for the last 15 years).
It roughly corresponds with increasing house prices (averaging 7%pa).
Using Average Wages to Median House Price as an affordability ratio is misleading at best.
What is disposable income though? I assume it means income after the basics are met. If that is the case then this makes sense as the basics are becoming cheaper due to economic productivity which leaves us with more disposable income.
So based on this you could argue house price rises are sustainable if economic productivity continues to improve and all the extra wealth this generates is pumped into housing.
But I don't know why this extra wealth should go into increased prices of housing (as represented by the median price). If all of our extra productivity (i.e. higher disposable income) was forced into higher prices for existing housing stock then it really is a very unfair distribution of this extra wealth - it is going 100% to the current owners of the housing stock (generally the older generation).
Wait a year and potentially buy something a whole lot cheaper with a better yield profile or jump in and BEST CASE SCENARIO prices remain flat for 12 - 24 months. No capital growth and an investment that is costing you money to hold. Sounds great sign me up!
By waiting 12 months worst case scenario is you buy a similar property for a similar amount of money and you are 12 months behind in "paying it off."
Jump in and worst case scenario you are down 10 - 15% in 12 months, in negative equity. Banks continue to raise lending rates independently of the RBA and holding costs start to hurt. Newbie gets spooked sells out to seasoned Somersoft investor at that time for 20% below what they paid for it!!
You did what you did in an entirely different economic climate. I fear that if you had started now, the outcome would have been somewhat different.
No, the majority of my major purchases have been done in the last year and a half at the same time the whingers have been working overtime in the media crying how it can't be done (incl. the largest 2 in the last 8 months). I wouldn't expect them to be making some of the purchases I've made, but to say they can't get into the market is a joke. But that's not really the issue of this thread, the vast majority of newbies trying to learn on SS wouldn't have this victim mentality.
Not really relevant. For a start I'm talking about people who are looking to get into an investment property, not a young couple who have mortgaged themselves to the hilt for a PPOR which is what your comment tends towards.
As far as rates etc, explain how this would be any different if they waited and bought houses in 2yrs. They could fix for 5yrs+ for a start if they are closer to the line than they'd like. As for losing their job, that could happen at any time for any reason including in good economic times. Does that mean they should never buy just in case?
You're the economist - you tell us. Simple maths tells me - CPI (which includes basics) at rising at 3%, wages up at 4%, assuming basics are 70-80% of disposable income then that 20-30% is rising at around 6%pa.
I'm sure the RBA has a definition tho.
Not all the extra wealth needs to be pumped into housing, just the same proportion as before. Lots will go into plasma, O/S hols, etc, but assume half of that extra 6% continues to go into housing, then house prices will continue to rise at around 6-7%pa. They will continue to be affordable regardless of actual wage increases.
Ahhh... it always comes back to the old 'It's not fair, I want it all now' whinge. Do you think it was fair for the current OOs when they bought from the previous generation ? Do you think it has ever been easy to buy a house ? If it was easy then we'd all have a few of them - one at the beach, another in the Swiss Alps, and one overlooking the harbour bridge. Ya gunna have to lose the victim mindset at some stage YM and notice that reality happens.
I think the idea of buying the previous generation's overpriced assets and hoping the next generation does the same for me to make up for it is a somewhat risky proposition. So I prefer to let that opportunity go.
Good point Keith,
We can crave for fairness but it will get us nothing but misery. Blaming whoever or whatever just deepens the ditch.
I think it is important for newbies to screen out the ego driven emotional debates on here ( I've probably contributed somewhere along the line ) and just focus on taking responsibility for their own lot. Have a positive volition. ie: don't just desire wealth for yourself but hold a thought or two for helping others as well. Do their Due Diligence and take action - which can always be investing in something else other than property.
Sorry to go on YM.... but every generation of prospective OOs has thought the same as you are now - 'they're to expensive, I can rent better for less'. And then some nesting instinct kicks in or the Landlord increases the rent once to often (or kicks them out
), and they think 'bugger it... I'll get on the ladder'.... and the cycle continues.I realise that you think the last 5 yrs has been the wrong time in the cycle - for you it probably is. You've said previously that you think property is 15-20% overvalued. It'll take another 3-4 yrs of 4% inflation & flat prices before housing gets back to your fair value. During that 4 yrs, that need for stability or the nesting instinct (with small kids) or wanting the great Australian dream will kick in for many. 99% of the population don't use logic when they buy a house, they use emotion. So you'll be starting on the back foot. Maybe your gfs' biological clock will suddenly tick over to baby o'clock, and you'll need some stability & IP purchase will be forced on you
. Good luck with arguing above fair value or wrong time in the cycle under those circumstances .
Good post Keith.
What is "fair value" anyway?
YM thinks; the house value should be rising in line with wage increases and inflation over a set period - noble thought, but delusional. Thank god it doesn't (and the same goes for the stock market), otherwise no-one would invest and try to get rich.
It's value is what the current market demand sets the price at, and your ability to buy it at, or under that price.
The value of the first PPoR I bought was $97k back in 1985in a suburb called Boronia - a sort of "upmarket bogun area", or a "blue collar" area to be Politically Correct.
I got it for $93k - fair market value at the time, and I was pleased as punch. A regular Donald Trump, was I.
I would have liked to buy in Brighton, but Boronia was my budget, and it was closer to work (but not real close either).
In YM's terms, that makes the house worth around $170k today - assuming that the house was at the correct value back in 1985 (I could have paid $20k too much for it, but will never know).
Now, the same house is going for $267k, so if someone can buy it for say; $260k, then that would be fair market value I suspect.
So, YM is gunna sit around until that house drops back to $170k? matbe it will, but does anyone really think this will happen in our lifetime?
The answer is simple; if it's for a PPoR, establish your maximum borrowing capacity with safety, then go out and find the best house you possibly can for that budget, in the area you can afford, as close to work as you can get, sign the papers and go.
If you can't afford anything; lower the standards and the expectations, or look in a different area - as I did.
YM wants to have his cake and eat it - he's happy for his stocks and mutual funds and gold and whatever else he invests in to got through the roof so he can get ahead, smugly sitting there saying how cool renting is while us nuff-nuff O/O's and investors get reamed buying property, but cries like a baby about how unfair it is that houses do the same when he wants to buy one.
Give us a break and shuffle off to Buffalo. There's a few cheap houses there for you YM. Good rent returns too.
What is "fair value" anyway?
YM thinks; the house value should be rising in line with wage increases and inflation over a set period - noble thought, but delusional. Thank god it doesn't (and the same goes for the stock market), otherwise no-one would invest and try to get rich.
It's value is what the current market demand sets the price at, and your ability to buy it at, or under that price.
The value of the first PPoR I bought was $97k back in 1985in a suburb called Boronia - a sort of "upmarket bogun area", or a "blue collar" area to be Politically Correct.
I got it for $93k - fair market value at the time, and I was pleased as punch. A regular Donald Trump, was I.
I would have liked to buy in Brighton, but Boronia was my budget, and it was closer to work (but not real close either).
In YM's terms, that makes the house worth around $170k today - assuming that the house was at the correct value back in 1985 (I could have paid $20k too much for it, but will never know).
Now, the same house is going for $267k, so if someone can buy it for say; $260k, then that would be fair market value I suspect.
So, YM is gunna sit around until that house drops back to $170k? matbe it will, but does anyone really think this will happen in our lifetime?
The answer is simple; if it's for a PPoR, establish your maximum borrowing capacity with safety, then go out and find the best house you possibly can for that budget, in the area you can afford, as close to work as you can get, sign the papers and go.
If you can't afford anything; lower the standards and the expectations, or look in a different area - as I did.
YM wants to have his cake and eat it - he's happy for his stocks and mutual funds and gold and whatever else he invests in to got through the roof so he can get ahead, smugly sitting there saying how cool renting is while us nuff-nuff O/O's and investors get reamed buying property, but cries like a baby about how unfair it is that houses do the same when he wants to buy one.
Give us a break and shuffle off to Buffalo. There's a few cheap houses there for you YM. Good rent returns too.
Query
Keep the posts coming in. Great info all around.
Is there a formula for working out what would be a fair rent for an IP?
With interest rates moving North one must try to get a reasonable return for one's investment.
Cheers
Geoff
Keep the posts coming in. Great info all around.
Is there a formula for working out what would be a fair rent for an IP?
With interest rates moving North one must try to get a reasonable return for one's investment.
Cheers
Geoff
Great questions Geoff.....if I may be as bold to have an opportunity to address them I would be most obliged ;
Indeed, I have always worked on something similar to this ;
Rent must be greater than 2 x {interest bill + all outgoings}
If you find a property that exhibits this type of rental structure, it would probably be wise to purchase it, but take your time and negotiate hard, the less you pay for the place, the higher that number is above that magic 2 level.
Indeed one must !! One can never be too careful, can one....capital, capital !!
Indeed, I have always worked on something similar to this ;
Rent must be greater than 2 x {interest bill + all outgoings}
If you find a property that exhibits this type of rental structure, it would probably be wise to purchase it, but take your time and negotiate hard, the less you pay for the place, the higher that number is above that magic 2 level.
Indeed one must !! One can never be too careful, can one....capital, capital !!
Good point.
Although some say we are coming to the top of the technology cycle and this figure might be maxing out.
The most basic toasters used to cost $100. Now you can get one at Coles for $10. That's about as low as they'll go you'd think. Same with mobile phone technology. I bought a brand new Motorola phone at Wal-Mart for $18 and it included $10 of credit.
Indeed, I have always worked on something similar to this ;
Rent must be greater than 2 x {interest bill + all outgoings}
If you find a property that exhibits this type of rental structure, it would probably be wise to purchase it, but take your time and negotiate hard, the less you pay for the place, the higher that number is above that magic 2 level.
Indeed one must !! One can never be too careful, can one....capital, capital !!
I'm sure you are joking here - that would mean a 20% plus rental yield. Damn right it would be wise to purchase it!!
I think in an ideal world / normal market rent should be at least equal to current interest rate x market value of house. It isn't even close at the moment.
Don't know about gold - not into it. But other investments like stocks / mutual funds etc should move ahead as the assets underlying them are becoming more productive over time. That is economic growth.
Houses are just houses and will always be houses. So that is why I see them differently and think they should be flat in real terms. I can't understand why your old place isn't still worth $170K - is the area or the house different in some way these days to justify more money?
Don't get me wrong, I'm happy to pay a premium to own. There are lots of benefits to owning - maybe too many to list here. But not the premium that exists today - it has blown out to a silly level. Give it another 6 to 12 months and I'll see what the premium has settled down to with the lack of credit at the moment pushing down house prices and rents moving up. It might make more sense then.
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