You will just love this....

[Sunfish]

It is possible property prices will never rise higher than they are now, as suggested in this thread it is also possible a meteor will wipe us all out.

You misread me. I did not suggest that prices will not increase. I said that they probably won't continue to rise at the same rate as they have in the recent boom (plotted on a log chart). There is a big difference between the two statements and it is important.

While a modest annual ticket price rise may be acceptable on property which was CF+ve at purchase, it is not good enough if net rent only meets half your interest bill. This boom in house prices (ex Sydney) has seen PEs increase from 12 to 40. For the same cap gains in the coming decade, rents will need to triple or investors will have to accept PEs of >100 or a combination of both. This is not impossible though. Hyper-inflation will mean that people will be swapping depreciating dollars for anything which holds value. But SSers, as a group, do not see hyper-inflation as likely and while I think it's possible there are other strategies I use to cover that possibility.

 

[FHB]

You misread me. I did not suggest that prices will not increase. I said that they probably won't continue to rise at the same rate as they have in the recent boom (plotted on a log chart). There is a big difference between the two statements and it is important.

I agree with what you said sunfish, my line about prices never rising was just suggesting to Francesca C that anything is possible, even extremes, we don't know. But comparing the past to now is not an easy thing to do.

We could have a repeat of the 1880s Melbourne land boom and crash, there are a lot of similarities. But we are now living in a different world. Inflation targeting should make things a bit different this time around, but it doesn't make us immune from recession or depression.

The difference this time could be that the RBA would react aggressively to hyper inflation, and holding costs on property may become unbearable. This wasn't standard market conditions in 1880s or 1930s.....

 

[alexlee]

More likely, there will be a fall in prices as rents rise strongly.

If you buy a property with a PE of 40 and no particular value-add strategy, you're probably going to see losses for MANY years. The entire market, however, does not have the same PE.
Alex

 

[alexlee]

The difference this time could be that the RBA would react aggressively to hyper inflation, and holding costs on property may become unbearable. This wasn't standard market conditions in 1880s or 1930s.....

For a more recent example, high interest rates to kill inflation happened in the early 90s.

Do I expect rates to go to 15%+ this time around? No. Reason: I think the RBA is more proactive with inflation busting and will push the economy into recession with pre-emptive rate rises before inflation goes too far. i.e. we're more likely to have a recession way before rates hit the teens.

And I will still go by my strategy: lower priced properties hold their rents better in downturns. Why? People can 'downsize' from more expensive accomodation, so it goes down the line. Cheaper, below-median properties always have ready demand.
Alex

 

[VYBerlinaV8]

This thread contains the type of thoughts that give me confidence that my own strategy should work ok:
1) Buy and hold, never sell
2) P&I loans, thus reducing LVR over time independently of value increases
3) Borrow against IPs later in life to invest in another asset class to generate income and diversify.

I suspect that over the very long term, property tracks to inflation, except where additional factors are at play. I can think of a few such factors:
1) A generation ago it was common for families to have only 1 income, whereas now it's common to have 2 incomes. Additional purchasing power drives demand, which in turn drives price.
2) Population growth increases the threshold price of entry to desirably located property, thus increasing demand and price.

The real question is: what other factors may come into play? I think factor 2 above will continue to drive some prices above inflation, but can anyone think of others?

 

[FHB]

For a more recent example, high interest rates to kill inflation happened in the early 90s.

The question is; are high interest rates on their own enough to cause recession? The cause of the 1990s recession is still disputed. Popular history puts it down to high interest rates (and Paul Keating) causing home owners to default. A closer look shows that it was the collapse of business investment, layoffs and negative sentiment based on international events constraining consumer spending that actually triggered household financial collapses.

Watch for the employment rates not the interest rates.... those areas where employment can withstand global slowdowns and business is not highly geared may be the best spot to buy rentals....?