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Optimism in property investment remainsALF1 [262 Posts]  In the fifties we said the price of property could never go up because we’d lost half the male population due to World War II and a recession, yet prices doubled. In the sixties they said property prices would never rise again because of affordability and wages couldn’t keep up, but prices doubled. In the seventies they said prices couldn’t increase due to the oil crisis... yet prices doubled again. In the eighties they said prices couldn’t increase due to the introduction of capital gains tax and high interest rates which reached 22 per cent at one stage, but prices doubled. In the nineties they said prices wouldn’t increase anymore due to low inflation and wages not keeping up, but prices doubled. In the noughties they said prices couldn’t increase due to the introduction of GST, but they doubled. “In 2003 when the property boom was full-on and the stock market had bottomed and was losing lots of money, I had clients coming to see me in a panic and wanting to sell out. I told them the same thing I’m telling everyone now: just hang tight. “All I can say when people make claims of gloom and doom is ‘yeah, yeah, yeah I’ve heard it all before’. So why am I so calm when everyone panics? “One must understand the fundamentals first before you can make a sensible analysis of what is happening. “We’ve experienced world wars and depressions and recessions and high interest rates and low inflation and high unemployment etc. but we’ve managed every time to move through this and come out the other side stronger and wealthier. “As long as the human race is wanting to ‘improve their lot’ then we’ll ride through the economic ups and downs. A simple way of explaining this is if you’re uncomfortable in your seat, you’ll move around until you’re comfortable again. This may happen straight away or it may take some time but you will get comfortable again. This is the same as economic conditions. “As we bring more people into our country to maintain our standard of living we have to provide more housing. In New South Wales alone there is a high building shortage and the demand will continue to push the prices of properties upwards like it has done since 1901 Anthony - Legal Director - Australian Legal & Finance ummester [507 Posts]  I'm reading this great book ATM - it's called Lord Foul's Bane. It's well crafted work of fiction - total fantasy - but enjoyable to read and inspirational none-the-less:)  ALF1 [262 Posts] Yeah, there's another well crafted, great book of fiction written on how to pay the Federal Government NO, ZERO, 0, NADA tax - it's called Dianetics! Personally, I thought Battlefield Earth was better but that wasn't the one that sucked the money out of the gullible masses and kept it from tha taxman's coffers. Anthony - Legal Director - Australian Legal & Finance ALF1 [262 Posts] REMEMBER FOLKS: When the pessimists rise from under their dark rocks so do the opportunities for the astute investor! Anthony - Legal Director - Australian Legal & Finance JackFlash [66 Posts]  The average annual compounding CG return for property in AU 1960 - 2006 was 8.7%. See data here: http://www.retireonproperty.com/propertyinvesting/research/australian-property-prices-since-1960.html You'll notice that from 72 -75 (3yrs) house prices doubled - now look at the inflation rate for those years. Peaked at 15.23% This simple compound calc was used for this result http://www.moneysmart.gov.au/tools-and-resources/calculators-and-tools/compound-interest-calculator The figure does not allow for inflation, entry, holding and exit costs. These would dilute the return quite substantially. Inflation figures for the same period Year Mar Jun Sep Dec Annual People can foresee the future only when it coincides with their own wishes, JackFlash [66 Posts] The figures below taken with the inflation figures show how much heavy lifting inflation does in pushing CG over time. 1960 - 1972 = 12 years The average inflation rate for the period 1960 - 2006 was 5.47%. A net CG average of only 3.23%. When you include the various taxes associated with property the actual real return will be negative. The problem with many of the figures I see bandied about don't take into account inflation and its affect on buying power. A dollar today that turns into 100 in 10yrs is of little consequence if it buys the same or less. Jack People can foresee the future only when it coincides with their own wishes, crj [526 Posts]  Other issues are: a. for individual properties substantial renovations may have been done so that when comparing the purchase price over a period of time a rise may be partly explained by renovations that have taken place b. generally if we look sat at the 1960's an average size house might have been eg 12 squares, 1 bathroom, single garage - now it might be 20 squares, ensuite, double garage, insulated, solar hot water crusty [127 Posts] JackFlash wrote:
The figures below taken with the inflation figures show how much heavy lifting inflation does in pushing CG over time. 1960 - 1972 = 12 years 1972 - 1975 = 3 years 1975 - 1983 = 8 years 1983 - 1988 = 5 years 1988 - 2001 = 13 years The average inflation rate for the period 1960 - 2006 was 5.47%. A net CG average of only 3.23%. When you include the various taxes associated with property the actual real return will be negative. The problem with many of the figures I see bandied about don't take into account inflation and its affect on buying power. A dollar today that turns into 100 in 10yrs is of little consequence if it buys the same or less. Jack Jack that is the whole point of investing in property you borrow money the real value of your loan goes down more the higher inflation goes. So the amount you have to pay for the house goes down an average of 5.47% each year, if your net CG is 3.23%, you have an increase of 8.5% in your assets real networth plus perhaps 6% yeild, plus your tax deductions. Adds up to over 15% gain . Would you rather put money in the bank that you have paid tax on ,than pay tax on the interest received, if inflatioin 5.5% your going back wards quickly. JackFlash [66 Posts] crusty wrote:
Jack that is the whole point of investing in property you borrow money the real value of your loan goes down more the higher inflation goes. So the amount you have to pay for the house goes down an average of 5.47% each year, if your net CG is 3.23%, you have an increase of 8.5% in your assets real networth plus perhaps 6% yeild, plus your tax deductions. Adds up to over 15% gain . Would you rather put money in the bank that you have paid tax on ,than pay tax on the interest received, if inflatioin 5.5% your going back wards quickly. The 15% is not real. You've just added inflation back in and taken a gross operating profit for your model. Strip out costs, taxes and the erosion of buying power through inflation and your underwater in most cases. You need CG's above trend and rental returns in excess of 10% to beat costs. Can work in the short term but CG gains fluctuate over time as do rental yields. Picking your timing is crucial to get it right but many strategies I see rely on Buy Hold and Hope. It's no longer a viable strategy in todays market. If you borrowed $1000 @ 6.5% over ten years it would cost you $319. $1000 now equals $681. If we look at the buying power of $1000 and depreciate over 10yrs by an average inflation rate of 3% it could only buy $736 equivalent Net real comparative figure is $417. You need a compound growth rate of around 8.8% to maintain equilibrium. That's near trend. You now need operating cash flows to exceed operating cost to make a real profit. That's a fairly baseline model but it illustrates how erosive inflation can be at relatively modest levels. True inflation tends to be from 1 - 2% higher than doctored government figures. Jack People can foresee the future only when it coincides with their own wishes, |
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