All Topics / Help Needed! / Is property investing really all its cracked up to be?

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  • Profile photo of LinarLinar
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    Wow

    I read this thread looking for opinions on the actual question Phil asked and holy mackarel, my head hurts just from looking at the graphs without any attempt whatsoever to understand them.

    At the risk of being a party pooper I'm going to give my thoughts to Phil on the question he originally asked: "Is property investing all it's cracked up to be?" (in case anyone else has forgotten what the topic was)

    IN MY OPINION, the answer is Hell yes.  My husband and I  started investing in property 4 years ago.  We now have $1.5M in equity.  We have both quit our jobs, bought the house of our dreams and spend our days raising our babies (with a bit of property development on the side).

    Property investing is everything it is cracked up to be and more.

    Cheers (because here in the Adelaide Hills it is wine time)

    K


    Profile photo of foundationfoundation
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    Linar wrote:
    At the risk of being a party pooper I'm going to give my thoughts to Phil on the question he originally asked: "Is property investing all it's cracked up to be?" (in case anyone else has forgotten what the topic was)

    IN MY OPINION, the answer is Hell yes.

    Oh don't get me wrong. I'm in the same boat (sort of). The vast majority of my wealth has come from buying and selling land. I just like to think I'm smart enough to realise the difference between a bubble and a boom and prepare accordingly (and to read charts without effort, and research history extensively). If you're developing, rather than just 'buy and hope', you may well be doing the same. However, collecting houses just because they "double every seven to ten years" is hopelessly optimistic at this point. In my not-so-humble opinion.

    Cheers, F. [cowboy2]

    Profile photo of Phil_McRakinPhil_McRakin
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    Linar wrote:
    Wow

    I read this thread looking for opinions on the actual question Phil asked and holy mackarel, my head hurts just from looking at the graphs without any attempt whatsoever to understand them.

    At the risk of being a party pooper I'm going to give my thoughts to Phil on the question he originally asked: "Is property investing all it's cracked up to be?" (in case anyone else has forgotten what the topic was)

    IN MY OPINION, the answer is Hell yes.  My husband and I  started investing in property 4 years ago.  We now have $1.5M in equity.  We have both quit our jobs, bought the house of our dreams and spend our days raising our babies (with a bit of property development on the side).

    Property investing is everything it is cracked up to be and more.

    Cheers (because here in the Adelaide Hills it is wine time)

    K


    Thanks for all the replies thus far-definately some interesting reading. I  spose what we (I) need to keep in mind is blind Freedy could have made money out of property in the last 5 years. The next 5-10 years though IMHO are going to be a completely different story. I just cant fathom how people are managing to service such extroadinarily high levels of debt, and I really think with some interest rate raises in combination with soaring inflation we are in for a whole world of pain. So what Ive decided to do is sit my $50k in a term deposit for 12 months and see what happens. AT the same time I will keep saving the amounts I would have been paying in interest towards the mortgage anyway. I think I will end up pleasently in front.

    What will make me angry though is when all these greedy people who have got in debt to their eye balls expecting proprty to keep going up at 30% per anum,  without factoring in being able to pay for increased costs such as inflation and interest rate rises. And when this does happen they will no doubt demand my tax dollars be used to bail them out!!

    Profile photo of Phil_McRakinPhil_McRakin
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    foundation wrote:
    Linar wrote:
    At the risk of being a party pooper I'm going to give my thoughts to Phil on the question he originally asked: "Is property investing all it's cracked up to be?" (in case anyone else has forgotten what the topic was)

    IN MY OPINION, the answer is Hell yes.

    Oh don't get me wrong. I'm in the same boat (sort of). The vast majority of my wealth has come from buying and selling land. I just like to think I'm smart enough to realise the difference between a bubble and a boom and prepare accordingly (and to read charts without effort, and research history extensively). If you're developing, rather than just 'buy and hope', you may well be doing the same. However, collecting houses just because they "double every seven to ten years" is hopelessly optimistic at this point. In my not-so-humble opinion.

    Cheers, F. [cowboy2]

    Foundation after speakign to a person who I have a LOT of respect for on the weekend he suggested I sell all my properties up as a crash is no doubt heading our way. I suppose I could quite easily get 7.5% on a term deposit which is probably a lot more than I would get out of property over the next few years, then buy back in. Whats your thoughts?

    Profile photo of foundationfoundation
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    My thoughts? Wager only what you can afford to lose on short term movements. Understand the range of possibilities for the long term. Discard any advice that is based on impossible expectations. Invest on knowledge, not hope.

    Profile photo of Phil_McRakinPhil_McRakin
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    foundation wrote:
    My thoughts? Wager only what you can afford to lose on short term movements. Understand the range of possibilities for the long term. Discard any advice that is based on impossible expectations. Invest on knowledge, not hope.

    Yeah…ahhh gee. thanks…

    Sooooooo anyway what are your thoughts-would you sell up/hold/or buy in?

    Profile photo of Benn StephensBenn Stephens
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    Hello Foundation, I hope you are well.

    Your input has been fantastic, I would love to know your job, but top secret, as you say.

    I don't suppose you have anything to offer regarding the length of the mining boom? As a Western Australian Property Advisor, obviously a large portion of my income comes from the fantastic wages being offered to our fly in fly out workers.

    I don't know if this is your area (we don't really know what your area is), but do you feel that W.A. is insulated from the American credit crisis by the mining sector, and if so, how well, and if not, how bad will the crash be?

    Given it is not really the topic of this forum (I am fairly new here), by all means email direct at [email protected]

    Profile photo of RockianRockian
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    Hey Foundation,

    With all respect

    In all your analysis of the stats ( and it seems obvious that you've mastered the art )! , you should have a fair idea of when the depression is going to hit? Can you enlighten us all when you believe this will occur ? Will it be 1yr, 5yrs or maybe 10 or 20? You are unwavering in your beliefs but can you substantiate the rationale with a prediction? Will this price doubling cycle occur again? (it seems to be on it's way already in Melbourne and Brisy) If so will it be just one more time? Or maybe we will see two more?

    Waiting with compounding interest,

    Ian

    Profile photo of millionsmillions
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    An old school friend of mine said 8 years ago he wasn't going to buy a house in Brisbane as he was waiting for the prices to fall and wanted to save up a larger deposit.  In his spare time he studied "shares" and traded.  At the time he could of purchased a decent house in Wishart (9k's from city?).  Now that prices have risen, he still doesn't have enough deposit to purchase a house.  Surely if he purchased 8 yrs ago he would be about $200,000 better off.  If I were to purchase my first propery today I would only invest in a good area, close to the city, views, infrastructure.  I still think it is better than not purchasing at all.  (Waiting for prices to drop, it may never happen.  If prices drop a little, ride out the wave) L

    Profile photo of seankseank
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    im confident about my investment properties in brisbane, also glad i got into property not shares at the moment, although i'm seriously thinking about buying shares now
    There are still many bargains out there look at rocky capital growth of 30% last year and a median price still under 250k!!!

    Profile photo of Jon ChownJon Chown
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    While I have to agree that property price increases that we are seeing at present are not sustainable and their will have to be a correction some time in the future, it won’t be the first time and it won’t be the end of the world. We saw it in the mid 80’s with the recession we had to have where property values dropped by almost 30% and interest rates were nudging 20%, we saw it again in the mid 90,s where supply exceeded demand for a short time and you could not give your property away ( the margin at this time appeared to be around 10% drop), there was a short period in 2003 where we had buyer reluctance and prices settled a little and while we are still getting strong growth today (around 10%), it’s nothing like the 20 and 30% we saw for those few years in the early 00’s.

    People who are reading this thread need to decide if they want to be a holder or a trader, neither option is better than the other, they are just different options. I would suggest that the main difference between the two options is Time. You need to be able to spend a lot of time looking, studying, understanding, negotiating and educating yourself to be a trader, but most people have seen the growth in their own PPOR’s to understand that if they buy and hold their investment will surely grow. So for the casual investor who has a life apart from investing, buying and holding is the best option.

    While I appreciate Foundations dedication to research and statistics, I would suggest that people don’t suffer paralysis from analysis. The profit in an investment is not made in the purchase it is made in the sale. The real issue is not over extending on the short fall of your investments.

    Jon

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    I'm starting to feel sorry for Foundation with all the questions that he has been bombarded with.

    The original question asked if property investing is worth it.

    Yes it is but a key factor is being dynamic and knowing when to change ones plan or investment strategy.

    I'm a big advocate of buy and hold and over the years it has done rather well for me although the late 80's was hard when interest rates were around 15%.

    There have been times when commodities and shares have been more productive than property but that is not my forte so I don't delve into that area.

    I've mentioned previously on other threads that instead of always looking for the highest return or the best cash on cash return investors should look for something they feel confident about and is within there comfort level.  I'm not good on figures and are probably a lazy investor which is why I prefer buy and hold over time rather than sell or renovate.

    I don't believe that even blind freddy could have made money over the last few years as bankruptcies have increased amongst home owners and not decreased over the last 5 years.

    C2

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    I do love all of your stats Foundation.  Just wanted to let you know I think their will be a slowdown, but not for a couple of years yet.  I also think it would be fairly risky to purchase "any property" right now, and I personally wouldn't purchase today unless I found an undervalued area or property.

    Profile photo of mrdenn1smrdenn1s
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    Foundation,

    Good analysis…maybe even brilliant. But I can't commit to an analysis rating as your graphs are way beyond me

    However, there is a major issue I have with your thoughts that buy and hold is not preferred. I think you may have used the term "wishful thinking"???

    Australia is a big bloody place…..god knows how many towns and cities, further disected into suburbs and streets with different attributes.

    This is the beauty of long term property investment.

    Maybe most of Melbourne cant keep up 10% CAGR. But I bet i can find at least 50 properties in the whole of Melbourne that can. I also reckon i could find another 50 in Adelaide, Brisbane…hell ….even the Cairns Northern beaches  My favourite new suburb is Footscray. Its a hole of a place, but there are a few little nooks and crannies that offer city views that cant be built out….quality asset.

    Its about what you buy and the drivers that push its growth.

    To take blanket stats and apply them to all properties is a nice sell….but not a good enough sell 

    Now go back to your figures and write a thesis with full bibliography on why I am wrong. I look forward to it Mr Generalisation

    Regards

    Mr D

    Profile photo of foundationfoundation
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    Hey Mr D.

    I'm thinking about your comment algebraically. If I can establish a limit for what is possible at a national level, and you can identify a small minority of properties that will exceed this limit of possibility, then the remaining majority of properties must perform below and not at this limit, right?

    And flowing from this, if property investors are best at identifying these properties, every additional property purchased by an investor will dilute the overall performance of investment property, right?

    Cheers, F. [cowboy2]

    Oh, because we've got a bit sidetracked from the original post, some people might like to be challenged by the following. I called it my "Layman's perspective on an irrational market":

    Quote:
    Here's something I wrote. You can take it or leave it.

    I recall one particularly rousing (read: fiery) debate I had on an internet forum with a gentleman named ‘sense’. His position was simple: that buying a house was always better financially than renting over the long term.

    Each of us produced spreadsheets to support our respective positions. Each was able to show that for a given set of assumptions, our case was sound. The equation boils down to the assumptions and how well they reflect the reality of an unknowable future.

    I don’t have those assumptions handy, but I believe they were approximately as follows:

    • 8% interest rates
    • 4% rental yield growing by 3% pa
    • 3% inflation rate
    • 4.2% net yield on invested savings.
    • 10% house deposit
    • 2% annual house ownership costs (rates/insurance/maintenance)

    All these can be estimated with some degree of confidence. There remained just one further factor, the important one that swung the outcome either to the renter’s or the buyer’s favour: Capital appreciation.

    The tipping point turned out to be (perhaps surprisingly) low. At somewhere between 4% and 5% annual appreciation, buying would surpass renting after some 20 years. At a higher rate of growth, the buyer’s financial position would exceed the renter’s earlier. At a rate slightly below 4%, the renter would be able to buy a house for cash before the buyer had finished repaying his mortgage!

    The debate should have been simple to close conclusively at this point. After all, prices have grown at an average (though not continuously) of 8% per year over the last 30 years. So it is not unreasonable to expect them to grow at 5% or faster for the next 30, right?

    Somehow, I don’t think it’s so simple. Incidentally, I seem to recall the debate ended at this point with an agreement that the final result depended on the assumption for capital gains. Sense’s view was that 5% growth was not far fetched (even a given?), so buying was the optimum choice. I’m still not so sure.

    Efficient Markets Theory

    It is a widely known fact that the stock pickers for managed funds are of little value. Over any a ten year period, somewhere around 85% (if memory serves) of actively managed funds will achieve for fund-holders a lower return than the index in which they invest. ‘Index Funds’ exploit this by emulating the gains (and losses) of the index.

    How is it that a fund that simply buys a few of every stock available can most of the time outperform most of the funds that follow the expert advice of a team of highly intelligent, highly educated analysts who spend countless hours and days poring over countless numbers of company reports and accounts? Proponents of efficient market theory would unsurprisingly say that it’s because the market is efficient.

    Basically, efficient market theory states (in an efficient market) that share prices always reflect all known information about the companies owned by those shares. Stock exchanges do their best to ensure this is true by mandating that listed companies provide all relevant information to all market players.

    A stock analyst might determine that a company will return a bumper profit next year. Clearly, its stock are a ‘buy’. But the analyst will not be alone. Others will use the same information to reach the same conclusion and prices will be bid up. Meanwhile, the sellers will realise that their stock is underpriced and refuse to sell at such a low price. Very soon the price will hit a level where all the information has been ‘priced in’. The stock is no longer a bargain. It is fairly priced relative to alternative investments.

    There is some debate about efficient markets, but this seems to be more about how efficient they are and how prone they are to behavioural anomalies of market players (see below), rather than the mechanics described above. So what has this to do with the housing market? Plenty.

    Imagine a house costs $100k. If this house will be worth $200k in ten years and the holding costs to a buyer will be $50k for ten years it is a bargain. We should all buy it if we can. Yet if it goes to auction or even a competitive private sale where just two people know that: a) Their holding costs will be $50k and b) It will be worth $200k, it will not sell for $100k and will not be a bargain. Its price will be bid up until one player decides he can get a better and less risky return elsewhere. The bidding will likely stop somewhere shy of $150k.

    To expect otherwise, you’d have to believe that markets are not very efficient at all. That the only rational person was the buyer. That the seller, the real estate agent and the competing buyer (in reality, numerous competing buyers) were all clueless. That the only person who knew this house would double in price in ten years and was a bargain at $100k was the single buyer!

    How likely is this? I mean, ‘everybody’ ‘knows’ that ‘house prices double every 7 to 10 years’, right?

    Behavioural Economics

    Some economists study something called behavioural economics. Among other technical stuff they notice that people tend to act in herds, buying (something) when others are buying it, selling when others sell. That people are moody, either unduly pessimistic or unduly optimistic. That market participants overestimate their own intuition/ability/understanding/knowledge. That people expect short term trends to be sustained for long periods even when this is highly unlikely or even impossible.

    By acting on these behavioural instincts, market participants do themselves great harm. They buy overpriced stocks and sell underpriced ones. They sell great stocks which dip in price and buy crappy ones that are ‘going up’. They repeat past lucky moves that provided great results only to be repeatedly disappointed. They mistake rapid irrational upward moves for a ‘sure thing’ or a ‘trend’ and buy more and more at unsustainably high prices, making small gains on the way up that are far exceeded by losses on the way down as the market recovers its senses.

    Of course there’s a problem here. If markets were totally efficient it would be impossible for such a person to do themselves much harm beyond incurring unnecessary trading costs. The shares they bought and sold would rarely be over or under priced. But a market where people behaved in such a way wouldn’t be very efficient! So which is it?

    Probably a bit of both. Individual shares, entire markets or even whole economies never operate at their perfectly efficient optimum. They are either too high or too low, too hot or too cold. They fluctuate around the levels proscribed by efficient market theory, veering away from fair value sometimes for a brief period, sometimes for many years, but always return to trend. This is partly because information is imperfect or unevenly distributed and partly because people are irrational.

    Back to houses. Supposing somebody did buy that house for $100k ten years back and now it is worth $200k. What does that tell us? Does it mean that house prices double every ten years? Heck no! At $200k that house is either fairly priced, overpriced or underpriced (the balance of probabilities is not with the former).

    Suppose it is fairly priced today. That means that a decade ago it was underpriced at $100k and should have sold for almost $150k in a competitive market. In that case it should be implied that house prices rise 33% on a fair value basis over ten years. NOT 100%! If it is overpriced today, it should be expected to gain less than 100% over the coming decade. Could it have been underpriced at $100k and still be underpriced at $200k today?

    Well… yes. But you’d have to be mad to bet on it, unless you had good reason. One such reason would be if its rental yield had risen so that holding costs had fallen relative to the expected gain. I’ll ignore this because it most certainly does not apply to the recent housing market!!!

    So how can we apply this information to the recent housing market? Let’s look at rational behaviour. Consider the expectation that house prices will double every seven to ten years. This was a commonly held belief in Perth in 2005 (as it still is across much of the country). Fair enough, house prices had doubled over the last ten years and stood at $300k. Over the following year, house prices rose 50% to $450k. And guess what? Many (most?) people still expect house prices to double every seven to ten years! Irrational.

    That means people expect house prices to hit $900k whereas a year earlier they were expected to reach just $600k. If the rule is true, and people are rational, they should conclude either that prices were 33% underpriced in 2005 or they are 50% overpriced today.

    By and large, they conclude neither. They instead concoct a convenient, self-serving and frankly deluded explanation. House prices move in predictable cycles. Several years of slow growth followed by two or three of explosive growth. Over the long term this averages out to 7% to 10% per year. This provides comfort to those who bought in 2006 only to have prices flatten or fall. I say phooey to this.

    For starters, efficient market theory tells us that rational players would take advantage of such an observable cycle. They would buy after several years of sub 7% growth and sell after a couple of years of 10% plus growth. Doing so would far exceed the returns offered by buying and holding. But if people did this, the ‘cycle’ would soon disappear. Prices would rise at a steady rate somewhere between 7% and 10% per year. But they don’t.

    What if the fair value of a house does rise by 7% to 10% per year and ‘the cycle’ is simply a reflection of behavioural economics theory? That implies that most people are not rational and there is scope for a rational person to take great advantage of them. How? By buying a house at the cyclical low (+/- a few years), in other words, NOT NOW!

    But what evidence do we have of this ‘cycle’? It’s true that in most parts of the county house prices have grown at a compound annual rate between 7% and 10% over the last 37 years. It is also true that they’ve sometimes been above and sometimes below this range. This does not prove the existence of a cycle.

    The first half of this period was dominated by high rates of inflation, which spent as much time above ten percent as below. Naturally, house prices grew rapidly in nominal terms but really didn’t go far in real (inflation adjusted) terms or anywhere compared to incomes. The first real peak came after the boom of the late 1980s. This was followed by a lull through most of the 1990s. Prices during this time (by most accounts) remained elevated in real terms relative to the 70s, 60s and beyond. Prices have been growing very rapidly since the late 1990s, though 2004 and 2005 were muted relative to the earlier and more recent boom years.

    So where’s this ‘cycle’? We’ve had a peak, a trough, then one more peak. This is hardly evidence of a recurring cycle! Take a piece of paper. Draw three dots in random locations. Okay, you’ve drawn a triangle. What? You haven’t? If you draw lines connecting these dots we’ll have a triangle. Clearly your dots are in a triangular arrangement.

    This is silly, right? Not as silly as looking at three dots and seeing a cyclical pattern, projecting it as self-replicating into the unknowable future and borrowing more money than you could ever hope to repay to gamble on this imaginary line’s existence!

    Back to the original question of renting or buying. Remember how it only takes 5% annual capital gains for buying to beat renting (all else being equal, predictable, and static)? Surely that’s much more of a sure bet than prices doubling every 7 to 10 years?

    Yes it is. In fact, a study by some clever university types in 2004 (Abelson and Chung) found that real house prices had increased just 100% over the 1970 to 2003 period, or an average of 2.1% per annum. So with the RBA mandated to keep inflation below 3%, 5% for houses sounds like a reasonable figure.

    There are a couple of problems here though. The study authors noted the recent rise in house prices which was as much as 18% above annual inflation. They suggested that these rises might turn out to be temporary, in which case real returns would be lower. The precise warning was that the 100% figure would “give an exaggerated view of real price increases if, as we expect, there is a real house price downturn post 2003”. In fact, if we wind the bubble back to 1998 house prices had struggled to keep up with inflation for much of the preceding 28 years.

    This poses a problem. We know that house prices today are either undervalued, fair value or overvalued. If we assume that inflation plus 2% is fair value growth over the long term (knowing this is a generous assumption) then when inflation is 3%, is the present fair value:

    • Whatever price is offered today
    • 5% per annum above the 1995 ‘trough’ price?
    • 5% per annum above the 1990 ‘peak’ price?

    Either of the latter options implies (due to recent growth well in excess of 5%) that prices are currently above fair value and future returns will be well below 5%. Renting would be better. If we take the former, we are saying that house prices have been grossly undervalued (that is, that every seller and almost every buyer has behaved irrationally) for every single year for the last 150 years or more.

    Expectations are funny things. Manias* are just weird.

    * Psst: You're standing in it.

    Profile photo of mrdenn1smrdenn1s
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    foundation wrote:

    Hey Mr D.

    I'm thinking about your comment algebraically. If I can establish a limit for what is possible at a national level, and you can identify a small minority of properties that will exceed this limit of possibility, then the remaining majority of properties must perform below and not at this limit, right?

    And flowing from this, if property investors are best at identifying these properties, every additional property purchased by an investor will dilute the overall performance of investment property, right?

    Cheers, F.

    Bad assumption my argumentative friend.

    There are thousands of good investments around Aus. Just like there are good and bad shares to buy.

    Anyhow, pointless debate. If everyone did and believed the same things given their exposure to the world and how they interpret it, then what a boring place it would be.

    Profile photo of kum yin laukum yin lau
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    Hi, to add a few cents worth. In 1970[Ok, that's 37 years ago instead of 30], my sister's wage was $60 a fortnight (I think that's what she said). She used to spend 20 cents on a rock melon for lunch & every other fortnight she sent 'home' $60 which in those days, transformed into quite a usable amount in Malaysia.

    Then came the Gough Whitlam era & I think the rest is history. In 2002/03, her salary was around $80000 pa, that's about $1500 pw about $3000 per fortnight.

    Wages went up 50x in 37 years.

    this is a real story. My sister was a nurse.

    Now to her daughter who's a true blue Aussie girl. Her salary in 2002 was $27000 pa. Now in 2007, it's gone into 6 figures.

    Obviously, we need to discount the wage increase due to promotions.

    Still, it does remind us that the buying power of cash shrinks. It's called inflation, isn't it? And what better way to combat inflation than property?

    KY

    Profile photo of foundationfoundation
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    mrdenn1s wrote:
    foundation wrote:

    Hey Mr D.

    I'm thinking about your comment algebraically. If I can establish a limit for what is possible at a national level, and you can identify a small minority of properties that will exceed this limit of possibility, then the remaining majority of properties must perform below and not at this limit, right?

    Bad assumption my argumentative friend.

    There are thousands of good investments around Aus. Just like there are good and bad shares to buy.

    So would it be the majority of properties in Australia can exceed the theoretical nationwide average growth limits?Your point was that even if there is a nationwide limit on how fast property values can climb over the long term, that some would exceed this limit, no? Surely you'd agree that it would have to be a minority?

    Did you read my piece on rational expectations?

    Cheers, F. [cowboy2]

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    kum yin lau wrote:
    Still, it does remind us that the buying power of cash shrinks. It's called inflation, isn't it?

    Precisely. And it is exactly that inflation, actually zero real growth between 1973 and 1998 (see below), which is responsible for most of the "house prices double every 7 to 10 years" meme! The rest coming from the recent, unsustainable credit-fuelled bubble period.


    This was all an illusion of growing prices caused by inflation which was above 10% per annum for much of the 1970s/1980s. Good for property investors, as you said, providing they don't suffer catastrophic losses from the associated high interest rates.

    These days, the RBA is tasked to keep inflation between 2% and 3%. If it does its job, it is simply impossible for house prices to rise at 7% to 10% per annum over the next 30 years. If it fails, you’ll see much, much higher interest rates. Remember that mortgage interest rates averaged 8.5% during the 1970s and 13.3% during the 1980s, while house prices grew just 12.6% per year on average over the 20 year period.

    Simply put, the recent period of growth far exceeding general inflation is unprecedented in history both in size and length. The closest comparisons are the land boom of the 1880s and the roaring ‘20s. But the recent bubble is much, much bigger. Both earlier events were followed by entrenched deflation, not inflation. It remains to be seen whether the financial wizards manage to steer us down a different path this time.

    Cheers, F. [cowboy2]

    Profile photo of Jon ChownJon Chown
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    Back  to Houses. Supposing somebody did buy that house for $100k ten years back and now it is worth $200k. What does that tell us? Does it mean that house prices double every ten years? Heck no! At $200k that house is either fairly priced, overpriced or underpriced (the balance of probabilities is not with the former).Suppose it is fairly priced today. That means that a decade ago it was underpriced at $100k and should have sold for almost $150k in a competitive market. In that case it should be implied that house prices rise 33% on a fair value basis over ten years. NOT 100%! If it is overpriced today, it should be expected to gain less than 100% over the coming decade. Could it have been underpriced at $100k and still be underpriced at $200k today? Well… yes. But you’d have to be mad to bet on it, unless you had good reason. One such reason would be if its rental yield had risen so that holding costs had fallen relative to the expected gain. I’ll ignore this because it most certainly does not apply to the recent housing market!!!  

     
    Foundation, I am really trying to understand exactly what you mean by this.  I don’t believe that you can rely on the happenings of one house sale, but if the average in that Suburb doubled in that 10 year period it is safe to assume that house prices doubled in that ten year period and that the Buyer paid fair market price.  Not over or under.  From my observations most Buyers are fairly savvy when it comes to the value of the property that they are buying give or take an emotional value of about 2.5% either way and depending on the position of the supply and demand cycle at the time of purchase. 

    I am also fuzzy on the rental bit.  I sold a property to a client in 1995 for $125,000 which at the time was renting for $130 per week.  He borrowed interest only so the property still owes him $125,000 but his rental income is now $310 per week and he is now in a positive cash flow position.  Are you suggesting that this is a bad scenario? 

    So how can we apply this information to the recent housing market? Let’s look at rational behaviour. Consider the expectation that house prices will double every seven to ten years. This was a commonly held belief in Perth in 2005 (as it still is across much of the country). Fair enough, house prices had doubled over the last ten years and stood at $300k. Over the following year, house prices rose 50% to $450k. And guess what? Many (most?) people still expect house prices to double every seven to ten years! Irrational. That means people expect house prices to hit $900k whereas a year earlier they were expected to reach just $600k. If the rule is true, and people are rational, they should conclude either that prices were 33% underpriced in 2005 or they are 50% overpriced today.  

    Again, I believe that your statements are weighted to the way you want the outcome.  You can’t compare a seven or ten year average and then use the same formula on an annual basis.  It is after all an average some years will be 1% and some may be 30% but the average is 10%.
       

    By and large, they conclude neither. They instead concoct a convenient, self-serving and frankly deluded explanation. House prices move in predictable cycles. Several years of slow growth followed by two or three of explosive growth. Over the long term this averages out to 7% to 10% per year. This provides comfort to those who bought in 2006 only to have prices flatten or fall. I say phooey to this.
     

    Take out the word predictable and are you seriously suggesting that this doesn’t happen?  
     

    For starters, efficient market theory tells us that rational players would take advantage of such an observable cycle. They would buy after several years of sub 7% growth and sell after a couple of years of 10% plus growth. Doing so would far exceed the returns offered by buying and holding. But if people did this, the ‘cycle’ would soon disappear. Prices would rise at a steady rate somewhere between 7% and 10% per year. But they don’t.
     

    If only we had a crystal ball and actually could predict these periods we would all be millionaires.
     

    Foundation, please believe me when I say that I am not trying to be argumentative here, I am just having difficulty coming to grips with some of your reasoning. 

    I agree that it is hard to believe that the average house value will soon hit the one million dollar mark but then I would not have believed that the average house price would have hit half a million in 2008 had you told me this in 1972 when I purchased my first house for $11,000. 
     

    Jon

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