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cdt18
23-03-2005, 12:10 PM
Good advice from the economists. Let the fools looking for huge returns from residential property pay the mortagage, rates, insurance, R&M. I read an article saying you'll get a greater return in government bonds than houses at the moment. How much risk is there in owning government bonds ??

rmbbrave
23-03-2005, 01:32 PM
Don't buy - house prices set to fall, banks warn

23.03.05
by Anne Gibson


First-home buyers are being warned to stay out of the housing market as property prices are set to fall.

Bank of New Zealand chief economist Tony Alexander has predicted a 10 per cent drop in the next three years and Westpac economist Donna Purdue has predicted a 5 per cent drop this year.

Keen buyers should cool their heels and continue paying rent to take advantage of the market, Mr Alexander suggested.

House prices rose 55 per cent in the past three years, but rents were up by less than 10 per cent.

"In the previous housing boom, from 1993-97, both rents and house prices broadly rose together," he said. "This time only house prices have moved strongly."

Mr Alexander cited tumbling net migration, which had gone from a record 12-month gain of 43,000 people in May 2003 to just 12,800 in January.

He also said sales figures from Auckland's Barfoot & Thompson showed the average sale price fell from $443,000 in January to $429,000 last month, if one large sale was excluded.

The capacity for Auckland house prices to fall was much less than that of other regions, particularly Nelson, the Hawkes Bay and Taranaki, where the price drops would be steepest, he said.

"But young Auckland home buyers looking at gearing themselves up to the hilt should wait," he said.

Donna Purdue said Westpac forecast a 5 per cent drop in house prices this year.

But competitive mortgage rates at the end of last year had given the market a second wind, delaying the predicted slow-down, she said.

Next year, prices would continue falling because of higher interest rates, low migration and increased supply of housing from record construction.

ANZ National Bank chief economist John McDermott was more guarded. "The market is defying gravity and it's had a good run but it can't keep being repeated. To say everybody should rent is overdoing it. People buy houses for reasons other than simply as an investment."

Bryan Thomson, chief executive of the 170-office Harcourts, hit back at criticism of the housing market, and particularly the Reserve Bank's attempts to cool it.

"Moves by the bank to slow the market by lifting interest rates appear to be having little effect apart from the impact on our exporters," he said. "The residential property market is driven by several factors, including job security and income."

Listings in Harcourts' northern region, which includes Auckland, fell for the second month in a row last month. But prices were up from an average $328,000 in February last year to $398,000 last month.

Auckland investment adviser David McEwen last month warned clients about residential property, saying signals such as overheated prices and low rental yields were cause for concern.

duncan macgregor
23-03-2005, 01:59 PM
Take it from me guys an old time builder with years of experience. Any time is a good time to buy a property. Average property values never fall to far, they only stall at that point. However if interest rates increase placing people in vulnerable positions, then the mortgagee basement bargain section opens right up for the bargain hunter. People are very reluctant to sell below cost, and hang on. The highs and the lows on the property market average out out at 10pc up pa over the long term. It is better to pay slightly to much and get exactly what you want, as buy for something cheaper because you think it is a bargain. Down the track in one years time the property you bought that was over priced is now under priced and you get what you wanted. macdunk

cdt18
23-03-2005, 02:34 PM
Personally I think what will happen is the major centres AKL, WELL & CHCH will stagnate over the next couple of years & the smaller regional centres such as Nelson will fall but who knows how much.

Of course there will be areas which will rise as well.

Bling_Bling
23-03-2005, 04:17 PM
Opportunity cost of investing your money somewhere else with better return is the key to wealth that is better than the average Joe.

coge
24-03-2005, 08:10 PM
The only risk of Govt. Bonds is the risk of not making a profit.

You will (almost) never regret buying decent property. People always need somewhere to live.

cdt18
24-03-2005, 10:40 PM
"You will (almost) never regret buying decent property. People always need somewhere to live."

If everyone is doing it, such as now, the law of dimishing returns kicks in. An ever expanding pool of properties to rent from an ever decreasing pool of renters + interest rate rises + rates rising faster than inflation + shortage of tradesmen and you start to realise it ain't that smart afterall at the moment. I'm not slagging property off as an investment, I've made far more money out of property than shares. I'm just saying now is a good time to cash up and look for new markets.

I'm not promoting government bonds as good investments, the returns are pathetic. What I'm saying is property at the moment & government bonds provide the same returns for two completely different risks. Who would you prefer to owe you money, the government of NZ or a the first beneficary/shift worker/solo mother that comes along as you are so desperate to rent your house out as you're competing with half of NZ for their custom.

And don't even think about calling your own house an investment, it just takes money out of your pocket.

25-03-2005, 12:08 AM
Cdt18 - Use the equity in your own house to fund other investments. I have very succesfully. Nuts to have 100's of thousands of lazy capital.
Duncan - While you may not lose on property you may be buying at the top and then have little appreciation (equity) for years - as happened in the late 90's locally.
The poxiest dumps on 350m2 sections in ChCh are being snapped up by mates for around $125,000, having $10-15,000 being spent on them then being rented for $250+ per week. The numbers stack up and while the tenants can be a challenge the cash flow is positive - not great but positive.

rmbbrave
25-03-2005, 11:39 AM
It doesn't even seem that difficult to borrow money to buy shares. The current interest rate is 9.65%. Here are the Lending Ratios for ASB Securities. NOG is not on their list though.

******************************************

ASB Securities allow borrowing on over 200 approved New Zealand and Australian shares. For each approved share a Lending Ratio is attached which is the percentage of the market value of a particular security that we are prepared to lend against.

These Ratios are set by ASB Securities for the purpose of managing the business and should not be taken as an investment recommendation.

ASB Securities has the discretion to change or withdraw any Lending Ratio from the approved list of shares without prior notification.

Click here for New Zealand Shares
Click here for Australian Shares

New Zealand Shares
A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |
<pre id="code">
Code Security Name Lending Ratio %
10001 ASB MONEY MARKET TRUST 90 %
10002 ASB FIXED INTEREST TRUST 70 %
10003 ASB NZ PROPERTY TRUST 70 %
10004 ASB NZ SHARES TRUST 70 %
10005 ASB WORLD FIXED INT TRUST 70 %
10006 ASB WORLD SHARES TRUST 70 %
10007 ASB EMERGING MARKET 50 %
AIA AUCKLAND INTERNATIONAL AIRPORT LIMITED 70 %
AIR AIR NEW ZEALAND LIMITED 50 %
AMP AMP NZ LTD 70 %
ANZ ANZ BANKING (NZ) ORDINARY SHARES 70 %
APT AMP OFFICE TRUST LIMITED 55 %
ASBPA ASB CAPITAL PERPETUAL PREFERENCE SHARES 80 %
ASBPB ASB CAPITAL NO 2 LIMITED - PERPETUAL PREFS 80 %
AXA AXA ASIA PACIFIC ORDINARY SHARES 60 %
BCA BAYCORP ADVANTAGE LIMITED 55 %
BGR BRISCOE GROUP LIMITED 60 %
CAH CARTER HOLT HARVEY ORDINARY SHARES 70 %
CAV CAVALIER CORPORATION ORDINARY SHARES 60 %
CEN CONTACT ENERGY LIMITED ORDINARY SHARES 70 %
CHP CALAN HEALTHCARE ORDINARY SHARES 60 %
CNZ CAPITAL PROPERTIES - ORDINARY SHARES 60 %
DBB DB BREWERIES LIMITED 55 %
EBO EBOS DENTAL & SURGICAL SUPPLIES ORDINARY SHARES 50 %
FBU FLETCHER BUILDING 70 %
FCGHA FONTERRA CO-OPERATIVE GROUP LTD CAPITAL NOTES 60 %
FCT FOREIGN & COLONIAL INVESTMENT TRUST PLC 65 %
FPA FISHER & PAYKEL APPLIANCES HOLDINGS LTD 70 %
FPH FISHER & PAYKEL HEALTHCARE CORPORATION 70 %
FRE FREIGHTWAYS LIMITED 60 %
FTX FELTEX CARPETS LIMITED 60 %
GPG GUINNESS PEAT GROUP ORDINARY SHARES 70 %
HBY HELLABY HOLDINGS ORDINARY SHARES 60 %
HLG HALLENSTEIN GLASSON ORDINARY SHARES 60 %
HQP HIREQUIP NEW ZEALAND LTD 60 %
IFT INFRATIL LIMITED - ORDINARY SHARES 65 %
INL INDEPENDENT NEWSPAPERS ORDINARY SHARES 70 %
KFL KINGFISH LIMITED 60 %
KIP KIWI INCOME PROPERTY TRUST 70 %
LNN LION NATHAN ORDINARY SHARES 70 %
LPC LYTTLETON PORT COMPANY ORDINARY SHARES 50 %
MET METLIFECARE LIMITED - ORDINARY SHARES 50 %
MFT MAINFREIGHT LIMITED ORDINARY SHARES 60 %
MGP MACQUARIE GOODMAN PROPERTY TRUST 55 %
MHI MICHAEL HILL INTERNATIONAL ORDINARY SHARES 60 %
MWL CANWEST MEDIAWORKS (NZ) LIMITED 70 %
MZY NZX AUSTRALIAN MIDCAP INDEX FUND (NS) UNITS 60 %
NGC NGC HOLDINGS LIMITED 70 %
NMNPB NEWS AND MEDIA NZ LTD -- PREFERENCE SHARES 70 %
NPX NUPLEX INDUSTRIES ORDINARY SHARES 60 %
NTH NORTHLAND PORT CORPORATION ORDINARY SHARES 40 %
NZR NZ REFINING COMPANY ORDINARY SHARES 55 %
NZX NEW ZEALAND EXCHANGE LIMITED 60 %
OZY TORTIS - OZZY FUND 60 %
PBG PACIFIC BRANDS LIMITED 60 %
PFI PROPERTY FOR INDUSTRY ORDINARY SHARES 65 %
PMN PROMINA GROUP LIMITED 65 %
POA PORTS OF AUCKLAND ORDINARY SHARES 65 %
POT PORT OF TAURANGA ORDINARY SHARES 65 %
PPL PUMPKIN PATCH LIMITED 60 %
RBC RUBICON LIMITED 60 %
RBD RESTAURANT BRANDS ORDINARY SHARES 65 %
RCL REPCO CORPORATION LTD 60 %
RYM RYMAN HEALTHCARE ORDINARY SHARES 60 %
SAN SANFORD LIM

clips
25-03-2005, 07:11 PM
as in any markets buying quality is best..borrow to buy shares ?? well shares can double in value but they can also go down to zero,while property will always have a value.. anyways ... yep renting is a much better option, i would recommend people don't buy their own homes but rent for many years (spoken by a landlord).

Dimebag
28-03-2005, 02:00 PM
In many ways, property is no different than any other business. Ultimately, it is a service business - you provide somebody with a place to live in exchange for a weekly fee.

Because of this, an investment in property should be treated in the same manner, and with the same valuation metrics, as one would apply to any other business they would consider investing in. And like most investments, it can be a good investment at one price and a poor one at another.

People often site the low-risk of property, and the fact that there is always some inherent value there. This is, to a large extent true, given that the ongoing costs (exc. interest) are usually pretty low and fixed, and that the rental market is a large one that will always exist, such that one can attract a buyer (renter) at some price. And given the low cost structure, almost always the rent will be high enough to cover operating costs. To this extent, it is true that there is always "value" there.



However, doing a Leveraged Buyout of a house (which is effectively what you do when you buy a property partly financed by a mortgage) can change this.

Many people are negatively gearing today. They may be picking up a 5.0% gross yield after costs, but paying 8.0% to service the mortgage. This is a loss-making business, full-stop.

On a $300,000 property, with 20% down:

Rent after costs (but before tax) = $15,000
Interest = $240k x 8.0% = $19,200

Loss before tax = $4,200

Now, some will say "but you will get a capital gain". Perhaps, but this should only occur if the value of the underlying property also goes up, and this can [i]only happen if the "rent after costs" increases. If it increases at 3.0%pa, then yes, you should get a capital gain of 3.0%.

Capitalise 450$pa @ 5% = $9,000 capital gain. One is ahead, just, by, $4,800. ROE = 8.0%

But this is a risky game to play. Rent may not increase by 3.0%. The drivers are:
-increased population
-inflation
-supply of housing stock
-concentration of population (can you build out or only up?)
-movement among suburbs to preferred/less preferred areas (driven by economic performance).

These factors must be assessed carefully. Buying in good areas in Auckland, one could expect annual rent increases of, say, 2% inflation + 2% comprised of population growth and economic growth driving people into more attractive areas.

[Less attractive areas might experience a mere 2.5%pa]

So that's 4%pa growth.

The prospective return offered by a a property is therefore equal to its gross yield (after costs) + 4%. So a property yielding 4%pa + 4%pa growth = 8.0% yield before tax. The tax relief on capital gains, and deferrals due to depreciation allowances etc is probably enough to offset maintenance requirements and actual depreciation etc, and add 1% pa to value; therefore, the total "comparable" return is about 9.0%.

That's probably about fair value. You can't make much money borrowing at 8.0% to invest it at 9.0% with considerable costs involved. But 9.0% gross is probably reasonably fair given (1) current interest rates, and (2) the levels of risk associated with property.

However, changes in interest rates will measurably impact the returns realised. Rises in interest rates will force yields on properties up, devaluing them, and vice versa.

For many New Zealanders, 9.0% is a pretty good return and a mortgage enforces some saving discipline on holders. I think that this is good. As such, the rent or buy decisions is fairly neutral, but geared towards "buy" for those with otherwise poor saving discipline.

However, owners should be wary of overgearing themselves. If interest rates rise, will they be able to take the pain? They will realise substantial losses if such rate increases are permanent. A "low-risk" property investment can become high-r

duncan macgregor
28-03-2005, 06:21 PM
Most people fail to see or understand property investment. It is the complete numbers game, that makes millionaires out of people that otherwise are only wage earners. To understand property is to understand the rules and how to invest. I said it before it really doesnt matter at what the property cycle is up to when you buy, property only falls slightly at the top of the cycle. Property increases in value by 10pc pa over the long term, and that is what property is,it is a long term investment, that leaves the sharemarket for dead, if you play it right. In order to play it right means to understand, and learn the rules of property investment. The very first rule is to remember it is the banks money you use with the least ammount of your own. The second rule is to have enough behind you if there is a hiccup, either an interest hike,or someone not paying rent. The third rule is to have a deposit only large enough that peter pays paul, and it self funds. After three or four years get it revalued and take out a bigger loan, and buy your next property and so forth. If you start in your twenties,your first property will turn you into a multi millionaire without adding any more of your own money towards it allowing you to play the sharemarket in your doteage. Property never crashes like the share market, your first investment can be your last,and with time make you rich if you play by the rules. MACDUNK

Dimebag
28-03-2005, 06:33 PM
Duncan

It cannot be correct that property increases at 10pc over the long-term. I don't have the figures, but I acknowledge that that may have been the case over the past few decades. However, I think there are grave dangers in extrapolating this experience forward.

The reason I say that is that returns can be hugely enhanced in a falling-interest rate environment. If interest rates are 15%, and property is price in line with rates, an area with a 4% expected nominal growth in rentals will have to sell at a 11% gross yield to provide a return = to the mortgage rate (the "no arbitrage" situation).

However, if interest rates fall to 8%, the property can sell on a mere 4% gross yield for the same result.

A property returning $300 p/w, or $15,000, less $2,000 = $13,000 pa in gross rental, a valuation based on a 11% yield is $118,000, whilst a valuation based on a 4% yield is $325,000!!! Great gains, but they can only be achieved in a falling interest rate environment. The reverse situation will prevail in a rising interest rate situation.

These tailwinds also have buoyed equity markets since the early-mid 80s. People who don't recognise this are apt to wildly overestimate sustainable long-term returns.

The fact is, 10%pa growth would mean that, given time, nobody would be able to afford properties. GDP is only growing at 3%pa. Property values cannot outpace GDP growth + inflation. 5%pa in the absolute maximum anyone can expect in the absense of further falls in interest rates.

Quote
Property never crashes like the share market, your first investment can be your last,and with time make you rich if you play by the rules.
Not correct; I believe property prices have fallen every year for the last 13 years in Japan! Property is an asset class like any other, and can be wildly overpriced just as stocks can. If such a situation prevails, the correction can be messy!

Dimebag

duncan macgregor
28-03-2005, 07:38 PM
DIMEBAG, Take it over the last firty years the price of property has averaged up 10 pc pa in loose mathematical terms upwards or downwards but near enough. Let us presume you bought a house today with a thirty year term in mind as your old age pension fund for your retirement. You pay Thirty thousand deposit on a $300000 property and get an 8pc yeild at the start which is the yeild to strive for. After the first year the capital gain is $30000 equal to your initial deposit or 100pc on your investment less whatever cost it takes to keep up with the bills. After a couple of years the property will run at a profit, with an increase in returns with the capital gain increasing as the price rises. By refinancing and doing it over, and over you increase your wealth without adding another cent to it. I know people that do this, it is not complicated, and is a non risk way to getting rich. Leaves share trading for dead, but not as much fun. macdunk

dingdong
28-03-2005, 07:55 PM
O MacAdder you have been reading too many Dolf De Roos books.

A 10% pa increase compounded over 50 years is 11600% or 117x. You can't tell me the average NZ property price was only worth £1000 in 1955?

duncan macgregor
29-03-2005, 05:54 AM
ABDAB, your arithmatic is a credit to your teacher. even although your numbers are wrong. If you take a great oak tree back far enough you will find it is an acorn. If you take the tree forward far enough you will find a pile of dust. You are doing this and fail to see where you are mistaken. Let me give you a real life situation. I bought a lifestyle bare block of land in 1994, and paid $75000 which was the valuation price. Todays valuation price is $315000 plus the price of the house i built. If a persons house increases at less than 10pc pa it only means that they made a bad buy in the first place. We have people in the share market that make bad buys, like wise the property market. We have people in the sharemarket that sell their advice to the dummies, same with property. I have averaged a lot more than 10pc pa on every property deal i have made, and i have bought and sold a lot more than the average person.
When i raise my mathematical standards to a worthy standard i will debate this further. your old mate macdunk.

Capitalist
29-03-2005, 02:26 PM
quote:Originally posted by duncan macgregor

ABDAB, your arithmatic is a credit to your teacher. even although your numbers are wrong. If you take a great oak tree back far enough you will find it is an acorn. If you take the tree forward far enough you will find a pile of dust. You are doing this and fail to see where you are mistaken. Let me give you a real life situation. I bought a lifestyle bare block of land in 1994, and paid $75000 which was the valuation price. Todays valuation price is $315000 plus the price of the house i built. If a persons house increases at less than 10pc pa it only means that they made a bad buy in the first place. We have people in the share market that make bad buys, like wise the property market. We have people in the sharemarket that sell their advice to the dummies, same with property. I have averaged a lot more than 10pc pa on every property deal i have made, and i have bought and sold a lot more than the average person.
When i raise my mathematical standards to a worthy standard i will debate this further. your old mate macdunk.


I agree MacDunk. Property leaves the Sharemarket FOR DEAD, and is where everyone I know has made their money. Apart from one commercial property my investments are bare land and I get real estate agents phoning up on a regular basis. You can't go wrong if you are in the know or get good advice from people who are, like I do.

Dimebag
29-03-2005, 02:40 PM
At a 10%pa annual compound growth rate, in 2025 the median property price in Auckland would be $2.4m. Adjusting for a 2%pa inflation rate, that is still $1.6m in today's dollars.

Surely this cannot happen. Firstly, for 20% down, a deposit of $320k would be needed; secondly, on a 20 year mortgage, based on morgage rates of 8.5%pa, weekly mortgage payments would be $2,600 a week!!

That means a family would require a gross salary of $207,000pa just to meet mortgage payments (before rates, maintenance, electricity, water, insurance, and that's not even getting to food, clothing, and lifestyle expenses!)

This just ain't going to happen. If you think it is you're dreaming.

Dimebag

Halebop
29-03-2005, 04:01 PM
Cap the fact that everyone you know made their money in real estate is hardly proof of a concept. If I were an All Black everyone I know would have made their money in Rugby and owning bars (and maybe one or two league mates lost money in property!).

What we do know is that property does not compound at 10% per annum ad-infinitum. A simple process of maths shows this to be impossible. Quite obviously Dr de Roos' PHD is in neither Math nor Statistics.

My net worth has increased 137% last year and with a couple of days to go this period I will confidently pick 96% for this year. All without leverage and without a single house, section or tin shed in sight.

Whenever I look at an NBR / BRW / Forbes etc Rich List they seem remarkebly devoid of people who own 4 rental properties in Mt Eden. Now I'm not knocking property investment - merely having a plan will make you richer than 95% of the population. Will property beat the sharemarket hands down? Quite simply no. Its just another choice.

Cooper
29-03-2005, 04:11 PM
High inflation rates in previous eras need to be taken into account as well... ie 15% return in a period of 12% inflation gives a real return of 3%. 70's, 80's etc, double digit inflation was the norm so any calcs going back 50 years would have to account for this.

cdt18
29-03-2005, 04:47 PM
Owning houses is so over-rated in NZ. It's ingrained in the culture and bugger the financial consequences. It's like you're a second class citizen if you don't own a house. Why not take advantage of this 'own it at all costs' culture and sell your cultural rites to some other fools. Property was a good investment a few years ago but now, it is just plain stupid in most areas. You get to look after a pack of slobs, risk your capital all for the eqivalent ( or less ) return available from the friendly government. This is surely a bubble when the returns in property are less than government bonds AND interest rates are going up. I noticed the fixed rates have gone up now also. This is the final stages of the boom, head for cover & don't even think about buying for the next year.

duncan macgregor
29-03-2005, 05:22 PM
COOPER,IT is easy to work out the past inflation rates etc. What most people dont understand with property is it is not your money that makes the money, it is the banks money. When a property becomes self funding, then makes a small profit, and progresses into a larger profit, then it is time to refinance and buy another property. The value of the property goes up along with the rent over time, so in the end on average your first property has financed you into at least five more in a ten year period. The object of the excercise is not to pay the principle off, but refinance into bigger and better deals. When it is at the stage where the tenant pays the out goings, then the capital gain is your profit on the total. The people that understand that simple system will be rich, without trying. It is like buying a car a house has a life cycle your oldest property gets sold at the top of the next cycle. CAP says buying blocks of land if you have money to spare is a good investment. The block of land next door to me is a typical example, 8 acres of paddock bought by someone left some money in an inheritance. They paid $68000 for it in 1994 and leased it to a farmer for his livestock grazing for the price of the rates. They have had offers for over $300000 to buy it, but on my advice refused. I told them it is a no hassle investment that sits there until you need the money, or find a better place to invest it. Those people next door will put their kids through university on the back of a `$68000 inheritance or slightly more, and hold common low paid jobs. I did tell them as you are not buying or selling property as a business, then this money is tax free when you finally sell. If anyone is so stupid they cant see the facts then be poor see if i care. macdunk
PS not as much fun as the sharemarket

dingdong
29-03-2005, 05:52 PM
O Caber Tosser, sections are in the same league as art, stamps, coins and of course GOLD. They provide no income and are purchased purely for the hope of capital gain. Proper investments should provide some income via POSITIVE CASHFLOW. Unfortunately this generally rules out rental property at the moment.

Halebop
29-03-2005, 05:54 PM
Investment: Bare Land
$68,000 Capital Cost
$300,000 termination value
11 Year time span
= 14.5% per annum compounding.

Upside:
Beats gross global share performance of roughly 12%
Can't get much more knowledgable about your investment than nearby land
Unlikely to pay tax on resale over such a long period
The bricks and mortar/something solid/hands on perception of security (I stress the word perception though)
Little input required beyond patience

Downside:
Lacks liquidity
Produces no income and potentially a negative income if you can't lease it to the farmer
High transaction costs on resale
Difficult to value accurately

Personally I'm happy to have held shares over that time period, having beaten that return by a useful margin. All the same, a handy result. Once again I'll say just having a plan is a step in the right direction. They could have spent the $68,000 on a car and a holiday!

duncan macgregor
29-03-2005, 07:07 PM
haletop, you miss the point. you and i are educated in investment strategies the people i speak of are normal people with no idea about what we talk about. macdunk

rmbbrave
29-03-2005, 07:40 PM
Halebop,

You missed the most important "downside".

Lost Opportunity for self Education. While the 68K was invested in the land these people learnt nothing about investing.

They could have reseached 20 or so companies, chose the best 5 and bought $13600 in each. Then, closely followed their 5 companies and sold when they thought the companies prospects had changed and bought some better ones.

At the end of the 11 years they'd probably have about the same amount of money but buying (and selling) shares should have also left them with an education.

29-03-2005, 08:21 PM
Halebop what would you have paid in rates in the period and how many times would you have mowed it. take these expense off and see what it does to your return. Then that money plus what the expense money could have earned either by compounding interest or other investment and then your investment does not look so good.

cdt18
29-03-2005, 08:39 PM
not to mention your time at full cost to mow it !

duncan macgregor
29-03-2005, 09:04 PM
ABDAB and RMBBRAVE, we must be truely aware that some of our friends have very little up top when we talk of investment. I will venture the suggestion that most of your closest and dearest friends alas fall into this category. It is not for us to advise in strategies that is clearly beyond their comprehension, but to play the game that in general is understood. MY friend ABDAB speaks of gold because where he comes from you can wear you bank account round your neck as you run up the street in front of the intruders. RMBBRAVE is obviousely an educated person living in Japan that teaches the natives to speak with a Kiwi accent. We have a common bond and that is to disclose or teach what life has thrown against us to the people that may want to learn from our life experiences. I feel priviledged that people like yourselves that will share your business knowledge with me. It is so easy to think this is right and that is wrong ,but then it is only a matter of your birth place that is why i like your views, it keeps me on track . your old mate macdunk.

rmbbrave
29-03-2005, 09:36 PM
quote:Originally posted by duncan macgregor

RMBBRAVE is obviousely an educated person living in Japan...


An education isn't how much you have committed to memory, or even how much you know. It's being able to differentiate between what you do know and what you don't.

Anatole France

French novelist (1844 - 1924)

Halebop
30-03-2005, 02:17 PM
RBNZ did some analysis of property dynamics and although they couldn't get a 100% accurate model they said the broad contributors to real property values were:

Employment
Productivity Growth
Real Wage Growth

There is also inflation but this is not a contributor to real value and as this tends to harm the prospects of all three other contributors is not the friend of property investors that the "borrow and have inflation eat the loan value" strategy purports it to be. Particularly when compared to the property value fruits of high real growth thanks to strong economic performance.

Dunc I think you gave your friends reasonable advice. I look at my friends, many of whom earn a higher "wage" than me but are poorer for it because they tend towards consumption rather than investment and limit their "investments" to owner occupied houses. While they mostly all have families that doesn't preclude a person from making sensible financial decisions. Few of them have an interest in investing or providing for themselves which I personally find frustrating because many of them also despair at their vocations and material lacks.

Enigma and CDT18: Dunc said it was leased to the farmer for cost of rates. Therefore no rates and the farmer would be required to maintain the property under commercial lease terms.

Tinker
30-03-2005, 07:16 PM
Halebop.

I think the advice given by that skirt wearing man north of the border was spot on in the circumstances.

Your friends with families? Well said! However I did the speadsheet thing and each of my children have/will cost $250k in toto. The mix of investing the maximum in what you love versus the best financial return you can get (hopefully to provide a better return in the future for your family) is tricky. Difficult to be an expert in many areas and perhaps for those with children who do a good job their expertise is not in investing?

And for those who strive in neither area well luckily for them central government takes from those who do and gives to them that don't:D.

Cheers
Tinker

elfer
04-04-2005, 03:14 PM
BNZ's economist has recently recalculated the NZ average house price increase on a real and nominal basis:


quote:On average since our data series started in 1960 house prices for the country as a whole have risen by 8.9% per annum. Inflation has averaged 6.9% p.a. so on average house prices have beaten inflation by 2% per annum. One can alter this number by moving the time periods around a bit. If we start our analysis in 1970 then the numbers become 10.2%, 7.6%, and 2.6% inflation-adjusted. Starting in 1980 the outcomes have been 9.4%, 6.0% and 3.4%. Since 1990 the numbers have been 6.2%, 2.2%, and 4.0%. So the inflation adjusted rate of capital gain has been trending up.

He then goes on to say he thinks both 2% and 4% are unreasonable, and that 2.8% plus inflation (ie 5.3%) is what to expect going forward.

This is a long ways away from the 10% being thrown around here.

Halebop
04-04-2005, 03:38 PM
Nor do those numbers take into account average house size data which have literally grown since the 1960s (and earlier). If you took into account housing "recapitalisation" in the form of renovations and extensions I wonder how big real growth would be then?

Still, 8.9% is not so far off 10% and with NZ property slumps tending to be a once a decade event you can see how people get the "safe as houses" investment mentality.

I wonder though with Baby Boomers rattling around large houses and a proportion of their children either not having families or priced out of the market if homes will continue to grow in size?

Dimebag
04-04-2005, 05:00 PM
Halebop

Yes agree - have often wondered about the house price statistics put out by the likes of REINZ - they are computed solely on the basis of the average sale price. With a number of so called "do 'em uppers" now operating in the market, these returns are surely exaggerated.

The very useful statistics presented by elfer (thanks mate!) also reflect how punters have benefited from a "one-time" fall in interest rates. This increases affordability hugely and reduces rental yields.

When you thing about it, overall NZ house prices cannot increase at a rate greater than inflation + real GDP growth, over the long-haul. Otherwise, people will simply not be able to afford the higher prices. Agree that 5%pa seems like a reasonable assumption, for good areas.

Interestingly, though, it shows that punters buying on a 4%pa after costs yield aren't necessariliy getting a bad deal. This should yield say 2.4% after tax + 5% tax free capital growth = 7.4% after tax return.

This comfortably beats returns on debentures of say 8.5% = 5.2% after tax, with less risk.

Not a get rich quick scheme by any stretch, but borrowing at 8.5%, after tax, costs only 5.2% which means one makes a 2.2% margin on cost.

With a 15% deposit, that's a 20% ROI when you add back the saves interest (0.8% + 2.2% = 3.0%). Most small punteres couldn't get taht in the stock market.

The numbers still stack up, just, IF interest rates don't continue to rise.

Dimebag

elfer
04-04-2005, 05:38 PM
To be fair, I think the REINZ figures are median (which helps smooth out the result) and that to some extent the effect halebop talks about will be offset by all the lower value apartments (at least in a city, especially Auckland).

The last two reports from the BNZ guy have been very, very interesting (the reports are a bit hard to find, under "About Us" on their home page). Last week had the real returns data set out above - makes you wonder if an investor buying a house now on a crappy yield because of expectations of long term gains is fooling themselves).

The week before had a graph of house prices to rents ---&gt; basically a dead flat line for 20+ years up to 2001, where the house price relationship went up by 40-50%. I guess because this coincided with low interest rates, no-one hurt much, then the capital gains frenzy made everyone happy despite the ever worsening yields.

One has to ask if there has been a fundamental change in the underlying price/equity ratio of housing (as measured by house prices to rents), or if the housing market is overvalued. The graph makes pretty scary reading (interestingly, The Economist magazine places great weight on this measure too).

IMHO, rents aren't going up (because people who rent can't pay more), so either prices come down, or... prices come down. Sooner or later residential rental properties have to become just another asset class.

http://www.bnz.co.nz/binaries/w310305.pdf
http://www.bnz.co.nz/binaries/w230305.pdf

Dazza
08-04-2005, 04:34 PM
why cant everyone just be merry :D

im planning to use both as a medium to make money....

IMO housing is more safe when u are using leverage as macdunk has outlined.

i wouldnt leverage that much on shares... no way hosay...

unless i know a **** load about them

thing is for housing... u dun have to have much brains to do it..

hell my old man didnt even complete college, moved to nzl from a different country , wasnt fluent in english... yet he still knew how to make money via buying property...

when all goes ****, at least u have a roof over ur head.... *unless u cant pay the interest...

there are alot of neat tricks and tax savings and etc tied up with property investments, thats why they are so worthwhile in nzl


btw, someones notion to OWNING a property is ingrained in nzl..

well theoretically speaking yes and no...

a smart property investory wont be owning it... instead the bank will ...

but yes i concer with that statement, what it takes 20 years for a normal european middle class family to own a house? and by the time they retire the house is all they have really...
*prob better fitted for the early 90s that statement*.

either way , i plan to use a mixture of share and property investing in the future to make my wealth :D

both have its potential and both has its down, synergise ppl :D

Sideshow Bob
19-04-2005, 05:27 PM
National Median Price up by $10.8K in March over February

http://www.stuff.co.nz/stuff/0,2106,3253734a10,00.html


Hard to Believe??

cdt18
20-04-2005, 07:02 AM
I think this is an indication of the increase in quality of the housing stock. Apparently they believe the top end of the market caused the increase. You could hardly compare a house of the 70s with one built today in terms of the features.

wns
20-04-2005, 04:38 PM
Some good discussion and analysis so far.

I’m going to add my 2 cents worth, and have a few points to make.

There are always bargains in the real estate market. You just have to look hard enough.

Buy and hold is not the only way to make money in real estate. There are several ways to make a healthy positive cash flow return in real estate, such as a 40%. See my post at the end of the ‘property rocks’ thread for an example using one method.

Now to the other issue of where you live yourself. What do you do – rent or buy?

The answer of which is better is different for everyone, with financial considerations not being the only part of the equation.

In the long run I personally think it makes sense to buy your own home. That said, it is wise to buy such that you can comfortably make the repayments, leaving a surplus each month that you can invest and get ahead, whether it be in shares and/or more real estate or something else.

Whether you pay interest or pay rent, either way it’s a necessary expense. Consider this, NONE of the money you pay in rent has any chance of producing a capital gain or income (for you)!

If you buy a house to live in, once you have paid off the mortgage, your living expenses are greatly reduced. But if you continue to rent, then in 5,10,15,… 30 years time, instead of your expenses dropping, you’re still going to be paying rent week in, week out and have nothing to show for all that rent money you have paid out.

I have, and continue to make money in both real estate and shares. Like Dazza says, both can be good vehicles and why not use both of them.

Longtack
20-04-2005, 10:06 PM
Board with a retired middle-class woman who wants a bit of company and income, or a lover. Both will provide stimulation.
Little mtce, no depreciation, no rates etc, all equity fully invested.

Sauce
21-04-2005, 07:20 AM
Ahem...

Longtack: Not only do woman depreciate, but depending on the model the maintenance and rates would equal even the most demanding property portfolio.;)

Regards,

Sauce [}:)]

Sauce
21-04-2005, 07:39 AM
Re: renting vs buying

I have a few rental properties, but rent myself. The house i am renting is worth around a million dollars, yet it only costs me $700pw to rent. The landlord pays for gardening and to have the swimming pool cleaned.

To purchase this home and have enough equity in it so that my interest costs were as low as $700pw I would have to divest most of my growth assets. Obviously, this would be a backwards step.

I think the argument for renting vs buying is fairly straight forward, but depends where you are in your personal investment cycle. If you are youngish and in a growth phase, it makes more sense at the moment to rent and put all your equity into growth assets like positively geared rentals and stocks. Especially renting in the middle/upper end of the market - you get more lifestyle for your money than you could possibly achieve by purchasing. With capital gain less likely over the next few years, the case for renting is even stronger. Obviously if rents were to rise back above the cost of borrowing, it would be better to own your home.

If you are at the consolidation stage of your personal investement cycle i.e. looking for lower levels of risk and growth and more cashflow it might be more comfortable to own with a lower level of gearing.

Regards,

Sauce [}:)]

Sauce
22-04-2005, 08:28 AM
From the latest BNZ Monthly Report:




Rents Lag Price Rises Again

For your guide, Statistics New Zealand have reported in the Consumers Price Index that on average rents
rose by 0.7% during the March quarter whereas average prices using REINZ data rose 5.4%. Compared
with a year ago rents have risen 2.2% while prices have gone up around 13.6%. And compared with five
years ago rents have risen just 9.4% while prices have gone up 67%. What is the most probable scenario
from here? Rents rise 58% in the near future or prices flatten out and probably fall. Given the evidence of a
growing oversupply of property it is hard to see an upward rents adjustment in the near future.

TheBossMan
10-09-2005, 06:56 PM
I'm about to implement the strategy:

1. Make money in shares (pretty easy to do)
2. Use the profits to buy&hold property. No immediate tax to pay.
3. By the time you retire, leave some for cashflow and convert the remaining into trust-based structures.

Any thoughts?

CJ
10-09-2005, 09:38 PM
quote:Originally posted by TheBoss


1. Make money in shares (pretty easy to do)
2. Use the profits to buy&hold property. No immediate tax to pay.
3. By the time you retire, leave some for cashflow and convert the remaining into trust-based structures.


If it is easy to make money in shares, why not keep doing it rather than moving to step two. Likewise if you had reversed the order of 1 and 2 I would ask the same question as you can start both with little money - some would argue you can start property with nothing!.

What is a trust based strcuture. It is a holding vehicle, not an investment structure I would have though. YOu can do both shares and property through a trust. Why wait until retirement to start a trust - you can only gift $27k per year so start young if you want to get Millions into your trust.

TheBossMan
11-09-2005, 12:02 AM
I'm an active trader and I doubt I've the discipline to buy&hold. Even if I were to pick good stocks for the long-term, I may be tempted to sell them off too early. So, I'll make short-term gains and use the profits to buy property (defer tax till I retire).

Sauce
12-09-2005, 02:44 PM
quote:Originally posted by TheBoss

I'm an active trader and I doubt I've the discipline to buy&hold. Even if I were to pick good stocks for the long-term, I may be tempted to sell them off too early. So, I'll make short-term gains and use the profits to buy property (defer tax till I retire).




I think your strategy is totally sound. Everyone has a different system and if it excites you enough to implement it then thats the most important thing. There are many people who make all the plans in the world and never get there.

I have engaged in a very similar strategy which has been incredibly good. I use income from my work to buy shares which act as my "long term porfolio" or "better than the bank savings scheme" (for tax purposes!) and for the purpose of diversification I have then channelled funds into property investments. If I need to sell shares that have made significant capital gains to allow for the purchase of these properties, then so be it, but for tax purposes they are always part of my long term portfolio.

One of the best things about shares is that you can enter and exit easily so moving funds into property is easy, and if you time things fortuitously you may even be able to get back into the same shares at a cheaper price later on (should it still be a good place to park your money of course).

In regards to an entity structure you should seek expert advice because its hugely important that you get it right and it's generally different for everyone depending on a whole raft of personal variables (age, family, work etc).

I would suggest that c's suggestion of setting up a trust early is a very pertinent point though. He is right that you can only gift 27k per year to your trust, but more importantly you want to lock in all the growth that your assets are providing into your trust (which should at least eventually eclipse 27k per annum by a huge amount).

One of the problems with trusts is that any (paper) tax losses cannot be carried over to be claimed against your personal income and will be locked within the trust (but can still mimimize the trusts tax liabilities of course).

So in the meantime you may want to consider using an LAQC or "loss attributing qualifying company" for your property purchases. This will mean that after expenses such as depreciation you can minimise your personal tax liability.

You will need to way up the long term benifits of asset protection and estate planning against immediate tax releif. And of course trusts also have tax advantages if you are on a 39% tax rate and also if you split income from your trust to each of your family members at lower tax rates.

Trusts can certainly be the perfect vehicle for creating a retirement plan, and as they say "the best time to set up a trust was yesterday" but get advice from a tax/asset planning expert who can look at your situation in detail.

Regards,

Sauce [}:)]

TheBossMan
12-09-2005, 09:26 PM
thanks. I'm already trading under the umbrella of a limited liability company. yep, long-term asset protection and passing the $$ to my kid when I retire is all I'm looking for.

cheers

duncan macgregor
15-09-2005, 03:25 PM
There is only one time to rent and not buy. That is if your work place is on the move. Lets take the average over the last fifty years,The price of property has exceeded the rise in inflation . Property can be leveraged very quickly, at lower rates than other investments. You can buy that house, borrow from it, and do whatever. We all know about hidden costs roof leaking whatever, but you get people that buy crap shares as well. Taking into account that property never crashes at the same extent as the share market, makes it a safer investment. It is very easy to borrow against a property set up, so take a look at what you save. If you stick it in the bank you pay tax on interest. If you stick it on your property loan your interest is nil. Set the deal up to pay up or borrow more. Play the markets in the good times with your property money its not a competition both are complimentary its only a case of opening your mind and seeing the opporyunities as they present themselves. macdunk

Sauce
15-09-2005, 03:37 PM
Hi Duncan

What about the following scenario:

Rent a high end property for a fraction of what it would cost you to own it.

Own several (or many) lower - middle range properties that's rents easily cover the cost of owning them (including maintenance).


This has been my philosophy for the last 5 years, and it beleive it has allowed me to have a higher standard of living, while still making huge capital gains over and above what I would have if I had purchased an equivilent property (to the one i am renting).

I am not anti owning your own home, and indeed I am looking forward to one day living in a home that I own. Its about growth now and consolidating later.

My point is that everyones circumstanses are different and for me I wanted to find a way to live fairly luxuriously while still maximising my wealth creation. Not something I believe I could have done by owning the home I lived in unless I sacrificed some of the quality of life that i was used to.

Of course, to keep renting and not own any rental properties at all would have been costly indeed! so dont get me wrong duncan, i agree that property is a great investment.

Regards,

Sauce [}:)] [8D]

Dough Boy
15-09-2005, 03:41 PM
quote:Originally posted by duncan macgregor

There is only one time to rent and not buy. That is if your work place is on the move. Lets take the average over the last fifty years,The price of property has exceeded the rise in inflation . Property can be leveraged very quickly, at lower rates than other investments. You can buy that house, borrow from it, and do whatever. We all know about hidden costs roof leaking whatever, but you get people that buy crap shares as well. Taking into account that property never crashes at the same extent as the share market, makes it a safer investment. It is very easy to borrow against a property set up, so take a look at what you save. If you stick it in the bank you pay tax on interest. If you stick it on your property loan your interest is nil. Set the deal up to pay up or borrow more. Play the markets in the good times with your property money its not a competition both are complimentary its only a case of opening your mind and seeing the opporyunities as they present themselves. macdunk


Never say never that property does not crash, their are numerous examples throughout history. Remember NZ and Aus are relatively new economies and down-turns have tended to be flat periods rather than negative as the increasing population and advancement of these young countries tends to quickly put an end to any slow-down.

However NZ and Aus are will and are becoming more mature countries.

Germans have substained nearly two decades of decline. I wonder what the average New Zealander's resolve would be after 2 years?

As to the question of if one should buy that depends on the price one is paying for one's digs. Are you purchasing a property with a rental return of 6% (should be OK) or a mansion with a return of 3% (maybe renting is ultimately a better choice)

Farouk
26-09-2005, 03:06 PM
A friend of mine has just rented a $1 million residence in Napier. The place has a heated pool, 4 brm, 3 bathrooms, double garaging, underfloor heating, nice kitchen etc etc. Evan has a gardener & a window cleaner (that are paid by the landlord). He is paying $500 a week.
I reckon that has to be a pretty good deal (for my friend).
For the landlord, his return is probably less than 2%, but I guess his asset should be growing, and my friend should be a pretty good tenant (the guy doesn't even drink & it is next door to a winery!!)

BRICKS
07-10-2005, 05:51 PM
quote:Originally posted by Farouk

A friend of mine has just rented a $1 million residence in Napier. The place has a heated pool, 4 brm, 3 bathrooms, double garaging, underfloor heating, nice kitchen etc etc. Evan has a gardener & a window cleaner (that are paid by the landlord). He is paying $500 a week.
I reckon that has to be a pretty good deal (for my friend).
For the landlord, his return is probably less than 2%, but I guess his asset should be growing, and my friend should be a pretty good tenant (the guy doesn't even drink & it is next door to a winery!!)


Sounds Great,, But if your friend wants to throw away $26,000 a year he will never even own a House at all.. [8D]

duncan macgregor
07-10-2005, 06:37 PM
BRICKS, Lets take your friends case paying $500 pw or $26000 per annum. The landlord has an investment that pays according to your figures less than 2%per annum and according to figures that i say an average for the last thirty years of a capital gain of 10%. I say that the landlord can borrow 90% of the initial investment or a deposit of $100000 and make your friend look stupid by renting.
Do the sums again then stop and think who the dummy is. Macdunk

wns
07-10-2005, 07:18 PM
Er, put your hand up if you would pay $100,000 to buy a business where you LOSE about $40,000 per year!!!!!!

If you put down 10% deposit ($100,000) to buy a $1m property, that's what you are in effect doing. $900,000 loan at say 6.8% interest = $61,200 of interest you have to pay per year. And that's not even paying down a dollar of the principle! Then there's all the other expenses such as rates, maintenance etc etc.

On the income side you've only got $26,000 ($500pw).

That's a BIG shortfall year in year out.

Forget about your theoretical 10% rise per year macdunk.

That's financial suicide!!

duncan macgregor
07-10-2005, 08:16 PM
WNS, you might say that about any investment, leave out the good bits, and only count the bad bits. Nothing theoretical at looking at a thirty year average of the past to forecast the future. The price of building and compliance costs are sky rocketing in comparison to the past so i predict 10pc pa in the future to be on the low side. If you cant show a decent profit even with the lousey figures presented i would be surprised. The more people that think your way the better lets tell them how clever they are by renting. macdunk

BRICKS
08-10-2005, 12:46 PM
quote:Originally posted by duncan macgregor

BRICKS, Lets take your friends case paying $500 pw or $26000 per annum. The landlord has an investment that pays according to your figures less than 2%per annum and according to figures that i say an average for the last thirty years of a capital gain of 10%. I say that the landlord can borrow 90% of the initial investment or a deposit of $100000 and make your friend look stupid by renting.
Do the sums again then stop and think who the dummy is. Macdunk


Look again its not my friend at all,, Farouk`s mate it was me calling the Dummy.. [8D]

wns
09-10-2005, 09:44 PM
quote:Originally posted by duncan macgregor

WNS, you might say that about any investment, leave out the good bits, and only count the bad bits. Nothing theoretical at looking at a thirty year average of the past to forecast the future. The price of building and compliance costs are sky rocketing in comparison to the past so i predict 10pc pa in the future to be on the low side. If you cant show a decent profit even with the lousey figures presented i would be surprised. The more people that think your way the better lets tell them how clever they are by renting. macdunk


Macdunk, don't get me wrong, I like property, we bought our own home, and we have a couple of investment properties.

Yes there are numerous benefits to real estate investment, such as leverage of your money, capital gains, tax advantages and cash flow.

The point I was making though is that its no use holding an investment for the appreciation when the cash flow is killing you in the mean time.

blackcap
12-10-2005, 08:01 PM
quote:Originally posted by Cooper

High inflation rates in previous eras need to be taken into account as well... ie 15% return in a period of 12% inflation gives a real return of 3%. 70's, 80's etc, double digit inflation was the norm so any calcs going back 50 years would have to account for this.


And thats what supports MCDUnk's figures. The high inflationary period. I have this exact argument with my dad every time. He just beleives property is the bees knees and cannot undertstand that it is in reality not as good as its made out to be.

Halebop
12-10-2005, 11:28 PM
It's a common misconception that property is a hedge against inflation. One of the biggest property slumps in "living" memory was during a highly inflationary period in the late 70s.

While property will catch up with inflation it won't necessarily do this in a concurrent manner, often waiting for inflation to recede and better economic times to begin before playing catch up. The problem with inflation is that it impacts productivity and financing costs, two key ingredients for a robust property market.

MacDunk's 10% contention (I won't bother arguing that one right now!) is actually better supported by the more recent low inflationary period. Here productivity is at least stable to modestly growing, interest rates more affordable, GDP growth relatively robust by NZ standards, employment has risen and our collective pocket books suitably bulging with both cash and confidence to coax us into mutli decade loan commitments.

Alas like all cycles the miracle of continously rising productivity, low inflation, easy credit and rapid GDP growth will invariably become a victim of its own success. From a New Zealand perspective Inflation and Balance of Payments problems seem the enemy right now - a potentially heady "stagflation" combination. And just a short time ago people were accusing the Reserve Bank of getting things wrong with a rate rise... Be glad Bollard runs the bank and not the communal board of ShareTraders.

wns
29-10-2005, 12:01 AM
Macdunk, I'm sure you will like this one... :)

The other day I got an update on what our two investment properties are worth, and got a pleasant surprise. So I decided to crunch some numbers.

We bought our house just under three years ago. Our cash outlay was was 5% of the purchase price + another 5.5% or so which paid for the closing costs (stamp duty etc etc). A year later our house had appreciated in value and we pulled out $50k as an interest only tax deductable investment loan and used that to pay for deposit & closing costs on two investment properties.

The two investment properties are both paying for themselves (8.93% gross rental yield on purchase price). We haven't done anything significant to improve the value of any of the properties.

The equity that we have in the three properties is now approximately 12 times our original cash outlay for the first property!!

In the parlance of Peter Lynch, that's a 12 bagger within three years!!

Comparing minimum loan repayments on our own house + rates +
insurance etc on our house; versus the rent we were paying, we have only paid about $10k extra over three years.

I couldn't decide whether to post here or on the 'property rocks' topic. ;)

duncan macgregor
29-10-2005, 06:19 AM
Good on you WNS, I know lots of people with similar stories. You will find the brain dead will argue against it. Keep it going good times coming up with a buyers market. macdunk

Tinker
29-10-2005, 11:19 AM
Just received the latest Govt valuation in the mail.

On purchase price and latest valuation the home has appreciated at 6.5% per annum compounding for the last 11 years. As it is a home and is intended to provide accomodation plus a solid base for many aspects of our life I think this is OK.

What do others think?

Cheers
Tinker

Halebop
29-10-2005, 12:47 PM
quote:Originally posted by Tinker

Just received the latest Govt valuation in the mail.

On purchase price and latest valuation the home has appreciated at 6.5% per annum compounding for the last 11 years. As it is a home and is intended to provide accomodation plus a solid base for many aspects of our life I think this is OK.

What do others think?

Cheers
Tinker


I think it's fantastic! Over the time frame it's probably more representative of recentish longer term returns achieved than the 10% theory. Just like the financial planners though, I'd hasten to add that past performance is no indication of future returns.

Compounded 6.5% is almost exactly double the purchase price over 11 years. Assuming you've made a dent in the mortgage (or at least refinanced for investment purposes only) it represents a substantial base for financial security.

In terms of wealth though it can be a bit of an illusion because if you intend to remain an owner occupier you can only swap the home for other homes at similar purchasing parity values. This is the danger of the "my overcapitalised house is my retirement scheme" plan, particularly for Baby boomers who may realise it is their only asset at the same time their peers do and attempt to "trade down" en masse.

I note recent data showing that outside of home ownership the average Kiwi has some $37,000 in financial assets at age 60 (I'm sure even modest Sharetrader members could beat this currently or at least on a time series valuation for younger/newer investors). Little wonder our sharemarket is so thinly traded - very few of us could even afford to own shares on that savings data.

duncan macgregor
29-10-2005, 03:42 PM
Haletop, You cant take it with you what better way to save up for your old age than over capitalize with a large house for the family. When the kids flee the coop move into a smaller property in an area where work dousnt dictate where you live. Reverse mortgage if you want for a better lifestyle. Most working people cant save as much as the value in their house increases so what better way?. My property has increased in value four times as much in 12 years without paying tax on the capital gain i would have been stupid to rent. macdunk
ps the bare paddock next door has increased in similar fashion with the farmer on the other side paying the rates to graze it.

Halebop
29-10-2005, 06:18 PM
quote:Originally posted by duncan macgregor

...You cant take it with you what better way to save up for your old age than over capitalize with a large house for the family...

Dare I suggest there are plenty of better ways?

CJ
29-10-2005, 09:59 PM
quote:What was the average inflation rate? Possibly 2.5% so a gain of 4% annual which still is not bad..... except for rates, any maintenance etc.
Apparently taking out inflation, prices for real estate acually decrese 40% of the time. OK the other 60% they stay steady or rise so we are on to a winner.

Inflation probably closer to 2% as it has only recently gone high/ I should actual cheak the calculator on the RB website.

Yes to rates and maintenance but no to rent.

The number isnt as high as 40% but again to lazy to find the cpi adjusted graph.

minimoke
01-11-2005, 08:55 AM
quote:Originally posted by Tinker

Just received the latest Govt valuation in the mail.

On purchase price and latest valuation the home has appreciated at 6.5% per annum compounding for the last 11 years. As it is a home and is intended to provide accomodation plus a solid base for many aspects of our life I think this is OK.

What do others think?

Cheers
Tinker

I guess you could take out 2 - 4% PA in Maintenance / Depreciation. Your rates are probably worth a months rent and your insurance is a couple of weeks. If you sell and buy again you are doing so in the same market so no increase in value there. Trouble is the real estate commisions and advertising costs are probably worth another years rent. Add in legal fees, there's another months rent there. Throw on your mortgage costs and how is the picture looking now?

On the contra side you would need to add the value of having a solid home base and only you can put a value on this. But the value would have been the same if you could have found a landlord who was committed to a long term tenancy arrangement.

duncan macgregor
01-11-2005, 09:49 AM
MINIMOKE, What a load of rubbish. What one eyed waffle it is obvious you have never been in the property business. macdunk
[/quote]
I guess you could take out 2 - 4% PA in Maintenance / Depreciation. Your rates are probably worth a months rent and your insurance is a couple of weeks. If you sell and buy again you are doing so in the same market so no increase in value there. Trouble is the real estate commisions and advertising costs are probably worth another years rent. Add in legal fees, there's another months rent there. Throw on your mortgage costs and how is the picture looking now?

On the contra side you would need to add the value of having a solid home base and only you can put a value on this. But the value would have been the same if you could have found a landlord who was committed to a long term tenancy arrangement.
[/quote]

minimoke
01-11-2005, 12:32 PM
[quote]Originally posted by duncan macgregor

MINIMOKE, What a load of rubbish. What one eyed waffle it is obvious you have never been in the property business. macdunk


Duncan – you shouldn’t be making such assumptions.

Without boring everyone to death with the detail Tinker appears to be happy with his residential property for personal use which is obviously different from a business rental. And there’s nothing wrong with that.

If you want a business model, lets look at some rough numbers. Say you have a $500k property, you might have $250k worth of land and $250k worth of improvements – with lets say a $250 mortgage. Your carpet, for example is going to depreciate (or deferred maintenance/replacement) at between 12 and 33% DV, while your curtains are going to be around 22%. The building itself will be around 4%. Your rates will be around $2k and insurance around $800. Interest on your loan at 7% will be $17,500. This gives me annual costs of around $30k.

Say you sell your house at 3.5% commission and $1k in advertising and $1000 in legal – here’s another $20,000. But you could probably accrue this over 7 years being the approx average time we seem to spend between moving houses. So this is another $1,500 a year.

So for the pleasure of your own home (or residential investment) you have to come up with over $30k a year.

Your rental on the other hand might cost $450 a week or $23k a year – but you have $17,500 gross (from your $250k cash) to offset this.

duncan macgregor
01-11-2005, 01:36 PM
minimoke, Lets not dispute the numbers, so for this debate we take yours as true and correct. You cost it out at $30k pa to own against $23k pa to rent on this $500k home. What you dont consider is the increased value of the property . My figures over the last thirty years show an average expected increase in house price in the home you talk about will be $50k pa. This means that by owning the property over the seven year time cycle you have lived rent free with money to spare. You might dispute this and say that the person that rents places his money in the bank where i would come back and say the person that buys does not pay rent. It all boils down to the simple fact that the appreciation in house prices plus rent beats what the bank pays. Therefore the smart investor uses the banks money to make money, at no cost to them. The real smart investor has hundreds of thousands of dollars invested in property with the banks money, at no or very little of their own money involved. The smart investor buys in the trough, and sells up at the peak. They all want the property market to boom and crash. macdunk

minimoke
01-11-2005, 03:16 PM
Duncan, its not so much that I am ignoring the value of capital appreciation of property – its more that I am trying to keep thinks simple. If I look at the capital appreciation of property I ought to then factor the power of compounding interest with the bank deposit. A bit of a stretch at this time of day!

I guess where I have difficulty with your model is that given the property increases by $50k a year, it has actually cost you $30k in cash to get to that state – so you are roughly $20 k better off.

With the rental model you spend $23k and you make $12k net.

Either way you get a roof over your head.

Given this particular thread is on rental vs buying I am not sure that there is that much in it with these kinds of figures. However the picture changes drastically if you do not currently have any property assets on which to leverage. I can’t see any point in anyone considering buying if they are looking at a 100% mortgage particularly with rates rising. And the trouble with buying is you can’t write off a number of your costs.

The other issue to consider when using the banks money is that they will charge you, say 9% interest which is a net/cash sum payable. This means your earning capacity has to be around 13% gross. Basically the only way your model works is if a person has high equity and/or low debt servicing costs.

And I am not sure that I can consider a person buying their own residential property an “investor”. They will buy/sell property in the same market so this is a neutral position. I also recall that most retirees who trade down to a smaller property actually spend equal or more than the value of their previous home.

I agree the clever money will be around for those properties that will get flogged off at the mortgagee sales. I remember well how hard it was for me to fund a mortgage at 25% interest on one income. I suspect those double income people are going to struggle when their mortgage goes from 6% to 10%, particularly if they drop to one income. These people will simply not be able to afford to hang in there and ride the hard times out.

Tinker
01-11-2005, 04:51 PM
Thank you all for your comments, bought back memories. As I recall the interest rate at the time was 7.5% and whenever I had $1000 in my bank account I trundled off dwon to the bank and paid it off the mortgage. Cleaned it out pretty quick. I remember my thinking at the time was where can I get a risk free post tax return of 7.5%? Nowhere so off the mortgage it went.

And I don't think I would feel as secure in the event of a death or loss of income if I rented. Plus I like my home.

And yes Halebop it has exactly doubled in 11 years. Still I would have been more wealthy if I had lived with Macdunk. Any room my scottish friend[:p]?

cheers
Tinker

duncan macgregor
01-11-2005, 05:00 PM
MINIMOKE, Sorry to harp on but you miss the importance of the banks money you invested against your own. Do all the sums work out bank rates rental incomes property appreciation then after all that you still think the way you do For christ sake do it. macdunk

wns
01-11-2005, 09:31 PM
Further to my previous post here...

"If" we were to sell all three houses today (which we won't)...

after taking into account all selling costs, capital gains tax on the two investment properties and paying off all associated loans in full...

The amount of cash left over would pay our rent (at current market prices) for the next 15 years!!

The total amount of cash out of our own pocket to buy the three houses was about the same as just one year of rent!!

Yes we were lucky with the timing of our purchases, but as the saying goes "you've got to be in it to win it"!

Looking at it another way: over the three years the cost of renting was less than the combined cost of our initial deposit plus closing costs + 3 years of loan repayments, rates, insurance & upkeep.

But to be ahead of where we are today, if we rented, I would have had to invest that 'saving' and multiplied my money by more than 10 times within three years. Could I have done it? Possibly, but probably not.

Am I glad we bought the first house instead of continuing to rent the last three years? You bet I am!!

minimoke
02-11-2005, 06:44 AM
quote:Originally posted by duncan macgregor

MINIMOKE, Sorry to harp on but you miss the importance of the banks money you invested against your own. Do all the sums work out bank rates rental incomes property appreciation then after all that you still think the way you do For christ sake do it. macdunk

Duncan, I appreciate this is a topic dear to your heart and that you speak with the enthusiasm of your successful experience. However when we look objectively at the numbers we might get a different story. Now, the numbers are such a hard one to deal with so it doesn’t really help making generalisations. My generalised numbers above show nothing between the option of renting or buying a place to live in. The numbers are obviously quite different if you are looking at a rental property or indeed a bare piece of land.

Your posts seem to miss two critical elements that go into the numbers. First the cost of using the banks money – it doesn’t come for free. In today’s market the ANZ has a variable loan rate of 9.25%. The numbers here aren’t difficult. On a $100k loan I have to pay, from one source or another, $9,250 PA – and this means I have to earn $14,000. The cost of using the banks money in my various property deals has ranged from around 6% to 25.1%, and this is during your 30 year period of capital appreciation which you use as the basis of your average 10% increase.

The second element you seem to gloss over is the cost of maintaining your asset in such a way that it either remains fit for use or you are adding value. You only have to go down to Bunnings or Mitre 10 or the local garden centre in the weekend to see how much money people are pouring into their properties. Even your own piece of bare land will be costing you something. Every now and then you are going to have to till and resow, and within 30 years you are going to be looking at refencing. The numbers are even worse those who lease their land out for horse grazing.

If you want to give me a hypothetical property to purchase I am more than happy to run the numbers to see what we can come up with.

duncan macgregor
02-11-2005, 07:16 AM
MINIMOKE, The paddock next door was purchased using money from an inheritance by the owner. The property cost exactly 11 years ago $68000. He leased it out to a farmer at the cost of the rates being the rent. His object is to sell it off as his childrens education fund. He asked my advice on selling the property as he had an offer of $340000 on the table. My advice was dont sell he still has roughly five years before the money is required, my viewpoint being that during the next five years i expect the property to double in price. That is a real life example, i can give you lots more if its to work out figures. macdunk

minimoke
02-11-2005, 11:20 AM
quote:Originally posted by duncan macgregor

MINIMOKE, The paddock next door was purchased using money from an inheritance by the owner. The property cost exactly 11 years ago $68000. He leased it out to a farmer at the cost of the rates being the rent. His object is to sell it off as his childrens education fund. He asked my advice on selling the property as he had an offer of $340000 on the table. My advice was dont sell he still has roughly five years before the money is required, my viewpoint being that during the next five years i expect the property to double in price. That is a real life example, i can give you lots more if its to work out figures. macdunk

So it looks like he's achieved around 17% average growth per year - but I'd guess most of that was achieved in the last 5 to 7 years. I'd have to say you've got balls since it seems to be that you are suggesting continued compound growth of 15% over the next 5 years for essentially a non productive and uneconomic piece of land whose value is driven solely by demand.

I am presuming the current owner is maxing out the economic value since there appears to be no revenue stream when he brought the land and there isn’t one now.

Since you are advising him to hold his land on the basis of asset appreciation it appears the owner will be up for capital gains tax when he comes to sell, so his $680 sale price will be substantialy less.

I personanly can't see rural land values increasing at 15% PA over the next five years for a couple of reasons; one being increased petrol will be a disincentive for people to build their dream home on the lifestyle block. Secondly with increased interest rates, alongside the view of using the banks money at say 9.25% a person/s has to earn $100k to make the $63k needed for the interest bill. I don't see wage growth at a rate that would match this increase level of funding needs. I'll leave the issues of GST payable aside as this would just come down to cash flow. Since there doesn't appear to be any economic use attached to the land I don't think it too likely that the new owner would be able to claim the interest as a tax expense.

So the guy in 5 years is going to sell his land for $680,000 (net somewhat less) to someone who has to earn $100k to pay the mortgage on the revenue expectation of a grand or so to offset the rates and the future promise of further substantial gains in capital value. I can’t see it happening but lets follow up in the future.

duncan macgregor
02-11-2005, 12:48 PM
MINIMOKE, Your arithmetic is so far out its unreal. $68k at 17pc over 11 years ?. No capital gains he is not a trader its not a business. Rural lifestyle land is and has skyrocketed they dont make it anymore, it will go up faster in the future. No upkeep, no mortgage, rates paid, he would be a dummy to sell. macdunk

minimoke
02-11-2005, 02:18 PM
quote:Originally posted by duncan macgregor

MINIMOKE, Your arithmetic is so far out its unreal. $68k at 17pc over 11 years ?. No capital gains he is not a trader its not a business. Rural lifestyle land is and has skyrocketed they dont make it anymore, it will go up faster in the future. No upkeep, no mortgage, rates paid, he would be a dummy to sell. macdunk

Sorry Duncan, my spreadsheet is a bit out. If I go to www.sorted.org.nz/calculator_index.html I get a more precise figure of 15.8% - still a figure not to be sneezed at. What are you looking for? I've also misunderstood the mans intent - I thought he intended to resell the property at some point at a profit for the kids education. Since its not a residential home, a business or farm I took it that he wouldn’t be CGT exempt. I’m sure there is a tax expert on ST who could clarify!. I think we all understand how lifestyle and all other properties have appreciated recently but as I mentioned before I think the gloss of this type of purchase will wear off thus lowering the expected rates of appreciation. To ensure he’s not a dummy he needs to make an informed choice and the questions seem to be: Will the land continue to appreciate at 15% - I don’t think so. Will there be a buyer around in 5 years time who will pay $680 – I don’t think so. How long will it take to cash up? I know of one property locally that has now been on the market for over a year and the price has dropped $50k. Can he improve on his $340 k current position – undoubtedly yes but where will he get the best return? Time will tell!

Halebop
02-11-2005, 02:52 PM
Capital gains in New Zealand is a sodding mystery but if he sells it as is without attempting to develop the site I'd be surprised if he ended up paying tax. He will pay a fair wad to sell it assuming he goes through an agent.

His returns have been great and in the circumstances I think MacDunk gave the guy reasonable advice since he was apparently not the most financially savvy punter. However, 15%pa over the next 5 years is plenty ambitious and personally I think unlikely unless inflation gets back under control and immigration spikes again, and maybe even not then (That's +100% in the next 5 years Duncan).

Assuming they need access within 5 years for the kids then surely it's time to start looking at his exit strategy? Can anyone guarantee where the market will be over that relatively short time frame? The property market is due a breather if not a correction. The current round of interest rate belt tightening with a rising currency impacting the productive sector and falling immigration is likely to be something of a bellweather. While I'm not sure anyone need mention the "R" word at this stage the negative consequences of the boom cycle could take just 6 months or could take 3 or more years to play out which would put a lot of pressure on that section to perform in the last few months.

Even if he's restricted to $320,000 after agent fees and costs, that could earn a reasonable income for kids at University. With prudence there should be plenty left over for Mum and Dad to invest or use afterwards.

duncan macgregor
02-11-2005, 02:54 PM
minimoke, I give in the land has appreciated five hundred pc in 11 years and you talk about 15 lousey pc. I expect the increase to slow down myself and only double in the next five years. You need a new calculator old son. macdunk

Halebop
02-11-2005, 02:57 PM
MacDunk I think you have problems with compounding? 15% per annum is almost the same as your "500%" over 11 years. 15.8% compounded for 11 years would generate a 5 fold increase

rmbbrave
03-11-2005, 07:06 PM
A lot of people do.

Some real estate pushers claim 10% gains since the year 1086.

If a house cost 1 cent in 1086 gained 10% a year it would cost $7.48x10 to the power of 35.

The GDP of the USA is about 9x10 to the power of 12.

Halebop
03-11-2005, 08:28 PM
Please, lets not use logic or hard data in the real estate returns debate.

Mick Jagger
10-11-2005, 11:16 AM
one eyed property people are so annoying...

house prices increase 2% a year in real terms.. same as population growth... simlpe as that.. look at 75 years of history and theres no dispute over that..

current prices will revert back to that longterm trend - its just a matter of how. they either stay still for five years (so in real terms prices fall), or there is a big fall in prices and it happens sooner.

bambi
11-11-2005, 02:36 AM
quote:house prices increase 2% a year in real terms.. same as population growth... simlpe as that.. look at 75 years of history and theres no dispute over that..

This is correct, then extrapolate what is happening to population growth to see what is going to happen to house prices.

Bambi

Halebop
11-11-2005, 08:16 AM
It's not fully correct. Propulation growth, employment, income growth, economic growth and productivity growth are all thought to impact real estate prices and inputs.

Then within population growth you'll have subsets where the country overall might have an anaemic 0.5% population growth but Auckland for example might still enjoy 1%+

Finally you'll have demographic changes. Having more children? Then bigger houses, large sections, multiple bedrooms etc are attractive. Aging Population? Painting weatherboards and rattling around an inner city bungalow worth high 6 / low 7 numbers while enduring a low fixed income probably doesn't make much sense.

Mick Jagger
11-11-2005, 08:55 AM
yeah yeah of course...

I'm just making the whole thing as simplified as it possibly can be... take the last 70 year of average house prices in NZ... then remove inflation... and you are left with 2% growth per annum... suspiciously that is also the long term population growth rate in NZ... maybe allt he swings and roundabouts you mentioned all smooth out over time and thats basically what it comes down to, on average...

Halebop
11-11-2005, 10:09 AM
Fair enough. But keep in mind our economic performance in terms of population growth, income growth, GDP growth, even our slow moving productivity growth has been superior to historical norms in the last decade or so. While this may not continue (and certainly seems to be in trouble on various fronts right now), that value won't necessarily be clawed back unless the inputs that created it do too - such as decreased population or negative economic growth (unlikely). Productivity growth and ironically inflation (often seen as the the purpose of borrow and buy housing strategies) seem most likely to be the equaliser in any property related correction.

On the plus the Baby Boomers show no sign of slowing down their real estate aspirations so the correction may take 10 years to play out and may only result in 10 years of underperformance rather than a "crash" (personally I think a quick correction is healthier). I suspect though financial markets may play a bigger role in the shorter term and Bollard will get what he wants one way or another. I really hope it's not some of the legislation mooted in recent press articles because it seems the medicine could be just as bitter as the consequences of outsized consumption and borrowing.

wns
11-11-2005, 03:10 PM
quote:Originally posted by Mick Jagger

one eyed property people are so annoying...

house prices increase 2% a year in real terms.. same as population growth... simlpe as that.. look at 75 years of history and theres no dispute over that..

current prices will revert back to that longterm trend - its just a matter of how. they either stay still for five years (so in real terms prices fall), or there is a big fall in prices and it happens sooner.



If someone puts down a 10% deposit (for example) then your 2% pa in real terms is a 20% return on their deposit. Of course the cash flow is the other part of cash-on-cash return equation but I only buy when the property is self supporting anyway.

Disc - not "one eyed" about property but very happy with the returns on the portion of my money that is invested in property.

Halebop
11-11-2005, 04:00 PM
quote:Originally posted by wns

If someone puts down a 10% deposit (for example) then your 2% pa in real terms is a 20% return on their deposit. Of course the cash flow is the other part of cash-on-cash return equation but I only buy when the property is self supporting anyway.

Quite so. The 2% turns into 20% rationale works for any investment involving similar amount of leverage and assumptions - shares via CFDs are an obvious and accessible alternative. But it is on cash flow that most residential property fails the litmus test. I can even now selectively purchase fully priced shares on better yields that I can purchase fully priced inner city Auckland real estate.

Purchasing a property on a 5% net yield on 90% deposit is a disaster waiting to happen. $350,000 with $35,000 down and $315,000 borrowed at around 8%: Net Rent 17,500 - Simple Interest 25,200 = -$7,700. The property has to increase by 2.2% just to cover the losses, let alone make a profit. Irrespective of the potential gains, an investor has to be able to fund these trading losses from alternative cash flows. Should their personal circumstances change due to illness, business failure or underemplyment suddenly life becomes much more stressful. There is a reason why the respective Rich Lists of the world aren't full of residential property investors - it's simply not that profitable. The benefits of leverage are an illusion and there are much better opportunities available.

Herein lies the fundamental truth of residential property investment: It's a rort designed by real estate agents, banks, builders and developers to syphon cash from from people too stupid to understand that a tax loss benefit first requires you to lose some money.

The most fervent proponents of the sector in this thread are builders, developers and traders, not investors.

Fundamentally the greatest benefit of a home is that it provides somewhere to live, not a superior financial advantage. To 90% of homeowners it represents a commitment to paying for a real asset. The secret to growing wealth here is that they were forced to contribute each fortnight, not that the asset itself exibited any particular superior economics. When you do the math the interest payments make it quite an expensive form of saving, notwithstanding the illusion of capital gains.

duncan macgregor
11-11-2005, 07:14 PM
Tell me guys if i buy a property worth $400000 with a lets say 10pc deposit or $40000 that is self funding through rent or whatever which over ten years is the norm that doubles in value then you tell me its a bad deal. I spent $40000 and end up with $460000 in ten years no risk no work no worries. I know lots of rich people that do much better than that. Twist as much as you like your $40000 deposit can be refinanced on the way to have you sitting in ten properties all getting that caputal gain. All markets rise and fall this market is no different get out at the top buy at the bottom. To play this market you must understand the rules which to me some of you are oblivious to. Ever second year each property will finance you into a second property so therefore your first $40000 deposit turns its self into two properties then 3 and so forth. I am amazed at the straight out stupidity that argues and thinks they are right that havent worked out this straight out system to wealth. I am very pleased that you think the way you do keep it up here is laughing at you. macdunk

Dough Boy
11-11-2005, 09:51 PM
quote:Originally posted by duncan macgregor

BRICKS, Lets take your friends case paying $500 pw or $26000 per annum. The landlord has an investment that pays according to your figures less than 2%per annum and according to figures that i say an average for the last thirty years of a capital gain of 10%. I say that the landlord can borrow 90% of the initial investment or a deposit of $100000 and make your friend look stupid by renting.
Do the sums again then stop and think who the dummy is. Macdunk


But what about the interest bill?????????????????????

10% capital gains + 2 % rent - 8% = 2%!!!!!!!!!!!!1

Halebop
12-11-2005, 09:17 AM
quote:Originally posted by duncan macgregor

...All markets rise and fall this market is no different get out at the top buy at the bottom....

...Ever [sic] second year each property will finance you into a second property so therefore your first $40000 deposit turns its self into two properties then 3 and so forth...

So which is it? Do all markets rise and fall or does this market rise so inexorably that you can ignore the rules of cashflow and buy another house every two years. This would imply the market never falls and that cashflow is always positive for capital growth properties.

MacDunk you've previously talked about your own experiences with property and what you have described have been trading and developing activities, not long term investing.

Extolling the superior economics at the miniscule yields the current market delivers is equally laughable. I have a number of friends who are property investors in one way or another and the two who actually realise it's a business and not a get rich quick scheme have both switched to trading strategies because buy and hold doesn't stack up unless you buy in the ugliest areas of town with the worst capital gain records.


quote:Originally posted by duncan macgregor

...I am amazed at the straight out stupidity that argues and thinks they are right that havent worked out this straight out system to wealth.

Me too.


quote:Originally posted by duncan macgregor

I am very pleased that you think the way you do

Me too.


quote:Originally posted by duncan macgregor

...keep it up here is laughing at you.

Back at ya.

Mick Jagger
14-11-2005, 07:46 AM
where does this "doubles in value in ten year thing come from"?

7% real growth per annum is ridiculous...

duncan macgregor
14-11-2005, 08:16 AM
It comes from me mick. I gave an example of my neighbours bare paddock next door bought at $68000 eleven years ago turned an offer down of $340000 on my advice. The price of my home and land has risen in similar fashion. I told him he will probabely get about $600000 for it in five years time. I have never owned a property that didnt increase in value by at least 10pc pa. Look up the history of house prices ten years ago then look at what they sell for today. The idea is use the banks money the rent money even a dummy can do it, its a bigger dummy that hasnt exploited it. macdunk

minimoke
14-11-2005, 09:11 AM
quote:Originally posted by duncan macgregor

Tell me guys if i buy a property worth $400000 with a lets say 10pc deposit or $40000 that is self funding through rent or whatever which over ten years is the norm that doubles in value then you tell me its a bad deal.

Duncan, I am not sure the past is always a good way of looking at the future. At best we need to consider the past and get a handle of the present - and then we might get to within 50% of knowing the future. I guess I keep coming back to it - If I was to today buy the property you have described above I would need to get at least $1,000 a week rent to cover my outgoings. Not so long ago I rented a $400k modern house and paid $350 a week. Perhaps where you are you can get a whole heap more in rent

Mick Jagger
14-11-2005, 09:28 AM
oh right... well done then you've obviously bought well... although the fact that my TPW shares have given 30% total return pa for the last 10 years doesn't give me the right to say... "Shares return 30% pa"...

so again i come back to the simple facts that the numbers tell us... take 70 years of house price increases... remove inflation and you get 2% real returns.

duncan macgregor
14-11-2005, 11:40 AM
Mick, what you fail to see is it is not your money that only makes 2pc its the banks money. once you have invested enough in a property to make it self funding showing a decent profit you refinance and get your money out. You then start all over again your first property will end up financing a dozen properties if you work it right. Lets not argue the figures if you can borrow money and make money from it and this is only a basic example do it. macdunk

Mick100
14-11-2005, 03:17 PM
Have you actually done what you talk of doing Macdunk? - like buying ten houses all on borrowed money
I think your just making noises through that hole in your head again as usual

allso ,it obviously hasn't occured to you yet that you can borrow against shares as well as property.
.

duncan macgregor
14-11-2005, 03:39 PM
MICK100, Your reply was fully anticipated still laughing at you. macdunk

Mick100
14-11-2005, 04:23 PM
I'v noticed that your usual boasting about all the easy money to be made in the sharemarket has been absent this year Macdunk.

Are you still making 20% pa

I must check the stock picking comp to see how well your going this year.

Another question for you
If returns on property are so constant and certain, why do you even bother with shares
.

Halebop
14-11-2005, 06:23 PM
Mick the same thought has occured to me. If I could borrow 90% and earn 10% capital growth with certainty I'd be doing it too.

I still note that those who grace the "Rich Lists" in NBR, Forbes, BRW etc both generate their wealth from and direct their investments towards Businesses, Shares and Commercial Property. Those who are involved in the residential sector are typically developers and/or financiers.

Mick Jagger
15-11-2005, 08:30 AM
don't get me wrong resi propertry is great and ion usual circumstances you get a decent yield and then gross that uop for the tax benefits and its well worth it... but in the current state of things theres no way at all that anyone is gonna make it stack up on a cash flow basis... at least not without a whopping great deposit that could be making 8% risk free in the bank... so to make it look reasonable you'd have to assuming some capital gains will result... and I've gotta say that by any measure house prices look hopelessly overvalued, and as they have throughout history, will come down as a result... this is the economic golden age at the moment, and it won't continue... so why would anyone be buying one now.. its a pretty brave person who suggests that house prices will increase over the next few years... why not wait for them to fall and buy one when the numbers stack up again... ie when rental yields have increased fornm the 4 or 5% current back to 8 or 9%...

minimoke
15-11-2005, 08:54 AM
quote:Originally posted by Mick Jagger

..... then gross that uop for the tax benefits and its well worth it...

And this is something I don’t understand. Why do we seem to see the tax benefits of rental property (which in reality is a reduction in tax payable due to losses made) a virtue when we should be trumpeting how much tax we have to pay – which is then a reflection of how much profit we have achieved!

stephen
15-11-2005, 09:05 AM
"theres no way at all that anyone is gonna make it stack up on a cash flow basis... at least not without a whopping great deposit that could be making 8% risk free in the bank... so to make it look reasonable you'd have to assuming some capital gains will result"

Yeah, when I look at prices where I am currently renting (Greenlane/One Tree Hill area) I cannot understand how anyone could be a landlord as a business proposition. When I worked it out I came to exactly the conclusion you did above.

duncan macgregor
15-11-2005, 12:21 PM
That is quite correct mick, property ebbs and flows in cycles a time to buy, and a time to sell. It is a much easier market to read than the sharemarket. Whangarei for instance over the last 12 months the values increased by 33pc but it would take a brave or foolish person to think that will continue. The advantage of the prices dropping but not collapsing is it gives good buying opportunities for the next cycle. the reason prices in the house market dont collapse is that people unless forced wont sell at a stupid price and the ones that do are fodder for the buyers to sell, when the market turns. the market at the moment is in decline, the smart people have moved on sitting on the fence like vultures ready to gobble up the cheap assets of the weak. macdunk

quote:Originally posted by Mick Jagger

don't get me wrong resi propertry is great and ion usual circumstances you get a decent yield and then gross that uop for the tax benefits and its well worth it... but in the current state of things theres no way at all that anyone is gonna make it stack up on a cash flow basis... at least not without a whopping great deposit that could be making 8% risk free in the bank... so to make it look reasonable you'd have to assuming some capital gains will result... and I've gotta say that by any measure house prices look hopelessly overvalued, and as they have throughout history, will come down as a result... this is the economic golden age at the moment, and it won't continue... so why would anyone be buying one now.. its a pretty brave person who suggests that house prices will increase over the next few years... why not wait for them to fall and buy one when the numbers stack up again... ie when rental yields have increased fornm the 4 or 5% current back to 8 or 9%...

Dimebag
20-11-2005, 08:56 PM
I've been taking a look at the issue of property recently, and have done a bit of analysis. The view I have formed is that a case can still be made for investing in property, even at current apparently excessive valuations. Whilst I certainly do not agree with Duncan's figures or unsubstantiated assumptions about future capital growth or the realistic rental yields that are available in this market, the numbers still seem to stack up. The clincher, it seems, is the preferential tax treatment property attracts in NZ.

The average Auckland property should appreciate in value at about 5%pa in nominal terms over the long-term. The two key drivers are inflation and economic growth, and if we assume that inflation will sit at about 2-2.5%, and economic growth similarly, we get about 5%pa. With the continuing favourable outlook for commodities, NZ's economy may in fact perform much better than this, providing additional upside.

The inflationary component is self-explanatory. The economic growth component rests on the assumption that over time, people will expend approximately the same proportion of income on property. As incomes rise, people opt for bigger and better houses in better areas. In doing so, they will spend about the same proportion of income on their property, but "trade up".

Properties that are above average should therefore grow at a rate greater than economic growth, and inferior properties at a rate somewhat less. The average property ought to grow at about the same rate.

These figures are aggregates; to assess the outlook for a particular region, one must assess the economic performance of that region. Population growth is automatically factored into the equation as an increase in population will increase the size of the economy, and vice versa. If a regional economy is losing its population, its regional economy will dwindle, and with it property values.

Rents and property values should therefore advance at about 5% pa. And owing to the (effective) lack of capital gains tax in NZ, this 5% is tax free.

This is the underlying increase in ECONOMIC value of the property. As anyone familiar with the sharemarket knows, short-term property values can fluctuate above and below fair value, disguising this figure. But the underlying increment in economic worth should approximate 5%, given enough time for things to even out.

Interest rates play a part, of course, in the setting of property values, as interest rates represent the opportunity cost of capital. Yet changes in interest rates essentially result in "one-off" adjustments in value, as ought to be the case in any asset class. If one has no particular view on whether interest rates long-term will rise or fall from present levels (as is the case with me currently), they can be ignored. They are ever present in assessing whether property is under or overvalued at current prices however. If property is generally overvalued, a one-time adjustment below the 5%pa rate of increase must occur at some point in the absense of falling interest rates.

It has been estimated that the average rental yield in Auckland is now about 5.0% gross. If we estimate costs as being 1.5% pa (including property managemetn fees), we get an estimate of a pre-tax return of 3.5% on a property, excludign the effects of leverage.

If we take the example of a $400,000 house, that is a weekly rental of $400 (assuming 2 week vacancy); annual rental of $20,000 less $6,000 in costs is $14,000.

If one were to gear the property 90%, as suggested by Duncan, one would borrow $360k and would be forking out, in interest, $30,600 per annum at a rate of 8.5%.

That tallies to a loss of $16,600 pa. However, the kicker is that a 39% taxpayer can claim back a tax loss of $6,474; the loss after tax falls to approximately $10,000. Further tax advantages will be available if one elects to claim depreciation deductions.

If the postulated 5%pa capital growth materialises, one has a tax-free $20,000 capital gain, for a net profit after tax of $10,000.

Based on th

Dimebag
20-11-2005, 09:14 PM
PS

I think this analysis also demonstrates how inequitable the current tax system in NZ is. Property investors can be pocketing millions of dollars in tax-free capital gains, whilst claiming tax losses from operating outgoings.

Yet employees working hard to earn their money through productive activities are taxed extensively.

I'm actually doing my honours dissertation over the summer on whether NZ ought to introduce a revolutionary flat-tax system, as propounded by Hall-Rabushka (see "The Flat Tax" - available from Amazon.com). One of HR's key claims is that current systems of tax are highly inequitable, and that a much fairer and more efficient system can be achieved by casting a much wider and more equitable net at a lower flat rate of tax, rather than the current system which favours particular forms of income over others, and results, in particular, in excessive taxation on employment income.

As the above analysis shows, this reasoning may be particularly strong in NZ.

Cheers,
Dimebag

Halebop
20-11-2005, 11:20 PM
It all comes down to assumptions. I'm certainly not a strong property bull but even I'd suggest property has over the last couple of decades done better than 5%. Certainly not 10% but perhaps 7% (In the last 20 years inflation has run at 3.7% per annum). But those headline numbers are irrelevant, as even Property Bulls would agree. Borrow 80% of the purchase price and even 5% capital growth becomes 25% ROE on a cash flow neutral property. But it is here that lies the crux of argument too...

Assuming 5% growth, on average, in order to maintain 25% capital growth, I need to on average maintain 80% leverage too. Fundamentally though, we have seen that rents have not kept pace with capital values, squeezing cash flows and increasing risk to investors blinded by spiralling capital values. When cash flows don't keep pace with capital values, we typically have a bubble situation. Either the cash has to play catch up or capital expectations have to correct downwards.

On top of this, in order to maintain my returns I have to keep borrowing 80%. So cash flow gets progressively worse under current market conditions while my risk for performing exactly the same historical function rises as yields fall. It has the hallmarks of a Pyramid Scheme. The growth orientated property investor must risk ever greater amounts of capital, supporting ever greater amounts of debt, funded by a proportionately shrinking cash pool. I suspect it is largely unrecognised that this is all propped up by the taxation system.

A perennial investment maxim is to never invest on the basis of tax. Governments can be capricious, covetous and sometimes just stupid. If tax is a key pillar holding aloft the mathematics of the transaction then you will one day be disappointed by the outcome. Reduced tax incentives, falling cash yields and 80% leverage make for a somewhat combustible mix.

Lastly, don't ignore productivity growth, demographics and population growth on the property equation. Oxymoronically wage growth and employment demands coupled with New Zealand's low investment in capital equipment will start to pressure productivity growth. The property slowdown in '97 was augered by a steep drop in productivity.

Mick Jagger
21-11-2005, 07:45 AM
just being a bit *****now, but also the $40,000 deposit or whatever amount it is can get 8% for no risk at all in the bank so we should net the value of that off the annual end profit as well, right?

wns
22-11-2005, 11:17 PM
Thanks for your thoughts Dimebag and Halebop.

I definitely wouldn't be buying property where you are relying on tax breaks and appreciation to get a positive return. For me it has to stack up from the cash flow point of view. At the moment that eliminates most properties. In fact I haven't bought real estate for about two years now which is why I started investing in shares again. Happy to hold real estate though. :)

Dimebag, when you are negative geared like the example you gave ($400k place renting for $400pw), it starts to severely limit your borrowing capacity. The bank / finance provider will look at your debt servicing ratio, which is a comparison of your interest repayments compared to income you earn / receive. Normally they allow up to about 25-35%, something like that. Normally 75-80% of rent is included on the income side. With negative geared places there's only so many properties you can purchase because each additional negative geared property impacts further on the DSR. Looking at it another way, how many lots of $10-16k can people afford to go backwards by per year?


quote:Originally posted by Mick Jagger

just being a bit *****now, but also the $40,000 deposit or whatever amount it is can get 8% for no risk at all in the bank so we should net the value of that off the annual end profit as well, right?


How can you earn 8% on your money 'in the bank' at the moment? I'm not aware of any banks offering anywhere near 8% - not in Australia anyway. I suspect NZ would be the same. (?)

Owning shares in some of the listed banks would earn you a gross dividend yield of approx 8% but that isn't risk free.

wns
22-11-2005, 11:26 PM
quote:Originally posted by Dimebag

PS

I think this analysis also demonstrates how inequitable the current tax system in NZ is. Property investors can be pocketing millions of dollars in tax-free capital gains, whilst claiming tax losses from operating outgoings.


Are capital gains tax free on investment properties in NZ? They aren't here in Australia.

Halebop
23-11-2005, 12:27 AM
Within certain reasonable limits all capital gains are tax free in New Zealand. (It may be another matter as to if your New Zealand capital gains are tax free in Australia though?). New Zealand's Capital Gain status is not very transparent and pretty much requires the average investor to lie (or lie by omission) on their tax returns.

Gains are not taxable so long as the investment is not a trading activity. The uncertain area comes into defining "trading activity", which is highly subjective and often rorted. Sometimes Property "Investors" find themselves categorised as traders following Inland Revenue audits. I suspect many Sharetrader members would fall into this category with both their property and share interests.

The issue of capital gains in New Zealand is somewhat a political powder keg. Not many politicians have the testicular fortitude of Australia's Hawke/Keating Labour party of the 1980s. The current tax system encourages property investment at the expense of the tax base, savings, current account and more productive asset classes. Logically, the proceeds of a gain from an asset is little different from the proceeds of working for a living. Why should those with capital not pay tax when those who work pay their share? On the other hand, those with capital encourage employment and prosperity (even property investors employ accountants, builders etc while business owners employ staff, contract outsiders and sometimes earn export dollars too). Those with capital already pay income tax on their cash earnings so I could also see the argument for saying capital gains is double dipping.

Having said that, the tax system encourages a logical person to leverage, reducing taxable income by purchasing a low yielding property with a relatively expensive mortgage. They hope to gain on the transaction by swapping the tax loss cash flow for an untaxable capital gain. Leverage in business can increase returns but also increases risk. Research has shown it more typically reduces returns, retarding innovation by impacting cashflows, mindset and flexibility. I see no argument that this would be any different for a small investor with a couple of units or town houses. So via the tax system we are encouraged to exchange low yeilding, low growth rental incomes for high yielding foreign debt obligations, eshewing more dynamic, diverse and profitable forms of saving in the process.

It would be a brave New Zealand politician who rams home a capital gains tax (they are after all, complex and emotive where the owner occupied home is considered). A smart one might start by looking at removing some of the borrow and hope incentives. While still rortable, I would remove all depreciation allowances and only allow deductions for actual maintenance (not to be confused with "enhancements" either). This would hopefully place a clearer focus on cashflow and enable housing investments to be better compared with businesses and shares rather than tax rates.

I also hope the Reserve Bank of New Zealand stays out of fiddling with bank lending practices. Such moves could well backfire or have strongly negative consequences. I do think they could look at forcing Finance Companies to operate more like banks. There are so many sources of finance these days that restricting the interest rate mechanism to bank lending seems too narrow.

minimoke
23-11-2005, 08:33 AM
quote:Originally posted by Halebop

Within certain reasonable limits all capital gains are tax free in New Zealand.

I'm not so sure on this. Capital gains on land sales aren't free of tax if the intent at teh time of purchase is to make a profit on the sale.

I think the political tools are already there to assess CGT but IRD for whatever reason is not enforcing them. I can’t help but feel that if we were to examine most rental property transactions in NZ the primary motivator of the owner at the time of purchase is to resell the land and make a capital gain – they should therefore be taxed on the sale of their property but IRD isn’t following through. IRD continues to be misguided when they hear the “intent” of the purchaser was to create an income stream – the numbers simply don’t stack up in most cases to support this view.

If we have a look at Dimebags model there are a couple of problems with it. Firstly his $6,000 annual costs are way short for the true costs. $10,000 - $15,000 on an annual average would probably be closer to the mark. And the banks won’t lend on a two week vacancy rate – they are looking at a 6 week vacancy. This means you have to have more of your own cash to make the loan repayments stack up – which increase your risk exposure in your personal life.

Actually his model is a prime example of the fallacy that the “intent” is for the income. It would be clear to IRD that it makes no sense to have total costs in excess of $36k to make $20k. Realistically there is no way this property is going to get a return. IRD don’t have the balls to follow through and this means that the property rorter is trading at the expense of the average tax payer who has to pay more in tax to supplement the loss of govt revenue.

Perhaps if Cullen wants to get tough on the property market he should be insisting that all rentals that cannot show a positive cash flow and are indeed unlikely to ever recoup their losses and still create a positive flow should pay their capital gains tax. He should also encourage much lower interest rates so that those who genuinely want to get into rental property business can do so and actually make a profit from their risk taking.

Mick Jagger
23-11-2005, 09:28 AM
wns - term deposits in New Zealand for a 1 year term are about 7.5% or a little more ... ok i'm rounding it up a little when i say 8%... but rock solid fixed interest securitys from decent NZ corporates are paying yields of 8% easily... so the point i'm making is the same...

Halebop
23-11-2005, 10:06 AM
quote:Originally posted by minimoke

I'm not so sure on this. Capital gains on land sales aren't free of tax if the intent at teh time of purchase is to make a profit on the sale.

That would then be a trading activity. It's easier to spot with land sales because typically there is no income.

wns
23-11-2005, 03:44 PM
quote:Originally posted by Mick Jagger

wns - term deposits in New Zealand for a 1 year term are about 7.5% or a little more ... ok i'm rounding it up a little when i say 8%... but rock solid fixed interest securitys from decent NZ corporates are paying yields of 8% easily... so the point i'm making is the same...


Mick – I don’t know a lot about banking, but if the bank can afford to pay you 7.5%, what are they doing with your money to make a profit?

They could be lending out your money at a higher rate (eg. 15% for someone’s credit card or 11% to a developer) and make money on the spread. Or they could go out and borrow money themselves against your deposit and lend out your money and the borrowed money to make an even higher profit. Either way, your money earning 7.5% may not be as safe as you really think. Is your 7.5% a risk free return? No. Is it safer than someone’s 10% deposit on real estate? I don’t know enough to answer that but it would depend on a number of factors such as the purchase price, the rental yield (and therefore direction & size of cash flow), the strength of the buyer’s financial position, their capacity to meet their loan repayments, the term they can hold for and the health of the property market.

Last time I looked, in Australia a bank term deposit earns somewhere in the vicinity of 4.5 - 5.5% so that is why 8% surprised me.

Mick Jagger
24-11-2005, 09:16 AM
yeah of course... nothing is risk free... the closest we get is government stock and evn those have fallen over in the past... but i'd generally accept that cash deposits in one of the big banks are as near as we'll get to risk free.. if the ANZ/BNZ/Westpac is going to be in a position to not be able to pay the money back that they have borrowed... it would be safe to sssay that the housing market would have crashed by 75% prior to this...

remember the OCR in NZ is 7.0%, and in australia yours is 5.5%... so theres a free 1.5% risk free to get in NZ which is a big portion of your difference...

Dimebag
05-12-2005, 06:24 PM
Halebop,

Thanks for your thoughts.

I especially like a couple of points you make:

Assuming 5% growth, on average, in order to maintain 25% capital growth, I need to on average maintain 80% leverage too....

On top of this, in order to maintain my returns I have to keep borrowing 80%. So cash flow gets progressively worse under current market conditions while my risk for performing exactly the same historical function rises as yields fall. It has the hallmarks of a Pyramid Scheme. The growth orientated property investor must risk ever greater amounts of capital, supporting ever greater amounts of debt, funded by a proportionately shrinking cash pool. I suspect it is largely unrecognised that this is all propped up by the taxation system.

This is a very important point. In the example outlined in my previous post, a punter was buying a $400,000 property on a 5% gross rental with 90% gearing ($360,000 mortgage).

If the property market were to suffer a sudden downturn, perhaps due to a spike in interest rates wrought by rising inflation (not out of the quesion in the next few years), and rental yields were to rise to a seemingly innocuous 7%, the property value would plummet all the way to $285,000. One now has a negative equity situation of $75,000, as well as needing to continue to meet the $10,000 annual outgoings (and if interest rates have increased, much more). Not a great place to be.

Even if you managed to hold on for the next 10 years, the 5%pa annual economic appreciation would carry the property back to $465,000. $65,000 in capital gains would be made, but you would have outlayed perhaps double this in outgoings & interest over the decade; in short, pretty much a complete disaster.

Yet as you mention, in order to sustain high rates of return, it is absolutely necessary to maintain high levels of gearing. If we had only geared to 60%, the arithmatic would look much less attractive:

Purchase Price: $400,000
Mortgage: $240,000
Equity investment: $160,000
Rental - costs: $14,000
Interest @ 8.5%: $20,400
Net loss after tax (39%): $3,904
Capital gain @ 5%: $20,000

Net profit: $16,096
Return on investment: 10.06%

Sure, it is true that property seldom gets knocked down from say $400k to $285k in a short space of time. Property prices have an empirically well-known tendancy to be "sticky" on the downside; landlords & especially owner-occupiers will tend to stubbornly refuse to take a loss; instead, volume tends to dry up substantially, and days to sell dramatically increases, as sellers hold out for a buyer that will pay up what they paid.

And there are buyers in the market. Many market participants (esp owner-occupiers) are buyers in the market irrespective of "value", provided the timing & finance suits their personal circumstances. It just takes longer for a seller to find one.

Of course some over-leveraged investors will be sellers who need to sell in a hurry, so there will be some downside tendancy to prices, but the overall market outcome tends to be relative price stagnation.

An alternative way for yields to rise to 7.0% is for rents to keep rising at 5.0%pa for 7 years, with static prices. But even if this relatively benign situation was to eventuate, the landlord has suffered accumulated cash outgoings of $70,000, and much more if interest rates had risen. And that's not even talking about opportunity costs.

Yet as Halebop astutely notes, to maintain high prospective returns, one must be prepared to endure this ever present risk by gearing highly. Its a risky business.

Unlike shares, where the most you can lose is 100%, in leveraged situations held in one's personal name, one stands to lose much more than this should the market really turn.

Also,

A perennial investment maxim is to never invest on the basis of tax. Governments can be capricious, covetous and sometimes just stupid. If tax is a key pillar holding aloft the mathematics of the transaction then you will one day be disappo

minimoke
07-12-2005, 08:13 AM
Purchase Price: $400,000
Mortgage: $240,000
Equity investment: $160,000
Rental - costs: $14,000
Interest @ 8.5%: $20,400
Net loss after tax (39%): $3,904
Capital gain @ 5%: $20,000

Net profit: $16,096
Return on investment: 10.06%

Dimebag
How does your ROI look if you put in 5% of $200,000 (being say the improvement value) cash expenditure on maintnace and capital replacement. And also 5% depreciation on the $200k through your tax?

Halebop
07-12-2005, 12:45 PM
Minimoke mathematically it's a zero sum equation. Assuming your maintenance and capex equal your depreciation allowances, then $1 in is equal to $1 out. The only benefit is that capex cashflows (perhaps the mathematical opposite to depreciation) tend to be lumpy. So there are some tax deferral benefits due to timing differences or until you sell the property for more than the depreciated value. The "win" of a tax benefit/tax loss is often marginal and must by it's nature either be clawed back or balanced by operating losses.

Dimebag
12-12-2005, 03:13 PM
Wns,

Thanks for your thoughts also. After those perhaps overly extensive comments in response to Halebop's post, I didn't get round to commenting on yours as well.

I pretty much agree with you. Negative gearing is a cash-flow nightmare and, like you say, seriously impedes your ability to purchase multiple properties, which is important for rapid accumulation of wealth in property.

However, as much as we would all prefer positively geared properties, market conditions are not always conducive to this outcome. So if one cannot get positive cash-flow properties, the next thing to consider is whether, given the opportunities that are available, any of them constitute a reasonable investment opportunity.

My analysis shows that this may be possible, although the investment case is far from ideal. And you are very right to point out the practical cash-flow difficulties that such an investment strategy would entail.

Regards,
Dimebag

Mick Jagger,

Yes, you are correct to consider opportunity costs, but this can equally be done by considering that "I can get 25% in property with x risk, and, say, 7.5% from a terms deposit with y risk", and asking which one you prefer.

Cheers,
Dimebag

Dimebag
12-12-2005, 03:29 PM
PS

Does anyone have any statistical information on how much rents have increased pa in Auckland over the past 20-30 years.

It would be intesting to compare this information with the rates of inflation and economic growth experienced over this period, to consider whether the assumptions I had used were reasonable.

I think I read somewhere that rents had increased by only 2.7%pa over the past 20 years. If this is so, there is a gaping whole between this and the 5.0% I specified.

This error of analysis could have been due to a number of factors:

Firstly, it is possible that the increases in land prices that are driven by economic growth are actually themselves a primary cause of inflation. Land & rentable space is a key resource in many businesses, and as its price goes up, the increased business cost is passed on to the goods & services it is used to produce. Therefore, adding both economic growth and inflation would be "double counting" the increase in economic property values.

Secondly, the 5% figure is perhaps only applicable to the land. It is possible to build up, not just out. As more and more appartments crop up, as well as high rise corporate offices, more rentable space is created. And more rentable space = more supply, and rental prices are simply the balance between the demand and supply of space.

You can't create more land, and the ability to build up on it makes it more valuable, so the original drivers remain intact. However, as far as the building upon the land are concerned, they are liable to be devalued by the increased supply of space by other building up. So the combined average increase in the rentable value, and hence capital value, of a "property" is likely to be somewhat less than 5.0%.

Furthermore, when someone builds up, it arguably devalues the remaining stock of land. Again, more "supply" has been created, and this must reduce the demand for remaining land.

If the 2.7% figure is correct, then this would tend to indicate that properties only tend to appreciate at about the rate of economic growth. As such, one could not realistically hope for appreciation greater than this longer-term (probably about 3.0% pa). This would render property values tremendously overvalued at current prices.

Cheers,
Dimebag

PS

"But property prices have increased much faster than 2.7% over the past 20 years" I here property proponents cry. Yet this is largely because interest rates have fallen so dramatically. This critical piece of information should not be overlooked.