# Returns on real estate



## Stan 101 (4 May 2008)

I was up here at a few open houses from 2 bed units to 4 bed homes of varying levels of opulence in Townsville today and noticed all real estate agents were really pushing home the concept of "great rental returns" and "great cashflow returns."

one example was $260k two bed unit, 80 square metres, no carport or garage, external laundry at the front of the unit masonry block wall with no plaster inside (common up here). Body corp $400 per qtr(inc sinking fund), rates $900 per half.
Rent = $190 - $200.

Now I'm no accountant but to my eyes that is one ordinary return. I was hearing people comment on the Real Estate agent's assumption about the great return and they were agreeing amongst themselves. Now captial growth is always an option but after the stellar performance on these properties up here in the last 3 years, one has to wonder where it peak. Last month unit sales actually dropped in Townsville.

I stood looking at this one particular place and was approached by the real estate agent and asked what I thought about this great little investment. Being out of earshot of all others there I suggested it was not a great investment at all. It was a terrible investment based on yield and was given a right dressing down by said agent!

Where is everybody else at in regard to rental returns? Doesn't the real estate agent have a duty of care to not mislead potential buyers?

In almost the 12 months I have been up here I have learnt that for me personally, Townsville is living in it's own little bubble and it would be good to see a debt ratio per household based on Townsville post codes.

Please comment at your leisure.

cheers,


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## numbercruncher (4 May 2008)

Thats awesome for realestate 260k investment for 6600 p/a return.

260k in bank account only gets 21k p/a return.


Or we could fully finance the unit for a loss of only 19k p/a


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## battiwallah (4 May 2008)

To use Stan 101's example, and supposing you could borrow the $260k at 9%, your interest costs would be about $23k.  Add to that the levies, rates, insurance, management fees, and you're up for more than $25k in annual expenses.  Your rent is about $10k.  You are looking at a loss of around $15k per year.  If you are on the highest marginal tax rate your real loss is about $8,700 (ie - if you can negatively gear).

So you would only enter this investment if you were really confident that the capital gains would offset this loss.  That means you have to be confident that the appreciation will average out better than about 3.3%pa.  This will get you to break even.  You will need a lot more than that to make a profit and cover your risk.

There are a lot of hassles in owning property, such as lousy tennants, building problems, fire compliance upgrades (I've had the lot).  If I had my time over again I would avoid direct property ownership.  It's a headache.

But that's just me...


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## Tysonboss1 (4 May 2008)

Stan 101 said:


> I was up here at a few open houses from 2 bed units to 4 bed homes of varying levels of opulence in Townsville today and noticed all real estate agents were really pushing home the concept of "great rental returns" and "great cashflow returns."
> 
> one example was $260k two bed unit, 80 square metres, no carport or garage, external laundry at the front of the unit masonry block wall with no plaster inside (common up here). Body corp $400 per qtr(inc sinking fund), rates $900 per half.
> Rent = $190 - $200.
> ...




It really depends on your investment stratergy,

It's true you can expect an average return from property especially units and apartments in the short term, however

The way I look at investing in property is that a property is an inflation hedged income stream, Meaning that even though your property won't give as good a cash flow return as a cash investment, it will provide you with an income stream of about 5% that grows with inflation mean while your capital ( the value of the property ) should also increase over the years by atleast inflation, So you are getting a 5% return and your capital is protected from inflation.

Not to mention that if you are invested in a growth area your investment growth and cashflow should out pace inflation.


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## Tysonboss1 (4 May 2008)

numbercruncher said:


> Thats awesome for realestate 260k investment for 6600 p/a return.
> 
> 260k in bank account only gets 21k p/a return.
> 
> ...




you could say  the same about 90% of the shares in the stock market, 

And the alot of the stocks that do provide a decent cashflow are property based,.... go figure


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## wayneL (4 May 2008)

Tysonboss1 said:


> you could say  the same about 90% of the shares in the stock market,
> 
> And the alot of the stocks that do provide a decent cashflow are property based,.... go figure



There may be other non-transparent returns involved with some of those shares, but from an investment perspective a good point. Without the prospect of capital gains/earnings growth, most shares are doggy doodie at current prices.

The question for the RE investor at the moment, is whether there there will be price and/or income growth in the medium term... and whether value may improve in the short to medium term (ie pricefalls).


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## Doris (4 May 2008)

Stan 101 said:


> I was up here at a few open houses from 2 bed units to 4 bed homes of varying levels of opulence in Townsville today and noticed all real estate agents were really pushing home the concept of "great rental returns" and "great cashflow returns."
> 
> one example was $260k two bed unit, 80 square metres, no carport or garage, external laundry at the front of the unit masonry block wall with no plaster inside (common up here). Body corp $400 per qtr(inc sinking fund), rates $900 per half.
> Rent = $190 - $200.
> ...




Stan 101...
I spent a week in Townsville a few weeks ago (holiday) trying to help a daughter find a 2 bed/2bath furnished unit to rent as she'd been seconded to work there until December.  They were $450 to $650 a week! Take off $90-130 for unfurnished.  And there were only four apartment blocks with vacancies!  We were told there were 3000 units currently under construction there.  I would believe it from what we saw!  

At the airport, I met a woman whose husband worked in a mine 300km south of Mt Isa and worked one week on and one week off when the company flew him home.  It seems this is the reason for the bubble there.  It's cheaper for the mines to fly them 'home' and their families are happy.  In this scenario the mine also paid their unit rental.

It took another two weeks of living at the Quest for her to find one she wanted... a 'bargain' at $460 a week... in time for her husband to join her.

Perhaps the lower end of the market is austere but a 'normal' unit pays quite well I thought.  

Maybe not though when the new 3000 units come onto the market!


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## Tysonboss1 (4 May 2008)

wayneL said:


> The question for the RE investor at the moment, is whether there there will be price and/or income growth in the medium term... and whether value may improve in the short to medium term (ie pricefalls).




Thats right, and every one always has a different opinion on this, One thing is though if you take a ten year approach no one would probably disagree that property returns and growth will not atleast match inflation.

Given that a property is returning say 5% and the capital is protected against inflation then in my book thats a good thing to have exposure to in a portfoilio,... especially when you take into account that the capital growth is compounded year by year before it is finally taxed at a 50% discount when you sell it.

Secondly If you are astute with where you invest then undoubtedly you will be able to benefit from growth that exceeds inflation so it is even better.

Personally I invest in Property and shares as well as my own businesses so I am not anti shares or some sort of perma bull which I have been called before.

What I do believe however is that alot of people that have been bagging property don't understand that stratergy behind it, and miss alot of big points when they over simplify things and make rash assumptions.


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## WaySolid (5 May 2008)

Stan 101 the requirements for getting a sales certificate in real estate is not much more than having a pulse, so take that into consideration when weighting investment advice from this source.

I'm not a fan of units myself, prefer holding the dirt beneath them. In the long run what's up top is merely a distraction.

There were people who made fortunes in property during the last recession, though not from buy n hold on it's own nescessarily, but from value add which is one of the truly great things about this asset class.


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## Stan 101 (5 May 2008)

thanks for your comments, all.

There is much better investment return in the RE market right now. There are places 1.5 hours out of Brisbane that are gross positive. They aren't falling off trees, but they are around if you are patient. It just seems from an outsiders point of view that the mentality of Townsvillians is to "buy buy buy" whatever the cost in the hope this extraordinary capital growth will continue. It also seems locals are satisfied with mediocre returns in the market based on perpetual BS from the estate agents.

Doris, it seemed from what I saw the higher priced units i town $750k etc are getting worse returns that my initial example. Glad you daughter found a home.


REgards,


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## Tysonboss1 (5 May 2008)

Stan 101 said:


> Townsville is living in it's own little bubble and it would be good to see a debt ratio per household based on Townsville post codes.
> 
> Please comment at your leisure.
> 
> cheers,




I have never Invested in townsville, and have only limited research on the area, However, When I'm investing in property I want to invest in a area that has a stable and growing economy with plenty on employment.

Townsville meets this criteria,as Townsville has several large external income steams.

Townsville has a large Defence presence being both an Army and airforce base which will support the rental market as well as provide jobs in many service industries and for defence civilian roles,... added to this about twice a year you have large amounts of USA soldiers and sailors spending millions of dollars during R+R time while they are in townsville on training exercises.

Townsville also has alot of tourism related income which again provides jobs.

Townsville also benefits from queenslands mining sector, so all up I think townsville is a dynamic regional centre tat has alot going for it.


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## Tysonboss1 (5 May 2008)

Stan 101 said:


> thanks for your comments, all.
> 
> There is much better investment return in the RE market right now. There are places 1.5 hours out of Brisbane that are gross positive. They aren't falling off trees, but they are around if you are patient. It just seems from an outsiders point of view that the mentality of Townsvillians is to "buy buy buy" whatever the cost in the hope this extraordinary capital growth will continue. It also seems locals are satisfied with mediocre returns in the market based on perpetual BS from the estate agents.
> 
> ...




All areas are different, Looking at return alone is not really a good idea.
You have to look at the big picture and suit your investment to the outcomes you are tryingto achieve.

Remember there are markets within markets and they all have there own pros and cons and move at different rates, and have varying cash flow returns.

For example a beach side apartment with water veiws will probally cost more and provide less cashflow than a ground floor apartment in a back sreet in an outer suburb,... how ever the value of the beach side apartment will grow faster as the water veiws become more sort after,... so the lower cash flow will be offset by the growth upside.

I guess what I am trying to say is that you have to learn the factors that affect property growth,... Property is not a simple asset class, even within one town there can be up to 10 different markets....

I have been actively investing in property for seven years and have read countless poperty books, and spend alot of time understanding how cities grow and studying the nature of cashflow vs growth, and after 6 years I am still learning,.... all I can suggest is for you to try and look more deeply into the property market than simply comparing rent to price.


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## wildkactus (5 May 2008)

Stan 101,
I see the townsville unit market as being gone, they are getting to expensive for what they are and also they are building to many especially in town and on the strand. It was good IMO about 2 years ago. the best returns I have found are in Houses.
I have several in South Townsville, Railway Estate, a couple of reasons, the area is becoming one of the inplaces and the blocks of dirt are big enough to sub divde, which I have done.
(This is my main MO with property, find a twist to add value ie subdivide, renovation etc)

The future as I see it for townsville should be good, an expanding economy for a few more years yet, funded by the mines out west, the military expansion, plus to a smaller degree the tourism sector.

There is good money to be had in property you just have to find it.

(By the way I lived in the ville for a few years before coming to HK)


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## adobee (5 May 2008)

I am a realestate agent ..

In my opinion i dont think there is to much wrong with the agent saying the return is great (if in his opinion) and it may be compared to what else he has for sale.. the main thing I expect / have a problem with is people mis quoting the actual rents for vacant apartments. . ie saying its great and rents for 260 a week is fine if 260 is the market rental and you can do your sums.. saying its great and can rent for 385 pw when its really 260 and people factor there sums on this then that is dodgy with a capital d..  I have to agree that alot of agents are stupid.. this guy probably isnt dodgy just thick.. i have met alot of people who think that if the price is $260k and the rent is $260pw they are getting a 10% return..

In general I am seeing around 3% to max 4% net returns on sydney property when sold (factored on a normal market rental not a furnished or holiday rent etc).. however i am seeing an easy 10-20% growth in rental per annum in the city and fringe suburbs..


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## Aargh! (5 May 2008)

Personally I have a problem with RE agents voicing their opinion of investment potential. RE agents are not qualified to give financial advice. They are in a position to influence and persuade to meet their own personal gain. Now I call that a conflict of interest


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## xoa (5 May 2008)

If unsustainable price rises are sustainable, then real estate is definitely a good investment.


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## wayneL (5 May 2008)

WaySolid said:


> There were people who made fortunes in property during the last recession, though not from buy n hold on it's own nescessarily, but from value add which is one of the truly great things about this asset class.




I think this comment requires some more input; in the stock threads this would be put down as a ramp. 

Why and how did these "people" make fortunes in the last recession? And what do you consider to be a fortune?

There is more to it than just value adding, as I knew several "value adders" that came a cropper in the early nineties through going about it the wrong way.


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## Tysonboss1 (5 May 2008)

xoa said:


> If unsustainable price rises are sustainable, then real estate is definitely a good investment.





Who's saying unsustainable,.... even with increases in cashflow and capital only matching inflation there is a benefit to property.


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## WaySolid (6 May 2008)

wayneL said:


> I think this comment requires some more input; in the stock threads this would be put down as a ramp.
> 
> Why and how did these "people" make fortunes in the last recession? And what do you consider to be a fortune?
> 
> There is more to it than just value adding, as I knew several "value adders" that came a cropper in the early nineties through going about it the wrong way.



I guess it was a ramp. 

A well know example would be Peter Spann. A fortune might be financial freedom, whatever that means to a person.

Agreed that you can lose money in real estate as well as make it.


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## ROE (6 May 2008)

Pick up a copy of Weekend AFR and read what it really mean being a landlord
it's not as rosy as many made it out to be.


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## Stan 101 (6 May 2008)

wildkactus said:


> There is good money to be had in property you just have to find it.




Sure is Wild. I am finding it and it is nowhere near Townsville hehe. As I mentioned in an earlier post, there are positive returning properties around, they are just harder to find. Having to prop a little capital off the investment loan to push them into positive or even better neutral territory is what seems to be the norm for what I'm finding.

Railway Estate is primed and certainly moving forward. All the best with it. I started investing in the northern beaches, Aligator Creek and Nome some time ago and the returns have been good. Prices have slowed in that region now, though.
All the best with the sub divisions in the future.

cheers,


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## Plasmo (6 May 2008)

For the life of me I can't understand why you would be a landlord;

Owning property is like owning shares, except:

1) Worse returns

2) Worse liquidity

3) Higher transaction costs

4) You waste your time trying to collect the rent, interviewing people and arranging repairs

Unless you are particularly good at being a landlord (ie you want to personally spend your time upgrading a place, for example because you enjoy making houses prettier) it's truly pointless.  The promotion of negative gearing is 9 times out of 10 a scam anyway.

The only reason I could see to get into property is to have a stable environment to live in, or to exploit government grants and artificially low interest rates.


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## wildkactus (6 May 2008)

Stan 101,
Thanks, and all the best in your investments also.

many the money flow free.


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## Julia (6 May 2008)

Plasmo said:


> For the life of me I can't understand why you would be a landlord;
> 
> Owning property is like owning shares, except:
> 
> ...



You are completely ignoring the aspect of capital gain.
In the present property environment, you do have a good point.
But when the cycle once again turns in favour of property, which of course it will, the rewards of investment property are very worthwhile.

I've had IP on which I've experienced 80% capital gain in less than a year.
And that was in addition to very high rent and a choice of good tenants.
Essentially, it's a case of choosing your investment according to the prevailing conditions.


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## Plasmo (7 May 2008)

Wow 80% in a year, that could never happen with a stock, I guess I've neglected "capital gains", the area where property beats shares hands down.


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## adobee (7 May 2008)

Aargh! said:


> Personally I have a problem with RE agents voicing their opinion of investment potential. RE agents are not qualified to give financial advice. They are in a position to influence and persuade to meet their own personal gain. Now I call that a conflict of interest




I agree .. I dont think they should give financial advise as they dont know the persons circumstances and they are also not qualified to do so.. There is no problem with them however advising the market rental and price for a property and what this equals in a gross and net return.. taking into account usual outgoings..


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## Tysonboss1 (7 May 2008)

Plasmo said:


> For the life of me I can't understand why you would be a landlord;
> 
> Owning property is like owning shares, except:
> 
> ...





There are lots of pros to property investing,... Using property, shares and business togerther is where the awesome power is. any one of the three by themselves has serious draw backs.


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## Jimminy (7 May 2008)

Plasmo said:


> For the life of me I can't understand why you would be a landlord;
> 
> Owning property is like owning shares, except:
> 
> ...




Will agree with points 2 & 3.

Just purchased a $770,000 commercial property. Transactions costs (approx):

1) $1650 transfer costs
2) Solicitors fees - $2000 +
3) Stamp duty - $28k 
4) no gst payable as owner wasn't registered thankfully.

Stamp duty is a killer, not to mention agent fees if you sell.


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## mime (8 May 2008)

Investing in RE is a bitch and I would strongly recommend against it useless you have the significant resources. There are so many things stacked against you such as poor liquidity, massive taxes, dealing with tradesman and councils and a poor rental return vs expenses(if your lucky maybe 5% pa vs 10%pa).

The only way to make any serious money from RE is the intangibles which no one else such as sub division or development but they are beyond most people.

I had an idea about RE investing. Buying a cheap house which is rich in materials and sack it of it's copper, steel and what not. Then demolish it and sell a vacant block of land.


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## Tysonboss1 (8 May 2008)

mime said:


> I had an idea about RE investing. Buying a cheap house which is rich in materials and sack it of it's copper, steel and what not. Then demolish it and sell a vacant block of land.




The demo would cost more than the scrap retreived,...


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## numbercruncher (8 May 2008)

Thats an expensive way of pursueing the Demolition business !

People often literally give houses away or PAY people to tear them down.


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## nioka (8 May 2008)

mime said:


> I had an idea about RE investing. Buying a cheap house which is rich in materials and sack it of it's copper, steel and what not. Then demolish it and sell a vacant block of land.



Try it. It will be an experience you will only have once.

Now I'll give you a suggestion that does work. Find a commercial property with a good tennant in a good position whose lease is in it's last year and where the existing lease includes all outgoings and maintenance including painting the premises prior to the end of the lease. It is possible to find one where the rent is low and possibly where the rent was not CPI indexed. These properties have poor returns. Commercial properties are usually priced at between 10 and12 times the annual rent. However the rent is usually adjusted again with a new lease. The value can rise substantially. This has worked well for me in the past and will again in the future.

I had another where the lease was for only part of a property which included the building. The balance of the block not included in the lease was vacant land. Hey presto a quick prefab and more rental property without buying more land.

Go commercial it beats housing tennants and you don't get the "tennants from hell" ( I've had a couple of them too.)


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## MaxInvestor (19 January 2011)

ROE said:


> Pick up a copy of Weekend AFR and read what it really mean being a landlord
> it's not as rosy as many made it out to be.




Well, there is always the option of using  a property management company, however it will lower the overall return quite a bit. ;(


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## Izabarack (27 January 2011)

Tysonboss1 said:


> The demo would cost more than the scrap retreived,...




Labour heavy and somewhat difficult to render a house for its scrap.   I have a rental that needs some work, lots of work if I want to really do it up.   Maybe as much as 50k to redo bathroom, kitchen, roof iron, paint, and carpet.

Have a quote from my neighbour, who is in the business, for 8k to trash house and leave me a grassed piece of land.   Timeframe of one day, all done, including me spreading grass seed of my choice.   His quote was after assessing whether it was worth stripping and metals and recycling the hardwood frame, and working out how far from the landfill site.  In the end, trying to recycle anything was not cost effective.

Only variable that might effect rental return in the near term is location.  Near Brisbane and rentals are in high demand given the number of displaced flood victims although I do have some concern about gouging people in distress by asking too much rent.   

Iza


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## klburrell (14 October 2011)

Tysonboss1 said:


> It really depends on your investment stratergy,
> 
> It's true you can expect an average return from property especially units and apartments in the short term, however
> 
> ...




Just curious has anyone invested in the US, we the market being so down and the Australian dollar out weighing the US. It just seems like better since especially if your already doing properties out of area, not your own back yard. You can get US properties from $20k US to $85K US and even the cheaper ones are pulling $400.00 a month cash flow. There's a ton of great markets there although I will advise you to be careful. If a property is super cheap there's probably a reason for it.


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## klburrell (14 October 2011)

klburrell said:


> Just curious has anyone invested in the US, we the market being so down and the Australian dollar out weighing the US. It just seems like better since especially if your already doing properties out of area, not your own back yard. You can get US properties from $20k US to $85K US and even the cheaper ones are pulling $400.00 a month cash flow. There's a ton of great markets there although I will advise you to be careful. If a property is super cheap there's probably a reason for it.






Stan 101 said:


> I was up here at a few open houses from 2 bed units to 4 bed homes of varying levels of opulence in Townsville today and noticed all real estate agents were really pushing home the concept of "great rental returns" and "great cashflow returns."
> 
> one example was $260k two bed unit, 80 square metres, no carport or garage, external laundry at the front of the unit masonry block wall with no plaster inside (common up here). Body corp $400 per qtr(inc sinking fund), rates $900 per half.
> Rent = $190 - $200.
> ...



 Just curious has anyone invested in the US, we the market being so down and the Australian dollar out weighing the US. It just seems like better since especially if your already doing properties out of area, not your own back yard. You can get US properties from $20k US to $85K US and even the cheaper ones are pulling $400.00 a month cash flow. There's a ton of great markets there although I will advise you to be careful. If a property is super cheap there's probably a reason for it. I know I had the same reply on a post below but I figure it also fit your comment.


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## Wysiwyg (28 July 2017)

tech/a said:


> So clearly it's important to have a passive income which is able to keep up with inflation
> 
> My 92 year  old dad
> Would have been better off buying 10 house with his 400 k
> ...



Interestingly present time, it is hard to comprehend multiple house prices compared to the past. My dad sold his low quality home for 7 times the bought price. It is hard to imagine that multiplying again for 2.1 million dollars in 30 years. As SKC noted it is inflation that skews the numbers to seem phenomenal wealth is being created when everything of worth has gone up in price too.


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## tech/a (28 July 2017)

Not so amazing when you realise that it's happened many times before.

Germany
Zimbabwe 
Japan 
To name a few.

It's just relative ----- at the time.
Only those who can't go with it feel it.
Those who can don't.


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## notting (29 July 2017)

What amazes me is what the big 4 Ausi banks have done in the last 10 to 15 years, compared to the house prices and expansion of the housing market in general.
It's ridiculous how badly they have done in comparison. Maybe their not really funding much of it at all?
ANZ hit $30 in 2006, today 30
WBC hit $30 in Sept 2007, today 32
NAB hit $30 in May 2001!!!! today 30
CBA hit $62 Sept 2007 today 84 not so bad, but hardly has the whole market. Nor is it 130 which it should be if it kept up with price growth in the housing market.


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## luutzu (29 July 2017)

notting said:


> What amazes me is what the big 4 Ausi banks have done in the last 10 to 15 years, compared to the house prices and expansion of the housing market in general.
> It's ridiculous how badly they have done in comparison. Maybe their not really funding much of it at all?
> ANZ hit $30 in 2006, today 30
> WBC hit $30 in Sept 2007, today 32
> ...




check out their number of shares outstanding. Just scanned through and most added some 1 billion new shares since 2007 each [from Comsec's morningstar freebie].

So that's $30B market cap each in ten years?

That can't be good.


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## luutzu (29 July 2017)

Wysiwyg said:


> Interestingly present time, it is hard to comprehend multiple house prices compared to the past. My dad sold his low quality home for 7 times the bought price. It is hard to imagine that multiplying again for 2.1 million dollars in 30 years. As SKC noted it is inflation that skews the numbers to seem phenomenal wealth is being created when everything of worth has gone up in price too.




It's not just inflation with the current property prices. 

Inflation-only would bring the median property prices in Sydney - around $120k? - some 30 years ago to be about $518k if we take inflation at 5%p.a. all those years.

Median house prices in Sydney now is some $1.2m?

Won't end well.


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## Value Collector (16 August 2017)

luutzu said:


> It's not just inflation with the current property prices.
> 
> Inflation-only would bring the median property prices in Sydney - around $120k? - some 30 years ago to be about $518k if we take inflation at 5%p.a. all those years.
> 
> ...




Inflation + population growth (add 2% to your 5% inflation figure and see how much that changes it)

both create upward pressure. 

Eg,

 even in a world of zero inflation, the population growth would have caused prices to rise

even in a world of zero population growth, inflation would have caused prices to rise.


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## luutzu (16 August 2017)

Value Collector said:


> Inflation + population growth (add 2% to your 5% inflation figure and see how much that changes it)
> 
> both create upward pressure.
> 
> ...




But won't most property prices ultimately be dictated by the buyer's ability to pay for them?

I don't think property, with maybe a few exceptions in the likes of Point Piper or some place, I don't think they can sustainably grow at that 7% of inflation+population growth. 

I mean, if that were to happen the current median property in Sydney will grow from $1.2m to $4.6m in 20 years.

Unless wages grow at a couple of percentage point above that too, I don't see how the median income Sydney barbarians can afford it. So they will either rent in ever smaller rooms, buy a tiny apartment to raise a family... or pressure will be put on politicians to release new land... or prices will have to drastically be corrected.

The last two are most likely to me. Particularly further out a bit from Sydney CBD, say 20km out. 

Then there's the death and dying problem. We will all go there... can't take it with us. Potential land release, apartment glut coming... no new population growth as high private debt will naturally curb that dream too. 

Heard someone quoting a famous book on the GFC saying that during the boom in the US... for every $1 gained in property prices, Americans borrowed $0.40. I don't know the figures for Australia, but from a couple of anecdotal experiences, people with a few properties do kind of splurge a bit lately.


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## Value Collector (16 August 2017)

luutzu said:


> But won't most property prices ultimately be dictated by the buyer's ability to pay for them?
> 
> I don't think property, with maybe a few exceptions in the likes of Point Piper or some place, I don't think they can sustainably grow at that 7% of inflation+population growth.
> 
> ...




The price of each "dwelling" will be dictated by the ability to buy or rent it.

But more and more dwellings are being put onto the land.

Eg, a median home used to sit on a 1/4 acre block of land, but if a developer is going buy that 1/4 acre block and then put 6 new dwellings on it, then the price of that 1/4 acre can grow faster than the wages that people would intuitively think limits its price.


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## Toyota Lexcen (17 August 2017)

notting said:


> What amazes me is what the big 4 Ausi banks have done in the last 10 to 15 years, compared to the house prices and expansion of the housing market in general.
> It's ridiculous how badly they have done in comparison. Maybe their not really funding much of it at all?
> ANZ hit $30 in 2006, today 30
> WBC hit $30 in Sept 2007, today 32
> ...




yes just amazing, your capital has gone nowhere, property could drop 10,20,30% and still be well ahead of share investment


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## luutzu (17 August 2017)

Value Collector said:


> The price of each "dwelling" will be dictated by the ability to buy or rent it.
> 
> But more and more dwellings are being put onto the land.
> 
> Eg, a median home used to sit on a 1/4 acre block of land, but if a developer is going buy that 1/4 acre block and then put 6 new dwellings on it, then the price of that 1/4 acre can grow faster than the wages that people would intuitively think limits its price.




Yea that's true. And I agree with you that if a block can be made more "useful" or productive than just a single house etc., it'd be more valuable. 

But the average $1.2m block nowadays are still nowhere near the kind of zone council or nsw gov would permit that kind of density. 

There's not the need for it outside a 500m or max 1km radius of only the few very busy/inner city stations. And maybe crowds around one or two bigger shopping centres in each suburb.

Besides that, the most that council would allow would be a duplex/triplex subdivision if each block is over 450m2 [fairfield council, depend on density zoning]. And the subdivision may have other requirements that will add $50k just like that. 

There's the stormwater easement required if the land slopes backwards. If the neighbour permit you, it'll cost you at least $30k just to get that permission. Then construction costs and other fees and charges. 

So if we take that average block in suburbia, zoned for medium density [r2?], costs $1.2m and we split it into a duplex. The costs to design, plan and construct the two double-storey duplex within the Floor Space Ratio permitted by most councils [45% to 50% of land]... totals would be around $600k easy.

After a year's work, interests etc., an investor would need to flock them off for at least $2m total to break even. 

Closer to the city, maybe a young couple can afford it. 

In suburbia where most earn about $50k to $60k a year working in the trades or a factory... I just don't see it happening all that much. 

----

But say an investor buy $1.2m and rent it out. Most of those $1.2m detached houses are 3-bedrooms... some even just 2. 

Say they put in another $100k to build that granny flat. Maybe get creative, put in another $100k for an "extension"... turning that single property into 3. 

Assume the neighbours don't complain and all goes well, rental would be say $400k a week on average for each... that's $1200x52 = 62/(1200+45k stampduty +$200k) = 62/1445 = 4.3% return a year.

I guess there's all that negative gearing and tax plays...

For my money, I'd put the cash in the bank (or some good stocks) and save all the stress of buying and managing the construction. 


That's not saying that property is a bad investment... just at current prices, I just can't work out how it can be a good investment. Maybe if it halved and I still have cash.


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## Value Collector (17 August 2017)

luutzu said:


> But the average $1.2m block nowadays are still nowhere near the kind of zone council or nsw gov would permit that kind of density.
> 
> .




It doesn't have to be.

As the developers buy houses on 1/4 Acre blocks and demolish them to build town houses or Apartments, it reduces the total number of detached houses sitting on 1/4 acre blocks, so the remaining stock of houses (even those away from development) will have their prices bid up by the people on higher incomes that don't want to live in Apartments.

You also have demographic factors.

Not only has the population grown, but the number of people in each dwelling has reduced.

You have elderly living longer, so you have a bunch of 3 bedroom houses being tied up by single elderly people who want to stay in the family home.

You have smaller families, So where as 5 people used to live in every house, now it might be average of 2 or 3 so even though population might have grown by 50%, demand for dwellings has grown 100%.

There's the stormwater easement required if the land slopes backwards. If the neighbour permit you, it'll cost you at least $30k just to get that permission. Then construction costs and other fees and charges. 



> So if we take that average block in suburbia, zoned for medium density [r2?], costs $1.2m and we split it into a duplex. The costs to design, plan and construct the two double-storey duplex within the Floor Space Ratio permitted by most councils [45% to 50% of land]... totals would be around $600k easy.
> 
> After a year's work, interests etc., an investor would need to flock them off for at least $2m total to break even.




These costs increase prices, they don't reduce them.


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## luutzu (17 August 2017)

Value Collector said:


> It doesn't have to be.
> 
> As the developers buy houses on 1/4 Acre blocks and demolish them to build town houses or Apartments, it reduces the total number of detached houses sitting on 1/4 acre blocks, so the remaining stock of houses (even those away from development) will have their prices bid up by the people on higher incomes that don't want to live in Apartments.
> 
> ...




I gotta think a bit about that one.

I guess it is true. But then that would only be if we think about it on a purely economic or able-to-afford [what's the neat word for that? ] point of view. I mean there are speculators who buy not because they are making returns from the rental yield, or buy a house because they can afford to and thinking of holding long-term. There are people who buy on speculation that "soon" they can flip it for a lot more.

So that speculation would also drive up prices, not simply demand/supply and enough firepower. 

Then there's that death and deceased estate factor too. Japan got into a lot of trouble back in the days when they over-build [to meet demand]... Then I'm guessing those who buy can't afford to have too many children, then soon enough a generation passes and they have that perfect storm of high supply, high private indebtedness, sluggish economic growth due to scaled down in consumptions [due to need to repay the mortgages]. 

But yea, property as an investment never really make much sense to me. I mean a person should have a home, maybe another property if they can afford it. But property as an asset class doesn't make much sense unless you have cash and it's a why-not kind of thing.




Value Collector said:


> [stormwater easement, subdivision etc....]
> These costs increase prices, they don't reduce them.




I think those are just sunk cost. The owner might want to charge more but unless there's a property boom, forget about it. They might be lucky to spent all that cost just to bring the property value up to par with a similar property with better Feng Shui.


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## Value Hunter (17 August 2017)

Shares are better than property in most regards. The real reason to invest in property is the borrowing power and the interest rates on property mortgages. If you want to borrow to invest in shares e.g. Margin loan, the LVR will be much lower and the interest rates you pay much higher and there would be the risk of a margin call. Other ways for leveraging into shares such as options, etc typically have expiry dates. I have invested in both so I am not biased.


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## Value Collector (18 August 2017)

luutzu said:


> I mean there are speculators who buy not because they are making returns from the rental yield, or buy a house because they can afford to and thinking of holding long-term. There are people who buy on speculation that "soon" they can flip it for a lot more.




Yeah, But that happens with shares, commodities, cars, antiques, foreign currency you name it.




> But yea, property as an investment never really make much sense to me. I mean a person should have a home, maybe another property if they can afford it. But property as an asset class doesn't make much sense unless you have cash and it's a why-not kind of thing.




are you talking all property or just residential?

Because you would be hard placed to operate any business without at least some property, and the people running the business don't always have the capital or the desire to own the property them selves.

Eg, Woolworths and Coles rent most of their stores, Some farmers rent their farms, hotel operators often lease their hotels.








> I think those are just sunk cost. The owner might want to charge more but unless there's a property boom, forget about it.




Prices are affected by supply and demand, right.

So anything that increases the cost of building new supply, is going to be passed through.

For example, most developers are pretty switched on to all the costs they face, they aren't going to start new projects until the market price of the finished product is higher than the cost.

So there is a whole lot of potential supply that sits un developed because of the input costs are to high to justify the project.

If you eliminate a bunch of costs, more projects would be done and the market prices would adjust lower.


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## Value Collector (18 August 2017)

Value Hunter said:


> Shares are better than property in most regards.




I agree, the return on equity you can get in a good business is generally much better than property.

But, property is much better than cash or gold.

I see property as a place to hold capital, where it will earn a return similar to government bonds, but where the capital and income is protected some what from inflation.

I see it as a bit like gold, but better because it produces income.


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## Toyota Lexcen (18 August 2017)

property is far better than shares, look at the previous post about the bank shares (supposedly well run top20 companies)

capital has gone nowhere in ten years versus medium prices in capital cities


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## Value Collector (18 August 2017)

Toyota Lexcen said:


> property is far better than shares, look at the previous post about the bank shares (supposedly well run top20 companies)
> 
> capital has gone nowhere in ten years versus medium prices in capital cities




I don't won't to get into the whole shares vs property debate because its been done.

But the people who often state property is better are not looking at the full picture.

they often forget 2 things things.

1, They don't include dividends in their calculations, which often include a tax credit and are net income after cost

2, They include the rental income of the property, which is before costs, and a portion of this rental income must be reinvested to maintain the value of the property.

So when you say the median prices of houses has risen, Part of this is due to some of the rent being used to keep the property in good condition.

However, 100% of the dividends from the shares has been available to the shareholders as income, e.g. CBA went from $12 to $80 over the last 20 years, with out requiring the investor to add back his dividends to maintain it.

*So if you bought a CBA share in 1996 for $12, you would have been paid $50.50 in dividends, along with $20.21 in franking credits, and you now have an $80 share.

So $12 grew into atleast $150.70 worth of value (actually a lot more if you reinvested the dividends over that time), you would struggle to find a property that provided that sort of gain.*


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## Toyota Lexcen (18 August 2017)

be interesting to what happens in the next 10yrs,


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## Value Collector (18 August 2017)

Toyota Lexcen said:


> be interesting to what happens in the next 10yrs,




It always comes back to return on equity, business in general has a better return on equity, so over time, through all the fluctuations, it should deliver a better result for the share holder, provided it is not purchased a silly price to begin with.

I own property as well, I am not saying its bad.


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## Value Collector (18 August 2017)

notting said:


> What amazes me is what the big 4 Ausi banks have done in the last 10 to 15 years, compared to the house prices and expansion of the housing market in general.
> It's ridiculous how badly they have done in comparison. Maybe their not really funding much of it at all?
> ANZ hit $30 in 2006, today 30
> WBC hit $30 in Sept 2007, today 32
> ...




They haven't actually done to bad, NAB is the worst, but it has paid out about $34 in dividends and about $14 in franking credits since 2001, So any investor that paid $30 for hasn't had a star result, but its not a terrible result, compounding the dividends would give you a return of over 7%, not bad for the dog example.

The others have performed much better, the numbers you quoted e.g. 2006 and 2007 include the peak from just before the GFC, if you took prices from either 2 years before or after that you would get a much better result. 

looking at a 20 year period, that includes the full lead up to the GFC, the crash and recovery, the results are very good, much better than property.


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## Toyota Lexcen (18 August 2017)

The capital has gone nowhere, even if you put +- 2yrs into it compared to median prices

And yes you have to deal with the GFC, trump, govt regulation, boards, asian crisis, poor management, crook traders

If you bought house with cash back in 2001 you get a "dividend"?

Great discussion, a lot of theory


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## Value Collector (18 August 2017)

Toyota Lexcen said:


> The capital has gone nowhere, even if you put +- 2yrs into it compared to median prices




Which capital are you talking about? as I said CBA since 1996 went from $12 to $79, and paid out about $70 of dividends and franking credits.

But since 2005

ANZ went from $17 to $30
WBC went from $18 to $32
CBA went from $32 to $79  (the star)
NAB went from $27 to $30 (the Dog)

All while paying gross dividends totalling the entire purchase price, 

When it comes to 5 year compounded returns,

ANZ is 10.2%
WBC is 12.4%
NAB is 11.6%
CBA is 13.7%

Again that a very good return, it's just the 10 year figure that looks mediocre, because as I said thats where the GFC was, you may very well find that property prices become over valued at some stage (maybe now) and when you look back at the peak in 10 years you will also get mediocre 10 year figures.





> If you bought house with cash back in 2001 you get a "dividend"?




Yes, but you don't get to keep all that "Dividend", you have to use a lot of your rent to pay expenses and maintain the property, and there is no franking.

Where as 100% of the dividends paid by the banks has been the shareholders to keep, especially because of the tax credit.


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## Joules MM1 (2 January 2019)

(counter balance "2018 offered one of the best opportunities for real estate purchases since 2008"):

SYDNEY (Reuters) - Australian home prices skidded nearly 5 percent in 2018, marking their worst year since 2008, led by tighter credit conditions and waning investor interest, and analysts expect the weakness to persist this year.

https://www.reuters.com/article/us-...3695&utm_medium=trueAnthem&utm_source=twitter


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## SirRumpole (2 January 2019)

*Negative gearing should exclude wealthy property investors from tax breaks: AHURI*

https://www.abc.net.au/news/2018-03-07/report-reveals-new-negative-gearing-proposal/9519586


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## Skate (2 January 2019)

Joules MM1 said:


> (counter balance "2018 offered one of the best opportunities for real estate purchases since 2008"):
> 
> SYDNEY (Reuters) - Australian home prices skidded nearly 5 percent in 2018, marking their worst year since 2008, led by tighter credit conditions and waning investor interest, and analysts expect the weakness to persist this year.
> 
> https://www.reuters.com/article/us-...3695&utm_medium=trueAnthem&utm_source=twitter




*What a great TAG *(I've included it in the 'Dump it here' thread)
https://www.aussiestockforums.com/threads/dump-it-here.34425/page-62

Joules MM1 - practice perfectly, to make what you do, a perfect expression of yourself.

Skate.


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