House prices to keep rising for years

[Macquack]

That's a concept many southern investors are unable to grasp.

Plenty of rural towns have seen prices inflate to near Brisbane levels. Even towns which are unconnected to the resources boom and/or having population declines.

I can visualise this.
Small outpost, high-flyer flies into town, buys a few properties, prices escalate, locals lose their dream of owning their own home in the middle of butt****.

 

[gfresh]

one thing that has kept brisbane kicking for so long is that it had alot of ground to catch up to due to the prolonged flat period in the 90's... and it is till one of the cheaper capital cities.

Well according to this article... Brisbane has moved up behind Sydney to become the 2nd most expensive city. Melbourne is now 4th.

http://www.theage.com.au/news/natio...-among-cheapest/2008/05/04/1209839456803.html

 

[wayneL]

Slightly off topic-ish, but interesting point:

http://www.angryrenter.com/

 

[Tysonboss1]

If your a long term investor, why are you always trying to beat-up the market. It does'nt matter what it is worth until you sell it.



.

I am not beating up the market,.... Just offering a different point of veiw and different ways to look at things in the face of an avalanche of negative veiws on this thead.

I am sorry if my opinion doesn't mold exactly with yours, I don't think it is fair to compare my coments with some sort of ramping.

 

[Tysonboss1]

Would not the same principle be extended to individual property to property. No two properties are the same.

Yes,... absouloutly. as I mentioned in another thread there are markets within markets. there can be up to 10 different markets within one town all with there own cashflow vs capital gain pros and cons.

much like the share market you can't paint the whole market with one brush,..

there are good stocks and bad stocks,... same with property.

 

[wayneL]

I am not beating up the market,.... Just offering a different point of veiw and different ways to look at things in the face of an avalanche of negative veiws on this thead.

I am sorry if my opinion doesn't mold exactly with yours, I don't think it is fair to compare my coments with some sort of ramping.

I think both bulls and bears should be tolerant of the other sides views, so long as they are reasoned and backed by logic/figures and not just ramping/deramping/trolling.

It's annoying when the other side sticks doggedly to their views, but that's just tough cheddar.

 

[CAFA1234]

Maybe it's time to think about some serious investments - when the news is this bad it is often the time of best returns!

Fannie offers dismal housing outlook
Mortgage finance firm cuts quarterly dividend as it moves to shore-up capital in the face of losses.
NEW YORK (CNNMoney.com) -- Mortgage financer Fannie Mae warned Tuesday that the tumbling home values and loan defaults that have crippled the U.S. economy are likely to worsen, after posting a far larger-than-expected first-quarter loss.

The firm said it now forecasts that home prices will sink 7% to 9% this year, 2 percentage points worse than its previous decline range forecast, a drop that could leave prices 19% off of peak levels.

Thestreet.com
U.S. Mortgages Drive UBS Losses
UBS UBS, Switzerland's largest bank, on Tuesday reported a first-quarter net loss of 11.5 billion Swiss francs, driven by a $19.5 billion writedown tied to U.S. real estate and structured credit.

The first-quarter loss of 5.59 Swiss francs per share compares to a loss of 12.9 billion Swiss francs, or 6.45 Swiss francs per share, in the fourth quarter and a profit of 3.2 billion Swiss francs, or 1.5 billion Swiss francs, in the first quarter of 2007.

BOSTON (MarketWatch) -- D.R. Horton Inc., one of the nation's largest home builders, on Tuesday reported a $1.3 billion quarterly loss as housing weakness and turmoil in mortgage markets continued to drain financial results.
The Ft. Worth, Texas-based company swung to a net loss of $1.31 billion, or $4.14 a share, compared with net income of $51.7 million, or 16 cents a share, in the year-earlier period.
D.R. Horton also halved its quarterly dividend.

 

[Aussiejeff]

BOSTON (MarketWatch) -- D.R. Horton Inc., one of the nation's largest home builders, on Tuesday reported a $1.3 billion quarterly loss as housing weakness and turmoil in mortgage markets continued to drain financial results.
The Ft. Worth, Texas-based company swung to a net loss of $1.31 billion, or $4.14 a share, compared with net income of $51.7 million, or 16 cents a share, in the year-earlier period. D.R. Horton also halved its quarterly dividend.

Wow. For one of the nations largest home builders, I'd say that's a pretty comprehensive turn-around right there, wouldn't you say? Hey, you might like to place an uber-contrarian bet on THAT one, CAFA1234... can only get better, wot?


AJ

 

[Temjin]

Ok, I've made this excel sheet almost one year ago, but have recently refined the pricing model to make it as accurate as possible.

The excel sheet is a model that determine the estimated return of capital per year for any HOME investment, in particular first home buyers. Remember to note that this is not used for rental property investment.

I've made a lot of assumptions in the model, but one can see that some of the assumptions are fairly "conservative".

This will give someone an idea how much REAL RETURN they will get for every dollar they put in to their house and treating it as a pure investment.

Feel free to distribute this.

Oh yes, here is a disclaimer statement.

Various assumptions have been made to generate the results from this model and no guarantees are made that these will remain valid over the length of the modelled period. This model was designed with no regards to individual's financial circumstances. The author will take no responsibilities for ANY liability or loss that may be resulted from anyone who have used this model as a basis for their decision making process. All copyright reserved.

 

[gfresh]

Thanks for putting it up there..

Have downloaded it to take a bit of a look.. however it gives me #NAME? in a few of the cells.. Think you may have a formula typo or something similar.

edit: looks like a particular formula doesn't work in Excel 2003. However, just opened in OpenOffice (free download - recommended) and works fine

 

[Temjin]

edit: looks like a particular formula doesn't work in Excel 2003. However, just opened in OpenOffice (free download - recommended) and works fine

Oops, yeah, I used the PMT, CUMIPMT and CUMPRINC functions which are in the financial category function list. I also used Excel 2003 to generate this model, maybe it's an added feature only or something. It also works for me at home on 2007.

This is also why I have a seperate Loan Amortisation sheet. One can find the principle and interest paid on the table depending on the investment period. The cell which is highlighted in light blue contains the result for that particular investment period. Then you can transfer this value back to the original sheet. The financial formulas just made it easier without referring to this table.

And thanks. Let me know if you think there are any mistakes. Would love to continue to refine it further.

P.S: Oh yes, the rental profit from the profit calculation section is NOT USED in the final ROI calculations. You can easily add this final value to return of investment cell if you want. I used $250 per week as assumption, and adjusted by inflation over time. There are tax complications though as rental income will be regarded as taxable income, so it's hard to model at this time. The model sheet is not complete and the layout is still a little bit confusing, so sorry for that.

Will try to make a rental property investment model when I have time.

 

[gfresh]

Few things to also take into account .. if it's a townhouse or apartment, I'd add a line for body corporate fees - would be significant over time.

With insurance in apartment blocks, often building insurance is included in body corp above. Landlords would also commonly have rental insurance incase the tenants trash the place inside. Tenants also pay their own contents insurance. Maybe that could be broken down into those?

Tenants also pay their own electricity, so you'd have to zero that out as well for a rental situation (and probably also home owners grant).

Otherwise seems to work fairly well as a pretty good guide.

 

[Tysonboss1]

This will give someone an idea how much REAL RETURN they will get for every dollar they put in to their house and treating it as a pure investment.

.

why have you included electricity and contents insurance,.... these are costs you would have to pay weather you are renting or own the property.

Also you should probally add in the rent you are saving if it is your own property,.... eg. if you are living in he property then te rent you would normally have to pay should be included as a saving some where.

 

[Tysonboss1]

P.S: Oh yes, the rental profit from the profit calculation section is NOT USED in the final ROI calculations. You can easily add this final value to return of investment cell if you want.
e.

Thats a pretty big point to leave out of the profit calculation,.... this is an example of over simplifying things,... the return becomes 9.71% when the rent is factored in.

Secondly you haven't allowed for the rent to be increased over the years.

for example you have calculated the rent saved as about 4.5 of the purchase price how ever this should be calculated at 4.5 % of the value of the property which in your model increases by 7% every year,... which again is another big point often missed

so with the increased rent the profit figure would return over 10%,..... plus the numerous other benefits holding a property can bring both personal benefits as well as investment benefits such as helping get cheaper finance for other investment and businesess ventures.

 

[Temjin]

Few things to also take into account .. if it's a townhouse or apartment, I'd add a line for body corporate fees - would be significant over time.

With insurance in apartment blocks, often building insurance is included in body corp above. Landlords would also commonly have rental insurance incase the tenants trash the place inside. Tenants also pay their own contents insurance. Maybe that could be broken down into those?

Tenants also pay their own electricity, so you'd have to zero that out as well for a rental situation (and probably also home owners grant).

Otherwise seems to work fairly well as a pretty good guide.

Cool, will definitely update the sheet with those. But it is as simple as adding certain numbers to the final expense cell.

why have you included electricity and contents insurance,.... these are costs you would have to pay weather you are renting or own the property.

Also you should probally add in the rent you are saving if it is your own property,.... eg. if you are living in he property then te rent you would normally have to pay should be included as a saving some where.

Try treating your home as a business in this model. That is, the home is an asset that is appreciating in value (the land only), but is not generating any direct cash flow unless you are renting it out. You are also utilising this asset for a specific purpose (e.g. living in it), so there is a cost associated in both using it and maintaining it. This will include everything from interest from debt and obviously electricity and/or content insurance.

Only if you are using it for a purpose other than living it, like just hoarding the house, then you can simply put a $0 in those electricity or content insurance if you decide not to insure it. (or not required to)

Play around with the numbers and one will find which variables are more sensitive to the final return than others. Obviously, expected growth rate and cost of debt is one.

If you own an investment property, the whole model will be a lot more complex. But because you are utilising the asset to generate cash flow (i.e. renting), and that you can claim any expenses that were incurred to generate that cash flow (Aussie tax laws), then final return is obviously more attractive than just owning a home outright.

This is why when I find someone telling me they will be MUCH BETTER off buying a home (and not renting it out) and will make tons of money from the appreciation of their home over the long term, I will just show them this simple model to bring them back to reality. Investment properties is another different story.

 

[Temjin]

Thats a pretty big point to leave out of the profit calculation,.... this is an example of over simplifying things,... the return becomes 9.71% when the rent is factored in.

Secondly you haven't allowed for the rent to be increased over the years.

for example you have calculated the rent saved as about 4.5 of the purchase price how ever this should be calculated at 4.5 % of the value of the property which in your model increases by 7% every year,... which again is another big point often missed

so with the increased rent the profit figure would return over 10%,..... plus the numerous other benefits holding a property can bring both personal benefits as well as investment benefits such as helping get cheaper finance for other investment and businesess ventures.

Read my above post, this is NOT DESIGNED for INVESTMENT RENTAL PROPERTY.

The rent will raise along with inflation at 3.5% EVERY YEAR (each year only) for whatever period you would like to specific. Remember the final values are all future values and have taken inflation into account. And obviously, you can tweak with the rental growth rate to whatever you believe it is to be. I can simply add a cell for that specific purpose.

As for your last paragraph, that's a qualitative benefit and has no direct relations with this particular model. You would use a different evaluation criteria for that.

 

[numbercruncher]

Mortgage sales nose diving - Can probably expect it to get worse too as lenders have just very recently started tightening lending standards ....

Mortgage sales across Australia fell every month for the first three months of the year, when compared to sales for the same three months of 2007 according to AFG, Australia’s largest mortgage broker with 9% of the national mortgage market (Source: ABS and AFG statistics).

This sales contraction is unprecedented in AFG’s experience: until this year, the company has never seen sales fall for more than a single month, when compared with data from a previous year.

Overall sales declined by 14.2% in the first quarter of 2008 compared to the first quarter of 2007. The worst affected states were NSW, where quarterly mortgage sales were down 18.9%, and QLD, down 16.4%. In WA quarterly sales declined by 14.2%, in South Australia by 11.6% and in Victoria by 4.9%.

Mark Hewitt, General Manager of Sales & Operations says: ‘A sales decline for an entire quarter is unprecedented in our experience. There’s no doubt that the high interest rate regime has already done its work, supporting the RBA decision last week not to increase rates still further.’

Along with the decline in mortgage sales overall, AFG Mortgage Index shows that refinancing continues at record levels, with 39.3% of all mortgages being arranged to refinance existing properties, rather than to buy new ones.

 

[Tysonboss1]

Read my above post, this is NOT DESIGNED for INVESTMENT RENTAL PROPERTY.

The rent will raise along with inflation at 3.5% EVERY YEAR (each year only) for whatever period you would like to specific. Remember the final values are all future values and have taken inflation into account. And obviously, you can tweak with the rental growth rate to whatever you believe it is to be. I can simply add a cell for that specific purpose.

As for your last paragraph, that's a qualitative benefit and has no direct relations with this particular model. You would use a different evaluation criteria for that.

Firstly the rent will rise with the value of the property,..( although not at the same time there will be a lag),... so it has a good chance rising faster than inflation.

this is another big point people miss,... they think rent can only ever rise at the rate of inflation due to incomes,...how ever take a 3 bedroom home within 10Ks of the city,.... that 3 bed home may have been considered an average home 25years ago so it received and average rent,....

however 20years later the average home in the area is probally a 3 bed unit,... so that same large 3 bed house on a large block is no longer an average home so it would receive and above average rent,.... so over the years the rent on the 3 bed home has been rising faster than inflation.

 

[Tysonboss1]

Cool, will definitely update the sheet with those. But it is as simple as adding certain numbers to the final expense cell.



Try treating your home as a business in this model. That is, the home is an asset that is appreciating in value (the land only), but is not generating any direct cash flow unless you are renting it out. You are also utilising this asset for a specific purpose (e.g. living in it), so there is a cost associated in both using it and maintaining it. This will include everything from interest from debt and obviously electricity and/or content insurance.


This is why when I find someone telling me they will be MUCH BETTER off buying a home (and not renting it out) and will make tons of money from the appreciation of their home over the long term, I will just show them this simple model to bring them back to reality. Investment properties is another different story.

It is flawed to include the cost of electricity, personal belongings insurance and to leave out the rent saving if your goal is to compare the cost of home ownership to renting,....

because the person will have to pay for the insurance and rent wheather they are renting or not,.... and as I said the rent should be included because they no longer have to pay rent if they own there own home.

It does not make sense what you are trying to say about treating your home as a business,.... I aggree you should run a profit and loss statement on your properties( which is pretty much what your speadsheet is). but when it comes to calculating in electricity and other personal costs it is of no use if your aim is to compare renting vs ownership.

 

[Temjin]

It is flawed to include the cost of electricity, personal belongings insurance and to leave out the rent saving if your goal is to compare the cost of home ownership to renting,....

....I'm not, where have I said that the goal of this model was to COMPARE the return of home ownership verse renting + investment?

You don't seem to understand the whole point of this model. Yes, I may be bearish on the whole real estate market at this time, but the model was designed to view the whole thing from an unbiased, quantative perspective.

because the person will have to pay for the insurance and rent wheather they are renting or not,.... and as I said the rent should be included because they no longer have to pay rent if they own there own home.

As above again, not designed for direct comparsion!

Just treat the model as, how much money invested, how much money in return! As simple as that.

It does not make sense what you are trying to say about treating your home as a business,.... I aggree you should run a profit and loss statement on your properties( which is pretty much what your speadsheet is). but when it comes to calculating in electricity and other personal costs it is of no use if your aim is to compare renting vs ownership.

Maybe it's the biases in you that is preventing you from making a sense out of this model. And like I said, the aim of this model is NOT renting vs ownership!!!!!

Firstly the rent will rise with the value of the property,..( although not at the same time there will be a lag),... so it has a good chance rising faster than inflation.

this is another big point people miss,... they think rent can only ever rise at the rate of inflation due to incomes,...how ever take a 3 bedroom home within 10Ks of the city,.... that 3 bed home may have been considered an average home 25years ago so it received and average rent,....

however 20years later the average home in the area is probally a 3 bed unit,... so that same large 3 bed house on a large block is no longer an average home so it would receive and above average rent,.... so over the years the rent on the 3 bed home has been rising faster than inflation.

This discussion is almost worth another different thread. I am not going to bother talking about how much growth renting will increase along with whatever over the long term. 3.5% inflation was a guessmate, if you think rent will increase 10% over the next 30 years, that is 6% above wage growth (assumption on 4% growth), then so be it, add it into the model.

But do you really think this is sustainable in the real term?

Remember that the model is never an accurate representation of the real world. Just look at the intellectual nerds in rating firms designing Einstein's style computer model to price/predict mortgage backed bonds. The subprime event was something they called a 7 standard deviation event, or something that should not happen in their model every billion year or so.

This model I have cannot account for black swan events such as the subprime event. Imagine what will happen to your "return" if interest rate suddenly goes up to 15% in less than one year. It happened before, why it shouldn't happen again?