The future of Australian property prices

[Tysonboss1]

No I'm not lost, I make my living from hedging - if your option knowledge is up to scratch, the example I gave is analogous to hedging something with a delta of 0.9 with another of 0.2 and differing convexity. Even though they may be related, the replication is not perfect.

But I'll leave it at that, we can agree to disagree.

Sorry, I meant to say I was lost, not you were lost.

You may well be right that you can use a option stratergy to hedge against inflation, But I try and keep it simple, I would much prefer to own property and just collect rent.

But yes as I have said many times you can not but any property at any price and expect to do well, the price you pay for the property must make sense when compared to the earning power of the property.

 

[Tysonboss1]

Have you read this Tysonboss?

Oh dear, you just did?

Oh dear, you feel silly?

That is OK. I won't tell anyone.

What was your point here.

 

[AlexG1]

I was not referring to the value of property in 6 weeks, I was referring to the value of shares and properties on that particular DAY.

If you have just sold something, are you not establishing its price
If I have the exact same item, it is not my ideals which determine the value at the time, it is what people are willing to pay.

I think the way I'd define value is what something SHOULD be worth based on all the measurable parameters. It should be entirely objective, but in reality it is subjective due to differing interpretations of various inputs. For example if I was attempting to estimate the future value of an oil company I must make some estimation about the future oil prices.

The price is, as you say, what people are willing to pay for it. It's a point in time measurement of a transaction.

If somebody estimates that the value of their asset is worth more than what somebody is willing to pay for it then they are unlikely to sell it (Unless they are forced to).

To me this is pretty much the crux of this whole debate. We have a bunch of people who estimate that the median value of Australian property is 7.5 times the median wage and that it will continue to grow into the future. There's others that estimate it should be waaaay lower than that (including me btw).

I can go out and offer one of these 7.5x guys half that today - and they aren't going to sell it to me. If no one offers the seller his estimated value he's not going to sell it - so there is NO price.

If however the guy on 7.5 times is leveraged at 90% and interest rates go up, fuel prices go up and god forbid he's out of a job - he's going to have to sell....... Now if nobody out there values his house at 7.5x he's going to have to sell at the highest somebody offers him - which may well be below what EITHER of them value the property at.

This is the aim of a value investor - to pay a lower price for an item than their estimated value for it. Adding a margin of safety to allow for errors in their calculations/assumptions.

I kinda think that's where Tyson was coming from as well and hopefully I've explained myself well enough.

Alex.

 

[sinner]

Tysonboss, I wish you would stop spouting this spiel about property being an inflation hedge, and using all your example points within a very narrow scope of recency bias to make your case!

The fact of the matter is that property is only an inflation hedge in a normally functioning economy with the inflationary pressures being result of higher productivity in the economy. However this is the same period that I refer to as the "dartboard" as in, you could throw a dart at any investment on the board and make money. Realistically during this period the best thing to hold instead of property is bank shares, as this is the company making actual money off "retail" property investors by acting as their secured creditor.

Yet, the truth is plain to see for anyone willing to check: Australia lags behind all contemporaries in productivity and yet we consistently record higher inflation rates. This is a massive structural imbalance that plays out over many many years, reducing our global competitiveness.

Property has never been shown to act as an inflation hedge against "unexpected" inflation, the sort we see more often than not in times like these. So please, unless you have proof that exceeds the narrow scope of 10-20 years Australian data (even then I am sure I can find counter examples), stop with this spiel.

 

[Tysonboss1]

I have determined that my 4 BR investment property in Cairns is valued at 2.4 million, so I am going to take a loan out against it and buy 5 more properties in the street, with that loan.

Well I have told you how I figure out the value of an asset, I conduct an analysis of it's earning power over time and then use this infomation to justify the price I am willing to pay for the asset and in this way I can have a certain assurance that over time I will have a decent return on my invested funds and by not over paying I have a certain assurance that I will not have a large loss in capital.

How do you work out the price to pay for an asset, Since you seem to believe that any asset is only worth what it can be sold for that day, How do you work out a fair price to pay for somthing, You seem to believe that the only value an asset has is it's current market price, How ever then you also state that you believe property is over priced and due for a correction, the fact that you believe it is due for a correction means that you do believe that assets have some sort of intrinsic value that can be measured and can become over priced in relation to this intrinsic value.

So which one is it, do you believe that the market is always 100% correct and market price is always equal to fair value, Or do you believe that there is a fair intrisic value to assets and they can trade at prices above and below this intrinsic value.

As I have stated i believe every asset has a value which is somewhat fixed and it is up to each person to decide they price they are willing to pay for that value, Sometimes it will be underpriced other times over priced. Each person may value an asset differently though, for example a developer may value a block of land higher because he has the skills to develop the property into apartments, so he can pay a higher price than some one who's plan was to simple rent out the house.

But each to there own. I would love to hear how you go about working out how to deploy your capital.

 

[Tysonboss1]

.

I kinda think that's where Tyson was coming from as well and hopefully I've explained myself well enough.

Alex.

Yes exactly, but I don't use a multiple of wages to determine the value of a property, I use the rental return.

 

[FxTrader]

Well I have told you how I figure out the value of an asset, I conduct an analysis of it's earning power over time and then use this infomation to justify the price I am willing to pay for the asset and in this way I can have a certain assurance that over time I will have a decent return on my invested funds and by not over paying I have a certain assurance that I will not have a large loss in capital

Valuation methodologies vary between asset classes and are far from an exact science. Take equities for example, you can easily get 10 different valuations for the same company from 10 analysts and frequently do with wide variation where each analyst has their own formula. Roger Montgomery's valuation methodology did not assist him when he lost millions on Credit Corp for instance. It may have been a bargain when he bought it but circumstances change, this can and does happen with property as well.

Valuers for property, including local councils and banks, use recent sale price history as a major factor in their valuation calculations so price and valuation are closely linked within the property asset class. Not so with profit making businesses (stocks) where the saying "price is what you pay and value what you get" really applies. Using rental yield as a guide to valuing a property is hardly more valid or accurate than recent sale price history since yield uses purchase/asking price as an input.

All you are doing is deciding what you are willing to pay for an IP based on return on equity today, but just as with stocks this is a point in time valuation subject to change when the propects for property prices change. American and Irish property investors found this out the hard way. What you are willing to pay today may prove to be to much a year from now.

 

[R35]

really lol...

so your mates in 95, some 15 years ago are still at the graduate accounting level? So your comparing graduate accounting level in 95 (30k) and their current jobs in 2011 after 15 years in the field (100k) and are deducing that wages have gone up 300%?

wow just wow

Maybe I should be a bit clearer.
Back in 1995 the average starting graduate accounting wage was $30k approximately in the big 4 - Brisbane - Sydney was higher etc..

15 years later, the guys who stayed in the accounting field are making at least $100k/year now. Thats 3times+ there starting salaries back in 1995.

I'm not saying or implying all fields are the same but if my accountant has 15years of experience and is not pulling down over $100k and works in a major Aussie accounting firm then he is likely to be a poor accountant.

good luck..

 

[prawn_86]

I'm not saying or implying all fields are the same but if my accountant has 15years of experience and is not pulling down over $100k and works in a major Aussie accounting firm then he is likely to be a poor accountant.

thats the whole point.

A graduate now doesnt get 100k. To compare apples with apples, you have to look at the grad wages then, vs the grad wages now.

Accounting:
Grad wages then - 30k
Grad wages now - 50k upper end

Its been proven numerous times int his thread that house price increase have outpaced wage increases.

 

[Tysonboss1]

1,Valuation methodologies vary between asset classes and are far from an exact science. Take equities for example, you can easily get 10 different valuations for the same company from 10 analysts and frequently do with wide variation where each analyst has their own formula.

2, Roger Montgomery's valuation methodology did not assist him when he lost millions on Credit Corp for instance. It may have been a bargain when he bought it but circumstances change, this can and does happen with property as well.

3, Not so with profit making businesses (stocks) where the saying "price is what you pay and value what you get" really applies.

4, Using rental yield as a guide to valuing a property is hardly more valid or accurate than recent sale price history since yield uses purchase/asking price as an input.

5, All you are doing is deciding what you are willing to pay for an IP based on return on equity, but just as with stocks this is a point in time valuation subject to change when the propects for property prices change.

1, Offcourse you can, and variations occur for several reasons a) the projected earnings growth differs between analysts, weekly rents don't move like the oil price (I don't use any sort of future projections when it comes to property other than the rent will stay between a certain range adjusted for inflation over time) B) the rate of return the analyst wants to achieve, for example if the business is earning $100 an investor who wants to earn 10% can pay more than one who wants to earn 20% leading to different valuations c) analysts can discount valuations due to different risk factors, the wide range of risk factors for businesses don't exist in property and the ones that do exist are very cheaply insured against or easily prevented.

2, offcourse there is always business risk with businesses on the stock market hence why graham says that using sound analysis techniques and the margin of safty principle ensures that the investor has a better chance for profit than for loss not that loss is impossible and as the number of investments increases you are more certain that the profits will out number the losses. it is a less important factor with property investments, because the Business risk is much lower.

3, Thats your opinion, I don't agree.

4, I don't use asking price / purchase price as an imput. I take the rental return less an allowance for outgoings and multiply it by 22.5,

5, Rental yields are far less elastic than business earnings, In fact rental yields are probably more stable than property prices. So using the rental return to justify the amount I can pay for a property investment to me is quite logical, After all thats what my return is, The rental return is the whole reason I buy property in the first place.

 

[medicowallet]

1 Well I have told you how I figure out the value of an asset, I conduct an analysis of it's earning power over time and then use this infomation to justify the price I am willing to pay for the asset and in this way I can have a certain assurance that over time I will have a decent return on my invested funds and by not over paying I have a certain assurance that I will not have a large loss in capital.

2 How do you work out the price to pay for an asset, Since you seem to believe that any asset is only worth what it can be sold for that day, How do you work out a fair price to pay for somthing, You seem to believe that the only value an asset has is it's current market price, How ever then you also state that you believe property is over priced and due for a correction, the fact that you believe it is due for a correction means that you do believe that assets have some sort of intrinsic value that can be measured and can become over priced in relation to this intrinsic value.

3 So which one is it, do you believe that the market is always 100% correct and market price is always equal to fair value, Or do you believe that there is a fair intrisic value to assets and they can trade at prices above and below this intrinsic value.


4 But each to there own. I would love to hear how you go about working out how to deploy your capital.

1. So you make assumptions about its earning power over time. This is what most people do, and most take into account historical precedence and future potential. A lot of spruikers have never seen property underperform in this country, I have, and hence I do not believe all the real estate agent generated hype at the moment. I am playing my real estate investments extremely conservatively at the moment, as I can afford to underperform the market at the benefit of protecting my assets. I know you gear at a low level, but you are in a market where the price pressures are not going to come from investors like us, but from the overcommitted.

2. It does not matter how I value an asset, if the market does not agree with me when I go to make the purchase.

That is why at a specific point in time Value = price. Future projections in value are just that, projections.

Therefore if I value my property in Cairns at 2.4 million, and the market values it at $400k, then it really does not matter what I think, its price AND its true value on that day is $400k

I believe, based on historical data that housing is overpriced and due for approx 20% correction (as I said claimed by a combination of falls/stagnation), but obviously at this exact point of time my valuation of property is clearly wrong, as the price I have to pay to acquire more is too high. I am, in fact merely making projections that house prices will either fall or stagnate, which I have been saying for many months on this forum. Therefore my projected valuation may be correct, but that does not help me in the moment.

4. It depends upon the asset class obviously, and an answer is not too easy eg do I want to purchase this specific business for capital growth or for cash flow? Do I want to purchase this particular property for my kids to stay in whilst at uni, or do I want it purely for tennants, do I want this share short term or long term. So I cannot ever give a blanket answer.

The only blanket rule which I like to apply, is that if something has outperformed for a long time, it is time to have a good, hard think about why this is, and the risks this presents.

 

[Tysonboss1]

but obviously at this exact point of time my valuation of property is clearly wrong,.

No, Mr Market may be wrong.

.

 

[Tysonboss1]

The very end of this video has an insight into what I have been trying to explain.

Watch this from the 7.20 minute mark,

.

 

[Tysonboss1]

Therefore if I value my property in Cairns at 2.4 million, and the market values it at $400k, then it really does not matter what I think, its price AND its true value on that day is $400k

.

When I value a business or a property I am not trying to come up with a price it will sell at that day, I conduct my analysis with the aim of coming up with a figure called "estimated intrisic value", the Intrisic value is what this asset should trade at between two rational parties outside periods of any extreme pessimism or over the top optomism.

By indentifying the IV I can with a high amount of assurance be sure that I am not over paying for the asset. Offcourse market flucuations will take the price at times above the IV and at other times Below the IV, But the IV doesn't change with the price.

In regards to your cairns property, you can stand on a hill and spruik that your property is worth $2.4M, you could even convince people to bid at this level but unless this price is supported by measurable facts then it will not change the IV. You do not decide what the IV is, the facts do.

Any way I am not interested in discussing this topic any more, I have explained my point of veiw it does not matter to me if you do not aggree. But just remember this is not a theory that I have come up with my self it is a theory that is used by some of the richest and most successful investors history, Many with longstanding histories of outperforming markets for decades.

Walter J. Schloss 1956–1984 21.3%pa

Tom Knapp 1968–1983 20.0%pa

Warren Buffett 1957–1969 29.5%pa

William J. Ruane 1970–1984 18.2%pa

Charles Munger 1962–1975 19.8%pa

Rick Guerin 1965–1983 32.9%pa

Stan Perlmeter 1965–1983 23.0%pa




http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Warren%20Buffett/Superinvestors%20of%20Graham%20and%20Doddsville%20-%20Hermes.pdf

 

[R35]

thats the whole point.

A graduate now doesnt get 100k. To compare apples with apples, you have to look at the grad wages then, vs the grad wages now.

Accounting:
Grad wages then - 30k
Grad wages now - 50k upper end

Its been proven numerous times int his thread that house price increase have outpaced wage increases.

*****************************
Yep - I get your point - yes average wages have not kept up with the average housing price in the last 15yrs or so as a fraction Wages/Avg Home price.

This point reminds that i did make the right decision 15years ago in search of the higher wage versus staying in Oz...the point above vindicates that decision as I'm making a lot more now oversea's that staying back home...may be that is a good take-away for others..there are low-tax, high paying countries in Asia only a day flight away that you can make some coin and return home one day and live a comfortable life back in Oz...that choice is yours to make.

good luck.

 

[FxTrader]

... the wide range of risk factors for businesses don't exist in property and the ones that do exist are very cheaply insured against or easily prevented.

Oh really, and just how do you insure against a dramatic decline in property prices as occurred in the U.S., Ireland etc. and overdue in Australia?

...it is a less important factor with property investments, because the Business risk is much lower.

Recency and normalcy bias will not serve you well in investing. IP is now a high risk investment in Australia and that's not just my opinion.

I don't use asking price / purchase price as an imput. I take the rental return less an allowance for outgoings and multiply it by 22.5,

Are you serious? And how do you arrive at rental return then?
Point in time valuation only reflects current market conditions and is not much of a buffer in a downturn.

 

[Tysonboss1]

Here is the proper figures, For some reason it put the dates as phone number in the other post

Walter J. Schloss 1956 to 1984 - 21.3%pa

Tom Knapp 1968 to 1983 - 20.0%pa

Warren Buffett 1957 to 1969 - 29.5%pa

William J. Ruane 1970 to 1984 - 18.2%pa

Charles Munger 1962 to 1975 - 19.8%pa

Rick Guerin 1965 to 1983 - 32.9%pa

Stan Perlmeter 1965 to 1983 - 23.0%pa

 

[againsthegrain]

high paying countries in Asia only a day flight away that you can make some coin and return home one day and live a comfortable life back in Oz...that choice is yours to make.

You can also go work in the mines here in Australia, opportunities everywhere but the point is average wage has nowhere near kept up with house prices, kind of the opposite of what you tried to reinforce in the original failed argument.

 

[Tysonboss1]

1,Oh really, and just how do you insure against a dramatic decline in property prices as occurred in the U.S., Ireland etc. and overdue in Australia?


Recency and normalcy bias will not serve you well in investing. IP is now a high risk investment in Australia.


2,Are you serious? And how do you arrive at rental return then?

1, By not over paying in the first place

2, Please try and over come your learning disability and after I have spelled it out nice and slowly you will see that at no point do I use the purchase price or asking price in the input.

Step one- Look at the property, make an assesment of it's likely weekly rent based on what it is currently renting for compared to other recent leases in the area and other other properties of similar type, quality an location etc.

Step two- you now have a figure of the likly weekly rent, lets say $425 / week. So times that by 52, because there are 52 weeks per year. this gives you a gross rental yield of $22,100

step three- You now have to deduct an amount from this figure that will cover rates/insurance/maintaince and other incidentals. you can make this figure as conservative as you like, most banks use 20% of gross rent as a rule of thumb so I will use that in this calculation (normally I would use 15%). So we multiply the $22,100 gross rent by 0.8 to give us an estimated net rent of $17,680.

step four- we then mulltiply the net rent by 22.5 to give you a figure of $397,800, this is then the IV of this property.

You will notice at no time did I use the purchase price or asking price in my calculation

 

[Tysonboss1]

Any way, Thanks to all ASF members for the lively conversation over the years, It's been entertaining. I am off to focus on other things for a while.

Cheers, I wish everyone the best of luck.