coolshadows

But as long as there is CAPITAL GAIN, everything is sunny and bright. Don't forget the unwritten law 'house prices double every 7 years'. Australia is unique and the people here, though they look the same, are in fact different from the rest of the world. (ok, I'm taking the mickey now )

Steve2009

Certainly different to Amsterdam where the average time to double (in real value terms) over the course of a four hundred years study would be 36 years or so.

asprilla

Not really sure what this has got to do with your original statement about shanty towns.
Show me any asset that "will" return 10% per annum and I will also buy. Earlier you said that there was a disconnect between rental pricing and purchase pricing, perhaps I don't understand your angle here? What do you mean when you say that there is a "disconnect"?


I don't think Australians invest for a tax break. People across the world simply make investments subject to the tax regime they are living in, and they adjust their preferences accordingly.

You say it is a "loss making investment" - what do you mean by that?

Plenty of people here borrow money to make long term investments in business, I know I'm not the only one. Investment in property is far more common though because it is perceived to be "easier".

asprilla

That's not what the article you quoted says:

Steve2009

There is no shortage of properties in Australia:
a) There is no mass of homeless families, they are living somewhere.
b) Statistics show that there are vast under-utilised units and there are plenty of surplus units.
Investors are not encouraged to borrow for other investments. With interest rates at 7% plus in Australia, rental yields would need to be superior to 10% to make borrowing to invest attractive. That 3% net yield is a slim margin given that interest rates are likely to rise in the short term and continue to rise over the medium term until this bubble bursts.

The disconnect between rental price and purchase price is that rental yields are sub 5% and interest rates are above 7%. The cost to rent a property is less than 5% of it's capital cost and the cost of the funds to purchase that property are greater than 7% of the capital cost. It's at least 2% of capital cost more expensive to buy a property versus renting.

If you buy then there is a negative risk that the capital value will depreciate and a positive risk the price will appreciate. Conversely, renters are not investing in their housing utility, they are choosing to pay as they use. Their risks are their security of tenure and that the price of their housing utility will increase out of line with general inflation.

You could argue that capital employed (i.e. savings/deposit) in purchasing the investment reduces the cost of the borrowed funds for the capital costs. Then you also have to consider the opportunity cost of employing that capital in a property investment versus having it employed elsewhere. ING currently offers 5.85% APR which is better than the sub 5% offered by property investment with a lower risk of capital depreciation. Deposit rates are expected to increase with RBA rate hikes and the end of the deposit guarantee.
Property has a negative yield on a cash basis. The cash cost of funds (borrowing or opportunity cost) is higher than the cash yielded. The only return comes from the positive risk of capital appreciation. There is an equal or greater negative risk of capital depreciation.

Tax breaks are offered because an investment would otherwise be unattractive. The problem with tax breaks is that they can be removed. While you may consider this unlikely and in the medium term you are likely correct. I believe that what was intended as a hedge against risk has been leaned on excessively in Australia and the tax break is no longer effective in making the investment attractive.

The fact that property investment is common (you said easy) and the accepted "knowledge" should raise more alarm bells. The greater fool concept is that you understand an investment to be unattractive but that others (the greater fools) believe it to be attractive so you invest with the intention of offloading your assets on the greater fool at some point in the future. This is the opposite of the strategy employed by the likes of Warren Buffet.

http://en.wikipedia.org/wiki/Greater_fool_theory

asprilla

So by your line of thinking, investing in a company that does not pay high dividends is a "loss making investment" ?

I think that there are possibly a few flaws in what you are saying.

Steve2009

I believe you're correct. From memory, I have a figure of 2% in mind for that study and I'm not sure where I got it from. A 2% increase over compounded over 36 years would give you 100% increase.

asprilla

But as far as I know, there are no tax breaks that are specific to property it isn't treated any differently from any other asset class.

So how are taxation laws relevant? you have to deal with them no matter what you invest in.

asprilla

It gave the figure as 0.2% ! As such it would take just under 348 years to double your capital value. That's certainly a long time to wait.

Steve2009

Not entirely correct. I do believe in value investing, that does not necessarily require that the company pay high dividends. It could be that the company could be undervalued versus it's assets.

comet555

I think the article mentioned a 0.2% increase each year, hence the 350 years.

Oops, Aspirilla beat me to it!

Steve2009

Yes, it's true the tax laws are the same for any investment. I believe that it was intended as a hedge against the possibility of a loss on a cash basis. I believe it was intended to encourage investment in a general sense.

It has been excessively leaned on by property interests to subsidise an almost certain loss on a cash basis with property investment. I haven't been in Australia that long so I don't know how long this has been the case. But the perceived wisdom in Australia over the last two years has been that it is acceptable to make a loss on a cash basis because negative gearing will cover those losses.

I'm guessing here but I reckon property spruikers would advise investors to borrow for proerty investments to take advantage of this tax break rather than use their own capital? I read of a similar concept recently, that of renter investors.
You're probably correct, I'll confess that I actually did not re-read that article before posting it. I've read it many times before but I seem to have mis-recalled that figure.

Steve2009

Mentions of renter-investors:
http://www.news.com.au/money/propert...-1225791188531
http://www.melbourneinstitute.com/hi..._bu-0504-2.pdf

IndieG

http://www.theage.com.au/business/ho...0310-pxpp.html

Decreasing number of greater fools who are willing to take on more and more debt to pay for over priced property...

Bring on the consecutive rate rises!

swigski

Full article here:

http://www.smh.com.au/business/home-...0310-pxpp.html

Another headline from the SMH which warns that house prices could go higher according to the RBA!

http://www.smh.com.au/business/rba-w...0310-pwlj.html

So, it appears that less people are taking on mortgages and the one's that do are going to have to take on bigger one's to meet the asking price.