Russell long term investing report

Interesting report and well worth a read.

http://www.asx.com.au/resources/pdf/russell_long_term_investing_report_2005.pdf

A key message from the report, as noted by Alan Kohler in an article from the ASX News is:

 

Agreed Nigel,

We owe it to ourselves to do something more active with our $$$ than stuff it under the mattress, or put it in the bank.

What about the premise that resi real estate returns are inflated because the contribution to CG of renovations is not counted when figures are produced.

I think this is significant. However I think this loss can be compensated by the ability of the buyer to carefully select and negotiate a bargain on an individual property - something shares cannot offer.

Is this a factor when making a comparisons?

Then of course we can talk about leverage too.

 

Insightful points Giddo. The leverage assumption on real estate for the report was 50%. Sounds pretty low for a typical property investment, but a good figure for shares...and therein lies the great power of property LEVERAGE! 80, 90 97%! Love it.

 

Assuming growth rates stay above the cost of the leverage. Why do we believe that house prices will grow at, say, 10% a year, when incomes, population and GDP rise at less than that? Merely because it has in the past or something more analytical than that?

 

As for myself Glebe, I certainly am hoping that growth of property values continues to exceed the cost of leverage.

Given that my total LVR is about 50%, I am counting on it. Many would tell me that my biggest risk is not being leveraged up enough, thereby passing up potential profits.

I have been scared to leverage up any more right now as values still seem to be dropping where I am. (I invest locally)
I will definitely leverage up more when the values bottom out.

As for your point about why we all seem to trust that long term values will increase at about 10%, I think it based on history.

I try to base my calculations and predictions on a growth of 5% only.

Do you think I am being too cautious?

 

Giddo,

I don't think you're being cautious.

You are correct in saying that history tells us house prices have gone up 10% (or even more) over the long term.

But if incomes increase 4% a year, then if we extrapolate for the next 30 years how is it possible for house prices to increase 10% a year?

For example, assume the average salary now is $50 000 and the average house costs $500 000. This represents a price to income multiple of 10x.

If we extrapolate the housing costs and income increases for the next 30 years, we're looking at average incomes of $156 000 and average house costs of $7.93 million - a multiple of 50x.

 

Guys,

House prices dont have to beat the price of leverage!! They probably rarely dnly when interest rates are at all time lows.
The cost of leverage should be covered buy rents and depreciaton. The cap growth is pure profit on OPM if you are nuetrally geared. CG on OPM is more than 100% return.

MJK

 

MJK you are right of course. My head is in bad shape - both literally and metaphorically.

My cost of leverage is fully covered by rent.

What I should have said was I hope I can continue to get at least 5% CG as that is what my budget and predictions are based on.

Yes it is great to get the CG as a massive percentage on other people's money.
My investment is any loss of sleep I may experience, and that is not much.

I am always amused when people tell me they are getting a good return on their cash investment usually 6% or something like that. I reaqlly like leverage.