The Leverage Strategy

Discussion in 'Share Investing Strategies, Theories & Education' started by Chris C, 20th Apr, 2010.

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  1. Chris C

    Chris C Well-Known Member

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    :D

    Yes this thread in many way was inspired by you. And I saw your more recent post which asked a similar question and I was wondering if you had had the opportunity to read this reply. I'm glad you did.

    Please do. Bouncing different ideas/opinions around is what makes these threads valuable.
     
  2. GG

    GG Active Member

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    Hi Greg (or anyone else with an opinion on this)

    In general is seems to me that there is more acceptance for borrowing for investment properties than for investing in the sharemarket. I'm not sure why this is - is it because people are more likely to sell shares than to sell a house when there is a dip in the market?

    For instance - if I borrow 300K to buy an IP
    Interest only loan, say 8%
    Tax rate 30% + medicare
    about 7K less due to tax deduction
    Say after tax and expenses 7K gained
    Would mean having to come up with 10K in one year

    Then say the same for shares - 300K
    To reduce risk, invest in etfs - STW and the like
    Equivalent amount from dividends
    So again need to find 10K roughly every year

    What if I was sure that I would always be able to afford the 10K?
    Why would it matter how old I am?

    And then I only checked the house price or the value of the STW shares after 20 years

    If interest rates had stayed at 8% (for sake of argument of course) and the rents or dividends had never increased, and the house prices and the sharemarket had never gone up, then I would be down by about 200K

    If I'm prepared for this kind of loss, then why shouldn't I take the risk?
    And why would the situation be different for the house compared to the investment in shares?

    I think that it's likely that through inflation eroding the value of my initial loan, rising rents and dividends (over time of course - maybe only after 5 years of staying the same or going backwards) and rising house prices and sharemarkets that the original borrowed 300K will sound like a very small amount of money in 20 years' time.

    By the way, are there good spreadsheets out there that will help with projections?
    And what sort of figures would you use for growth of things over a 20 year period?

    Any comments or opinions?
     
  3. Chris C

    Chris C Well-Known Member

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    I don't know why I didn't originally respond to some of the points GregR made earlier, but given that GG is now quoting him I feel compelled to at least offer mention a few things.

    I'm not a financial advisors, but my logic concludes that if people's retirement saving strategy is just paying off their home loans, then it stands to reason that they are somewhat funded for retirement, if they SELL their home.

    On Australian median housing prices most retirees should be able to sell their homes and comfortably live on the proceeds for 10 years or so.

    The idea that everyone should be able to own their own home in retirement and receive government support isn't really logical in the long run, because ultimately these capital assets will be passed onto someone (like their kids) who assuming have done the same thing and save for their retirement by owning their own home, will now have two homes.

    So the original owners may as well liquidate the asset and use their proceeds as part of their retirement consumption.

    Life should theoretically be a zero sum game. So the idea that retirees won't eat into the capital of their homes doesn't work when applied across the economy.

    For most people owning your own home plus putting away 10% in a super style saving program over the course of their working career should be reasonably sufficient when it comes to funding a decade or so of retirement.

    My point is that utilising debt for investments isn't a necessary component to being well funded for retirement. It's prudent saving that is the requirement.

    The notion that the banks are willing to lend money to individuals that plan to retire at some point over the life of their loan is quite amazing. I'm sure as bank tighten their credit standards this will be an issue that will come under consideration.

    I know hindsight can be a b*tch, but the data is now showing that property prices through the second quarter of this year have slowed dramatically, as many people suspected.

    This data might not indicate price falls yet, but the way the Australian housing market is structure anything short of 5% price growth per year would hurt many property investors. So investors shouldn't just be worried about about price falls - no growth will see their hip pocket hurt significantly, especially those with aggressive negative gearing or large portfolio values in comparison to working income.

    Some make millions, some go bankrupt, isn't much of an investment strategy. It's gambling.

    No doubt "some" people can make a lot of money when they utilise leverage, however it's all too often sold as something that "most" can take advantage of.

    I reckon if you need someone to explain the risks to you, then you shouldn't be taking on leverage. That simple.

    Can you please explain what you define as a "capital growth asset"?

    That's not "investing"... that's "working", because you are undertaking the "work" involved in adding value or developing.

    I don't mean to sound patronising... but did you reach my previous posts in this thread?

    My main point was that the assumption of inflation based on exponential credit growth is a recipe for disaster. So assuming that rents will go up is again making a BIG assumption.

    A 5 to 8 year timeframe won't mitigated the losses if a bubble fuelled by credit growth pops while holding a highly leveraged asset. Plus recouping losses over time never factors for the opportunity cost of tying up your money in a non performing asset.

    ...but hey who knows when the next major credit contraction could be - might be years or decades away. So I guess I'll just leave it at that.

    But in the long term a house is a house is a house.

    Let's see if they have the same level of paper profits in 10 years time when they go to cash in...
     
  4. GG

    GG Active Member

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    But in reality, has that ever happened to anyone in Australia?
    I mean, what Wealth_Creator was talking about - somebody puts down 10% and buys a house and then keeps it for 20 years. And then they are wiped out?

    And if anyone else knows - has anyone ever borrowed to invest in the Australian Stockmarket, managed to hold their investment for 20 years, and then found that they had become wiped out?
     
  5. GG

    GG Active Member

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    Sim, this last part worries me because up till now I've seen things very differently (I mean, the same way as the guidelines for planners suggest)

    When I've considered taking a loan to invest further in shares I can easily admit that it is a risk too far if I'm looking for a short-term gain. That I continually monitor the investment and fret about a big turndown. And that I can't take the gloomy news day after day, so I end up selling and losing a large amount.

    But so far I've seen it as much safer if I keep to a long-term plan of e.g a 20 year time span (which to older people doesn't seem such a long time!). So only to go into borrowing if you can afford to stay in through the downs and ups. And to be mentally prepared to not give in if sharemarkets go down or don't do much over a long period of time. And frequently monitoring what I would see as the 'paper value' of the investment would probably not be a good idea if one was trying to achieve the long term outcome
     
  6. GregReid

    GregReid Well-Known Member

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    GG,
    I agree with you, if rents or dividends don't increase and there is no capital growth, you will be down. There is the argument about relative cost of debt re inflation but you will still be down. Whether it is shares or property or a business, it is about buying assets or stock (as in business goods) that people are going to continue to want to consume or providing a service that people want to use.

    Investment in shares is essentially an investment in the underlying company. Companies go broke, Lehman Bros, ABC, and the list goes on. In any time up to 20 years, you could lose all your capital if you invested in one of these companies. If you had purchased a property, unless it was an island that was sinking, you will still have the physical asset. If it was in a mining town that closed down, the asset will still be there but the demand to live in the town is gone and the price will reflect that.

    The reason I use property as the asset class is because banks do, they will still lend 90%. There are no margin calls, you can do something to improve the value, whether it is a rejuvenation, sub division or development. What can you do with a share certificate - frame it maybe?

    The doom sayers keep spouting that a bubble is occurring in property and we will see a 40% crash. I remember reading about that property bubble in the late 1980's about to burst and I am still waiting. It did level out for a few years after that at steady growth just above inflation until the next cycle.

    I guess it is not much different to people buying/investing in tattslotto, one day they may be right and win but history has shown the odds are against them. There have been 2 periods since in late 1800's that property has dropped in Australia significantly, once in the mid 1890 where it took nearly 20 years to recover and again in the late 1920's where it took another 15 years or so to recover. History says that there will be another crash at some point in the future for some extraordinary reason but I do not see that happening unless we have a major world disaster, like a world war or nuclear wipe-out. If that happens, the share market will feel the effects far stronger than the property market. At the end of the day, people need a roof over their heads.

    It is generally the share traders that talk about bubbles and crashes as that is what they know in their world.

    You can purchase properties that are either neutral or positively geared. Residential properties are harder to find in capital cities but commercial properties can be found. A leverage strategy works even better with a positively geared property as it does a negatively geared one.

    The phenomena of negative geared properties is relatively new. Historical rent yields of 7% to 8% were more normal 30 years ago. Statistics from the ATO show that in the 1999/00 period, there was a net positive rental income declared by property investors, this has dramatically decreased since then to significant net rent losses.

    Like any other strategy, it needs to fit your goals and your comfort level. If you believe that property is going to crash, stay away.

    The Somersoft PIA software is a widely used property projection spreadsheet readily available.
    Good luck
    Greg
     
    Last edited by a moderator: 13th Jul, 2010
  7. GregReid

    GregReid Well-Known Member

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    Chris,
    You make some valid points but you make some that do not match with what I deal with daily. I post in these forums on areas I know about and have experience in, you talking about inter-generational and retirees situations is perhaps not where your knowledge is.

    I am happy discussing the issues seniors face and the difficulties in another forum perhaps rather than get this off the thread too far.

    It is hard to argue hindsight for the property doomsayers. As I posted earlier, I have been hearing the property bubble for many decades and am still waiting. I have heard from those seniors and up to 90 year old how hard it was getting into the property market and it is not much different now.

    Even if property just keeps pace with inflation for a period, rents will as well, they are driven by basic economics like anything else, demand and supply. The inflationary effects on debt means that investors will benefit over time.

    I will say again, creating wealth is about finance, the asset class is almost incidental. Lenders will still lend up to 90% (some are still doing 95%) because their models say that this asset class is most secure and that the risk of default is very low. The additional benefit of property is no margin calls, it is a basic commodity, people need a roof over their head and that it can be improved.

    We, as investors, need to do what we believe in. 5% will do very well, 20% will be better off and the rest will continue not do anything due to fear, lack of knowledge or believe they can save their way to afford a comfortable retirement. Some will be able to do that but statistics says that 60%+ will have very little to retire on and join the ranks of being on government assistance.

    You seem to lump in highly geared assets into being negatively geared and non performing. Each is a different characteristic and are not dependent on each other. I don't know many investors who would hold onto a non performing asset. I don't like highly negatively geared assets as the holding costs can be too hard to service.

    I sometimes think you use broad generalisations too easily to try and justify your points.
    Greg
     
  8. Chris C

    Chris C Well-Known Member

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    I study economic history - it's my passion. I think it's what the world is lacking today. Too many financial lessons have been forgotten. And too much simple financial laws overlooked with statements like "it's different this time" and "it's not the same here".

    I'm actually 3/4 of the way through re-reading Niall Ferguson, Ascent of Money, which I think is a more valuable source of inter-generational economic history of how money works than the average under-funded Australian retiree.

    :cool:

    Anyway my area of knowledge is economics and business management. It's what I studied at university and it's what I still love studying today. What is your field of expertise?

    Also please bare in mind the fact that you deal with things "daily" is one of the main reasons I challenge you proposition. So often we all get caught up in the day to day stuff we can't discern the forest from the trees.

    Don't get me wrong 24 months ago I held similar beliefs to what you do today, but I found that to just be a case of hubris on my part, and once I stepped back and re-analysed everything I saw the flaws in my thinking, which largely centred around my "daily experience" and "conventional wisdoms" shaping my economic belief system.

    Which brings me back to a point I made earlier - did you read some of my original posts (I know they were long)? Particularly this one:

    http://www.invested.com.au/85/leverage-strategy-37587/#post77134

    Sounds like an interesting discussion. And I'd love to read your thoughts on it, because truth be told I don't think we as a nation talk about the issue enough. Especially given that everyone knows that it's a big issue that is just around the corner, but we are all still too focussed on trying to find shortcuts to work through the GFC problems...

    You're right. There are always those that will call the sky is falling, but this time I think there is a much stronger argument for the likelihood of such an event occurring given what's happened in many other major developed economies in the last 5 years, but I'll concede that doesn't mean it will. I just feel that over the next 2 - 3 years is far more likely to than not.

    But at the same time I think it's a fair to suggest that Australian property isn't "strong" right now. It fell slightly in 2008, recovered 2009/2010, is flat-lining again. So it's be a poor 2 - 3 years for Australian property by its normal standards and that includes unprecedented interest cuts and massive government intervention.

    So whilst it appears the Australian credit fuelled property price growth seems to be back on track for the moment, it's an extremely fragile recovery and there are a lot things that could derail this train and then once again it will be an issue of if the central bank and government will step in or not.

    But you only have to look at Greece and now the UK to realise that governments can't distort the markets forever... eventually financial reality sets in.

    Yes I understand the argument of taking on leverage and then letting "inflation" eroding the debt, but do you understand what causes inflation?

    ... Monetary economics - Wikipedia, the free encyclopedia

    Because once again assuming inflation will always be present is a big assumption.

    The big 4 don't seem to be taking this approach, at least not with investors anyway.

    And I assure you that they went from their 100 - 105% loans back to 80% because they realised how messed up their models were and that property isn't as secure as they thought. Otherwise they'd still be giving out 100% loans.

    ;)

    Most of them are still counting their lucky stars that Australia didn't fall into a deflation spiral so that they at least had the opportunity to utilise capital raisings to prop up their balance sheets before the next credit crunch. I won't be surprised if some of them go for round two of capital raising in the not too distant future if they envisage difficulties obtaining funding in international markets.

    Everyone needs to buy goods from businesses and they can be improved as well... so property doesn't hold some special security that stocks don't.

    Successful investing doesn't have anything to do with belief - it has to do with reality.

    Once again, debt is not the key to prosperity. Debt may facilitate making good investments that weren't able to be made due to a shortage of capital, but using debt alone to does make an investment a good investment, because using debt has costs which need to be more than offset by the return from the investment before it becomes a good investment.

    I know more wealthy retirees that made their fortunes through business than through property investing, because businesses provide genuine value without the need for financial leverage. The majority of Australian property investors use it as a store of wealth and protection from inflation when using low leverage and outright speculation when using high leverage.

    That's because they didn't save enough - not because they didn't use debt.

    I imagine most people working in 1950s, 60s and 70s wouldn't have envisaged living into their 80s or 90s, so they didn't save for it. That or they didn't understand economics and that you can't have 20% - 30% of your population not working and receiving welfare payments and thus thought they'd be provided for and didn't feel they should save.

    Most Australian property when factoring all costs, including opportunity cost of equity, are running at a significant loss.

    You can make more money using leverage with such assets when there is high levels of inflation, particularly if that inflation is targeted to that asset class, but if that inflation is credit fuelled you will only make money while more credit is pouring into that asset class. Once people start selling that asset to pay down debt, or simply stop buying that asset because its becoming purely speculative then the asset price crashes back to a sustainable price level, and of course through the process of deflation debts actually become more burdensome and in many cases wipe people out entirely.

    Right now, Australian property investments run at a loss when discounting for credit fuelled inflation within the asset class. As a result at some point in the future the price will either stagnate or collapse as it's unsustainable.

    That doesn't mean it has to be this year or next, but it will happen. So it's up to you if you want to advise people to roll the dice, but make sure you explain to them that they are rolling the dice.

    The fact you even need to "service" the loan implies it's non-performing as the asset doesn't even provide enough return to justify short run costs.

    I use broad generalisations because most people don't understand economic formulas and terminology.

    :rolleyes:

    If you want more specifics just ask.
     
  9. GregReid

    GregReid Well-Known Member

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    Chris,
    I am not going to argue point by point.
    My qualifications include - BComm, PGDAcc, MBA(FP), DFS(FP), C4(MB) ACA, AMC I have worked for small business to very large companies and I am an investor. I deal with investors and seniors daily. My knowledge is both theory and practice.

    That is simply incorrect. Lenders still lend at 90% for property investors with a number still lending at 95%. These are harder to arrange at the higher LVR but if the deal is strong enough, finance is available. The reason lenders aren't going higher is they cannot get the funds from overseas (securitised model) for the higher LVR mortgages or the mortgage insurers won't back the deal, it is not because they doubt property. There are certain areas they will not lend higher than 60% to if they perceive a risk, high rise developments, certain inner city areas for example, so it is not carte blanche, banks are very good at knowing where they make money for risk.

    You are just saying what I have said using different words. It is no different in business start ups, you use seed funding, often borrowed to get the business up and running. It may take 3 to 5 years before returning a profit and you reinvest in your business. An investment property is often no different. Most people do not and cannot save to purchase a capital asset outright, whether it is a property or a business asset, they borrow to do so on the basis it will generate a greater return than costs incurred.

    Likewise most people either cannot or chose not to sacrifice their lifestyle to save to be able to purchase a property outright. That is what our parents and older folk did, got a deposit (or gifted one by parents) and borrowed and paid off that home over the next 30 years. They never used their 'asset' being the equity in their home to their own advantage, it is a massive opportunity cost lost. Irrespective of why that equity increased, it could have been used.

    Do you think a business, once it has generated goodwill, doesn't access it to grow? Do you think a business doesn't use debt to finance itself to grow, creditors in most part and then lenders?

    That is just nonsensical. Do you suggest to BP that they should not undertake R&D or invest in start-up mining developments as the asset doesn't provide enough return to justify short term run costs? Investing in property is generally a long term investment with returns expected after 5 to 8 years and increasing after that. Some properties will do better, some not as well but it is no different to many companies or shares. There is far less volatility in the residential property market than there is in the share market and that is how lenders measure risk.

    You and I can argue all we want, lenders are lending 90% to people who qualify and want to purchase residential property. It is not my opinion or yours that matters to them. They don't think the property market is going to crash.

    As I said, investors need to do what they believe in, if you doubt property, don't invest in that asset class. I agree that beliefs are not reality but your views are at times, not reality either. You express an opinion but the Australian historical results which are reality, do not currently support some of your future projections. You have been on the property doom-sayers band wagon for a while now and these have not panned out. Perhaps we have another discussion in 10 years and talk about opportunity cost then.

    Greg
     
  10. Chris C

    Chris C Well-Known Member

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    Wow, that's a long list of credentials!

    :eek:

    That said, I have never engaged in a debate with you over the best way to minimise tax for retirement or setting up a SMSF, which I assume you are an expert in!

    My argument doesn't centre on a lot of regulation or micro economic points it centres on long term macro economic variables, largely centring on monetary economics of which it would seem your qualifications and day to day business probably don't relate to directly.

    So do you understand and have a position on Australian property from the monetary economic perspective?

    Which of the major Australian banks are lending at 95% to investors?

    I had a quick look, but was finding it hard to find precise figures because they revised their lending criteria quite awhile ago, though I do distinctly remember earlier in the year most of them increasing their equity requirements to 13% - 20%.

    Have they loosened lending standards again?

    If you review my argument - this is a key premise in it.

    That it's not a matter of supply and demand on the part of investors. It's a matter of credit availability. It doesn't matter if they can't source funding from overseas, or raise capital in Australia or just want to tighten to increase reserves. The point is tighter lending conditions will stifle the Australian property market more than any other variable.

    I'm not even saying the problems will start in Australia. I'm just saying that the international funding problem will inevitably cool the Australia credit markets as well and with an already fragile market it could quickly turn into a deflation spiral like has happened all around the world.

    Once again, I hate to state the obvious, but the reason they won't insure such loans is obviously because there is a lot of underlying "doubts" about the asset.


    I run a small business. I didn't use any "debt" to start my business. Nor was I running at a loss over the first 3 to 5 years.

    I don't have any statistics, but the idea that the average small business start up runs at a loss for 3 to 5 years sounds extremely unlikely. I'd be surprised if most small business start ups would be willing to run at a loss for more than one year before pulling the pin. Not to mention that most small businesses achieve returns significantly higher than property investors.

    Anyway, my point is that business definitely don't keep running at a loss, they are focussed on making profits. Nor is their path to profits dependant on inflation.

    The only reason most businesses run at a loss in the short run is because they need time to develop a customer base. The same can't be said for property investors who buy an already developed asset.

    Also a lot of businesses operate without the use of debt and fund projects with their own capital. Not to mention that even when they use debt they more often than not only borrow the money if it is going to increase revenues above the cost of servicing the debt.

    Also businesses actually grow, become more productive over time, and generate more income, not from inflation, but from doing more business.

    Yes but the BIG difference is property investors knowingly or unknowingly only generate a return if there is inflation.

    My argument is that most property investors don't even know what causes inflation.

    Well if they cannot sacrifice to save, they shouldn't put themselves in debt because ultimately they will be forced to sacrifice by the bank who will also charge them interest for the privileged of living in a property they were unable to afford.

    There is only an opportunity cost if the equity in that home could produce a higher return than the cost of the debt the bank would impose on them for withdrawing the equity.

    And I'm going to argue that in rational markets (please note we are not in rational times) unless someone is going into business for themselves most people would not be able to consistently find investments that produce a higher real rate of return than the cost of finance (interest rate).

    And if they can produce such returns, then it'd make more financial sense to sell their home, rent and invest all their equity in the investment that produces the highest return on equity, which is exactly what my father did 10 years ago when he started his business.

    Only if they see a way to "profitably" grow. Businesses don't take debt just because they have access to it and then let inflation do the rest (or at least good businesses don't - *cough*ABC Learning*cough*).

    LOL, you can't compare R&D and major infrastructure developments with an already built non-value-adding investment property.

    Though even if you want to draw that parallel, I can assure you that both those undeveloped projects factor for a return on equity or financing costs, which most property investors don't account for, nor would either of those projects have "inflation" as the key variable for producing a ROI.

    Not if inflation isn't present. Go ask any US, Japanese, Spanish, Brittish, property investor how critical a role inflation played in their "long term investment strategy".

    Go ask a Japanese property investor about holding for the long, long term. When you look at the Japanese case you realise that it's not buying and holding that is important in a property investment strategy. It's money supply, because houses are more like commodities.

    I fully realise that it's not my opinion that matters, and I'm not out there shorting property stocks, because I know that markets can stay irrational longer than I can stay solvent.

    I think they have made a number of policy changes in the last 12 - 24 months to protect themselves as much as possible from such a situation.

    I agree recent past disagrees, but that is because inflation was a permanent part of the economic landscape for the last couple of decades.

    But to assume the past is indicative of the future without understanding the economic model in which we operate and what is require to sustain the trend of the past is a recipe for disaster, very much like the Storm Financial model - leverage without true understanding = bankruptcy.

    Throughout my posts I haven't said when this correction would occur, I haven't even said that things can't go higher from here, I have just been saying it's not a great investment right now and that a correction is inevitable.

    Also let's not forget the property market was deleveraging back in 2008/2009, but the government and central bank both stepped in aggressively to prevent further falls. They can't do this forever, granted they probably will be able to step in again in the short term.

    Happily.

    :D
     
  11. GG

    GG Active Member

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    Thanks Greg for the interesting comments. I wasn't so much thinking about the property vs shares issue but rather - if it's generally accepted that borrowing to buy an IP is usually a good idea, then why isn't borrowing to invest in the sharemarket also a good idea - provided that you take a long-term position (as people usually do with IPs) and that you are sure that you can handle the interest payments.

    From what I've heard/read so far, it seems that both have been good investments provided that the investor can ride out a downturn in prices, or a period of high interest rates.
     
  12. GregReid

    GregReid Well-Known Member

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    GG,
    In theory there should be no difference, they are both assets.
    In practice lenders are now generally only going out to 50% to 60% leverage on shares and managed funds where pre GFC you could readily get 75% to 80% in some cases.
    Lenders will still go out to 90% for most residential properties.

    The other real difference is margin calls. Reflect on Storm Financial, Opus Prime as examples where investors got burn big time. Margin calls are not part of the lending criteria in relation to real property. You may be able to use leverage safely with shares but at a much lower percentage or have sufficient cash funds to back any potential margin calls, again effectively lowering your LVR.

    It is that additional leverage combined with added security (perceived or not) that I use real property as the asset class rather than shares.
    Greg
     
  13. Chris C

    Chris C Well-Known Member

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    OK two years into this experiment. Let's see what time has told us...

    Here is Wealth Creators statement:
    Here is what has actually happened:
    So if someone had bought into the Melbourne market with a 10% deposit 12 months ago, they would have now lost 84% of their equity, and own a leveraged asset in an aggressively falling market.

    And I'd be betting if you chose to sell today, with a glut of houses on the market it is probably going to take a good 60 - 90 days and prices will probably continue to fall which will mean you will be completely wiped out by the time you sell.

    So you shouldn't talk so derogitorily about the "poor folk" that "just aren't interested in being rich, plain n simple"... becaue it looks like your strategy is putting you in the poor house, but lucky for them they still know "how to work for money" so they should get by fine.

    :rolleyes:

    Here is what GregR was saying:
    Well wait no longer... it has arrived.

    :D

    Turns out we only had to wait 12 months... so it turns out "my beliefs" were closer to "reality" than "your beliefs"...

    I wouldn't be looking to the past for future projections. And I'm always happy to talk "opportunity cost"...

    Here is what Wealth Creator felt like parting with...
    As I mentioned in another thread, my "under a rock" investments have served me VERY well over the last two years. I've outperformed the market substantially, and I'm also cashed up and able to buy cheaply because there are a lot of desperate sellers out there who thought they had a sure thing and leveraged in.

    :D

    OK so let's argue that I've been mostly right so far, it might pay to now start reflecting on what I said about the future back in 2010 that has yet to come true:

    OK so I was off the mark on Dubai being a short term problem, but the sovereign debt problems has already caused Greece to default, and the wheels are already in motion for a similar situation in Portugal, Ireland and Spain, probably Italy too.

    And it's worth noting the problem with these debt spirals is they become self fulfilling prophecy, in that the fact that the trend has even tipped slightly makes it MUCH more likely for the spiral to begin because human nature will take over as people rush for the exits as a result of fear.

    So I "fear" that for a number of countries in Europe it's now just a matter of time and the "resolutions", "talks" and "can kicking" can't prevent the inevitable, ie once you jump off the cliff you keep falling until you hit the bottom, the couple of updrafts on the way down won't blow you back onto the cliff edge.

    As for Japan, UK and the US - Japan will probably next to get into trouble - hard to say when given that their bonds are at all time lows, but you'd be a brave man to say trouble won't start brewing in the next 2 - 3 years, I wouldn't be surprised if that spiral starts in the next 12 months.

    If I'm right and Australian housing prices go back to equilibrium we can expect AT LEAST another 20% fall. They've really got to go back to "good value" from a rental yield perspective, ie they need to get back towards 7% - 11%, we are a long way from that.

    Anyway... I felt compelled to say "I told you so" because frankly us property bears copped all too much abuse over the last 5 years. So let us have our moment in the sun.

    And just remember, good times will be back soon enough...

    :D
     
  14. GregReid

    GregReid Well-Known Member

    Joined:
    1st Jul, 2015
    Posts:
    252
    Location:
    Melbourne
    Chris C,
    You seem to make the mistake many make in regarding the property market as one market, it is many. There are areas and there are price brackets that have dropped considerably, there are also markets and price brackets that are recording capital growth and good rent yields.
    Melbourne is not a traditional market for decent rent yield, Sydney is a much stronger rental market in terms of yield.

    I certainly have not claimed markets rise year on year, more look at long term trends. Real property suffers far less volitality than does the share market. If you are investing on a buy and hold strategy for the long term, I have belief in the residential property market will provide decent capital growth just due to demand and supply characteristics, population will grow as it has to and they need somewhere to live.

    As I said, come back in 10 years time and we can then debate the historical facts. If you think the property market will fall be another 20% or more, don't invest in it if you have better alternatives.
    Greg
     
  15. Redwing

    Redwing Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    7,438
    Location:
    WA
    I've possibly missed it ion the posts but what is your investing strategy then Chris and how are you looking to benefit from your beliefs?
     
  16. Chris C

    Chris C Well-Known Member

    Joined:
    1st Jul, 2015
    Posts:
    904
    Location:
    Brisbane, QLD
    Hi Redwing, I read your reply a couple of days ago, and I wanted to respond with a thorough explanation - and you are 100% right I just can't go talking about what's going to go wrong with the world and not tell you how you might take advantage of the above situation - I just haven't found the time as yet. Nor am I likely to find any time prior to early next week as I'll be in Sydney until Monday, but I'll do my best.

    Just wanted you to know that I'm not ignoring your reply

    Very happy to resume the discussion in another 8 years time, and I'm always happy for "time" to determine which investments were the best choice.

    ;)
     
  17. Redwing

    Redwing Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    7,438
    Location:
    WA
    Thanks for the response Chris
     
  18. BIG_Bessi

    BIG_Bessi New Member

    Joined:
    1st Jul, 2015
    Posts:
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    Location:
    GoldCoast
    hi all i just signed up.
     
  19. anfenie

    anfenie New Member

    Joined:
    1st Jul, 2015
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    Location:
    Sydney
     

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