Archive through May 02, 2008

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resillent1

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Post Number: 444
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Wednesday, April 30, 2008 - 01:33 pm:

My thinking is directed at the overall trend for housing prices. Not pockets, as with shares, some property will go against the overall trend.

First graph is housing affordability

How low can it go? The simple fact is the lower it goes the less buyers that can afford to participate. It doesn't matter how tight the rental market is, prices won't clime without buyer demand.

Higher prices for existing houses, hasn't been enticing dwelling construction investment. Higher rental yields may, but additional stock is likely to lower existing prices not increase them further.

If our Federal reserve can manage it, I think they would be much happier to hold off easing rates until the current tightening has resulted in existing house prices declining. It would be much more prudent to see any future monetary stimulation driving new construction, rather than be directed once again to speculation in existing house pricing.

With other real-estate markets around the world experiencing hard landings, our reserve is going to have a challenge to get the timing right. Too soon and the easing will get redirected back in existing prices, too late and we get a hard landing. Just right and we get a soft landing with new housing / infrastructure construction etc taking up the slack from any diminishing wealth impact on consumption.

resillent1

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Wednesday, April 30, 2008 - 01:36 pm:

As housing price affordability has decreased the pool of buyers has been maintained to an extent by people utilising debt to increase their purchasing power.

How much more debt can be taken on?

Debt

resillent1

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Wednesday, April 30, 2008 - 01:41 pm:

ody

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Wednesday, April 30, 2008 - 03:40 pm:

House prices: Kate and Resillent

Kate, I must confess that the idea of buying residential property from time to time has crossed my mind, but all in all I feel like Resillent - very exactly, in all the points he makes - about this issue. I would only be interested in that market if prices took a really big tumble, which may very well happen: logically, they should. Even then they are not necessarily immediately attractive, as, once down, they often plateau for a long time, and the thing to do would be to wait FOR THE BEGINNING OF THE NEXT BOOM. That would, if prices do fall, probably be some years out.

I'd like to add to Resillent's various excellent points just the general consideration that this would be part of a general picture of inflated asset values deflating, where housing is simply lagging behind the share market (quite a common pattern).

So my attitude would be that patience would be required, and that now, or any time soon, is probably not a good time. (Again, like Resillent I would of course allow for exceptions - but I don't think there are many, as just about any area is getting its turn, even in the country.)

I feel, therefore, that the earlier idea of deposits is probably better, at this stage. And I would suspect that if both shares and houses go down, shares would be the first thing to buy back into, as we would then almost certainly see some excellent value emerge.

However, particularly now that there don't seem to be any listed property trusts which are appealing to buy, I'd definitely give thought to something residential in the future. But probably not in the direction of Victor Harbour - thanks for the suggestion, but I feel that the inner suburbs here, or even Adelaide itself, would be safer: I suspect lots of people will want to rent there, and also buy. Then again, I am not sure Melbourne wouldn't be better: stronger gains, I expect, if one bought a central property once the market is truly down, and just beginning to go up again (early Weinstein stage 2!).

I'd in any case want an agent to look after it, wherever it might be - too much hassle, otherwise. I did this with two properties in Perth when prices were low, and it worked quite well, except that I sold too early. I should probably just have kept them, for diversification, but we were retiring (end of 2001), and felt we should gather "maximum liquidity".

I didn't realise that the share market would do SO well for us from 2003, and that in fact it would have been quite OK to keep those properties. One lives and learns ...

My primary hope as a would-be investor right now is to see the share market go down, first of all, before it will look positive enough, and similarly with residential property. Of course I may be completely wrong in my expectation about the share market, but I just cannot see it go up convincingly. And I think residential property is a MAJOR crash waiting to happen. In other words, I expect a cyclical downturn - the bear market has not run its course, going by precedent, and property is still to collapse.

In the years to come I would expect Australians to invest a lot more in productive business activities, once confidence is regained, and less in housing. The economy needs to be turned into a different direction: improvements in infrastructure; more value-adding for exports; more creative companies that can sell goods and services to OTHER countries. Less money wasted on domestic self-indulgence. Another reason why I see the share market as a priority.

rdumas

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Wednesday, April 30, 2008 - 04:21 pm:

Hi Kate,

I used to own three rental properties in Sydney at one stage so I was heavily committed to real estate. I doubt that I would ever do that again having seen what the share market can do for me. My main objections to real estate are as follows:

1) Too much money gets tied up in one asset. If I was a multi millionaire and could afford 15 ~ 20 properties then I would feel much more comfortable as I would then have the diversification that I would like. Whilst I have never had a bad tenant, I have had friends who had really bad tenants and under those circumstances it can become a real night mare.

2) Liquidity is another real problem. Unless you want to borrow money against the asset it is a real nuisance if you need to cash in on your investment and it is at the wrong time of the cycle to do so.

3) The other thing associated with liquidity is if you need an amount of money that is only a small portion of the value of the house you are still forced to sell a complete house. If I want to get some fast cash with my shares I can sell them within seconds, with a house I can't do that.

4) Buying and selling properties always involves significant cost. Share costs are negligible.

5) I found that most of the time the yield on investment investment properties is small. You really depend on the capital appreciation to push up the total return before you get adequately compensated for your investments. I also found that the property market can sit dormant for years at a time and then suddenly they start to take off in price. For that reason you really need to be either lucky (or clever) to buy at just the right time or you have to have a long investment time frame.

eblode

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Post Number: 758
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Wednesday, April 30, 2008 - 05:10 pm:

Kate,
There is money in Real Estate, no doubt about it BUT YOU HAVE TO KNOW WHAT YOU ARE DOING! I have made more money in real estate than in the share market because the profit margins are enormous if you buy at the right time and sell at the right time. I built a luxury home in 2000 for $800,00 and sold it in 2004 for 1.7M, but the timing was perfect. In 1993 I built 5 units and was lucky when they were finished to get my money back. That's real estate. It's all about timing. Or you can buy a good house in a good neighborhood, wait 30 years and get back 10 times what you paid for it. I did that from 1971 to 1997. Original cost $54,000. in 1971, sold it 1997 $850,000. That's real estate. All in all Rudy's assessment of real estate is spot on. But the share market is more fun and exciting.
Eugenio

ohkoolnutz

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Post Number: 744
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Wednesday, April 30, 2008 - 05:34 pm:

While we are on the subject of excitement...did you sell CTX? I see an inside day on a doji below all moving averages which could be dangerous.

---
ohk

Lies, Damn Lies and Technical Analysis

eblode

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Post Number: 759
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Wednesday, April 30, 2008 - 06:19 pm:

OKH,
Yes ol buddy, unloaded that dog days ago. Made up for it by going into AAX. Also sold most of my SMX, but will keep it on my list to buy back when it crosses the 4.00 mark
,Eugenio

ody

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Post Number: 2418
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Wednesday, April 30, 2008 - 10:57 pm:

REAL ESTATE AGAIN

Eugenio, you are actually making a pretty good case for real estate, in that all in all you seem to have done quite well out of it. But you are very right to say that, at least for very good results, the timing is crucial - and as Rudy would then add, that makes the purchases very big bets indeed.

In truth, I used to be very happy when it was still possible to buy good property trusts as listed investments on the share market, for that removed Rudy's justified objections to housing to a considerable extent. They were originally good vehicles. Not any more. I suppose the reason why, therefore, I feel quite drawn to, say, a good apartment is that it is a good addition to shares. They don't move altogether at the same time, and if you buy a decent property to begin with and let someone else manage it you shouldn't have too much trouble. Apartments seem to be less troublesome than houses, in my experience - I mean in terms of upkeep and tenants.

I'd next time probably make it a very long hold, i.e. until death do us part. The Perth units were reasonably long-term (1985, pre-capital gains tax, until late 2001), but I think property in essence is for keeping pretty well ongoingly, as otherwise timing really does become a major issue. Long-term figures suggest that, overall, both property and shares are good investments if you buy at good prices and hold for long enough. With a good property I never worried as much as with shares - but I think you MUST be in a position that does not force you to sell, or else, as Rudy says, you may have to do it at a very bad time.

I do like the flexibility of shares: the fact that you can readily quit one that disappoints, yet hold the winners while they win. But, except if you are out of the market, shares are a lot of work if you want to do well. Or at least that applies to me personally. I am "at peace" with property most of the time, while I am heavily involved in what I am doing once I'm in the share market. On the other hand, I have done OK with property but better in shares, so the trouble has been worthwhile. Ultimately I suppose I like the dynamism of the market, in particular the fact that it keeps you involved in economic movements, which I find intensely fascinating.

I like the peace of property but find it essentially boring. Even just observing the market as an outsider still gives me a kick and enables me to go on learning while watching.

Of course, with any of these choices a lot also depends on one's tax position. If you don't pay any tax on the sale of a property and don't negative-gear either, then you could buy when the market starts to go up, and sell when prices are high. As in the case of shares, these things can be reasonably well timed. Usually it is not difficult to see when a market is taking off and when it is likely to fall. Of course, I may be wrong (with Resillent) about Australian residential, but I'd be amazed if we didn't get a substantial fall, and if I owned a property with a good capital gain in it I'd sell now if I hadn't already done it. I'd then hold my powder dry until prices have been low for a long period and take off again. This is if I did NOT apply a buy-and-hold principle.

By any standard I think it MUST be the case that far too much money has been pumped into Australian residential, and that the prices will prove unsustainable, notably in the kind of financial situation we are facing. Luxury houses will not be spared either, in several cases, as they usually are bought on a highly speculative basis.

rdumas

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Post Number: 1373
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Thursday, May 01, 2008 - 08:42 am:

MARKET ACTION TODAY

It should be an interesting day on our market today. The commodities were mixed as can be seen by the following report from Huntley.

Base metals on the LME finished mixed. Aluminium fell $45 (1.52%) to $2,918 while copper rose $30 (0.35%) to $8,570 and nickel weakened $50 (0.17%) to $28,600. Zinc dropped $3 (0.11%) to $2,243 and lead shed $1 (0.04%) to $2,714. Comex copper was last quoted at 393.40 US cents per pound.

Australian mining stocks were up last night on overseas markets but the bank stocks were down.

The S&P500 went up around 1% from yesterday's close but then dropped to close down 0.38% from yesterday's close. That forms a shooting star candle which would normally be a bearish sign for the US market. I suspect that on the back of that signal our market will be down today. The futures market currently has us going down 30 points today but I would be very surprised if it were limited to this small move down. I would expect at least an 80 point move down at some point during today.

The fact that the S&P500 has made several attempts to close above 1395 and has shied away from this level indicates to me that we may have seen a temporary top last night and that the 1400 level is presenting a significant resistance to further upward movement. As usual I have drawn last night's action on yesterday's chart to give you some idea of what it looked like.

kate

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Thursday, May 01, 2008 - 10:14 am:

Well that sparked a bit of response!!

I think everybody has a different opinion of how to invest in property. Some use the property cycle to buy for capital gain, others buy with the sole reason of negative gearing and there are those who buy with the intention of holding for years and eventually providing an income stream.

I agree it is madness to have all your money tied up in property and not to be able to trade when we're in a bull market.

However, if you were 90% sure we were going to have a bear market (and therefore limited trading opportunities)for the next 3 years what would you all do?

Kate

ody

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Thursday, May 01, 2008 - 12:08 pm:

KATE: FURTHER THOUGHTS

That's an extremely interesting challenge!

1. I am inclined to agree with anyone who thinks that there is a 90% chance that we shall see a prolonged bear market, though I am not convinced that it will take three years, and would keep an open mind about alternatives. That, in fact, is what I am doing. I have our money in deposits because I do not trust the market enough, at present, to invest anything substantial in it. And I am more bearish than bullish about where it is heading - and possibly even for a long period.

2. The market is unreliable because of a major global financial crisis, caused by excessive leveraging: a problem which ultimately cannot be solved by central banks, but will have its inevitable denouement, in the form of "de-leveraging". We have seen some of this already, but most likely there is far more to come yet. The "solutions" we have seen are patchwork. It is therefore likely that ANYTHING finding itself at a high level because of leveraging is at significant risk of being reduced in price, and I have no doubt - privately, in my own mind - that those who have been talking up Australian residential property are likely to be shown wrong. In almost every country where property has gone up it has been coming down of late, and we have even seen the beginnings of that here too. It may not be AS bad in Australia as in some other places, but on the other hand people here often do have big property debts and leverage. So in essence my attitude to property is no more optimistic than towards the share market: I would expect prices to fall.

Unfortunately, if that were to happen, they might well, once they plateau, stay in the doldrums for several years. During that period you are not accumulating a good capital gain, will have only moderate income, and ongoing hassles and costs to contend with. If the property market stands still after it has fallen, then it would not be the place to be.

3. It is extremely annoying that stages like these do occur, during which only people who know of alternatives, like shorting shares, make significant money. But for most "normal" investors there is probably no great joy to be obtained until we actually KNOW more. Again, an open mind is vital. As things stand, I think one is best off in deposits, and possibly will be for years. No point in investing in assets that go down, or stand still.

SUBJECT TO REVISION OF JUDGEMENT AS CIRCUMSTANCES CHANGE!

kate

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Thursday, May 01, 2008 - 12:17 pm:

Ody
The only problem with that answer is that you haven't taken into account that we are at the top of interest rate cycle and from now on interest rates will come down. Therefore term deposits will also be a declining asset class.
I refer to the interest rates set by the RBA not the individual banks.

Regards
Kate