My Property Rant

Bloody Property!

Australians are addicted to bricks and mortar. Most of my friends only know how to invest in two things:

Bitcoin or the housing market.

This post has nothing to do with synths (except if you avoid property you'll definitely

be able to afford more synths in the future).

I'm writing this to get things off my chest and try to change the mind of some of my friends. 

The Australian residential property market is crazy

For the property market to have as much appeal are things like shares it must drop in value.

There is really no other option. Its too expensive at the moment.

As an asset, it's brilliant. You can live in it.

It's utility is great. You can't do this with shares.

Yes, I understand the arguments....

The population in Australia is growing. There is lots of immigration.

There is a massive undersupply and huge demand.

It's something that will always be in demand.

Everyone needs somewhere to live.

My problem with housing is the price.

If you need somewhere to live, not flip or speculate on... that's cool. 

But get that roof over you head paid off as quickly as you can. 

Maybe buy a apartment and invest the money you've saved elsewhere.

but as an investment, I'm really skeptical about property.

Affordability is a real problem.

I live in Sydney.

The average house price is 1.3M

The average weekly rent for a house is $560/week

That's $560 x 52 = $29,000

(29000/1,300,000) x 100 = 2.2307

So if I bought a $1.3 million investment property, I would earn 2.2% interest on my investment.

This is the raw income. I haven't taken into account things like interest payments,

depreciation, repairs, land tax, rates, etc etc.

Wouldn't I be better of just putting the money in a Bank term deposit (current interest rate is 4.2%).?

The only way property as an investment makes any sense is if the value halves or the rent doubles.

Historically, house prices have gone up, so this is still I guess, possible. 

However, we had a low interest rate environment for the last decade. 

And I don't think this will continue.

I could be wrong.... of course. And I wouldn't bet against it.

Australian's are nuts about housing..... that quarter acre block is the "Australian Dream".

Logic often doesn't come into the equation.

Is FOMO (fear of missing out) too great a force?

Will prices double every 9 years?

Maybe. But what drives this?

Where does the money come from?

For every seller, there must be a buyer.

Will the average Australian wage double in 9 years to keep up?

The market is a voting machine in the short term, and a weighing machine in the long term.

(Ben Graham)

It must be supported by fundamentals. 

This is the same in shares... in any asset class... not just property.

If prices just keep rising, and wages don't keep up, then future investors will have to accept lower, and lower returns.

Past generations invested in property because prices to wages were lower.

They were getting at least 7 to 10% yields.

It made sense back then.

Maybe there will be a correction.

This might even be healthy in the long run.

But a "small" 10% correction could be dangerous for anyone with high gearing.

eg: If you borrowed 100K to buy a $1M property.

A 10% correction would wipe out your entire deposit.

If this were invested in shares, you'd get a margin call.

Food for thought.