Comments on: Dubai Debt Meltdown a Parallel With Australian Property Market

By: etch

etch — Wed, 02 Dec 2009 07:19:24 +0000

HEATHENS !!!!!!!!!!!!!!!!!!!!

By: cb

cb — Tue, 01 Dec 2009 01:05:48 +0000

GB – Wait. I am not sure what you mean by the loan side of the argument, but it could be what I was hoping to clarify and demonstrate. And, namely, that in an inflationary environment, the rationality of purchasing a real asset (gold, property, whatever) by means of debt increases in proportion to the expected rate of inflation going forward. That is why I suggested that we assume the house price to stay constrant for 15 years, and then I was hoping to show to you that the 5% annual inflation would dutifully chew up the value of the debt over those years, giving you an unseen, but very much real and tax free benefit.

Anyhow, I am pretty sure that if you compute all those variables into your model, the investor with leverage will come out way ahead of the saver, who simply keeps his savings in cash. And that, even in an environment, that his savings keep pace with inflation, which is a rather generous assumption to make, because in reality banks will never compensate savers for lending them their money in line with the real rate of inflation, as this is the way governments and bankers steal money from savers.

By: GB

GB — Tue, 01 Dec 2009 00:38:30 +0000

PF – people ask for an increase in salary as a minimum of inflation, the cost of living increases by 2% then they want a 2% pay rise

cb – dont worry about it, as i mentioned property bulls are oblivious to the loan side of the argument.

By: cb

cb — Mon, 30 Nov 2009 15:57:59 +0000

GB – I do not follow you, but it would be good to pin this scenario down. We want to find out whether one could be better off over a 15 year period where there was no capital gains for a 500k investment property, as opposed to sticking one’s available savings into a bank account and earning interest on it. Are you happy with these assumptions then:
1. Buy a house with, 100k down and borrowing an additional 400k.
2. Sell it after 15 years for the same price, 500k.
3. Inflation during that time runs at 5% pa, and wages more or less keep up with it.
4. As an income producing investment property, the house brings in 5% ROI in the initial year and is adjusted upwards in subsequent years in line with the CPI, which, say, runs at 3% per annum, which would be a whole 2% less than the real rate of inflation and nominal wage growth we are assuming, giving a real deal for the tenant, whose accommodation will be getting cheaper relative to their income every year.

Based on these assumptions, we want to find out whether an investor would be better off putting their 100k in savings into a property as described, as opposed to simply keeping it in the bank and earning 5% interest on it per annum.

Can you do the two sets of calculations and see which option would be better, and by how much? For the sake of completeness, assume that the house is paid off with the rent and from current income during that 15 year period in the one case, and that the same amount of cash is put aside into the bank account by the saver. They both pay taxes, of course, on any interest earned, as that is part of the investment landscape.

By: Peter Fraser

Peter Fraser — Mon, 30 Nov 2009 14:31:01 +0000

GB – “new home sales falling for the second month in a row”

NEW HOMES – not total homes. And an underproduction of new homes creates undersupply, and that creates higher PR_ C_ S.

Go on fill in the blanks.

By: Peter Fraser

Peter Fraser — Mon, 30 Nov 2009 14:26:35 +0000

GB – Wages increase with productivity, not inflation. Use your maths skills and do some calculations on productivity increases.

By: GB

GB — Mon, 30 Nov 2009 13:38:03 +0000

cb
inflation 5%
wages go up with inflation at 5% = no real gain
term deposit makes 5% per annum =no real gain
house prices 0% (NO INFLATION) = -5%

if you adjust house prices and wages for inflation by the same amount then it will take more than the 15 years mentioned in my last post, i.e. it will take eternity and then some as they will never return to long term averages

but its irrelevent because spruikers will always believe that property prices can grow at 10% while wages, which is is the only way to pay for the ‘property price’, grows at 5% for ever and ever and ever and ever…. because they truly believe the loan size doesn’t matter

Once again I will challenge the spruikers to prove me wrong mathematically. I will try an new approach. Below is a table that begins in year 1 with an annual salary of $1 and a loan of $8. This represents the difference between the average salary and the median house price (8x). It supposes that they borrow 100% which is irrelevant as its just to prove that salary and price must rise together to be sustainable. You can see that it takes 13 years before the loan, growing at 10%,
completely dissolves the entire wage which is growing at 5%

Years Salary Loan Repayments Balance
1 $1.0 $8.0 $0.6 $0.4
2 $1.1 $8.8 $0.6 $0.4
3 $1.1 $9.7 $0.7 $0.4
4 $1.2 $10.6 $0.7 $0.4
5 $1.2 $11.7 $0.8 $0.4
6 $1.3 $12.9 $0.9 $0.4
7 $1.3 $14.2 $1.0 $0.3
8 $1.4 $15.6 $1.1 $0.3
9 $1.5 $17.1 $1.2 $0.3
10 $1.6 $18.9 $1.3 $0.2
11 $1.6 $20.7 $1.5 $0.2
12 $1.7 $22.8 $1.6 $0.1
13 $1.8 $25.1 $1.8 $0.0

By: cb

cb — Mon, 30 Nov 2009 11:50:28 +0000

Hey, GB. Good arguments. I would just like to complement it with something surprising, if not counterintuitive. You asked whether there would be a point in buying a house now, as an investment if you knew that for the next 15 years its face value would stay flat, while there was, say, 5% pa wage increases, which were simply keeping up with overall inflation in terms of living costs, similar to what is being measured in a manipulated and doctored way by the CPI. So, these are our assumptions then:
1. Buy a house with, say, 100k down and borrowing an additional 400k.
2. Sell it after 15 years for the same price, 500k.
3. Inflation during that time runs at 5% pa, and wages more or less keep up with it.
And our question is whether under such circumstantes it could possibly make sense to put your savings of 100k into this investment, as opposed to leveraging it up and buy an investment property, as discussed, instead of sticking your 100k into a bank account and earn interest on it at, say 5% pa.

Before I deal with the question in more detail, I should ask you whether you are satisfied that the scenario is more or less realistic in terms of likely inflation and interest rates to make it worthy for the exercise. So, I will stop here to see whether you would like to make any changes to the setup.

By: etch

etch — Mon, 30 Nov 2009 07:59:44 +0000

heres my little poem ?// ode??/

“see thet little thing over thar ?”
“why yes i do” sir ,yes i do .& and wat is it?”..
“well holy tuna-crap its DUBAI”
“and say good-bye”

By: etch

etch — Mon, 30 Nov 2009 07:49:18 +0000

ccccrrrrraaaaccccccccccccckkkkkkkkkkkkkkkkkkkkkkkkkkkkkkk!!!!!