hornblower
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chump said:
very true
your full of little gems this week
Dentalfloss
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10 year gilt now paying 4.75%.better than property yields.no risk involved
hornblower
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dentist007 said:
True , but you do not make money putting money in gilts, 4.75% is just keeping pace with inflation
I have propertys that I bought in the last big down turn
in the 1980 -1982
and I am getting £450 pr month , for a property that cost me £24,950
and an other £27,950
in a moden Barret block
when I bought them I was getting about 8% return
they are worth 5 or 6 times what I paid for them
this is how you make money
at the time interest rates where 15%
and they just where unable to sell them
H,
Consider this.
If you bought at £24950 and it's now worth as you say 5 times that sum we have todays value at
£124750.
Your rental stream today is £5500.
Your return now is 4.4%pa gross. Subtract associated costs and that becomes more like 3 to 3.5% pa at the most. Inflation (RPI) is now in excess of 4%pa ,but for most of us with any reasonable equity value I would say our inflation rate is much closer to 7% (private education , prestige car , holidays etc etc).
It should be apparent that you are actually now making a negative return. Your original purchase price at this point is pretty much irrelevant. Let's put it this way if you cashed in and taking away the longrun taper relief and CGT you banked say £90k net that would get you £5265pa with no maintenance costs,tenant hassles , insurance premiums etcetc.
The way you have to look at this is separating out cash genearation in the P&L from the asset value in the balance sheet. At this time holding as you are ,you are essentially 'bleeding' your capital asset for 2 to 3% pa of it's value in the hope that you will get further capital growth in the future. Now if you think that is a good idea that is up to you. However ,the dentist is right when he implies that you are exposing your capital at this time and you are not receiving any higher reward for doing that than you would get if you simply stuck the money in an internet savings account and took 5.65%pa risk free (long as the bank doesn't fold).
The problem with longterm holding is you can lose sight of the fundamentals , come to believe that 10%pa capital growth on property is the norm....well it obviously isn't and can't be unless labour costs start rising at that rate also. However , even if they were all that happens is overall inflation matches the growth pace of the property bringing little net real retruns.
We've had about 3 really great periods for capital growth that led to real wealth in prop over the last 25 to 30years ,but for a lot of that it's made no sense to tie up the capital in prop. You'd have got most of that overall return by simply being in the market for just over a third of that 25 to 30 years ...the rest was just aggregating your return (smoothing). I might add that each of those 3 periods arose under similar circumstances except for the last one which was something of an anomaly as it also coincided with a huge blunder by the central banks.
I'm not suggesting you don't have a case for holding property (that's a personal decision based on many factors) ,but the dentist is correct ...I did these calculations myself over 3 years ago and have sold every year since to empty the portfolio whilst there are takers and make use of the tax benefits of spreading the sales across multiple tax years. I didn't believe and don't believe that prop values can continue to rise well above the rate of labour costs ...the bank won't allow it just as i don't think they will allow a prop crash without moving rates to all time lows to stop same.... stagnation and erosion by inflation is the future I think until affordability ratios come back into line.
Consider this.
If you bought at £24950 and it's now worth as you say 5 times that sum we have todays value at
£124750.
Your rental stream today is £5500.
Your return now is 4.4%pa gross. Subtract associated costs and that becomes more like 3 to 3.5% pa at the most. Inflation (RPI) is now in excess of 4%pa ,but for most of us with any reasonable equity value I would say our inflation rate is much closer to 7% (private education , prestige car , holidays etc etc).
It should be apparent that you are actually now making a negative return. Your original purchase price at this point is pretty much irrelevant. Let's put it this way if you cashed in and taking away the longrun taper relief and CGT you banked say £90k net that would get you £5265pa with no maintenance costs,tenant hassles , insurance premiums etcetc.
The way you have to look at this is separating out cash genearation in the P&L from the asset value in the balance sheet. At this time holding as you are ,you are essentially 'bleeding' your capital asset for 2 to 3% pa of it's value in the hope that you will get further capital growth in the future. Now if you think that is a good idea that is up to you. However ,the dentist is right when he implies that you are exposing your capital at this time and you are not receiving any higher reward for doing that than you would get if you simply stuck the money in an internet savings account and took 5.65%pa risk free (long as the bank doesn't fold).
The problem with longterm holding is you can lose sight of the fundamentals , come to believe that 10%pa capital growth on property is the norm....well it obviously isn't and can't be unless labour costs start rising at that rate also. However , even if they were all that happens is overall inflation matches the growth pace of the property bringing little net real retruns.
We've had about 3 really great periods for capital growth that led to real wealth in prop over the last 25 to 30years ,but for a lot of that it's made no sense to tie up the capital in prop. You'd have got most of that overall return by simply being in the market for just over a third of that 25 to 30 years ...the rest was just aggregating your return (smoothing). I might add that each of those 3 periods arose under similar circumstances except for the last one which was something of an anomaly as it also coincided with a huge blunder by the central banks.
I'm not suggesting you don't have a case for holding property (that's a personal decision based on many factors) ,but the dentist is correct ...I did these calculations myself over 3 years ago and have sold every year since to empty the portfolio whilst there are takers and make use of the tax benefits of spreading the sales across multiple tax years. I didn't believe and don't believe that prop values can continue to rise well above the rate of labour costs ...the bank won't allow it just as i don't think they will allow a prop crash without moving rates to all time lows to stop same.... stagnation and erosion by inflation is the future I think until affordability ratios come back into line.
Good post chump, it be interesting to see what hornblower comes back with.
Fixed-rate mortgage deals are being taken off the market by banks and building societies. The withdrawal of fixed-rate deals began after the Bank raised its rate to 5.25% last week, its highest rate in almost six years. At present, 60% of householders have fixed-rate deals with the remainder vulnerable to fluctuating rates.
What's going to happen to all those who bought Property over the last 4 years on low interest deals, when they end. ho dear
Fixed-rate mortgage deals are being taken off the market by banks and building societies. The withdrawal of fixed-rate deals began after the Bank raised its rate to 5.25% last week, its highest rate in almost six years. At present, 60% of householders have fixed-rate deals with the remainder vulnerable to fluctuating rates.
What's going to happen to all those who bought Property over the last 4 years on low interest deals, when they end. ho dear
Jack o'Clubs
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very odd to read such a relaxed attitude to capital utilisation from a trader?! I can't see an obvious reason why despite the different time horizons you would fundamentally look at capital employed in property differently from that employed in other more liquid and shorter term investments? Compare your argument with someone saying 'yes, but my divi yield on these shares is actually 20% because I bought them 10 years ago at a quarter of the price'. Would that still be a good reason to hold them? Sure, you can't switch in and out of property easily or without substantial costs, but at this point in time the medium-term prognosis for capital appreciation doesn't look great. Hard to disagree with Dentist, or with Chump's excellently argued point of view.hornblower said:
hornblower
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your position is based on the the returns if I sold up these propertys now at £125,000
but I do not look at things like that ,
what about all the capital gains?
If I was at retirement age then , I might consider your argument
money is worth less and less each year , only property ,land, and and income , stands the test of time
when we have a down turn , these propertys will go down in value , but they have before , and they will go up again
but nice to have an other point of view
but I do not look at things like that ,
what about all the capital gains?
If I was at retirement age then , I might consider your argument
money is worth less and less each year , only property ,land, and and income , stands the test of time
when we have a down turn , these propertys will go down in value , but they have before , and they will go up again
but nice to have an other point of view
LOL...if you were at retirement age the argument for holding props would actually be stronger. You could simply use them as a 'fixed' income asset and be content to allow the revenue stream to meet your living costs ignoring the asset value completely.
The younger you are the less attractive this argument should be as you should look to expose your asset value to higher returns to maximise compounding .
At times of extreme outperformance the probability of higher returns diminishes so in the context of props the logical choice should be to move to the sidelines and avoid capital loss if another market is not currently offering better opportunities.
I did also mention CGT earlier. I think it is a mistake to allow taxation to deflect you from the numbers. It really should be a choice of where am I going to get reward commensurate with my risk and if that means withdrawing from an investment by all means do that by utilising taxation periods.
There's no law against buying back into a market if circumstances change. It's called being adaptable
The younger you are the less attractive this argument should be as you should look to expose your asset value to higher returns to maximise compounding .
At times of extreme outperformance the probability of higher returns diminishes so in the context of props the logical choice should be to move to the sidelines and avoid capital loss if another market is not currently offering better opportunities.
I did also mention CGT earlier. I think it is a mistake to allow taxation to deflect you from the numbers. It really should be a choice of where am I going to get reward commensurate with my risk and if that means withdrawing from an investment by all means do that by utilising taxation periods.
There's no law against buying back into a market if circumstances change. It's called being adaptable
Jack o'Clubs
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I'm an amateur in the property stakes (just my place and one other for investment), but did some work on the maths a year or so ago. What I couldn't make work was the attraction of 'bricks and mortar' relative to other instruments which gave you proxy exposure to the market. When you consider the disadvantages of tenants (both in dealing with difficult ones, and finding new ones when the property is vacated), agencies (or having to do all the property management yourself), massive transaction costs, illiquidity in the market, etc. and compared that to property company shares, property investment trusts (or now, REITS), and CME futures if you fancied some exposure to the US, it seemed much better to go for the derivative. You can get 'mortgage' equivalent leverage by buying as a CFD, and while that means relatively high interest rates, when you adjust for the costs inherent in owning a property the financing was pretty comparable - you could even draw up a schedule for replicating the paying off of a mortgage over time, by scaling down the CFD and switching to the shares themselves. When you add the convenience, and particularly the ability to get in and out of the market at a day's notice (or even going short), it seemed the preferable option to me. The only downside is that exposure is generally to commercial property rather than residential, but then that's been hot too over the last few years. Just a thought...
A really impressive analysis, Chump.
A report in this weekend's FT noted that while house prices have increased an avergage of 31% over the last 3 years, the average price of a flat has fallen almost 1%. Further, there is an over-supply of flats due to over-optimism (or more accurately, mis-judgement) on the part of developers in areas such as Manchester, Bristol and Birmingham. And it is in this sector that many buy-to-let investors have invested.
Manchester must be one of the biggest building sites in Europe but the only things being built are flats and apartments in really shttiy areas, eg Longsight, where council properties are being bulldozed to provide the land. If you buy a gaff, here make sure it has bullet-proof windows, and don't go out after dark.
As an analyst said in the report, it's pointless building yuppie gaffs if there are no yuppies to fill them, ie outside London.
Grant.
A report in this weekend's FT noted that while house prices have increased an avergage of 31% over the last 3 years, the average price of a flat has fallen almost 1%. Further, there is an over-supply of flats due to over-optimism (or more accurately, mis-judgement) on the part of developers in areas such as Manchester, Bristol and Birmingham. And it is in this sector that many buy-to-let investors have invested.
Manchester must be one of the biggest building sites in Europe but the only things being built are flats and apartments in really shttiy areas, eg Longsight, where council properties are being bulldozed to provide the land. If you buy a gaff, here make sure it has bullet-proof windows, and don't go out after dark.
As an analyst said in the report, it's pointless building yuppie gaffs if there are no yuppies to fill them, ie outside London.
Grant.
Dentalfloss
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fibonelli...you got any proof..??
18 year cycle
18 year cycle
Grantx ,
Thanks and yes you're right about 'flats' ..over supply will be a real drag in many city centre areas for this type of property. I have emptied my portfolio , except ...LOL...I kept a number of simple 2 bed terraces in a trust fund for my daughter. My only argument for keeping these is , nobody is building this type of property anymore so it will be in increasingly short supply over the term I am looking at and as far as I am aware no one in this country can actually build these off city centre property types even at their current high prices...the land alone would cost probably more than half the market value.
Fib,
I don't know what country you are referring to ,but it isn't the UK unless you have simply looked at the very late 80's and now and said "18 years".
What you have to consider are three factors ....current prices , cost of money (interest rates) and income growth.
I could bracket interest rates in the UK arbitrarily as follows; (Scylla: An History of Interest Rates)
A 0 - 4%
B 5 - 9%
C 10 - 15% +
Historically the mean band is B and further it is the lower end of that band 5 - 7% .
What that means is any move outside of that band will tend to be mean reverting. In other words when rates move outside that band the probability of them reverting to mean becomes higher as opposed to a lower probability move to further extremes.
Now look at what the consequences of that are and introduce the notion of drawdown by being positioned in the wrong direction.
You take a rate at say 3.50% leaveraged to the max. A mean reversion as we have now had to 5.25% is only a nominal move of 1.75% ,but the drawdown impact on costs is 50% !
You take a rate at 10% and rates move against you by the same amount of 1.75% you have a drawdown of only 17.5%. Moreover the first scenario has a higher probability of happening as it is mean reverting than the second scenario which would have meant a lower prob. move to a further extreme.
Let's look further. When rates are low and income growth is running at roughly the same rate the probability is real capital values will rise if this occurs against either a background of price stability (consolidation) , or real price recession. Meanwhile yields will probably fall.
When rates are high this background of inflation probably means incomes have risen higher than their longrun norm. The outlook would be for real capital values to fall either quickly ,or through stagnation. Meanwhile yields would rise.
Rather than mechanically try to apply a rule to how property rises and falls you would be better to consider the variables mentioned and ask where are they now ,where have they been and from this anticipate the probability of were they will go from here across the forseeable future.
From this you should be able to decide on how you wish to place your money on the table through being better informed.
For example ...if you wanted into property in the last 3 years or so when you've already missed the move up ..you should have grabbed a fixed finance deal at the very low end probably for a 10 year term. In doing that you would have balanced out buying high with financing low. As we saw above buying high with a low rate with a potential large drawdown on costs is the worst of both worlds.
Alternatively , if you had bought in the past at times when yields were running at 15 to 20% against financing costs in the mean band of 5 to 9% just buy more.
and so on and so on.
Thanks and yes you're right about 'flats' ..over supply will be a real drag in many city centre areas for this type of property. I have emptied my portfolio , except ...LOL...I kept a number of simple 2 bed terraces in a trust fund for my daughter. My only argument for keeping these is , nobody is building this type of property anymore so it will be in increasingly short supply over the term I am looking at and as far as I am aware no one in this country can actually build these off city centre property types even at their current high prices...the land alone would cost probably more than half the market value.
Fib,
I don't know what country you are referring to ,but it isn't the UK unless you have simply looked at the very late 80's and now and said "18 years".
What you have to consider are three factors ....current prices , cost of money (interest rates) and income growth.
I could bracket interest rates in the UK arbitrarily as follows; (Scylla: An History of Interest Rates)
A 0 - 4%
B 5 - 9%
C 10 - 15% +
Historically the mean band is B and further it is the lower end of that band 5 - 7% .
What that means is any move outside of that band will tend to be mean reverting. In other words when rates move outside that band the probability of them reverting to mean becomes higher as opposed to a lower probability move to further extremes.
Now look at what the consequences of that are and introduce the notion of drawdown by being positioned in the wrong direction.
You take a rate at say 3.50% leaveraged to the max. A mean reversion as we have now had to 5.25% is only a nominal move of 1.75% ,but the drawdown impact on costs is 50% !
You take a rate at 10% and rates move against you by the same amount of 1.75% you have a drawdown of only 17.5%. Moreover the first scenario has a higher probability of happening as it is mean reverting than the second scenario which would have meant a lower prob. move to a further extreme.
Let's look further. When rates are low and income growth is running at roughly the same rate the probability is real capital values will rise if this occurs against either a background of price stability (consolidation) , or real price recession. Meanwhile yields will probably fall.
When rates are high this background of inflation probably means incomes have risen higher than their longrun norm. The outlook would be for real capital values to fall either quickly ,or through stagnation. Meanwhile yields would rise.
Rather than mechanically try to apply a rule to how property rises and falls you would be better to consider the variables mentioned and ask where are they now ,where have they been and from this anticipate the probability of were they will go from here across the forseeable future.
From this you should be able to decide on how you wish to place your money on the table through being better informed.
For example ...if you wanted into property in the last 3 years or so when you've already missed the move up ..you should have grabbed a fixed finance deal at the very low end probably for a 10 year term. In doing that you would have balanced out buying high with financing low. As we saw above buying high with a low rate with a potential large drawdown on costs is the worst of both worlds.
Alternatively , if you had bought in the past at times when yields were running at 15 to 20% against financing costs in the mean band of 5 to 9% just buy more.
and so on and so on.
Dentalfloss
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www.mouseprice.co.uk.this site gives all the property transactions in tha last 5 years by postcode
hornblower
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dentist007 said:
link seems not to work
Priceman
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Atilla
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Priceman said:
I thought it was a typo error and tried
http://www.houseprice.co.uk
which also worked.
grantx said:
Excuse me......
I've got a few rentals in Longsight.. property prices have gone ballistic over the last few years mine have tripled(now 100+) and yields are 20%+.... :cheesy:
None have bullet proof windows but whilst people have been shot it does not disuade tenants - predominantly students/nurses some new grads...
Less than 10 years ago an old biddy was selling her 2+2 for 17k did n't buy now selling for 135k with only minor refurb and changed hands 3 times since...
