Timing the market is enormously important for property investing

[divinejourney]

@nailz I just used that as an example for why you can’t look at inflation adjusted returns for property. It wasn’t meant to be an accurate example.

But a good example of how property can create good returns is mine. I bought my investment property on a 95% LVR in 2019 (pre-election). Accounting for all expenses and mortgage payments, the return on my equity (including stamp plus all other costs) has been around 80% p.a. (My LVR is now around 65%, mainly due to 45-50% price growth since when I bought it).

Is this going to be the experience for most property investors? Absolutely not. But, the majority of the wealth in this country has been built from property, and there’s a reason for that.

The problem with a 40-50% leveraged equity portfolio is that you can get margin called. If you use nab equity builder to avoid the margin call, your borrowing capacity will be limited by income and also your interest rate is higher.

Personally, I consider a 50% LVR on shares to be a similar risk profile as 95% LVR on a property. It really depends on your job security. I have a super secure job, so a 95% LVR on property is less risky because I can always just not sell, whereas if the stock market tanks I can still get margin called (unless you use nab EB, but then your borrowing capacity is severely limited).

 

[mcarans]

@divinejourney Fair point, although this has less to do with inflation, and more to do with the fact that the total return from property isn't just the capital gain, which is all my charts show (there is of course the additional income from rent, holding costs, transaction costs, and the cost of debt if you use it).

I think adjusting prices for inflation is useful, as inflation has changed a lot over time (e.g. very high in the late 80s where the data starts, and basically zero now).

 

[divinejourney]

@mcarans Yes, adjusting property prices is important when considering affordability, but it shouldn’t be used when trying to estimate returns over 10 years. In many circumstances, it’s possible to generate significant returns with property even if the asset has negative real returns. This seems unintuitive, but it’s definitely possible.

Your cost of debt doesn’t have to be less than the inflation rate for debt to help with returns, it just needs to be less than the total nominal return of the asset.

Also, looking at real property prices is like looking at real share prices (without factoring dividends). What you’ll find is that real share prices have only grown 2% p.a since 1900 (link).

 

[mcarans]

@divinejourney I've thought about this some more and concluded that you're correct. Certainly counter intuitive.

I will update the charts so they're in nominal terms

 

[resjudicata]

@mcarans Your charts are misleading .

You've subtracted inflation from your numbers and left out rental yield.

Considering cash yields and wage growth are substantially lower than inflation why would you use that as a baseline to subtract from house price trends.

You've picked a 10 year scale to suit the point you want to make too.

 

[mcarans]

@resjudicata I disagree. Removing inflation just makes comparing changes in actual prices over time easier, given how much inflation has varied over time. Return on cash and wage growth are low now, but were on average higher than inflation over the time series.

I picked 10 years because it is an often quoted time period for property investment (in fact people sell their properties more often than every 10 years on average.

 

[octsris]

@mcarans Property also needs to be fairly priced to be a good investment, just like any other investment. Additionally one also needs to buy the right product like picking the correct stock. If an investor buys a 1 BR unit in a high rise then the investment will certainly not enjoy the same gains as a house on a land.

That said, Time in the market still matters. Just the timescale is longer. For stocks investments 10 years is considered long term, for property investments 15-20 years or more would be considered long term.

If you run the same analysis for a 15-20 year period, you should get a different result.

 

[mcarans]

@octsris Yes, good points. If I have time I will redo the charts over 15-20 years and see how big a difference it makes.

 

[nailz]

@mcarans I now work in property management…

I don’t invest in property outside of an old PPOR I can’t be arsed to sell. Take that for what it’s worth and of those I’m aware none of my investment partners do either.

I’ve explained here before why property is overrated and get some really angry responses. Simple fact of the matter is “cheap leverage” can only make a good investment great. It can’t turn shit into gold and property returns just aren’t that great. But they seem that way because we don’t measure the all those little costs that add up. Property managers fees, council rates, insurance, occasional shit head tenant, depreciation isn’t something to sneeze at either. Not to mention freaking stamp duty on a million dollar house is eye watering.

Note: I’m talking about your typical house and land little packages, below a quarter acre and even down to townhouses. Big slabs of land are in a market of own since they can get rezoned etc. but this idea people have of “buy house, rent it out and get rich while you sleep” is just meh. But I make bank from people believing in it so go right ahead.

 

[resjudicata]

@mcarans You're looking at it in hindsight. Easy to say looking back.

But were you able to predict the peaks and troughs?

 

[mcarans]

@resjudicata Nope! Not a chance.

My main point is that if you expect to achieve historical average capital gains over a period of 10 years, you'd better have good luck or above average ability to time the market.

 

[resjudicata]

@mcarans Ohh sweet, looks like I bought in the valley of 2013! Good to know.

 

[resjudicata]

As I walk through valley in shadow of 2013, I take a look at my cheque and realise there’s none left

 

[thaotran4]

@mcarans I have actually wondered this. Once you take away inflation, account for falling interest rates (which increase how much can be borrowed) and general increase in size and quality of housing , prices of property has stayed the same. Though knowing all this is no comfort when prices have increased 7.6* in nominal terms over 30 years.

 

[tubal]

@mcarans Very true. But just as important is the location. Finding the right property in the right place at the right time is what makes property investing difficult. But if it was easy, everyone would make money investing in property.