Author Topic: Australia/USA Mustachian Philosophy Differences  (Read 54762 times)

misterhorsey

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #150 on: March 12, 2015, 04:50:59 AM »
I'm subscribing too!

This_Is_My_Username

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #151 on: March 14, 2015, 05:28:13 AM »


There have been entire decades, multiple decades, where home prices in Australia decreased when taking inflation into account.  One of those "lost decades" just ended in 1999.  The one starting around 1974 lasted almost 2 decades.  The one in 1950 lasted 2 decades, the one from the beginning of the chart lasted at least 80 years...etc.  It looks like the latest boom started right in-line with the last US boom, which has already fallen in-line.  How long until the Australian housing market follows?

You should view housing as a commodity.  Like gold.  It doesn't produce anything, like a company does (stock), it doesn't represent a contractual agreement for an entity (company/government) to pay you back on a fixed schedule (like a bond), it just...sits there.  There is no economic reason for a commodity to grow faster than inflation.

I think this is false, and the reason is:

"housing" is really just land.  Think 50 years ahead, the building will be a hovel but the land will not have changed. 

And land is not a commodity because it is not fully fungible.  Particularly inner-ring land in Sydney, Melbourne, Hong Kong, London, New York, etc.   

An ounce of gold in Manhattan is identical to an ounce of gold in a rural town. 
An acre of land in Manhattan is a thousand times different to an acre of land in a rural town. 

The graph quoted above is too broad, because it is for a whole country.  There is no such thing as the median australian parcel of land, it has no address. 

The economic reason for inner-ring land to grow faster than inflation is supply and demand.   Australia's population is becoming more concentrated in its cities.  Immigration is increasing and immigrants (moreso than locals) want to live in a major city.   Australian jobs are becoming more concentrated in the city centre.   Population is increasing at a greater rate in inner ring suburbs than outer ring suburbs.   the ratio of house prices from inner ring to outer ring is increasing and the rate of increase is increasing.   Inner ring land has higher growth than outer ring land, and that growth gap is increasing. 

That is why the price of inner-ring land increases faster than inflation.  Because the gap between supply and demand is greater than 2.5% per year.  There is no prospect of demand waning any time in the medium term. 

That said, I am still racist against real property as an investment.
« Last Edit: March 14, 2015, 05:30:47 AM by This_Is_My_Username »

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #152 on: March 15, 2015, 09:07:26 PM »


There have been entire decades, multiple decades, where home prices in Australia decreased when taking inflation into account.  One of those "lost decades" just ended in 1999.  The one starting around 1974 lasted almost 2 decades.  The one in 1950 lasted 2 decades, the one from the beginning of the chart lasted at least 80 years...etc.  It looks like the latest boom started right in-line with the last US boom, which has already fallen in-line.  How long until the Australian housing market follows?

You should view housing as a commodity.  Like gold.  It doesn't produce anything, like a company does (stock), it doesn't represent a contractual agreement for an entity (company/government) to pay you back on a fixed schedule (like a bond), it just...sits there.  There is no economic reason for a commodity to grow faster than inflation.

I think this is false, and the reason is:

"housing" is really just land.  Think 50 years ahead, the building will be a hovel but the land will not have changed. 

And land is not a commodity because it is not fully fungible.  Particularly inner-ring land in Sydney, Melbourne, Hong Kong, London, New York, etc.   

An ounce of gold in Manhattan is identical to an ounce of gold in a rural town. 
An acre of land in Manhattan is a thousand times different to an acre of land in a rural town. 

The graph quoted above is too broad, because it is for a whole country.  There is no such thing as the median australian parcel of land, it has no address. 

The economic reason for inner-ring land to grow faster than inflation is supply and demand.   Australia's population is becoming more concentrated in its cities.  Immigration is increasing and immigrants (moreso than locals) want to live in a major city.   Australian jobs are becoming more concentrated in the city centre.   Population is increasing at a greater rate in inner ring suburbs than outer ring suburbs.   the ratio of house prices from inner ring to outer ring is increasing and the rate of increase is increasing.   Inner ring land has higher growth than outer ring land, and that growth gap is increasing. 

That is why the price of inner-ring land increases faster than inflation.  Because the gap between supply and demand is greater than 2.5% per year.  There is no prospect of demand waning any time in the medium term. 

That said, I am still racist against real property as an investment.

Let's compare Sydney to New York City:

Sydney population in 1981: 3,204,696
Sydney population in 2010: 4,575,532
Sydney current population density: 980/sq mile

NYC population in 1980: 7,071,639
NYC population in 2013: 8,405,837
NYC current population density: 27,778.7/sq mile

NYC population growth, in terms of people added, was roughly the same during this time period, 1.3 million.  With a much higher population density, I think it would be fair to say that land is at a much higher premium in NYC.  How did the recent housing bubble affect NYC prices?  Here's an inflation adjusted chart (red line):



And here is Sydney:



Source: http://www.macrobusiness.com.au/2013/10/sqm-sydney-prices-to-the-moon/

So the NYC housing market, and the Sydney housing market, both had about the same raw number of population growth, both boomed in 2000 (when all the housing markets were booming), but the NYC market already came back down, where the Sydney market just kept going.  From 2000-now, NYC had a 1.4% inflation-adjusted return, while Sydney is enjoying a 3.6% inflation-adjusted return.  NYC is currently sitting at 30% off it's inflation-adjusted high, while Sydney is still climbing at an increasing pace.

NYC has all the same population/land/density issues (more so), why didn't it keep rising?  Why did the same housing boom give the Sydney housing market 2.5 times the return?  Are we to believe that NYC had lower demand for housing during this period?  Maybe NYC was an outlier, let's find another population/land/density area and see how they handle housing booms.  How about Tokyo?



I'm reading "A Random Walk Down Wall Street", which has an interesting quote on this very issue:

"The bursting of the bubble destroyed the myth that Japan was different, and that it's housing prices would always rise.  The financial laws of gravity know no geographic boundaries."

I recommend against putting the majority of your net-worth into such a speculative asset.  I strongly urge those intending to leverage into such an asset (mortgage) to first consider the consequences.  I have many friends my age who say they, "signed my life away to a mortgage", and the bubble in Australia is much worse than it was here.  Like all previous speculative bubbles, no matter the asset class, prices will fall in-line.  Inflation-adjusted prices on commodities even-out over time.  It happened in the NYC, it happened in Tokyo, and it will happen in Sydney.

deborah

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #153 on: March 15, 2015, 09:23:41 PM »
Dodge, as I understand it, there are many more regulations limiting the availability and use of land in the Australian market. When those regulations are eased, the housing market will ease. When we start building more houses than are needed per year rather than less, the housing market will ease. Unfortunately our politicians are not talking about easing the regulations or expanding the building rate. They are talking about making superannuation available for buying housing, which is only going to increase rather than decrease the price.

Until you realise the fundamentals underlying the Australian property market, you don't understand the nature of the "bubble". If it is eventually eased by an increase in building rates, it will very slowly deflate. If the rules change overnight, it might deflate quickly, but it won't, because the rules will change slowly because of nimby (the basic reason the regulations exist and are gradually getting worse rather than better).

nonsequitur

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #154 on: March 15, 2015, 10:01:10 PM »


Thank you all for the stimulating discussion.  I have found this thread incredibly enlightening. 

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #155 on: March 15, 2015, 10:41:15 PM »
There's an interesting article in Fairfax today - http://www.canberratimes.com.au/comment/surge-expected-of-older-people-buying-their-first-home-20150228-13qjdh.html - about renting vs owning in retirement. The author assumes the younger person of today has a reasonable amount in super and rents. When she reaches retirement age, it makes sense to become a home owner, so that she receives the pension and is much better off.

This article is very bad.  It doesn't calculate the additional cost of maintenance, it doesn't calculate the Age Pension's "Rent Assistance" payment...this leaves much to be desired.  I did some research on Age Pensions, which led me to Australia's official government website:

http://www.humanservices.gov.au/customer/services/centrelink/age-pension

Which then led me to an official Age Pension calculator:

https://www.centrelink.gov.au/RateEstimatorsWeb/publicUserCombinedStart.do

I filled it out with the the "current information" of a renter paying $576 a week in rent, with $900,000 invested in shares.  Then I choose a "proposed" situation with someone owning a $750,000 property (which doesn't get counted as an asset for the Age Pension), and $150,000 invested in shares:





Here are the results, per person (so times this by 2 since both situations are a married couple):





It looks like they're using a 3.4% withdrawal rate to calculate the "Non-Centrelink Income", so let's ignore that.  According to the calculator, you are much better off renting, but we still haven't taken into account the recurring costs of owning.  This website estimates you might have $60,000 of extra expenses in year 1, after buying a $400,000 house:

http://www.yourmortgage.com.au/article/tallying-up-all-the-costs-of-buying-a-home-79472.aspx

Another website estimates the yearly maintenance costs might be closer to 2%:

http://www.retirement-communities.com.au/retirement-village-guide/cost-of-maintaining-a-home/

Let's split the difference and call it a 1.5% yearly cost.  Which ends up being $432 fortnightly.  We haven't removed the renting cost from this yet either, which is $576 weekly.  So in total:

Renting = $353.75 (Age Pension income) x 2 (# of people) + $1384 (4% rule)  - $1,152 (rent fortnightly) = $939.50 fortnightly income

Owning = $644 (Age Pension income) x 2 (# of people) + $230 (4% rule) - 432 (maintenance and other fees) = $1086 fortnightly income

So yes, under these assumptions, owning can give you a slight advantage if you're old enough to take advantage of the Age Pension, which is currently 65 years of age.  This does, however, come at a cost.  Since the market will grow much faster than this small difference in pension income, over the years your net worth will very likely suffer.  Putting these numbers into the NYTimes Buy/Sell calculator, the breakeven point is much larger than the $576 weekly ($2,500 monthly) rent:



This calculates out to a $2,307,347 higher net worth with renting after 25 years.  Of course, assuming the housing market doesn't crash...

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #156 on: March 15, 2015, 10:48:01 PM »
Dodge, as I understand it, there are many more regulations limiting the availability and use of land in the Australian market. When those regulations are eased, the housing market will ease. When we start building more houses than are needed per year rather than less, the housing market will ease. Unfortunately our politicians are not talking about easing the regulations or expanding the building rate. They are talking about making superannuation available for buying housing, which is only going to increase rather than decrease the price.

Until you realise the fundamentals underlying the Australian property market, you don't understand the nature of the "bubble". If it is eventually eased by an increase in building rates, it will very slowly deflate. If the rules change overnight, it might deflate quickly, but it won't, because the rules will change slowly because of nimby (the basic reason the regulations exist and are gradually getting worse rather than better).

I'd be careful with the "but this time is different" argument.  Every bubble in recorded history has heard that argument...it has a 0% success rate ;)

deborah

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #157 on: March 15, 2015, 11:32:28 PM »
The trouble is that it is not different, and the people in control all know how to get prices down. There is just a lack of willingness to take the appropriate action. I agree prices are very high. However, a bubble is usually speculation rather than regulation which people can't get around.

dungoofed

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #158 on: March 17, 2015, 07:11:02 PM »
http://www.smh.com.au/comment/negative-gearing-the-economic-reasons-why-government-must-kill-this-sacred-cow-20150317-1m14s4.html

Not sure how it will play out. I think there is enough noise around negative gearing now that you should only purchase a house if you could continue to afford it even if the policy was repealed. And if it wasn't repealed then it should just be treated as a nice bonus.

frozzie

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #159 on: March 18, 2015, 06:19:14 PM »
I think there is enough noise around negative gearing now.
Enough Noise that's for sure : The Project on the 17th https://youtu.be/vqBrXP_gHQA

JLR

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #160 on: March 24, 2015, 04:25:00 AM »
Subscribing in the hope this thread sees more action. :)

vagon

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #161 on: April 15, 2015, 08:02:50 PM »
Also in to see any updates as they arise.

aspiringnomad

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #162 on: April 15, 2015, 10:20:14 PM »
I can't say this any more eloquently or convincingly than Dodge, but before any Australian friend of mine buys a house, I would want them to see the attached graph. Again, fundamental value for property, barring permanent government or foreign investor intervention, should reflect the cost to rent that property over the long term. (The blue line is the US, 100 represents a price-to-rent ratio equal to 1). This time is unlikely to be different.
« Last Edit: April 15, 2015, 10:30:04 PM by dcmustachio »

bigchrisb

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #163 on: April 15, 2015, 11:15:17 PM »
Can't say I disagree on the comments about Aus housing being over-valued.  However, I've been saying that for the last 10 years.  For me, its been a bit of a case of Keynes, with "the market remaining irrational longer than you can remain solvent".   I'm very stock focused in my investments, and am close enough to FI at 33.  However, I probably would have been better off buying a house 10 years ago.  I capitulated and bought one last year (at which point, it was less than 50% of my liquid net worth).  This means I'm now neutral the AUS property market (as opposed to short).

Australian's seem to have an irrational love affair with bricks and mortar.  I think there are a few reasons this is particularly the case here, being:

- Minimal taxation on owner occupied housing. From what I have read, property/land taxes in the US are higher than those in AUS (really only.
- Addiction to negative gearing. Probably talked about enough already.
- Traditionally high fee financial products, vs DIY fees on residential property.
- Poor tenancy rights compared to some juristictions, making "renting" appear a low socioeconomic choice / class in much of the public's eyes.
- Lack of recessions in our economic memory (over 20 years since the last one), mean that the downside risks, or what happens with high unemployment rates are not in Australian's awareness.
- Ability to access lower finance rates against property - I was using margin loans, but now use a loan against this property for the same purpose, with a better interest rate.  (If leverage is ever a good idea is another debate).

Plenty of people have made their wealth in property, plenty of people in shares.  Of those who currently own Aus property (myself now included), we have had some very fortunate timing! 

I figured I was ok buying in, as I'm prepared to hold this property in perpetuity, and probably live in it for a significant portion of the time, and rent it if I'm travelling elsewhere.




vagon

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #164 on: April 16, 2015, 06:49:49 PM »
Can't say I disagree on the comments about Aus housing being over-valued.  However, I've been saying that for the last 10 years.  For me, its been a bit of a case of Keynes, with "the market remaining irrational longer than you can remain solvent".   I'm very stock focused in my investments, and am close enough to FI at 33.  However, I probably would have been better off buying a house 10 years ago.  I capitulated and bought one last year (at which point, it was less than 50% of my liquid net worth).  This means I'm now neutral the AUS property market (as opposed to short).

Australian's seem to have an irrational love affair with bricks and mortar.  I think there are a few reasons this is particularly the case here, being:

- Minimal taxation on owner occupied housing. From what I have read, property/land taxes in the US are higher than those in AUS (really only.
- Addiction to negative gearing. Probably talked about enough already.
- Traditionally high fee financial products, vs DIY fees on residential property.
- Poor tenancy rights compared to some juristictions, making "renting" appear a low socioeconomic choice / class in much of the public's eyes.
- Lack of recessions in our economic memory (over 20 years since the last one), mean that the downside risks, or what happens with high unemployment rates are not in Australian's awareness.
- Ability to access lower finance rates against property - I was using margin loans, but now use a loan against this property for the same purpose, with a better interest rate.  (If leverage is ever a good idea is another debate).

Plenty of people have made their wealth in property, plenty of people in shares.  Of those who currently own Aus property (myself now included), we have had some very fortunate timing! 

I figured I was ok buying in, as I'm prepared to hold this property in perpetuity, and probably live in it for a significant portion of the time, and rent it if I'm travelling elsewhere.

I agree Chris - like you I am both in the housing market and bearish on the housing market. The fundamentals are all horribly wrong.

I wanted to add one more thing around leverage - property gives you a higher LVR than shares.

slothman

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #165 on: April 17, 2015, 09:13:09 AM »
Could we take a moment to talk about Australian taxes?

From what I've read, for Americans "a married couple can have $19,500 a year in income AND $70,700 in investment income, TAX FREE"
http://www.gocurrycracker.com/never-pay-taxes-again/

In Australia, as far as I know, there's no separate allocation for tax-free investment income. Rather, all income (regardless of earned income vs investment income) gets taxed at income tax rates. Therefore we only qualify for roughly $20K a year in income tax free as a resident.

Additionally, I've been investigating what will happen to my tax residency status should I decide to 'retire early' overseas. From what I can tell I'll become a non-resident for tax purposes and as such, investment property rental income will be taxed at 32.5% (no tax free threshold) and dividends will be subject to withholding tax of 15% (tax treaty rates).

Why do Americans get it so sweet?

Ozstache

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #166 on: April 17, 2015, 04:14:52 PM »
In Australia, as far as I know, there's no separate allocation for tax-free investment income.

What about super?

marty998

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #167 on: April 17, 2015, 05:39:46 PM »
Yes infinite tax free income through super when you're over 60 sounds like a good deal to me?

slothman

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #168 on: April 17, 2015, 06:37:15 PM »
Looking to retire by my mid 30s so super isn't really a factor for me...

potm

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #169 on: April 17, 2015, 06:46:28 PM »
Americans don't get franking credits remember. If you earned 70k of fully franked dividends, you will still get a refund from your tax.

Also if you no longer become an Australian resident then you can invest anywhere in the world apart from Australia and your Australian citerzenship won't impact anything. Not so much for Americans.

slothman

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #170 on: April 17, 2015, 07:07:48 PM »
Americans don't get franking credits remember. If you earned 70k of fully franked dividends, you will still get a refund from your tax.

Also if you no longer become an Australian resident then you can invest anywhere in the world apart from Australia and your Australian citerzenship won't impact anything. Not so much for Americans.

Could you please run me through the numbers for an Australian resident? I hadn't considered the effect of franking credits.

I did learn that if I become a non-resident I won't be able to claim franking credits and will need to pay 10% withholding tax on any franked dividends, or 15% if non-franked. Note: this is dependent on the relevant tax treaty.

slothman

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #171 on: April 17, 2015, 07:36:49 PM »
Been reading up on franking credits and playing around on the ATO tax calculator. Can anyone critique my numbers to see if they look correct?

Assumptions: Australian tax resident
Stache $750,000 in Australian diversified share portfolio
Dividends Received    $30,000 (assume 4% dividend yield) (no other income)
Franking Credits    $12,857  (assume fully franked dividends) (Franking Credits = Dividend * ( 3 / 7))
Taxable Income    $42,857

Based on tax calculator (http://calculators.ato.gov.au/scripts/axos/AXOS.asp):
Tax on taxable income    $5,476
less low income tax offset    $357
Tax payable    $5,118
   
plus Medicare levy    $643
Total tax payable    $5,761
   
less franking tax offset    $12,857
Net refund    $7,096
   
Total Income (After-Tax)    = $30,000 + net refund = $37,096
« Last Edit: April 17, 2015, 08:14:47 PM by slothman »

potm

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #172 on: April 17, 2015, 08:26:11 PM »
Assuming the tax calculator is correct, then that is right. You've gotten the franking credit part right.
Time to sell all your IPs and go all in? :P

slothman

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #173 on: April 17, 2015, 08:43:43 PM »
Assuming the tax calculator is correct, then that is right. You've gotten the franking credit part right.
Time to sell all your IPs and go all in? :P

Thanks potm! Who spilled the beans on my IPs?!?! :P

I still firmly believe property has a way to go before the boom is over. I've stopped adding to my portfolio as of last year and have since been borrowing against equity to purchase LICs/ETFs.

When I transition into retirement I will start selling down part of my portfolio to clear some debt.

dungoofed

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #174 on: May 14, 2015, 09:25:59 PM »
http://news.domain.com.au/domain/real-estate-news/the-mother-of-all-housing-bubbles-20150515-gh24hv.html

Quote
In 1991 the value of housing debt divided by disposable household income was 35 per cent. Today it is more than 140 per cent, and climbing daily. Australia has never had to contend with home loan rates of less than 4.3 per cent.

A little over 12 months ago I remember people scoffing at analysts predicting the Sydney housing market was "10 percent undervalued." Yet here we are, 10% up from last year, and analysts are still predicting it has another 10% to go over the next 12 months.

Interest Compound

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #175 on: May 14, 2015, 09:41:14 PM »
http://news.domain.com.au/domain/real-estate-news/the-mother-of-all-housing-bubbles-20150515-gh24hv.html

Quote
In 1991 the value of housing debt divided by disposable household income was 35 per cent. Today it is more than 140 per cent, and climbing daily. Australia has never had to contend with home loan rates of less than 4.3 per cent.

A little over 12 months ago I remember people scoffing at analysts predicting the Sydney housing market was "10 percent undervalued." Yet here we are, 10% up from last year, and analysts are still predicting it has another 10% to go over the next 12 months.

Everyone knows market timing is a horrible idea in the stock market.  Yet people are excited to market time with leverage in a commodity (Real Estate)?  This is such a bad idea, I'm genuinely shocked that people on this forum aren't universally panning it.

marty998

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #176 on: May 15, 2015, 02:31:15 AM »
http://news.domain.com.au/domain/real-estate-news/the-mother-of-all-housing-bubbles-20150515-gh24hv.html

Quote
In 1991 the value of housing debt divided by disposable household income was 35 per cent. Today it is more than 140 per cent, and climbing daily. Australia has never had to contend with home loan rates of less than 4.3 per cent.

A little over 12 months ago I remember people scoffing at analysts predicting the Sydney housing market was "10 percent undervalued." Yet here we are, 10% up from last year, and analysts are still predicting it has another 10% to go over the next 12 months.

Everyone knows market timing is a horrible idea in the stock market.  Yet people are excited to market time with leverage in a commodity (Real Estate)?  This is such a bad idea, I'm genuinely shocked that people on this forum aren't universally panning it.

For a long time most Australians really only had 2 choices when it came to investments - shares or real estate, and most people still think shares are a lottery.

Property is so ingrained in the culture that you would be hard pressed to convince the average person it's a bad idea.

slothman

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #177 on: May 15, 2015, 02:53:47 AM »
Just started reading Peter Thornhill's motivated money and beginning to see the light.

Ive made a plan to diversify more into shares and rotate out of property.

Interest Compound

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #178 on: May 15, 2015, 10:20:03 AM »
http://news.domain.com.au/domain/real-estate-news/the-mother-of-all-housing-bubbles-20150515-gh24hv.html

Quote
In 1991 the value of housing debt divided by disposable household income was 35 per cent. Today it is more than 140 per cent, and climbing daily. Australia has never had to contend with home loan rates of less than 4.3 per cent.

A little over 12 months ago I remember people scoffing at analysts predicting the Sydney housing market was "10 percent undervalued." Yet here we are, 10% up from last year, and analysts are still predicting it has another 10% to go over the next 12 months.

Everyone knows market timing is a horrible idea in the stock market.  Yet people are excited to market time with leverage in a commodity (Real Estate)?  This is such a bad idea, I'm genuinely shocked that people on this forum aren't universally panning it.

For a long time most Australians really only had 2 choices when it came to investments - shares or real estate, and most people still think shares are a lottery.

Property is so ingrained in the culture that you would be hard pressed to convince the average person it's a bad idea.

Are the people in this thread considered average?  If I talked in this thread about making investing decisions based on the following statement, I'd immediately and unanimously be told it's a horrible idea:

A little over 12 months ago I remember people scoffing at analysts predicting the stock market was "10 percent undervalued." Yet here we are, 10% up from last year, and analysts are still predicting it has another 10% to go over the next 12 months.

I don't think many Australians in this thread think the stock market is a lottery, why is it easy to bypass one cultural misconception (shares are a lottery), but not the other?

This_Is_My_Username

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« Reply #179 on: May 17, 2015, 04:26:16 AM »
australians on the MMM forum are not average

dungoofed

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #180 on: May 17, 2015, 07:42:25 AM »
Hi Interest Compound - You're not the only one who has tried to show Australians the folly of our ways in this thread and others : )

And there is no shortage of Australians on this site who think property in Australia *shouldn't* be returning as much as stocks, consistently, for almost a century.

Personally I think a lot of people get into property in Australia because they have seen their own parents build wealth over 40 years through property, seen the security it has brought them and their family. It's hard to tell these people they are making the "wrong" decision by leveraging themselves to the gills, and if nothing changes then things will turn out fine for them.

Also, is real estate really a commodity? I could see it more like running a business, providing income streams for retirees across the nation. Hadn't really thought of it as something like gold that just sits there, but now you've got me thinking.

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #181 on: May 17, 2015, 10:51:59 AM »
And there is no shortage of Australians on this site who think property in Australia *shouldn't* be returning as much as stocks, consistently, for almost a century.

But that's the thing, it hasn't been consistent, and it hasn't been returning as much as stocks:
  • Had you bought in 1950, and held 50 years, you would have seen less than a 1% real return yearly on the value of your home.
  • During this span of 50 years, the first two decades would have seen a large drop, then a break even.  0 appreciation. 
  • Starting in 1970, you would have seen 0 appreciation for 18 years.
  • Starting in 1988, you would have seen 0 appreciation for 10 years.
Inflation-adjusted stocks since 1950:



(Unfortunately I can't find any long term, inflation-adjusted, and dividends included Australian or World stock market charts.  An Australian investor should be investing internationally anyway, and the US market is about half the world, so I think it's close enough)

Personally I think a lot of people get into property in Australia because they have seen their own parents build wealth over 40 years through property, seen the security it has brought them and their family. It's hard to tell these people they are making the "wrong" decision by leveraging themselves to the gills, and if nothing changes then things will turn out fine for them.

Now this I understand.  When speaking to these people, I'd remind them that it's not the last almost century of gains, or even the last 40 years which brought them incredible wealth, it's this part of the chart that gets them excited:

« Last Edit: May 17, 2015, 11:06:35 AM by Dodge »

vagon

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #182 on: May 17, 2015, 06:19:46 PM »
I honestly don't understand the obsession with property in these forums.
Why does anyone think property returns the same as the stock market over the long term?

The fact people are saying that sort of thing makes me think we're definitely in a bubble. The question then becomes how long do you ride it out.

slothman

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #183 on: May 17, 2015, 10:23:36 PM »
I honestly don't understand the obsession with property in these forums.

Not sure why it deserves so much flak. It's still a legitimate asset class to invest in, an asset class that isn't dominated by investors, unlike shares which is dominated by institutional investors.

I'm almost finished reading Peter Thornhill's book on shares (he's 100% pro shares), and in the book, he provides an example of building wealth by borrowing against property equity to purchase shares and using share dividends to help pay down the property debt. So the two can co-exist and mutually benefit each other to deliver a superior result.

Property in my eyes is just a means to get cheap leverage. I don't believe it has the ability to overperform shares in the long-run.

vagon

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #184 on: May 18, 2015, 01:11:04 AM »
Not sure why it deserves so much flak. It's still a legitimate asset class to invest in, an asset class that isn't dominated by investors, unlike shares which is dominated by institutional investors.

As an asset class I dont think it does get flak, most people would suggest a portion of an asset allocation to be invested in real estate.
As investment in a single property or small group of properties it should get flak.
Institutional investment is not by default a negative trait of the stock market.

I'm almost finished reading Peter Thornhill's book on shares (he's 100% pro shares), and in the book, he provides an example of building wealth by borrowing against property equity to purchase shares and using share dividends to help pay down the property debt. So the two can co-exist and mutually benefit each other to deliver a superior result.

Property in my eyes is just a means to get cheap leverage. I don't believe it has the ability to overperform shares in the long-run.

I agree with this wholeheartedly and do it myself - debt recycling.
« Last Edit: May 18, 2015, 01:13:30 AM by vagon »

marty998

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #185 on: May 18, 2015, 01:32:38 AM »
I honestly don't understand the obsession with property in these forums.
Why does anyone think property returns the same as the stock market over the long term?

The fact people are saying that sort of thing makes me think we're definitely in a bubble. The question then becomes how long do you ride it out.

I thought my place was worth $500k. Half hour ago a local agent rings me up and says "you know that unit in your block you were sticky-beaking on Saturday? We've got an offer on it for $570k. Still interested in it?

Me: "Wonderful world we live in, isn't it?"

Her: "We can help you, as you can see it's a great time to sell your place!"

I give up. Boom on baby, boom on.

This boom is going so far that if it busts it we'll still be filthy rich. Just not super duper filthy rich.

johnnydoe

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #186 on: May 18, 2015, 03:42:04 AM »
This is a good chart on Australian house prices over 100 years:



Source: http://www.macrobusiness.com.au/2013/02/the-history-of-australian-property-values/

Interest Compound

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #187 on: May 18, 2015, 10:11:46 AM »
This boom is going so far that if it busts it we'll still be filthy rich. Just not super duper filthy rich.

Tell that to the entire generation of people who will buy at $570,000, then watch as the price of their home drops to $250,000 within the span of a year, slowly slides down to $150,000 over a decade, and stays at $150,000 (0 appreciation) for another decade.

That wouldn't be abnormal, or even crazy.  That's simply what housing markets do.

agent_clone

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #188 on: May 19, 2015, 03:01:14 AM »
This boom is going so far that if it busts it we'll still be filthy rich. Just not super duper filthy rich.

Tell that to the entire generation of people who will buy at $570,000, then watch as the price of their home drops to $250,000 within the span of a year, slowly slides down to $150,000 over a decade, and stays at $150,000 (0 appreciation) for another decade.

That wouldn't be abnormal, or even crazy.  That's simply what housing markets do.
A tour guide I had for a tour around Tokyo in Japan in 2011 bought before the market crash there (the early 90's one).  His home is still worth less than it was prior to his purchase.

AustralianMustachio

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #189 on: May 19, 2015, 03:21:28 AM »
Yes, to those who are invested beforehand, bubbles can be very profitable. Later investors, less so

Interest Compound

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #190 on: May 19, 2015, 10:42:44 AM »
Yes, to those who are invested beforehand, bubbles can be very profitable. Later investors, less so

The biggest problem with participating in housing bubbles, is that people never get out!  It's not uncommon to see people cashing out when they feel the stock market is too high, or in a bubble.  But if someone buys a house and it rises significantly in price, they typically either borrow against it, or sell and buy an even BIGGER house.  Instead of getting out, people double down and increase their leverage.  I don't know anyone who sold their house at the market peak, and decided to rent for the next 10 years.

plainjane

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #191 on: May 19, 2015, 10:55:40 AM »
Yes, to those who are invested beforehand, bubbles can be very profitable. Later investors, less so
I don't know anyone who sold their house at the market peak, and decided to rent for the next 10 years.

I used to work with someone who got out of the Toronto housing market 3-4 years ago and went into gold, waiting for the real-estate bubble to burst.  So didn't manage to hit the market peak on the housing sale, but I fear he was pretty close to the peak on gold.

AustralianMustachio

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #192 on: May 20, 2015, 06:07:33 AM »
Kerr Nielson, head of what appears to be one of Australia's most successful funds*, on this exact issue:

"The key take-away is that after years of great domestic returns, Australian investors should surely now be asking, have things changed and whether they have enough foreign share exposure."

https://www.platinum.com.au/Journal/Views/Investing-Sept-2014/

*I know we're all about indexes here. But really quite exceptional returns. They've outperformed every equivalent market. Completely smashed most of them. Their broad fund has more than doubled the international MSCI index over the last twenty years. Who knows if they can continue of course.
« Last Edit: May 20, 2015, 06:17:04 AM by AustralianMustachio »

bob999

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #193 on: January 15, 2018, 01:34:02 AM »
Hi All,

Great thread. I don't think that property vs shares debate is ever going to be resolved. I was property PRO over the last 15 years but am now PRO shares. It was a difficult transition (took 5 years of reading MMM) to make for someone who thought 'shares = gambling' at a point in my life.

Anyhow, I have tried to 'balance' my portfolio towards shares by investing money into index funds from savings. Still holding onto rental properties (in Australia). However, now I am wondering if it is worth selling at least one of the investment properties.

Reasons for selling:
  • It would reduce my debt and hence leverage position
    It hasn't performed well over the last 10 years
    It is negative cashflow by 10k per year (paying Principle off)
    It is neutrally geared.
    Looking at Shiller PE graph for property over the last 100 years in australia and comparing to US it looks like property will either go down or flat line for a few decades This is my main reason for selling.
    One more reason, I am looking into buying a PPOR as my wife is sick of renting and noting this will not be an investment decision but lifestyle choice, I want to reduce my overall debt.

Reasons for keeping the property:

  • It is neutrally geared. So it is not costing me money and I have put up with it for 10 years so should keep it 'just in case' prices go up near term and then sell.
    I can easily afford the property even if interest rates double.
    Selling it would cause a small capital gains (tax).
    It would mean a fundamental shift in my financial plan. I had bought it thinking that I would keep it for at least 20 years. (not 10).
    The world around me is going crazy with buying property.

So any recommendations, pointers, books, suggestions that you think would help me make a more informed decision that I wouldn't regret?

Thanks

Little Aussie Battler

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #194 on: January 15, 2018, 03:25:27 AM »
Interesting thread.  Thanks for digging it up!

happy

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #195 on: January 15, 2018, 03:43:28 AM »
Your post is lacking some useful details e.g. how many rentals, approx location and context of the one you are thinking of selling, how much is it worth, how much debt do you have on it and overall, hard numbers re rent etc  and how much are you thinking of spending on a house etc etc etc .

So in general terms : There are 2 ways property make you ROI - rental yield and capital growth.  Sound like this one does neither.  Therefore thus far it hasn't been good investment. It does depend on where  it is: e.g. if it were in Sydney and you've had very little capital gain in the last 10 years - holy smoke its a dud, or you paid way too much in the first place. But on the other hand Perth market was booming and has now died off, so over 10 years you only have yield, not capital gain and thats normal for that area.  And from what you are saying you don't even have yield. That being said, overall I'm not sure it makes ever sense to hold a poorly performing rental, its an investment.  Are there actual specifics that make you think  something remarkable will change with this rental in the near future? Or are you just telling yourself you'd kick yourself if it did after you sold it?   To be honest, we can all say that about uncle bobs coin collection, our childhood stamp collection, that old ceramics vase that might turn out to be Ming dynasty, and so on : I shouldn't sell it, coz it might be worth a lot of money one day.

If your reason for selling is that you wish to use the proceeds to buy a PPOR, then this is a lifestyle decision  and you should own it as such. Even if you don't benefit financially from this, in investment terms, at least you will get some perceived improvement in quality of life (happy wife= happy life) from the capital. At the moment its not helping you, just generating more paperwork.


happy

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #196 on: January 15, 2018, 03:46:21 AM »
@Little Aussie Battler

Hopefully enough time has passed that it can be revived without another bomb attack stalemating discussion.

steveo

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #197 on: January 15, 2018, 04:26:56 AM »
How much have house prices increased in the last 2 years. I love that it was a bubble in about 2008. I bought up then or soon after. The price of property has doubled.

I haven't read the whole thread but geez I prefer shares over property. Easy to get in and out. No debt. No hassles.

My plan involves being able to sell our 4 bedroom Sydney house and move to a LOC area. We might not do that but it's a great back-up plan.
« Last Edit: January 15, 2018, 04:29:22 AM by steveo »

Eucalyptus

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #198 on: January 15, 2018, 05:21:36 AM »
I and my family were absolutely in the property investment camp for a long time. I never really got into it myself (studying forever). My parents are close to retirement and have a few investment properties. All helped to aquire by the Property Investment Club. Unfortunately, in the last few years or so when most were aquired, growth hasn't been that great. If they were lucky, and went against most of the advice they were given by "experts" and bought in parts of Sydney and Melbourne that have still continued to go up, they would be doing great. Instead they bought in other cities. Oh well. They haven't gone backwards. There own house and probably a cheap country one will end up being paid off, they'll get a few $k a year in rent. They'll mostly live off Dad's super, which he is going hard at over the next 3-4 years so that he can retire.


I have friends that are actually accountants and work in finance for large companies, that raved at how they knew what they were doing, and bought houses in Adelaide's northern suburbs. I didn't think it was a very good idea based on population growth and large amounts of land and development opening up...little demand, heaps of supply. One friend bought a place about ten years ago now. For I think $250k. Its now worth, ten years later, $250k. So its tracked backwards with inflation and against wages/salary growth. To be honestly I secretly laughed... which is a bit cruel. What would I know about investing when I queried them when they were talking about making these decisions? Hmmm.


Property as individual properties is inherently risky, and while probably less risky than picking random non-blue chip shares, is a hell of a lot more risky than picking a diversified ETF. You can be lucky. You can also be pretty unlucky. It can also take a LOT of work and effort. Taxation, picking houses, working on them, ongoing management, etc, even with a good property manager, tax agent, etc, is a pain! Its not worth it for most people. Much easier to spend your time trying to work out how to keep a steady income from your job, and, how to increase your savings % to stick in ETFs (which could include a bit of REIT). The effort is out of proportion vs any potential extra reward I think. Its also really hard to buy part of a house. This makes it hard to invest a small bit on one house, and a small bit in another, etc. You have to buy a whole house. You have to sell a whole house. Its a pain.


Its not the kind of pain I want. Dealing with legacy family investment and PPOR houses when the time comes is more than enough!


I have bought my own small, cheap PPOR though. For me, locking in a living expense like that is totally worth it at my age (early 30s with a long time to live).

stashgrower

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #199 on: January 15, 2018, 06:31:34 AM »
I tend to agree that the current tax shelter is not going to exist for much longer, but my conclusion is a bit different. If I was in my early career now and earning a reasonable amount, I would put 50/50 inside/outside super as per Burrow - or more probably 30/70 - depending on how soon I was retiring. This would enable me to have it in the current tax haven for longer, and could mean that proportion of my super would remain in a better environment (if changes to super grandfather what is already there). When the new scheme came in, I would revise this. It would mean that if I had a windfall, and retired even sooner, or started to have more expenses (eg. kids), I could reduce (or 0) the amount I was putting into super and it would just get bigger.

Deborah, would your ideas for that split include an early careerist who hadn't bought a house yet?

ETA: oops, sorry, I just saw the date!! (Thought this was a new thread but really it was just resurrected.)
« Last Edit: January 15, 2018, 06:33:42 AM by stashgrower »