Cash

[prawn_86]

What sort of net yield would you have after expenses + tax?

About 0% first year and then increasing to around 2% after a yrs worth of savings have been paid off the loan. I'm not at home so dont have the exact figures. It seems the only way for a young couple to leverage their funds outside of a margin loan (which i am not sure if the bank would even give to us anyway with no property ownership history)

[craft]

About 0% first year and then increasing to around 2% after a yrs worth of savings have been paid off the loan. I'm not at home so dont have the exact figures. It seems the only way for a young couple to leverage their funds outside of a margin loan (which i am not sure if the bank would even give to us anyway with no property ownership history)

Prawn, be careful leveraging the residential real estate market.

In my opinion, current returns woefully underprice the potential risk for capital deprecation.

A lot of real estate is held on leverage for private consumption or negatively geared investments. That means the asset itself does not liquidate the debt which creates a nexus with employment to sustain the status quo.

The potential for falling house prices and unemployment to feed off each other could set in place a pretty serious negative feedback loop that could get very deep pretty quickly.

Considering there is no sound logic for house price growth to exceed the rate of real wage growth, and in fact can’t over the very long term, then this long term view sounds plenty of warnings.


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The last 60 years have sown the future – the real questions now are when and how. (And of course it will be a called a black swan when it happens)

And when it happens, Australia’s net foreign Liability means there is less scope for macro intervention then many may perceive.

If you really want to invest in residential property then USA looks a much better option.

If you want to buy a house for your own private consumption then now is probably not the time to go more grandiose then you can comfortably afford afford on a pessimistic basis

All just my but please carefully consider.

The first home buyer generation is unfortunately most at risk of making real loses as long term holders see the paper gains handed back.

[prawn_86]

Thanks Craft & McLovin,

As i have said we are at a point in life where we have a substantial amount of free cash-flow (probably at least 100k over the next 5 yrs) and it seems there is very little areas to invest it in order to grow it quickly or consistently. We want to be able to make 15k pa off our 'assets' in 5 years time.

I agree that credit has fuelled the house price growth, and most of my assumptions have been based on no growth over the next 5 years, but i still have a niggling feeling that perhaps we are better off waiting a couple years and seeing where things are at, but then again it comes down to where do we park that 50 - 100k in the meantime... As this thread is stating, cash doesn't seem like a worthwhile investment at the moment.

The generation of little to no low risk returns hey...

[McLovin]

The first home buyer generation is unfortunately most at risk of making real loses as long term holders see the paper gains handed back.

From what I've read, they already are. Those FHB who bought in 09-10 seem to be the unfortunate ones who are left holding the hot potato when the music stopped playing. A large number are now in mortgage stress and selling for less than they paid.

[craft]

The generation of little to no low risk returns hey...

Australian Equity risk premiums haven’t been better than since early 1970’s.

[craft]

From what I've read, they already are. Those FHB who bought in 09-10 seem to be the unfortunate ones who are left holding the hot potato when the music stopped playing. A large number are now in mortgage stress and selling for less than they paid.

That genuinely sucks. The run up in house prices really amounts to nothing more than an intergenerational transfer of wealth.

[McLovin]

That genuinely sucks. The run up in house prices really amounts to nothing more than an intergenerational transfer of wealth.

Yeah, and wait until we have to start paying their healthcare and pensions...

[Bill M]

If the 'earnings' for a property is it's rent, it makes a lousy investment...
(You'd struggle to beat a P/E of 15 for residential property!)

Every investment I buy whether it is property, shares or a subordinated note has to have a return. I don't invest in anything that relies on hope of capital growth. In other words, if there isn't any income then I won't invest. Capital appreciation is the bonus on top for me.

Thats the problem there could be a huge crash, everyone says we're overpriced, we aren't immune to problems and the markets been rising rapidly for ages so there should be a correction, some say it's already here, slow motion, prices are down over the past 12 months.
The rental market here in Melb is not strong last time I got feedback there were thousands of vacancies.
All I can say is if you buy property to hold make sure you can hold it through all down scenerios as in the end it will be ok, but you have to be able to get through what might be on it's way.

That is pretty sound advice MrBurns!

[Bill M]

Just to add further to the thread. Right now a most of my interest sensitive investments are being hammered, lower income due to the lower Bank Bill Swap Rate. Suncorp has sent me an email telling me about their Issue of Convertible Preference Shares coming up. It will be called CPS2.

As I understand it this CPS2 will offer 4.65% over the BBSW. The BBSW right now is around 3.18%. So 3.18% + 4.65% will give you 7.83% income on your capital invested. Sure there are rules and nothing is guaranteed but I am willing to buy such a stock in order to lift my portfolio. This is what I mean about having to take risk on, of course DYOR, cheers.

[Vesupria]

As I understand it this CPS2 will offer 4.65% over the BBSW. The BBSW right now is around 3.18%. So 3.18% + 4.65% will give you 7.83% income on your capital invested. Sure there are rules and nothing is guaranteed but I am willing to buy such a stock in order to lift my portfolio. This is what I mean about having to take risk on, of course DYOR, cheers.

Bill, is the 4.65% premium better than the same offerings from the Big 4 banks? From memory they were lower, especially the CBA Perls V. My memory may be hazy though. I guess the big question is whether it also included franking credits!

[Bill M]

Bill, is the 4.65% premium better than the same offerings from the Big 4 banks? From memory they were lower, especially the CBA Perls V. My memory may be hazy though. I guess the big question is whether it also included franking credits!

Yes it is, from memory I think PERLS V pays 3.3% above the BBSW rate. ANZPA is around that 3.1 to 3.3% as well. Dividends will be fully franked as far as I know. The 7.8% I mentioned before is the gross dividend, with franking that will be lower, cheers.

[Vesupria]

Yes it is, from memory I think PERLS V pays 3.3% above the BBSW rate. ANZPA is around that 3.1 to 3.3% as well. Dividends will be fully franked as far as I know. The 7.8% I mentioned before is the gross dividend, with franking that will be lower, cheers.

Thanks - gotta be careful if you are in the 30% tax bracket or higher then. The yield quickly decreases from there on!

I think these sorts of things provide good comparison to other opportunities and that is the main reason I occasionally check what they are currently offering. If I can find a quality business that pays an equivalent yield, that is growing at a good clip then it certainly surpasses these types of investments. I think you mentioned that you also do this yourself. Cheers.

[Julia]

Agree, but if i am buying a property for around 2-250k i can find ones with a PE under 20, which i feel is pretty good for property. It is also only 3.9 times the median income so is still 'affordable' so to speak. If prices are going to drop it will be the houses in the middle band of suburbs that are already priced >6x income imo

Or i could be wrong and there could be a huge crash, who knows?

If I were in your position I'd be considering seriously the likelihood of capital gain v capital loss, especially if you're not actually getting a decent yield to offset any capital loss.

If the 'earnings' for a property is it's rent, it makes a lousy investment...

Exactly. And absolutely no guarantee of capital gain in the foreseeable future, and quite possibly capital loss.
As Mr Burns has suggested if you were going to buy now, it would pretty much have to be on the basis of being prepared to hold for the very long term. I guess that isn't a problem at your age, prawn.

Prawn, be careful leveraging the residential real estate market.

In my opinion, current returns woefully underprice the potential risk for capital deprecation.

+1.

The first home buyer generation is unfortunately most at risk of making real loses as long term holders see the paper gains handed back.

Yes, lots of people who bought, fully leveraged 100% of cost of the property at the height of the bubble, are now in considerable negative equity. Awful position to be in.

From what I've read, they already are. Those FHB who bought in 09-10 seem to be the unfortunate ones who are left holding the hot potato when the music stopped playing. A large number are now in mortgage stress and selling for less than they paid.

Several properties here on the market for around $550K - $600K because that's what they paid, having borrowed 100% of the entry. That is more than $100K overpriced on the current market. Most have been sitting there for about three years.

[MrBurns]

IMF now warning of a global recession
No wonder I keep deferring investment decisions

[ROE]

IMF now warning of a global recession
No wonder I keep deferring investment decisions

You never going to find blue sky report and if you wait for that sort of stuff it may be too late..

I usually don't care too much on macro level, I just look for something that provide me a reasonable yield (that I am happy with to hold for years)

good balance sheet, reasonable earning prospect then I load up and I hold up down, good or bad weather, GFC or not doesn't even bother me if it down 40%.

Most of them turn out alright regardless of macro environment or GFC or some bad ass event around the corner.

you need to have a frame work of how you want your money invest, take a consistent stand and I'm pretty sure things are not as bad as it seems...

GFC came and almost all the expert said buy and hold is dead doesnt even register with me, stick to same strategy .....some of the best stock I have since GFC are buy and hold

[Tysonboss1]

By the time the general concensus is telling you to get out of cash you probably have left it way to late, Same as when the general concensus is telling you to sell out of shares it's probably to late.

I just focus on buying a diverse range of good businesses when they are good value and refrain from buying when they are over valued.

I never hold a business I would not be willing to hold through another GFC event,

[Tysonboss1]

IMF now warning of a global recession
No wonder I keep deferring investment decisions

Do you base all your investment decisions on what the IMF says.

Try not to get over whelmed with macro information, If your into property focus on looking for individual properties that meet your investment criteria.

If your into businesses, focus on looking for individual businesses and companies that meet your criteria.

[Vesupria]

Many wiser people than I have said this, but I will say it again: trying to predict the economy (especially if you are relying on the views of others in the process!) will lose you more money (through either "missing out" or "getting it awfully wrong") than you will make by attempting it.

Lots of people got the GFC correct for instance: they shorted the thing down and loaded right up when it approached the (now known) bottom and gave all of their gains back when it violently v-bottomed.

[MrBurns]

Many wiser people than I have said this, but I will say it again: trying to predict the economy (especially if you are relying on the views of others in the process!) will lose you more money (through either "missing out" or "getting it awfully wrong") than you will make by attempting it.

Lots of people got the GFC correct for instance: they shorted the thing down and loaded right up when it approached the (now known) bottom and gave all of their gains back when it violently v-bottomed.

I avoided losing a high 6 figure sum by not investing just before the crash, ever since Ive trusted my gut feel, I havent lost much since.'
It's made me very cautious.

[Klogg]

I avoided losing a high 6 figure sum by not investing just before the crash, ever since Ive trusted my gut feel, I havent lost much since.'
It's made me very cautious.

But the question can also be asked - will you be losing money by holding your assets in the form of cash? Given the rate of inflation floating between 2 and 3%, savings rates just about 5%, you'd barely break even after tax.

Hypothetically, what if savings rates went below the rate of inflation, where you do lose money in real terms - would you consider this a loss...? (especially when many companies are paying 4-5% fully franked dividends with a great chance of growth)