I found this article online about the pros and cons of renting vs buying.
"Assumptions:
> You are a first home buyer, 25 years old and based on life expectancy tables, you should live until 75
> I have used a $300,000 unit in my example
Renting
> An investor expects a 5 per cent return from a $300,000 unit
> Rent on a $300,000 unit @ 5% = $15,000 pa or $288 per week
> Rent increases on average at about 7 per cent a year, which means it doubles every 10 years
Buying
> A first home buyer requires at least a 5% deposit = $15,000
> First home buyer borrows $285,000 @ 6.5%, interest only for 30 years = $21,617 or $416 per week
> Home ownership expenses, such as rates, taxes, insurance, repairs, etc, average approximately 20% of the equivalent rental income = $58 per week
> I have calculated capital growth of about 7% per annum, which means it doubles in value every 10 years
This simple example above shows that you that it costs $9,600 pa or $186 per week extra in the first year if you buy the unit rather then rent it. This assumes that you have a $15,000 deposit and the FHOG & FHOB pay for all other buying costs. Now let’s look at the long term picture.
In summary, if you are now 25 years of age, by the time you are 75, you would have paid a total of $5,655,000 in rent over 50 years and your net worth is $0, if you didn’t buy any other assets.
However, if you bought the unit, you would pay $649,000 in mortgage repayments over 30 years and $1,131,000 in home ownership expenses over 50 years, totalling $1,780,000, making a difference of $3,875,000 in cash payments.
So there you have it - $13,475,000 difference. The home owner has $9,600,000 million in equity plus $3,875,000 better off than the renter because they made the decision to buy the unit rather than rent it."
Basically, your $300,000 home will become $9,600,000 in 50 years time at an annual compounding rate of 7%.
No wonder every America has rushed into residential property for a seemingly risk-free investment. Why wouldn't you when you are presented with figure like the above.
Invest wisely.
Thursday, December 3, 2009
Saturday, November 7, 2009
Interest rate
Australia is the first OECD country to lift interest rate.
Glen Steven, the Governor of Reserve Bank of Australia appears to have looked through the conventional monetary policy focusing on the core inflation.
In many of his speech, he expressed concern over a seemingly ever-increasing residential property price in Australia. He warned against property bubble and feared many Australian will soon be unable to afford a home.
Glen is a very handful central banker around the global who targets asset prices or at least starting to.
The number one reason for rising asset price is availability of cheap credit. This was precisely the reason behind the US housing bubble induced global financial crisis.
RBA's decision to increase interest rate should be welcomed as a stabliser for the future prosperity of Australia economy. As interest rise, debt becomes more expensive to service hence tapper off the demand for cheap credit.
However, the other critical factor government appear to miss is the availability of credit or the ability to lever up. Consider the following scenarios:
What can $50,000 saving buy?
(LVR = Loan to valuation ratio)
With the same amount of saving, the ability to leverage is astounding.
At 90% LVR, one can leverage up to purchase $500,000 property.
At 95% LVR, one can leverage up to purchase $1m property.
So you just see how 5% difference in LVR can do to the property one can afford.
In my opinion, a more effective way to control the property price from growing out of control is to restrict the maximum leverage banks can provide to customers.
This will have significant impact on the property market with a very positive long term outcome.
Reduction in maximum LVR will force potential home buyers to save longer and save more for property purchase. This also leads to a lower leverage which will significantly reduce the case of household financial stress and bankruptcy.
This in turn has a positive contribution to fostering a healthy, responsible and sustainable economy for many generations to come.
With added bonus, the reduction in LVR is likely to reduce the property price to some extent which makes the property more affordable for living instead of speculation.
Increasing interest rate will no doubt have some downward pressure on prices. However, increasing interest rate will also have negative impact on business investment which will contribute to improvement in productivity and real economic growth and prosperity.
Inflating property price will only be beneficial to a handful of property owners at expense of many hard-working Australians such as nurses, fireman, policeman and other public servants who devote their life to society.
If there is anyting we need to learn from the GFC, number 1 lesson is to constrain use of credit. Saving is the key to prosperity not credit.
Glen Steven, the Governor of Reserve Bank of Australia appears to have looked through the conventional monetary policy focusing on the core inflation.
In many of his speech, he expressed concern over a seemingly ever-increasing residential property price in Australia. He warned against property bubble and feared many Australian will soon be unable to afford a home.
Glen is a very handful central banker around the global who targets asset prices or at least starting to.
The number one reason for rising asset price is availability of cheap credit. This was precisely the reason behind the US housing bubble induced global financial crisis.
RBA's decision to increase interest rate should be welcomed as a stabliser for the future prosperity of Australia economy. As interest rise, debt becomes more expensive to service hence tapper off the demand for cheap credit.
However, the other critical factor government appear to miss is the availability of credit or the ability to lever up. Consider the following scenarios:
What can $50,000 saving buy?
(LVR = Loan to valuation ratio)
With the same amount of saving, the ability to leverage is astounding.
At 90% LVR, one can leverage up to purchase $500,000 property.
At 95% LVR, one can leverage up to purchase $1m property.
So you just see how 5% difference in LVR can do to the property one can afford.
In my opinion, a more effective way to control the property price from growing out of control is to restrict the maximum leverage banks can provide to customers.
This will have significant impact on the property market with a very positive long term outcome.
Reduction in maximum LVR will force potential home buyers to save longer and save more for property purchase. This also leads to a lower leverage which will significantly reduce the case of household financial stress and bankruptcy.
This in turn has a positive contribution to fostering a healthy, responsible and sustainable economy for many generations to come.
With added bonus, the reduction in LVR is likely to reduce the property price to some extent which makes the property more affordable for living instead of speculation.
Increasing interest rate will no doubt have some downward pressure on prices. However, increasing interest rate will also have negative impact on business investment which will contribute to improvement in productivity and real economic growth and prosperity.
Inflating property price will only be beneficial to a handful of property owners at expense of many hard-working Australians such as nurses, fireman, policeman and other public servants who devote their life to society.
If there is anyting we need to learn from the GFC, number 1 lesson is to constrain use of credit. Saving is the key to prosperity not credit.
Tuesday, October 27, 2009
Where to now
There is once again heightened debate about inflation or deflation going forward.
Mind you this is not the first time. The deflation and inflation camp has been in debate for quite some time.
There is merit for both.
On one hand, the massive amount of debt accumulated in developed nation didn't reduce as a result of the financial crisis instead government filing up even more debt.
The effect of money printing is reflected in one of the best run of stock and commodity market in history in the short run. Now this cannot go on forever. This is an inflationary environment in the short term. However, the weak economy with high unemployment rate offsets the effect of quantitative easing.
In the long run, I favour deflationary pressure. The financial system remains toxic with unprecedented levels of debt in developed nations worldwide.
As Marc Faber suggested, the ultimate crisis is yet to arrive. Once it does, it will be mother of all crisis. The real crisis will clean up the system so that global economy can start all over again.
It sounds very scary. Unfortunately, it is not a joke and there is nothing funny about it.
As to where the market is likely to go, I think there is still room left for the upside however the margin is wearing extremely thin. Market sentiment is such that many participants are finding reason to be bearish a number of times yet nothing happened so far re-ignite this bearish concern. Every time, it fails to find sufficient reason to be bearish, the market rallies higher.
The weariness itself means the sentiment is not extremely bullish. However, market does not have to reach extreme bullishness in order to turn the corner.
One space to watch closely is the housing market in the U.S. and unemployment rate. We are at the very start of another wave of mortgage reset. Last time, reset in subprime mortgage market caused a devastating effect on the market.
Also US Dollar has been fairly bearish for quite some time. There appears to be support around 75 for the US dollar index. A snap back in US dollar will cause grief in the asset market like what we saw in 3 months period from Dec08 to Mar09.
It is not a bad time to take some money off the table. Rather be safe than having regrets.
Mind you this is not the first time. The deflation and inflation camp has been in debate for quite some time.
There is merit for both.
On one hand, the massive amount of debt accumulated in developed nation didn't reduce as a result of the financial crisis instead government filing up even more debt.
The effect of money printing is reflected in one of the best run of stock and commodity market in history in the short run. Now this cannot go on forever. This is an inflationary environment in the short term. However, the weak economy with high unemployment rate offsets the effect of quantitative easing.
In the long run, I favour deflationary pressure. The financial system remains toxic with unprecedented levels of debt in developed nations worldwide.
As Marc Faber suggested, the ultimate crisis is yet to arrive. Once it does, it will be mother of all crisis. The real crisis will clean up the system so that global economy can start all over again.
It sounds very scary. Unfortunately, it is not a joke and there is nothing funny about it.
As to where the market is likely to go, I think there is still room left for the upside however the margin is wearing extremely thin. Market sentiment is such that many participants are finding reason to be bearish a number of times yet nothing happened so far re-ignite this bearish concern. Every time, it fails to find sufficient reason to be bearish, the market rallies higher.
The weariness itself means the sentiment is not extremely bullish. However, market does not have to reach extreme bullishness in order to turn the corner.
One space to watch closely is the housing market in the U.S. and unemployment rate. We are at the very start of another wave of mortgage reset. Last time, reset in subprime mortgage market caused a devastating effect on the market.
Also US Dollar has been fairly bearish for quite some time. There appears to be support around 75 for the US dollar index. A snap back in US dollar will cause grief in the asset market like what we saw in 3 months period from Dec08 to Mar09.
It is not a bad time to take some money off the table. Rather be safe than having regrets.
Sunday, October 25, 2009
Words of Wisdom
I wish I can have the following attributes when it comes to investing.
-
Exercise independent thought, as you'll shoulder the responsibility of your decisions.
-
Only risk (trade with) what you can afford to lose.
-
Always ask "why" rather than "what?"
-
Running with the herd may prove profitable but it often obscures the edge of the cliff.
-
Size matters in more ways than one; if you're staring at every tick, you're likely out-sized in your positions.
Australian education export
As far as Australia economy concerns, education is the third largest export contributing AUD 14 billion a year according to 2007-08 statistics from ABS, following coal and iron ore.
Recent government's call to end the "study-residency" link is likely to temper the third largest earner for Australia economy. If handled carelessly, it will have significant long term impact.
All of this started from a series of attacks on Indian students in Melbourne and a handful of dodgy education providers tarnishing the industry.
As a result, government called on radical changes to protect the reputation of Australian education industry.
In brief, government officials proposed that international students should be forced to return home and wait two years before being allowed to apply for permanent residency in Australia.
They claimed that this will decouple the link between study and permanent residency. This does sound like a probably outcome if implemented. However, this is also likely to cost Australia billions of export dollar.
Let's leave the debate about the rationale of the proposal aside and focus on the fundamentals.
The reason why so many international students are fond of Australia being their preferred education destination is largely because of the "study-residency" link.
Many will argue that Australian education attracts international student because of the quality of education provided here. I won't argue. But instead I would like to ask:
"how well does it compared with countries?"
At least for those international students I knew of had clear intention of using education as a mean of obtaining residency.
So decoupling such link is likely to mean significant reduction in interest amongst prospective international students.
It is not difficult to imagine what this will do to the education industry.
The story does not end here. There will be ripple effects.
The reduction in international student enrollment will mean less demand for student related services e.g. accomodation.
A potential weakening demand especially in areas surrounding universities may lead to weakness in pockets of the residential property markets. This may well manifest itself into a broader market since many experts attributes growth in immigration being one of many reasons underpinning Australian property market.
Obviously good news for some bad news for others.
Of course, all is at best hypothesis at this stage. Nothing is set in the stone yet.
However, often perception alone can become self-fulfilling and manifest itself to cause the same effect even if the proposal remains proposal.
Recent government's call to end the "study-residency" link is likely to temper the third largest earner for Australia economy. If handled carelessly, it will have significant long term impact.
All of this started from a series of attacks on Indian students in Melbourne and a handful of dodgy education providers tarnishing the industry.
As a result, government called on radical changes to protect the reputation of Australian education industry.
In brief, government officials proposed that international students should be forced to return home and wait two years before being allowed to apply for permanent residency in Australia.
They claimed that this will decouple the link between study and permanent residency. This does sound like a probably outcome if implemented. However, this is also likely to cost Australia billions of export dollar.
Let's leave the debate about the rationale of the proposal aside and focus on the fundamentals.
The reason why so many international students are fond of Australia being their preferred education destination is largely because of the "study-residency" link.
Many will argue that Australian education attracts international student because of the quality of education provided here. I won't argue. But instead I would like to ask:
"how well does it compared with countries?"
At least for those international students I knew of had clear intention of using education as a mean of obtaining residency.
So decoupling such link is likely to mean significant reduction in interest amongst prospective international students.
It is not difficult to imagine what this will do to the education industry.
The story does not end here. There will be ripple effects.
The reduction in international student enrollment will mean less demand for student related services e.g. accomodation.
A potential weakening demand especially in areas surrounding universities may lead to weakness in pockets of the residential property markets. This may well manifest itself into a broader market since many experts attributes growth in immigration being one of many reasons underpinning Australian property market.
Obviously good news for some bad news for others.
Of course, all is at best hypothesis at this stage. Nothing is set in the stone yet.
However, often perception alone can become self-fulfilling and manifest itself to cause the same effect even if the proposal remains proposal.
Friday, October 23, 2009
House price
The economist has compiled a really great interactive graphs of the residential real estate price over the last 20-30 years for many countries.
House price
House price
Most hated and unbearable rally
The rally since March 2009 low had many skeptics worrying from the start.
According to them, a "true" bear bottom is not usually featured by a short and shape rally like what we've seen since the March low.
Historically, the ultimate "capitulation" is met with loss of faith and utter disgust in stock investment as the conventional wisdom of achieving long term return is thrown out of the window.
However, the market kept on proving them wrong. Really? We will have a "V" shape recovery after a perceived worse than the 1930's great depression many feared towards the end of Decemeber 2009 after Lehamn failure.
A closer look at the cause of the financial crisis in 2007 and what the government and central banks around world has done in response to this crisis will perhaps provide the answer.
The root of the cause is the availability of cheap debt for a prolonged period of time.
I didn't know much about history before 1983 personally. So starting at 2001, Fed Chairman Alan Greenspan slashed the Fed funding rate to 1% in wake of September 11 terrorist attack.
Around that time, the economy perhaps had just came out the recession and was in a fragile state. Greenspan tried to use low interest rate to entice a re-ignite in economic activity.
he succeeded in a sense that the ultra low interest rate encourage lending and business activities. However he kept the rate too low for too long. He didn't increase the Fed fund rate until 2004.
A low interest rate environment effectively increased you capacity to borrow money. Such low interest rate also encouraged growing loose lending standards as the risk of defaulting will also be suppressed.
Cheap debt manifests its way into the markets and created an amazing impact. It managed to prop up almost every single asset class in nominal terms except for one asset i.e. the US dollar.
House price, bond price, stock prices, commodities, art etc all boomed from 2002 to 2007 at an incredible pace yet unsustainable.
It is not surprising to see that because excess supply of money/credit drives down the value of the currency. Many assets in the world are denominated in US dollar. So when US dollar went down, the nominal price of the asset goes up.
Of course, nothing kept on going in one direction without a pause. The question is when and how big the correction will be. It turned out the pause was gigantic and caused significant stir in the financial markets while the US dollar strengthened during the period but not enough to arrest its downward spiral.
Perhaps the best reflection of US dollar strength, or weakness for that matter is gold price. Gold made its low in 2002 at US250 and increased more than 4 fold to US1060 recently. It coincide with a consistent dollar slide from 2002. Coincidence? Not so much.
Back to now, the fact is that S&P 500 has rallied more than 50% since March 2009 low. Many hated this rally as many investors sat on the sidelone watched the market going up. The higher the market rises, the more skepticism grows. It is very difficult to watch such a spectacular run in the market and not be part of it.
Here is the thing.
If you don't believe this market rally as the beginning of a sustained recovery, then there is little to worry about a 9 monthly rally. If you span the chart of Dow, it first reached the 10,000 mark back in 1999.
If you think you are too late to participate in this rally, I think you are probably right. Getting into the market when it is running hot is never good economics.
However, the fundamental human nature (greed and fear) will ensure that your time will come sooner or later. Be patient. When your time comes, make the most of it.
As mentioned previously, nothing goes in one direction indefinitely. The rally since March 2009 will end. The question is when and how big.
According to them, a "true" bear bottom is not usually featured by a short and shape rally like what we've seen since the March low.
Historically, the ultimate "capitulation" is met with loss of faith and utter disgust in stock investment as the conventional wisdom of achieving long term return is thrown out of the window.
However, the market kept on proving them wrong. Really? We will have a "V" shape recovery after a perceived worse than the 1930's great depression many feared towards the end of Decemeber 2009 after Lehamn failure.
A closer look at the cause of the financial crisis in 2007 and what the government and central banks around world has done in response to this crisis will perhaps provide the answer.
The root of the cause is the availability of cheap debt for a prolonged period of time.
I didn't know much about history before 1983 personally. So starting at 2001, Fed Chairman Alan Greenspan slashed the Fed funding rate to 1% in wake of September 11 terrorist attack.
Around that time, the economy perhaps had just came out the recession and was in a fragile state. Greenspan tried to use low interest rate to entice a re-ignite in economic activity.
he succeeded in a sense that the ultra low interest rate encourage lending and business activities. However he kept the rate too low for too long. He didn't increase the Fed fund rate until 2004.
A low interest rate environment effectively increased you capacity to borrow money. Such low interest rate also encouraged growing loose lending standards as the risk of defaulting will also be suppressed.
Cheap debt manifests its way into the markets and created an amazing impact. It managed to prop up almost every single asset class in nominal terms except for one asset i.e. the US dollar.
House price, bond price, stock prices, commodities, art etc all boomed from 2002 to 2007 at an incredible pace yet unsustainable.
It is not surprising to see that because excess supply of money/credit drives down the value of the currency. Many assets in the world are denominated in US dollar. So when US dollar went down, the nominal price of the asset goes up.
Of course, nothing kept on going in one direction without a pause. The question is when and how big the correction will be. It turned out the pause was gigantic and caused significant stir in the financial markets while the US dollar strengthened during the period but not enough to arrest its downward spiral.
Perhaps the best reflection of US dollar strength, or weakness for that matter is gold price. Gold made its low in 2002 at US250 and increased more than 4 fold to US1060 recently. It coincide with a consistent dollar slide from 2002. Coincidence? Not so much.
Back to now, the fact is that S&P 500 has rallied more than 50% since March 2009 low. Many hated this rally as many investors sat on the sidelone watched the market going up. The higher the market rises, the more skepticism grows. It is very difficult to watch such a spectacular run in the market and not be part of it.
Here is the thing.
If you don't believe this market rally as the beginning of a sustained recovery, then there is little to worry about a 9 monthly rally. If you span the chart of Dow, it first reached the 10,000 mark back in 1999.
If you think you are too late to participate in this rally, I think you are probably right. Getting into the market when it is running hot is never good economics.
However, the fundamental human nature (greed and fear) will ensure that your time will come sooner or later. Be patient. When your time comes, make the most of it.
As mentioned previously, nothing goes in one direction indefinitely. The rally since March 2009 will end. The question is when and how big.
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