Thursday, February 28, 2008

Product Newsletter 1 March 08

Our goal – helping you from zero investment properties to ten.


Investors can remain confident that capital growth in our preferred suburbs in Brisbane (adjacent to the south west economic zone) will remain strong for the foreseeable future.

The underlying issue is that Australia – as a nation – builds only 150,000 new dwellings each year, compared with a need of 180,000. This is referred to as a “two month shortfall” i.e. we are short one sixth of what we need.

In contrast, the United States has a “nine month oversupply”. This caused the sub-prime crisis.

So my feeling is that it’s totally different here in Australia.

In November, the Housing Industry Association forecast that the housing backlog will continue to swell for at least two more years in south east Queensland, before easing.

Of interest, what actually happened in the US was that builders kept building too many homes, so they had to move them. Their solution was to leave behind a notional deposit – look up “down payment assistance programs” on Google - so that borrowers who could not normally afford to borrow, appeared to have a cash deposit.

So the banks lent them the balance - but these “economically challenged” borrowers couldn’t service even those loans, and as borrowers in the US can walk away from home mortgages without penalty, the crisis simmered along, and finally erupted.


The biggest assumption that we make in property is that it will double every 7-10 years. This assumption is based on many, many years of recorded property prices.

In fact if you consider that property will double every 10 years then it means it must grow on average at 7.5% per year. This is considering that it only doubles every ten years. For it to double every 7 years it would need to be a huge 10.5% compounded.

Now in truth property does not grow at 7.5% each year, every year. The property cycle affects the rate of growth in any particular year.

If we factor in the effect of the property cycle over the past 50 years we will find that it has doubled every 7.3 years and that there are three full property cycles each 21 years.

Now within those packets of 7.3 years it will normally decrease or stagnate one year, grown at between 2-5% for 3-8 years and best of all grow between 10-25% for between 2-3 years. Obviously we all wish every year was a 25% growth year but there's no way that the market could sustain itself compounding at those rates.

It's being armed with this basic knowledge we can safely and confidently build a portfolio knowing it will double at some time in the not-too-distant future.

I enjoy using this statistic like this – I might say when I meet with private clients for the first time “if your home is worth $500,000 today, then when you bought it 14 years ago, you must have paid something like $125,000. Am I right?”. They generally express amazement and say “How did you know?”


If you have ever seen – sometimes in the same newspaper on the same day – different values for the current medium price of housing in your city – you have a right to be confused.

The reason is that there are six different sources, and each uses a different survey technique, or different geographic boundaries, or different time periods, or different dwelling types.

The six providers are the government’s Valuer General, the state real estate institutes, and private providers RP Data, Residex, Australian Property Monitors and Adviser Edge.

There are difficulties with each source. For example the Valuer General uses rates notices, which of course don’t reflect market values. The real estate institutes use data which is supplied by their members (not all real estate agents are members, and perhaps only two thirds of those members provide data) and typically these figures do not reflect the sales of new homes as they are generally sold by developers and builders. RP Data develops its results off a database based on the number of bedrooms, land size, location and dwelling type.

However you know yourself that values keep doubling every seven to ten years. If you don’t believe that, ask yourself if you have ever expressed concern about how your own children will ever be able to afford to buy their own family home. We have all done that, as did our own parents.

We all know property prices continue to move up.

If you don’t have enough for 20-25 years of dignified retirement, let me help you explore your options

Phone me Bernard Kelly anytime mobile 0414 778 518 cell 61-414 778 518

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