Real Estate vs. Buying more index (Australia)

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alex123711
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Real Estate vs. Buying more index (Australia)

Post by alex123711 » Thu Jun 25, 2020 12:46 am

What are everyone's thoughts on having property in their portfolio vs. just having the index? I am considering it either as an investment property or own home due to the tax breaks such as negative gearing and potentially no tax on capital gains as well as the ability to leverage.

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Schlabba
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Re: Real Estate vs. Buying more index (Australia)

Post by Schlabba » Thu Jun 25, 2020 1:49 am

alex123711 wrote:
Thu Jun 25, 2020 12:46 am
What are everyone's thoughts on having property in their portfolio vs. just having the index? I am considering it either as an investment property or own home due to the tax breaks such as negative gearing and potentially no tax on capital gains as well as the ability to leverage.
It really depends on the number. I live in a country where a mortgage payment is always less than rent for the same property. That includes the interest and principal payments!
So having an own home is always the best choice. Even if its just for a few years.

I also sold my rental. I don’t want my money to be dependent on a single city and money in an investment account is a lot easier when moving across a border (which I am planning on doing).
And I saw local politics flirting with ideas such as rent control.

https://jlcollinsnh.com/2013/05/29/why- ... nvestment/
Secretly a dividend investor. Feel free to ask why.

Valuethinker
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Re: Real Estate vs. Buying more index (Australia)

Post by Valuethinker » Thu Jun 25, 2020 2:00 am

alex123711 wrote:
Thu Jun 25, 2020 12:46 am
What are everyone's thoughts on having property in their portfolio vs. just having the index? I am considering it either as an investment property or own home due to the tax breaks such as negative gearing and potentially no tax on capital gains as well as the ability to leverage.
I don't know much about the Australian tax system.

Work by Robert Shiller et al (see his website) shows that the long run return from housing in real terms is nearly zero. I follow a guy on twitter (Philip Soo or Soos?) who seems to know a lot about Australian housing prices (and is very bearish). See also Hillard Macbeth, a Canadian financial planner and writer about the Canadian housing bubble (mostly Toronto & Vancouver, but those are the 2 biggest metropolitan areas by far GVA & GTA).

I do have 2 data points on Australian housing:

1. Neil Monnery, "Safe as Houses: 8 centuries of housing prices" has a bit on Australian housing prices. There is a pattern, dating back to the 19th century, of boom and bust - that's where Melbourne got all its amazing Victorian suburbs.

2. The Economist publishes an index of housing prices relative to rents and incomes. Along with Toronto, Vancouver, Singapore, Hong Kong, Auckland, Melbourne & Sydney are way up there in terms of how overvalued they are rated.

So, setting that aside:

- I think most people here would favour equity investing over housing investing. Given the nature of the Australian stock index (banks + natural resource companies) most of us would say that the dividend franking is not enough to overcome the risks of concentration on Australia, and would recommend a global weighting (including emerging markets) with an Australian concentration (to get the franking benefit) limited to c 20%

In doing so you are also hedging against an Australian economic downturn (which would most likely be due to a Chinese economic downturn, as the largest destination for your exports).

As I understand Australian taxes you should maximise your supperannuation contribution albeit it's not accessible until age 65. It does seem to take a lot of fiddling to get a low cost index fund provider.

- owning your own home is not a bad idea and if the price rises and you have more equity, you can in effect use that leverage (which cannot be called by the bank) to increase your investments in equities

I am tarred. I lived through 2 housing price crashes (prices in Toronto in 1998 were lower than they were in 1989; London the crash was shorter but still about 40%) and saw what they did to relationships, marriages & lives. And there was the US housing crash.

Nonetheless a well located property in an Australian city is, given Australia's positive approach to immigration and the search for a "safe haven" by money, particularly but not only Far Eastern, will hold its relative value. Just be prepared for slumps that are long and painful to those who are overleveraged or need to move.

Question. In Australia, if you default on a home loan are you still liable for the shortfall post sale of the property? In some North American jurisdictions, in a legacy of the 1930s Great Depression, you are not.

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alex123711
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Re: Real Estate vs. Buying more index (Australia)

Post by alex123711 » Thu Jun 25, 2020 2:56 am

Schlabba wrote:
Thu Jun 25, 2020 1:49 am
alex123711 wrote:
Thu Jun 25, 2020 12:46 am
What are everyone's thoughts on having property in their portfolio vs. just having the index? I am considering it either as an investment property or own home due to the tax breaks such as negative gearing and potentially no tax on capital gains as well as the ability to leverage.
It really depends on the number. I live in a country where a mortgage payment is always less than rent for the same property. That includes the interest and principal payments!
So having an own home is always the best choice. Even if its just for a few years.

I also sold my rental. I don’t want my money to be dependent on a single city and money in an investment account is a lot easier when moving across a border (which I am planning on doing).
And I saw local politics flirting with ideas such as rent control.

https://jlcollinsnh.com/2013/05/29/why- ... nvestment/
Australia is the opposite, renting is always cheaper, cheaper than even just the interest repayments

andrew99999
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Re: Real Estate vs. Buying more index (Australia)

Post by andrew99999 » Thu Jun 25, 2020 3:12 am

The elephant in the room is that in Australian capitals, properties start at around 500k for a shoebox apartment, so you get the most extreme concentration risk imaginable. One single asset - leveraged up to the hilt.

From for a number of years until 2003, Sydney property boomed. Those who purchased in 2003 trying to get a piece of the action, or within the next few years, faced a decade of no growth. Take a moment to think of your life from an entire decade ago.

From 2000-2008 Perth and Brisbane went nuts and tripped in value. Those who bought in the years after that have had no return for 12 years. I know someone who purchased as prices started to boom in 2013. End of the year the market stopped dead. No price movement for 4 long years, then as a reward for holding on, the bottum fell out and prices are now it's about 25% off from purchase price. 25% of a 600-800k property is a ton of money. Even in those 4 years of no price movement, rental income fell steadily the whole way, meanwhile investors had to continue adding more of their work salary to make up the shortfall for their bank loans. I would estimate that person's loss at 200k in terms of income short fall, stamp duty, fall in value, and don't forget the usual (maintenance, building insurance, landlord insurance, property management fees, strata fees, vacancies. re-letting fees, council rates, water rates, land tax, etc). And this doesn't even include the opportunity cost had they invested elsewhere (and again note this is directly due to concentration risk).

Another person I heard of tried to replicate the "property investor" strategy and saved to get 3 properties in her home city (also Perth), and has zero to show for it from the last 10 years. Frustrated that it has not been like Sydney during the last decade. But as I mentioned earlier, if they were in Sydney and bought in 2003 they would have faced the same thing.

Are you getting the picture of what I mean by concentration risk? If your one single asset is not in a market that is booming within the next few years (which there is no way of knowing), you could end up suffering enormously.

This is very different to the US where you can buy homes in $100-200k range and can focus on cash flow, and can get multi-family homes for less than half the price for one median priced Sydney or Melbourne house.

Property investors never speak of this concentration risk. They shrug it off saying "everyone does it" as though that somehow makes it not completely insane. This level of concentration risk is still insane even if "everyone does it".

I only began to notice the horror stories once I started paying attention. Until then you miss the horror stories for all the sensationalist articles of people who retired in 5 years because they bought 5 properties all in Sydney in the few years leading up to 2013, making it look like it's simple to make buckets of money.

In all honesty I would really like to have some of my assets invested in at least a diversified portfolio of unlisted residential property if only I could find such a thing that was diversified and did not overwhelm my total portfolio, but no such thing exists within Australia unfortunately for the average person. To limit your concentration risk would require an 8 figure portfolio.

Lots more problems, but this is such a big one that I don't see how it can make sense as an investment.

As for being a house to live in, there is utility which is a big factor, plus no CGT (for now anyway), plus potentially no stamp duty on your first property. So there can be a case for that.

Valuethinker
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Re: Real Estate vs. Buying more index (Australia)

Post by Valuethinker » Thu Jun 25, 2020 4:13 am

andrew99999 wrote:
Thu Jun 25, 2020 3:12 am
, but this is such a big one that I don't see how it can make sense as an investment.

As for being a house to live in, there is utility which is a big factor, plus no CGT (for now anyway), plus potentially no stamp duty on your first property. So there can be a case for that.
I think we are agreed housing is a volatile asset. It's also AUD-linked. For a country that imports most of what it lives on (other than food) and likes to travel abroad (pre Covid-19 ;-)) that's a significant risk to standard of living (ask a Brit, whose currency has depreciated by 30%+ against USD and Euro since the Global Financial Crisis ;-)).

Your own place is about ownership and the benefits thereof. That can be a pain, though, if neighbours turn difficult, noisy etc. Or if you live in a condo (multi-unit housing) then there are the politics of condo associations etc.

It's also a form of forced savings - the repayment of the mortgage. For many people I know (and I include myself) pension savings will pay for retirement, the equity in the home will pay for the care home at the end (that runs £5,000+ a month in the UK, for a decent one).

There is consumption value of living in the right place. I have not always made the best housing decisions (in the context of a real appreciation in price of c 400% since 1994) but I have enjoyed the 'hoods I have lived in and the access to central London (pre Covid-19 ;-)).

Leveraging up just to "get on the ladder" and live in some box somewhere you don't like is counter-productive to my mind. But if renting you have to be sure that you are steadily investing the surplus over ownership.

As you mention, people habitually understate the cost of housing - property taxes, home ownership fees, repairs & maintenance etc. That's one of the things Shiller & Weiss' research showed, where we do have true like for likes (the Herengracht Canal in Amsterdam from the 1630s) it's very clear that houses depreciate (even if land appreciates). Also we tend to own more of a house than we do if we are renting - our consumption goes up.

Covid-19 is actually relevant because my gut says this means people disperse from the urban centres. If it's possible to work from home 5 days a week, people will move to the exurbs (the very edges of the greater metropolitan areas). If downtown shopping, social life and cultural life are restricted, that makes it less fun to sit in coffee shops reading your ipad. I am not calling the end on downtown life, and I think things will normalise - young people have far less to fear from Covid-19 than the over 50-set (i.e. me). But there will still be some restrictions, perhaps. Perhaps someday we will have a vaccine.

But the shift towards working from home seems quite significant. And the CEOs & other leaders, who are themselves in that 45-55 year old bracket, tend to have kids and commute (particularly nowadays as CEOs get younger and younger) and so they rather like it. No one loves commuting.

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Re: Real Estate vs. Buying more index (Australia)

Post by Schlabba » Thu Jun 25, 2020 5:59 am

Valuethinker wrote:
Thu Jun 25, 2020 4:13 am
andrew99999 wrote:
Thu Jun 25, 2020 3:12 am
, but this is such a big one that I don't see how it can make sense as an investment.

As for being a house to live in, there is utility which is a big factor, plus no CGT (for now anyway), plus potentially no stamp duty on your first property. So there can be a case for that.
...
But the shift towards working from home seems quite significant.
...

There is another shift I think is likely to happen, which will reduce housing prices in the cities: self driving cars.

With self-driving cars you can live further away without commuting being a pain, and you can still have a drink in the city center and let the car drive you home safely. It even solves the parking problem.

But now we are talking maybe decade(s) into the future.
Secretly a dividend investor. Feel free to ask why.

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Re: Real Estate vs. Buying more index (Australia)

Post by Valuethinker » Thu Jun 25, 2020 7:23 am

Schlabba wrote:
Thu Jun 25, 2020 5:59 am
Valuethinker wrote:
Thu Jun 25, 2020 4:13 am
andrew99999 wrote:
Thu Jun 25, 2020 3:12 am
, but this is such a big one that I don't see how it can make sense as an investment.

As for being a house to live in, there is utility which is a big factor, plus no CGT (for now anyway), plus potentially no stamp duty on your first property. So there can be a case for that.
...
But the shift towards working from home seems quite significant.
...

There is another shift I think is likely to happen, which will reduce housing prices in the cities: self driving cars.

With self-driving cars you can live further away without commuting being a pain, and you can still have a drink in the city center and let the car drive you home safely. It even solves the parking problem.

But now we are talking maybe decade(s) into the future.
I agree with you, with certain caveats.


1. I have a scepticism re fully autonomous vehicles. From what I have read, we have solved the 95% of the way problem. However the last 5% is really really hard, and that's why no one has solved it (Google's Waymo out in front, perhaps).

2. If you read urban transport theorists, there's a consensus that AVs create as many problems as they solve:

- more people will want to use AVs, because you don't need a driver's license (the very elderly or the disabled, for example)
- AVs may spend their days cruising the outskirts of the city centre, waiting for someone to call them (as Uber drivers already do)
- because you can work or watch a video, etc, in an AV, the marginal cost of transport falls, thus people will tolerate longer distances and more congestion. Cars in some parts of Asia come with portable bathrooms etc the congestion is so bac

So people may indeed commute from further away, but they won't be faster. In fact, traffic could be worse. I am thinking thoroughly decentralised cities like LA & Atlanta, which do indeed have public transport, but commuter traffic is severe (and more or less 24-7 at least in LA).

I think the evidence is people settle around a 30-40 minute journey to work (so 60-80 minutes a day). Unless they have professional jobs, in which case the commutes can be much longer - people willing to pay the time price, because the rewards can be so much greater (both financial & psychic). 90 minutes each way is not unusual in London.

Sprawl has been the natural tendency of cities post the first phase of the Industrial Revolution. First people commuted by omnibus (horse drawn bus). Then by subway & tram. Now even by High Speed train. People even commute by Easyjet or Ryanair (discount air lines) - or did, before Covid-19.

If we only have to show up at work occasionally I could see this getting even more extreme.

Australia and Canada are similar in that there are these intense pockets of suburbanisation, 90% of the countries is urban/ suburban, and then vast emptiness. The logic of location seems to draw people towards Melbourne, Sydney, to a lesser extent Brisbane and then Perth on the W Coast (and Canberra). Greater Toronto/ Greater Vancouver area same logic.

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Re: Real Estate vs. Buying more index (Australia)

Post by SR7 » Sat Jun 27, 2020 10:34 pm

Wife and I purchased our first house together in about 2005 in the ‘burbs of a Brisbane / Perth / Canberra like area, previously we were renting inner city with a city lifestyle. House size and location went down, but payments went up. Still we were going to start a family, so a friendly area, a big backyard and no landlord inspections were worth it.

The house value was just over $300k, the house loan was just under $300k, and my super was worth bang on $300k.

About 10 years later, house was worth about $400k, loan was about $250k (or a bit more), but my Super had doubled to about $600k. My super was the “Growth” fund, about 70% shares. It also took about this long for my mortgage payments to be about on par with rent, before that I was paying more.

These are all very rough figures, as I didn’t pay any attention to prices and money until very recently, and I’m still trying to learn the basic language. But my take was that the stock market pays better than the housing market, but I feel we still did the right thing, as my wife and I both like owning our own home now that we have children. However I would never own a rental, too much hard work, when there are easier ways to invest your money, such as extra super contributions.

Not sure if this helps, but one of the few times I could add something to a conversation here.
I studied Physics not Finance, so best to ignore anything I say about money.

Valuethinker
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Re: Real Estate vs. Buying more index (Australia)

Post by Valuethinker » Mon Jun 29, 2020 3:27 am

SR7 wrote:
Sat Jun 27, 2020 10:34 pm
Wife and I purchased our first house together in about 2005 in the ‘burbs of a Brisbane / Perth / Canberra like area, previously we were renting inner city with a city lifestyle. House size and location went down, but payments went up. Still we were going to start a family, so a friendly area, a big backyard and no landlord inspections were worth it.

The house value was just over $300k, the house loan was just under $300k, and my super was worth bang on $300k.

About 10 years later, house was worth about $400k, loan was about $250k (or a bit more), but my Super had doubled to about $600k. My super was the “Growth” fund, about 70% shares. It also took about this long for my mortgage payments to be about on par with rent, before that I was paying more.

These are all very rough figures, as I didn’t pay any attention to prices and money until very recently, and I’m still trying to learn the basic language. But my take was that the stock market pays better than the housing market, but I feel we still did the right thing, as my wife and I both like owning our own home now that we have children. However I would never own a rental, too much hard work, when there are easier ways to invest your money, such as extra super contributions.

Not sure if this helps, but one of the few times I could add something to a conversation here.
Buying a home in Melbourne or Sydney (or Toronto or Vancouver) 20 years ago was like winning the lottery - huge one off gain. The problem is you have to live somewhere, so you've got all those costs of home ownership (property taxes, maintenance) and if you want a better house you have to mortgage up to get one.

It's an interesting point whether those countries can keep going. Demographics say no - young people are being priced out of the cities. On the other hand Canada and Australia have relatively high immigration. And there's a flow of money from SE Asia and things like the ructions in Hong Kong only increase that flow - send the kids to university in Vancouver, buy them an apartment, they eventually get a Canadian passport and the family has a bolt hole in Vancouver. A lot of those properties are never even rented out - the Chinese property market favours pristine places, not pre-owned. It's a bubble, for sure, but it may never pop.

In your situation you have used a house successfully as a lifestyle decision - control over your own place, more space etc. Housing is a consumption good (in economic-speak terms). It can also have an investment role, but historically that came from companies owning blocks of apartments and managing them professionally for long term gains in rent. Or from (typically immigrants) buying smaller properties and renting them out, often starting out as a spare time job - becomes their pension plan.

For many of us the equity in our home is what will pay for our care home fees (which run over £5k pcm in the UK for a nice home).

We would hold here that diversification is good. What you have done is hold a balanced portfolio of assets.

Shares (stocks, equities) tend to grow faster than real estate. However they tend to be much more volatile. That's because a lot of the return from RE comes from rental income, not capital growth (that's true of office buildings, malls etc as well). Also housing prices are backward looking - we don't actually know what a house is worth at any given moment, we only know what comparable houses sold for in the last weeks or months.

When property does go down it's often for many years at a time. The reason is it is linked to the broader economy. So if Australia's commodity boom ends, then it can really hit everything (especially Perth, but not only).

Shares are a great ride. But a volatile one. You can lose 20% in a day. You have to be in it for the long run.

It's also important to have global diversification - significant percentage of your equities (say at least 50%) non Australian.

SR7
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Re: Real Estate vs. Buying more index (Australia)

Post by SR7 » Tue Jun 30, 2020 7:28 am

Valuethinker wrote:
Mon Jun 29, 2020 3:27 am
SR7 wrote:
Sat Jun 27, 2020 10:34 pm
Wife and I purchased our first house together in about 2005 in the ‘burbs of a Brisbane / Perth / Canberra like area, previously we were renting inner city with a city lifestyle. House size and location went down, but payments went up. Still we were going to start a family, so a friendly area, a big backyard and no landlord inspections were worth it.

The house value was just over $300k, the house loan was just under $300k, and my super was worth bang on $300k.

About 10 years later, house was worth about $400k, loan was about $250k (or a bit more), but my Super had doubled to about $600k. My super was the “Growth” fund, about 70% shares. It also took about this long for my mortgage payments to be about on par with rent, before that I was paying more.

These are all very rough figures, as I didn’t pay any attention to prices and money until very recently, and I’m still trying to learn the basic language. But my take was that the stock market pays better than the housing market, but I feel we still did the right thing, as my wife and I both like owning our own home now that we have children. However I would never own a rental, too much hard work, when there are easier ways to invest your money, such as extra super contributions.

Not sure if this helps, but one of the few times I could add something to a conversation here.
Buying a home in Melbourne or Sydney (or Toronto or Vancouver) 20 years ago was like winning the lottery - huge one off gain. The problem is you have to live somewhere, so you've got all those costs of home ownership (property taxes, maintenance) and if you want a better house you have to mortgage up to get one.

It's an interesting point whether those countries can keep going. Demographics say no - young people are being priced out of the cities. On the other hand Canada and Australia have relatively high immigration. And there's a flow of money from SE Asia and things like the ructions in Hong Kong only increase that flow - send the kids to university in Vancouver, buy them an apartment, they eventually get a Canadian passport and the family has a bolt hole in Vancouver. A lot of those properties are never even rented out - the Chinese property market favours pristine places, not pre-owned. It's a bubble, for sure, but it may never pop.

In your situation you have used a house successfully as a lifestyle decision - control over your own place, more space etc. Housing is a consumption good (in economic-speak terms). It can also have an investment role, but historically that came from companies owning blocks of apartments and managing them professionally for long term gains in rent. Or from (typically immigrants) buying smaller properties and renting them out, often starting out as a spare time job - becomes their pension plan.

For many of us the equity in our home is what will pay for our care home fees (which run over £5k pcm in the UK for a nice home).

We would hold here that diversification is good. What you have done is hold a balanced portfolio of assets.

Shares (stocks, equities) tend to grow faster than real estate. However they tend to be much more volatile. That's because a lot of the return from RE comes from rental income, not capital growth (that's true of office buildings, malls etc as well). Also housing prices are backward looking - we don't actually know what a house is worth at any given moment, we only know what comparable houses sold for in the last weeks or months.

When property does go down it's often for many years at a time. The reason is it is linked to the broader economy. So if Australia's commodity boom ends, then it can really hit everything (especially Perth, but not only).

Shares are a great ride. But a volatile one. You can lose 20% in a day. You have to be in it for the long run.

It's also important to have global diversification - significant percentage of your equities (say at least 50%) non Australian.
Valuethinker, thank you so much for your reply and detailed information. You helped me understand my situation better.

I looked up my Superannuation and it’s about 45% Australian shares, and only about 25% International shares. There is also another 10% in property and infrastructure (Aust. I assume), so it looks like I’m heavily exposed to the Australian economy.

I’m trying to use all my extra money to pay more into my mortgage, which has a redraw facility. This, I assume, reduces the interest I’m paying, while acting as my emergency fund. I have about $100k extra in there right now.

Maybe I have the option of adjusting the share balance in my Super fund to increase the proportion of international shares. I’ll look into this.

Sorry to hijack the thread OP, maybe I should start a new one to carry on this conversation.
I studied Physics not Finance, so best to ignore anything I say about money.

andrew99999
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Re: Real Estate vs. Buying more index (Australia)

Post by andrew99999 » Tue Jun 30, 2020 8:50 am

SR7 wrote:
Tue Jun 30, 2020 7:28 am
I’m trying to use all my extra money to pay more into my mortgage, which has a redraw facility. This, I assume, reduces the interest I’m paying, while acting as my emergency fund. I have about $100k extra in there right now.
A note on this.

An offset account is legally a savings account. Any money in there is still your money and you can take it out whenever you like without restriction.

Paying money into a redraw facility is legally considered paying down the loan. There are 2 consequences of this
  • The bank can decide not to allow you to redraw it out (yes this happens, for example if they see a change in your spending patterns on a credit card from that bank indicating you may have lost your job, which incidentally is the time you desperately need the money); and
  • When you take money out, it is considered a new loan for tax purposes. If this newly borrowed money is used to purchase income-producing assets, the interest is tax deductible, else it is not.
Consequently
  • If you decide to pay down the mortgage and if you want to ensure that you still have access to it later in case you need it, instead of paying down the loan directly, put it in an offset (not a redraw).
  • If you decide to invest in shares (outside of super), keep it in an offset until you're ready to invest it. Once you're ready to invest it, pay down your PPOR loan and reborrow it and use that for investing. Using this money to buy income-producing assets makes the interest tax deductible which would not be the case if you purchased the shares directly without paying down your PPOR loan first and then redrawing it out to invest.
Don't use a redraw for investing, get a separate loan split instead
  • While technically you can use a redraw to pay it down and borrow it out, you should instead contact your bank and pull your money out into a new separate loan split so that the money you pay off and then pull out for investing is not mixed with funds that you draw out and use for personal use.
  • Mixing is where you use some of your funds for investing and some for personal use. Don't do this. In fact if you did pay money down and want to borrow it back out to invest (so that it is tax deductible), get an accountant to help you. It's not worth the risk of making a mistake.
Sorry to interrupt the thread further. Just wanted to make sure people are aware of the complications that come with a redraw while trying to avoid the fee of having an offset account instead.

Valuethinker
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Re: Real Estate vs. Buying more index (Australia)

Post by Valuethinker » Tue Jun 30, 2020 11:10 am

SR7 wrote:
Tue Jun 30, 2020 7:28 am
Valuethinker wrote:
Mon Jun 29, 2020 3:27 am
SR7 wrote:
Sat Jun 27, 2020 10:34 pm
Wife and I purchased our first house together in about 2005 in the ‘burbs of a Brisbane / Perth / Canberra like area, previously we were renting inner city with a city lifestyle. House size and location went down, but payments went up. Still we were going to start a family, so a friendly area, a big backyard and no landlord inspections were worth it.

The house value was just over $300k, the house loan was just under $300k, and my super was worth bang on $300k.

About 10 years later, house was worth about $400k, loan was about $250k (or a bit more), but my Super had doubled to about $600k. My super was the “Growth” fund, about 70% shares. It also took about this long for my mortgage payments to be about on par with rent, before that I was paying more.

These are all very rough figures, as I didn’t pay any attention to prices and money until very recently, and I’m still trying to learn the basic language. But my take was that the stock market pays better than the housing market, but I feel we still did the right thing, as my wife and I both like owning our own home now that we have children. However I would never own a rental, too much hard work, when there are easier ways to invest your money, such as extra super contributions.

Not sure if this helps, but one of the few times I could add something to a conversation here.
Buying a home in Melbourne or Sydney (or Toronto or Vancouver) 20 years ago was like winning the lottery - huge one off gain. The problem is you have to live somewhere, so you've got all those costs of home ownership (property taxes, maintenance) and if you want a better house you have to mortgage up to get one.

It's an interesting point whether those countries can keep going. Demographics say no - young people are being priced out of the cities. On the other hand Canada and Australia have relatively high immigration. And there's a flow of money from SE Asia and things like the ructions in Hong Kong only increase that flow - send the kids to university in Vancouver, buy them an apartment, they eventually get a Canadian passport and the family has a bolt hole in Vancouver. A lot of those properties are never even rented out - the Chinese property market favours pristine places, not pre-owned. It's a bubble, for sure, but it may never pop.

In your situation you have used a house successfully as a lifestyle decision - control over your own place, more space etc. Housing is a consumption good (in economic-speak terms). It can also have an investment role, but historically that came from companies owning blocks of apartments and managing them professionally for long term gains in rent. Or from (typically immigrants) buying smaller properties and renting them out, often starting out as a spare time job - becomes their pension plan.

For many of us the equity in our home is what will pay for our care home fees (which run over £5k pcm in the UK for a nice home).

We would hold here that diversification is good. What you have done is hold a balanced portfolio of assets.

Shares (stocks, equities) tend to grow faster than real estate. However they tend to be much more volatile. That's because a lot of the return from RE comes from rental income, not capital growth (that's true of office buildings, malls etc as well). Also housing prices are backward looking - we don't actually know what a house is worth at any given moment, we only know what comparable houses sold for in the last weeks or months.

When property does go down it's often for many years at a time. The reason is it is linked to the broader economy. So if Australia's commodity boom ends, then it can really hit everything (especially Perth, but not only).

Shares are a great ride. But a volatile one. You can lose 20% in a day. You have to be in it for the long run.

It's also important to have global diversification - significant percentage of your equities (say at least 50%) non Australian.
Valuethinker, thank you so much for your reply and detailed information. You helped me understand my situation better.

I looked up my Superannuation and it’s about 45% Australian shares, and only about 25% International shares. There is also another 10% in property and infrastructure (Aust. I assume), so it looks like I’m heavily exposed to the Australian economy.

I’m trying to use all my extra money to pay more into my mortgage, which has a redraw facility. This, I assume, reduces the interest I’m paying, while acting as my emergency fund. I have about $100k extra in there right now.

Maybe I have the option of adjusting the share balance in my Super fund to increase the proportion of international shares. I’ll look into this.

Sorry to hijack the thread OP, maybe I should start a new one to carry on this conversation.
Property and infrastructure may well be international.

Canada and Australia the stock markets are both 80 % banks + natural resources. So not very diversified.

There is dividend franking in Australia andcdimeone like Andrew9999 can explain to you whether or how much it benefits you.

My guess is you don't want to be over 25% in Australian stocks. Your bonds will be Australian in any case, probably.

One should not panic. If your Super is a good low cost fund that has to be born in mind. Low expense ratios is important.

I think Vanguard had a paper on the merits of international diversification for Canadians Australians Brits. I shall surf around for it.

Andrew9999 is the local guru for Australian investors.

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Re: Real Estate vs. Buying more index (Australia)

Post by SR7 » Wed Jul 01, 2020 8:26 am

andrew99999 wrote:
Tue Jun 30, 2020 8:50 am
SR7 wrote:
Tue Jun 30, 2020 7:28 am
I’m trying to use all my extra money to pay more into my mortgage, which has a redraw facility. This, I assume, reduces the interest I’m paying, while acting as my emergency fund. I have about $100k extra in there right now.
A note on this.

An offset account is legally a savings account. Any money in there is still your money and you can take it out whenever you like without restriction.

Paying money into a redraw facility is legally considered paying down the loan. There are 2 consequences of this
  • The bank can decide not to allow you to redraw it out (yes this happens, for example if they see a change in your spending patterns on a credit card from that bank indicating you may have lost your job, which incidentally is the time you desperately need the money); and
  • When you take money out, it is considered a new loan for tax purposes. If this newly borrowed money is used to purchase income-producing assets, the interest is tax deductible, else it is not.
Consequently
  • If you decide to pay down the mortgage and if you want to ensure that you still have access to it later in case you need it, instead of paying down the loan directly, put it in an offset (not a redraw).
  • If you decide to invest in shares (outside of super), keep it in an offset until you're ready to invest it. Once you're ready to invest it, pay down your PPOR loan and reborrow it and use that for investing. Using this money to buy income-producing assets makes the interest tax deductible which would not be the case if you purchased the shares directly without paying down your PPOR loan first and then redrawing it out to invest.
Don't use a redraw for investing, get a separate loan split instead
  • While technically you can use a redraw to pay it down and borrow it out, you should instead contact your bank and pull your money out into a new separate loan split so that the money you pay off and then pull out for investing is not mixed with funds that you draw out and use for personal use.
  • Mixing is where you use some of your funds for investing and some for personal use. Don't do this. In fact if you did pay money down and want to borrow it back out to invest (so that it is tax deductible), get an accountant to help you. It's not worth the risk of making a mistake.
Sorry to interrupt the thread further. Just wanted to make sure people are aware of the complications that come with a redraw while trying to avoid the fee of having an offset account instead.
Andrew99999, thank you very much, I did not appreciate the difference, I have taken out money before via redraw but I didn’t realise that the bank could stop this if they want. It’s not how they sold it to me in conversation, but I’m sure it’s in the fine print.

I may consider taking some out now, while times are good, just in case. Right now I’m happy for most to stay there, as this is my biggest bill anyway.

Sorry to ask another questions, but could you stop paying your mortgage for awhile, if you lost your job say, and just let it use up the redraw?

Good to know about the tax implication of investing in shares with the various loans.

Thanks everybody for your education.
I studied Physics not Finance, so best to ignore anything I say about money.

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Re: Real Estate vs. Buying more index (Australia)

Post by andrew99999 » Wed Jul 01, 2020 9:06 am

SR7 wrote:
Wed Jul 01, 2020 8:26 am
Sorry to ask another questions, but could you stop paying your mortgage for awhile, if you lost your job say, and just let it use up the redraw?
I believe so, but I can't confirm it's for all banks and non-bank lenders (and god knows you can't rely on your mortgage broker to have your best interests or tell you the whole story).

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Re: Real Estate vs. Buying more index (Australia)

Post by Watty » Wed Jul 01, 2020 10:25 am

alex123711 wrote:
Thu Jun 25, 2020 12:46 am
What are everyone's thoughts on having property in their portfolio vs. just having the index? I am considering it either as an investment property or own home due to the tax breaks such as negative gearing and potentially no tax on capital gains as well as the ability to leverage.
Be very careful.

Low interest rates are a huge factor in why home prices have gone up a lot here in the US and in some places caused housing bubbles. Sooner or later interest rates will go back up and that will likely hurt home prices a lot.

In the US you can get a home mortgage that is around 3% right now but it was not that long ago that a 5% mortgage would have been considered to be really good.

It would be good to take a look at what Australian mortgage rates have been in the past then try to picture what would happen to your housing prices if the mortgage rates reverted to what they used to be.

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Re: Real Estate vs. Buying more index (Australia)

Post by Valuethinker » Thu Jul 02, 2020 4:25 am

Watty wrote:
Wed Jul 01, 2020 10:25 am
alex123711 wrote:
Thu Jun 25, 2020 12:46 am
What are everyone's thoughts on having property in their portfolio vs. just having the index? I am considering it either as an investment property or own home due to the tax breaks such as negative gearing and potentially no tax on capital gains as well as the ability to leverage.
Be very careful.

Low interest rates are a huge factor in why home prices have gone up a lot here in the US and in some places caused housing bubbles. Sooner or later interest rates will go back up and that will likely hurt home prices a lot.

In the US you can get a home mortgage that is around 3% right now but it was not that long ago that a 5% mortgage would have been considered to be really good.

It would be good to take a look at what Australian mortgage rates have been in the past then try to picture what would happen to your housing prices if the mortgage rates reverted to what they used to be.
A related problem is I am not sure whether Australian mortgages are fixed or floating rate? I don't know of any other country besides USA where you can get 15-30 year fixed rate mortgages at an affordable price. Canada used to be all 5 year fixed but I gather now a much higher fraction is floating rate.

Melbourne and Sydney at least have profited from big movements of international capital. Basically wealthy individuals (or even middle class ones) in SE Asia moving money to places which are secure, low risk & friendly to immigrants (even if they don't live there, it's a future bolt hole; and their kids may easily go to university there). Very similar to Miami with all its Latin American money. Vancouver is City Number One for this, and it has totally distorted the local housing market, one of the most expensive in the world -- Seattle with all its tech companies is much cheaper.

(San Francisco I see the housing prices as the natural result of all the money being made in the tech sector + limited ability to grow the housing stock. So it's not quite the same story as Vancouver, where every local industry has been overshadowed by real estate - a Pacific Miami).

Australia is the country that avoided recession for 30 years running. The rise and rise of Asian demand for Australian commodities, plus reasonable economic management.

Conversely outside of Sydney and Melbourne I am not sure there are the same issues re land supply & access to the core (traffic) and housing prices have just not shot away. Or they did in Perth until the iron ore price came down - Western Australia is one of the biggest iron ore suppliers in the world.

I really do see it like Canada (and that may be reasoning by false analogy). You have a relatively small economy with a huge trading partner. Your economic success is dependent upon that partner. As an investor, you really want to be globally diversifed because your own stock market and economy are so limited. But if you bought a house in Vancouver, Toronto, Sydney, Melbourne any time since the early 1990s, you have basically won the lottery. (Auckland too, I gather).

Australia is also "having a good war" re Covid-19. Early measures plus being an isolated and isolatable island have helped. So has the general success against the infection in East Asia. However tourism cannot really recover, yet, and that's probably Australia's biggest earner after natural resources exports.

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Re: Real Estate vs. Buying more index (Australia)

Post by Watty » Thu Jul 02, 2020 8:36 am

Valuethinker wrote:
Thu Jul 02, 2020 4:25 am
As an investor, you really want to be globally diversifed because your own stock market and economy are so limited.
It is not just that the Australian economy is small relative to the global economy it is that there are limited investment opportunities to invest in Australian businesses.

The problem is that a lot of the Australian economy is impossible for an individual to invest in because it is either privately owned or run as part of an international company.

For example I looked it up and there are about a thousand McDonald's restaurants in Australia but (as far as I know) they are privately owned as franchises or corporately owned and the overall operations are part of the US based McDonald's corporation. The only way for an Australian investor to invest in that is to buy McDondalds US stock.

The company I retired from was in a mostly consumer related business and it had gone through a number of mergers and somewhere along the line it ended up with an Australian division which had its own corporate structure with separate departments and staff for things like warehouses, IT, accounting, HR, etc. It is a good size operation with nearly 1,000 Australian employees.

The company only had a few other minor international (non US) operations.

One time the president of the company was talking to my group in sort of an annual morale building meeting for the staff and during the question and answer period someone asked about the Australian division. While it was doing OK he was less than excited about it because of all the overhead. The problem for him was that the population of Australia is only about 25 million people which is the same as the population of Southern California and having all the country specific overhead made it expensive and cumbersome to operate there.

The company went public a few years ago and the only way to invest in their Australian operations is by buying the US stock of that company.

Australia is also huge country and the first time I saw this map it surprised me a bit since I did not realize just how large it is.

Image

For the company I worked for that also made the logistics of supporting the business outside of the Melbourne and Sydney areas very difficult especially compared to supporting the same population in Southern California.

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Re: Real Estate vs. Buying more index (Australia)

Post by SR7 » Thu Jul 02, 2020 9:00 am

Watty wrote: In the US you can get a home mortgage that is around 3% right now but it was not that long ago that a 5% mortgage would have been considered to be really good.

It would be good to take a look at what Australian mortgage rates have been in the past then try to picture what would happen to your housing prices if the mortgage rates reverted to what they used to be.
Right now in Australia home loan interest rates are about 3 to 3.5%, but about 15 years ago they were double that at about 7%. When I was a kid I’m pretty sure they were suffering under double digit rates.

Ref: https://www.orangefinance.net.au/histor ... est-rates/
Rates exceeded 10% for the first time in 1974 and pretty much remained above 10% until 1995.

In just 4 years, interest rates dropped from the high of 17% (January 1990) to the low of 8.75% (June 1994).

After a peak of 10.5% in 1995, interest rates reached a low point of 6.5% in December 1998.

Since then, interest rates have tracked within a band of approximately 8% and 6% (with a period of approximately 8 months during which interest rates rose to 9.6% in August 2008).
Most people I know get Variable Rate loans, but some fix then for 3 to 5 years, then it reverts to variable again.
I studied Physics not Finance, so best to ignore anything I say about money.

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Re: Real Estate vs. Buying more index (Australia)

Post by andrew99999 » Thu Jul 02, 2020 9:36 am

Australia does not have a secondary mortgage market like the US has where they are packaged off and sold and resold. That's 'why Australia doesn't have 15, 20, and 30 year fixed rate loans. I think the longest I've seen is 7 years and the rates aren't attractive.

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