IS THIS THE BIGGEST REVELATION IN OUR PROPERTY MARKET EVER ? Now, is this the best buy in 18 years…? Find out more. One of Australia’s most diligent researchers in the property investment market found a simple rule of thumb that’s picked 4 of the most important market turning points in the last 30 years. His findings are based around one of the two critical elements of investing: YIELD. The other is, of course: Growth What these findings are saying now might shock you. Remember when negative gearing was all the rage. Some financial planners actually thought there was no other way. It was all about Growth and we’ve seen patterns emerge over the past zillion years in property investment strategies showing the cyclical nature of growth and the economy. But then we thought if you could, why not have it all? Why not find a house that pays for itself, and increases in value over time. Buy Yield plus Growth. Serious investors picked it up, and indeed, it still seems like it’s the only way to build a real portfolio of properties. The power of ‘positive gearing’ is obvious. (Saul Eslake reckons the whole positive and negative gearing thing is just an Australian thing. Americans can’t understand why you’d invest in something that loses you money… but that’s another story.) However, it’s interesting to have a look more closely at yields. In particular, to see if some long-run patterns might be playing out in rental returns as well as growth. So, let’s break it down. Mr Cameron Murray is a professional economist with some real world experience, having spent a number of years working with a property developer. He was trying to develop a rule-of-thumb to time entry and exit into the market. He focussed on the qualities property has an investment class (Growth v Yield) and started researching rental yields from property from an investment perspective. He wanted to put capital growth to one side for the moment and just focus on property’s performance as an income generator. He was really interested in the rental yields relative to price, as a way of measuring performance. But since he wanted to strip out capital values (remember, our goal always is to try and pick tops and bottoms in price), he had to find something other than house prices so he focussed on Mortgage Rates. When you’re buying a house, unless you’re buying it outright, the Mortgage Rate is effectively the Price of Money. He found a way of comparing the return on your money, with the price of money, taking capital values out of the equation. There are cycles in returns that seem to move in long cycles. And these cycles seem to take around 18 years. This measure then gives you your signals. When YIELDS are HIGH relative to the mortgage rate, then it’s going to be a good time TO BUY. When YIELDS are LOWER, it’s a better time TO SELL. And what did he find? Well, now you’re in for a surprise. Have a look at this chart here (taken from a blog he wrote for, MacroBusiness). This is the mortgage rate divided by gross yield. A higher yield, gives you a lower reading. A lower yield, and the ratio increases. With arbitrary buy (green) and sell (red) lines on the chart, we see buy and sell signals. Ok, well, imagine you followed its advice. Buy at the green. Sell at the red. You would have bought in the early to mid eighties, at the market bottom. Then you would have sold in 1988/89, just before the late eighties crash. You would have then bought in the mid to late nineties just as things were kicking into gear again, and then you would have sold, perhaps a little early, in 2003, or again in 2007, just before GFC. And you would have made a truck-load of money. A simple rule of thumb that can get the timing right on those four occasions, across over 30 years in the market, seems to be doing pretty well. This is the repetition of a classic “head and shoulders” pattern over an 18 year cycle. Importantly, where this measure is at right now. Take a look again. It’s the lowest it’s been since the late nineties. Looking at the long-run yield cycle chart again, the property market is a screaming buy right now. It’s back down at a screaming buy. This is not theory or opinions this is real money-making, actionable information…and if you’ve been following my blogs, you’ve got more than enough proof to explain why these are such great buying conditions. Taken from an article by: Jon Giaan of Knowledge Source Now, is this the best buy in 18 years…? Find out more. propertyinvestmentinstitute.au
Posted on: Fri, 14 Jun 2013 05:58:40 +0000
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