The Decision Tree of Life

Posted by Daniel Joseph

Do something today that your future self will thank you for – anonymous. Life is governed by the choices we make, and, unfortunately, the benefit of hindsight provides little comfort for opportunities missed by inaction or incorrect action. Acting as the proverbial ostrich and putting your head in the sand may result in you leaving potential investments by the way side, only to be rediscovered once hindsight rears its head!

As we often discuss on this blog, markets, be they property, equities or otherwise move in cycles: ‘In a sense we actually are always heading for the next boom or the next bust, at some point in the future’ – Pete Wargent. The trick is to find quality long term investments which can perform well for you through the cycle. Now would be a good time to regurgitate a study on the performance of property vs. shares or something similar, but I won’t bore you with that. Rather, I’ll share two facts that highlight what sets property apart from alternate asset classes:

Leverage – one small word that offers much potential. Leverage amplifies gains of investment. Here’s a very simple example:

You’re an Australian earning an average income ($80,000 for all those playing at home) who purchases a $500,000 property. You invest 10 per cent of the purchase price in addition to the ancillary costs of stamp duty and legal fees. I’ll be conservative and call the total cash investment $70,000. You’re now the proud owner of a half million dollar asset that enjoys an annual growth rate of 4 per cent – fast forward ten years, and that 4 per cent growth rate has resulted in a capital gain of $314k. I hate to do this but I now need to talk about costs: The effects of negative gearing, tax concessions and that all important tenant work to reduce your holding costs to $150 per week, that’s $78k over your holding period. Let’s crunch some numbers:

Investment = $70,000

Holding costs = $78,000

Total investment = $148,000

Return on investment = capital gain / total investment = 112 per cent or 7.8 per cent per annum

Hooray for leverage

Stability – now this one’s simple. By its nature property is a relatively less volatile asset class. It’s harder to obtain and offload than other asset classes which makes it less susceptible to what former chairman of the Federal Reserve Alan Greenspan termed ‘irrational exuberance’. The largest reduction in prices for our capital city property markets over the last couple of decades has been 5 per cent (that’s based on an index that combines prices in all our capitals). Safe as houses, indeed.

Tune in next week for the first in a series of our picks of capital city property markets in 2016.

Posted by Daniel Joseph, on 25th Jan 2016