Michael Yardney book

[Judge]

Well, numerous people on this forum suggested that i read the latest book if this author. I bought the book and i am now diligently working my way through it. However, one thing that strikes me as rather interesting is that the books is based on a claim that property values double every 7-10 years. This is a claim that is being made regularly throughout the book.

Numerous people on this forum stated that it is irresponsible to claim that properties will always grow by 10% a year or double every 10 years. Obviously no one has a crystal ball, but when a person with a reputation like Micheal's is making a claim in his book one would tend to believe it. Yet, doubling of property prices every 7 years does sound too good to be true (unless of course there is a boom like the last one ever 7 years, but this is also unlikely i understand..). Who is right? Who is wrong?

[Emblaze Pete]

I think you just need to look at the history of property prices over the last 100 years to get your answer. On average they do appear to double every 10 years. The trend is one way traffic over the long haul. But obviously there is peaks and troughs through each cycle.

[Skeptic]

Naturally of course there is also the question of whether past trends in property prices can reliably be used to predict future trends. For example I'm sure the Japanese weren't expecting their property prices to decrease over the last 20 years, regardless of what their long-term average is.

[toby]

That's right. Whilst anyone can get on a stage and say properties increase #% every year we all know that taking data black and white is a fools paradise.
As the saying goes there are lies, damn lies and statistics.
I think that if anyone on this site rushed out and bought a neg geared house in 1986 or even neutrally geared come 1988 that would think that they had been somewhat misinformed.
Often I find that many strategies work but some work best in hind sight or "back when".
An example would be buy 50 homes that after expenses put $20 in your pocket every week.
I'd be suprised though open to the possibility that there is someone on this forum who could claim to have got even close using this strategy starting in the last 12 months.

I'm going to read his book, the thing is though, to date I can't think of one well known foreign investor who would use this strategy - Not John Burley, Ron Legrand, Robert Allen, Russ Whitney, Keith Cunningham, Nicholsen, Robert Kiyosaki - not one!??
In fact I know JB would call you a screaming scum sucking PIG!

Actually why not try this strategy playing the board game CF101? Now that would be interesting.

[Monid]

A distinction also needs to be made between nominal and real values. Most of the data relates only to nominal values, in real terms doubling every 7-10 years is unlikely.

Cheers
David

[poormastery]

One of the reasons for the current subprime debacle is that the financial instruments (CDO’s et al) were usually valued using financial models. These models were based on historical figures. For example, historical default rates and historical property price increases were often assumed when the valuation was calculated.

The US property market had not fallen year on year since the Great Depression. Default rates had historically been tiny. This resulted in huge valuations for the instruments.

Alas, for the first time since the Great Depression, property prices are falling year on year in the US. Perhaps this proves (once again) that historical performance is not always a good basis for estimating future performance.

In Japan, after the sharemarket bubble of the late 1980’s, average Japanese real estate prices fell 70%. Property prices have not recovered in Japan yet, approximately 20 years after the event. Hong Kong property prices also fell 70%.

In Germany, property prices are about the same nominal level as they were 15 years ago. In Switzerland, nominal property prices are at the same level as they were 15 years ago.

I could go on, but perhaps you get my point. Extrapolating out previous price performance, and gambling on the results, is a risky game.

Consider yourself warned!

Regards,
*poormastery*

[JohnL]

Getting inflation adjustment long term trends is probably more reliable (remember when inflation was running over 15% in the eighties). I remember reading in the Herald some time ago the inflation adjusted increases were about 3 % above inflation over the last 40 years. This last boom has been larger than normal so not sure what it would be at the moment!!

Also, you need to research regions as some times a boom has totally missed parts of NZ. This can result in bigger increases than Auckland when a bit of catch up occurs.


John

[Julian Grainger]

Our House Price Index monitors the trends and goes back over many, many cycles.

What we see is that, adjusted for inflation:
1. some suburbs double over the 7 years,
2. a smaller number of suburbs exceed this,
3. a goodly number of suburbs struggle to grow faster than a compounding retail bank deposit (which exceeds inflation),
4. a small number of suburbs never recover from their peaks,
5. a small number never grow faster than inflation, and
6. a small number are totally and utterly reliable in that they have never slumped and grow well.

So Michael Yarney's strategy is more than possible.

[toby]

It's not the increase in values that is the real issue the real issue is debt serviceability, regardless of how you obtain the loan where does the money to service the negative cash flow come from year in year out.
Sooner or later the cup over floweth and not from surplus cash flow - surely?

[donna]

It's not the increase in values that is the real issue the real issue is debt serviceability, regardless of how you obtain the loan where does the money to service the negative cash flow come from year in year out.
Sooner or later the cup over floweth and not from surplus cash flow - surely?

Umm - grow a business that can provide the shortfall? Just a thought. Look at the people doing it they have multiple income streams and not all from the same strategy.....Michael Yardney is a perfect example and maybe you're not a bad example either Toby insofar as you have different income streams.

Cheers,

Donna

[whitt]

It's not the increase in values that is the real issue the real issue is debt serviceability, regardless of how you obtain the loan where does the money to service the negative cash flow come from year in year out.
Sooner or later the cup over floweth and not from surplus cash flow - surely?

Toby has hit the nail on the head.

There are several large companies In OZ promoting this strategy.

However all rely on your ability to service and keep topping up loans.

If somebody was to rely Solely on this for retirement they may end up in difficulty. There only income would be from the properties making it more difficult to qualify for a loan or top up.

As a strategy which when combined with other sources of income it may work. But only in a limited range of situations though.

[Tucker]

Remember once you get large portofios or large wealth in your portfolios (e.g. $3,000,000 value and mortgaged to 50&#37 some lenders class you as asset rich and will just lend on that basis.

Plus No doc loans are a good way too as no income is needed.

I was in the situation of financing a reno/trade property and had the choice of No Doc and Low Doc. For this one I took the Low Doc as could verify my income and wanted 80% but they would have given me the No Doc with no income verification required because of being classed as asset rich in their eyes but it was only to 75%.

[Julian Grainger]

Isn't the strategy just a really complicated reverse equity loan?

Assuming the portfolio is going to grow, it's always going to create cash flow. All he's doing is pulling out equity and using half to service the interest while living off the rest. And when he dies the estate pays out the debt. He could do this with a Sentinal loan.

[Tucker]

Don't you have to be over 60 to get this and isn't it on your home. Plus I think there is a max of $500,000 so your limited.

Nothing complicated about it, refinance to 80% used a revolving credit and use it as you need it.

[simoncoles]

For the mathmaticians amounst us.

Doubling in 10 years is a 7.18% compounded return.

Doubling in 7 years is a 10.41% compounded return.

So in 10 years time it is quite concievable to double in values. 7 years will require more of a boom period to achieve but still relatively easily achievable.

Simon