Ron Hoy Fong - Will The Next Boom Be The Boom Of All Booms?

[Chris W]

Parents Family home Grey Street, Onehunga
Purchased 1942 £1500 ($3000)
1st Doubling 1952 £3000 ($6000)
1962 £6000 ($12000)
1972 $24000
1982 $48000
1992 $96000
2002 $192000
2012 $384000
2011 CV $600000

First property investment Inkerman Street Onehunga
Purchased 1969 $10500
1st Doubling 1979 $21000
1989 $42000
1999 $84000
2009 $168000
2011 CV $830000

First Home Peter Mulgrew Street, New Windsor
Purchased 1972 $15500
1st Doubling 1982 $31000
1992 $62000
2002 $124000
2012 $248000
2011 CV $670000

First Block of Investment Units Don Croot St, Morningside
Purchased 1979 $52000
1st Doubling 1989 $104000
1999 $208000
2009 $426000
2011CV $960000

Ron Hoy Fong

Super Coach

Interesting to know how his expectation of prices doubling every 8-10 years was developed.

[Davo36]

This is what a doubling of values looks like:





You can see it goes along nicely but then goes bananas.

This is starting with a value of $10,000 and doubling every 10 years.

So at some point this will happen if values keep doubling, but as Anthonyacat pointed out, we could be at the start of this period, and so it all looks doable.

[flyernzl]

Which is largely due to the loss of value of the money in your pocket.

Back in the 1960s, $40 per week was quite a good income.

[Davo36]

Which is largely due to the loss of value of the money in your pocket.

Back in the 1960s, $40 per week was quite a good income.

But surely inflation adjusted values are way up right?

[Wayne]

But surely inflation adjusted values are way up right?

Not as much as you might think.
RBNZ says that "house prices have increased at a more modest pace, growing 3 percent per annum on average since 1965"
Source http://www.rbnz.govt.nz/-/media/Rese...016jan79-1.pdf

Inflation is the leveraged person friend.

[Bluekiwi]

Which is largely due to the loss of value of the money in your pocket.

Back in the 1960s, $40 per week was quite a good income.

Yep, and the debt says the same, so as long as house prices keep going up your mortgage is deflating so hence its really a waste of time doing P and I unless its your own home.
Of course if prices were halving every 10 years its a bit more grim isn't it.

But have done this before at seminar's by different people, the crowd is asked to provide details of a house they bought a long time ago, and they compare the value now to this model.
Boy every time it was about right.

[Bluekiwi]

Boom of all booms officiall ended septemeber 2016 btw

[Davo36]

Not as much as you might think.
RBNZ says that "house prices have increased at a more modest pace, growing 3 percent per annum on average since 1965"
Source http://www.rbnz.govt.nz/-/media/Rese...016jan79-1.pdf

Inflation is the leveraged person friend.

A lot of info in that report, the 3% figure is just one statistic. Others point to how when house prices have risen, they've usually fallen back afterwards. But in the previous cycle, prices didn't fall back much, so we've started from a fairly high position and gone much higher...

Will be interesting to see what happens.

I agree inflation is the leveraged person's friend.

[Chris W]

Wayne,

Here is an excerptfrom the linked RBNZ report

Before the Reserve Bank adopted inflation targeting in1989, high nominal house price inflation partly reflected generalised inflationin the economy. There is a statistically significant structural breakin nominal house price inflation in 1991, when low and stable inflationwas established. After this structural break, nominal house price inflationhalved. Before 1991, house price inflation averaged 12 percent per year;afterwards it was about 7 percent.

In real terms (i.e. adjusting for consumer priceinflation), house prices have increased at a more modest pace, growing 3percent per annum on average since 1965


That 3% is a realreturn (i.e after inflation) since 1965. That is a decent return afterthe cost of living - as you are increasing your real purchasing power.


Since 1965, theinflation rate and interest rate has been impacted by different monetary policyregimes in New Zealand. Here are some key dates eventsfrom 1965 to the free float of the NZD in 1985:

1) predecimalisation currency of the New Zealand Pound which was pegged at a fixedexchange rate to the GBP of 1:1
2) 1967 July -decimalisation and introduction of the New Zealand dollar. The NZD wasthen pegged at a fixed exchange rate to the USD at US$1.39045 per NZ$1.00
3) 1967 November 21- NZD was devalued 19.45% and then pegged at a new fixed exchange rate to theUSD at US$1.12 per NZ$1.00
4) 1971 December -NZD fixed exchange rate is revalued upwards vs the USD. The fixedexchange is then US$1.1952 per NZ$1.00
5) 1973 February -NZD is revalued upwards vs the USD. The fixed exchange is then US$1.3511per NZ$1.00
6) 1973 July - theNZD exchange rate is now fixed versus a trade weighted index basket of tradingcurrencies and NZD revalued 3.24%
7) 1973 September 9- NZD revalued 10%
1974 September 25- NZD devalued 9% against all currencies except AUD
9 1975 August10 - NZD devalued 15%
10) 1976 November 30- NZD devalued 2.73% against basket (however appreciation of 12.7% vs AUD asAUD devalued by 17.5% the day before)
11) 1976 December 20- NZD revalued 2% vs the basket
12) 1978 January 5 -suspension of trading of all currencies except GBP, USD and CAD
13) 1978 January 6 -suspension lifted
14) 1978 August 18 -suspension of trading for all currencies except USD
15) 1978 August 21 -foreign exchange market opens
16) 1979 June 21 -flexible exchange rate (crawling peg) introduced
17) 1982 June 23 -crawling peg suspended, fixed exchange rate against a basket of currenciesintroduced
1 1983 March 8 -NZD devalued 6% against basket of currencies
19) 1984 July 15 -foreign exchange market closed
20) 1984 July 18-NZD devalued by 20%
21) 1984 July 19 -foreign exchange market opens
22) 1985 March 4 -NZD allowed to float against all currencies

For more here is theRBNZ link - http://www.rbnz.govt.nz/-/media/Rese...b1/6022491.pdf


The monetary regimes and resulting economic conditions prior to the 1985 float are unlikely to be repeated, so if we focus on the period after the RBNZ adopted the inflation targeting measures in 1989, and the structural break in property prices after 1991 when we have price stability, then nominal property prices increases averaged 7% per annum. So from 1991 -2015 nominal property prices averaged 7% per annum.

Another way to look at it is 3%per annum average real return historically since 1965, and if you add the inflation target midpoint of 2% of the RBNZ, then that would be 5%growth per annum in nominal property prices.

So that gives you a possible nominal property price increase range of 5-7% per annum.

The questions are:
1) are historical changes in property prices useful as predictors for the future property price changes?
2) if the answer to the above is affirmative, then can those price changes continue to be achieved from current price levels?

3) if the answer to 1) is negative, is there another method which is useful as a predictor for future property price changes?

[Bluekiwi]

There is no point looking at property prices in terms of real return as the mortgage is staying at a nominal amount.

Well unless you have no mortgage.

But remember Rents are going up as well, albeit slowly.

So long term as long as you still have inflation, and you can hold on to those assets and don't go broke, its Win Win Win.

[Bobsyouruncle]

I never quite understand why naysayers say you should strip out inflation to compare RE withother asset classes. Inflation is real so what's the point. Ill take 2 to 3% gain on the banks capital every time. It's like working out the profit margin on a product now based on material and labour costs from a decade ago.
Isn't it weird?

[Wayne]

I never quite understand why naysayers say you should strip out inflation to compare RE withother asset classes. Inflation is real so what's the point. Ill take 2 to 3% gain on the banks capital every time. It's like working out the profit margin on a product now based on material and labour costs from a decade ago.
Isn't it weird?

I agree but...
People like to say property increases in value 10% per year and always has.
I think it is important to understand what makes up that so called 10%.
If large amounts of it are due to high inflation and we are in a low inflation environment it is hard to expect that the 10% will continue.
I agree that x% is just that but I consider the inflation component when thinking about the future.

[Bluekiwi]

That's a great point Wayne, if the economists are right and the 1970 to 2010 age of inflation was a blimp due to extraordinary times.
And this period of low inflation and low interest rates is now actually the norm.

Then so to could this house price inflation model of the past 60 years be at an end.
Technological advances and over productive capacity and the demise of oil are keeping prices down or slightly deflationary.

They were saying that every 7 years prices doubled, and I was working on every 10 years even though I didn't believe it, but comparing my rental purchases in 2008 to 2010 to now, that 7 to 10 years was correct.

But now, maybe its double every 20 years, or every 30 years.
But I will take Deans 2 or 3%, or even 1% as long as its not deflationary, and I am sure the megalomaniacs at Auckland Council will ensure the marginal cost of new housing never goes down

But I am not building my portfolio anymore, so I don't really care what house prices do to be honest.
I am not selling, and its what happens to my rents and interest rates that count now.

[Rentex]

Yeah good points. As Bobsyouruncle said, it's gearing that creates the larger ROI.
I like this Bluekiwi, "can hold on to those assets and don't go broke, its Win Win Win.".

[Davo36]

This came up under "Suggest Posts" on my FaceBook account: Link

I noticed Kieran Trass is down to speak at an event in August...