2019-05-01 Money Australia

W

hen it comes to money, an

absolute necessity is a really

good “crap meter” because,

by goodness, there is so much absolute

nonsense said and written about money and

investment. The good news for me is that

this provides an endless source of issues to

write about, but the bad news is that many

people seem to have some of the great

money myths ingrained in their DNA.

One of my favourites is the oft-quoted

“good property doublesinvalueevery

seven years”. This seemstobeinthereal

estate agent’s trainingma l

it has also penetratedthe

of many investors. Aswit

any good myth, thereis

always partial truth.

Here the part truth is

that at times property

does double in seven

years, but when it

does, watch out, as we

must be nearing the

end of a boom. In our

big east coast cities in

particular, there is clear

evidence that in someare

prices did indeed double

2011 to 2017.

Here a well-developed p

very handy. Let’s thinkaboutthisideathat

property doubles everysevenyears.Todo

this, property would need to growat a bit

over 10% a year. A useful tool forallofus

is “The Rule of 72”. If some maniactells

you that an investment will doubleinvalue

in a set number of years, just divideit into

72. So if property will double invaluein
    seven years, divide 72 by sevenandyouget
    around 10%. Sure, it’s actually10.285%,but
    10% will do us just fine.
    Now 10% may seem possible.Aswith
    any investment, in some yearsit happens.
    But our crap meter should be onhigh
    alert because common sense showsus
    the problem. In many cities, $1millionis
    a common price for a home. Let’sapply
    the “double in seven years” idea.Inseven
    years this house would be worth$2million.
    That sounds possible. Seven yearslaterit
    would be $4 million. That soundsunlikely.
    But in another seven years it wouldbe
    $8 million. And to my great amusement,
    as I love compound interest, ifwejump
    forwards 21 years, our house isworth
    $64 million. Even better, 21 years later it
    is worth $512 million. Then you have to
    wait only seven more years for your house

IN YOUR INTEREST Paul Clitheroe

PaulClitheroeisMoney’schairmanand

chief commentator. He is also chairman

of the Australian government’s Financial

Literacy Board and a best-selling author.

o beworth

1 billion.And

ofthishappens

urlifetime.Yep,

ondoubling

n years,takes

y g ere.Sowecan

safelysaythatanyoneofferingus10%a year,

goingonforever,is eitherunawareofbasic

maths,a foolora crook.Takeyourpick.

Mindyou,forinvestorsandowners

a propertyboomis a verypleasant

experience.It alsohelpsthebroader

economy,asevenwhenpeopledon’tsell

theyfeelricher.Thisincreasesconsumer

confidenceandflowsontohowwespend.

Theonlylosersarethefirsthomebuyers

whosaveddiligentlyonlytoseepricesgo

upmorequicklythantheirsavings.

Butbigjumpslikethiscannotbe

sustained.Inthepasta bigjumpinprices

hasbeenreversedbyallsortsofeconomic

events.Usuallyit hasbeena decent

recession,suchastheGFCof2009.Here,

AustralianswereluckyasChinesedemand

forourcommoditiesexploded,savingus

fromrecession.Butinmanypartsofthe

USpropertypricesfellbyovera third.At

othertimesit hasbeenveryhighinterest

rates,suchasin 2000 whenmortgagerates

hit18.75%.Thistimeit is different.Interest

ratesarelowbutwehavehadlowwages

growth and the banks have turned down the

lending tap, making finance harder to get.

Even in a tough property market, the

anual.But

minds

th

eas

from

crapmeteris

to

$

all

inou

$1milli

everyseven

770 yearstogetthe

There’s

so much

nonsense

around that

we all need

a good crap

meter

property PR spin keeps on churning. I

doubt we’ll hear the “double every seven

years” line for a while, but I did read with

interest a good result from an auction in

Leichhardt, Sydney, on March 31. I also like

good news, so I was pleased for the vendors

of a property that sold for $1,705,000, a

healthy $105,000 above the reserve. What

interested me more was that they bought it

new in June 1991 for $255,000. The excited

vendors had sold for over six times what

they had paid for it.

Stamp duty aside, renovations and selling

costs, and just looking at the purchase and

sale prices, how did they do on an annualised

rate? Well, despite buying at a very good

time in the downturn of 1991 and seemingly

getting a good sale price, they were well off

10% a year. That would have given them

a sale price of $3.6 million. But they did

achieve, before any costs, an excellent return

of a bit over 7% a year – this would have

been some 4.5% better than inflation.

On a really good investment, history

shows us that 3% to 5% above inflation,

before tax and costs, is quite possible.

That is my long-term target on my money.

But if anyone tells you about returns much

higher than that, your crap meter should

be on high alert.