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Monthly Archives: November 2012

November 2012 — Points to Ponder


What is happening in our economy …………. How is the property market doing …………….. And the loaded question ‘What is the Value of a Property’ ……………………

Dear Readers,

Thanks to all of you for accepting our invitation, for accessing our blog, and for your participation & feedback. Your positive feedback inspires me to explore new ideas & topics. I look forward to more of your active participation.

A particular thanks to all of you who called up to comment and chat about the August 2012 Article (“What is Money”) and the September Article (“If it is Too Good To Be True”). To all the over 55’s out there, in particular, please take note and make wise judgements when investing your hard earned money.

My apologies for missing the October Blog. I had urgent Family commitments. I was advised, for the sake of continuity, to do a ‘cut & paste job’ …….. I refused. Originality is more important, I thought. Hope my honesty is appreciated.

It is nearly end of Calender Year 2012, The Christmas break is coming soon …….. What is all the ‘Daily Media noise’ telling us ? …….. What are you hearing ? ………….

The Big Picture

Europe and the Euro Zone is slowly trying to manage its way back towards growth and better times, some are saying.
Others have consistently argued that the whole concept of the Union, especially the Euro Zone, is a flawed concept to start with.
That many of its members are, if they were treated as independent private entities, already insolvent. That the Centrepiece of this Union, Germany, is in itself under severe strain trying to support a collapsing structure.

What are you hearing ? ….. What do you think ? …………..

The US – Recent presidential election was made out to be a contest between two opposite Ideas & economic thinking …………. But is it ? ………..
What are their major differences on things that really matter – The Economy, Monetary Policy, Foreign Policy, Budget Deficits, National Debt ? ………….
Some say the US economy is bottoming out and can only get better. That wise elected leaders will have to ‘compromise’ and will work out solutions.
Others say the US economy has already fumbled over the “Fiscal Cliff” …….. That no ‘Compromise’ by the two sides in politics will solve anything ………
That the majority of legislators do not even understand what the problem is, let alone start to think of rational solutions ………….
That the US central bank (the Fed) cannot borrow and print (create money & debt) forever …………
The common sense, which even smart kids realise, that ‘you cannot rescue a man drowning in debt with a burden of more debt’, is not visible anywhere ……….

What are you hearing ? …………… What do you think ? …………..

China – Which we in Australia see as our big white hope, is engaged in a ‘Change of Leadership’ process. There is talk of a bottoming out of its slowdown. That demand (for our commodities – stuff we dig up and ship to them for dollars) should pick up soon. What is this optimism based on ? ………….

What are you hearing ? ………… What do you think ? …………..

Australia – Our local economy, in spite of its current management, and uncertain world economy (please refer to the first half of my July 2012 Blog for more details), is reasonably stable.
Both Commodity prices and volumes are down, some say it will be so over the medium term (3-5 years).
The big hope, that ‘Consumer Demand’ will take up this slack, did not happen. The current big hope is for the ‘Infrastructure & Property Sector’ to pick up the slack ………… This is in the background of continuous flat / deflating property values.
Some say ‘Property Prices’ are holding well and rising ….. with expected growth in the near future.
Others talk of ‘flat’ prices over the medium term, with chances of up to 10% fall, in the medium term.
What are you hearing ? ………….. What do you know ? ………………….

This brings us to the topic of the month – “What is the Value of My Property”?

Go to any BBQ, party, Get-Together, etc. and soon enough the subject of property & value crops up. This fascination with the “Property Market” is valid, most of us own (or we pretend to – our banker does) our home, or a property (directly or through our investments & super).

A recent conversation with a young couple, trying to educate them on ‘Property’, the ‘Market’ and ‘Value’ started me thinking. I have tried to open a discussion on three basic questions;

What is the ‘Property Market’, if there is any such thing ? …………………..

What is “Property Value’ and who decides it ? ……………………………..

And the shockingly obvious question – Does it Matter ? ……………………

The Property Market

This is a very broad concept, easy to generalise, but can be misleading when used in relation to a particular property.
Firstly, there are Global Regional property markets – Europe, North America, Latin Americas, Middle East, Asia, Oceania (Australia & surrounds), etc.
Under this would come individual National Property Markets.
Another Classification would be broad Purpose – Residential, Commercial, Office, Industrial, Rural, etc.
Within a National Property Market are sub-regional Markets – Different States & regions within the country.
Within Each State there are differences – Capital City, Other cities, Towns, Villages, etc.
Within Each City, Town & Village will be various Suburbs.
Within Each Suburb will be ‘Sub-Markets’ – Based on Type (Detached House, Unit/Villa/Town House, High Density, etc.), Location (A subjective choice based on demand & ‘Prestige’, Socio-Economic mix & background of current residents, etc.), Proximity (To Main Roads, Public Transport, Recreational Facilities, Educational Facilities, etc.).
And Many more of similar minute criteria & preferences.

Now imagine a complex mixture, of varying degrees, of all of these criteria. Then add in various statistics, opinions, projections, agendas, hopes & wishes of everyone who care to comment on this subject ……..

I think we are getting closer to the question – What is a Property Market ? ………………………

For the sake of Clarity I have limited this blog to Residential Property

So, How is the residential Property market doing ? ……………..
At best you could quote a much generalised trend, based on statistical figures sliced & diced to suit any particular agenda.
At worst, if this trend is directly applied to A Particular Property, it could be misleading.
The right question could be – ‘How is a particular type of property (Detached House, Unit, Villa, Town House, High Density, etc.), in a Particular Suburb, trending over a particular period of time (till today, future predictions should be taken with a pinch of salt)’.

Residential Property & Value

What is Value ? – The Oxford Dictionary, in part, states “The Material or Monetary Value of Something”. A wise man would say “Value is; Worth in One’s Judgement”.
A moral man would say “To put a Price on Every Thing is to Value Nothing”.

Think of a rubber band between your hands; Think of the left hand as the “Buyer” and Right hand as “Seller”.
The band can be stretched in many ways, sometimes by the left hand, sometimes by the right, other times by both. Some times less stretched & other times a bit more …………………
And while doing so, ask yourself the question “What is the value of My Property” ?

Perception, Sentiment, Past History, Future expectations …………. Of the overall economy, of Current Circumstances, of Future Expectations, etc. affects current perception of Price & Value of Property.

Consider a Particular Property. Ten different buyers (or a hundred, the logic remains the same) may have many different reasons for paying different Prices for this property – Because they see Value in it – for various reasons;

‘I love the property, don’t ask me why, So will pay “A” for it’. (Emotion driven decision)
‘It once belonged to my ancestors, will pay anything to get it back, so will pay “B” for it’. (Decision based on pride of ownership, not price or value)
‘My wife’s friend lives in a similar property in this suburb, So why shouldn’t We ? Will pay “C” for it’. (Living up to the Joneses)
‘Seems a lot of people are ready to pay higher price for this property, they should know something. They should be right, so will pay a bit more …… Will pay “D” for it. (He dunnit, She dunnit, so will I)
‘My research and numbers add up, will pay only up to “E” for this property and no more’. (Rational decision)
And there will be variations & combinations of many more reasons ……………

Price & Value is decided by the Market; Based on stock supply, current demand, willing buyer and willing seller ……..
Add a bit of marketing savvy, and a good dash of ‘luck’ and you are getting closer to the question “What is the value of My Property” ?

Now the contrarian question “Does it Matter” ?

You would, by now, be saying “Don’t be crazy Hari, of course it does …… What do you mean, does it matter!!! …………
Hold on, let me explain.

Let us look at your home.
What is its primary purpose ? To live in.
Who owns it ? Most probably your bank (mortgaged). You pay the bank ‘Rent’ (Interest) for the privilege of living in the property.
What if you did not have your property ? You would probably be a tenant and pay ‘Rent’ to your landlord.
Do you derive an ‘Income’ from your home ? No, obviously.

Let us assume you expect to live in your property for at least 5-10 years. Assume you paid “X” for the property. You may hope and expect a gradual increase in the value of your property over the long term, no harm in that expectation ……..
But, does it matter what the ‘Media Noise’ is saying about price & value on a weekly, monthly, yearly basis ?
Suppose you hear (and are convinced) that your property has gone up 10% …….. Does it matter ?
Has your property (or land size) grown by 10% ?
Has your income suddenly grown ?
Has your bank account become bigger ?
In reality, what exactly has happened ?

It can matter, if you Feel (perception, not actualised reality) that you are somehow “Better Off”, “More Wealthy”, are of “Higher Net Worth” because of general rise in property values around you.
It can make you feel good ……… This is called the ‘Wealth Effect’.
And everyone around you is talking about it.
And the ‘Media’ reminds you of it daily ……….
And all those sellers of dreams (products, gizmos, toys, lifestyles, holidays, you name it) ………
And your Friendly Bank too …………….

There is a risk of ignoring (or sidelining) rational concepts of Thrift (living within your means), of Saving, of thinking long term ………….
‘Why bother to save, my property will automatically make me wealthy’ ………
‘It’s ok to borrow & spend more now, I feel wealthier’ ………..
‘Live for Today’ ….. ‘Improve your Lifestyle’ …… ‘You deserve more’ …… ‘Just Do It’ ……….

And so it can get to you, and you may end up in more debt (borrowing against the ‘Higher Equity’ in your property) for today’s consumption ……….

It can also matter, if you do not let the ‘Wealth Effect’ get to you.
If you use this ‘Higher Equity’ for a productive purpose (not immediate consumption).
If you continue good habits of Thrift (living within your means), of Saving, of thinking long term, etc., ignoring the ‘Wealth Effect’.

I hope the blog is challenging enough to start all of you thinking ……………..
I will leave the forum open to you now ………… What are your thoughts on all of this ?
What is your experience ?
Come, join the discussion, share your ideas & experiences …….
I look forward to your opinion, counter argument, response, constructive criticism, feedback, etc.

Looking forward to hearing from you …………

Hari

 
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Posted by on November 16, 2012 in Uncategorized

 

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