Forum Archive Index - November 2001

["Jeremy" <jeremy@electrosilk.net>]

> I've done Pure Maths 2 and Econometrics and Advanced Stats 3 amongst other
stuff
> Actually I'm rather amazed at the complete lack of any analysis of
property companies.
> Here we have companies in NZ with gross dividend yields of over 10% that
are sustainable,
> we have interest rates that have been monotonically declining for over a
year

Returns on property are directly derived from current interest rates.
Income from properties (after a short period of time) settle to a fixed
margin above the interest rate arbitrated by the marginal taxation rate.

Look at it this way.  You borrow money to buy an investment property.  You
have to get at least the cost of your money back each year or you have to
write off the cost of the money against other income.  *If* you have other
income, you can afford to pay a higher interest bill and still come out of
it looking like roses (in fact that is the reason some people invest in
property - to make a loss).  If not, you have hope to your rental income
exceeds the cost of the money.

Rule 1. A lot of people who invest in property are older and have low
'other' incomes to compensate.
Rule 2. People subject to rule 1 charge rental slightly above the cost of
money and hope for capital gains
Rule 3. People not subject to rule 1 charge rental under the cost of money
and write it off against other income.
Rule 4. The competition between rule 2 and rule 3 people keeps property
rentals closely related to the current interest rate

Summarising these rules. Lower interest rates means lower long term property
returns.  Interest rates are falling.  Your income will fall.

You have made a poor analysis and chosen a bad time to invest in the
property market.

Jeremy





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