You had my curiosity with property, @Bogan but mention Bitcoin and you have my attention :)

Firstly, love the rant and actually don't think we are miles apart. And I'm really glad you framed it relative to inflation/purchasing power (that's definitely something i missed earlier on too. Some long-term debt is really a good thing against hard assets).

A place to live is a world apart from an investment property, so there I agree with you too. And in that regard i tend to think any return is unimportant, so long as the value of your house more or less retains its purchasing power over time. EG if your house doubles or halves is irrelevant unless you plan to start renting (don't!) or downsizing. So long as you can afford to carry the repayments without too much stress, i say it's got to be one of your main priorities.

And the point with leverage is bang on too. It changes everything, but I do tend to think that people tend to forget that it cuts both ways. And a lot of people appear to be geared to the hilt. But, yes, if you have a reliable income and moderate gearing, it's a huge point in favour of property.

But even with that, you still need a certain level of growth, especially when you look at an all-in cost and carrying basis.

You noted earlier at the growth in asset-to-income multiples for both stocks and property, and how that's underpinned the growth in these assets over and above what their underlying earnings would account for. To what degree there is an element of ponzi to that, i'm not sure (but take your point), but i guess my argument is that multiples can only stretch so far before you hit very real serviceability constraints.

Understanding that multiple expansion has accounted for much of the growth in property (itself facilitated by a long-term structural decline in rates and a preparedness by households to allocate a larger share of income to housing), and that that thematic can only play out to certain degree (eg. price to income ratios going from 6 to 12 is a lot easier than going from 12 to 24), just means that I'm somewhat sceptical of average residential property prices sustaining the kind of growth most Australians have come accustomed to.

And if you're negatively geared and leveraged 10-1, as many people are, 3% growth probably wont cut it. And if you can buy outright, or for very little debt, you lose the benefits of leverage and might as well go shares (which will probably do better).

It all depends on the structure and growth assumptions you use, I just can't get excited about the prospects for growth despite supply shortages and strong demand -- household balance sheets and credit conditions just seem like they will, at the least, keep a lid on things. Another significant and sustained fall in interest rates would obviously help -- and i do tend to think inflation concerns will take a back seat if ever there's a wobble in the property market. But it's not something I would want to bet on.

It's not that a sensible investment property portfolio will end in disaster, far from it. I just prefer my (hopefully realistic) target of 10-15%pa ungeared in shares, versus a 3-4%pa gross, or 7-8% leveraged in property.

Plus, i'm told managing a property is a nightmare :)

@Bogan interesting comments on property, leverage, shorting the dollar and Bitcoin. I've not really heard those observations/opinions much before. It's made me think. Thanks. I like these novel discussions found on Strawman :-)

I have a hopeless track record in property, with the 2 houses I have previously owned, and both sitting on the market for 6+ months before I could sell them and I made very little net capital gain after stamp duty and other expenses. My first house in Wollongong cost $141k and I sold it 5 years later for $185k but I had sunk about $20k and a lot of time into renovations. The next house I bought was a 4bdr spec home and the builder couldn't sell it so it was advertised on local TV believe it or not. I lobbed in a low ball offer of $305k and waited him out, refused to negotiate, and he eventually gave in. Then of course I found that house difficult to sell :-/

I haven't owned a home for over 20 years now which has been fine because my personal circumstances changed a few times, and I've rented some great houses. I invested most of my savings in shares so financially I'm going OK, but it's certainly not sensible strategy for most people. It is scary when house prices move quickly and I'm wondering if I ever will get back in. Luckily I sleep soundly at night because I listen to the Motley Fool podcasts in bed (true story).

I've never done the maths to see if I would have been better off with a leveraged property portfolio or shares. But I've been really happy with my total returns from shares over the long term and I've never felt confident with buying property. Real estate agents and transactions cost freak me out. Anyway it's good to read your post and learn. I plan to buy a home in the next 5 years.

"Shorting the dollar

What I failed to understand at 24 was that borrowing in dollars effectively shorts the currency. i.e. if the dollar is worth less over the period of time that you take to pay back the loan, then you benefit from this. For example, if I am $5 million in debt now, and these loans have on average 20 years left on them, then what will that $5 million be worth in today’s dollars in 20 years’ time? If we assume an average devaluation of 3%, then it's about $2.76 mill. Borrowing dollars which will decrease in value against assets which go up in value is akin to picking money up off the floor. We KNOW that the dollar is going to go down in value – it is designed to. The only risk to this approach is that the asset goes down in value more than the dollar does, or you get yourself into trouble with your repayments. Educated purchasing of property and a reasonable holding period is the answer to risk one, and judicial use of debt is the answer to risk two. It’s fair to say I have a lot of ideas around risk one and am happy to talk about that to anyone who asks, but I won’t go into it today.

By the way, this system of an ever devaluing dollar is total garbage, but I am not taking on the job of discrediting modern economic theory today – maybe tomorrow! ???? Side note - If I do come out of retirement, it will be because I've found someone to supervise my PhD in how inflation functions as an opaque and blunt tax and completely messes up the taxation system as well as many other aspects of the financial system. I will then critically evaluate the proposed justifications for the 2-3% target rate with the relatively misunderstood side effects of inflation in mind. "

This is what I also failed to understand. >_<

@Bogan great thoughts and I tend to agree with most of what you have said. A few points from my history:

• Purchasing PPOR is a fabulous investment … avoid rent, avoid inconveniences of being a tenant, see the benefits of CGT free capital growth (I’ve been fortunate that the capital appreciation of my last couple of houses has been like having an average Aussie Income earning family in the front room). I agree that the strategy of living in your first investment property is also really good, my callout there is that if that is your intention, try not to pay down capital … you want to be able to extract all your money when it comes to turning it into an investment property and buying your next PPOR. Best way to do this is with an offset loan that you are hyper-disciplined about … i.e. it’s not a Line of Credit for buying jet-skis … once money goes in there it never comes out unless its to buy that next house. I fell into the trap of having paid down too much of my Melbourne property when circumstances changed and I had to move to Sydney … would have loved to have kept it as a rental but the numbers just didn’t work.
• If you can avoid “trading up” your property that’s a key to success … just like driving a clunky old car rather than having to try and display wealth with a leased Range Rover. Maybe some extra size for a growing family but also think about how you might downsize later in life and get some of those capital gains out while still living in an area you love.
• Sensilble leverage is the way to go … my wife always wants to take on more leverage than me (she feels very comfortable with property and I prefer shares). We are in our 50’s now so I’d rather be able to see a trajectory that when the income from personal exertion stops / diminishes the properties can look after themselves.
• My experience is that the first few years of ownership of a property always look pretty bad until as you say, money devalues and inflation increases rents while the mortgage outgoings should be coming down. With hindsight, we’ve often regretted the properties that got away because we were quibbling over a few % of the purchase price. With a lot of investing, time in the market can help was away the impact of a sub-optimal purchase price.
• Investment properties are a bit of a pain in the but to manage (even with a property manager) there is always something breaking or some tenant breaking a lease or some State Government wanting to change the rules on land tax or some other thing that could make the whole investment strategy come unraveled. It’s funny that I probably lose more sleep of stupid little property annoyances than paper losses due to stock volatility.
• Demographics seem favorable … Australian population is growing yet housing supply is not keeping up (effectively meaning increase in rents and increase in asset value) … 660K migrants last year + 315K births … some need to be housed immediately, some will be looking for housing in 20 years time. The new dwelling numbers fall well short with 12,500 approved in the most recent month. https://www.abs.gov.au/statistics/industry/building-and-construction/building-approvals-australia/latest-release

Diversification of asset classes is a great concept … Some blend of property, stocks and other stuff is a fabulous idea.

• Within that context I’ve got way too much diversity of stocks … I.e. too many individual companies to try and keep an eye on and certainly way more than the 25 or so that is commonly quoted as more than enough for a sufficiently diversified portfolio. I know I look at diversity across geographies, industries, market caps and growth vs dividend stocks. I like to think that I will be able to eke out enough dividends to cover a large part of my expenses without being forced to sell and reduce overall capital. I’m also trialing whether I can make any meaningful amount of income (i.e. a couple of extra percent) from selling covered calls (especially on the US portfolio) … so far in this fast rising market not a winner.
• I want to preserve my assets … I’ve got a disabled son son my investment horizon and estate planning considerations are a bit more complicated for me as its not about accumulating until retirement and then spending until we die. We need to leave something to generate a solid income for him as I don’t have enough faith in the quality of life he will get from over-stretched government programs like the NDIS.
• I dipped my toe into Crypto, BTC and ETH plus some shitcoins. Started out by trying to trade it with not really much to show. Have just endured a massive drawdown (diminishes faith in the asset class) and now the huge comeback (makes it hard to buy due to over-hype fears). This one is certainly hard to value. The more I’ve been going deep, the more I am starting to believe in BTC as a buy and hold forever strategy so am looking at how to slowly increase my exposure. Kudos to you for having the nerve to get to a 20% allocation. I’m still hovering around 2% and kind of feel I should try to get it towards 5-10%. The biggest argument I hear for BTC is aligned to your value of money point …
• FIAT currencies will constantly be tinkered with by government and central banks (inflation, rates, QE, QT etc) … buying power will diminish over time.
• Technology should be causing deflation (I.e. through productivity enhancement). The potential of AI and robotics etc. should mean that the unit cost of things comes down (but they seem to go up in FIAT currency terms)
• The value of bitcoin should be increasing as the energy required to mint the coins increases and the total number of coins gets closer to the absolute maximum. To make bitcoin cheaper to mint, energy costs need to come down and we certainly don’t seem to be doing a good job of that as a global society.
• My concern is that there stills seems to be a massive Ponzi effect in crypto (which worries me) as the free float is very low … a lot of the value seems to be based on all the people who are not market participants seeing the light and wanting BTC. It’s really hard to place a value on a Ponzi scheme (and hence value BTC in any traditional way).

Just my 2c … thanks for sharing your PoV and looking forward to reading your PhD thesis.

For me the the really big advantage with property in Australia is that banks love it and will let you operate way more leverage than you can with any other asset. Buying a house to live in is a no brainer in my mind for this very reason as it has lots of lifestyle benefits and forces you to save and is a low risk investment you can then use to continue to leverage for the rest of your life. Not a no risk investment but pretty good. Get it paid off as quick as you can and tgen borrow against it for other investments. Having said that I have no idea how people afford the current house prices in areas like Sydney and I have been fortunate enough to never have to life there since the 70s!

In my mind buying an investment property is s rarely a good investment compared to an investment in a share portfolio and should be the next step for most people.

But the main thing is - spend less than you earn and invest the rest!