Buy a House Now for Capital Gains and Income

On Thursday we predicted doom and gloom for the Australian housing market. More doom and gloom than we’ve seen already.

‘On a 12 month basis capital city dwelling values have fallen by 4.5 per cent, with the weak conditions in Melbourne (-7.0 per cent) and Brisbane (-6.4 per cent) dragging the weighted average down,’ RP Data property analyst Tim Lawless said in The Age.

But today we’re going to suggest buying houses, for two reasons. Capital gains and income. The catch is, it’s not Australia we’re on about. But, just so you don’t think we’re serial doomers and gloomers when it comes to housing, here is why you should flip a house in the land of beer and sausages, and invest for income in the land of peanut butter and jelly sandwiches.

The Eurozone has a one-size-fits-all monetary policy. This sounds like a bad idea, because different regions surely need different monetary policy, right? Well, the United States of America only have one policy, and their collective GDP isn’t much smaller than Europe’s. So if it works there, why doesn’t it work in Europe? Perhaps because Europe doesn’t have a fiscal union – a government spending union. But the American states have their own fiscal sovereignty too, on many matters, and they issue their own debt.

We’re not sure why the EU’s monetary union is somehow inherently doomed. The economic arguments just don’t make sense to us, because they apply within countries like the US as well. But what does make sense is the opportunities the monetary union creates for you. And the one we want to uncover today is squarely in our ‘policy profiteering’ category of how to make money. You see, the government’s misguided policy of manipulating interest rates never has the effect they want it to. Just like all other government policies. (The exception is when they want something really stupid, like a housing bubble – then they get it.)

But the predictable mistakes that governments make create opportunities – policy profiteering opportunities. In this case, they are creating a housing bubble in one of the few countries to avoid the 2007 episode. Just think about it for a quick second and you’ll see the point we’re making. Low interest rates created housing bubbles in places like Spain and Ireland.

Now rates are even lower. So where is the next housing bubble forming? Germany is our bet. Although you might discover the same phenomenon in countries we’re less familiar with like the Netherlands and Austria. Anywhere that didn’t have a bubble in 2007 might have one forming now.

The monetary policy that is keeping Greece, Spain and their fellow PIIGS on life support is not necessarily finding its way to Greece, Spain and the rest. At least not all of it. That’s because central bankers can’t control where the money goes once they create it. Funds are fungible. This is a very important point to understand, but we can only get it to make sense with an example…

Imagine a charity with admin expenses of $50,000 and regular donations of about $500,000 dollars. You, the local billionaire, decide to give the charity $1 million. But, being a suspicious and astute Markets and Money reader, you insist on the condition that your money is only to be used for the cause, and not to line the pockets of charity employees. None of the million is to go to admin expenses, you agree with the charity. A year goes by and the charity employees overtake you on the highway in their new Bentley, eating Häagen-Dazs ice cream in the back. You discover that admin expenses of the charity have grown by exactly $500,000.

Storming into the charity office, you demand an explanation as to why your money was spent on the Bentley and over-priced ice cream. The answer you get is ‘funds are fungible’. The charity employees didn’t spend any of your donation on the Bentley and ice cream, they did it with other people’s donations.

The ECB faces the same problem. Actually, all money faces the same problem. You cannot connect one flow of money with another because all money is the same. Money can be redirected, manipulated, reclassified, and moved around. With the ECB’s efforts to prop up Greek, Spanish and other PIIGS debts, part of the money will inevitably flow into other parts of the European economy. And we reckon German property is a big recipient.

The reasons are fairly obvious. Housing is sensitive to interest rates, and rates are low. The German economy is one of the few that Europeans probably feel like investing in. And the German politicians aren’t likely to do as many stupid things as their fellow Europeans (short memory, we know), so foreigners will park their money there. That makes more money available for loans in Germany.

So anyway, all this is leading to a boom in German house prices. It’s already underway according to your editor’s Grandmother (in the interests of disclosure, we do have an indirect interest in the German property market). But our bet is that it will continue until interest rates normalise or prices go through the roof completely.

But if you’re not interested in capital gains in Germany, how about a nice income play in the US of A?

Our colleague Chris Mayer and Markets and Money founder, Bill Bonner outlined the opportunity in US housing on Wednesday. As you read it, keep in mind that property prices may continue falling in the US. In fact, they are falling now. But that doesn’t mean they can’t earn a pretty impressive rate of income:

“US housing is the best value play in America,” says colleague Chris Mayer. “If you own a house then look to buy and rent another.”

Here’s the idea. You can now buy a decent house for $60,000 to $80,000 depending on where you are. You spend a little to put it into rentable condition. Then, you can rent it for $1,000 a month…maybe $1,500. At $1,200 a month on a $60,000 house you have a gross rental yield of nearly 20%. Assume you spend half of that on taxes, maintenance, etc. That leaves you with 10% net. Not bad.

Better yet, mortgage it for 30 years. Say you put up cash of $20,000…and mortgage the rest. Your mortgage payments should be a good deal less than $250 a month. So, after expenses (assuming they are 50% of your gross rent) you are netting $250 a month, which works out to a 15% yield on your cash.

And what happens to that $40,000 mortgage? Could be that it is a burden for years…and you pay it off with no gain or loss. More likely, it gets cheaper, year after year. Inflation knocks it down. Perhaps slowly at first – 3%…5%…

But we wouldn’t be at all surprised to see it get knocked away completely in a few years. Most likely, within 10 years a $40,000 mortgage…at today’s fixed rates…will be worth less than half of what it is today. So, you’ll make another $20,000 over 10 years…giving you a real yield on your investment over 20%…

This seems to us like the perfect investment for a retired person with time on his hands. Put $60,000 of savings into a money fund and you’ll get…what…$100 a month?

Instead, buy 3 houses for $60,000 each…mortgaging $40,000 on each one. You’ll have to work to fix them up and find the right tenants. But you’ll end up with positive cashflow of about $750 a month…plus, maybe a bonus of $60,000 more over 10 years as your mortgages get whittled down by inflation.

All of that sounds like quite a good proposition. Imagine the look on your friends’ faces when you tell them you’re making a fortune in the housing market while their investment properties here in Australia plunge.

Until next week,

Nickolai Hubble.
Markets and Money Weekend Edition

ALSO THIS WEEK in Markets and Money

By Dan Denning

According to Roger Kimball, gleichschaltung means two things, ‘First, bringing all aspects of life into conformity with a given political line. And second, as a prerequisite for realizing that goal, the obliteration or at least marginalization of all opposition.’ This, then, is the politicization of all discussions and then kind of an enforced sameness in the discussion. It sounds pretty contemporary, actually, doesn’t it?

Stagflation: The Consequence of Printing Money That Nobody Wants
By Tim Price

Moreover, an outbreak of serious stagflation will decimate conventionally managed debt and equity portfolios. And given that most people invest with the crowd, with conventional investments or conventionally managed portfolios, stagflation will wipe the savings and livelihoods from untold masses. But, we live in strange times – times, for example, that reward bankers handsomely for bankrupting the economy.

The Fake Money From The Fed That Goes “Nowhere”
By Bill Bonner

Let’s start with the money. When a fix is needed, the feds come up with money. But everyone knows the feds are broke. So where does the money come from? “Out of thin air,” was an expression used by John Maynard Keynes. But how could that be? How can you get cash…money…out of nowhere? And what kind of money could it be…if you could get it at no expense? It must be a “funny” money…a zombie money…It must be worthless, right? But it’s not. That’s the crazy thing…

Examining the Long-Term Benefits of Gold Investing
By Joel Bowman

Does that make gold cheap, or expensive? A buy, or a sell? It depends on your perspective. We’ve all wished we could go back in time and buy ’90s shares of Apple, acres of unpopulated beachfront and unloved ounces of gold. Alas, time marches in one direction and one direction only. So where will gold be tomorrow…a year from now…next decade?

A Growing Ageing Population… Catastrophically Successful Life Extension
By Patrick Cox

Even those who have no personal interest in life-extension strategies, beyond those supplied by conventional medical networks, will have to deal with the social and economic problems they cause. Our lives will be profoundly affected by emerging biotechnologies that will push maximum healthy life spans up much faster and further than ever before. Typically, when I say that life extension brings problems, the default assumption is that I’m referring to traditional fears of resource depletion and overpopulation. I’m not.

Nick Hubble
Nick Hubble is a feature editor of Markets and Money and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about Markets and Money, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails.

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4 Comments on "Buy a House Now for Capital Gains and Income"

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You must tread with caution is seems if looking to invest in the US property market. There are many stories online already of people who have been burned doing this. It appears the main pitfall involves unscrupulous agents selling property in badly run down or dangerous neighbourhoods where it is difficult to find tenants, and ones that pay the rent. The houses are often vandalised and stripped of their fixtures and fittings if left unattended for long. Other problems are poorly built houses that are overvalued even at 40k or 60k US. You must be prepared to go over yourself… Read more »

The collapse of our dollar vs the USD is a bonus too, AUD vs USD reverts back to trend of 70 cent range is a nice little earner.


I guess so Nick. If you can find a place that will be shielded from the blood death and misery likely to ensue in a post dollar reserve USofA than it will certainly be a bull market for sure. Invest when there’s blood on the streets..not for the faint hearted I reckon.

Markus Werner
The property prices in Germany might be soaring, but it highly depends on the area: In former east Germany you can get prices as low as 30000 for house and large plot of land in Countryside. In some cities you have a hard time finding an Apartment for 5x that amount. As for the interest rates: Spot on: I have a loan at the moment in Germany: 2.5% from a normal Bank 1.8% Government sponsored loan for upgrading the house with “green” technology and insulation. As for the bubble: I am not so sure about it being a bubble (yet).… Read more »
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