QUOTE (ThomasBeyer @ Sep 17 2010, 01:46 PM) I see .. equity gain through less assets ?
A DEflationary view of the world !!
What I am saying is that by having prudent debt level and paying it down through holding you have a built-in automatic cushion.
We did increase our cash reserves .. but to what level ? 6 months rent ? 12 ?
ANY model has assumptions.
One can`t function in this world without assumptions !!
My assumptions is:
a) debt will cost slightly more in a few years BUT NOT A LOT MORE
b) there is plenty of cash
c) people move to desirable countries (not Iran, not Afganistan, not China, ..) such as W-Europe, USA, UK, Canada and Australia .. if they are allowed in
d) even people move to strong parts of this so called Western world, like cities in W-Canada where one can raise a family in peace, with jobs, democracy and decent laws free from persecution for little reason
e) it costs more to build new than buy old and upgrade .. thus: buy old and upgrade
f) plenty of money around at 50-70% LTV .. cheap .. why not use it as long as it is 2% or more cheaper than a CAP rate of an asset
g) plenty of investors around that wish a yield that exceeds 2% or 3% with low risk .. plenty !
h) plenty of folks who rather not buy stock or mutual funds but don`t know what to buy and need help
i) the sun will rise tomorrow .. and the day after .. and in 12 years .. and in 250 ..
... there area few more ..
Thomas I agree, assumptions are the premises upon which we forecast. In regard to a) above, as you mentioned in your earlier post, inflation is the result of demand - however demand doesn`t give the whole picture; inflation is also, and more importantly, the result of the increase in the money supply, competiting for the same number of goods produced, not just the demand for goods. Trillions of dollars of stimulus have been injected into the markets globally. Much of this money has made its way through the system and is now parked on the sidelines. In the US they’re talking QE2 – so there’s more stimulus to come. When this money finally hits the market, which it inevitably will, we’ll see spikes in prices and the question is how high. I`m not willing to bet a high-ratio mortgage on this and I would advise investors not do so either. I`m not disagreeing with you that a) is likely but I`m not sure I agree with a) either so I would suggest to investors to pay down debt as an alternative to leverage, and therefore not expose themselves to unnecessary risk on a low probability outcome and thus risking us all (widespread default as in the US). f) is tempting to an investor, however resist, a 2% margin on a cap rate isn`t much to work with, slim returns, but I believe the cap rate already factors in the cost to service this debt. But to the point, cap rates as you know, if you’ve been in this game long enough, are at historical lows which suggest there are just too many people playing the RE market (do you agree on this ?) - not a good sign - just like any bubble in gold, commodities, resources, oil and even bonds, when margins shrink beware.
But as I said I hope you`re right and that I`m wrong – I’d prefer it that way.