Value of Second hand Mansions

[fools_gold]

However, look what happens when you start factoring in periods of negative returns:
+5% in period 1, 0% period 2, -5% period 3: Option 1 is best, Option 2 is worst.
0%, -5%, +5%: Option 3 is best, Option 2 is worst.
+5%, -5%, 05: Option 3 is best, Option 2 is worst.

You can play around with the numbers and the periods, but the point is, it appears that once you factor in periods of even mild negative returns, Option 2 - borrowing the max with zero down - is apparently never the best option, and in most cases, it appears to be the worst option.

Very interesting, though things change quite a bit if you have negative returns in the first 10 years.

Basically, by saving up and paying in cash you're effectively taking a bet that investment returns over the next 30 years are going to be pretty ropey. If that's the case why bother investing at all?

[DragonAsh]

However, look what happens when you start factoring in periods of negative returns:
+5% in period 1, 0% period 2, -5% period 3: Option 1 is best, Option 2 is worst.
0%, -5%, +5%: Option 3 is best, Option 2 is worst.
+5%, -5%, 05: Option 3 is best, Option 2 is worst.

You can play around with the numbers and the periods, but the point is, it appears that once you factor in periods of even mild negative returns, Option 2 - borrowing the max with zero down - is apparently never the best option, and in most cases, it appears to be the worst option.

Very interesting, though things change quite a bit if you have negative returns in the first 10 years.

Doesn't change that much - Option 3 is still best:
-5%, -5%, +5%: Option 3 is best, Option 1 is worst.

Basically, by saving up and paying in cash you're effectively taking a bet that investment returns over the next 30 years are going to be pretty ropey. If that's the case why bother investing at all?

Because history says that inflation is the real threat (the last 10-15 years or so in Japan notwithstanding).

[jcc]

For starters, your example was based on the japanese stock market. Throwing all your eggs in one basket(japan) is just a poor idea.

Second, you skipped over my main reasonining: I can afford it even if shit goes down the drain: it just means I retire later. And if I lose my job due to disability, I still keep the house due to danshin hoken which is included in every half-decent mortgage package.

Third: there is no period of 35 years where the global economy has gone down. None. Ever. Despite that I still ran simulations where on average it went down, and the differences were small(particularly due to the cost of paying rent). The dead period for the economy including the tech bubble and 2008 was surrounded by two huge bull markets. The people that lost are the people that got out after those crashes. I've spent enough time studying this that I'm aware that's the worst possible action to take. I'm also comfortable with it because that is money I can *afford to lose*, as painful as that would be.

It's worth considering why the market always goes up: improvements in technology and productivity. There is no reason why we would get less productive. Speculation will bring booms and busts, but the market does go up and the longer you stay in the market the "safer" it is.

[jcc]

+5% in period 1, 0% period 2, -5% period 3: Option 1 is best, Option 2 is worst.
0%, -5%, +5%: Option 3 is best, Option 2 is worst.
+5%, -5%, 05: Option 3 is best, Option 2 is worst.

Ok, so first you're doing some really picky selection there. And then you're assuming net returns of roughly 0% in 40 years. That's plain absurd. I mean, a 20 year period of averaging yearly 5% losses? Secondly, your hand-selected combinations frontload the bad returns into the period the savings plans are less invested into the market. You're guilty of hand-picking extremely unlikely scenarios.

You do know that even using the nikkei, which is one of the worst performing developed indices in recent history, including the japanese stock bubble that we have positive 35 year returns? In 1983 its value was 8500. Now it's 21000. That's average yearly returns of 2.5%. The big losers on the stock bubbles were the people that bought in at the peak and sold out afterwards. But any money that was invested before 1983 in fact was still up in value after the worst of the bubble.

Anyway, I think the scenarios you picked are a bit far-fetched and would not happen in a properly diversified portfolio, BUT even if they did happen I'd be totally fine with it for the reasons I pointed out above: I'm aware of the risks, in the worst case I can afford to see a loss in value on it, though as I'm in this for the long run, I expect it'll do far better than a low-risk low-return strategy.

Essentially your argument against this comes down to "what if we have x series of good and bad runs". It's timing the market. And I don't believe I can time the market. I there'll probably be another bear market eventually, but it could be next year or it could be in ten years time. It could be short or it could be long. The market could go up for 10 years at 8% an year, and crash to half its value then and it'd still be higher than it is now! I have no intention to time the market, I plan to be in it for the long run, and as I approach my target sum I'll gradually shift more funds to conservative investments, but if anything I'll see market downturns as a time to rebalance and get more out of the recovery.

One more note: your mortgages were way off. The 15 year mortgage would have an annual payment around double that of the 35 year. Yours is only 1/3 more. The actual numbers for 1.5% mortgages would be 1.57mil and 2.98mil per year. You also skipped the tax deduction which is nearly 4 mil free money in the first 10 years of a longer mortgage(less if you're paying it off fast). Once you fix these major issues(and they are big because small changes compound with time), you see the gaps close significantly in your timed(and extremely unlikely) scenarios, while in realistic scenarios a full mortgage opens significantly larger gaps.


Anyway, I do hope the thread starter can follow this discussion and see there is a fair amount of nuance in choosing what to do.

I think the real take-home points are to
a) buy a place he wants to live
b) buy within your means
c) make a clear distinction between whether this is a home or investment
d) treat it according to the results of c. If it's an investment it really should be part of a larger portfolio and it should be something they can afford to not see returns on
e) understand what your worst case scenario is and how that would affect your behaviour. I'm pursuing a more aggressive strategy because I still have a lot of time in the market and I'm not dependent on the returns. This is not applicable to everyone

[DragonAsh]

Ok, so first you're doing some really picky selection there.

Dude, it’s a friggin’ spreadsheet, did you want me to list 999 different scenarios?
Go ahead and put in examples of net positive returns over 40 years but with periods of rising and falling equity prices.
See what happens. Can you find examples where option 2 is better? Sure. Are lots and lots of real-life scenarios where option 2 is worst? Yes.

I pulled examples from the Japanese stock market because the examples here are talking about 35yr loans at 1.5% and such. But it’s not like I couldn’t pull any number of examples from any of the other equity markets around the world.

And then you're assuming net returns of roughly 0% in 40 years. That's plain absurd. I mean, a 20 year period of averaging yearly 5% losses?

Really? You think it’s absurd? You shouldn’t. In the last 100 years, we have four 10-year periods where real equity returns were negative, and one 20-year period with zero real returns. It’s not absurd at all.

15 year mortgage would have an annual payment around double that of the 35 year. Yours is only 1/3 more. The actual numbers for 1.5% mortgages would be 1.57mil and 2.98mil per year

No, my numbers are fine; in the 15yr example, 10mn is paid down, so it’s only a 30mn loan, not 40mn. I’ve rounded up for all three scenarios to factor in house repairs and such. You are right that I forgot the ‘tax break’, so Option 2 would have a slightly higher tax break. Whoopee, somehow I don’t think the Y8500 difference per month between option 2 and 3 changes all that much. It’s not 4 million in tax money, it’s less (the deduction is only on the balance of the loan, so as the loan balance goes down so does the deduction – but fine, let’s call it 4 million, and let’s call it 3 million for the 30mn 15yr loan. The 35yr loan pays 11 million in total interest, or 7 million even after the ‘major’ (LOL LOL LOL) 4 million in ‘free interest’. The 30mn 15yr loan pays 3.5 million, which is only half of your 35yr loan even ignoring the tax deduction for the 15yr loan..

I think the scenarios you picked are a bit far-fetched and would not happen in a properly diversified portfolio

What do you think the biggest draw-down (peak to trough) has been in the past 100 years for developed nation government bonds?

Third: there is no period of 35 years where the global economy has gone down.

If you’re thinking of returns based on economic growth you are seriously misguided. Ignore economic growth, because the correlation between real stock returns and economic growth is *negative*.

I'll happily and comfortably stand by my numbers and scenarios as - at the very least - reasonable.

[jcc]

Well, I don't want this to become an argument about right or wrong as like I pointed out above it really depends on your capacity both to take on and to tolerate risk. My right is your wrong, and both our rights may or may not be wrong for crew.

I do think your scenarios are unlikely but that doesn't mean they couldn't happen, but discussion of the long term returns of diversified stock portfolios would be better saved for a different thread. I still think there are some issues in your numbers(I did miss the 15 year mortgage being on 30m, but the numbers are still way off the actual rates), but arguing specific scenarios is kind of beside the point: I can agree that in a very poor market paying up the house early will end up in small gains(after all 0% interest or 1.5% for a shorter time vs no gains on investments is a clear gain), while in an average or strong market early investment will give significantly better returns.

That leaves crew to make a decision on whether he is making an investment he can afford to lose on. To return to the original subject, should they get an expensive condo in an expensive part of the city?

That takes a few questions to answer:

a) is it well within their means? If paying it off/saving up for it is a stretch, that's a straight up no.
b) is it for investing? If so, and it is the vast majority of their invested assets, it's probably a poor idea as it's not very diversified. So probably no
c) if it's for living do they plan to live there a long time? If yes, then it may well be worthwhile if it fits the kind of neighborhood they would like to raise a family in.

If they do come to the conclusion they're buying to live long term and it's something they want, then we finally get to the issue of saving on interest payments or investing early, and at that point it really comes down to the ability to take on risk vs immediate financial security. I do think they should take a mortgage just for the danshin hoken that comes with it(a good hedge for the worst case of disability/illness), but a conservative choice of paying it off asap is absolutely a viable choice if they are more risk averse.

[DragonAsh]

I still think there are some issues in your numbers(I did miss the 15 year mortgage being on 30m, but the numbers are still way off the actual rates),

I have no idea how you're arriving at your numbers.
Option 2 is a 40mn 35-year loan, Option 3 is a 30mn 15-year loan.
Both are 元利均等返済

The annual payment for 2 is 1.459mn, round up to 1.5mn, and I bump this to 1.6mn to factor in repairs and stuff.
The annual payment for 3 is 2.234mn, I rather generously rounded up to 2.3mn then bumped to 2.4mn to factor in repairs and stuff.

I mean, if you're able to come up with an amortization table with different numbers, by all means share.

[jcc]

I still think there are some issues in your numbers(I did miss the 15 year mortgage being on 30m, but the numbers are still way off the actual rates),

I have no idea how you're arriving at your numbers.
Option 2 is a 40mn 35-year loan, Option 3 is a 30mn 15-year loan.
Both are 元利均等返済

The annual payment for 2 is 1.459mn, round up to 1.5mn, and I bump this to 1.6mn to factor in repairs and stuff.
The annual payment for 3 is 2.234mn, I rather generously rounded up to 2.3mn then bumped to 2.4mn to factor in repairs and stuff.

I mean, if you're able to come up with an amortization table with different numbers, by all means share.

You're right about that sorry. I misremembered the numbers that you had in there(I remembered the 15 year being only 1/3 higher but it is 1/2 higher as would be expected)

I shouldn't even have brought it up as the important discussion here is that of the decision-making process

[StockBeard]

To answer the initial question:
My opinion is also that people who sell their manshon are trying to recoup their loss. When we sold ours (it was about 10 years old, we weren't the first owners), the overall cost for the buyer was pretty much the same thing we had paid 2 years before, when we bought it.

However with the closing costs, all the fees that everyone takes here and there, we lost a significant amount of money by buying and reselling. We estimate it would have been the same if we had rented the place for that same amount of time, so not a big loss, but still a loss.

Bottom line, from the eyes of the prospective buyer, the manshon looked like it hadn't dropped in value over the course of 2 years. In practice, it did, and the difference went in the pockets of the real estate agents, attorneys, banks, etc... and we initially bumped the price up in a vain attempt to compensate for that. I'm sure lots of owners trying to sell are doing the same. So it could even look like the price is going up...

[RetireJapan]

To answer the initial question:
My opinion is also that people who sell their manshon are trying to recoup their loss. When we sold ours (it was about 10 years old, we weren't the first owners), the overall cost for the buyer was pretty much the same thing we had paid 2 years before, when we bought it.

However with the closing costs, all the fees that everyone takes here and there, we lost a significant amount of money by buying and reselling. We estimate it would have been the same if we had rented the place for that same amount of time, so not a big loss, but still a loss.

Bottom line, from the eyes of the prospective buyer, the manshon looked like it hadn't dropped in value over the course of 2 years. In practice, it did, and the difference went in the pockets of the real estate agents, attorneys, banks, etc... and we initially bumped the price up in a vain attempt to compensate for that. I'm sure lots of owners trying to sell are doing the same. So it could even look like the price is going up...

That's a really good point about the fees. We ended up paying about 10% of the sale price in fees when we bought our place (this is higher than usual because many of the fees are fixed and we paid a very low price for the manshon).