Cap Appreciation vs Yield

Given the explosion in house prices and also the similiar rise in shares in the dot.com era...are we as "modern" investors moving from yields to cap appreciation as our tool for determining returns? Most people i know would be happy to subsidise a rental property for the perceived capital appreciation. Most buyers in the dot.com boom(and burst) bought shares with little or no dividend solely on the basis of projected cap appreciation...have we entered a new era? Are people too greedy?

Firefly

Hi Firefly,

I think modern investors are moving from yields to capital appreciation and there's lots of evidence abroad to support that. Lots of people I know are happy to subsidise a rental property, but not forever, they are paying their, albeit low, yield off the mortgage in order to bring it down in case of interest rate hikes. None, that I know anyway, are preparing to sell.

As to people being greedy, I've heard this being bandied about on another thread, but in reality, everyone would like to get ahead. Those who put in extra work, for extra pay, in order to make life easier for themselves and their families are not called greedy. Most people want to have a better life and the enterprising try to find a way to achieve it.

The property market in Ireland has been bouyant for a long time now. If people who were able to avail of low interest rates to purchase, handed to them on a plate, so to speak, and yet did not take the opportunity.....would some people call them stupid for not doing so?

No, by and large, I don't think people are too greedy. I think the ordinary joe soap is sick of seeing those with money doing even better simply because they can! In Ireland, Joe Soap wanted a slice of the pie and took it. That's not greed, it's enterprise.

Investors focus on yield, speculators focus on capital appreciation.
In the current Irish market, a majority of non-PPR buyers are speculators.
In any bubble market, speculators dominate but when the market crashes, yield returns as the most important factor in an "investment decision".

I am an investor but I'm currently selling as the yield is too low in relation to the current market value (as opposed to the purchase price). With rising interest rates and a rapidly weakening property market, I think many investors will realise that without capital appreciation, yield is vital - causing them to sell.

Whether speculators are greedy or not is not for me to say. It's human nature to want to do well and get ahead, but then human nature creates asset bubbles.

whathome said:

I am an investor but I'm currently selling as the yield is too low in relation to the current market value (as opposed to the purchase price). With rising interest rates and a rapidly weakening property market, I think many investors will realise that without capital appreciation, yield is vital - causing them to sell.

Whether speculators are greedy or not is not for me to say. It's human nature to want to do well and get ahead, but then human nature creates asset bubbles.

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If this (rental market) is your only income stream then yes sell. If it's not and you want to sell because you're not making enough money out of it...is this greed? This is not personal btw Whathome, I just think it's interesting. Doesn't everyone try new things, property purchase, investing in stocks/shares etc. to try to make a few bob extra? Is the difference between a speculator and an investor so big? How long does a speculator have to stick with property investment before he/she deserves the title investor?

liteweight said:

If it's not and you want to sell because you're not making enough money out of it...is this greed?

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Do you think it would be greedy liteweight?

If it's good enough for Warren Buffett, it's good enough for me...
Warren Buffett's reason for selling a property in 2005:

"People go crazy in economics periodically," he continued. "Residential housing has different behavioral characteristics, simply because people live there. But when you get prices increasing faster than the underlying costs, sometimes there can be pretty serious consequences."
[broken link removed]

Turns out that he sold at just the right time - as usual. The market has weakened since.

To get back on topic.... Cap appreciation vs yield? Yield every time.

- The professional investor buys on known information, as in - the property purchase puts money in their pocket (yield)
- The novice/speculative investor (speculator) buys only on the fact that the trend of prices is rising

whathome said:

Investors focus on yield, speculators focus on capital appreciation.

Click to expand...

Echo.

No Whathome, I don't think it's greed......I think it's business!!

The FTBs reduction in stamp duty made prices soar for everyone, including the investor. Looking around the market place for the last 8 months or so, it was impossible to find anything that would produce even a reasonable yield, once let. Personally, I wouldn't buy for capital appreciation only but I would for a small yield and the hope of some appreciation. My criteria are different though. We have 2 children and intend to retire abroad, so eventually, there will be no family home. I'd like to see my kids alright and somewhere for us to come back to.

Firefly posed the question of greed and it just started me thinking. Ireland is a very expensive place to live and I don't think people can be branded greedy for trying to get ahead by whatever means open to them. They may be uneducated and naive in the field but lots have made money. The problem is knowing when to stop.

The opposite is also true i.e people not realising what they're sitting on. Yes even today this is the case. Slightly off topic but still..I met an old couple about 6 months ago while I was taking a course(like to keep brain active). They were both 70ish and wanted to sell the family home to retire abroad. They were very worried that they wouldn't have enough to live on for the rest of their lives. I asked where they lived and was gobsmacked that they didn't know the value of the place. They sold it for almost 9M...yes that was 9M!! They genuinely didn't know and now they're worried because they don't know what to do with all that money as they have no children!!

I suppose the story kinda makes a case for capital appreciation, but only in the long term. Do you think there's still a decent yield to be made out there?

are yield and capital appreciation mutually exclusive? I would have thought that the earnings yield on a property would ultimately determine capital appreciation. If you buy any investment with a low earnings yield you ought to do so because you think that earnings will grow over time.

In the case of property, accepting a low yield initially would make sense if you were anticipating significant increases in rental rates - if rents do not increase (as in Ireland) then earnings are shrinking relative to the market value of the property.

The same is true of any asset IMHO - what is it really worth but the stream of income that it will produce?

Earnings yields must also be judged with reference to prevailing interest rates as an investment has to return more than the deposit rate otherwise it is overvalued. Mania for certain types of investment (particularly property) has pushed earnings yields lower but there are still good yields available on other asset classes. For example the earnings yield on the DAX is 8% at present and the ISEQ's earnings yield is 6.5%.