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What is Currently Good Value?
Currently we are in the middle of reporting season where all the companies on the stock market are releasing their financial information. This is important as we can see how these businesses are performing and we can assess the valuation of those businesses.
Assessing the valuation means we look at the amount of profit they are making relative to what we have to pay to own a stake in that business. Valuation is a different concept to that of the financial strength or appeal of a business. For example you can have a pretty poorly run business but if it is really cheap it may be a great investment. Alternatively, you can buy the best run company in the world but if you pay too much for it you will be waiting a long time to get a suitable return on your investment.
Speaking of valuations our favourite asset class or investment, residential property, is displaying some worrying signs in regards to valuation.
The Demographia International Housing Affordability Survey for 2011 found Sydney was the second most expensive city in a survey which included countries such as US, China, Australia and Canada. When using the measurement of median property price divided by Median household income a multiple of 9.6 times is the result. It should be noted that the long term average for this measure is closer to 3 times. A similar survey conducted by HIA puts Australia’s ratio of house prices to household income at 4.1 times. When they started the survey in 1995 this measure was only 2.5.
For those looking to buy their first home or an investment property how does this fit into their thinking?
Assessing the valuation means we look at the amount of profit they are making relative to what we have to pay to own a stake in that business. Valuation is a different concept to that of the financial strength or appeal of a business. For example you can have a pretty poorly run business but if it is really cheap it may be a great investment. Alternatively, you can buy the best run company in the world but if you pay too much for it you will be waiting a long time to get a suitable return on your investment.
Speaking of valuations our favourite asset class or investment, residential property, is displaying some worrying signs in regards to valuation.
The Demographia International Housing Affordability Survey for 2011 found Sydney was the second most expensive city in a survey which included countries such as US, China, Australia and Canada. When using the measurement of median property price divided by Median household income a multiple of 9.6 times is the result. It should be noted that the long term average for this measure is closer to 3 times. A similar survey conducted by HIA puts Australia’s ratio of house prices to household income at 4.1 times. When they started the survey in 1995 this measure was only 2.5.
For those looking to buy their first home or an investment property how does this fit into their thinking?
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