Couple of weekends ago I met an old friend who has an investment portfolio of three houses in
Melbourne, Australia. Curiously, I asked him about his thought process behind
investing in three houses. Specifically, what did he see in those three houses
that made him willing to borrow x times his annual income to buy them. His
reply – potential house price growth.
That sounded too abstract, so I asked him
to explain. He started with the location of those houses and the amenities
around them (i.e., school, transport, shops, cafes, parks, etc.). He added how
close they were from the central business district including commute time by various modes of transport. And on he went about those houses and
their neighbourhood.
After listening for a while, I asked him
how does all that lead into potential house price growth. That was followed by silence, which I broke by saying potential house price growth is simply how much more another person in the future is willing to
borrow to buy those same houses than him. To borrow a phrase from Howard Marks, he is betting (or waiting) on a bigger fool.
PS - we are still friends and felt our friendship grew stronger with that thoughtful disagreement.
