keens ridiculous scenario, page-45

warnie what others fail to understand when you talk about yields on property....the property yields reflect a capital growth component built into it..... hence it appears low.....but you are in fact talking about a capitalization rate......say the 300,000 prop is returning 12000 pa or ....compared to 7% bank interest = 21000, to the average joe difference of 9000 income

but the cap rate built into that equation is 4% ie the rent 12000 divided by 4 = 300,000 mv., so as rates move down the cap rate also moves down....lets say a year later 6% is the interest rate...the prop is still returning 12,000 rent, but now divide the 12000 by .03 = 400,000 mv

over time the rent should increase in line with inflation...but not cover inflation...because the cap rate does that for you
when interest rates go up the cap rate goes up and produces a lower capital growth...or mv....which is what has been experienced the past 2 years as interest rates went up.....
house prices have grown 12-15 % in the last year alone....so an average 3-4 % built into the cap rate is still below the actual growth.....
so for the sake of comparing interest rates in that example the depositor gained 9000 income....but the prop owner gained 100,000 capital gain.....huge difference

interest on deposit offers no such capital growth....so the 7% current rate you get is it....nothing more its income only....your 100,000 capital remains the same regardless if it there 1 year or 20 years......

so lets use the term cap rates when discussing property
cheers