Forum Replies Created
What more were you looking for god_of_money?
toe wrote:Between late 2002 and 2005 the market plateau'd. So I dont see how you say that's impossible.I’m still not convinced. You’re looking at the weighted average for 8 capital cities. Is it possible that the plateau you’re seeing is really just an average of rising markets (such as Perth) and falling ones (such as Sydney)?
toe wrote:And while house prices have increased at about the same rate they did in early 2000s, the Price to Income ratio has remained stable since 2003. Which means the likelyhood of a crash based on affordability has been the same since 2003, and it hasn't happened yet.Not too sure why you brought this up. I never mentioned that a crash was related to affordability. However, I do notice that your graph finishes at 2009. Look at this more recent graph and you’ll notice that affordability has actually worsened since 2003.
http://upload.wikimedia.org/wikipedia/commons/0/00/Real_Melbourne_House_Prices_1965_-_2010b.JPGtoe wrote:There was a smaller economic event which lead to banks tightening lending practices at the same time as hundreds of thousands of ARM mortgage resets doubled peoples mortgages simultaneously (within the space of three months anyway).OK, what was the smaller economic event that lead to tighter lending practices and ARM mortgage resets?
Or are you saying that was the event? If so, regarding tighter lending practices, I think you might be confusing cause and effect. I would say that falling house prices triggered tighter lending practices, not the other way round. Of course, once the cycle starts, they feed off each other.
Hi Pharvie – you raised some good points – and I agree that price can trade within a tight range. Would you agree however, that it’s usually due to one of two reasons – either a) there’s not much interest or trading happening so not much price movement, or b) there’s a lot of interest but it’s a battle between bulls and bears.
We can definitely rule the first scenario with housing which has become a national obsession. If then it’s the second scenario, there has to be an eventual winner between bulls and bears meaning prices cannot simply plateau for long.
Hi Guys,
I’m not so sure there needs to be an “event” in order to pop our housing bubble. With the American housing bubble, or the ‘87 stock market crash for example, nothing specific happened that caused them to burst. A bubble relies on a constant supply of new entrants to keep it going. One day, you eventually run out of people willing to pay ever-increasing prices, and the whole thing comes tumbling down.
thecrest, I think there is absolutely no chance of a plateau after a boom. Feel free to check out my recent post on this topic if you’re interested in my reasons.
http://aussiehouseprices.blogspot.com/2011/01/will-property-prices-plateau.html
Cheers,
Andy.Great topic Steve and to answer your question – of course Buffets comments can be applied to Australia.
The only difference being that our bubble was about twice as big as theirs, so our inevitable crash will likely be twice as severe – see the second graph on this page: http://www.whocrashedtheeconomy.com/blog/?m=200903fWord – I think we've gone as far as we can with this debate. Was fun – cheers.
god_of_money – I've got no idea what you're talking about or why you're asking me to define the GFC.
Here's a link – look it up yourself. Looks like it started in 2007, but I'm not an expert.
http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932010god_of_money – I thought the GFC started around mid 2007 (the peak of the sharemarket).
Do you have a link to prove otherwise? And what is your point?fWord wrote:In a similar fashion, when either the property bubble bursts or property goes out of fashion, prices of all houses are reduced when they change hands. But when things pick up again, the houses in the most desirable locations will have the greatest potential to increase in price (as the graph in that PDF file you told me to read, demonstrates), because of their scarcity and demand for them. Hence the property market cycles.You’re spending a lot of time making a point that I’ve already made – that the more expensive areas rise and fall by the biggest percentage. Personally, I wouldn’t take that to mean it’s OK to hold throughout the downturn. It could, for example, take 20+ years to get to its pre-bubble peak.
fWord wrote:Really? Property investing is a business. Look at the example on diamonds again. Diamonds routinely change hands for ever increasing prices. Did they improve in value because the previous owner added some desirable colours or lustre to the diamond? Did they bake it in their hands to add some quality to it? No! They are the exact same thing! And it is not entirely correct to assume that NOTHING was done to a house that changes hands for ever-increasing prices. The quality of finishes may have improved, major renovations may have been done etc.Have a look at the million-dollar mansions of today. Are you trying to tell me that these houses are the same today as they were some 30 years ago, with all the stainless steel kitchen appliances, luxury granite bench tops, massive inground pools, tennis courts, built-in plasma TVs and sound systems? How can we say that value or convenience (or both) has NOT been added to these houses?
Sure you can make a business out of property by, for example, buying a knock-down job, re-building and selling for a profit – or even just as a full-time landlord offering shelter to tenants.
But in a property boom, prices go up because …prices are going up! They are rising more than can be explained by increasing population, shortage of land, general inflation etc. Therefore, we are paying each other increasing amounts for the same thing for no good reason – with less to spend on other things and less money being investment in the productive area of the economy. It’s a Ponzi scheme and it will end in tears. That’s fine of you’re OK with that. I’m not.
fWord wrote:The way I see it, there's a lot of seriously loaded people out there. If these people are always buying into the hip and trendy suburbs, prices are going to get higher as each of them tries to outbid other parties for a chance to live in these areas.
You keep saying that you’re not implying that good areas won’t fall. So what is the point of the above sentence?
fWord wrote:AussieHousePrices wrote:It’s not rocket science – paying eachother ever increasing amounts for the same thing is in no-one’s best interests. It’s not good for individuals and it’s not good for the economy.
This is precisely the nature of business, unless we're talking about a charitable business. That's how coffee beans worth a few cents end up in a cup of our coffee that eventually costs us $2.50 to buy.
No it’s not the nature of business to buy and sell the exact same thing from the same place at ever-increasing prices. Business is involved in producing something or adding value/convenience etc, and selling it for a profit.
fWord wrote:Don't be so sure about that. Knowing the speed at which the world is moving, the memories we have of the recent GFC would be merely a shadow of what it really was in just a few years time. Just looking at the stock market for example, it appears the market rebounded over a very short period of time, and this was after people were still talking doom and gloom, and when I was still hearing people say, 'Believe me, things will get worse before they get better.'
Well, we’ll see. I think when people find out that they’ve been wrong all along that prices always go up, their confidence will be shattered. More importantly, the financial scars from the popping of the biggest asset bubble we’ve ever seen will take a long time to heal.
god_of_money – charts of the All Ords and Dow Jones are readily available on the internet. Check them out.
Well said Melbournite.
god_of_money wrote:The facts ARE
All Ords went back to pre GFC level in 18 months
DOW went back to pre GFC level in less than 18 monthsNo they didn't. In fact, they still haven't recovered to pre GFC levels.
fWord wrote:Then why bring up the point earlier that property values are crashing (or have crashed) in other countries to say there is no truth in the claim that property values will trend upwards? If we have not studied the fundamentals in these countries, we cannot draw any conclusions about the reason for their property market crash, nor make any comparisons between their bubble and ours in Australia.It’s clear from other countries that property booms can and do end in busts. I would need a good explanation of why that’s not possible in Australia. Otherwise, I’m going to assume that we’re no different.
fWord wrote:But of course, in tying in with the above point, I've learnt that you're not interested in finding out what has happened in other countries to cause a crash, which could give us information to predict the reasons behind the crash you believe we need to have (and which we could indeed have) in Australia.That’s not true – I’m very interested in how bubbles burst in other countries and have read a lot about them. What I’ve learnt is that bubbles blow up and they burst. Fundamentals have little or nothing to do with it. In fact, in many cases, the bubble bursting is so powerful, that it affects the fundamentals, rather than the other way around. I’m working on a post to explain how I think bubbles work. Keep an eye out over the next couple of weeks, and feel free to share your thoughts over there. http://aussiehouseprices.blogspot.com/
fWord wrote:Frankly, I don't know how much clearer I can make this. Since when did I say or imply that prices in these areas cannot fall? I am merely stating the obvious: well-located property will always be in demand and will always sell for more, relative to properties in outlying areas that are devoid of something unique, desirable or trendy.You’re right – that is saying the obvious. I though there must have been more to what you were trying to say.
fWord wrote:There is no point preaching that the end of the world is coming if we cannot predict with any degree of certainty when and why it is going to occur.I think it’s still worthwhile investigating the risk of a property crash, and not just believing everything you read in the media. That way, you can take what you think to be appropriate action. You can’t predict with any certainty if and when you are going to have a car accident, but you still take out insurance – just in case.
fWord wrote:Under these conditions, there will STILL be people complaining that that $840K house is so unaffordable even though there are cheap $300K houses (worth $500K today, if I might add) sitting everywhere just waiting to be bought.It’s not rocket science – paying eachother ever increasing amounts for the same thing is in no-one’s best interests. It’s not good for individuals and it’s not good for the economy. Yes, the crash will be painful. But the soon we get it over with the better.
fWord wrote:Additionally, I'm getting the impression that 'bubbles' seem to get bigger and bigger everytime. If we had a crash, I'd be waiting for things to stabilise and the next big bubble to come.There will always be bubbles. But I doubt the next one will be in housing. It will probably take a generation to forget the lessons learnt from this bubble.
fWord wrote:Sorry, you've got me confused here. Which statement are we referring to that leads you to bring up this point?I was referring to when you said “Hmm…your statement seems to imply that people who put money into property do not focus on potential cash flows” but I may have misunderstood.
fWord wrote:Not entirely true. With depreciation benefits and the deductibility of losses from a property venture, it is possible to make a property neutrally or even positively geared. This is especially so for people in the highest tax bracket.Agreed. But non-cash expenses are dwarfed by cash expenses. So, the only way that tax can turn a cash flow negative investment into a cash flow positive one is if it was on the verge of becoming positive anyway.
fWord wrote:Well then, if we don't look at fundamentals, how do we know when it is the 'right' time to purchase?Good point. I do believe in looking at the fundamentals of Australian property when deciding whether it’s over-valued. But I don’t see the point in studying the fundamentals of another country that I’m not considering investing in.
fWord wrote:Just going back to Singapore's property market for a moment. I personally think that prices are awfully high, however the sheer density of living and the size of the population will continue to put upwards pressure on prices. I don't see a property crash occurring in Singapore because, high as the prices are, that's just the way it is.How then do you explain the price crash in Toyko?
fWord wrote:Well-located property will be in the highest demand relative to poorly-located property and this is irregardless of market conditions.I’m not following – it still sounds like you’re saying nice places in nice areas can’t fall in value??
fWord wrote:Circumstances like these only make things more DIFFICULT for people wanting to buy a house. So again, does a property crash really help to improve the prospects of home ownership? If not, then why are people spending so much energy stating that property is overpriced when a property market crash isn't going to help anyway?Personally, I would rather struggle to save a 30% deposit and buy a reasonably-priced house than easily save a 5% deposit and struggle to pay back the super-sized mortgage plus interest for the rest of my life.
In addition, I’d imagine it will be tough DURING the crash but once prices have stabilised, prices will be affordable and lending should become reasonable again.
Are you serious? Is that actually what it recently sold for or what the owner is asking? That would be a 2% yield – before costs!
fWord – you were the one that said the majority of investors are in the business of capital gain. And in recent times, I would agree.
I also agree with you about tax. Although, I think many property investors don’t realize that a tax deduction just reduces the loss (as opposed to eliminate it, or turn it into a profit).
Underlying profitability is the rent less expenses. To be an investor, you would have to be satisfied with the expected profitability of the investment over the life of the investment. A speculator does not care about that – as long as the capital gains outweigh any potential loss.Regarding other counties – I don’t see the need to compare all of those fundamental aspects of their economy and housing market, because I don’t think property booms and busts are driven by fundamentals.
Your last few paragraphs seem to imply that desirable houses cannot go down in value. But you’ll find it’s the top houses that go up the most in an upturn and down the most in a downturn. Look at the last graph on page 1.http://www.rpdata.com/images/stories/content/pressreleases/rp_data_rismark_home_value_index_december_31_2010.pdf
You mention banks being reluctant to lend in a falling market which is right. And this will only exacerbate the downturn. Consider this – a slight increase in deposit requirements from 5% to 10% HALVES the amount someone has available to bid on a house!Hi Wynyard. My guess $460,000 now. About half that in 7 years.
fWord wrote:Where then is this fine line between investing and speculating?
Investors focus on the potential cash flows of the investment (e.g. rent / profitability / dividends). Of course, they might also hope that the value of their investment will go up as the potential future cash flow improves. Speculators aren’t as interested in the potential for cash flows. In fact, when it comes to property, they are happy to lose money and get a tax deduction, in the hope that capital gains will more than offset their loss. Therefore, they are speculating that the value is going to go up, regardless of what the underlying profitability of the venture is.
fWord wrote:What is it that caused other markets to go from gangbusters to disaster and what conclusions can we draw from them
I would sum it up as: fear and greed, sentiment and the herd mentality.
fWord wrote:The question is, what is the 'downtrend' that we're likely to see? Is it really going to be a crash where the property market falls flat on its face and prices tumble 40% like some pundits have talked about? Or are we more likely to see a 10-15% correction?
I think we need to see minimum 40% to get back to long-term trend, and to get back to historical norms of multiple of household income and rental returns.
fWord wrote:Then it is the market dictating the cost of renting, is it not? And why should an investor charge rent that is under market value?That’s right. I’ve never suggested that investors should under charge.
fWord wrote:The vast majority of the investors on this forum are actually losing money on their investments every year. However, without sounding cliche, they are in the business for the capital gain (which they predict will occur),If that’s the case, they are not investors, they are speculators and many will get burnt when capital gains dry up. When people are buying simply because prices are rising, not because the investment is sound, that is a pretty good sign that there’s a bubble. It’s the greater fools theory and it works – as long as you’re not holding the investment when greater fools run out. Do you not find it strange that a loss-making investment continually goes up in value?
fWord wrote:The thing I urged was 'taking action'. And if saving, renting cheaply etc is what they're doing, then that's good.Great – we agree there.
fWord wrote:However, is there some truth in them saying that property prices will always go up?No there’s not truth in it. Prices are crashing in many countries around the world. 20 years ago, prices in Toyko started falling and have still not recovered to their bubble prices.
fWord wrote:Honestly, people can only attempt to predict the future based on what has happened in the past.Yes, this is true. Where people go wrong, however, is they predict in a straight line – when prices are rising, they assume they will always rise, when prices plateau, they think it will be permanent and when prices are falling, they can see no end to the downturn in sight. In reality, markets move in cycles and what goes up beyond inflation and wages must come down.
