Don’t know how you can predict this Foundation ,as you don’t even know where these regionals are.

Saying that , we have 6 IP’s val’ed at 1.6 mill, bringing in more than enough $$$ to pay for themselves and a bit. We only started doing this 2 years ago and all of the houses are regional and cost well under 200k each

AS Chopper Reid says, ” Peter, you need a big mugachino of harden the f#ck up”

Summary

Only a small proportion of houses are bought and sold each year. This small number, generally around 5%, set the new price levels accepted by banks, valuers and ultimately owners and borrowers for the entire stock of housing. This is an illusion and a folly.

Bubble? What bubble?

If we turn the clock back a few years to when the total value of all housing stock was $1 trillion dollars in the mid-1990s, total housing debt stood at $250 billion.

In 1997, the rate House Price Inflation (HPI) hit 10% for the year. Although only 5% of houses turned over, the banks told everybody their houses were worth 10% more, implying $100 billion in extra wealth/equity. But all that had really happened was $50b of houses had sold for $55b. Magically, $5b spent became a $100b gain in wealth, but worse still, much of this extra $5b was debt-funded.

In a rational lending system, the banks would say “Hey, house prices are 10% higher, so instead of lending against $50b of houses this year, we’ll lend against $55b of houses.” Or, if they believed house prices were in a sustained 10% pa up-trend, perhaps an EXTRA 10%, ie $60.5b. But no, they revalued not 5% of the houses per annum at the new price, but 100% and the public largely fell for it. They withdrew a large chunk of their newfound ‘equity’, spent a little and invested the rest… in houses.

This added to demand and drove up prices even further, year after year. By 2000, we’d gained around $650b in additional housing wealth for an outlay of just $120b in extra debt. It’s no wonder the ‘borrow your way to wealth’ / ‘Other People’s Money ™’ seminars were doing so well – clearly it worked!

2003, total housing value passed $2.5 trillion and total housing debt was a miserly $540b. We’d turned $290b into $1,500b.

Now certain Cracker Housing contributors, the government, banks, REIs, and recently (shock and shame) the RBA themselves have all told us this is good, fine and dandy: “the sharp run up in household debt has not been a source of concern, as household’s overall balance sheets have remained sound.” ANZ Economics told us. A senior politician who should know better said “While it’s true that Australian families now have more debt than ever before, compared to asset values they are very low geared” or something very like it. And did you ever see those rubbish surveys that came out and said “the average Australian is now worth $270,000, 30% more than just 2 years ago”? Gack.

It sounds good, but it is in fact lunacy.

Why? Because for values to remain inflated, turnover must continue at reasonable levels at current prices. Current prices are only met with increased debt (witness household debt continuing to rise by an additional $240b in 3 years of relatively flat prices, increasing LVRs on new loans, booming LMIs…). At 5% turnover per annum, it takes 20 years for a change in price to fully feed through to a new debt-load. We’re 4-6 years into our new level of house prices, with 14 – 16 to go.

So today with the average national price at around $300k, 420-450k houses must be sold each year. With the average new loan at $235k, that’s $100b in turnover, and around $80 billion new debt each year __just to maintain current house valuations__.

Where we had $250b in debt secured against $1,000b of houses a decade ago, we now have $800b in debt secured against $2,800b of houses, BUT an implied / required future debt load of $2,000b secured against that same $2,8000. The net national gain is exactly ZERO! It staggers me that most people can’t see this. If you don’t put anything in, you can’t take anything out.

Now if we take gross national wages at $435b today, and compound them 3% pa until 2022 (no recession or aging population here then, huh?!), they’ll be around $700b pa, growing by $22b that year. Instead of housing debt at 184% of wages as it is today, it will be 286%. Instead of housing wealth at 644% of income, it will be just 386%. Assuming 8% interest rates, debt servicing will take 29% of gross income, rather than 15% today! In 30 short years we will have quadrupled the (relative) amount we spend on INTEREST PAYMENTS ALONE from 7% to all most 30%! And all for what? NO NET NATIONAL GAIN!!!

Meanwhile the Schmucks who buy (sorry Ff, Cobran ) those average $300k houses today with a $235k mortgage will fall into two groups:
– Those whose loan is IO will have spent $300k in interest and still owe $235k on a house STILL worth $300k

– Those whose loan is PI will have spent $340k on repayments and still owe $170k on a house STILL worth $300k.

All best-case scenario, pie in the sky kind of wishful thinking, because earlier I lied when I said “NO NET NATIONAL GAIN!!!” In econo-speak there will be a national gain, it will just be a NEGATIVE one! Imagine if the current 15% DSR rose to 30% tomorrow. Many people would cope, although most highly leveraged investors would be shirtless, or at least wearing brown pants. But if this happened over a decade or two, people would adapt. What wouldn’t adapt is the economy. The extra interest costs will take the equivalent of 65 billion dollars in today’s money OUT of consumption and investment EVERY YEAR! Enough to cripple the economy and bring on the mother of all depressions. I think.

So, best case scenario, we’re screwed. Worst case scenario, house prices collapse. Or should that be the other way around? House prices need to fall to a point where housing debt is growing at less than wage growth. As I’ve said before, that will require a massive (50%++) average drop in house prices coupled with a massive drop in turnover.

The third scenario, and final remaining option for us collectively, is to fund another house price boom, thus delaying the inevitable and magnifying the consequences when the correction does eventually arrive. In fact I think we’ve been doing this for the last 20 years anyway…

Thanks for the interesting reply

ELEANOR HALL: But you talk about depression in Japan. I mean, even though there are obviously pockets of real hardship in Australia right now, you know, we’ve got so many more Australians in employment, we’ve got booms in at least two states. Do you really think that a depression is likely in Australia any time soon?

STEVE KEENE: If we follow the path that Japan has, then yes I do, because exactly the same things were said in spades about Japan in 1989. So you can get to be absolutely going gangbusters, you hit a debt wall, and if it’s as big as we’ve got now, you just don’t get out of it without the help of things we’re currently trying to get rid of, like inflation.

ELEANOR HALL: From your knowledge of the level of private debt in Australia, have you been surprised by the official figures on defaults and mortgagee sales, because they don’t seem to be so worrying?

STEVE KEENE: I was surprised by those figures. It did look strange compared to what I saw about the data.

With levels of debt like we’ve got, with the price bubble that we had beforehand, and with the number of people who were encouraged to regard speculating on house prices in Sydney as being investing for their futures, I can’t see how you can match off those levels of private debt against the ending of the housing bubble, and still the level of mortgagee sales look quite low to me. It just didn’t seem to compute, basically.

And your show yesterday, about the number of… the proportion of sales which are actually mortgagee sales, but aren’t being noted as such, that’s more realistic, and that is extremely scary, because we’ve never had scales that high since the great depression.

ELEANOR HALL: So, from what you’re saying, we are heading for economic breakdown…

STEVE KEENE: I believe we are.

ELEANOR HALL: Can we avoid it?

STEVE KEENE: No. I’m titling this ‘the recession we can’t avoid’.

Now, I would be delighted to be wrong, and I’m not making an econometric prediction. I am making a prediction based on looking at the data and the debt deflation coming our way.

ELEANOR HALL: But a recession we can’t avoid – when?

STEVE KEENE: Well, that’s the $64 million question. If I had to put a stab at it, I’d say about one to two years away.

ELEANOR HALL: And that’s Dr Steve Keene, Associate Professor of Economics and Finance at the University of Western Sydney, with that dire prediction.

What part of the interest rate cycle are we in? I would have thought at the bottom but some say nearing the top…

I know this isn’t going to make millions following this path

Is it too late for us or should we perhaps wait a little longer to see what the market is doing in the new year.

You will have up to 6 years in which you can continue to claim the first one as your main residence and not pay CGT if you sell. I guess what all this boils down to is, after up to 6 years you can decide to sell one and not pay CGT.