Forum Replies Created
- Originally posted by World Changer:
we just need to be careful listening to reports from the media and taking that as truth for what the property market is doing just from 2 examples. This is the stuff that changes the market as people listen to what they hear on the news etc and act accordingly as if it was gospel.
As I pointed out on another thread, this is not just one or two extreme example properties…
Here’s more from Louis Christopher, the from the company who produce the official figures used by ABS/RBA et:
Sydney Edition 24 August 2006When is a crash… a crash?
An interesting story came out earlier this week, which was published in The Sydney Morning Herald regarding the state of the Sydney housing market. The main focus was a number of examples where property owners have lost as much as 42% based on a purchase in 2003 and a subsequent sale this year. Please click here to read the story.
A number of the sales were forced repossessions and highlighted the extent to which how much red ink some mortgagees are in. No doubt, given the most recent rate rises, this number will surely rise.
However I think it is only fair that we point out this is not occurring in the majority of transactions and to think the Sydney market has “crashed†as per the titled headline is probably taking the point too far.
Yes certainly the market has fallen, and in some areas fallen considerably. Yes there are examples of where home owners have lost everything. However we have found that the majority of Sydney repeat-house sales over the period 2003 to July 2006 have actually been in the positive. Please see the table results below.
Percentage of Resales
Price decline 31.8%
0 to 2% increase 13.3%
4 to 8.5% increase 13.9%
8.5 to 20% increase 21.7%
Greater than 20% increase 19.4%
NOTE: Based on properties selling between 2003 and July 2006 for data reported to APM prior to 24/7/2006. A total sample of 4526 properties were used.
That said, when one assumes average buying and selling transaction costs of 8.5% of a property’s value, we note that over 59% of repeat sales have been in the red in terms of estimated net losses for the owner.
If we were also able to take into account the cost of renovations and the cost of borrowing money I would suggest that the percentage of people who have lost money purchasing Sydney residential property during 2003 would be far, far higher.
What we also haven’t had a chance to do is provide the results for the unit market, which one would have assumed to be even more revealing.
But even so, the market in my opinion hasn’t actually crashed. Though, it is up for debate what is defined as a crash. In the stock market a crash is the generally accepted term to use when stock price indexes fall by 20% or more, as was the case in 1987 and 1929.
So translating this to the property market, our Sydney wide composition adjusted house price index has fallen 10% from the peak, which was recorded at the end of 2003.
That’s a significant downturn and in my opinion a hard landing. Though, you won’t be hearing from our organisation that it’s a crash.
We will be saving those headlines for the appropriate time.
Louis Christopher
For emphasis?
32% of resales have sold for less (gross) than they were bought!
59% of resales have sold at a net loss!
Factoring in interest costs & renovations, these figures “would be far, far higher”.So over 3 years, interest costs alone would have come to 23%. This shows that well over 80% of this large sample of properties have been resold at a loss! Perhaps close to 100% once stamp duty, agents fees, mortgage insurance etc are included!
F.[cowboy2]
There is a name for this – ‘stoozing’.
And Terry, $700 pa would be considered by many to be quite cashflow positive…
F.[cowboy2]Spend less than you earn, use the difference to repay your debt. Sell the stuff you bought with the debt in the first place.
That should about do it.
Cheers, F. [cowboy2]Wow, so many typos, spellos and excess commas. I swear it’s either the work of the devil or perhaps just the cans. Apologies to the grammar police.
In summary:
- there is a massive fundamental difference in the Australian economy post-1970 vs pre-1970
- 35 years is a very short time, economically speaking, and to project future asset prices based on gains from this period into perpetuity would be a folly
- Asset price growth cannot continue indefinitely to outstrip wage growth, else we will soon (in less than 30 years at current rates) be spending more on housing alone than the total of our wages. Which is impossible.
…Continued…
In a few short years the total rated (read conservative) value of ‘Victorian’ properties had doubled, but this understates the real gains made by many property-speculators. Prices per square foot of street frontage in inner-suburban Melbourne had doubled, then quadrupled in just 5-7 years.
What many ‘investors’ (speculators) failed to realise was that this situation was unsustainable. They were using their capital gains, not by selling, but borrowing against the increased wealth held in their existing land / land-bank shares to invest further in land assets. A classic pyramid formation which could only last as long as an ever-increasing new base of ‘investors’ were willing to enter the game. This kind of pyramid formation is the basis for the classic ‘asset bubble’.
There was no fundamental, discernable cause of the bubble’s demise. Perhaps sentiment changed – perhaps prudency prevailed. More likely, all involved parties had reached their capacity to service additional debt. The house of cards finally collapsed in the early 1890s. Property prices fell on average by 50% and didn’t regain their previous levels for almost 20 years (until around 1909). Specific instances show that inner-city (ie Collins St) properties aroused no interest, even when asking prices were slashed by 70-80% from their peak (to 20-30% of their previous value)!
The ‘Land Banks’ took massive losses. Most failed, leaving shareholders and directors with massive, often catastrophic debt. The result was a huge economic depression, often considered to be more destructive to the country than the ‘Great Depression’ of the late 1930s and 40s. In some industries, job losses exceeded 50% of the workforce, and unemployment generally was widespread.
So that’s how a Boom/Bust scenario plays out under a gold-standard..
Let’s hop back into the time magine, and move forward to the year 1985, some 100 years after the collapse of the ‘Melbourne Land Boom’. Australia has now adjusted to life under a fiat currency after a bumpy start in the 1970s, where inflation in goods, services and assets played leap-frog with wage inflation until the early 1980s ushered in a period of relative stability.
This stability brought prosperity and confidence to the masses, aided by ralatively benign interest rates. Financial deregulation, a floated dollar and the inception of over a dozen new lending institutions provided an influx of new money, both domestic and from foreign sources. Our economy boomed. We were confident about our future. We borrowed to invest in the booming share-market and housing assets. Rising net-worth from business and house values made us feel wealthy, and we borrowed against these values to reinvest in more, more, more of the same!
Our fundamental belief was that we could borrow at low rates and reap the rewards of ever-increasing capital gains in the sharemarket, housing and commercial real-estate, and that these capital gains would always be greater than the interest costs. But we were wrong.
First the sharemarket went belly-up in 1987. But much of the smart money had already moved on to the ‘safe-haven’ of residential real-estate. The residential real-estate market faltered in 1989, but once again the smart money had moved to commercial property, which boomed. Eventually, in the early 90s prices per square metre of commercial real-estate in Melbourne fell by 30-50%, and the boom was over.
Several large lending companies and banks collapsed, some were bailed out by government. Westpac is a prime example of a near-miss (as a result of their lesson they have been far more prudent in their lending practises during the recent boom, positioning them in perhaps the best position to ride out any ensuing bust).
All told, some $20-30 billion dollars evaporated almost overnight as debt that would never be repayed. The cost was shared between depositors (Pyramid anyone?), shareholders, institutions and government. The excesses and subsequent losses ended in the ‘recession we had to have’.
But there’s a difference between these two events – the bust of the 1890s was left largely to sort itself out (under a gold standard), while the bust of the late 80s/ early 90s was interfered with ‘politically’. Like it or not, our ‘independant’ Reserve Bank is an arm of politics. They reacted to the early 90s bust (and the tech-wreck, 9-11) by lowering interest rates. On the one hand, this minimised the economic fall-out from such dire events. On the other, it prevented the bubbles from fully unwinding, and largely maintained what would have otherwise been unsustainably exuberant asset pricings in shares and real-estate.
Thus, under a fiat currency, controlled by the Reserve Bank of Australia, asset prices in shares AND real-estate have been allowed/enabled/encouraged to continue to inflate at a rate exceeding both aggregate wage growth and GDP growth.
So here ends my thesis. My point is, things look and work differently under a gold standard than they do under a fiat system. We have only endured some 35 years under fiat, so to project the capital gains from these few decades into perpetuity may be highly detrimental to one’s true wealth.
A Glance at the Future
In 2003, the RBA held a conference, under the theme of “Asset Price Bubbles” (I wonder why?). Submissions included reports on the ‘Melbourne Land Boom”, the “Poseidon Bubble”, the “1987 Stockmarket Crash” and the “Commercial property Bubble of 1990” or near-enough. At the time, a Mr Glenn Stevens, who is soon to take the reigns as the Reseve Bank of Australia Governer said of asset price bubbles:“I think it is generally accepted that, after an asset-price bust, the conductof monetary policy is going to involve easing, and quite possibly easing a lot. There is a potential issue of moral hazard here: namely that ‘bailing outʼ market participants in some sense will create further incentives to gear up in the future, to the detriment
of the economyʼs long-term stability. But Adam Posen argued that, in practice, the evidence for this has not been all that clear. Furthermore, I think when faced with a fi nancial system and economy in distress, one just has to incur that risk.“This should at the very least provide some surety to those engaged in the latest speculative real-estate boom that the Reserve Bank will act to prevent widely falling house prices by lowering interest rates and therefore temporarily perpetuating the inflation-fed (and creating) bubble that has supported otherwise unsustainable growth in house prices (and debt) over the last 25-35 years.
On the other hand, sentient readers will recognise that over the longer term, house prices (and the associated debt servicing levels) can only appreciate at the rate of wage OR productivity advances and will therefore not match the costs of borrowing over my lifetime. If they exceed this cost, beware, as an hyper-inflationary or deflationary event will become increasingly inevitable.
Regards, F. [cowboy2]
Ok, so here’s another installment. I thank you readers for all your comments, both positive and negative, posted and PM’d. This latest episode cost me 11 pages in the A3 notebbok and 4 cans of beer, so I welcome all kinds of feedback.
Last posting, we discussed Inflation, Deflation and Hyper-inflation. I wrote more last night, but didn’t reach my goal, so I’ll skip a few pages and get to my next installment. Please, bear with me. We can review the skipped episode later if interest is strong.
INTEREST RATES and the Reserve Bank
Interest under a gold standard is the price payed to creditors, that enables debtors to ‘rent’ their excess gold reciepts. Given a finite amount of gold, higher demand for debt results in higher interest rates. Supply and demand. This works well, as these same higher interest rates both encourage deferred spending (thus more capital becomes available to debtors), and disencourages excess debt by making it more expensive.
Under a fiat system, interest rates have much the same effect. Higher rates discourage borrowing and encourage saving. However, the feedback loop that ensures excess borrowing is met with higher interest rates is severed and replaced with the discretion of the reserve bank.
As discussed earlier, their mandate is to keep ‘inflation’ as measured by the cost of goods & services growing at a measured pace. This does not preclude excess debt accumulation, providing:
– this debt is spent on non-CPI goods and assets
OR
– if spent on CPI components, the market can suppy the icreased demand without raising prices.With regard to the explosion of debt levels in recent years, this has largely been the case. Most of the new debt has been spent on houses (a non-CPI asset). In addition, the increased demand for consumer goods has been largely offset by globalisation (lower wages producing more of the desired goods), and efficiencies of scale (more demand enables larger manufacturers who can afford better tech, and have more leverage over material supply contracts and lower over-heads).
So debt levels have undeniably risen by astronomical amounts, in the absence of CPI ‘inflation’. Yet this injction of new money HAS caused inflation in the true sense – the devaluation of the purchasing power of money. Sure, you can buy a mobile phone or digital camera for $100 where it would have cost $1000 ten years ago, or a $3000 plasma screen that’s better than the $30k one available 5 years ago, but…
For the average school/university graduate entering the workforce, the same things his/her parents bought, in total are much more expensive relative to his/her income.
This is not simply the product of immigration, government policy, CPI ‘inflation’, the GST etc, etc. Sure, some of these thinbgs have had a direct or indirect influence, but the net result is that he/she cannot expect to gain the same standard of living his/her parents did via the same proportional equivalent expenditure of income. Ergo, today’s dollar is worth less, and this is true inflation.
Now, to finally have a poke at the crux of the issue, which originated in another thread. How have house prices under a fiat currency managed to grow at a rate that averages much higher (2-3%pa) above the rate of wage inflation for the last 35 years?
If anybody has reached this point yet still believes such a situation can continue indefinately, I urge you to re-read my previous posts and/or entlighten me?! At least, let’s discuss the short-comings of my musings. For all others, we’ll continue.
Let’s travel back in time. All aboard the Foundation Magical Mystery Machine of Time Exploration (FMMMTE)! We’ll stop at 1885. Ancient history you say? Hardly. 121 years is only a few generations. My great-great grandfather was delivering milk (and sometimes emtying poop-cans) on the narrow streets and alley-ways of new Melbourne.
In 1885-ish the ‘Melbourne Land Boom’ was in full swing. Fresh money, mined as gold from the fields of Ballarat, Bendigo, Walhalla and hundreds of other tent-cities in the second half of the 19th century had brought prosperity to the city. Factories were modernising & industrialising. The miracle of electricity was beginning to reap rewards. Telephones, trams and railways were making urban and suburban living a realistic proposition. Land prices were subsequently rising. Everything looked rosy, and life was good, or getting better for almost all residents. Booming, if you will.
But then the boom turned into mania. It seemed that buying land was a better use of money than building factories, clearing farms, or establishing new businesses. The ‘mother country’ saw what was happening and soon English money flowed to Australia. ‘Land Banks’ were formed, with shares sold locally and in England. Politicians certainly invested in property, and misused their power – either manipulating infrastructure decisions (rail/light rail/comms) to flow near their properties or purchasing properties near where they knew these infrastructures would be built. But it wasn’t just foreigners and politicians involved; it was widely accepted that:
a) Property values never fall*; and
b) Prices would always rise more than the cost of borrowing** Interestingly, these ‘truisms’ still pervade our collective thinking today*
…Continued below…
Under the new rules, those aged 60+ can withdraw funds from their superannuation tax-free. That is, regardless of employment/income situation etc, they can take small or large lumps out and not include this as assessable income, as I understand it.
Direct share investments or real estate have capital gains tax to pay, and are therefore less attractive under the new rules.
Cheers, F.
Originally posted by depreciator:In the telling and retelling of the story about that 42% drop on that Sydney property, people are forgetting that the original story stated that the place needed $40K of ‘essential repairs’.
You’re implying that this is an isolated case! Not so.
Here’s more from Louis Christopher, the from the company who produce the official figures used by ABS/RBA etc.
Sydney Edition 24 August 2006When is a crash… a crash?
An interesting story came out earlier this week, which was published in The Sydney Morning Herald regarding the state of the Sydney housing market. The main focus was a number of examples where property owners have lost as much as 42% based on a purchase in 2003 and a subsequent sale this year. Please click here to read the story.
A number of the sales were forced repossessions and highlighted the extent to which how much red ink some mortgagees are in. No doubt, given the most recent rate rises, this number will surely rise.
However I think it is only fair that we point out this is not occurring in the majority of transactions and to think the Sydney market has “crashed†as per the titled headline is probably taking the point too far.
Yes certainly the market has fallen, and in some areas fallen considerably. Yes there are examples of where home owners have lost everything. However we have found that the majority of Sydney repeat-house sales over the period 2003 to July 2006 have actually been in the positive. Please see the table results below.
Percentage of Resales
Price decline 31.8%
0 to 2% increase 13.3%
4 to 8.5% increase 13.9%
8.5 to 20% increase 21.7%
Greater than 20% increase 19.4%
NOTE: Based on properties selling between 2003 and July 2006 for data reported to APM prior to 24/7/2006. A total sample of 4526 properties were used.
That said, when one assumes average buying and selling transaction costs of 8.5% of a property’s value, we note that over 59% of repeat sales have been in the red in terms of estimated net losses for the owner.
If we were also able to take into account the cost of renovations and the cost of borrowing money I would suggest that the percentage of people who have lost money purchasing Sydney residential property during 2003 would be far, far higher.
What we also haven’t had a chance to do is provide the results for the unit market, which one would have assumed to be even more revealing.
But even so, the market in my opinion hasn’t actually crashed. Though, it is up for debate what is defined as a crash. In the stock market a crash is the generally accepted term to use when stock price indexes fall by 20% or more, as was the case in 1987 and 1929.
So translating this to the property market, our Sydney wide composition adjusted house price index has fallen 10% from the peak, which was recorded at the end of 2003.
That’s a significant downturn and in my opinion a hard landing. Though, you won’t be hearing from our organisation that it’s a crash.
We will be saving those headlines for the appropriate time.
Louis Christopher
For emphasis?
32% of resales have sold for less (gross) than they were bought!
59% of resales have sold at a net loss!
Factoring in interest costs & renovations, these figures “would be far, far higher”.So over 3 years, interest costs alone would have come to 23%. This shows that well over 80% of this large sample of properties have been resold at a loss! Perhaps close to 100% once stamp duty, agents fees, mortgage insurance etc are included!
F.[cowboy2]
Hi Alexpk,
As per my PM (I figured all the work you’ve done deserves a BUMP!)
You’re living my dream. I assume your writing skills are better than mine. Eh, maybe one day I’ll be good enough to get something published that isn’t classified as a ‘technical report’ (ie never read by more than 6 people, all of whom either contributed directly or peer-reviewed my work!)
Anyway, I’m always hungry for new material on any interesting subject. I’d love to read your work, but my ability to ‘review’ will I’m afraid be limited by a lack of letters after my name…
However, I’ll be pleased to provide feedback from the ‘lay-man’. Please let me know if you’ll let me read your work.
Regards,
F.[cowboy2]
Let’s review
Under a gold standard – the money supply can only grow at the rate thate god is mined and added to deposits. The total money supply = total gold in existance.
Under a fiat currency – the money supply can grow through the addition of money due to printing of new notes or through the addition of loans.
Under a gold standard – interest rates are determined by a true supply/demand situation. Higher demand for newly mined gold (fresh money) = higher interest rates.
Under a fiat currency – interest rates are determined by government or its proxy – in our case the Reserve Bank of Australia. Their goal, in an ideal world is the same as the gold standard – to price ‘new money’ at a value that promotes ‘deferred spending’ at a rate equal to money creation. They do not wish to promote excess money creation.
INFLATION, DEFLATION, HYPER-INFLATION and the Reserve Bank
Contrary to popular belief, inflation is not about rising prices. It is a reduction in the puchasing-power of money. This results in the illusion of rising prices.
Another widespread belief is that under our fiat currency, the Reserve Bank of Australia’s role is to prevent inflation. This is not true. In fact, there mandate is to keep INFLATION running at between 2 and 3 percent. Their true enemies are DEFLATION, a situation where assets and goods reduce in value over time, and HYPER-INFLATION, where the loss in purchasing power of money accellerates uncontrollably, effecting higher and higher prices….Measured inflation is sustainable. Prices rise, wages rise, asset values rise. All this is offset by rising productivity. We work more as the population expands. We work more efficiently as new technology allows our productive output to rise faster than man-hours.
In addition, inflation (over time) cures the ills of the boom-bust cycle that exists wherever man (or woman) with his (or her) many flaws exists. His (her) natural tendancies to simplify complex scenarios, to follow the herd, his (or her) greed and fear.
When capital is misallocated during an unsustainable boom, the present value of this misallocation is eroded over time. When the innevitable bust occurs, the losses are soon replaced by new capital, as inflation allows its creation.Inflation is sustainable. Prices rise, wages rise, asset values rise. All this is offset by rising productivity. We work more hours, the population expands. We work smarter and more efficiently as new nechnology increases productivity output per man (or woman) hour of work.
Inflation cures the ills of the boom-bust cycle that exists wherever man (or woman) with his (or her) many flaws exists. Wherever the natural tendancies to over-simplification of complex situations, the tendancy to follow the herd, the balance of greed and fear exist…
When capital is misallocated during an unsustainable boom, the present value of this misallocation is eroded over time. When the inevitable bust coccurs, the losses are soon replaced by new capital as it is created.When DEFLATION occurs, people stop spending. The incentive to buy now before prices of goods and assets rise is gone. In its place, spending is deferred (detrimentally), as people know they’ll buy tomorrow, next month, next year for cheaper than today’s prices. They don’t care about interest on their savings, as they’ll save money without any. This becomes self-referential. Prices are cut as producers and manufacturers chase sales. Wages fall as these same producers and manufacturers are forced to accept lower prices for their goods today. Soon prices are falling because people are unable to pay last weeks price. Under a fiat system, the Reserve Bank are powerless to encourage spending. They can’t lower interest rates below 0%, but prices continue to fall. Even printing more money is inneffective, as people just save it. Refer to Japan 1990 – 2006 for a perfect example.
HYPERINFLATION is nor a product of ever-increasing prices. It is the the result of rampant devaluation of a currency. The triggers are diverse and often political. Over-zealous public (political) spending, massive excesses of private debt etc. One thing is common – the supply of money grows faster than the domestic product of the country. Another element is required – increased aggregate wage demands that are met by employers. It is higher wages that enables the higher prices that in turn promote even higher wage demands. This can only be enabled by a ‘strongly’ growing domestic economy, or by reckless debt accumulation. And so, the Reserve Bank’s role becomes to dampen the economy and to deter reckless debt accumulation, by increasing interest rates.
In Summary
– Inflation is ‘good’, at a measured pace.
– Deflation is ‘bad’ and once in play, inflation is difficult to restore.
– Hyper-inflation is ‘very, very bad’ but the Reserve Bank (of Australia) has the means to halt/prevent it.BUT
…there is another factor to consider. Higher (or rising) interest rates are politically destructive (for both the RBA and Gov’t). They depress economic activity and output. Economic depression can result in a Recession (2+ quarters of negative GDP growth) or even a Depression and can lead to job losses, personal & business bankruptcy. AND due to ‘man’s’ fallible nature, to stave off a period of high inflation (with it’s hyper-inflationary risks, usually at the end of an irrational and unsustainable boom), the RBA generally needs to raise interest rates so high that a recession occurs simply to prevent hyper-inflation.So ends the lesson for tonight! I know we’re still a long way from an explanation of why a fiat currency allows House Price Inflation (HPI) in excess of wage / GDP inflation, but the next installment promises to wrap it all together.
Regards, F. [cowboy2]
Also up for discussion – full-reserve VS fractional reserve banking. And, consequently, the ‘velocity of money’.
PS – As always, I welcome a full and frank discussion. This writing is both cathartic and educational to myself – a way of clarifying my A.D.D.-style thoughts, if you will. Anything anybody has to add will be duly noted and add to my own personal understanding, and therefore be most welcome.
Yes, this is a viable option. Commonly called Sell To Rent or STRing. I’m in the process of doing just this very thing.
F.[cowboy2]
Originally posted by tony wpb:Hi crashy ,
still waiting on that calculation , or dont you understand it ??? ASX 100 and ALL ORDS ??? Keep searching ….
I like the price/dividend ratio myself, by price/earnings (PE) is commonly accepted. Your point being?
F.[cowboy2]
Note: I do not advocate buying into shares willy-nilly at the current point in the cycle.
… and let’s add Sydney’s capital growth since 2003 shall we? 32% of properties resold for a gross loss, 59% resold for a net loss after costs, figures much, much higher if holding (interest/rates) costs are included…
The question related to yield, my answer was about yield.
F.[cowboy2]
ps if its cap growth you’re after, I think my gold and silver bullion has still beaten any real estate market in Aus over the last 12 months!@
Let’s see, deposits:
BankWest 6.6
Citibank 4.75
Citibank 5.85
Commonwealth Bank 5.85
CUA 5.65
Easy Street Financial Services 5.95
Encompass Credit Union 5.6
HSBC 6.2
HSBC 4.75
Illawarra Credit Union 5.25
ING Direct 5.85
Members Equity Bank 6
National Australia Bank 5.9
Power Credit Union 5.4
Select Credit Union 5.85
St. George Bank 5.8
Suncorp 5.9
Unicom Credit Union 5.25
Westpac Banking Corporation 5.25
Westpac Banking Corporation 6.05
AMP Banking 6.3
Austral Credit Union Ltd 5.7Shares:
ATG Austin Group Limited 19.67%
CMK Cumnock Coal Limited 16.67%
ETW Evans and Tate Limited 16.67%
CFI Colonial First Private Capital Limited 16.53%
COS Cool or Cosy Limited 16.25%
RPG Raptis Group Limited 16.09%
AMO Ambertech Limited 15.39%
VLL Village Life Ltd 15.00%
CNR Coonawarra Australia Property Trust 13.11%
CMV CMA Corporation Limited 12.80%
RAT Rubicon America Trust 12.65%
MPH Magna Pacific (Holdings) Limited 12.20%
MCP McPherson’s Limited 12.07%
RRT Record Realty 11.37%
AQE Aequs Capital Limited 11.36%
CWT Challenger Wine Trust 11.33%
MFT MFS Diversified Trust 10.82%
AAU Adcorp Australia Ltd 10.81%
KRS Kresta Holdings Limited 10.53%
BBB B Digital Limited 10.42%
BEC Becton Property Group Limited 10.42%
CIY City Pacific Limited 10.39%
SLF StreetTRACKS S&P/ASX 200 Listed Property Fund 10.27%
NAM Namoi Cotton Co-Operative Limited 10.08%
CMI CMI Limited 10.00%
RCL Repco Corporation Limited 10.00%
FRR Frigrite Limited 9.94%
VOF Valad Opportunity Fund No 11 9.90%
ALZ Australand Property Group 9.57%
FLK Folkestone Limited 9.52%
RNYCA Reckson New York Property Trust 9.45%
MPR Macquarie Prologis Trust 9.39%
WST Westralia Property Trust 9.38%
ANC Angus & Coote (Holdings) Limited 9.26%
LIP Lipa Pharmaceuticals Limited 9.22%
ZFX Zinifex Limited 8.99%
GSA Galileo Shopping America Trust 8.98%
MDT Macquarie DDR Trust 8.94%Sorry, but I pay quite a bit of tax. About a third of it goes to welfare recipients. I don’t think somebody with over 1.5 million dollars in assets should be entitled to a slice of my hard-earned every fortnight.[angry2]
F.[cowboy2]
So half a dozen people overpaid for houses a few years back? So what? That doesn’t prove a crash!
…or does it?
Here’s more from Louis Christopher, the from the company who produce the official figures used by ABS/RBA etc.
Sydney Edition 24 August 2006When is a crash… a crash?
An interesting story came out earlier this week, which was published in The Sydney Morning Herald regarding the state of the Sydney housing market. The main focus was a number of examples where property owners have lost as much as 42% based on a purchase in 2003 and a subsequent sale this year. Please click here to read the story.
A number of the sales were forced repossessions and highlighted the extent to which how much red ink some mortgagees are in. No doubt, given the most recent rate rises, this number will surely rise.
However I think it is only fair that we point out this is not occurring in the majority of transactions and to think the Sydney market has “crashed†as per the titled headline is probably taking the point too far.
Yes certainly the market has fallen, and in some areas fallen considerably. Yes there are examples of where home owners have lost everything. However we have found that the majority of Sydney repeat-house sales over the period 2003 to July 2006 have actually been in the positive. Please see the table results below.
Percentage of Resales
Price decline 31.8%
0 to 2% increase 13.3%
4 to 8.5% increase 13.9%
8.5 to 20% increase 21.7%
Greater than 20% increase 19.4%
NOTE: Based on properties selling between 2003 and July 2006 for data reported to APM prior to 24/7/2006. A total sample of 4526 properties were used.
That said, when one assumes average buying and selling transaction costs of 8.5% of a property’s value, we note that over 59% of repeat sales have been in the red in terms of estimated net losses for the owner.
If we were also able to take into account the cost of renovations and the cost of borrowing money I would suggest that the percentage of people who have lost money purchasing Sydney residential property during 2003 would be far, far higher.
What we also haven’t had a chance to do is provide the results for the unit market, which one would have assumed to be even more revealing.
But even so, the market in my opinion hasn’t actually crashed. Though, it is up for debate what is defined as a crash. In the stock market a crash is the generally accepted term to use when stock price indexes fall by 20% or more, as was the case in 1987 and 1929.
So translating this to the property market, our Sydney wide composition adjusted house price index has fallen 10% from the peak, which was recorded at the end of 2003.
That’s a significant downturn and in my opinion a hard landing. Though, you won’t be hearing from our organisation that it’s a crash.
We will be saving those headlines for the appropriate time.
Louis Christopher
For emphasis?
32% of resales have sold for less (gross) than they were bought!
59% of resales have sold at a net loss!
Factoring in interest costs & renovations, these figures “would be far, far higher”.It’s not a few of the “unluckiest and/or most stupid buyers”. It’s very widespread. And the crash appears to be accelerating now that interest rates are rising.
F.[cowboy2]
I think 4.75% gross is an attrocious investment yield.
Originally posted by crusher:professionally analysed data from Residex
Is this not a contradiction in terms? Refer to their ‘analysis’ of house prices vs interest rates if you need a good belly-laugh.
F.[cowboy2]
Funny things these medians (alright, so I know that the ABS/APM figures are ‘average composition weighted median prices’ or what-not).
The median price for 11 properties at $500k each is, unsurprisingly, $500k. If 5 of those properties fall in price to $150k each, the median is still $500k. If demand for properties falls and turnover is 5 properties, 3 valued at 500k and 2 at $150k, the apparent median price for all 11 properties is still reported at $500k. Even though half the vendors are unable to sell.Now what if demand is 5 houses, with a preference for better houses? Three houses sell for $600k, 2 for $150k. The median price is now $600k, a 20% increase. And the bank valuers will lend 20% more to each of the 6 vendors with a ‘good’ house, even though only 3 are able to be sold.
Cool, huh?
F.[cowboy2]
… and certainly I will explain. However, I didn’t wish to just jump in with gross generalisations and inaccuracies. First I needed to research the facts to support my theory, now I’m ready to jump in with gross generalisations and inaccuracies! [oneeyed]
Give me a day or two and I’ll complete my explanation. Part one follows.
Cheers, F.[cowboy2]
“House prices have averaged around 8.5% pa since 1970. No more, no less (time and value.)â€
The emphasis in that statement was intended to fall primarily on the 1970 bit, rather than equally with the value bit. Nonetheless…A most important event occurred in 1971. One event that has, if you like, enabled house prices to rise at a rate commonly referred to as “doubling every 7 to 10 yearsâ€. A nominal rate averaging between 7% and 10%. This event was the collapse of the Bretton Woods system of international monetary management. And why was it important? Because it marked the beginning of true fiat currency in this country.
Important Note!
Despite my undeniable attraction to gold, I wish to make it clear that in no way am I an advocate of a return to a gold standard, partial convertibility or even to a full-reserve lending/banking system.A bit of history
For over 2500 years, gold has been used as currency. Silver, much longer.
Here in Australia, we are a nation of the British Commonwealth. However, in our early days we weren’t even a country, we were a colony, and legal tender here was imported from England. The primary unit of account was the pound sterling. Originally (ie 1100ish!), one pound had represented one troy pound of sterling (>95% purity) silver. But by the mid 1500s, the pound sterling replaced the original penny (1/240th pound). Still following? No. Hrmph. Moving right along!By the time our shores were settled, Sir Isaac Newton had set the value of silver to gold, at around 4 pounds sterling to the ounce. Effectively, our monetary systems operated under a defacto gold standard.
In 1844, Britain introduced an act to the effect that the Bank of England could issue notes that would be legal tender, and fully redeemable in gold. This was a true gold standard.
In 1910, Australia introduced its own currency, the imaginatively titled pound. One Australian pound was fixed in value to one pound sterling, which was redeemable in gold.
After that, things get messy. We (the Commonwealth) went to war. In order to print money to buy ships, guns and ammunition, the UK abandoned the gold standard. It believed that it would win the war, head home with the spoils (masses of gold) and be able to return to the gold standard, no harm done. Or something. Unfortunately, when the gold standard was reinstated in 1925, it forced a deflation on the economy (Austrian economists might say this was actually just a reaction to the inflation that had occurred during the years without a gold standard). Eventually, most of the world abandoned gold convertibility in response to the Great Depression.
The next really exciting (
) development in monetary history occurred in 1944. The 44 ‘Allied Nations’ agreed on a sytem of international monetary exchange that would promote stability, and enable the rebuilding of countries destroyed during the Second World War. This system was called the Bretton Woods Agreement. Essentially the value of the currency of each country was directly related to their reserves of gold, and each country agreed to ‘peg’ its exchange rate. Sort of..How it worked in practise was that the US dollar was redeemable in gold (for $35/oz), and other countries maintained their exchange rates by buying and selling US dollars.
In 1971, the US revoked gold-convertibility of its dollars, removing the world from the gold standard. In the years since, the world has operated under a range of fiat currencies, some fixed and some floating, but none with any tangible value. A piece of paper or plastic or cheap scrap metal.
Who Cares?
Well, nobody it seems. People have come to accept that fiat currency is worth ‘something’. Even more amusing is that >90% of the population (my figures) appear to think that their money has a fixed value and find ‘rising prices’ frustrating or unfair!Coming soon… how the absence of a gold standard affects the ability of asset prices to inflate at ratios greater than wage inflation and even increases in GDP …
) development in monetary history occurred in 1944. The 44 ‘Allied Nations’ agreed on a sytem of international monetary exchange that would promote stability, and enable the rebuilding of countries destroyed during the Second World War. This system was called the Bretton Woods Agreement. Essentially the value of the currency of each country was directly related to their reserves of gold, and each country agreed to ‘peg’ its exchange rate. Sort of..
