Forum Replies Created
- Stagflation is merely a situation where an economy slows and prices rise.
Merely? Rising consumer prices but an economy that cannot sustain wage inflation while redundancies increase?[blink] Far from rosey IMO.
May I ask what evidence of this you have seen?Current inflationary pressures are being masked by falling consumption & confidence, but the reserve bank is aware that they exist and has stated so. Further inflationary pressure will be added as the interest rate differential between the US & AU narrows, depressing the Aussie dollar.
As I previously pointed out, the RBA has 3 choices – tighten their bias to combat inflation but risk tipping the economy into recession; loosen it to prevent stagnation thus compounding their past errors; or try to balance the two with stagflation the likely result.
Who is advocating a further 45% drop in property prices??? Certainly not me!I don’t recall stating that you did. I stated that I believe property prices will return to historic trends in relation to rents, household income and inflation. This will require 30-45% falls in real terms around the country, with some regional variation.
Anyway we will no doubt continue to disagree. Only time will tell*. Back on the topic of Renting vs Buying – I say renting is [specool] and [thumbsupanim].
Cheers, F.[cowboy2]
*
Further to the rosy outlook, these from News.com.au and AAP:
JP Morgan chief economist Stephen Walters said the market had largely expected the on-hold decision.
“We suspect the RBA has left policy unchanged for the past two months because there is mounting evidence the economy has hit an air pocket,” Mr Walters said.National Australia Bank head of research Peter Jolly said the RBA was acknowledging the emerging signs of a slowing economy.Commonwealth Bank of Australia chief economist Michael Blythe said the market now had the perception that the economy was shifting down several gears.Shaw Stockbroking analyst Brent Mitchell said the interest rate rise in March, the cooling in the residential property market and general concerns about the economy were behind the jittery market reaction to a fairly benign announcement from Mirvac.The narrowing gap between US and Australian interest rates has weighted on the dollar.
The local currency opened lower at $US0.7737-42, down from yesterday’s close of $US0.7774-79. At noon, the dollar was quoted at $US0.7769-75, slightly down from yesterday’s close of 0.7774-79.Indications of an economic downturn accompanied by higher inflation have led some to fret that the US economy could be returning to 1970s-style “stagflation”, although this is not the consensus view.
“The Fed is more worried about inflation but very aware of the moderation in growth,” commented Joel Naroff at Naroff Economic Advisers, noting the committee’s continued attachment to the words “accommodative” and “measured.”I wasn’t suggesting that IRs should be hiked to combat economic growth, rather that the reason rates have been held for the last 2 months is the faltering economy. Even Howard and Costello have been heard to urge IR restraint in light of the economic outlook.
Anyhoo, F.[cowboy2]
‘Australian Dream’I think you’ll find that the ‘great American dream’ is quite similar as is the UK’s. The thing is that due to a wider gap between the rich and the poor in those countries, less are actually able to achieve the dream. The result is a far greater (almost unlimited) demand pool.
Regarding the state of the economy, if the outlook is rosy, why did the RBA hold interest rates?
Do me a favour and take a look at how the various western economies reacted following the problems after the Asia Crisis and 9/11. Australia was nowhere near as severly impacted. This demonstrates good resiliency and supports my ‘rosy economy’ theory.I don’t dispute that Australia was in a strong position during the collapse of various asian economies, but can see little difference between Australia and other western countries since 2000.
A quote from last night:
Here’s a quick rundown of our current situation as I see it.
The US is in strife, and they are under great pressure to support their dollar at any price. This is done by raising interest rates (note that this is less damaging to US homeowners due to the prevalence of 25+ year fixed interest loans and PPOR interest being tax deductible). Rising US rates reduce the IR differential between US and AU, making the $AU and AU investments less attractive and causing the AUD to fall unless the reserve bank raises the overnight cash rate.
Should the AUD fall, exporters will benefit, but inflation will rise as consumer goods and oil become more expensive. This will force the RBA to hike interest rates if their sole purpose remains to control inflation.So how will the domestic economy handle higher interest rates? How will home owners and investors handle higher interest rates*? How much higher will they go*?
First it is helpful to understand where the inflationary pressures (both local and global) have come from. The simple answer is debt. Interest rates were lowered worldwide after the Tech bubble burst in 2000, then again after S11 2001 in an attempt to prevent recessions by encouraging consumers to continue… well, consuming. What the reserve banks either failed to notice, or hid from the public and politicians was that rather than look around and say “Hey, things aren’t as dire as we thought, business as usual!”, those consumers took the opportunity to encumber themselves with unprecedented levels of debt. Why not? After all, debt was cheap, and house prices were rising. Any additional debt could be repaid out of future increases in house prices, after all they rise at a faster rate than interest.
Here’s the crunch – every dollar borrowed brings a new dollar into circulation. Every dollar added to the total money supply reduces the purchasing power of every other existing dollar. This is inflation in it’s genesis. Here in Australia, the total monetary supply has increased by something in the order of 50% in the last 4 years. In contrast the CPI measure of inflation has increased by around 15% over the same period (I should clarify that these figures are very approximate and scraped from the back of my mind as best estimates). So why have consumer prices not risen 50% in line with the creation of all this extra money? People sure aren’t saving it – household saving rates have fallen to below zero, so they must be spending it. If people are spending 50% more money, the added demand should drive up the prices of the consumed goods.
There are a few simple answers. Firstly, obviously and simply the majority of this extra money has been spent on houses. House prices are not included in the official CPI measure of inflation. Oddly, they are ignored.
Secondly, changes in consumer behaviour generally take 18-24 months to fully reveal themselves. For example, when interest rates are hiked, consumers have less to spend on other items. The producers of such items face reduced demand and reduced profits, so they may downsize, and will also order less of the components of their products from their suppliers. The suppliers are similarly effected. All this takes time, but eventually it shows up at the other end as falling GDP, falling employment and smaller budgets for the government.
Finally, many imported items have remained cheap or gotten cheaper due to China’s policy of pegging their currency to the US dollar and the US dollar falling about 30%. Remember when the $AUD was around fifty US cents? This has offset rises in other costs.The bank economists, housing lobby groups and government are all urging the RBA tonight to hold interest rates, claiming the economy and house prices cannot handle a rise and is already slowing. At the same time, the US Fed Reserve have made it very clear that their recent string of rate rises is just the beginning. Now what is the RBA to do? Act in the interests of the government, banks and REIs or do the job they were instated to do – to keep inflation within it’s target range?
We will see.*Ok, so I didn’t answer either of these questions. So sue me..
I wonder how many people are familiar with the term stagflation?
Cheers, F.[cowboy2]
In the next 18 months, I believe real estate will trend back to the prices it should have been had we not had a boom.Snap![biggrin]
Although I expect the correction to occur over a longer timeframe.
It’s not just the pointy end of development either. Watch the profit warnings roll in from the big building co’s. Things are starting to get ugly.
F.[cowboy2]I’ve already linked over a dozen Australian articles Robert, but that one is fresh and does in fact clearly support a reversion to the historic house price – household income trend.
How would 1% after inflation and tax from a bank deposit be worse than 0% before inflation and holding costs for real estate?
Can’t say I follow your logic.If you believe that there has been a ‘20% odd correction’, what makes you think that the bottom has been reached? What caused the correction? Why would there not be further falls following the last interest rate rise? If your outlook for the economy is rosy, why will IRs not continue to rise? You can’t have it both ways.
Cheers, F.[cowboy2]
Welcome to the forum Matt.
Now, let’s get back off-topic.
Here’s a quick rundown of our current situation as I see it.
The US is in strife, and they are under great pressure to support their dollar at any price. This is done by raising interest rates (note that this is less damaging to US homeowners due to the prevalence of 25+ year fixed interest loans and PPOR interest being tax deductible). Rising US rates reduce the IR differential between US and AU, making the $AU and AU investments less attractive and causing the AUD to fall unless the reserve bank raises the overnight cash rate.
Should the AUD fall, exporters will benefit, but inflation will rise as consumer goods and oil become more expensive. This will force the RBA to hike interest rates if their sole purpose remains to control inflation.So how will the domestic economy handle higher interest rates? How will home owners and investors handle higher interest rates*? How much higher will they go*?
First it is helpful to understand where the inflationary pressures (both local and global) have come from. The simple answer is debt. Interest rates were lowered worldwide after the Tech bubble burst in 2000, then again after S11 2001 in an attempt to prevent recessions by encouraging consumers to continue… well, consuming. What the reserve banks either failed to notice, or hid from the public and politicians was that rather than look around and say “Hey, things aren’t as dire as we thought, business as usual!”, those consumers took the opportunity to encumber themselves with unprecedented levels of debt. Why not? After all, debt was cheap, and house prices were rising. Any additional debt could be repaid out of future increases in house prices, after all they rise at a faster rate than interest.
Here’s the crunch – every dollar borrowed brings a new dollar into circulation. Every dollar added to the total money supply reduces the purchasing power of every other existing dollar. This is inflation in it’s genesis. Here in Australia, the total monetary supply has increased by something in the order of 50% in the last 4 years. In contrast the CPI measure of inflation has increased by around 15% over the same period (I should clarify that these figures are very approximate and scraped from the back of my mind as best estimates). So why have consumer prices not risen 50% in line with the creation of all this extra money? People sure aren’t saving it – household saving rates have fallen to below zero, so they must be spending it. If people are spending 50% more money, the added demand should drive up the prices of the consumed goods.
There are a few simple answers. Firstly, obviously and simply the majority of this extra money has been spent on houses. House prices are not included in the official CPI measure of inflation. Oddly, they are ignored.
Secondly, changes in consumer behaviour generally take 18-24 months to fully reveal themselves. For example, when interest rates are hiked, consumers have less to spend on other items. The producers of such items face reduced demand and reduced profits, so they may downsize, and will also order less of the components of their products from their suppliers. The suppliers are similarly effected. All this takes time, but eventually it shows up at the other end as falling GDP, falling employment and smaller budgets for the government.
Finally, many imported items have remained cheap or gotten cheaper due to China’s policy of pegging their currency to the US dollar and the US dollar falling about 30%. Remember when the $AUD was around fifty US cents? This has offset rises in other costs.The bank economists, housing lobby groups and government are all urging the RBA tonight to hold interest rates, claiming the economy and house prices cannot handle a rise and is already slowing. At the same time, the US Fed Reserve have made it very clear that their recent string of rate rises is just the beginning. Now what is the RBA to do? Act in the interests of the government, banks and REIs or do the job they were instated to do – to keep inflation within it’s target range?
We will see.Cheers, F. [cowboy2]
*Ok, so I didn’t answer either of these questions. So sue me..
If the market is ‘flat’ ie house prices are not increasing, not decreasing, yet renting is far cheaper than buying, how does it not make sense to sell? By selling, you crystalise your profits and can invest elsewhere rather than letting inflation erode the gains of recent years. Many people would find that if they sold to rent, the bank interest on their profits from sale will more than cover the cost of renting.
In contrast to general opinion, falling house prices are good for PPOR owners. Trading up during a boom is a mug’s game. Sure your PPOR may have risen in value, but the larger, more expensive house you desire will have risen even more. The dollar difference between what you have and what you want is greater than before the boom. The opposite is true as house prices fall. The gap narrows – even as your PPOR loses worth, your goal becomes nearer. Of course, selling to rent is the best option…
In contrast to Rob’s belief that the market has ‘bottomed out’, I believe houses are still 30-45% overvalued throughout Australia, and will revert to historic trends in relation to rents, wages and inflation.
I know I’ve posted it before, but THIS ARTICLE is a must-read for anybody who thinks my ideas are off the wall and The author clearly backs steel30’s plan.
Cheers, F. [cowboy2]
Some b@astard stole my wheelie bin, then came back a month later and stole my recycling bin.
Boo.[thumbsdownanimF.[cowboy2]
As for going back ten years to check if this ‘system’ works, there is no point. The last ten years are no indication of the next ten yearsCorrect. In fact all my research indicates that the next ten years (give or take) will simply see a reversion to the values of ten years ago.
I can’t wait to see how the banks react to the strategy of ‘living off negative equity’…It seems I’m not the only one with a similar outlook. Try this article from the chairman of GMO, who I’m told manage some 80 billion odd dollars…
Cheers, F.[cowboy2]
Originally posted by The Mortgage Adviser:that plan is the most ridiculous thing I have ever heard!!!!!!!!
I agree entirely.
‘Redrawing equity’ is a misnomer. Acquiring additional asset-secured debt is what you are actually doing. Acquiring debt to ‘fund wealth’ by purchasing growth assets can work well if you’re fully aware of the market in which you are investing. Acquiring debt to fund living expenses, on the other hand effectively sacrifices future prosperity for the illusion of wealth in the present.
Out of curiousity Terry, for house prices to sustain a doubling over the next 7 years, then double again over the following 7, what level of inflation would be required and what would the corresponding interest rates be? Roughly?
In your plan, you ‘draw down’ when house prices increase and notably borrow nothing further when they do not. I take it then you repay additional capital when house prices fall?
Cheers, F.[cowboy2]
Given that property generally doubles in price every 7-10 years it looks like your graph only confirms that growth. I certainly wouldn’t class it as extreme growth just the expected growth every property investor’s strategy seems to be based around*.Oh dear, here we go again. Apologies to those who’ve already called me a broken record.
Your statement is:
a) misleading
b) alarming (if this* is true)When looking at investment returns, nominal values are interesting, but not all that useful. Yes, during most 10 year periods in most parts of Australia over the last 3 decades you will see nominal house prices doubling or better. Unfortunately, this ignores the important factor called inflation. What’s the good of having an investment double in value if the cost of living has also doubled?
I would strongly advise that you look at real (inflation adjusted) returns rather than just expecting that because nominal prices of houses have doubled every decade for 30 years that this ‘rule’ will be repeated ad infinitum.
So what has been the state of inflation in Australia over the last 30 years? Graph 7 from the ABS shows annual % changes since 1986. As you can see, 10% and above is not uncommon, in fact compared to the early 70s, it is rather tame. Historical CPI data from the RBA Under such high levels of inflation it is fundamentally normal for house prices to double every ten years because other prices are also doubling as are wages and rental returns.
The real (inflation adjusted) return from residential real estate investment over the last 30 years is less than 2% per annum. That includes the spectacular gains of the last 7 years or so which are neither sustainable nor based on fundamental changes. If this period is excluded and we look just at say, 1970 to 1995, the average is a little better than 1% pa above inflation.
Professor Peter Abelson of Macquarie University has this to say:
There were significant housing price booms from 1971 to 1974, from 1979 to 1981, from 1987 to 1989, and from 1996 through to 2003. After each of the first three booms, real prices tended to fall.
However, in the long run real price rises outstripped falls. Consequently, real house prices rose by about 180 per cent between 1970 and 2003. Allowing for hous ing improvements, real prices rose by more like about 100 per cent over this period. However, both estimates give an exaggerated view of real price increases if, as we expect, there is a real house price downturn post 2003.(The emphasis is mine)
HOUSING PRICES IN AUSTRALIA:1970 TO 2003
The entire research paper can be found here:
http://www.econ.mq.edu.au/research/Abelson_9_04.pdfIf we look at the long-term, say 1900-1995, returns are less again. The graph here on page 13 shows that median house prices fluctuated around a trend of roughly 4.5 times average income (which rises generally in line with inflation) for over 80 years.
For whatever the reason (baby boomers nesting? increased women in the workforce? deregulation of the banking system? something much more disturbing#?) house prices did not correct to the historical norm at the end of the last boom in the late 80s. They largely stagnated in nominal terms (with minor falls in real terms) throughout the best part of the 1990s then as we are all aware, the current boom took off. See figure 1 here This boom has left house prices at record levels compared to rental returns, wages, historic trends and inflation.I believe that we are in the process of (or perhaps in WA soon to be) seeing house prices return to more normal levels. This adjustment may manifest itself as a full blown house price crash of 30 to 40% falls across the country over a couple of years, or it may simply stagnate prices and let inflation erode the real value as investments. At current inflation rates this would take about a decade. If inflation rises, the nominal falls will be smaller or the duration of stagnation shorter, but interest rates (and therefore loan repayments) will also rise.
Bear in mind that this scenarion relies on a rational public, however it is much more likely that sentiment will turn entirely against real estate as an investment in either scenario and the market will over-correct. That is where the real money is to be made.Don’t blow your hard-earned now. Make sure your wealth plan is sound and does not rely on dubious rules. Print out this picture and stick it above your desk, wait, watch and save to make the most of the coming opportunities.
Here endeth the sermon. All statements are in my humble opinion and should not be taken as specific investment advice.
Cheers, F.[cowboy2]
#Household Indebtdedness
A graph of household debt as a percentage of annual household disposable income can be found here under 01/12/04 Household debt in perspective 161KBHouse prices broke their strong historical relationship to income in the mid to late 80s. Until this time household indebtedness was at relatively low levels. From the early 90s, the indebtedness statistics also broke trend and at a casual glance appear to be accelerating at similarly unsustainable levels:
30% of annual income in the 60s
40% in the 70s following inflation in the high teens
45% in the 80s
90% by the end of the 90s
and now at a whopping 140%!!!One interesting result of this is that an interest rate rise now packs 3 times the punch of the early 90s:
thanks to the rise in debt levels, moves in interest rates are three times as potent as they were in the early 1990s.you will never find a CF +ve property…that time has past.1) Never is a long time.
2) I disagree.Adelaide has not experienced an extreme property boom like Sydney and Melbourne so may only be due to a minor correction in the future, I really cant see Adelaide prices dropping more than 10%1) The graph in this report illustrates that house prices have more than doubled since 1998 in SA. Pretty extreme if you ask me.
2) I disagree.Cheers, F.[cowboy2]
Once things hit rock bottom there’s only one way for them to go…. UP.
But then you have to start trying to figure out how long will the ‘rock bottom’ period last before growth starts up again.Yes, that’s the tricky bit. Take Japan for example – when will their 14 year trend of declining property values be reversed? Residential real estate is cheaper in real terms today than it was in 1980, but it’d still take a brave investor to leverage into that market!
Cheers, F.[cowboy2]
Originally posted by 1Winner:Mm, interesting possibilities….. I wonder if anyone factored in his investment strategies the possibility of a super eruption in Yellowstone? I mean, according to the TV show I saw the other day it is overdue….[cigar]
It’s always doom and gloom with you isn’t it![biggrin]
F.[fear]
Yale apparently.
In a recent Yale University survey of home buyers in Los Angeles, for example, respondents said they expected their homes to increase by an average of 22 percent annually over the next decade, while more than two thirds said they feared being left out of the boom if they didn’t buy now. Recent buyers in Boston and San Francisco were similarly exuberant, expecting 13.2 percent and 17.9 percent in annual appreciation, respectively, while also saying they had been anxious to get in before prices rose further.Source
I can’t find the original paper, but The Economist are generally very thorough.
Cheers, F.[cowboy2]Duckster why do you suggest using a fixed 7% pa for house price inflation but a floating index for consumer price inflation?
Are you suggesting that there is no relationship between the two?
Why would the yield be 4%?
I’m not having a go, just curious as to how such results are arrived at and whether they are useful.Regards, F.[cowboy2]
Tip 1: Surface prep.
If you are laying on concrete, ensure it is completely flat – fill any chips/ gaps/ irregularities. If it’s prone to damp, Bondcrete.
On timber or particle board, make sure your cement sheeting is in good nick or replace it.Tip 2: Lay lino.
Cut it to shape first using either a paper template or a measuring tape – can be roughly pre-cut with a little left over – fold this up the wall then trim in place. Apply adhesive, roll out lino, remove any irregularities by rolling from the middle to the edges, trim if required and you’re done.Oh, and if it’s just a change of look you’re after and the old lino is still ok, you could lay the new straight over the top to save time.
Cheers, F.[cowboy2]Of course 22% pa compounded annually over 10 years is roughly 630% growth:
Year 0 = $100k
Year 1 = $122k
Year 2 = $149k
Year 3 = $182k
Year 5 = $270k
Year 7 = $402k
Year 10 = $730,460!
The US has some of the world’s greatest minds, eh’ superman?
Cheers, F.[cowboy2]Then again:
a recent survey of buyers in Los Angeles indicated that they expected their homes to increase in value by a whopping 22% a year over the next decadePerhaps LA is the best place in the US to invest?
Source: The EconomistThe article is a very good read (as you’d expect) relating to the state of the housing market in the US.
Cheers, F.[cowboy2]DebtBubble has a few fascinating articles by a very credible (IMHO) financial wizard. Somewhat relevent too.
