Forum Replies Created
And just in case I haven't really bagged on about this whole thing too much already, here's some more charts:
Please point to the bits on the chart where house prices go up and rents go up the same amount?
How on earth (with all the evidence available to all your senses) could you possibly think that was a closer relationship than this (which I provided earlier):
Are you an investor? Which lender do you use (I really feel like I need to ensure my deposits are safe).
F. [cowboy2]
Scott No Mates wrote:Foundation, it may not make sense, as you have put it, for prices to grow at a faster rate than wages however you fail to consider one aspect – profit/reward for risk.If I undertake work on a property, I am exposing myself to some degree of risk, the builder who carries out the work takes a risk (that he will be paid), bank takes a risk I will repay them (interest). This degree of risk (and subsequent reward) mustl far outstrip wages growth and the reward of wages for labour inputs.
I'm sorry, you seem to have missed how risk/reward works in the real world.
Yes, generally speaking, you take higher risks to achieve greater rewards. But it does not follow that by taking greater risks you will reap higher rewards! The 'greater risk' part is all about a higher failure rate. Apologies if I have misunderstood.
In fact, what we currently have is a gross mispricing of risk. From the lenders to the borrowers, nobody is demanding high enough compensation for their risk. They assume that house prices are secure and in future will grow at an impossibly high rate, thus negating the need for immediate risk compensation (think bank spreads or rental yield or…). History shows that in times of negligent optimism or mania, assumptions of low risk grow even as risk increases. Then the whole shebang falls over.
It's a two way street. Once the players realise the reward isn't there and the risk is greater than they imagined, they stop taking the risks. The bank doesn't just keep handing out the money and saying "Oh I'm taking a huge risk here therefore my rewards must be great"!
Quote:If debt is harder to come by, eg credit squeeze, then there are a few possible outcomes: turnover of properties stagnates (due to tightness of funds), prices drop due to lack of funds and ability of geared buyers to enter the market, other sources of funds are found (creative financing).Well done if you actually read that thread through. But you've missed the point. I'll lay it out here briefly:
– households cannot afford to pay more than 100% of their income on the mortgage
– for house prices to eternally grow faster than incomes, they will need to
– they (households) can't
– so they (house prices) won't.It's that simple. No amount of 'creative financing' can rearrange this truth. That's what the thread was about. There must be a limit to debt servicing as a proportion of household income. When we hit this limit, real debt growth must stop.
keydefender wrote:I hear in other countries that it take 2-3 generations to own a property, maybe with shared equity loans etc in the future this might happen in Aus and prices keep going up…. any thoughts?keydefender, much of the developed world is in exactly the same situation as us. The credit induced house price bubble is global. It's unwinding in the US, Spain, Ireland, England looks shaky…
As to the inter-generational loans, I don't think any country has these. They were briefly available at the height of the Japanese real estate bubble (which incidentally left prices falling for 14 years, currently ~70% below peak), but any talk you hear of them today is likely to be wrong. Besides, we already have 'Interest Only' loans which are functionally identical to 1,000 year loans… You can't get a longer period to repay the principal than forever!
Shared equity loans might help sustain prices at a higher level than otherwise, for a while at least. But they can only be implemented once. Let's suppose every single borrower used a 25% shared equity loan. Sure, now all buyers can afford to pay more for a house. If they all chose to, this would be a structural shift to a higher price level. It wouldn't enable prices to perpetually rise at a faster rate than household incomes.Cheers, F. [cowboy2]
seank wrote:Hi Foundation,I respect your privacy.
My proposition is that house price movements are driven primarily by debt
So don't you think there are any other factors which influence prices eg.
1. supply and demandYes, but it's market supply and demand that pushes and pulls prices. Supply (new dwellings) has exceeded underlying demand (population growth) despite claims to the contrary by various building industry lobby groups (see here). So this supply/demand is balanced.
On the market supply/demand, increased access to credit has at least tripled the amount people are able to pay for houses over the last decade and a bit. Part of this has come from declining interest rates (some from easier access to credit, some from access to increased levels of credit). As interest rates fell, people apparently maintained their preference for spending a particular amount of income on housing, thus increasing market demand. As the boom gathered pace, this amount increased. Demand rose further.
Supply here is about the number and quality of properties available for purchase in the areas the buyers wish to buy. These properties are primarily existing houses. As it became ‘cheaper’ to buy, people preferred to spend the same amount of money on a higher quality (or location) of house. Because it was impossible for these existing houses to triple in quality (or location
, prices rose instead.There is a very good explanation of this phenomenon from Luci Ellis, for the Reserve Bank.
http://www.rba.gov.au/PublicationsAndResearch/RDP/RDP2006-12.htmlIncidentally, if you do read this, try to fully understand the bit about ‘mortgage tilt’. I think it’s pretty clear that people are absolutely blind to this (lower interest rates don’t necessary mean the overall cost of buying falls).
Quote:2. ImmigrationProviding sufficient additional dwellings are built to house the growing population, there will be no overall impact on house prices. See above. Sure, if they choose to all move to the same areas and buy houses, prices in these areas will have additional upward pressure.
Quote:3. Mining towns? I wouldn’t buy in an area where a boom in mining has pushed prices several times higher than the local non-mining economy can sustain, particularly if there is scope for future building to alleviate this added demand pressure (as in the long run house prices have to reflect the amount people are able to pay for housing). But that’s up to you.
Quote:4. Interest ratesSure. See my answer to question 1
Quote:I say this with no dis-respect but you are always negative in regards to most posts.I don’t see my interpretation of reality as “negativity”. I see unbridled and unfounded optimism based on falsehoods and slick sales pitches as… problematic. All I’m doing in this thread is countering the series of posts where people claimed to be able to see into the future, a future where house prices would rise far, far above the price that anybody could afford to pay.
Quote:Are you saying we shouldn't invest in property?Not at all! Knock yourself out! There’s no doubt plenty of money to be made still. Just base your decisions on thoughtful and realistic assessments of the likely outcomes, not the false hope of unrealistically (impossibly) high future house prices.
Quote:For us novice investors could you share some thoughts/views in regards to investing in property?Sure, just this one. Over the next 20 years, it is highly likely that asset prices will appreciate at a rate considerably lower than the prevailing interest rate.
Cheers, F. [cowboy2]
duckster wrote:rent is determined by supply and demand for rental properties. If investors were to suddenly buy a lot of investment properties and flood the market with available rental properties then the rental vacancy figure would increase which in turn would cause rent to decrease.I think wages are pretty important too, plus there is plenty of elasticity in rental demand. Renters can react to rising real rents (as a proportion of income) by sharing more or having fewer spare rooms, and to falling real rents by going solo. Here's another chart I whupped up similar to the first but using rent as a proportion of average income by capital city.
Investors may be heartened to note that rents have been declining as a proportion of income. This might indicate room for further significant moves to the upside. But I think the tie is far greater to inflation than incomes.
yarpos wrote:the charts show interest vs rent, the question was rent vs inflation.That's real (inflation adjusted) rent. A flat line indicates rents equalling inflation, rising indicates rents increasing faster than inflation, a falling line indicates rents increasing more slowly than inflation.
I included the cost of mortgage interest to illustrate the point that ‘you can borrow your mortgage but you can’t borrow your rent’.
Here’s a simpler, more direct look at inflation and rent, using Melbourne as an example:
Quote:The rent line if its adjusted for inflation indicates flatline, this has not been my experience over short term in Melbourne with two properties in different areas. Over 2 years rent moved 170 >215 and 240 > 300 .That’s right, Melbourne rents are currently growing faster than inflation (as seen in the uptick at the end of the chart), but this comes after several years when they were declining in real terms. And remember that your examples of 25% increases over 2 years equates to 12%pa compound rate and a real increase of 8% to 9%. That’s still a hefty increase averaged over the last 2 years, but if you add in the previous 5 years of declining real rents the annual average falls further.
No doubt rents have been rising faster than inflation recently. But over the longer term they can’t.
Quote:Long haul you would think that rents can only outstrip inflation for short periods of time e.g. gentry-fication of areas driving up rents, and driving out low income earners. Sooner or later affordability kicks in and balance has to be restored which would get back to the flat line. Long term it doesnt seen wise to base a strategy on ever escalating rents above CPI.I agree.
Cheers, F. [cowboy2]
dreaming wrote:for my technical advise I'll read books by well educated people like Ed Chan, Micheal Yardney and Steve for foresight into the future.
That's a real knee slapper!Oh wait, you're not serious about Ed Chan and Michael Yardney are you? If so, apologies; it might look as though I'm mocking you. I'm not, I really thought you were joking.
Cheers,
F. [cowboy2]Sorry, I hadn't read this question before answering it on another thread!
https://www.propertyinvesting.com/forums/property-investing/help-needed/4322828Above figures are CPI inflation adjusted rent in 2007 dollars. The answer is "no it doesn't". Because of the close correlation of wages and inflation, and because rent is limited to wage growth, inflation in rent prices simply tracks inflation over the longer term. House prices are much more flexible because they are driven primarily by the amount of credit banks are prepared to lend. This is why there is no correlation over the short to medium term between the cost of buying a house and the cost of renting it. You can borrow your mortgage but you can't borrow your rent. Hope this helps.
If you're prepared to step into the bear cage for a little while, there's been some discussion of this topic here:
http://forum.globalhousepricecrash.com/index.php?showtopic=24555&st=0&start=0F. [cowboy2]
Just a few more bits…
foundation wrote:I might say to you:
“Make no mistake about it Devo my boy, an unsustainable trend in debt is the driving force of our economy today and will be the most influential factor in our economic future over the next decade or so (either by its continuation or by its absence).”You might try to refute this statement, but you’d have a hard time trying. That debt growth is following an unsustainable trend is proven beyond doubt. That without this unsustainable trend our economy would be in recession is adequately arguable on empirical grounds, and certainly stronger than any counter-argument. Thus, the (continuation or absence of this) unsustainable trend will decide whether we will have an economy of growing or declining productivity in the future.
Given that the very definition of unsustainable is that it cannot be sustained, I’ll leave you to make your own assessment of the probabilities of various futures.
Don't forget that a back-of-the-fag-packet calculation can indicate roughly the percentage impact on house prices that a slowing of debt growth to a sustainable rate would have. Do report back when you're done!
lostie wrote:can you please spell out the long and short of for us newcomers.
Lostie (by name, not necessarily by nature)Hi Lostie. Everything you need to know about this subject can be found on Steve Keen’s Debt Deflation blog here:
http://debtdeflation.com/blogs/SK is a mathematician and professor of economics, so some of his work is very technical, but his argument is sound and his blog itself is an easy read. Check through the comments and you’ll find I’ve tried to make my point over there too (probably better so than here). There are also plenty of clever people reading there, so anything you don’t understand can be sorted out with a quick question. Oh, and PM me – I’ll link you to an interesting site.
If you don't feel like checking out those sites, I'll break it down to "the short" as you requested:
The past 30 or so years of house price growth has been dependent on an unsustainable trend in debt growth. This trend is reaching it's limit. Anybody who is basing their expectation of house price growth over the next 30 years on their experience or knowledge of house price growth over the last 30 years is deluding themselves.
And even if they turn out not to be entirely deluding themselves, they might simply be abusing mathematics. For example, by assuming house price growth is exponential* (based on a poorly fitted historical function), and entirely disconnected from real drivers, such as wage growth…
* An example of this would be parroting "house prices double every seven to ten years", which not only assumes exponential growth, but assumes that only price and time are relevant. Something like "historically, house prices have tended to track slightly higher than wages, but this gap has been bridged by increasing mortgage debt" would be more accurate…
Anybody needing a refresher on exponential (compound) growth versus other functions? Here ye go:
Next time somebody tells you that house prices have "grown by 9% per year on average over the last 10 years", ask them to point to which one matches house price growth…
https://www.propertyinvesting.com/forums/property-investing/help-needed/25921?&page=4#comment-154617
Cheers, F. [cowboy2]
PS – Incidentally, if you project that pre-1890s crash average Victorian price out at 10% per year, the average value of a Victorian Rateable property should be $524,288,000 by 2013. Sweet.
And rent has increased faster than inflation? Here's a chart I prepared earlier:
Real (inflation adjusted) rent versus real (inflation adjusted) interest costs on the average house.As for the last 30 years of house price growth… well, let's say it aint gonna repeat over the next 30 years. Here's something I wrote a while back which began as a spiel about interest rates but ended with the unsustainability of our present trend.
Quote:I notice that many responses to the Have Your Say thingy feel that the RBA are misguided in their ‘suggestion’ that people should curb their spending. They seem to think that by raising interest rates, the RBA is only reducing expenditure by home-loaners, when the real culprits, the cashed-up home owners (sans mortgage) and renters are the ones with the disposable income to burn. I think they’re right and wrong. They’re right in so far as the spending patterns of people without mortgages won’t change. They’re also right that people who are savvy enough to rent for half the cost will be relatively unaffected. In fact, those with sizeable savings will have greater spending power as interest rates rise. But these posters are missing the point, failing to see the bigger, non-immediate picture.Aggregate demand increases as the money supply grows. The largest contributors to this are currently business borrowing and household mortgages. These two combined are currently adding $220 billion dollars annually to the money supply, hence aggregate demand. This compares to a total of 40 billion dollars of productivity growth over the same period (year to March). Debt is rising faster than production. No big surprises there, it’s been happening for years. Leaving aside for now the fact that this is unsustainable…
The RBA isn’t simply putting up interest rates to curb the spending of existing debtors. This would be silly as these people have limits; the posters correctly note they already have less disposable income than renters and owners. The RBA are raising rates to reduce the future growth of the money supply. Higher rates increase the propensity for people to borrow and encourage them to save. Saving is more rewarding, borrowing is more expensive. People who would consider borrowing money in the future will be more likely to not borrow that money or at least likely to borrow less money. People who are currently being squeezed by higher repayments have simply been too short-sighted. They should have realised that interest rates would trend up, after all, when the money supply is growing faster than productivity inflation and interest rates will follow.
The really scary part is that not only is the money supply rising faster than GDP, but our GDP (increasingly) relies on the increasing money supply just to keep on growing. Remember, $40 billion in GDP growth that cost us $220 billion in additional debt to achieve!
If the growth in the money supply stays above $40 billion we face higher inflation and higher interest rates. If it falls below $40 billion we face a massive crash in the housing market and a severe, spiralling recession. This is not scare-mongering, it is the reality of the future, one which we have brought upon ourselves, aided and abetted by government ‘strong economy’ propaganda (sorry sense
) and a reserve bank that held interest rates too low for too long.Choose your own adventure: Inflation and higher interest rates or a recession (probably deep enough and long enough to be called a depression).
The biggest problem is the degree to which we rely on monetary inflation (through debt) to keep our economy growing and looking ship-shape. The following chart, my current favrite, shows the depth of our predicament. This charts our total bank credit as a percentage of GDP over the last 150 years.
What should be immediately, bleedingly freaking obvious is that credit growth as a proportion of our national income has been growing exponentially for the last 30 odd years. What is less obvious to the mug punter and to many commentators and economists is that this is not ‘normal’. Blinded by ignorance, most of these people (who really should know better) only ever glance at a much shorter chart of 30 odd (yes I know, “very odd”: ha ha) years and surmise that things are proceeding ‘as normal’. Alternatively, they consider only how much the rate of growth has changed from one period to the next. Ugh.
‘Sure,’ they think, ‘credit growth is exponential, but this must be normal because it’s been that way for decades and nothing really bad has happened’
F__k off! At the very least, this ratio of credit to GDP must flatten at some point, otherwise we’ll soon be paying every cent of our national income just to service our debts. At some point, whether tomorrow, next week, next month or in ten years time, the upward slope has to stop.
The staggering truth is… it can’t!
As we’ve seen, last year total credit grew by $220 billion while GDP grew by just $40 billion. What would happen to our economy if credit had just grown at the rate of GDP? The simple, ignorant answer would be “GDP and total credit would have both grown at $40 billion and that stupid chart would have levelled off”.
"Wrong", "wrong" and “uh-uh buddy, what are you a blockhead, a crackhead (sorry CL), a government (sorry sense) goon (sorry goon) or all three?”
Suppose for a second that total credit did grow at just $40 billion. If corporate/business debt had not grown at all that would still have required a 60% drop in mortgage debt growth, hence a 50% reduction in prices. That aside, debt growth and therefore money supply growth would have been $180 billion lower, which would have lowered demand by $180 billion or thereabouts. And with that scale of demand drop, productivity also would have fallen… in other words GDP would have declined, rather than grown by $40 billion.
If you were Microsoft, you’d be telling me by now that we had a circular reference. Really? An economy that relies on ever increasing quantities of debt to produce ever decreasing (relative) measures of growth is ‘circular’? Blow me down.
Of course if we have a declining GDP (due to ‘sustainable’ credit growth), even a static amount of credit would be too high. The ratio, and our chart, would continue its upward trend. So credit has to decline? But that would precipitate a further plunge in the prices of debt-backed assets (houses) and further declines in credit, and further declines in GDP! Damn right it’s circular!Incidentally, if somebody were to ask me to describe the economic conditions in the decade leading up to the depression of the 1890s or the far less significant 'Great' depression of the 1930s I'd say the period was dominated by a credit-fuelled boom. If somebody were to ask me to describe the economic conditions leading up to today?…
Cheers, F. [cowboy2]
, prices rose instead.
) and a reserve bank that held interest rates too low for too long.
