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toe
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February 26, 2011 - 8:34 pm
patriotsoldier wrote:
Take a look at precious metals. smart money, maybe…. maybe not. alot of money…… yes.
Agree with precious metals. Since the world abandoned the gold standard the market has been scared off the world currency, USD on two occassions. Both times gold climbed to a price where the value of all gold in the US treasury was equal to the value of it's currency in circulation. If that happened again gold would go to $15k an ounce.
It's not just any old speculators that've been buying it either, the governments of South American, Asian and African emerging economies are seeking to hold more gold. Including India, and China which is mining its own gold.
toe
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February 25, 2011 - 9:32 am
AussieHousePrices wrote:
I’m still not convinced. You’re looking at the weighted average for 8 capital cities. Is it possible that the plateau you’re seeing is really just an average of rising markets (such as Perth) and falling ones (such as Sydney)?
All flat line indices will contain both rising and falling markets within it. Even rising or falling markets contain instances of trend bucking, it would be a very unusual market that didn't. Still not convinced? Check out Google Images Search For 'Australian House Prices'. All the charts look the same as the one above.
toe
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February 24, 2011 - 8:24 pm
AussieHousePrices wrote:
Hi Guys,
I’m not so sure there needs to be an “event” in order to pop our housing bubble. With the American housing bubble, or the ‘87 stock market crash for example, nothing specific happened that caused them to burst. A bubble relies on a constant supply of new entrants to keep it going. One day, you eventually run out of people willing to pay ever-increasing prices, and the whole thing comes tumbling down.

thecrest, I think there is absolutely no chance of a plateau after a boom. Feel free to check out my recent post on this topic if you’re interested in my reasons.
http://aussiehouseprices.blogspot.com/2011/01/will-property-prices-plateau.html

Cheers,
Andy.
Sorry Andy but I have to disagree with just about everything here. First lets look at the chance of a plateau, in 2001 Ian McFarlane the RBA governor at the time warned that he would personally see to it that the house price boom of the early 2000s stopped by raising interest rates. Between late 2002 and 2005 the market plateau'd. So I dont see how you say that's impossible.
And while house prices have increased at about the same rate they did in early 2000s, the Price to Income ratio has remained stable since 2003. Which means the likelyhood of a crash based on affordability has been the same since 2003, and it hasn't happened yet.
The one thing I agree with you on is that the '87 stock market crashed under it's own weight, however the stock market is an entirely different beast to housing. However I can't understand what in the world would make you think there was no event external to price increases which triggered the GFC crash. My memory is different to yours. There was a smaller economic event which lead to banks tightening lending practices at the same time as hundreds of thousands of ARM mortgage resets doubled peoples mortgages simultaneously (within the space of three months anyway). People who were planning on refinancing as their mortgage reset had no other option than to default enmass. Is this not a trigger, what am I missing?
toe
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February 23, 2011 - 8:49 am
pharvie wrote:
It usually takes some economic reason to trigger a significant
financial event
Thanks pharvie, you have crystalised my point in that sentence.
toe
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February 22, 2011 - 9:26 pm
pharvie wrote:
You can argue these points until you are blue in the face, but at the end of the day unless you are just living somewhere and for some reason don't care what happens to your house price, it is an investment decision.
The botttom line is most people will not have an exit strategy except to do what everyone else will do and rush for the exit en-masse if something goes wrong as per the Moran Stanley article.
Very few investment properties in recent times have any cash flow value past a hope for capital gains in the future and negative gearing in the present because everyone knows that property just goes up without fail. I even read an article in the Fin Review on the weekend where John McGrath indicated cash flow positive to be 'old school'. That pretty much says it all.
It usually takes time to accumulate capital and the prime rule in investing is to protect that capital so you can reinvest and keep increasing it. If you have lost it all it is hard to make more.
Those in the community who are experienced investors will likely take some money off the table at an appropriate time and not mind if they inadvertently leave a bit for the next person.
I can hazzard a guess that very few will; I am sure there a more than a couple of US citizens suffering from that so often heard 'If only' lament.
pharvie, I'm not really arguing any points, I'll leave that to people who are saying there'll be a crash regardless of what happens.
I can't even get the four members of my family to agree on which movie to watch at night. How do you expect to get 40% of investors selling at the same time? That's what I'm saying. I'm not convinced that 1.4million investors will all decide their investments are duds in the same month, without some major influence from the wider economy. That's what a crash is you realise, everyone running for the exit at the same time.
What if it happens over a longer period, say two years? That's what happened from 2003 onward? Property market stagnation.
I'm not convinced that the market can crash under it's own weight people. Not without influence from the wider economy!
But I'm open if you want to, convince me otherwise!
toe
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February 22, 2011 - 9:09 pm
white_goodman wrote:
toe wrote:
if there's a crash it will be due to wider economic conditions. A China bust maybe, or the world loses confidence the world currency (US dollar), given the amount of money they've "printed" recently.
look at the source of funds for our major banks in financing residential property, our banks arent as immune as you think, when the banks costs go up (interest they pay from getting foreign money), and they are, interest rates will go up
You're arguing against yourself here. All I'm saying is that the market won't implode on it's own as many people seem to think. My quote says "if there's a crash it will be due to wider economic conditions". You said I'm wrong and that bank funding from overseas could cause a crash. That would be the wider economic condiditions I'm talking about! And even that won't happen on it's own, we'd need an event to cause overseas funding to be tighter than now.
toe
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February 21, 2011 - 10:49 pm
nicolas_b wrote:
I am not saying that Australian property is expensive, there is a bubble and it's going to pop. I do not know.
Let's just look at property investors.
Toe, these quotes are from this article from morgan stanley
"Australia has become a nation of landlords: in 1988-89, 608,000 taxpayers reported rental income; by 2007-08 1,765,000 taxpayers did – 13.5% of the total."
"Over the past decade property has been an excellent investment. But it is, in my view, extremely unwise to expect such gains to continue, given current valuations. The investment fundamentals of housing have sharply deteriorated."
"Australian Tax Office data confirm that residential investment is a poor investment: total rent has not covered total costs since FY2000"
"The percentage of landlords claiming a rental loss (that is, rent not covering interest and other costs) has increased from 50% to 70% over the past decade. It's not just that there are more landlords, there are more loss-making landlords. This matters a lot. Much of the discussion on the residential market concentrates on owner-occupiers. But arguably property investors represent a significantly larger risk if they became widespread sellers of their loss-making investments. "
"it is simply wrong to assert that rental properties are largely owned by high-income households: losing on residential property investment is largely a middle-class affair. Only 3% of all loss-making properties are owned by taxpayers with a taxable income of over $200,000. Taxpayers who earn $80,000 or less own 80% of all loss-making properties."
So what do you think the average property investor, who is on an average income $80k is going to do if we see property prices fall or move sideways.
That's ~1.4 million investment properties owned by average income earners ($80K), negatively geared, negative cash flow.
Will 10%,20%, 30% or 40% decide to sell if there are no further "house price" increases? Your guess is as good as mine.
nicolas I agree with the points you have raise and in your quotes. I think that the average investor is in a pickle, and that as a result prices might stagnate for some time. After the boom in the early naughties people were also calling for a crash but instead prices went sideways for three years. The reason they don't crash in this cash is the reverse of why the US did crash, in the US the crash wasn't just about expensive housing, it was because everyone had to sell at once. Mortgage resets had doubled their payments and the resets all occured within a few months of each other (people had planned to refi but banks had tightened their lending practices). That won't happen in our case, if investors offload it'll be over a wider timeframe, just like the early naughties.
So I am maintaining my position that if there's a crash it will be due to wider economic conditions. A China bust maybe, or the world loses confidence the world currency (US dollar), given the amount of money they've "printed" recently.
toe
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February 21, 2011 - 8:24 pm
white_goodman wrote:
yes but where does the demand come from if people cannot afford to buy? Cos supply will increase (new developments etc), unless you plan on closing a vast majority of the economy down. I cant imagine all the baby boomers having a nice cash flow nest egg after retirement many will downsize to get their hands on some equity.
Say you earn double the median wage (you are probably a home buyer) and the affordability ratio is still high, you are still paying a higher proportion of your wages in debt servicing etc. You arent really making sense, its a measure of affordability as a whole, not who can and cannot buy homes specifically. If less and less people can afford homes (not saying everyone should, thats retarded) then the pool of people to buy and sell greatly reduces, thus demand will have to come down naturally.
If you have done any economics at school/uni, draw the chart showing inelastic supply (near vertical and what we have in Sydney, Melb etc) and draw demand crossing it. Now show what happens to the price equilibrium when you reduce demand.
Victoria (in red) was less affordable in 1996 for the people who were actually paying mortgages, than it is now. That's after you take into account changes in costs like interest rates, tax etc. And this doesn't include renters who are not at risk of default to banks.
The point that I want to make is that despite housing being more unaffordable in 1996, prices have boomed several times since then, and there hasn't been a crash.
The fact that there are increasing renters who would like to buy but cant afford it is immaterial for two reasons. Firstly it doesn't figure into the likelyhood that mortgage payers will default because banks in Australia are pretty strict about DSRs so they won't allow many people to borrow more than they can afford to repay. The second reason is because of what happened in flemmington (blue in the SQM graph).
Flemington was far less affordable by the people that actually have mortgages there in 1996 than it is now. Yet population inflows lead to higher density housing. Suddenly land that was way expensive was worth the price that was paid for it because instead of one family living on a residential block there were 8 families on four blocks. Owners paid less for their housing and were still close to work, developers were happy, the economy benefited.
State governments generally have done a shoddy job of infrastructure and planning which is why we are in this affordability situation, people cant afford to live near their jobs, yet congestion and shocking public transport mean they have to. Demand in inner city areas closed to jobs is way ahead of supply for that reason. In order to judge the likelyhood of a crash we should look at stability in the wider economy, because people will continue paying high prices until supply increases or the economy crashes and they lose their jobs. We are not going to get a crash due to affordability alone, though we may get prices stabilizing.
toe
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February 21, 2011 - 11:59 am
white_goodman wrote:
your first sentence makes zero sense.
I can only assume you've misunderstood my point, because it makes perfect sense.
Quote:
From SMH
About a quarter of Australians rent their homes through the private rental market — and nearly half of these (45%) are helped to make the rent through subsidies from Commonwealth Rent Assistance (CRA) program.

Most of these people are never going to buy homes, so how does it make sense to consider their earnings in affordability calculations?
It's important to use the correct statistics also. This thread is clearly about risk to housing and economy, largely due to the broad risk of defaults. While inaffordability may coincide with risk of default, there are circumstances where it may not may not. Just because people cannot afford to buy, does not mean that those who are currently owners cannot afford to hold.
Thats why banks do not use affordability to assess your risk of default, they use your Debt Service Ratio.
toe
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February 21, 2011 - 7:28 am
white_goodman wrote:
with housing at record unaffordable levels, baby boomers drifting off into retirement, and banks needing to create more and more debt to keep the status quo, where is the demand gonna come from to keep prices escalating upwards?
is this sustainable or plausible? I think not
the party may continue for a while, but when China starts correcting and the baby boomers start retiring on mass, it will be an interesting time.
The trouble with using Median Price to Averge Wage as an indicator is that a large percentage of the average wage earners do not buy housing.
Money supply is pretty interesting though. The U.S. is far worse in this regard. In order to pay out bad mortgage debts, they have trippled the money supply since 2008. It took 200 years to get to US $1Trillion in circulation, in two years they added $2 Trillion more!
toe
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February 19, 2011 - 9:31 pm
If you believe Australia will have it's own GFC, have a look at how much effort the international banks had to put in to to cause the GFC from which many would benefit. A US government report suggests that they all new, or ought to have known the crisis was coming. It wasn't just caused by some over priced housing. It was international banks conspiring on a massive scale, to create dodgy mortgage products, and then protect themselves and even benefit from the fallout.
Whilst knowing they would cause a catastrophy, several of these banks took measures to protect themselves from the hurt that was brewing by selling off subprime mortgages packaged up with some prime mortgages and rated AAA. The ratings agencies looked into these mortgage backed products and found they were a potential disaster, yet they rated them AAA anyway.
I'm sure I'm not saying anything people don't already know. These were the causes of the GFC, inflated house prices was a symptom. Just because we have inflated house prices doesn't mean we will have a FC (doesn't mean we won't either).

http://www.washingtonpost.com/wp-dyn/content/article/2011/01/27/AR2011012702940.html
Quote:
Government report blames regulators and financial institutions for economic crisis
The official U.S. government report on what caused the financial crisis casts blame on Goldman Sachs for fueling the subprime mortgage bubble, Merrill Lynch for not telling investors about the true state of its financial condition and the Federal Reserve for failing to stop dangerous lending practices…

…Goldman played a key role by providing billions of dollars in loans to subprime mortgage lenders and then bundling tens of billions of dollars in risky loans into investments…
…the creation of investment products that let people speculate on whether mortgage investments would rise or fall in value. Goldman itself often bet against the investments it created and sold to others. …
…The report tackles the role of Fannie Mae and Freddie Mac, the mortgage finance giants taken over by the government in the fall of 2008, …… calls the firms "kings of leverage" that borrowed $75 for every dollar they had reserved as a financial cushion…
Also can I point out that Warren Buffet is implicated in the GFC calamity, which is why he was testifying in the first place. His company Moodies was one of those responsible for making those AAA ratings. Of course he's going to say no-one could see it coming. But the truth is he's not a silly billy, every insider could see it coming. Buying and selling investments when that the ratings agencies have misrated them is how Buffet makes his money.
http://washingtonexaminer.com/blogs/beltway-confidential/warren-buffett-owns-ratings-agency-and-profits-its-ineffectiveness
Quote:
“What we really hope for is misrated securities, because that will give us a chance to turn a profit if we disagree with how the agencies rate them,” Buffett told the Commission.
According to the Financial Crisis Inquiry Commission's report, US bankers had a private saying that they used to justify their actions before the financial crisis, 'IBGYBG' or I'll be gone, you'll be gone.

toe
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February 17, 2011 - 8:32 pm
There is a possibility of house prices declining in Australia, however to compare our situation with the US is a mistake. In order to believe a crash will happen here you'd have to see a way around some key differences.
First, rental vacancy rates in the US at the time were as high as 10% in various areas, they had been building far more housing than required in order to boost the economy. We have the reverse situation in many of the 'expensive' areas in Australia. On that basis there is some sort of justification for prices here.
Secondly, planning in our major cities has been atrocious for two decades, in Melbourne the outer wedges, poor rail infrastructure and public transport, and slow to catch up road infrastructure, and a planning department that lets local residents dictate to the needs of the city, all means that people have had to pay through the nose to buy housing within a 30 minute drive to work. This adds up to justification for prices, and it wont reverse quickly.
Thirdly, in the U.S. it took two events to knock over the housing market, first unemployment went up a bit and banks tightened their lending practices. Second, tens of thousands of simultaneous mortgage resets, when the 'honeymoon period' of peoples loans ran out an their rates doubled. All these people had planned on refinancing into new honeymoon rates, but tighter lending practices didn't allow it, and they could't afford double the rate. This particular situation can't happen in Australia because the we dont have simultaneous mortgage resets brewing.
Forth, one the of the reasons the US had trouble was because the banking system fell over and was unable to help the country out of the crisis. Largely that was due to the US system of non recourse loans, people were able to walk away from home whos values had fallen, leaving the banks with the repayment obligation. in Australia we have full recourse loans which is strong protection for the banks, it motivates owners to pay the mortgage regardless of price drops, and that is a buffer against deep price drops.
There are other differences but I wont write a book here. Of course this doesn't mean that serious price drops can't happen here, it's just meant to point out the differences between our situation and that in the US.
toe
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February 1, 2011 - 10:07 pm
luke86 wrote:
toe wrote:
luke86 wrote:
If property prices increase on average by say 6% a year (a low figure), then a $500 000 property will increase in value by $30 000 every year.
I'm not so sure about that.
There are many opinions out there on where the property market is heading, and there always will be. If you think it will keep rising slowly and steadily, then you would be better off buying property. If you think property will not go up in value anymore or fall in value, then you should not buy property. No one has a crystal ball, so you cant be sure either way I suppose.
Luke.
Sure, but I should've been more specific, I'm not on about where the market is heading. An average historical property price increase of 6% does not mean a specific property will increase by any particular amount per year.
Forecasting future gains is a perilous game, and in property beginners often have to stake their future on each deal. If the forecast is 6% average over 10 years the safest bet is 0% growth for five years then higher growth for five years.
A real estate agent recently said this to me about averages. "Put one hand in a bucket of icy cold water and the other hand in a bucket of boiling hot water, on average you'll be just snug." Kinda reminds me of 2010 vs 2011 so far in Melbourne.
toe
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February 1, 2011 - 10:23 am
Accountant wont really help, you can call a quantity surveyor and ask questions. But from a non expert who has done this before, you can claim all renovations regardless of when they were carried out (after 1985). If you don't have receipts then the Quantity Surveyor is qualified to estimate the values by visiting the property. If you have receipts you can save money on the QS if they don't have to visit the property.
They claim is based on useful life of the items, and depends on whether it is considered plant or equipment. Plant is a straight 2.5% per year. The rate of equipment depreciation is more complex, each type of item has a different rate. Also there are two methods of calcultion, deminishing value, and prime cost, it's your choise.
This website can give you a rough estimate for initial calcs, http://calc.washingtonbrown.com.au/wbdcalculator/calculator.aspx?RID=ZOCV2FNY2F
I should add that claiming a repair is a different matter. You can only claim repairs after the date the property is leased or advertised for lease. And it must be repaired to original condition not improved. Then you can claim 100% in that year.
toe
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February 1, 2011 - 10:03 am
Why do you want to index your returns? For example for me the answer would be to see if my investment was still working as hard as other potential investments. Therefore I'd take the 'current net income'/'current equity'. Then compare that to the 'cash on cash' return available from other investments, ie 'net rent'/'cash invested'.
This way if your equity has gone up a lot, and there are good returns elsewhere, then it might be worth taking a profit to get better returns.
toe
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February 1, 2011 - 9:48 am
luke86 wrote:
If property prices increase on average by say 6% a year (a low figure), then a $500 000 property will increase in value by $30 000 every year.
I'm not so sure about that.
toe
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October 29, 2009 - 8:25 pm
By the way, I'm just a private investor who'd like access to RPData. I'm in contact with a rep who tells me that we dont need to be REAs but we will need a signature from an REA or valuer to say the data is for private use.
If you'd like to know more PM me and I can give you the reps details, if you're serious he can do an online walk through demo, takes about 45min.
toe
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December 17, 2005 - 4:34 am
Michael thanks for that, I think we may be heading down the same path after all.
Yes seven sales will make it a little hard difficult in terms of having ‘confidence’ in the figures. In fact there is a calculation that quants use called confidence interval. If I can find it I’ll post the link to a website that calculates it for you. It essentially lets you know how confident you can be in your figures if there are few observations.
Residex teaming with REIV is interesting, hmmm.
Craig Sillitoe
toe
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December 16, 2005 - 3:19 pm
Thank you Derek it does help. I should be more clear because I was also refering to valuation using yields over a period of time for the suburb, rather than the yield on the investment property. In any case it sounds like we agree that it is more important to be happy with ones valuation and rental expectations, than to get a client that is paying big rent.
mathewc73, I agree that what you’ve described is the general definition of a net cf+ prop. What I’m sudgesting is an alternative definition that takes into account the risk that the current tenant may be overpaying, and that if they leave we may no longer have a cf+ investment.
Craig Sillitoe
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December 16, 2005 - 8:47 am
Thanks Alistair
Craig Sillitoe