What can cause a downturn or correction?

Hi Tas,

I think that for every boom, there’s got to be a bust. How big a bust and when it happens are the things that’re impossible to predict.

I think that even if interest rates remain unchanged, there may still be a risk to the housing market. That’s because US rates are being cut, and may go even lower. This means the Aussie dollar will become stronger and stronger. The problem with a strong Aussie dollar is that our exports become more and more expensive, and less and less competitive, on the world market. And when export companies find the going hard, it flows through to the business who supply or rely on them (even cleaners!). This results in loss of jobs or pay cuts, which means people will find it harder to buy a property, or to keep paying the mortgages. And when there are enough people who are struggling to pay their mortgages, the number of bank repossessions will rise, which could depress price.

But don’t pay any attention to me – I’m just a toilet bowl economist.

Cheers
M

Supply and demand is true, however interest rates surely play a part in supply and demand as would any other cost factors. I would also say that interest rates play a significant role in affordability or debt serviceability for many people, but again are linked to demand. Lower rates could mean increased demand which in turn may put upward pressure on property prices.

I accept that if interest rates were 0% then it would be purely demand for limited housing. But if you made interest rates 30% many people would not be able to service the loan repayments at given property values, relative to their disposable incomes.

This would put downward pressure on demand for purchasing houses as opposed to renting. This downward pressure would then translate to slower property price growth or even negative price growth, depending on the degree of pressure and other pertaining cost and income factors in the market.

Without knowing the specifics, 12% interest rates may not have been sufficient to dampen demand sufficiently enough at that time, for house prices to stop rising. But eventually if either house prices or interest rates reach a certain point, demand would slow. This is because as the cost of debt servicability rises, there would be fewer and fewer prople with disposable incomes sufficient to meet the loan repayments.

The reality is that debt serviceability is a function of several variables. Mainly being 1. House Pricing, 2. Disposable Income, 3. Interest Rates

A $100K home at 10% interest will cost as much to service the debt as a $200K home at 5% interest i.e. It would cost me $191.79 in interest per week, assuming interest only IP.

So clearly the debt serviceability would remain the same on both investments. This is assuming that debt serviceability is the major impediment to buying property, rather than price alone. I would assume this to be the case as you could always afford the repayments even if it took a lifetime to pay off.

Even I could afford a 1 million dollar property if interest rates were 1% It would cost me $191.79 in interest per week, which happens to be the same cost in interest as the other two examples I gave above. This would mean that many people like me on slightly above average incomes could afford to buy 1 million dollar IP homes.

The problem is that this would then increase demand for these types of homes and hence prices, until affordability at even 1% rates become a problem for people like me. So clearly interest rates and incomes play an important part in demand for housing at certain prices.

Also interest rates play a factor in serviceability of debt and hence affordability relative to disposable incomes and hence demand.

In fact supply and demand for loans at certain rates will effect supply and demand for houses at certain prices, as most people require loans to buy houses.

Affordability and hence demand, is a function of debt, interest rates and available disposable income.

There may be many short term micro effects to changes in market conditions, but ultimately when all changes are complete and the dust settles, the market would move toward some form of equilibrium, where in consideration of all relevant variables, supply meets demand.

In answer to the question, I think any of the pertaining variables, but particularly the big 3 identified being prices, income and rates could create a downturn. Remember that there is usually a lag time between action and market reaction.

So if for example, any of the variables changed by say 25% or more, one may eventually see the market reaction to such change. But there is no magic number, as there are so many variables that can effect demand and to some extent supply.

The other thing is speculation about what is likely to happen. Once people start to panic this it self can cause a correction if they try to offload property that they can no longer afford to hold due to higher rates against rents. On the other hand buyers may also become reluctant to buy at current prices and rates.

This may result in supply at a given price exceeding demand for property at that price, in terms of property cost, rates and available income. This could cause sellers to get nervous and dump property at lower prices which may eventually bridge the supply demand gap and then stabalise demand and supply at lower prices for a while.

Many factors to consider clearly.

I think it’s the media!!!!!!!!!!!!!!!!!!!!!
not an original idea, but one which when I heard, made perfet sense…

Don’t forget, only 6 percent of the market are INVESTORS.

That means that 94 percent of the market is driven by Owner-occupiers.

!!!! Anyone would think it’s the stockmarket around here, the way people talk about booms or busts. I just don’t think things happen that quickly or radically with property.

OK so most of the market – the 94 percent owner/occupiers- They choose carefully, choose on emotion/ their budget, and then tend to stay there for a while. The stopped looking at ‘what the market is doing’ (if they ever did) because they’ve moved into their new home, and that is pretty much that for the next while.

It’s these people that are looking to the newspapers and TV for their ‘truths’ about the market – they don’t do the numbers themselves. Wouldn’t necessarily be buying API magazine and going to seminars..(Remember again that the PPOR by nature is always going to be negatively geared, too – – even if it would have been +ve as a rental.)

I watched a richmastery video where they explained this (that the media drives booms!!) a lot better than I’m doing it.
They said that previously, booms/busts were to do with real market-driving fluctuating factors such as interest rates, inflation, but nowadays interest rates are much more stable- inflation has been capped, … so the media talks it up and then talks it down.

6 months ago compared to now, the indicators are exactly the same or maybe even more favourable to buying, but the media is saying ‘PROPERTY BUBBLE ABOUT TO BURST???’ which gets the fear into people, who start to panic, and talk about it – etc etc

my three cents

cheers-
Mini

http://www.vocalbureau.com

hi there,

>does this translate that it is the rich and powerful that are >influencing the property market prices for their own gain ?

I don’t think so – it makes sense to me that the ‘market’ is driven by owner occupiers as they are the market – not ‘investors’-

>or are they merely trying to create attention to their own >stories about property to sell more.

to sell more newspapers – not properties!
I’ve read/heard that wealthy people store their wealth in property long-term (rather than trading it up or down like people use the stockmarket)

>If not, then of what interest does the media have in talking up >or down the market ? other than selling news papers, >magazines or TV news items etc… ?

if there’s one thing that september 11 and the iraq brought home it’s that the so-called ‘news’ is nothing more than a press-release sent out by whoever’s releasing it – OK let’s not go there – the property dudes richmastery reckon they do it to sell papers- create sensational headlines, get people hooked in to buy papers to read about it, follow up with more stories, sell more papers…etc

cheers-
Mini

http://www.vocalbureau.com

although im loathed to reply to this topic. mini the references you are using ie richmastery, property seminars, api magazine – they sound a little unbalanced as far as reference material goes.

im guessing you also have a vested interest that the market goes up or you wouldnt be so positive. i think if we were on a forum board for shares there would be similar one sided views

my 3 cents

Interesting Point Mini. Something to think on. I guess though that even if it doesn’t burst it may flatten out for a while. To be honest I don’t think about it much as I buy on numbers that make sense whether bubbly or flat (much like I know you do). I guess the rule for me is if I am worried about bubbles then maybe I am investing in the wrong market or the wrong way.

Enjoy
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(Andrew)

“Character cannot be developed in ease and quiet. Only through experience of trial and suffering can the soul be strengthened, ambition inspired, and success achieved.”