Hi, guys
Not wanting to enter into the middle of the discussion between Ausprop and Foundation, just seeing if I understand what the two of you are saying.
In my personal view, the actual value of houses would still increase at an inflationary amount, so that $600 billion in true housing value would increase over time, as well as the amount of debt actually needed to maintain that true housing value.
So, if I understand correctly what Foundation is saying, is that in order to maintain or increase the current perceived value of housing that many people are enjoying right now, the level of demand for housing and especially willingness to incur debt to pay for the demand must continue at a much higher than inflation rate.
With the ballooning debt comes increasing interest payments. As the debt and interest payments are growing quicker than the growth of wages, it will come of a point where the amount of wages will not be sufficient to cover interest and debt repayment, after accounting for living expenses.
It is at that time where we got a problem. So, the early signs are now where we see the number of mortgagee and forced sales going up, as the tail end of the borrowers are no longer about to deal with the debt and interest repayments.
The real problem hits when we have a significant percentage of the population going under due to those repayments. The impact then to the society and economy will be enormous…
Of course no one knows when this will happen, or it could already be happen to a small extent. What to do? I am just going to continue renting at the mean time, save my money and then seek out that bargain.
Regards
Daniel Lee [specs]well I think it would be reasonable to assume that wages don’t generally go down after you purchase a house, so there is no increasing burden. cheaper housing is created on the peripheries of cities and that is where FHO’s make a start (the median property of today is not the same property that was around 30 years ago). those trading up or fresh to the market e.g, cashed up immigrants and those that have got well ahead in life can afford locations that are detached from affordability. another point being that when we talk about ‘the property market’ it is hard to define what that is exactly. Take the Dunsborough / Eagle Bay region of WA where housing costs $2m to $10m – I think arguments about affordability don’t apply. so you can see the argument tends to fracture as we start to narrow down locations within locations – and what is today a first home owner location is tomorrows blue chip inner city
being off of the property roundabout is a dangerous game. I have several examples of people who thought the merry go round would stop and they could grab a better seat so they jumped off only to find it was just warming up. once you are locked out of those sort of gains the dream can easily become impossible.
some good arguments in this thread…which has been going for 9 mths…..
these words from Saul Eslake recently add further clarity to what drove the last boom.
http://www.theage.com.au/news/business/the-great-australian-struggle/2007/03/08/1173166895673.html
“Although the borrowing capacity of buyers had more than trebled in the past 15 years, and immigration risen, there had been no corresponding increase in the supply of housing.”By the way, 9.35pm next Monday, Difference of Opinion on ABC TV are looking at what can be done about housing affordability…
So far, govts just want to throw money at the demand side, which pushes prices up further…..and have been slower to improve supply side…..probably because supply side solutions require hitting revenue sources for local and state govts.
To danniellee,
Your entire post has shown that you do understand the fundamentals. This sums it up perfectly:
As the debt and interest payments are growing quicker than the growth of wages, it will come of a point where the amount of wages will not be sufficient to cover interest and debt repayment, after accounting for living expenses.But it doesn’t end there. If prices continue to rise faster than wages, they will take 100% of net wages, then 100% of gross wages, then 150% of gross wages etcetera. People continue to tell me that this is a plausible scenario. No wonder I’m intolerant!
Good for you, by showing you can think this through, you’re in a very small minority*! Just be sure to do your own thinking, don’t let important decisions be overly influenced by what some crazed lunatic with a calculator (me!) says anonymously on an internet forum! The only thing I can guarantee is that over a long period (many decades) house prices can not and will not rise more than wages. They certainly can over a 10-20 year period. That has been shown by the last 20 years. Check out this chart of Sydney house prices against wages for the period 1901-2001:
http://img71.imageshack.us/img71/9599/hpvwagesydneyqm1.jpgIn my personal view, the actual value of houses would still increase at an inflationary amount, so that $600 billion in true housing value would increase over time, as well as the amount of debt actually needed to maintain that true housing value.“Would increase� Think about why prices tend to rise over time. Inflation isn’t a fixed percentage that is added to prices each year. It represents the tendency of prices to adjust to the loss in purchasing power of money. Wages do the same, thus there is no real impact of ‘rising prices’ – the cost of a good remains much the same in relation to wages, only the number on the ticket changes.
Broadly speaking, wages rise on inflation expectations, then the price of goods rises to consume the added purchasing power. Why? Because they can, and because the labour cost of producing the goods for the consumers will have risen. House prices are similar, people tend to spend more as their incomes rise, because they can. Thus house prices rise – perfectly reasonable. Unless the cost is constantly eating more and more of their incomes…
The problem with assuming that “true housing value†(I’m comfortable with equity or net worth) will rise in line with inflation is this: we’ve already seen how much debt levels must rise this year for house prices to stay flat. $90 – $100 billion dollars. Assuming 5% wage growth:
2007 – Interest $65 billion – Wages $450 billion – 14.5% of gross wages required to pay for mortgages.
2008 – Interest $73 billion – Wages $473 billion – 15.4% of gross wages required to pay for mortgages.
See, even with zero inflation in house prices, the cost of mortgages is eating more than the increase in wages! This situation is not inflationary for house prices!
What it is reasonable to assume is that over time (as you’ve already pointed out), the proportion of wages required to service mortgage debt will fluctuate in a range from above zero to… the maximum. Do we know what that maximum is?
F. [cowboy2]
*Keep an eye on http://www.debtdeflation.com/blogs/
It’s still developing now, but will be a great resource for those who would rather hear uncomfortable truths than get sandy ears.Of course, regardless of the plausibility of the debt growth required, there are also major mathematical dangers when projecting forward with historical rates of compound growth:
http://img442.imageshack.us/img442/3413/hpiassumptionsxv3.pngGlad to help, F. [cowboy2]
Concur with what you say above….but never underestimate the bank’s sly dog tricks to squeeze the last drop out of the common folk….Ponzi ain’t happy till he has sucked the last dollar out….consider these ways to keep house prices moving up….
– increase term of loan above 30 years. i.e. intergenerational loan.
– shared equity loan (misbehave, or get sick, and you get nothing, the bank gets all)
– joint loans via pseudo communal households (though how many Gen Ys can get on for more than 2 weeknights under the same roof
– honeymoon interest rate periods extended beyond 1 year.
– the rba drops rates, significantly (doubtful though)
– trend for median household to grow above 2.4 people.
all of the above stretch your debt serviceability that little bit further.
– Australia suffers some sort of emotional shock that makes us wake up to the fact that we must get more productive…..like Finland, Ireland, and Sth Korea…..extra wealth pushes property further. (hate to say it, but that’s a long shot too)
Hi Foundation I'm back and very impressed with the quality of the comments coming in … thanks also for the links.
So who is to blame "the banks" or "greed"
We have a 40 billion dollar credit card problem "highest in the world"
Our layby system has been changed to "interest free" and stats show that only 14% pay out this debt by the terms end ???
Civil works costs are increasing and building products are increasing however affordability is decreasing.
Our parents lived in 3 bedroom homes when they started out but our young generation demand 5 bedrooms, media room, double garage, dish washer, pool, BBQ area etc etc
Is the solution a 50 year home loan – cheaper credit cards – or other slippery bank offers …
The situation WILL get WORSE until people wake up.
Cash is king
D
taking on debt is a reflection of confidence. look at the birth rates. none of this is amazing nor nation building stuff, but it's all good.
cash is not always king… usually it's just lost opportunitieswealth4life.com wrote:So who is to blame "the banks" or "greed"Hi Wealth. I'm not the sort of person who needs to blame something or someone every time something goes 'wrong'. While all the evidence is that we're headed for stormy economic times, 'the economy' will be fine… in the end.
On the individual level, I don't think there is/should be any blame to be dished out. Every person is responsible for their own situation. If they've made decisions which turn out to be wrong, based on incorrect assumptions of the future, they'll need to deal with any shortcomings in their assumptions. On the other hand, individuals who do truly understand what they're doing, and have expectations of returns that are simultaneously possible, plausible and likely: many of these people will prosper. Again, good for them.
The limiting factor is that it's dang hard for the average person to objectively assess all the pros and cons of a particular investment, particularly when macroeconomic conditions are uncertain. Should they try… well, once you start unravelling pieces of the financial puzzle, you discover how little you know. Just last week I was involved in a long (web) argument on the origins and nature of money. What is money & where does it come from? A question so fundamental and seemingly simple, yet not so! Prepare to spend dozens of hours a week for many years just trying to catch up on how the world works! Is this the ultimate 'analysis paralysis'!
So, "the banks" or "the greed"? I believe that banks only respond to consumer demand for debt. Sure some of them send out unsolicited credit offers, but once again, the individual needs to sign a credit contract before they can start to spend the banks money. I guess greed then?
Quote:We have a 40 billion dollar credit card problem "highest in the world"And by the end of the year we may well have a $920+ billion dollar housing debt problem. The biggest in the world! Should we apply to Guiness Book if we get there? And before anybody says "but not as bad as the US", let me say, yes, we will have more household debt than the US by the end of the year:
http://www.debtdeflation.com/blogs/wp-content/uploads/2007/03/US_v_Aus_HHDebt2GDP.pngQuote:Cash is kingPerhaps. Perhaps it is not yet cash's time! We're likely to see further inflation before we see deflation, but I'd rather lose a small amount of my purchasing power by holding cash… than lose many multiples of it's purchasing power by leveraging debt against deflating assets. Debt (any debt, 'good' or 'bad') is a killer during deflationary times. The sweetener of any inflation (for savers) is higher interest rates… the sweetener of deflation is high real interest rates (goodbye tax)!
Cheers, F. [cowboy2]
Sorry for this however i really don't agree that things are that hot,
Some people are talking the market up but lets look at the big picture, the majority of people are hurting out there …
Credit debt is sky rocketing and the first home owners with young families are not happy. Secondly read the comments from the people on this site in their 20's and 30's. Thirdly 2 billion dollars has been stripped from unsophisticated mums and dads super funds from property collapses of Westpoint, Bridgecorp and Fincorp and many many other smaller preditors.
The last bust was in 1989/1994 which is 14 years ago so a 30 year old today on this site was 16 then with no memory of what happens when you are charged 19% interest on a home loan – lets hope that doesn't happen again.
It's OK to be caught in the frenzy and greed of making money and hear the stories of multipul property owners but I think the best advise is to look over all the markets and not just pick a few hot spots and blurt all is good in real estate.
Sydney although rising in value is hurting – people have to borrow more to get into the market and the ROI is not good over 80% ot the market – most of the larger developers are keeping their money in the bank at 10%
D
With all due sympathy to your friend of a friend, you have not described an investment strategy, but a lifestyle choice. I am pleased that financially he can get out of it because of his employability.
He has purchased and initially is paying $400.00 per week interest plus rates plus body corporate plus whatever for something that will return $237.50 a week. I know I will get shot down in flames by some but grossing 3% income on something that is costing 6+% is not my idea of fun. Ultimately capital growth is only going to occur because of increased income potential.
Camden and Dazzling show their strategy. Find something with unrealised potential and work out how to add value.
I wonder what Foundation's friend of a friend has learned from this experience. I know from Dazzling's stories that he learned after his unhappy experience with residential IP to keep on with direct property investment but in a field where the issues he had had wwere minimised.
Isn't it fascinating to watch how interest keeps going up in 25 point steps every 3-4 months. The interesting part is that disregarding interest rises credit card debt keeps going up, people keep buying housing at inflated cost, store accounts keep growing up and Retrovision type shops reporting sky high profits together with sales of new luxury cars going up.
I feel like I been left out, do people know something I don't or they earn x2 or x3 time what i make ….
I am not too far away from 100K p/a.What…. you mean you haven't been trying to keep up with the Jones, Simple?
Don't forget; property investors are the minority, so most people you see are just blowin' it all.
I know and agree that things look a bit rough ahead but i still feel the doom and gloom outlook can be a bit overdone. This talk of massive house price crashes etc etc i feel is a bit overdone.I look at my personal IP situation that wasnt a bargain but just a todays value purchase. With all costs considered it costs me $35 per week to hold THATS IT.
Thats $18,200 over ten years.Now will my house go from $300,000 to $318,000 over ten years to break even. I think its a safe bet that it will go much higher than that.
I think people will always look for ways to increase there wealth and property is the only answer for the majority so if prices do drop(as the very well might).People will start buying again and with a improved economy they will climb in value again.More and more people are becoming investors so if things slow down it just means more buyers are getting ready to purchase.
Ad to this a growing population.
Also this is just my thoughts on the debt situation but i think national debt levels will never reach the low levels of the past. Debt is a more excepted part of life and if you want to increase wealth. Its a essential part.While i agree that debt must reduce from current levels( This is obviose). The days of buying a city 3 bed house for 4 times your wage is over.Our parents hated debt and avoided it but later generations i believe will have to carry higher debt through there lives and this will become normal.Yes many abuse it and they will soon pay the price. But in general debt is not the evil word it use to be.Hi Devo,
I agree debt is not the evil word it used to be until the interest rates go up … wahct this space … interest rates are rising and people are packing it … how old were you in 1994 eg; 16 years ago when interest rates were 19%
Heed the roar of the distant drums!!!!!!!!!
D
I agree. I have really only being part of one cycle and only half of one has effected me financially. I was lucky as my first purchase was in 2001. Perfect timing. I am now selling my toys and reducing debt. I was planning on buying another place soon but now i might hold of.If things do turn bad ill have a PPOR debt under $50,000, No personal debt and my IP is fixed at 1% below current rates. Im sure im in a safer position than some.
Devo76 I think that you are very very smart … oh and wise.
Most people are not listening to world events and I believe that there are troubles ahead … lets see who is wright or wrong … cash is king.
A friend of mine bought some RAMS shares and made a 165k profit …. some ones bad luck is some ones elses good luck.
D
Wealth, Foundation..I'm back, .. how are you. Have been browsing, but nothing really to contribute.
A couple of points now. -Many members discuss in their posts and lay out there own scenario, and feel that no matter what, for various reasons they will be okay. Back in the last crunch, many people lost houses but to many, many, more the news on TV and a few bargains at a garage sale was as close as they got to the recession, if they had a steady job and a capped home loan they barey felt a thing.
The pain in this will not be evenly shared
A interesting observation I can make however is (I'm a public practice accountant) that I have more clients bleeding and spewing on their investment properties (all bought since 2000) than clients who are not. The thing is we said bail last year, ie: had a tax loss of $37,000 so got little value in the tax break, but he was waiting till May 2007 for it to "bounce back". Not quite the case with him but for many of these people they cannot afford to sell as these properties are the mainstay of their retirement strategy, and they have no other choice but to sit, watch their other savings evaporate and pray.
Talked to another accountant who deals with the big end of town $500,000 salaries and bonuses on top, and mentioned these guys have been paying down debt in a big way this year.Maybe just his clientele but have seen this in the few heavy hitters that I have.
I have noticed in my practice a lots of clients who I have had for 20 years who owe more and more each year. No more assets the home loan is just refianced and bumped. Lines of credit are often to blame. Funny how they never paid off the house in 7 years as promised. Funny thing is the penny only ever drops when they sit down and discuss their retirement. They usually have not factored mortage costs into their budgeted cost of living.
When the reality of new lending caps hit, and people cannot refinance as they have been doing, consumption drops, and the reverse wealth effect kicks in and bingo, we will have arrived.
wealth4life.com wrote:Devo76 I think that you are very very smart … oh and wise.Most people are not listening to world events and I believe that there are troubles ahead … lets see who is wright or wrong … cash is king.
A friend of mine bought some RAMS shares and made a 165k profit …. some ones bad luck is some ones elses good luck.
D
thanks for the comment wealth. But i must admit my thoughts have changed recently. 6 months ago i thought you couldnt lose in realestate.
And knowing what i know now i probably wouldnt have bought my IP 6 months ago. But i weighed up the pro,s and cons of selling and i believe i can safely hold on to the property without exposing my self to much to the downturn.
Its a unique central cbd property with high rental demand. Things should be ok for me.
I have several friends in high debt with minimum wage from jobs highly effected by down turns. I pass on my info but sadly they are only going to learn the hard way.The world is faced with so many problems. Housing boom in the inner Melbourne, people paying million to be a small property while big land at the outer side of Melbourne are faced with low demand.
A wide gap and confuse.
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