Useful Buffett Insight

It will be interesting to see what happens post the floods in Brisbane.  I have heard some talk about a change in what they rank as important.  Will this include devaluing the "materialism" value that you talk about.

The perceived value you talk about is not just about the physical construction.  What has affected us at Graceville after the floods is the mess that the community spaces are, eg, parks, walk tracks etc which all adds to the perceived value of a location.  This certainly is a constant reminder of what happended and could happen again.

The other issue that will start to affect things is the new responsible lending requirements under the NCCP.  Upgraders may face age issues, proovable income is focused on much more, etc.  Is the purchase a "reasonable thing" for the borrower to do?  How can you objectively answer that?

The other issue still holds – that income growth is not keeping up with property value increases.  We will become more and more like Europe where there are fewer land owners and more renters.

We have seen property listings in our area reduce.  That is one thing we tend to do in OZ.  If we don't like what the market tells us we generally delist and bunker down till things look better.  We haven't had the same toxic lending that America had. 

We are looking at renovating at the moment – it is much cheaper to renovate the house we have than buy a finished job as we bought about 6 years ago.  Most houses comparable would cost an extra $300,000 on top of the construction of our renovations.

I wouldn't be surprised in seeing some stagnation for a while.  Mammoth drops – not really as the cost of land and construction is still high.

Dont be silly Leo, Australians are just as greedy as Americans and everyone else in the world for that matter – its a basic human trait to want a reward for no effort!

I think there will need to be a significant drop in employment before there is an American-style crash in Australian property prices. Plus there is still the matter of low supply in Australia – America had a glut of properties prior to the GFC and the foreclosures added to the supply.

Hi Steve.
Unlike the US situation where many Americans had "walk away" mortgages and the Banks copped heaps of "jingle mail",  Australians are and feel accountable for their housing debt, even when values fall, a bit like "for richer for poorer" , and they'll back it with continued hard work to dig it out of a hole.  They know the values will return. This refers to the majority of good solid Australians, the backbone of our country and national character, and excludes the slick types who file for bankruptcy.

USA went out on a limb and when the cracks started, no one was accountable or held firm, and with a walk away mortgage they didn't  have to hold anything. It's not bankruptcy for them.

Cheers
thecrest

Yes, we have the greed, but Leo is right in saying we do not show the same hubris. Our actions are more tempered by a conservative streak, and a kind of wariness: "Things have gone wrong before!". This is hardly likely to be forgotten given recent events.

The only people I see with unbridled hubris would be the Chinese 'Players' and people who have just come out of property investing seminars! You know the ones I mean.

I think this is a really interesting take on this question.

Many of the comments made on this issue have been excellent. Thanks Steve and everyone for posting.

I have more questions…

AAQ has already raised the manufacturing issue, What of infrastructure projects and other initiatives that create jobs and ongoing jobs? Seems like quite a few in high places have shrugged and said hey the mining boom will take care of us for awhile. Then what?

Retail is getting it in the neck. Eastern states, especially QLD are getting it in the neck, as far as I can tell there hasn't really been a flow of money into anywhere in WA apart from the mining areas.

I think here in Melbourne we will see a bit of a tough bit, you can't have values rise in some suburbs by $400k in three years then expect it to keep going up.

Having said that what of the Victorian state governments initiatives on stamp duty. Will this just delay the inevitable or will a new bread of buyers step out of the shadows? Gen Y's who everyone has discounted.

The baby boomer effect hasn't even started yet, will this cause problems with high housing stock as they sell up or will this cause more employment as they opt out of the workforce to live off investments etc?

Watch the retail space for the clue to any rate rises. The RBA seems to have clipped peoples wings very suddenly and spooked people. Point to a person you know who has not cut their spending on 'stuff'. I think we are also discounting the amount of equity some people have in their properties. People may not care that the prices drop as they have a buffer. Not everyone will have this.

What of the return of 95% loans. Indentured slavery or banks confidence in the market?

I would be interested to hear Steves opinion on the "prestige areas". Steve – Do you think that values will decrease in these areas as people begin  to doubt the "perceived value"?

Please keep informative discussions such as these coming. Thanks again.

D

When we talk about 'perceived value', shouldn't we perhaps ponder over the 'perceived value' of money itself? After all, are sheets of plastic and bits of metal really worth that much?

It might boil down to supply and demand. If people continue to want to live in certain areas, the prices there will probably rise. For example, I'm unlikely to give up a house by the beach even if the price dropped a great deal. Why? Because I want to live there.

There is a perception by some that land, being mere pieces of dirt, shouldn't be worth much money. The key issue that is often missed in these instances however, is where this piece of dirt is located. This piece of dirt on which people live on directly impacts the quality of their lifestyle. A comparison between extremes will bring this to light: a pieces of dirt in the middle of a polluted industrial hub versus a piece of dirt of the same size but located fronting the beach. Which would people prefer?

It's the preferences that drives the prices. These preferences are deeply ingrained into most of us, and it explains why people would gravitate towards certain locations, and it probably also explains why the vast majority of us prefer to sit in an empty row of seas on the bus rather than share it with someone else. Human nature is an interesting thing.

EDIT: OOPS, the perceived value of money was an issue already mentioned before me. Pardon the repeat. It was purely coincidental, I promise.

I think what everyone realises at the moment is that we just piled a large load of money (March 2009) into 'saving' our economy. It doesnt matter that as a largely unaffected country .. we didnt need it. The flow-on effects for this will be a significant inflationary pressure once it spreads throughout the whole economy. And we are starting to see it already in most household items.

Bringing this back to house prices, usually house prices go up first with an influx of money washing away from stocks and bonds. People just jump onboard and usually end up borrowing to the hilt for their next property.And then .. inflation takes hold, and the whole price of money rises, flattening especially anyone who is borrowed to a point they cant afford. Its a nice stabiliser, a horrid headache .. but we are just coming due for our inflationary period now. It should straighten things out nicely. Of course .. the end result from the other side is that no-one has any spare cash for a couple of years .. but thats also usual.

As far as working out if the property market will crash .. you'd need people selling to start that off. People will sell when they really cant afford the payments any longer, otherwise they will grit their teeth .. hold on and bear it as long as they can. The only time I would be getting worried is if the Government FAKES inflationary numbers. In which case .. inflation will go on around you, and what you can buy for that dollar becomes less and less, taking wealth and minimizing it over the longer term.

We all work on perceived value in any object. The lack of valid sources for excess capital to be invested in has leant itself to movements in collectibles, housing, and of course art. But the areas where it would make a difference and it CANT be invested in are places where it would create genuine wealth. Areas such as manufacturing, farming and the creative arts, which survive and thrive off each other. The risk we face at the moment of rapidly becoming a society that cant tie its own shoelaces without overseas support is not something to take lightly.

I reminded me of one book that I recently read: “Guide to Investing in Gold and Silver” by Michael Maloney and opened my eyes in terms of what a “real value” of anything is: it is what we are prepared to pay for it at a particular moment, and nothing else.
There were also some great insights into how the modern financial system works. And it is not something specific to the US, it has been global for quite a while already.

I'm of the same opinion as Steve. Of course the market could go backwards or crash. However the likelyhood of it happening is a difficult thing to determine. My own view is that there should be some consolidation in your portfolio. Unless you have access to sufficeint cash or cash flows, the chances are a correction could impact on you. Being forced into a position will cause panic selling, that is the problem.
Having said that if you have a position of strength financially and can sustain that for a period of time, at the least you will hold on to your assets, at best there will be buying opportunites. Otherwise you will lose.
Unforunately the media tends to grab a headline that highlights negative sentiment, when things are a little depressed, so too the experts that fall over themselves predicting doom. Treat the market with respect and understand that unless you are fortunate, going against the herd (trend?) could bankrupt you. If I was to call the market now it would be to hold and/or moving to a defensive position, we personally are very low geared. take it for what it's worth.
Reading the media lately we in the West were subjected to the head lines "Perth property prices slump etc" the reality was that there was a -2% move during 2010. What is more interesting is that during the last quarter, the rate of change was significant. There is a chance that 2011 could see a 6 to 8% drop. Having said that four of the five properties in our portfolio were above my long term trend of +6%, returning  11.6, 12.5, 12.5, 24.4% . One property returning 3.3%, this property in the Dec qtr was -1.8%, the rest are on target to achieve 2010 gains.
We bought the hi-gain property in May 2009, the GFC was in full swing ,there were 4 other buyers, our first and only offer was 4% higher than asking price, So there are opportunities in the current market. I would suggest many investors are not in a position to capitalise on opportunities. The few will grow their wealth significantly, for the rest if they consolidate and prepare, the next positive period of growth will be an opportunity. This is not the time to bet on the market. If the purchase of your next property doesn't stack up, then pay off some debt because you are doing the best you can at the time.
Remember. We can't all be rich, but we can all be poor.
I'm sure you have all read Steve's book. Pick it up, read it again and stress test your portfolio. There is no absolute prediction that will satisfy all investment portfolios. If you have properties that are likely to fluctaute in value significantly in a negative trend then be prepared to go defensive. Your properties could be middle ground in which case hold and see, if your properties are in the positive growth area, be prepared to act on good buying opportunities.
External Factors:
I've been around long enough to experience trends, gold price, oil, jobs, food shortages. Don't mention China, I've travelled that road in my mind countless times. Just think, if the chinese economy goes into a tail spin, ask yourself how many chinese will be in the unemployment queue? You can bet they will be in front of you looking for jobs. The worst case scenario is the longest unemployment queue in history. This phase in world development cannot be halted. A major correction in the wealth of the chinese middle class will impact on us all. It is their gain in wealth that is funding the market. Don't bet on the US supporting the transition of wealth from the west to the east either, something has to give, china will move to democracy or the US will corrupt the market. The game has changed and there are some shocking outcomes. Having said that, I woudln't give quids to be on another planet, it may be a complicated world we see emerging, but hell it is going to be exciting!
Domestic Factors:
I like the banks and the goverment, they are so predictable. We seem to forget both institutions depend on cash flow, OURS!
Currently they are spooking us and we are spooking them. They need us, we are cash flow opportunities for them, stamp duty, bank fees, taxes they need the cash flow more than we do. Just look how they worry about deficits or profits. The banks can't continue with a depressed market, I bet they and the government are working their little fingers to the bone calculating the next move. I'll take a bet sooner than later they will have to release the pressure. New building is in a hold pattern. Investment is slow(other than the resources). Retail is heading for a dive. So expect some change in the budget, it can't be a lame budget, there will be change, superannuation being used for house purchase, a short period where negative gearing will be reduced to perhaps 50% of your tax rate. Remember that the problem is that all the players have been in the market, at the same time, first home buyers, second home buyers, investors. The property markey has been synchronised by policy, taxes etc. you can' t give money to the first home buyers and then expect not to have a surge in investment and prices . The link at least for a period has to be broken. Have you noticed that block prices are on hold or going backwards or being subsidised by giveaways? By impacting on the turnover of blocks (interset rates=less demand) there is in fact a pool of blocks building, the government could quite easily introduce a withholding tax on blocks that have gone through the approval process but are artificially held from the market to inflate prices. 
I know that there are some contradicting influences and complicated relationships out there in the market, but sometimes it pays to brain storm. How else would you even begin to think you (I?) know it all? 
Remember. We can't all be rich, but we can all be poor.