I tell everyone the same thing. At the moment you all should be prepping a little cash tin on the side, paying off extra on your loans and clearing your credit cards. I know that the last time around the only reason I picked up some of my deals was that I had money available WHEN NO-ONE ELSE DID. Ok .. also a good rep with the bank manager helped. But .. it was still very hard to squeeze credit out of the guy.
Its not bunker down and prepare for the worst. Its bunker down and prepare for the unexpected. House prices fall 20% .. or 70%? Can you know ahead of time? Can you tell PRECISELY when? I sure cant … all i can witness is trends in movement. And that doesnt predict a crash.
Regardless of where the property cycle is, and what could happen, you should always have an emergency plan. I have a series of food cans and twelve large bottles of water in the back of my garage. I dont need it, I hope I will never need it. But if the food and water delivery systems were to stop overnight … who thinks they'd be prepared?
There is an article by some bright puppy in the Age today (you go find it i wont mention names) talking about how the US markets are responding to the idea of a double dip recession not happening, and how comforting that is. From what I've read in the overseas papers and financial reports, everything bad comes due in March. The Alt-A loans start their problem period, the US has to resolve with China its debt situation, Greece has to be worked out, the first set of figures not affected by the stimulus come out mid-March. If any breathing sighs of relief happens .. its how we make it to Easter.
I know two things, you dont feed stimulus money into a financial system without the balance of inflation, and that at the moment .. most home buyers are riding close to the wind on their payments anyway. Thats your critical pressure at the moment. Times are getting worse in the commercial sector (Gold Coast 23% vacancy?) and there isnt a sign of that clearing up yet.
I like to observe the real factors and trendlines affecting property. It helps me get an accurate picture rather than what the paper hands me. I was witnessing the precipise for a boom in 2006 and the papers were all talking crash .. doom and gloom. And we all know what happened next.
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.htmlQuote:Government report blames regulators and financial institutions for economic crisisThe 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.
I always find this crash/no crash discussion in property really interesting.
I don't have a clue what the market is going to do, but I apply the following risk-reward logic to an asset being considered for investment:1. What is the probability of the asset gaining as much as it has over the past ‘x’ time as opposed to going sideways or falling?
2. What is my financial risk across all assets; am I exposed too heavily to one asset class and therefore risking everything if the 'impossible' happens to that asset class?
3. Is the asset cash-flow positive and therefore able to withstand a possible downturn; in other words is the portfolio properly balanced? Does my investment strategy heavily rest on just attaining a capital gain, and if so, how exposed am I to financial risk?
4. What is my exit strategy should the investment not go as planned and what is my likely advantage or point of difference if that is the likely simultaneous exit strategy of many others?
This video possibly captures the average Aussie's view on the housing market…
http://www.unconventionaleconomist.com/2010/12/now-i-understand.html
The simplest thing that could cause a reduction in value would be a rationing of credit which would take people out of the market. The banks are still borrowing a lot from overseas. A lot of businesses have found the last couple of years very hard because banks stopped lending or increased their requirements.
Great topic Steve and to answer your question – of course Buffets comments can be applied to Australia.
The only difference being that our bubble was about twice as big as theirs, so our inevitable crash will likely be twice as severe – see the second graph on this page: http://www.whocrashedtheeconomy.com/blog/?m=200903So, out of interest, how many PIs from this forum are trying to sell now?
Are you willing to drop prices enough to undercut similar property and get a sale, or are you determined to get a minum price?
Hi Unmester
Your logo is driving me to sell off all my beef stocks,
and apart from whatever the market is doing,
your bear's a wrong'un – due for a major correction.
Cheers
thecrestthecrest | Tony Neale - Statewide Motel Brokers
http://www.statewidemotelbrokers.com.au
Email Me | Phone Meselling motels in NSW
thecrest wrote:Hi Unmester
Your logo is driving me to sell off all my beef stocks,
and apart from whatever the market is doing,
your bear's a wrong'un – due for a major correction.
Cheers
thecrestThey're just cuddling:) It's meant to show that bulls and bears can get along, even over Ozzie houses:)
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.
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 wrote: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!
your first sentence makes zero sense. Its an indicator on affordability not % of average wage owners buying property.
Money supply is an issue considering to sustain current levels of growth we need to issue more and more debt, usually more than GDP growth…
<moderator: delete language>
ummester wrote:So, out of interest, how many PIs from this forum are trying to sell now?Are you willing to drop prices enough to undercut similar property and get a sale, or are you determined to get a minum price?
Good question. Personally, I'm fully invested and not selling. Whatever happens, I still need a house to move into ultimately, or for retirement. I'm not fussed if prices were to drop because I need the house, or at least want it badly enough. I'd also have to admit that there is a very high emotional value on my property and the attachment is great enough to keep me hanging onto it.
Having said that, this sort of answer is probably not representative of how the majority of PIs think.
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 wrote: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.
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.
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 wrote: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.
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_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.
nicolas_b wrote:toe wrote: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.
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.
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.
toe wrote: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.
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 independent of the RBA cash rate, and I imagine there are large chunks of the community (FHB's, gen X and Y's) who are very susceptible to interest rate rises, negative equity on PPOR, and downturns in general economic activity (unemployment etc). I dont see it as orderly as you think, nor as crisis mode as other people think…
2 cents etc
kind of what white_goodman said
Banks can't create lvr out of nothing, even with no fractional reserve limit like Australia. Without new money enterring the housing market, there will be no capital appreciation in the asset class. That is why the FHB boost worked so well, it leveraged the whole market up.
Investors can sit on overvalued houses but they can't use the money without selling and they can't leverage further investment without appreciation.
In a no FHB scenario, where no PIs sell up, there can be only stagnation. IRs will increase, as will required deposits in this situation (the banks still need to make a healthy buck to stay competetive globally). Housing becomes more expensive to hold, without tangible return. Contrary to what anyone may believe, rents can only increase from her at wage inflation levels.
It's not rocket science. it's not even complicated economics. It's just logic.
Home values need to increase for the market to sustain now.
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