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Sydney rents defy predictions to continue their rise
Topic Started: 10 Jul 2014, 10:55 AM (3,887 Views)
Veritas
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b_b
10 Jul 2014, 02:56 PM
House prices trend around replacement cost. When it is above cost, supply accelerates causing downward pressure on prices. When below, supply slows, resulting upward pressure on prices.

That has been the Australian experience. That is what happened in the USA. I expect that is what is / has happened in Ireland.

Can't blame a banking cartel for that.
So the replacement cost of a housing in Ireland has changed so much in 5 years that the construction of new dwellings has completely slumped.

Sorry buddy, you will have to elaborate on that one:

If you mean by replacement cost that the banks wont lend to developers of housing than I agree with you.

Is that included in "replacement cost"?

Posted Image
Sydneyite
10 Jul 2014, 03:09 PM
Credit growth is a consequence of rising asset prices, not the other way around. If anything you should view credit as a *constraint* on house price growth - ie prices don't have to grow with credit availability, but they probably can't grow beyond what credit conditions could allow (in aggregrate).
Eh...how do asset prices rise if its not through credit growth?

Unless of course, people werent going into debt to make the purchase.

What massive is saying is this

Good fundamentals + credit boom = inflation.

I agree.

Good fundamentals minus Credit boom = inflation but certainly not as much.

Surely this is quite elementary stuff no?
Edited by Veritas, 10 Jul 2014, 03:52 PM.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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Massive
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Veritas
10 Jul 2014, 03:48 PM
What massive is saying is this

Good fundamentals + credit boom = inflation.

I agree.

Good fundamentals minus Credit boom = inflation but certainly not as much.

Surely this is quite elementary stuff no?
yep... in a nutshell ... not sure how it was construed i thought otherwise...

it seems its selective interpretation month and noone told me.

( edit: and funny im labelled as a bear too - im just here rummaging through the info to assess my understanding of the market and question holes in debate that are relevant to my understanding )
Edited by Massive, 10 Jul 2014, 04:30 PM.
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b_b
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Veritas
10 Jul 2014, 03:48 PM
So the replacement cost of a housing in Ireland has changed so much in 5 years that the construction of new dwellings has completely slumped.
Replacement cost usually increases will building and labour cost. Sometimes it increases from regulations and taxes (increase in GST, or new developer levies etc).

Your chart tells me Irish house prices were probably well above above replacement cost in the 1st half of the 2000. The spread between cost and price encouraged new supply. The USA was no different. Listed property developers and builders made record profits up to 2006.

Since 2008, volumes probably disappeared, and prices fell well below replacement cost. Hence supply has slowed to a crawl. Why would a banker lend a developer $1000 to build a dwelling priced at $750? That is disciplined banking IMO.
(S – I) + (T - G) + (M - X) = 0
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Veritas
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b_b
10 Jul 2014, 04:36 PM
Replacement cost usually increases will building and labour cost. Sometimes it increases from regulations and taxes (increase in GST, or new developer levies etc).

Your chart tells me Irish house prices were probably well above above replacement cost in the 1st half of the 2000. The spread between cost and price encouraged new supply. The USA was no different. Listed property developers and builders made record profits up to 2006.

Since 2008, volumes probably disappeared, and prices fell well below replacement cost. Hence supply has slowed to a crawl. Why would a banker lend a developer $1000 to build a dwelling priced at $750? That is disciplined banking IMO.
I think there is something in that.

The margins are certainly tighter. And its not helped by the fact that levies and taxes are still at boom time levels.

That said, the banks do have a massive vested interest in price appreciation in Ireland given the state of their bloated mortgage books.

Politically its difficult for them to get serious about foreclosures but they also know the foreclosures = extra supply which has the potential to harm their books even more as house prices fall.

Like in all of these things you have to follow the money.

Posted Image
Edited by Veritas, 10 Jul 2014, 04:43 PM.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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b_b
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Veritas
10 Jul 2014, 04:43 PM
I think there is something in that.

The margins are certainly tighter. And its not helped by the fact that levies and taxes are still at boom time levels.

That said, the banks do have a massive vested interest in price appreciation in Ireland given the state of their bloated mortgage books.

Politically its difficult for them to get serious about foreclosures but they also know the foreclosures = extra supply which has the potential to harm their books even more as house prices fall.

Like in all of these things you have to follow the money.

Posted Image
I think you are giving banks too much credit here. I don't think they act they way you suggest. They are just hopelessly pro-cyclical.

Banks have one aim. Profit maximisation.

Rising house prices helps if it encourages more demand for loans.

Although this may be good for near term profits, it can actually be bad for banks. A LVR of 99% on a property 20% below replacement cost is a better loan than LVR 80% on a property 30% above replacement cost.

I don't think they look at it this way.
(S – I) + (T - G) + (M - X) = 0
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Veritas
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b_b
10 Jul 2014, 04:52 PM
I think you are giving banks too much credit here. I don't think they act they way you suggest. They are just hopelessly pro-cyclical.

Banks have one aim. Profit maximisation.

Rising house prices helps if it encourages more demand for loans.

Although this may be good for near term profits, it can actually be bad for banks. A LVR of 99% on a property 20% below replacement cost is a better loan than LVR 80% on a property 30% above replacement cost.

I don't think they look at it this way.
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Rising house prices helps if it encourages more demand for loans.


But in this particular case it helps with their rotten mortgage books and ever greening loans.

If thousands of the properties whose owners are currently in arrears go from negative to positive equity territory it makes it a whole lot easier to resolve the problem they have now: thousands of loans outstanding to people in houses that are worth far less than the loan attached to them.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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Black_Dragon
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According to SQM, rents only rose marginally in the quarter. They are up though just under 5% for the 12 months. A good rate but slower compared to previous years. And that's the point. Rental growth appears to be actually slowing in Sydney.


http://www.sqmresearch.com.au/graph_median_rent_weeks.php?region=nsw%3A%3ASydney&type=c&t=1

More evidence?

Yes, consider vacancy rates.


http://www.sqmresearch.com.au/graph_vacancy.php?region=nsw%3A%3ASydney&type=c&t=1

Once again there is a gradual rising trend in Sydney right now. Yes, it still suggests a landlords market but not to the extent it once was say two years ago.

And given what we know is around the corner with new completions, I would suggest Sydney rents will likely slow in its rate of growth from here.
"No sympathy for the devil; keep that in mind. Buy the ticket, take the ride...and if it occasionally gets a little heavier than what you had in mind, well...maybe chalk it off to forced conscious expansion: Tune in, freak out, get beaten."My Webpage
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Sydneyite
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Black_Dragon
10 Jul 2014, 05:10 PM
According to SQM, rents only rose marginally in the quarter. They are up though just under 5% for the 12 months. A good rate but slower compared to previous years. And that's the point. Rental growth appears to be actually slowing in Sydney.


http://www.sqmresearch.com.au/graph_median_rent_weeks.php?region=nsw%3A%3ASydney&type=c&t=1

More evidence?

Yes, consider vacancy rates.


http://www.sqmresearch.com.au/graph_vacancy.php?region=nsw%3A%3ASydney&type=c&t=1

Once again there is a gradual rising trend in Sydney right now. Yes, it still suggests a landlords market but not to the extent it once was say two years ago.

And given what we know is around the corner with new completions, I would suggest Sydney rents will likely slow in its rate of growth from here.
Sounds like a repeat of 2004/2005 may be coming our way? Not unexpected I think, given the past 1.5-2 years.
For Aussie property bears, "denial", is not just a long river in North Africa.....
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peter fraser
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Sydneyite
10 Jul 2014, 05:53 PM
Sounds like a repeat of 2004/2005 may be coming our way? Not unexpected I think, given the past 1.5-2 years.
+1 although I don't think we are at the peak in Sydney, maybe another 8% to go over the next 15 months.
Any expressed market opinion is my own and is not to be taken as financial advice
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Black_Dragon
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peter fraser
10 Jul 2014, 06:36 PM
+1 although I don't think we are at the peak in Sydney, maybe another 8% to go over the next 15 months.
As we know, yields are getting tighter world wide. And so having lower yields in the Sydney market (and elsewhere) is just part of the global trend. So even if rents stall in Sydney, prices will likely keep rising for a while yet.
"No sympathy for the devil; keep that in mind. Buy the ticket, take the ride...and if it occasionally gets a little heavier than what you had in mind, well...maybe chalk it off to forced conscious expansion: Tune in, freak out, get beaten."My Webpage
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