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Interest rates will stay low for at least another 20 years to keep house prices propped up; This is exactly why we’re so bullish on the stock market
Topic Started: 28 Jul 2014, 05:54 PM (9,607 Views)
Wisebear
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stinkbug
11 Aug 2014, 11:34 AM
"The recovery from the 2009 slump was the result of grants... Subsequently the continued expansion of the property bubble was a result of low interest rates and easy credit (not grants)..."

I'm confused - are you saying it was grants or not, or have you just made a typo?
Grants were required to reversed the decline as interest cuts had no effect.
Subsequently grants were removed and IR cuts continued the bubbles expansion.

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stinkbug
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Wisebear
11 Aug 2014, 11:59 AM
Grants were required to reversed the decline as interest cuts had no effect.
Subsequently grants were removed and IR cuts continued the bubbles expansion.
Thanks for clarifying.

Would you agree, then, that low or reducing IRs contribute substantially to increases in property prices?
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While it's true that those who win never quit, and those who quit never win, those who never win and never quit are idiots.

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Veritas
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stinkbug
11 Aug 2014, 12:00 PM
Thanks for clarifying.

Would you agree, then, that low or reducing IRs contribute substantially to increases in property prices?
We know the answer to that one.

Yes, but there is the countervailing influence of other vital fundamentals:

1. employment/performance of the real economy
2. Sentiment ( and that's the big one)

ZIRP wont save you if a deflationary dynamic takes hold on prices that are already at nose bleed levels.
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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stinkbug
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Veritas
11 Aug 2014, 12:05 PM
We know the answer to that one.

Yes, but there is the countervailing influence of other vital fundamentals:

1. employment/performance of the real economy
2. Sentiment ( and that's the big one)

ZIRP wont save you if a deflationary dynamic takes hold on prices that are already at nose bleed levels.
I agree, Veritas. I view property prices as being subject to a range of pressures, some positive and some negative. Low IRs is a positive pressure, high unemployment a negative, for example.

I think it would be foolish to apportion reason for change solely to one factor.

I'm curious as to wisebear's opinion, though.
---------------------------------------------------------------

While it's true that those who win never quit, and those who quit never win, those who never win and never quit are idiots.

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Elastic
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Shadow, the concept of replacement cost refers to the static cost of building a home on a greenfield site on the edge of the city.
This includes all the developer costs, land and cost of building.
This is the true replacement cost.
As you move closer into the city nearer amenities and transport etc, people pay a premium for the land.
This premium is quite dynamic and is subject to demand.
It is possible for prices to fall significantly in an inner city area but it is still viable for a developer to build and make a profit. They are just less likely to do it while the demand is low and the prospect of further falls is possible.
Only a rat can win a rat race.

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Shadow
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Evil Mouzealot Specufestor

Wisebear
11 Aug 2014, 11:59 AM
Grants were required to reversed the decline as interest cuts had no effect.
No - you are forgetting that there is a lag. The RBA doesn't just begin to adjust rates and then prices immediately start rising or falling in response.

It is a gradual process. The RBA adjusts rates over many months or years, and it takes up to a year for the market to slowly turn around.

Quote:
 
Subsequently grants were removed and IR cuts continued the bubbles expansion.
IR cuts did not continue.

In fact the RBA started raising rates in late 2009, and by mid 2010 house price had started to fall in result (there was the typical lag of 6-12 months before prices started moving in response to the rate hikes).

Then in late 2011 the RBA started cutting rates again, and after the usual lag, house prices started rising again in mid 2012.

The lag was similar in 2009 - i.e. the RBA started cutting rates in late 2008 and after the usual lag, prices started rising in mid 2009.
Edited by Shadow, 11 Aug 2014, 12:22 PM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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Wisebear
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Shadow
11 Aug 2014, 11:33 AM











Ok, you won't accept that there's a bubble and can show grants being used in the latest run up so your position is dead. Let's move on.

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...your expectations of a crash, your belief that prices would fall with falling interest rates, and that we would have a global deflationary depression that 'cannot be avoided' etc etc.
Agreed. A Global deflationary depression cannot be avoided. That is my position. That's why I'm a bear.

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No, a fall in land prices would cause a fall in sale prices (the land value is a major component of the total property value).

It would still not be profitable for developers to bring homes to market if they can't sell those homes for more than the cost of bringing them to market.
House prices and land prices can fall together. Both are set by supply and demand. If both land and property fall, say, $50k the profit margin remains the same.

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Show me examples of places where house prices remain below replacement cost, yet developers are still developing new stock.
I don't need to because I don't agree with statement. Replacement s costs will simply respond to market forces and building will become profitable at a lower equilibrium.

Quote:
 
Grants have nothing to do with the RBA. The grants (provided by government, not the RBA) did help a subset of buyers, but it was the interest rate cuts that drove the boom in 2009 (same as today) since all buyers and owners benefit from lower rates.
If the IR cuts worked there would be no need for grants. The grants worked at the margin, they supported the bottom of the market just as the free market was about work and this had a significant effect. Low IR's subsequently expanded the bubble further.

Quote:
 
The grants were unnecessary. Interest rate cuts alone would have led to increased prices in 2009, as they are doing today. Note that there is always a fairly long lag between rate cuts/rises and the market turning around. It is possibly this lag that causes you to misinterpret the effect of the rate cuts.
Almost agree with this. Grants weren't need. Lower IR do lag and they are the main driver of the property bubble. However, property did fall with interest rates until those grants came into effect which was my point.

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It's not a battle. Try not to lose your temper. We're just having a discussion. Relax.
Hey, I'm cool baby.
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stinkbug
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Wisebear
11 Aug 2014, 12:34 PM


If the IR cuts worked there would be no need for grants. The grants worked at the margin, they supported the bottom of the market just as the free market was about work and this had a significant effect. Low IR's subsequently expanded the bubble further.

The grants were increased as part of the government's efforts to stimulate the economy. This is very separate to the RBA's IR policy decisions. The feds goosed the economy enough that we ended up with higher IRs to keep a lid on things.
---------------------------------------------------------------

While it's true that those who win never quit, and those who quit never win, those who never win and never quit are idiots.

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Wisebear
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stinkbug
11 Aug 2014, 12:00 PM
Thanks for clarifying.

Would you agree, then, that low or reducing IRs contribute substantially to increases in property prices?
Many things effect house prices but, in my opinion, low interest rates and ease of credit have been the significant drivers over the past 2 decades.


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Shadow
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Elastic
11 Aug 2014, 12:11 PM
greenfield site on the edge of the city...

It is possible for prices to fall significantly in an inner city area but it is still viable for a developer to build and make a profit
You need to compare sale price across Sydney vs replacement cost across Sydney, or sale price across Australia vs replacement cost across Australia.

Nobody is saying developers need the sale price in a specific area like a greenfield site on the edge of Sydney to be higher than replacement cost in some other specific area like inner Sydney.

We're talking about the same area - i.e. developers won't develop new stock if the replacement cost is higher than the potential sale price in the place where that stock is developed.

Replacement cost acts to support house prices in the same area. It doesn't support house prices in some other area.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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