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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 (9,606 Views)
Wisebear
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Elastic
11 Aug 2014, 12:11 PM
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.

Agreed. Markets are dynamic.
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zaph
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Wisebear
11 Aug 2014, 12:41 PM
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.

They're more enablers than drivers for PPORs, less so for IPs.

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Shadow
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Wisebear
11 Aug 2014, 12:34 PM
A Global deflationary depression cannot be avoided. That is my position. That's why I'm a bear.
A bear who has been wrong since he started posting on this forum three years ago.
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, 12:42 PM
Replacement cost acts to support house prices in the same area. It doesn't support house prices in some other area.
Replacement costs don't support prices in any area.
Markets are dynamic and prices settle at new equilibriums (even lower ones).


Shadow
11 Aug 2014, 12:46 PM
A bear who has been wrong since he started posting on this forum three years ago.
Why am I wrong?
In my opinion we will get a global deflationary depression.
Edited by Wisebear, 11 Aug 2014, 12:49 PM.
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Shadow
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Wisebear
11 Aug 2014, 12:47 PM
Replacement costs don't support prices in any area.
Markets are dynamic and prices settle at new equilibriums (even lower ones).
The new equilibrium, whether lower or higher, is still supported by the new replacement cost.

Quote:
 
Why am I wrong?
In my opinion we will get a global deflationary depression.
You were wrong because in 2011 you thought a new up-cycle was not possible (and that anyone who expected one was a 'fool'). You said prices would fall with falling interest rates. And that was just in your first month of posting here. I haven't bothered reading through more recent posts, but they have mostly been similar, and I do remember you telling me a couple of years ago that the latest round of rate cuts wouldn't make prices rise this time in the absence of grants. You thought it was all about the grants.
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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zaph
11 Aug 2014, 12:45 PM
They're more enablers than drivers for PPORs, less so for IPs.
We've been down this path before. I believe they're drivers.

To me "enablers" suggests that people want to pay $1m for a house and low rates lets them do it. I think people would rather pay $500k for that same house at twice the IR.
Shadow
11 Aug 2014, 12:53 PM
The new equilibrium, whether lower or higher, is still supported by the new replacement cost.


Replacement costs respond to market forces.
They therefore offer no support.

Quote:
 
You were wrong because in 2011 you thought a new up-cycle was not possible (and that anyone who expected one was a 'fool'). You said prices would fall with falling interest rates. And that was just in your first month of posting here. I haven't bothered reading through more recent posts, but they have mostly been similar, and I do remember you telling me a couple of years ago that the latest round of rate cuts wouldn't make prices rise this time in the absence of grants. You thought it was all about the grants.


As far as I can recall I've always argued that interest rates and easy credit are the drivers of the property bubble. I've always emphasised risk strongly in my posts because I don't know the future. In my opinion we will get a deflationary collapse and during this time I expect lower interest rates to be accompanied by lower house prices as the bubble deflates.
Edited by Wisebear, 11 Aug 2014, 01:07 PM.
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Veritas
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Shadow
11 Aug 2014, 12:42 PM
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.
Got any academic research you can link on this hypothesis?

Basically, you are saying that the prices in any given zip code cant go below the cost of building a housing in that zip code.

Hmmmm....

So really we are talking about the price of land ( which is fluid)

How useful therefore is this replacement cost theory at all?
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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Shadow
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Wisebear
11 Aug 2014, 12:58 PM
As far as I can recall I've always argued that interest rates and easy credit are the drivers of the property bubble. I've always emphasised risk strongly in my posts because I don't know the future. In my opinion we will get a deflationary collapse and during this time I expect lower interest rates to be accompanied by lower house prices as the bubble deflates.
Everyone knows interest rates drive housing markets, but you were still wrong in 2011 when you thought a new up cycle would not be possible, and that the falling rates at that time would be accompanied by falling house prices.

If you want to make a new prediction about falling prices and deflationary collapses in the future that's fine.

What is your new prediction? When will the global deflationary collapse and Australian house price crash begin?

Quote:
 
I've always emphasised risk strongly in my posts
You over-emphasise negative risks, but under-emphasise the risk of prices rising. In fact, in 2011 you totally discounted the risk of prices rising. You tend to ignore the risks that actually have a greater chance of eventuating, which is a very risky way to operate.


Veritas
11 Aug 2014, 01:10 PM
Basically, you are saying that the prices in any given zip code cant go below the cost of building a housing in that zip code.

Hmmmm....
No, I'm saying it can't happen on more than a temporary basis, because developers would stop developing new stock if they can't sell it for a profit. This means the price would eventually rise above replacement cost again (assuming the population is growing).
Edited by Shadow, 11 Aug 2014, 01:20 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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Anne
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Hahaha. I think I’ve lost count of how many years these rental losers have been waiting for this magic price drop of upwards of 50%. It. Will. Never. Happen. Understand? The Chinese buy before things are built not counting other nationalities, houses sell in my area before I see the For Sale sign and my apartment in town is beating my husbands salary. (I don’t work). But if it makes you feel hopeful even tho, like my relo’s on the bad side know, its just a dream, keep dreaming. We all have the right to hope. I hope to win lotto, doesn’t mean its gonna happen next week tho right. I pity no one who can’t buy. You’re not trying hard enough. I see it with my own eyes. We were very young parents and bought several without mummy and daddy’s help and my 19 yr old son has bought his first investment property and once it’s built he’s planning his next one. He’ll retire and you guys will still be waiting for the price drop. Your kids can put your most commonly used phrase on your tombstone “but there’s a bubble. I’ll buy next week when it bursts. It’s still good”. Now go find a job you can work in till you die so my rent keeps coming in. My hair needs doing and money doesn’t grow on trees for us investors. OH WAIT.
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zaph
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Veritas
11 Aug 2014, 01:10 PM
Basically, you are saying that the prices in any given zip code cant go below the cost of building a housing in that zip code.
I thought the discussion was about Australian Real estate - we don't have zip codes.
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