It is therefore irrelevant to say that replacement cost forms a baseline and that this is somehow a supporter of house prices.
This is true. There are towns in the North of England, South Wales, Spain etc, where you can buy houses a lot cheaper than you can build them. I could build a $500k house in the middle of the Gibson. I wouldn't be able to sell it for fifty bucks. The largest cost component in most properties is the land value (location,location,location). This is generally followed by the Labour component and then materials. In materials there is considerable margin for the builders merchants. In an environment where money is flowing freely, labour is more expensive and builders merchants work on higher margins. In a property "boom" land is more expensive. During downturns, all of these costs reduce so what is 500k to replace today may only be 300k in a downturn. But there is always the possibility of a house being worth zero. Detroit has a few of those.
Matthew, 30 Jan 2016, 09:21 AM Your simplistic view is so flawed it is not worth debating. The current oversupply will be swallowed in 12 months. By the time dumb shits like you realise this prices will already be rising.
If your base keeps moving how do you use it as starting point for comparisons?
How could you not?
If the replacement cost today is $500K then that is the baseline today. Prices won't fall below $500K on anything more than a temporary basis, because if prices are below $500K then developers will stop building homes until prices rise above $500K again so they can make a profit.
In 2020 if the replacement cost is $800K then that will be the baseline in 2020.
It's not rocket science.
Jimbo
6 Aug 2014, 06:13 PM
This is true. There are towns in the North of England, South Wales, Spain etc, where you can buy houses a lot cheaper than you can build them. I could build a $500k house in the middle of the Gibson. I wouldn't be able to sell it for fifty bucks.
But that's the whole point. Developers are not going to build new houses there until prices rise above replacement cost. Why would anyone build a house knowing they will lose money when they sell it? As long as the population keeps growing, eventually prices will rise back above replacement cost.
If the replacement cost today is $500K then that is the baseline today. Prices won't fall below $500K on anything more than a temporary basis, because if prices are below $500K then developers will stop building homes until prices rise above $500K again so they can make a profit.
Incorrect. If the replacement cost falls then developers will start building again. Prices don't have to go above replacement cost, replacement cost can fall below current market prices. You know, like what has happened with every single manufactured good in the last 50 years.
Incorrect. If the replacement cost falls then developers will start building again. Prices don't have to go above replacement cost, replacement cost can fall below current market prices.
I said 'If the replacement cost today is $500K...' - i.e. my scenario is based on $500K being the replacement cost.
Your scenario is about what would happen if the replacement cost is no longer $500K.
I don't disagree with your scenario, but it doesn't make my statement incorrect. You have simply presented an alternative scenario.
Why are bears so lacking when it comes to basic logic and comprehension of the English language?
It's like I say 'if an object is spherical it will roll downhill' and then you say 'Incorrect! If it is a cube it won't roll!'
But that's the whole point. Developers are not going to build new houses there until prices rise above replacement cost. Why would anyone build a house knowing they will lose money when they sell it? As long as the population keeps growing, eventually prices will rise back above replacement cost.
Why would someone build a house if they were going to lose money. They don't , they don't know if an economic decline is headed toward them , just as others who built in the US and the euro did not expect to lose money, but they did.
Could you explain why the population and mass immigration into the USA did not prevent their house pricesfrom collapsing, considering there land mass is of a simliar size yet the population is about 15 times larger than ours .
I said 'If the replacement cost today is $500K...' - i.e. my scenario is based on $500K being the replacement cost.
Your scenario is about what would happen if the replacement cost is no longer $500K.
I don't disagree with your scenario, but it doesn't make my statement incorrect. You have simply presented an alternative scenario.
followed by "because if prices are below $500K then developers will stop building homes until prices rise above $500K again so they can make a profit."
That's what I disagreed with, what I was saying was incorrect. To be completely correct, the statement above would be. "because if prices are below $500K then developers will stop building homes until prices rise above $500K againor the replacement cost falls below current market prices so they can make a profit."
Quote:
Why are bears so lacking when it comes to basic logic and comprehension of the English language?
Ah, so you decided to take a section of my statement out of context by ignoring the preceding 'if'. Well, if we're going to take stuff out of context then...
o2sd
6 Aug 2014, 08:38 PM
what I was saying was incorrect
Yes. It certainly was.
Guest
6 Aug 2014, 08:34 PM
Shadow
Why would anyone build a house knowing they will lose money when they sell it?
Why would someone build a house if they were going to lose money. They don't , they don't know if an economic decline is headed toward them.
Here we go again. I ask why anyone would build a house KNOWING they will lose money, and a bear reiterates the question but ignores the word 'knowing', and proceeds to discuss a scenario where the person doesn't know they will lose money.
Just in case you really can't follow the discussion, the point is that if prices fall below replacement cost then developers won't build because they know they would lose money.
Guest
6 Aug 2014, 08:34 PM
Could you explain why the population and mass immigration into the USA did not prevent their house pricesfrom collapsing, considering there land mass is of a simliar size yet the population is about 15 times larger than ours .
1. They had a construction boom leading to a massive glut of empty homes, ghost estates etc. 2. Lenders wrote huge numbers of loans to people with no income, no job, and no assets (no deposit). NINJA Loans. 3. The US population growth rate is about half of the Australian growth rate (approximately 0.9% vs 1.8% per annum). 4. Most Americans are on fixed rates so slashing rates didn't help them much. 5. Many states are non-recourse so borrowers can just hand the keys back to the bank and the bank can't chase them for any additional funds - i.e. there's not much incentive for the owner to try and hold on to the house if it goes underwater or they lose their job.
Wages and material prices can both fall lowering the replacement cost...
There are some people who seem angry and continuously look for conflict. Walk away, the battle they are fighting isn't with you, it's with themselves.
The first lesson of economics is scarcity: There is not enough of anything to satisfy all who want it. The first lesson of politics is to disregard the first lesson of economics. ~ Thomas Sowell.
Who was the fool, who the wise man, who the beggar or the Emperor? Whether rich or poor, all are equal in death.
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