Available evidence suggests that financial stress among households with mortgages is not widespread. Although it will always be the case that some individual households find it difficult to meet their repayment obligations in the face of negative events (such as job loss, illness or relationship breakdown), there is no evidence of systematic provision of credit beyond the amount that borrowers can be reasonably expected to repay. Arrears rates are low and have fallen since their 2011 peak. Most personal bankruptcies are unrelated to mortgage debt, and they have also declined in recent years, as have home repossessions. In addition, many households have built up buffers of excess repayments through offset and redraw facilities. These buffers provide those households with a cushion of prepayments that can be drawn down to avoid falling into arrears. In short, I think we can be confident that the situation is under control. Financial deregulation increased the availability of credit leading to increased borrowing and purchasing power.
What were the arrears like for tech investors in 1999?
It is about valuation. Everything else is a distraction.
glennstevens
23 Oct 2014, 03:33 PM
Available evidence suggests that financial stress among households with mortgages is not widespread. Although it will always be the case that some individual households find it difficult to meet their repayment obligations in the face of negative events (such as job loss, illness or relationship breakdown), there is no evidence of systematic provision of credit beyond the amount that borrowers can be reasonably expected to repay. Arrears rates are low and have fallen since their 2011 peak. Most personal bankruptcies are unrelated to mortgage debt, and they have also declined in recent years, as have home repossessions. In addition, many households have built up buffers of excess repayments through offset and redraw facilities. These buffers provide those households with a cushion of prepayments that can be drawn down to avoid falling into arrears. In short, I think we can be confident that the situation is under control. Financial deregulation increased the availability of credit leading to increased borrowing and purchasing power.
What were the arrears like for tech investors in 1999?
It is about valuation. Everything else is a distraction.
glennstevens
23 Oct 2014, 03:33 PM
Available evidence suggests that financial stress among households with mortgages is not widespread. Although it will always be the case that some individual households find it difficult to meet their repayment obligations in the face of negative events (such as job loss, illness or relationship breakdown), there is no evidence of systematic provision of credit beyond the amount that borrowers can be reasonably expected to repay. Arrears rates are low and have fallen since their 2011 peak. Most personal bankruptcies are unrelated to mortgage debt, and they have also declined in recent years, as have home repossessions. In addition, many households have built up buffers of excess repayments through offset and redraw facilities. These buffers provide those households with a cushion of prepayments that can be drawn down to avoid falling into arrears. In short, I think we can be confident that the situation is under control. Financial deregulation increased the availability of credit leading to increased borrowing and purchasing power.
What were the arrears like for tech investors in 1999?
It is about valuation. Everything else is a distraction.
So long as you and your RBA mates think house price valuation is related to price / income ratios, you will continue to misjudge valuation. House prices have now extended beyond fair value and are now entering a very risky phase.
Only inasmuch as the risk to interest rates is mostly to the upside.
Rental yields are OK if you believe interest rates will stay where they are forever.
If interest rates rise, rental yields will have to rise to compensate. There is only very limited capacity for rents to rise fast, so yields can only adjust through values dropping if interest rates rise quickly.
Obviously interest rates rising means mortgage stress rises as well, and we have the late 1980s all over again.
So long as you and your RBA mates think house price valuation is related to price / income ratios, you will continue to misjudge valuation. House prices have now extended beyond fair value and are now entering a very risky phase.
Unfortunately b-b the market cares nothing about fair value. It is all about relative value.
Definition of a doom and gloomer from 1993 The last camp is made up of the doom-and-gloomers. Their slogan is "it's the end of the world as we know it". Right now they are convinced that debt is the evil responsible for all our economic woes and must be eliminated at all cost. Many doom-and-gloomers believe that unprecedented debt levels mean that we are on the precipice of a worse crisis than the Great Depression. The doom-and-gloomers hang on the latest series of negative economic data.
Only inasmuch as the risk to interest rates is mostly to the upside.
Rental yields are OK if you believe interest rates will stay where they are forever.
If interest rates rise, rental yields will have to rise to compensate. There is only very limited capacity for rents to rise fast, so yields can only adjust through values dropping if interest rates rise quickly.
Obviously interest rates rising means mortgage stress rises as well, and we have the late 1980s all over again.
Interest rates are pretty irrelevant.
skamy
23 Oct 2014, 06:01 PM
Unfortunately b-b the market cares nothing about fair value. It is all about relative value.
The market cares very much about fair value. Just not always on a timelime which suits. Investing on relative value is the best way to do your arse. There can be no joy losing less money that the next guy. Focus on absolute value and you will make better decisions.
Interest rates are pretty irrelevant. The market cares very much about fair value. Just not always on a timelime which suits. Investing on relative value is the best way to do your arse. There can be no joy losing less money that the next guy. Focus on absolute value and you will make better decisions.
Not really b_b otherwise all house would be the same price. Prices are always relative. At the moment there are loads of places in Australia where you can buy a pre-existing home for less than the cost of rebuilding eg Jimbo's beachside area south of Perth. So in real terms it is great value but anyone buying there cares only about its price relative to other recent sales.
The only thing that matters is whether people can afford or are willing to pay the price. Buying a home is a competition you will pay whatever you have to get a house in a given area. The cost only depends on what other people are prepared (and well off enough) to pay.
The house's value lies solely in the eye of the beholder. Sydney prices could double and still not look bad value when compared to other major international cities.
That London Flat does not look like good value if you compare it to the nearby Aylesbury Estate. But if anyone thinks this sale is the top of the current cycle in London they have never lived through a British housing cycle (they go crazy there). All that money transferred from the public to the private sector during the downturn will be out and about before you know it.
The corrections occur for sure but they are only ever very severe in very silly markets.
Definition of a doom and gloomer from 1993 The last camp is made up of the doom-and-gloomers. Their slogan is "it's the end of the world as we know it". Right now they are convinced that debt is the evil responsible for all our economic woes and must be eliminated at all cost. Many doom-and-gloomers believe that unprecedented debt levels mean that we are on the precipice of a worse crisis than the Great Depression. The doom-and-gloomers hang on the latest series of negative economic data.
Then you have never done a DCF evaluation. Interest rates most certainly impact your required rate of return.
The balancing factor is that when interest rates are higher, the growth rate you can plug in goes up as well. In my experience, however, it does not go up as much, so your NPV will inevitably drop.
But whatever. If you think interest rates rising by 5% will not cause the value of financial assets to crater at just the time when people are being forced to try to unload them, be my guest.
b_b
23 Oct 2014, 06:14 PM
The market cares very much about fair value. Just not always on a timelime which suits. Investing on relative value is the best way to do your arse. There can be no joy losing less money that the next guy. Focus on absolute value and you will make better decisions.
This, on the other hand, I agree with completely.
At the bottom end of the scale prices are always tied very closely to fair value. As you move up the scale, the link is a little more tenuous, but in any case the price that upgraders can pay is very much linked to the price they can get for their current accommodation.
Then you have never done a DCF evaluation. Interest rates most certainly impact your required rate of return.
The balancing factor is that when interest rates are higher, the growth rate you can plug in goes up as well. In my experience, however, it does not go up as much, so your NPV will inevitably drop.
But whatever. If you think interest rates rising by 5% will not cause the value of financial assets to crater at just the time when people are being forced to try to unload them, be my guest. This, on the other hand, I agree with completely.
At the bottom end of the scale prices are always tied very closely to fair value. As you move up the scale, the link is a little more tenuous, but in any case the price that upgraders can pay is very much linked to the price they can get for their current accommodation.
I have spent my life doing dcf valuations. Which is why I understand their limitations.
Very helpful for franchise business valuation. Useless for commodity style business valuation (what was the dcf valuation of bhp in 1994? 2004? 2014?). Dumb analysts just move the assumptions with the price.
My comment was in the context of Aust resi - substantially commodity style asset class.
Have a look around the world. Property doing well in saf, brl both with high IR. Japan or Europe? In both cases property values were higher with higher interest rates. There is much much more to valuation than dcf.
Quote:
If you think interest rates rising by 5% will not cause the value of financial assets to crater at just the time when people are being forced to try to unload them, be my guest.
It may cause prices to fall. I don't know, it depends on the situation. Either way this statement is confusing price with value.
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