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Reserve Bank says housing crash will not improve affordability.; Luci at it again
Topic Started: 28 Oct 2014, 01:04 PM (6,486 Views)
zaph
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A Reserve Bank official warns that if Australian house prices dropped, affordability would not necessary be any better than it is now.

The bank's head of financial stability Dr Luci Ellis was speaking at a Sydney University urban planning forum on the role of housing in the global financial crisis.

Dr Ellis presented evidence that loan repayments are not unusually high at present, despite the sharp rise in house prices, thanks to record low interest rates.

She also argued that overseas experience during the crisis showed that if prices came off it would likely mean there were other issues in the economy that would make housing unaffordable.

"One of the key messages I drew from a lot of the presentations and the supporting paper was that housing crashes do not improve affordability," Dr Ellis said.

"Housing prices are lower, yes, but capacity to pay is also lower and it's something that is not well understood outside these sort of professions [economists and urban planners]."

http://www.abc.net.au/news/2014-10-28/reserve-bank-says-house-price-crash-will-not-improve-affordabil/5846576


For some maybe, but I don't follow her logic for most.

If prices crashed the buy in price would be cheaper. The deposit would be a greater percentage of the purchase price and any loan required would be less. Interest rates would be lower.

Of course finance would be more difficult to get and more people would be unemployed (but still, most people would be employed).
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skamy
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zaph
28 Oct 2014, 01:04 PM


For some maybe, but I don't follow her logic for most.

If prices crashed the buy in price would be cheaper. The deposit would be a greater percentage of the purchase price and any loan required would be less. Interest rates would be lower.

Of course finance would be more difficult to get and more people would be unemployed (but still, most people would be employed).
What she is saying is that the salaries that underpinned the higher prices also drop.

What good is a cheap house price to an unemployed person?

The bear argument runs along the lines that house prices will drop and all the investors and home owners and bankers etc will become too impoverished to compete with renters for the newly cheap houses. It is a fantasy.

What happens is that the bankers, the investors and the equity rich owners buy the cheap homes from struggling people.

To the strugglers home affordability worsens in a crash even though prices may drop.

I guarantee that, as the economy recovers, you will see an increase in the uneven distribution of wealth in all the economies that suffered an extreme crash. You can go back in time and research Britain after the 90s crash if you want proof.
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.
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herbie
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zaph
28 Oct 2014, 01:04 PM


For some maybe, but I don't follow her logic for most.

If prices crashed the buy in price would be cheaper. The deposit would be a greater percentage of the purchase price and any loan required would be less. Interest rates would be lower.

Of course finance would be more difficult to get and more people would be unemployed (but still, most people would be employed).
Agreed. (Ellis is talking crap.)

For the majority who wish to enter the market, houses would be more affordable after a correction of course.

Though those who lose their jobs are in trouble obviously.
skamy
28 Oct 2014, 01:19 PM
What she is saying is that the salaries that underpinned the higher prices also drop.
Salaries tend to be very 'sticky' even in a recession is my thought.

From the article: "In order to prevent such a damaging crash, an American expert on housing said that Australia needs to be very wary of building too much while prices are high."

I do agree with that though. As builders don't seem to be very good at restraining their "animal spirits" in a boom. So overbuilding just could occur.
Edited by herbie, 28 Oct 2014, 01:47 PM.
A Professional Demographer to an amateur demographer: "negative natural increase will never outweigh the positive net migration"
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Veritas
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herbie
28 Oct 2014, 01:31 PM
Agreed. (Ellis is talking crap.)

For the majority who wish to enter the market, houses would be more affordable after a correction of course.

Though those who lose their jobs are in trouble obviously.

Salaries tend to be very 'sticky' even in a recession is my thought.
That's right Herbie.

Wages are sticky during recessions.

What Ellis fails to understand is a quite simple concept: house price crashes are only possible if they were overvalued in the first place.

The problem is not the crash, the problem is the preceding overvaluation which ensured that, sooner or later, the market would falter.

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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Bardon
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The notion of affordable housing is a modern day myth conjured up by the don't buy now type of rent a mob without basis, or those trying to exploit house prices to their advantage.
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zaph
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skamy
28 Oct 2014, 01:19 PM


The bear argument runs along the lines that house prices will drop and all the investors and home owners and bankers etc will become too impoverished to compete with renters for the newly cheap houses. It is a fantasy.



I guarantee that, as the economy recovers, you will see an increase in the uneven distribution of wealth in all the economies that suffered an extreme crash. You can go back in time and research Britain after the 90s crash if you want proof.
Quote:
 
What she is saying is that the salaries that underpinned the higher prices also drop.


She could have just said that. I have suspicions why she didn't. But do salaries drop by more than house prices/payments? - for those that can maintain employment, I seriously doubt it.

Quote:
 
What good is a cheap house price to an unemployed person?


As I said a price drop would make housing less affordable for some. But even if unemployment went to 20%, 80% are still employed.

Quote:
 
What happens is that the bankers, the investors and the equity rich owners buy the cheap homes from struggling people.


Investors who are in the accumulation phase (which appears to be most) would not be able to borrow after the value of their portfolio has dropped significantly.

Quote:
 
To the strugglers home affordability worsens in a crash even though prices may drop.


But 80% will still not struggle.

Luci points out the effect of supply on any possible crash, and rightly so. If we were to experience a massive supply side response then a crash would be inevitable. I highly doubt we will get a generalised oversupply response in oz.

IMO we will get, and we are now seeing a moderate supply response. It's likely to result in a flattening of prices rather than a crash.
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How about giving the tenant a share in the capital gain on the property, in proportion to the nett cash expenditure of both owner and tenant, and tenure? That simply reflects the tenant's contribution to the owner's capital gain. A government organisation should lodge a caveat on every rental property and act as intermediary for the eventual sale or transfer, as well as handling the bond. Any capital gain on sale or transfer would be divided between that owner and all their tenants, any loss borne entirely by that owner.

Owning an investment property (not infrequently vacant, capital gain being the aim) has indeed been a very good investment, both before and after the 2008 crash. As property websites put it: "The tax man and the rental income pays for your investment property." Any yearly loss is much more than offset by the capital gain! Not so for the tenants - a direct and entirely foreseeable result of the commoditisation of a basic human need.

Such a sharing would reduce the consequently increasing inequality of wealth. Some 90% of families in the least wealthy fifth of Australian households are renters. Obviously, the filthy rich will be very determined to keep it all, collecting their rent from the comfort of their Mercedes-Benz.

Incentive, too. A share of such a gain would assist the incentivation and employability and mobility that the Coalition claims to want.

After all, as Alan Kohler has pointed out, "One retirement village that I’m familiar with requires 25% of the original purchase price to be paid to the owner, plus 75% of any capital gain. Others simply take 30% of the sale price - 3% a year for a maximum of 10 years." So profit-seekers already practice that approach, just as shopping centre owners checks the books of their tenants to increase the rent for those doing well.

Vacant dwelling tax of at least 25% of the gross rental value is also an urgently needed instrument.
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Chris
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Ellis is either naive or she is an investor herself trying to use her position to maintain the balance of power. Not sure which one but they are the only conclusion, a part for Her being just plain dumb, you could draw from these comments.

What everyone needs to do is sit back and ask themselves why is this even an issue/topic? I was speaking to my dad and uncle on the weekend and they were saying something quite interesting. They both agreed that house prices were never an issue for their generation, a predictable 2.5-3.5 yearly income was the standard lending power of an individual and a 20%. All this was very manageable for the majority so this 'affordability' issue was never discussed because it never existed as it does today.

Bulls will now bang on about 'it is still affordable for the majority, the majority own their homes' but this is simply not true. In the last decade, or just over, the home ownership rates between 25-34 yr olds has declined 23%. Their is a clear trend here and a define issue that keeps getting blacked out by vested interests.

I couldn't give a shit really, I can't afford to buy and I won't be but to suggest that lower house prices, in line with historic norms, would not be beneficial to society going forward is just lunacy. Sure a downturn would see temporary job losses and wage deflation but eventually this will find its equilibrium as well. What Ellis is suggesting is that modern day price escalation has been due solely to higher wages and this is simply untrue.
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stinkbug
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We didn't see hordes of people swooping in to buy bargains in the US when they had their big drops. I don't think things would be much different here if the same thing happened.
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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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doubleview
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stinkbug
28 Oct 2014, 02:10 PM
We didn't see hordes of people swooping in to buy bargains in the US when they had their big drops. I don't think things would be much different here if the same thing happened.
I disagree!

The bears will be lining up to buy Skamies pad for pennys on the dollar, the bears will then burn it down & piss on the ashes.
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