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.
As I said a price drop would make housing less affordable for some. But even if unemployment went to 20%, 80% are still employed.
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.
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.
In Ireland and in the US house buying by the middle classes virtually stopped (this is why prices dropped).
Houses did not become more affordable to the majority, that is how reality played out. People struggled to pay for the homes they had bought. this showed up in many statistics on housing stress levels.
The middle classes, rightly or wrongly, perceive the cost of risk too high in a downturn. Only the rich can afford the risk or the market perception of risk.
As you have pointed out the majority of home owners and investors have no need to sell their homes and they don't. Investors actually thrive as rents rise and interest rates drop.
The houses that do sell (and create the perception of a new paradigm of low house prices) are stressed sales and investors and the cash rich will always be prepared to pay more than a FHB as they can afford and assess the risk better.
FHBs need to borrow the most, they are likely to be early career and most at risk of unemployment, they find housing just as unaffordable if not more so in a market that is in a downturn than in a normal housing market.
When the GFC hit the banks immediately raised the required deposits this alone caused a significant decrease in affordability for FHB.
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.
quote]The observed reality in Ireland and in the US is that home ownership rates dropped. In Perth closer to home during the downturn nobody bought land or built homes, why? because their perception, and that of the banks and lending institutions, was that there was more inherent risk in the market. Banks wont lend and people are reluctant to borrow as they fear for their jobs. So the perception of affordability changes.[/quote]
No. They dropped because:
1. Unemployment rose which weakened demand. 2. Sentiment changed; again demand fell as people stayed out of the market anticipated further drops in prices ( why buy something for 100 bucks that I can get next week for 90?) 3. Australian bank lending rates to property buyers barely skipped a beat during the GFC. So you are wrong there too.
Quote:
It is a dream shared by Veritas and Zaph that if property prices crash they will find a home more affordable. It is not true. Their jobs become less secure, they may have to work less hours, they will lose overtime. They will not get pay rises, bonuses are non existing etc etc.
Sigh.
Fact: providing I remain employed a drop of 20% in the median house price will make housing more affordable.
Do you disagree?
Quote:
Two years ago Perth land was cheap as chips and builders were offering fantastic incentives, the Perth property market was experiencing a correction. Why did Veritas not buy? because investors were prepared to enter the deflated market before him and he missed the boat.
The height of the mining boom seems like an odd time for a correction Skamy. I wonder what is going to happen not that the end of the mining boom is accelerating in severity.
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
Unfortunately I agree that a crash in prices would be very very bad for everyone. Immediately afterwards and for a long time affordability would be probably be the same or worse as credit would dry up and there would be substantial job losses. Yet at the same time the current situation is also untenable and unsustainable. This is a sort of catch-22. I just wish house prices would stabilize, revert to a more reasonable multiple of median wages, and people stop regarding them as speculative asset.
Unfortunately I agree that a crash in prices would be very very bad for everyone. Immediately afterwards and for a long time affordability would be probably be the same or worse as credit would dry up and there would be substantial job losses. Yet at the same time the current situation is also untenable and unsustainable. This is a sort of catch-22. I just wish house prices would stabilize, revert to a more reasonable multiple of median wages, and people stop regarding them as speculative asset.
Agreed.
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
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.
You are just waving a big stick threatening everyone who annoys you eg landlords, developers who refuse to build into a market that is not buying etc.
There are always people like you around who want to take what others have. If you want a share in capital gains so buy a property and take the risks and responsibilities that go with it.
Chris
28 Oct 2014, 02:07 PM
What Ellis is suggesting is that modern day price escalation has been due solely to higher wages and this is simply untrue.
No it is not untrue. Prices rise with growing wages and wealth and population. Every now and again a given market goes a bit crazy eg Ireland growing at 10% plus a year for a decade and this led to an over correction.
This did not happen in Australia, the Australian market slowed down on its own shortly after 2003, whereas the US and Ireland boomed for another 3-4 years. This is why those prices fell back so much. However, prices in the US and Ireland will climb back and they will climb some more.
The big bear mistake is to believe that crashed property prices reflects actual property values, they don't. To believe the bear myths you have to assume that there is some other unsustainable force pushing high prices in Australia. There is absolutely NO evidence whatsoever of this.
doubleview
28 Oct 2014, 02:17 PM
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.
Dream dream dream
How silly is that statement people like me with the returns of a lifetimes investment in real estate will always be shielded better should a downturn occur.
zaph
28 Oct 2014, 02:44 PM
Strangely the hordes seem to swoop when the price is high, not low.
Nail on the head.
The majority of people prefer high prices and lower risks to low prices and higher risks
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.
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).
The big issue is with finance.
Suppose you have a place that is today on the market at $300k, valuation is $300k. Banks are happy to finance you at 95% LVR because you have a decent job and can handle the mortgage no probs. Real savings required: About $24,000 after all expenses and taxes, etc.
Now let's have a 20% crash in the market prices.
Same dwelling: Fair Value: $240,0000 Owner believes current market will recover: Wants $255,000. Valuer is worried about over-valuation - values at $220,000 Banks get scared and now won't do it at any more than 90% LVR even though you still have your good job.
Bank will lend you no more than $198,000. You need to find $6500 for expenses.
Real savings required: $255k+$6.5k-$198k = $63,500.
Result: Massive drop in affordability for the FHB, massive increase in affordability for people who still have equity or cash.
You can quibble and dick around with the numbers a bit, and you might be lucky enough to find a place you like that the owner is *forced* to sell, even though they don't want to, but the effect is real.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
Suppose you have a place that is today on the market at $300k, valuation is $300k. Banks are happy to finance you at 95% LVR because you have a decent job and can handle the mortgage no probs. Real savings required: About $24,000 after all expenses and taxes, etc.
Now let's have a 20% crash in the market prices.
Same dwelling: Fair Value: $240,0000 Owner believes current market will recover: Wants $255,000. Valuer is worried about over-valuation - values at $220,000 Banks get scared and now won't do it at any more than 90% LVR even though you still have your good job.
Bank will lend you no more than $198,000. You need to find $6500 for expenses.
Real savings required: $255k+$6.5k-$198k = $63,500.
Result: Massive drop in affordability for the FHB, massive increase in affordability for people who still have equity or cash.
You can quibble and dick around with the numbers a bit, and you might be lucky enough to find a place you like that the owner is *forced* to sell, even though they don't want to, but the effect is real.
Yes, but a 20% crash in market prices cannot happen, so the numbers are little more than a fantasy. It's much better to use Shadow's scenario to understand how much the buyer will lose if it doesn't act now.
Yes, but a 20% crash in market prices cannot happen, so the numbers are little more than a fantasy. It's much better to use Shadow's scenario to understand how much the buyer will lose if it doesn't act now.
20% crashes have happened and one could possibly happen. And prima facie the potential buyer loses nothing by not acting now.
I think a 20% crash is hugely unlikely, and I am generally mildly bullish on real estate, among other things. But there is no need to overstate the case.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
Fact: providing I remain employed a drop of 20% in the median house price will make housing more affordable.
Not a fact, debatable. It depends whether the bank will give you a loan. If they tighten credit you might not get one at all and houses would be less affordable than they are now. Have you built up a good credit rating with the bank, a good history of taking out loans and paying them back on time? If not, then in a situation where credit is tightened substantially the bank may view you as being too inexperienced with credit and too risky to lend money too. Ironically, folk like Mike and Skamy would be in better positions than you as a result of their stronger credit history.
20% crashes have happened and one could possibly happen. And prima facie the potential buyer loses nothing by not acting now.
I think a 20% crash is hugely unlikely, and I am generally mildly bullish on real estate, among other things. But there is no need to overstate the case.
So you are closer to Shadow that your proposed 20% crash, which is unlikely to happen. a 20% crash may have occurred in the past, but it cannot happen again because we have the systems in place to prevent them.
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