Panic would overplay it IMO. Sure it would have been in Vegas or SoCal but not most places. Remember US has a relatively low level of property investment. The only person I knew while I was there for 7 years who had IPs was a Brit :-) Many people have holiday homes but thats another issue. Aus is far more vulnerable from that perspective anyway.
I agree that theres no panic here, except maybe for some luxury property owners. But living in Melb what I see is a steady but strong tide of shifting sentiment. Sure there are still plenty bulls but there arent many people seeing property as a one-way bet anymore, which was markedly not the case when I moved here in 2010. I think this is the start of a major correction in sentiment. How much will fall into prices I dont know.
Valuers are critical here. To some degree they're under pressure from lenders and thats where their cues come from IMO (maybe Peter F can comment there). But the point is, their job is to look at the value into the future too. In many places, that means down. Obviously that becomes self-fulfilling.
Your point about property valuations is a good one, and one I had not thought about up to now but will factor into my calculations from now on. I wonder what level of annual price drop you need to cause property valuers to start a vicious spiral?
But we can't get that sort of spiral here. As Davel pointed out, the typical thing in the US was to get a low fixed rate mortgage that "reset" to a higher rate after X years, but you would re-finance / roll-over to a new low fixed period fixed rate before that happened. This worked for a while, but the reval cycle meant that you couldn't roll-over, suddenly repayment went up to some level (often based on 3 month LIBOR + some margin - remember that during the crisis LIBOR rates blew out massively! Big problem.) which was higher than anyone expected, next thing you default. That was a major contributor to the rapid increase in loan arrears and defaults over there. Add in the sub-prime debarcle, and the fact that a lot of people were sold these sorts of reset loans under sub-prime as well, and the whole thing turned into the mess we have seen since.
In Australia, our mortgage market is predominately variable interest rate based, and even those that fix reset to the standard variable rate after that (based mostly on the RBA set overnight cash rate), not another contrived and very high fixed rate driven by a possibly irrational / fear driven market like the LIBOR.
Your point about property valuations is a good one, and one I had not thought about up to now but will factor into my calculations from now on. I wonder what level of annual price drop you need to cause property valuers to start a vicious spiral?
But we can't get that sort of spiral here. As Davel pointed out, the typical thing in the US was to get a low fixed rate mortgage that "reset" to a higher rate after X years, but you would re-finance / roll-over to a new low fixed period fixed rate before that happened. This worked for a while, but the reval cycle meant that you couldn't roll-over, suddenly repayment went up to some level (often based on 3 month LIBOR + some margin - remember that during the crisis LIBOR rates blew out massively! Big problem.) which was higher than anyone expected, next thing you default. That was a major contributor to the rapid increase in loan arrears and defaults over there. Add in the sub-prime debarcle, and the fact that a lot of people were sold these sorts of reset loans under sub-prime as well, and the whole thing turned into the mess we have seen since.
In Australia, our mortgage market is predominately variable interest rate based, and even those that fix reset to the standard variable rate after that (based mostly on the RBA set overnight cash rate), not another contrived and very high fixed rate driven by a possibly irrational / fear driven market like the LIBOR.
They got caught in a double bind in the USA. I agree that the reset loans (ARM's) caused much of the problem.
I get plenty of requests from homeowners in the USA to help refinance. I'm struck by three things. the house is cheap, usually around $110,000 (I check it on Zillow) the interest rate (around 8.5%) is high by todays standards, and they earn a pittance compared to us - that's unskilled blue collar types. Sounds strange, but it's true. They struggle to meet payments on a $75,000 loan, whereas anyone with a half decent job here would easily afford that.
Any expressed market opinion is my own and is not to be taken as financial advice
miw - as you point out the first 18 months was "only" 8%. Not dissimilar to Aus now.
Sure there it then speeded up, and this was largely due to inability of people to roll over their mortgages due to tremendous change in valuations. Many people, me included, took advantage of low mortgage rate deals in the period 2005+ when mortgage rates were relatively high (30 yr fix for example was 7+%). Idea was always to roll over to a new deal. But when the valuers suddenly knocked 100k off the value of your house, whilst lowering their LVR tolerances, many people needing to refi were tipped onto the street.
This is the real story of what happened. There really werent many subprime borrowers in most places.
Wont happen in Aus, but doesnt need to follow exactly the same track in order to be damaging.
Yeah. I noticed that, too. But if you take the selloff as starting late in 2006 when it first became evident that prices were actually dropping (Jul-Oct 2006 just looked like noise in the index) then the market was already off 17.6% from November 2006 by May 2008 - 18 months from the start of selloff or 22 months from the peak. A far cry from the 6.1% in 22 months according to ABS. (Dropped from an index value of about 150 to 140 based on 2004=100. Steve Keen the dishonest sod called that a 10% decline in his headline. :-)
Dropping values are a real bitch if you need to refinance/rollover to get a lower interest rate. Essentially dropping the FED rate didn't help the people who needed it most at all.
Also, in the US people move around a lot more and finance issues bite harder. Not to mention home equity loans, credit consolidation (so getting behind on your credit card can make you lose your house!) and a bunch of other pathology people will bite off on when they think home prices can only go up.
You won't get any disagreement from me that the current situation is already damaging for some and potentially could get more damaging. I do get a little annoyed with the share spruikers who change the axes and scales of a line on a graph and try to say it makes the Australian and US situation directly comparable and that Australia will inevitably follow the same path down.
They are trying to get people to sell up property and buy shares which to me conjures up images of frying pans and fires, especially for people who are not used to dealing with highly volatile assets. My drawdown in October 2008 was almost equivalent to a small apartment and it took me 3 good years to make it back up. It would have been significantly worse had not high interest rates in 2007/8 convinced me to sell over half my stocks and pay down mortgage in Jan 08. Never again.
Panic would overplay it IMO. Sure it would have been in Vegas or SoCal but not most places. Remember US has a relatively low level of property investment. The only person I knew while I was there for 7 years who had IPs was a Brit :-) Many people have holiday homes but thats another issue. Aus is far more vulnerable from that perspective anyway.
Fair enough. You were there, I wasn't.
Mind you, I don't think it will be the PIs who will precipitate any crash here. Most of them are already out of the buying market already (hence the downturn) and unless they lose their jobs and they are seriously negatively geared, they are unlikely to sell either because nett yields are rising nicely. In the US I guess the equivalent of the PI is the REIT shareholder, and they got horribly hammered as well.
Quote:
I agree that theres no panic here, except maybe for some luxury property owners. But living in Melb what I see is a steady but strong tide of shifting sentiment. Sure there are still plenty bulls but there arent many people seeing property as a one-way bet anymore, which was markedly not the case when I moved here in 2010. I think this is the start of a major correction in sentiment. How much will fall into prices I dont know.
Not altogether a bad thing in my view. Usually the time to sell is when sentiment is at its sunniest and when sentiment is toxic is the time to buy. (Probably with a lag of 6 months or more in property markets given their illiquidity) At the very least, a healthy dose of caution is a good thing.
I get plenty of requests from homeowners in the USA to help refinance. I'm struck by three things. the house is cheap, usually around $110,000 (I check it on Zillow) the interest rate (around 8.5%) is high by todays standards, and they earn a pittance compared to us - that's unskilled blue collar types. Sounds strange, but it's true. They struggle to meet payments on a $75,000 loan, whereas anyone with a half decent job here would easily afford that.
why? do they not realise you are in Australia? or do they think it doesn't matter?
you wouldn't need a half decent job, just a job to service that debt here. you could even do it on centerlink benefits at a pinch.
I'd have to say it is far from certain and in fact unlikely. At any rate, to turn a downturn into a crash you need to get into the forced-sale negative feedback loop. (On the stock market, margin calls, on the property market - foreclosures or mass unemployment.)
Sorry to be the neighbourhood pedant, but the behaviour you describe above (price falls leading to forced sales leading to further price falls) is a 'positive feedback loop'
Don't worry, most people use it incorrectly. Best online definition I have seen of a PFL is "Positive feedback loops enhance or amplify changes; this tends to move a system away from its equilibrium state and make it more unstable."
Without knowing the area, schools, work opportunities etc it's hard to make an accurate judgement. I also note that the house price graphs show that homes are back to pre gfc levels, so that's a bit of a mystery as well.
Any expressed market opinion is my own and is not to be taken as financial advice
Sorry to be the neighbourhood pedant, but the behaviour you describe above (price falls leading to forced sales leading to further price falls) is a 'positive feedback loop'
Don't worry, most people use it incorrectly. Best online definition I have seen of a PFL is "Positive feedback loops enhance or amplify changes; this tends to move a system away from its equilibrium state and make it more unstable."
You are absolutely right and I stand corrected.
I really should proofread what I write. I should know this. I have actually studied control theory.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
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