Or perhaps they are preventing the crash in the only way they can:
by using monetary policy to create another boom.
Basically, if IRs weren't so low what direction would housing be travelling? Down.
and what happens then? The dreaded deflationary spiral as investors head for the door.
Remember the plan is to rescue the economy be stimulating new home construction and that can only be done by convincing people that prices are on the rise again.
Quite the bind we are in.
That might be what you say, but it is diametrically opposed to what Joye is saying. He's saying that prices would be rising anyway, without current low interest rates.
To tell the truth I am agnostic on this issue. Obviously lower interest rates normally bring out the FHBs and upgraders and they increase the amount of debt that people can service, which should drive prices up, but are they required? I am not so sure.
Also, I had a conversation with someone with some insight into the developer scene in Qld, and when I asked him why developers aren't building, he repeated what I had heard before which is that they cannot get finance - not that interest rates are not low enough for them. What he did say which I hadn't heard before was that developers who had perfectly viable projects were being refused finance not because they did not meet the criteria, but because the banks have already met their quota for this kind of lending. I can only speculate that this might be because new APRA guidelines have caused banks to reduce the portion of their loan books they allocate to developers. Maybe someone with closer connections to the banking industry could comment on this.
If that is in fact the case, we could be in for a very dangerous situation indeed, because supply response to rising prices could be delayed very significantly. And low interest rates won't help the developers one bit.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
This highly-leveraged consumer is an artefact of Australia’s even more leveraged banking system. The major banks are leveraged about 80 times across their $1 trillion home loan books. Put differently, they are only holding about $1.25 of true loss-absorbing capital against every $100 – as opposed to the “risk-weighted”
This is just a financial time bomb waiting to blow. You can say what you like about aussie banks but Bear Stearns only went about 50:1. No doubt in a crunch our banks will get bailed out, but at what cost to Australians and to Australian house prices?
Quote:
A stunning 33 per cent of new home loans are today being advanced with LVRs greater than 80 per cent. In some countries they don’t even allow banks to lend at these levels, period.
This along with interest rate drops has been done to prop up the market, to allow more entrants and yet the FHB, that is the key to house prices, has all but vanished. As wages go up, FHB's reach a point where they feel safe to buy and their mass paticipation has always driven the market up. Since the mid 2000's they have been replaced by speculators hoping to get rich on property appreciation and the result of that mania is obvious. Speculators don't need the houses they buy for personal accomidation so they too have fled en-mass due to economic fears. The sales figures show this clearly. I believe very little is driving property now, and that is why we have seen the ups and downs like in Perth for 6 years or so. When a vessel slows enough it loses steerage and begins to wander.
So he's saying people have gone on a big binge, and made us ripe for the big bust.
stinkbug omosessuale Frank Castle is a liar and a criminal. He will often deliberately take people out of context and use straw man arguments. Frank finally and unintentionally gives it up and admits he got where he is, primarily via dumb luck! See here Property will be 50-70% off by 2016.
Also, I had a conversation with someone with some insight into the developer scene in Qld, and when I asked him why developers aren't building, he repeated what I had heard before which is that they cannot get finance - not that interest rates are not low enough for them. What he did say which I hadn't heard before was that developers who had perfectly viable projects were being refused finance not because they did not meet the criteria, but because the banks have already met their quota for this kind of lending. I can only speculate that this might be because new APRA guidelines have caused banks to reduce the portion of their loan books they allocate to developers. Maybe someone with closer connections to the banking industry could comment on this.
If that is in fact the case, we could be in for a very dangerous situation indeed, because supply response to rising prices could be delayed very significantly. And low interest rates won't help the developers one bit.
It's not APRA it's the banks own risk assessment teams. They have seen major developments in SEQ fail with developers going into bankruptcy - several on the GC. They then close up shop on developments and won't go back into the water until they see successful developments that are very profitable - then they are interested again.
Given the lead time for a major tower it's almost compulsory for the industry to be boom and bust, and always undersupplied.
Even Harry Triguboff has changed his model to a "rent first then sell when the market recovers model" When times are good you can knock up a six-pack with 20% equity on the hard costs plus you have to cover the soft costs, but that equity doesn't last long when the market turns down and you have unsold apartments at high interest rates. Developers pay high rates to reflect the risk and short term nature of the finance. Even today they would probably pay 9% or 10% interest. They might get 8% if they are very strong.
The other issue is the skill shortage - when the market is hot they can't get contractors at a decent price, so the price has to be jacked up above realistic costs. To make a profit the head contractor has to systematically screw the smaller contractors during the build. When the project turns bad all of the sub-contractors go broke because they don't get paid and they can't pay their suppliers.
developers make a bucketload of cash if they can get into the cycle early and hit the market at the right time, and they go broke if they get in late.
It's no place for the feint of heart, developers need large testicles.
Any expressed market opinion is my own and is not to be taken as financial advice
So what Joye is saying is that it is possible that there might be a boom followed by a crash and that something needs to be done to prevent the boom.
Not quite "Chris Joye Predicts Crash"
Bingo
my drunken uncle always said we were ten years behind the US and my money is on him. I've long stated i believed the RBA would overcook it (because im badass)
Importantly though, i think the people in charge have the benefit of hindsight and can look for solutions to the problems that faced other parts of the world during the GFC. Demand via immigration is a rabbit in the hat which has worked well in the past
It's not APRA it's the banks own risk assessment teams. They have seen major developments in SEQ fail with developers going into bankruptcy - several on the GC. They then close up shop on developments and won't go back into the water until they see successful developments that are very profitable - then they are interested again.
Given the lead time for a major tower it's almost compulsory for the industry to be boom and bust, and always undersupplied.
Even Harry Triguboff has changed his model to a "rent first then sell when the market recovers model" When times are good you can knock up a six-pack with 20% equity on the hard costs plus you have to cover the soft costs, but that equity doesn't last long when the market turns down and you have unsold apartments at high interest rates. Developers pay high rates to reflect the risk and short term nature of the finance. Even today they would probably pay 9% or 10% interest. They might get 8% if they are very strong.
The other issue is the skill shortage - when the market is hot they can't get contractors at a decent price, so the price has to be jacked up above realistic costs. To make a profit the head contractor has to systematically screw the smaller contractors during the build. When the project turns bad all of the sub-contractors go broke because they don't get paid and they can't pay their suppliers.
developers make a bucketload of cash if they can get into the cycle early and hit the market at the right time, and they go broke if they get in late.
It's no place for the feint of heart, developers need large testicles.
You have conveniently neglected to state that the banks have at times have given certain developers a very, very hard time...of course you cannot state who these guys are.
Newjerk? can you try harder than dig up another person's blog. My first promo was with Billabong and my name in English is modified with a T, am Perth born but also lived in Sydney to make my $$ It's Absolutely Fabulous if it includes brilliant locations, & high calibre tenants..what more does one want? Understand the power of the two "P"" or be financially challenged Even better when there is family who are property mad and one is born in some entitlements.....Understand that beautiful women are the exhibitionists we crave attention, whilst hot blooded men are the voyeurs ... A stunning woman can command and takes pleasure in being noticed. Seems not too many understand what it means to hold and own props and get threatened by those who do. Banks are considered to be law abiding and & rather boring places yeah not true . A bank balance sheet will show capital is dwarfed by their liabilities this means when a portions of loans is falling its problems for the bank.
Irish bears made the same mistakes, calling bubble around 2000, only to see house prices double again over the next five years
Price have not stopped falling in Ireland. Plenty more to go.
And even if what you say is true, the bubble collapsed the banking system.
The most startling thing about Joye's article is that he admits that the banks have a problem now, let alone 5 years from now.
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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