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Punting on Australian houses is bonkers, attracting dumb money, speculation, not investment; Ordinary people priced out of Great Australian Dream by cashed-up older generations
Topic Started: 20 Sep 2013, 10:18 AM (4,927 Views)
Veritas
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stinkbug
26 Sep 2013, 03:33 PM
Fair point, but can you give me an example of a bubble that stayed inflated for a decade or more, and then popped?
It really depends on whether we can agree when a bubble started.

We had a long argument on this in relation to Ireland some time ago.

Some of the chaps took the view that the bubble only began in 2001/02 because that is where prices have adjusted to.

I do not hold that view, I think it started a few years earlier.

Where the prices fall back to after the crash is largely a moot point in any event. When a bubble bursts, the economies in question, especially in the most recent examples, have bigger fish to fry like shoring up the financial system and addressing the rise in unemployment that accompanies the burst.

Ives said it before and Ill say it again, there has been far too much money in this country chasing capital gain in res property for a healthy, sustainable market to be the result.

There will be a reckoning.

Edit: here is a list of some other boom/bust occurrences since 1970 in OECD property markets.

Posted Image
Edited by Veritas, 26 Sep 2013, 03:42 PM.
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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Shadow
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Veritas
26 Sep 2013, 03:39 PM
It really depends on whether we can agree when a bubble started.

We had a long argument on this in relation to Ireland some time ago.

Some of the chaps took the view that the bubble only began in 2001/02 because that is where prices have adjusted to.

I do not hold that view, I think it started a few years earlier.
Ireland didn't sustain peak price/income levels even for a single year.

The housing bubbles in USA, Ireland, UK, Spain and Japan had something in common. They were all characterised by a sharp rise in the house price to income ratio as the bubble inflated, followed almost immediately by a sharp fall in this ratio as the bubble collapsed after prices peaked.

The chart below illustrates this phenomenon quite clearly.

On the other hand, Australia has sustained its current price/income ratio for over a decade now. No bubble in history has done this.

Posted Image
Veritas
26 Sep 2013, 03:39 PM
here is a list of some other boom/bust occurrences since 1970 in OECD property markets
Here is a list of countries in which booms were not followed by a bust...

Posted Image
Edited by Shadow, 26 Sep 2013, 03:48 PM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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Trojan
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GloomBoomDoom
26 Sep 2013, 03:35 PM
I just top up the oil and water on my 1988 model car and never get it serviced. It hasn't blown up yet therefore it never will.
Just because pigs haven't flown in the past, it doesn't mean it never will either.
But somehow, I'm not betting the house on it :)
I put trolls and time wasters on my ignore list so if I don't respond to you, you are probably on it ....
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Ok, so what’s the consensus on when this damn thing pops and how far will it retrace?

I’m in the horrible situation of being able to afford a reasonable house in a half decent location with somewhere around a 40% LVR. That’s cheaper than renting by a big margin, even with holding costs, but…and it’s a big but, I can’t get it out of my head that all of the above is true and houses today are at least 25% over-valued. (In my schadenfreude moments make that 50%). So if prices go backwards 25% then the mortgage I’m considering drops by 2/3rds and the interest bill goes from $148k to under $10k!

Talk about a rock and a hard place. Buy? Or wait?

What would you do?
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stinkbug
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GloomBoomDoom
26 Sep 2013, 03:35 PM
I just top up the oil and water on my 1988 model car and never get it serviced. It hasn't blown up yet therefore it never will.
And what capital gain are you expecting to make on this car?
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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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Shadow
26 Sep 2013, 03:44 PM
The housing bubbles in USA, Ireland, UK, Spain and Japan had something in common. They were all characterised by a sharp rise in the house price to income ratio as the bubble inflated, followed almost immediately by a sharp fall in this ratio as the bubble collapsed after prices peaked.
The bubbles that popped already around the world, took their policy makers by surprise.

Other nations with not yet burst bubbles, like Australia, have policy makers that think the correct course is to keep pumping and spruiking “so we won’t have a bust like those ones”.

But I say that eventually the bubble itself has to be the means of its own demise, just like a cancer has to be the means of its own demise.

A house price bubble continuing to grow even as unemployment is rising and everything to do with actual production and income is stagnating, is a similar phenomenon to a cancer growing as its host dies.

If the Aussie economy was a wooden boat, planks would be getting cannibalised from the hull to build a more impressive superstructure.
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stinkbug
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26 Sep 2013, 03:56 PM
The bubbles that popped already around the world, took their policy makers by surprise.

Other nations with not yet burst bubbles, like Australia, have policy makers that think the correct course is to keep pumping and spruiking “so we won’t have a bust like those ones”.

But I say that eventually the bubble itself has to be the means of its own demise, just like a cancer has to be the means of its own demise.

A house price bubble continuing to grow even as unemployment is rising and everything to do with actual production and income is stagnating, is a similar phenomenon to a cancer growing as its host dies.

If the Aussie economy was a wooden boat, planks would be getting cannibalised from the hull to build a more impressive superstructure.
But we haven't reasonably established that Australian property is in a bubble. Yields are still sensible, median price to median household income ratio hasn't changed meaningfully in a decade, we are underbuilt not overbuilt and haven't had gains anything like those seen in places like Ireland or Japan.

When we are exhibiting some genuine bubble characteristics then yes, we can discuss what property in a bubble means, but getting a bit more expensive does not constitute a bubble, and I am yet to see a convincing argument that we are in one.

The term bubble was being applied to property since around 2002, we had the GFC in 2007, and here we are almost 7 years later again and no crash. Places like the GC of course dropped hard, but they always do in an economic downturn. But the main centres?
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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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Veritas
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Quote:
 
Ireland didn't sustain peak price/income levels even for a single year.

The housing bubbles in USA, Ireland, UK, Spain and Japan had something in common. They were all characterised by a sharp rise in the house price to income ratio as the bubble inflated, followed almost immediately by a sharp fall in this ratio as the bubble collapsed after prices peaked.

The chart below illustrates this phenomenon quite clearly.

On the other hand, Australia has sustained its current price/income ratio for over a decade now. No bubble in history has done this.


Meh...England, Spain and Ireland were all holed below the water line by the GFC/ Great recession.

Australia breezed through it.

Swift thinking ( much of it designed specifically to shore up the property market) plus China's massive stimulus plan meant crisis averted in Australia.

There is no evidence to suggest that a holding pattern like the one we have seen here means that a new and permanent plateau has been reached.

If you have any, Id like to see it.

Where are you going with those charts btw? They are total boolox. Whats the source?

http://online.wsj.com/article/SB10001424127887323741004578416152525027078.html

Quote:
 
LONDON—House prices in large parts of the euro zone fell in the fourth quarter of 2012 adding to the euro zone's economic woes, by both reducing household wealth and future consumption, particularly in austerity-ravaged economies.

The decline in prices can also lead to problems for the bloc's banks if the value of homes falls below the value of mortgage loans they are secured against.

The declines were spread across the currency area, with falls in Spain, Italy and France, according to figures released Thursday by the European Union's official statistics agency. Eurostat didn't publish a figure for Germany, and would not disclose the estimate for Germany upon which the overall figure for the euro zone was based.


And, as we know, Sweden and Norway are in deep dodo with their housing bubbles.

Basically, you are showing me bubbles and calling it normal

You have no evidence whatsover to present that this new normal is normal at all.
Edited by Veritas, 26 Sep 2013, 05:51 PM.
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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Shadow
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Veritas
26 Sep 2013, 05:43 PM
Whats the source?
The source is shown on the charts.

Were you able to find any bubble in the history of mankind (in any asset class) where peak price/income ratios were sustained for decades before the bubble popped?
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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Veritas
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Shadow
26 Sep 2013, 05:59 PM
The source is shown on the charts.

Were you able to find any bubble in the history of mankind (in any asset class) where peak price/income ratios were sustained for decades before the bubble popped?

What I have learned is that usually a strong and unexpected shock to the economy has to occur.

THAT SIMPLY HASN'T HAPPENED HERE.

But the lead in period is very similar. Take Sweden in the 1980s for example:

Quote:
 
Most of these are in developing countries, the main
exceptions being three of the Nordic countries
(Norway, Finland, and Sweden) in the late 1980s
and early 1990s. The majority of these crises
appear to have followed a common pattern. They
have (i) been initiated by deregulatory measures,
which have (ii) led to overly rapid credit expansion.
This has in turn been followed by (iii) a sustained
increase in asset prices, apparently unwarranted by
fundamentals (a ‘bubble’). At some point (iv) the
bubble has burst, with a dramatic fall in prices and disruption of asset markets (in particular for real
estate) and widespread bankruptcies.
This has been
accompanied by (v) non-performing loans, credit
losses, and an acute banking crisis, in many cases
intertwined with (vi) a currency crisis. Finally, (vii),
a weakened banking sector has inflicted a credit
crunch on the private sector, the severity of which
has depended on (viii) the government measures
taken to salvage the ailing banks


http://www.contrahour.com/contrahour/files/theswedishbankingcrisisrootsandconsequences.pdf

Sound familiar?

David McWilliams, the man who called Ireland's bubble out for what it was thinks so. He also described how it will unravel.

Quote:
 
So why has Australia avoided a bust so far, particularly when the Aussie banks are so exposed? If you doubt this, consider this fact: at today’s share prices, the Australian banking system is valued at more than the entire banking system of the eurozone. Australia has a population of 22 million, compared to the eurozone’s population of 317 million. You might say ‘go figure’, but the crash hasn’t happened. Why?

Maybe one of the reasons is that the Aussies have that rare luxury of being one of that relatively small number of benighted countries – we also could have been one – to which the financial markets are prepared to lend in its own currency, which is floating. This means that, if the country has a wobble, the exchange rate falls dramatically, which cushions the blow and allows the country to recover without an over-dramatic collapse in local asset prices.

But the mechanism whereby a country with its own exchange rate overheats is not too different from one which does not have its own exchange rate, like Ireland. In Australia, the boom causes the current account to plunge into deficit, because Australian banks are borrowing abroad to lend into the overheating local markets. The locals want Aussie dollars so that the banks have to convert their borrowed US dollars into Aussie dollars, because you can only buy Aussie property with Aussie dollars. This causes the Aussie dollar to rise dramatically against the US dollar – as has been the case in the past few years.

In order to cool down the economy, the central bank raises interest rates, but this just attracts more money in, as the spread between Australian interest rates and US rates widens and the currency appreciates more. Gradually as this goes on, exports become more difficult and imports become cheaper, driving the trade deficit upwards. Also, as happened in Ireland, all this effervescence in the local economy makes investing in the local economy much more attractive than the hassle of competing on the international market. As for productivity, it begins to fall, as more and more cash and immigrants are sucked into the country to be deployed in the booming local economy.

As prices go ever higher, certain investors begin to take profits - and then prices fall. Then leveraged investors, who got into the boom late, panic and try to sell, leading to a flood of properties. This in Australia will be coincident with the currency falling. The fall in the currency will offset some of the falls in property, but not all. This is what is on the cards for Australia. As to when exactly, it’s impossible to tell, but it will happen – for sure mate.


The old Anzac shuffled off after a while, locked into his own world. I turned to last Wednesday’s Sydney Morning Herald. The main paper was 20 pages long. The business and sport supplement was another 20 pages but – wait for it – the property supplement last Wednesday was a whopping 136 pages of wall-to-wall, unashamed, top-shelf, property
porn. Now where have we all seen that before, and what did it signal?


http://www.davidmcwilliams.ie/2012/11/19/boom-and-bust-cycle-is-the-same-down-under
Edited by Veritas, 26 Sep 2013, 06:22 PM.
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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