You were discussing this "replacement cost" argument the other day and I have to ask exactly what you mean by that. Are you referring to a house and land package built on the outskirts of town for $400000. If that place was for sale on the same size block in the inner city it could be worth $1,000,000. While I agree the replacement cost argument may hold some sway when referring to houses on the fringe it is not relevant to areas where the land cost makes up most of the house price. When prices fall, the construction costs don't tend to change much but the land prices take the hit. So can you elaborate a bit further on the "replacement cost" theory.
Land costs money to develop. Unserviced land (englobo land) Accounts for around 5% of a house and land package. After the cost of supplying services (power, utilities, roads, gutters, parks, council chambers, infra levies, developer contributions ect) The cost of land end up at at least $400 per sqm before profit. So there is very little room for land to fall until supply is constrained (ie 5%). We have seen that this cycle -at least in Sydney.
You are right in that replacement cost is important for marginal production. But this acts as an anchor or reference point for other properties in progressively better locations.
You miss the point. The level of lending to home buyers doesn't affect the level of lending to business. The bank will lend to home buyers and businesses if they believe they will be repaid. Just because they lent to a home buyer doesn't mean they now can't lend to a business.
Banks can have a policy bent that means they are more inclined to lend to one type of investor over another.
An example:
Mortgages are easy to come by
Builders of houses complain endlessly about lending criteria and lack of credit.
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
I personally am not debating banks ability to issue a loan for business
.. It seems people are choosing to get loans for properties over business.. And banks are not helping by providing the best deals for property loans as they are as others have said , the least risky investment ....
So we end up with people parking cash / speculating in existing property instead of going out and starting something new ... Taking a mortgage on a house basically guarantees u gain an asset u can keep and wealth increases ... Loan for business u could lose everything AND fall behind on property ladder ... ( and wealth )
In risky times people will choose the less risky option ... Hence the huge shift into property and out of other investment streams even though money is needed elsewhere ... And as our economy slows , its probably going to compound
Banks can have a policy bent that means they are more inclined to lend to one type of investor over another.
An example:
Mortgages are easy to come by
Builders of houses complain endlessly about lending criteria and lack of credit.
This is true. Banks are suspicious of property developers and business cashflow based lending is very uncommon in Australia. Banks here are very conservative. This has the effect that housing is a large percentage of their loan books but it doesn't follow logically that it (lending for housing) causes business lending to be (proportionately) low.
“You Keep Using That Word, I Do Not Think It Means What You Think It Means” - Inigo Montoya
Banks can have a policy bent that means they are more inclined to lend to one type of investor over another.
An example:
Mortgages are easy to come by
Builders of houses complain endlessly about lending criteria and lack of credit.
I have no problem with that. But that is a credit issue (perceived or real).
But capital us not diverted away from business because of mortgages.
Massive
26 Sep 2013, 11:29 PM
I personally am not debating banks ability to issue a loan for business
.. It seems people are choosing to get loans for properties over business.. And banks are not helping by providing the best deals for property loans as they are as others have said , the least risky investment ....
So we end up with people parking cash / speculating in existing property instead of going out and starting something new ... Taking a mortgage on a house basically guarantees u gain an asset u can keep and wealth increases ... Loan for business u could lose everything AND fall behind on property ladder ... ( and wealth )
In risky times people will choose the less risky option ... Hence the huge shift into property and out of other investment streams even though money is needed elsewhere ... And as our economy slows , its probably going to compound
What about people who have sold their house. They have plenty of cash available for investment.
Capital is always available for sensible investments.
I have no problem with that. But that is a credit issue (perceived or real).
But capital us not diverted away from business because of mortgages.
b_b - You are banging your head against a brick wall trying to explain these ideas to Veritas I suspect.
Veritas - a simple question; do you think a Building Society with 100% of it's assets based on residential housing loans, is a more risky institution to be invested in, and/or from a macro/systemic perspective, compared to say a commercial bank with only 50% of it's assets in resi loans and the other 50% lent to developers, big/small business overdrafts, project funding etc?
For Aussie property bears, "denial", is not just a long river in North Africa.....
So I agree that house prices are never going to fall below replacement cost, which is the cost to build a house on the outskirts of town. This is primarily true when you have an increasing population and the requirement to build more houses. This replacement cost is always well below the median price of a house in the city, however. The price gradient as you move closer to the city or more desirable areas is still subject to market forces and is due to the level of competitive demand on top of the base replacement cost. This is why investor demand has to have a significant impact on prices. We are seeing it now in Sydney.
On the subject of household debt to GDP, nobody has yet explained why there seems to be a natural limit before it affects both the economy and house prices. Why is debt servicing an issue if my debt is someone else's savings? Surely their savings can be used to pay me a higher wage to service my large debt. Clearly there must be demographic issues around which part of the population holds the debt (workers?) and who holds the savings (retirees?).
As a microcosm imagine a retiree who holds $100000 worth of CBA shares and $300,000 cash in the bank. Meanwhile a worker has a $300000 mortgage with the CBA. The worker's interest repayments on his mortgage pay the deposit interest on the retiree's deposit and the 2.5% margin gets recycled through the bank and paid to shareholders including the retiree. I think I have heard that you need 3 workers to support every retiree so I can see why the ageing population and the fall in participation rate could be a significant drag on the economy.
What about people who have sold their house. They have plenty of cash available for investment.
Capital is always available for sensible investments.
As I said previously .. Recent statistics are showing a surge in IP and upgrade mortgages ..
Sellers are simply buying back in at a higher level ... Sure they COULD put capital elsewhere but right now they aren't ... It would seem not many people are .. Everyone thinking property is the way to go for wealth creation
Surplus capital directed towards speculating on established housing carries with it the opportunity cost of not being invested in far more productive parts of the economy.
Do you disagree with this statement of the bleeding obvious?
If so, are you cool with all surplus capital being used to buy houses built 30 years ago?
Surplus capital spent on a house goes right into the pocket of somebody else who can then invest it.
An existing house transaction consumes capital equal to the transaction costs and the stamp duty only. And even the transaction costs go into the pockets of people who provide services who, presumably, then spend it.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
Money spent speculating values on existing properties is dead money ...
Please explain how the money becomes "dead" without it dying.
Quote:
just that it is directed into speculation of property, rather than at offering capital for new business to stimulate employment...
Read my previous post. The money simply moves from one bank account to another and remains just as available to the bank or account holder.
Quote:
Recent charts are showing increasing amount of new loans are upgraders ... ie Money from property sold is moved straight into a new property of higher value with a new mortgage...
A housing transaction which involves a net increase in loans for the participants results in MORE money in the banking system and increases money available for new business. That's the opposite of your wrong headed assertion.
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