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RBA enormously worried about Australian house price surge, but won't admit it; House prices are popping, Sydney is going berserk
Topic Started: 26 Sep 2013, 05:04 PM (8,092 Views)
barns
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Elastic
26 Sep 2013, 11:45 PM
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.
Houses certainly can fall below replacement cost in the short term, eg many parts of the USA. They just can't stay below replacement costs for long (I guess, unless you had an area of declining population).
“You Keep Using That Word, I Do Not Think It Means What You Think It Means” - Inigo Montoya
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miw
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Massive
26 Sep 2013, 11:46 PM
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
Yeah. It's turtles all the way down.....
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
AREPS™
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b_b
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Elastic
26 Sep 2013, 11:45 PM
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.
Investors look for the best value proposition. If median house price in Sydney is 650k and the new estate houses in inferior locations are 600k, then investors will probably buy existing rather than new stock. That is what is happening in Sydney and will continue to happen until the new builds offer better value. In other words, existing house prices are going higher and investors are acting rationally.

I'm not sure there is a natural limit for debt to GDP. But I think there is a natural limit in credit worthy borrowers. High household debt levels MAY indicate deteriorating credit standards and lack of credible borrowers. At some point bad loans gum up the banking system.
(S – I) + (T - G) + (M - X) = 0
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Veritas
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miw
26 Sep 2013, 11:48 PM
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.
or buy another house with it.

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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b_b
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Veritas
26 Sep 2013, 11:56 PM
or buy another house with it.
Then the new seller has the cash. We can keep this going for days if you want.
(S – I) + (T - G) + (M - X) = 0
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miw
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b_b
26 Sep 2013, 11:55 PM
I'm not sure there is a natural limit for debt to GDP. But I think there is a natural limit in credit worthy borrowers. High household debt levels MAY indicate deteriorating credit standards and lack of credible borrowers. At some point bad loans gum up the banking system.
Given that nett rent on a $500k house doesn't pay the interest on $500k, I think it is very safe to say that there is a hard limit on the abilty of borrowers to service the debt and hence on creditworthy borrowers.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
AREPS™
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Sydneyite
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Veritas
26 Sep 2013, 11:56 PM
or buy another house with it.
From whom? And then what do they do with the money??? And so on.....

Veritas, each transaction is essentially near-zero-sum - an asset swap, your cash for my asset (less some transaction costs). No money / capital destroyed, or "tied up" in the process. In most cases, money is created via an expansion of the monetary base through a new loan - and this is all fine, as long as the vast majority of loans are repaid and don't default, as IS the case in Australia.
Edited by Sydneyite, 27 Sep 2013, 12:01 AM.
For Aussie property bears, "denial", is not just a long river in North Africa.....
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miw
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Veritas
26 Sep 2013, 11:56 PM
or buy another house with it.
Yep. It's turtles all the way down.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
AREPS™
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Strindberg
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Veritas
26 Sep 2013, 11:56 PM
or buy another house with it.
...and the "money" remains just as available to the bank and the new owner of that money as it was to the bank and the previous owner of the money.

Maybe you think the money actually gets buried in the concrete base and walls of the house. It doesn't, it stays available in the banking system and even increases if the transaction involves a net loan increase.
Housing costs to Income broadly unchanged since 1994 - re-ratified here
The People of Australia have the highest median wealth in the World
2002-2012 10 year house price growth the SLOWEST since 1952-1962
"There are two kinds of people in this world: ones that fiddle around wondering whether a thing's right or wrong and guys like us." (Hugo to Gagin in Ride the Pink Horse)
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Veritas
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b_b
26 Sep 2013, 11:58 PM
Then the new seller has the cash. We can keep this going for days if you want.
I get your point.

The logical conclusion of your argument is, however, that is doesnt matter as long as the banks keep writing the loans.

Which is what happens before property crashes.

The banks keep writing those loans, until one day, because the loans got so big, as something nasty happens, people stop paying them back.

Its frankly absurd that so many of you dont realise this.
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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