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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 (8,091 Views)
b_b
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miw
27 Sep 2013, 12:00 AM
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.
Yes - there no doubt there is a limit. But the ratio varies between countries because wage share varies between countries. Australia can sustain a higher ratio compared to the USA. I have always thought the limit will be when cash rates get to zero. Even then it does not follow house prices will crash it they are still at replacement cost, although it may mean higher unemployment.
Veritas
27 Sep 2013, 12:07 AM
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.
That is not true. Appropriate government deficits adds net savings to the household sector and allows them to deleverage without impacting the economy.. After a while balance sheets are repaired and credit growth resumes,

Pretty much what has happened in Australia since 2009.
Edited by b_b, 27 Sep 2013, 12:12 AM.
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Elastic
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It appears that there is a direct link between household debt/GDP and land values/GDP.

So how much higher can this ratio go. Obviously, lower IRs can help push it slightly higher but if we start to see other factors damaging the economy then it's probably not prices to the moon.
Although, I hear that Black Panther is working in his lab, transmutating live babies into housing debt to achieve this outcome.

Edited by Elastic, 27 Sep 2013, 12:17 AM.
Only a rat can win a rat race.

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Massive
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Strindberg
27 Sep 2013, 12:05 AM
...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.
And then the next investor steps in line and where do they want to invest ?

Property

Not disputing availability of credit ...

Its where it keeps going at an increasing rate that's the issue... The current pattern is not sustainable

Edited by Massive, 27 Sep 2013, 12:31 AM.
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b_b
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Elastic
27 Sep 2013, 12:16 AM
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It appears that there is a direct link between household debt/GDP and land values/GDP.

So how much higher can this ratio go. Obviously, lower IRs can help push it slightly higher but if we start to see other factors damaging the economy then it's probably not prices to the moon.
Although, I hear that Black Panther is working in his lab, transmutating live babies into housing debt to achieve this outcome.

There is a relationship between land prices and household debt. However the relationship is cost-pull rather than demand-push.
Massive
27 Sep 2013, 12:18 AM
And then the next investor steps in line and where do they want to invest ?

Property

Not disputing availability of credit ...

Its where it keeps going at an increasing rate that's the issue... The current pattern is not sustainable
It is sustainable. Read my post at #61 to veritas.
Edited by b_b, 27 Sep 2013, 12:22 AM.
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Elastic
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I find it interesting that rents have levelled off in most cities in the past year. I think this is partly due to increasing unemployment and the large rent increases that have occurred in the previous couple of years. With investors now appearing to be chasing capital gains and sending prices higher I don't think rental yields have much capacity to improve anytime soon.
Only a rat can win a rat race.

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b_b
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Elastic
27 Sep 2013, 12:24 AM
I find it interesting that rents have levelled off in most cities in the past year. I think this is partly due to increasing unemployment and the large rent increases that have occurred in the previous couple of years. With investors now appearing to be chasing capital gains and sending prices higher I don't think rental yields have much capacity to improve anytime soon.
We will see. The rental yield scenario can be solved with higher rents, lower prices, or lower interest rates.

Having said that, I think you need to look at rents over a longer timeframe to understand the trend.
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Massive
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b_b
27 Sep 2013, 12:19 AM
There is a relationship between land prices and household debt. However the relationship is cost-pull rather than demand-push.

It is sustainable. Read my post at #61 to veritas.
Not if everyone ties up their wealth speculating in property.

GDP will stall without sufficient investment into other areas of economy .. Can't all be geared 1 way .. Why does rba want dollar down ? To make our industries competetive ebough that people are willing to invest ..can't be 1 trick pony

We had mining driving growth but that's slowing ... New investment required for continued growth .... And right now its not proving easy to balance ... Its all lopsided in existing property
Edited by Massive, 27 Sep 2013, 12:41 AM.
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Elastic
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b_b
27 Sep 2013, 12:29 AM
We will see. The rental yield scenario can be solved with higher rents, lower prices, or lower interest rates.

Having said that, I think you need to look at rents over a longer timeframe to understand the trend.
It seems that investors are displacing FHBs to some extent.
Due to the difficulty of saving a deposit and paying a mortgage many are choosing to rent a house purchased by an investor.
The IP mortgage is then paid by a combination of rent, investor contribution and NG subsidy.
It is somewhat sustainable but a renter can be very flexible in case of job loss or rising rents.
Only a rat can win a rat race.

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b_b
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Massive
27 Sep 2013, 12:35 AM
Not if everyone ties up their wealth speculating in property.

GDP will stall without sufficient investment into other areas of economy .. Can't all be geared 1 way

We had mining driving growth but that's slowing ... New investment required for continued growth
Yes - it will be replaced by housing construction. Unlike mining capex, housing construction has an insane multiplier effect. So it does not need to be a dollar for dollar replacement.
Elastic
27 Sep 2013, 12:35 AM
It seems that investors are displacing FHBs to some extent.
Due to the difficulty of saving a deposit and paying a mortgage many are choosing to rent a house purchased by an investor.
The IP mortgage is then paid by a combination of rent, investor contribution and NG subsidy.
It is somewhat sustainable but a renter can be very flexible in case of job loss or rising rents.
I think the renter will always pay rising rents. Along with air and food, shelter is a high priority item. As rents rise, Other industries will suffer first (car, travel, retail, etc).
Edited by b_b, 27 Sep 2013, 12:42 AM.
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Elastic
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b_b
27 Sep 2013, 12:39 AM
Yes - it will be replaced by housing construction. Unlike mining capex, housing construction has an insane multiplier effect. So it does not need to be a dollar for dollar replacement.
If you look at the figures such as vacancy rates, population growth and housing construction I don't really see much likelihhod of housing construction increasing significantly. There is no strong evidence of a housing shortage. The current build rate appears to be about right to me. With unemployment increasing, household density will also increase thus lowering the need for higher housing construction.
The contribution of housing construction to GDP is also not as significant as you might think and it dwarfs in comparison to the forecast drop in mining capex.

Do you think that retail may already be suffering as a result of high rents. Young people with high disposable incomes have to cut back as rents increase.
Edited by Elastic, 27 Sep 2013, 12:47 AM.
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