House prices to keep falling for years

[aleckara]

Housebuyers have it quite hard now don't they? Here in Sydney the FHB grant has had a large effect on where I live. Beforehand there were some good blocks on the lower end for a person starting out (ie city fringes). Now if you look at any real estate site the quality of properties has gone for the <$300,000 mark.

The properties just aren't there for people buying under this category unless they are willing to settle for a villa or townhouse on the city fringes.

I used to be a bear with housing, but I have to admit Rudd is doing a good job of stuffing up the first home buyer. I think it would be better if they didn't have grants to prop up housing but maybe subsidies to the builders to build houses. Would give them an incentive to produce enough housing as well rather than just seeing it as a price increase.

 

[gfresh]

This really sounds a bit out there! I remember a few weeks ago someone at a BBQ I was at said exactly the same thing - when I asked them to explain further they didn't even actualyl know what a credit derivative product was or one worked, let alone how this was actually effecting the australian financial system. To me a lot of these theories sound like internet generated urban myths akin with the stuff going around about Y2K that motivated some folks to stock-pile baked beans and shotgun ammo......

No tin foil hat required! The sort of commentary that implies the world is about to end as this huge wall of derivatives is going to come crashing down is not the same as a basic understanding by which the wheels of the credit market have changed over the last few years. And the world "post GFC" in many ways will be quite to the one before. Not in an apocalyptic fashion, but one in which the rules and regulations are much different.

What we saw from the early 2000's is the world's largest commercial investment banks shifting into the role of regular banking institutions. By packaging up the world's most common assets, mortgages (not just subprime, but AAA rated and Australian loans as well) into mortgage backed securities, banks were able to create massive number of these 'assets' on their books in this form. Then using other more exotic instruments such as CDO's, CDS, and other such derivatives *over* the top of these regular MBS, these could also be stored as further assets on the world's largest banks. So we got into the situation, where banks had a mass of assets on their books they could not generate so easily in say the 80's, even 90's using regular lending and borrowing... but only a fraction of these had real tangible backing, that is a borrower paying back that loan over the life of X years, etc.

Now as you know, under the fractional reserve system, banks are able to lend a multiple of what they actually have listed as assets or capital on their books. This also allows them to borrow from other institutions (overseas or otherwise), and with such a supply of credit available, this has allowed them to lend out more freely then ever before.

The way in which the credit markets have operated in this way in the last decade have led to greater risk, and greater leverage than ever before. This in turn has allowed fed back into larger asset prices rises, leading to large house prices rises, as well as many others, including true, real growth also, by stimulating demand in major economies.

In going forward, because the exact form of this model has been seen to fail, banks are going to be (and made to be!) much much more cautious on how they rank these credit derivatives. No longer will banks be able to so easily claim these as rock hard "assets", and as a result the amount they can lend will not be the same as pre-GFC. Because of this, here will be placed a much greater amount of scrutiny placed on each and every loan, here, there, worldwide.

This starts from the bottom up, and will mean that every tom cobly who wants a loan for their great business idea, an extension to their house, equity drawdown, or anything else will not find it as easy as they did just a couple of years ago.

At the moment the world is in recession, and Australia is close to it, so lenders are naturally going to restrict credit based on greater risk profiles presently. Coming out of this, and this is the key, some aspects of this are going to become more permanent.

We are not the US or the UK, and did not get so involved with these fancy derivatives being at the bottom of the chain, however we are very much dependent on the growth of these countries, for trade, general demand for our products, and some forms of credit. Now if the growth in those countries is slower in future years, then of course, we ourselves will be effected also.

Maybe I am failing to illustrate things properly, but many greater minds than me are aware that things will not quite be the same as they have been leading up to the GFC, and some are even working towards making sure such a risky environment cannot so easily happen again. These are not your minor players, these are your major Governments, regulators, IMF, and others *worldwide*.

Anyhow, essay over, there is plenty of reading that can be done on this, without getting into the conspiracy side. It may take a long time, and a lot of trust to be built up before we return to a freer credit environment, forget the mistakes of the past, and do it all again in some slightly different form - which is of course part of the financial cycle.

 

[Beej]

Gfresh - thanks for the detailed explanation - I've removed my tin foil hat now Mostly makes sense to me and I don't think I disagree with the your main points. Certainly it is true that many things will change post GFC, especially with respect to the level of regulation of credit markets overseas and the mechanisms by which credit is going to be made available, packaged etc.

Cheers,

Beej

 

[kincella]

beej, I have no confidence that things will change.....my main source of information, or what sticks in my mind, alan greenspans book, covering period 1987 to 2007....he noted many instances of problems in the finacial systems, and the havoc they caused....that should have been rectified, but raised its head in another similar form, creating another problem.....

once people become used to earning substantial amounts of money....they will continue to find ways and means to afford that lifestyle...
and they will continue to manipulate others into giving them money...

look at our current bailouts...most of it is going to the same people, banks, car manufacturers....that put us into this mess to begin with....looks like they are being rewarded to me...the US, Uk,ire, aus all seem to be doing the same....
I believe there should be new clean banks, started fresh, offer interest to depositors, and lend to finance home loans...simple, no derivatives, no bundling and sellin off the loans etc...like in the old days...when you could trust the banks...
in the meantime..let the high flyers with huge salaries implode..go bust..

 

[robots]

hello,

what a day, the discussion is huge brothers,

i keep getting that tingly feeling through my body when I get home and read the great writings from all on ASF

spot on Kincella, all thats happening is people are losing money, got a draw full of certificates with the same outcome over the past 10yrs, some would have over 10yr old certificates

and some will sucker more money out of people, not much has changed was all happening over the last 100yrs

the good times keep rolling on and on

thankyou
robots

 

[kincella]

robots, no worries bro....as you may well know...less than 10% of the population own 90% of the worlds wealth...leaving the other 90% of the population with less than 10% of the wealth........
its too easy to figure out why?
and then to add to the stats....less than .001% of the population hold multiple investment properties.......
arhhh.... scaredy cats are apparently in control of the net communications on property as an investment atm......there is a gotcha clause, if ever I saw one....
me,. just a humble, stupid IP investor....and contrarian to almost anything I read, hear on the net
cheers

 

[kotim]

The gov't is absolutely crapping itself over the potential unemployment rate becasue they realise the implications. It is as simplas this. In the larger cities and larger regional areas, most people who have bought property since say 2004 need two wages to service the debt and live. Now lets for a moment imagine that when unemployment goes from say 4.5% to say 7.5% and allow for one quarter of all those people sacked to be people who are paying into a mortgage. Remember the current interest rates are not that much lower than what they were 12-18 months ago, so we are set up for an allmighty big nitghmare.

The reduction in interest rates only really helps those people who purchased in the last year or so.

There are going to be tens of thousands of porperties coming onto the market in the next two years simply from the increase in unmeployment when in real terms housing has been at extremely high levels realtive to income.

 

[Julia]

i keep getting that tingly feeling through my body when I get home and read the great writings from all on ASF

Wow!

 

[Beej]

There are going to be tens of thousands of porperties coming onto the market in the next two years simply from the increase in unmeployment when in real terms housing has been at extremely high levels realtive to income.

And there are going to be hundreds of thousands of people who will still have jobs, who also want to buy their own first home, who will all compete for those tens of thousands of places that "might" hit the market over the next 2 years. Government assistance, low interest rates and lower (but stabalised) prices will make those sales the opportunity of a decade for those who keep their jobs, as was the case in 1991/92/93....

Cheers,

Beej

 

[Dowdy]

And there are going to be hundreds of thousands of people who will still have jobs, who also want to buy their own first home, who will all compete for those tens of thousands of places that "might" hit the market over the next 2 years. Government assistance, low interest rates and lower (but stabalised) prices will make those sales the opportunity of a decade for those who keep their jobs, as was the case in 1991/92/93....

Cheers,

Beej

The opportunity of the century will come in a few years - for buyers. If your a seller you should get out now while prices are still inflated from the grants

 

[Pommiegranite]

And there are going to be hundreds of thousands of people who will still have jobs, who also want to buy their own first home, who will all compete for those tens of thousands of places that "might" hit the market over the next 2 years. Government assistance, low interest rates and lower (but stabalised) prices will make those sales the opportunity of a decade for those who keep their jobs, as was the case in 1991/92/93....

Cheers,

Beej

In a perfect world maybe, and that's a big maybe. However we live a world where market sentiment is the biggest factor i.e greed and fear. We've had the greed. We all know what comes next.

 

[kotim]

Beej, I am not suggesting 50% falls in house prices in major centres, what I see though is larger falls to come and then a long time dilly dallying about.

We have in real terms still all time high house prices, the absolute lowest interest rates we have seen in many a decade.

We have unemployment almost doubling over thext 18 months and we have the government giving first home buyers big dollars to get in the market. Mostly those who have the least ability to afford changes to the upside in interest rates etc.

Human nature to try and live to our means to the full or beyond, meaning that if people can borrow the max at say 4%, the vast majority of people will.

All valuations are based on perceptions looking into the future, not on what something or someone knows is the real value.

The reason so few are financially super succesful in life is becasue it is endemic in people that we fear the downside more than we enjoy the upside, that is what causes people to stay ont he sidelines etc.

We have set ourselves up for an almighty property price crunch. All time low interest rates, huge increase in unemployment and still historically extremely high house prices relative to history.

The world will not end, but there will be many places that experience 50% falls in property prices as there will be many areas that only see 5-10% falls.

 

[CamKawa]

Good to see the unemployment rate increase today. A bit hard to repay a mortgage or pay your rent without a job I would have thought.

Source: http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6202.0Main+Features1Jan%202009?OpenDocument

 

[Beej]

Good to see the unemployment rate increase today. A bit hard to repay a mortgage or pay your rent without a job I would have thought.

Source: http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6202.0Main+Features1Jan%202009?OpenDocument

A) Are you seriously "happy" to see rising unemployment?

B) There was actually a "surprise" increase in full time jobs, with losses coming from part time, so actually more income around than previous month (if we want to be pedantic about it).

C) The influence of rising unemployment on house prices has been discussed ad nauseum - we all know unemployment in AU is going to increase over the next year. The only thing we don't know for sure is by how much - but even the government forecasts an increase to 7% by mid 2010.

D) To summarise the arguments - the bears are "now" saying that unemployment will be the trigger for the "great house price crash", as all the other triggers have failed to deliver the massive falls predicted (eg, high interest rates - gone, credit rationing/systemic banking crisis in AU - hasn't happened, etc). While the "bulls" are saying that the impact of rising unemployment on house prices is being over-played based on past history (early 80s, 91/92 etc when unemployment was 10%+) where we had both rising/high unemployment and rising house prices at the same time.

Cheers,

Beej

 

[Lancelot]

http://business.smh.com.au/business/surprise-jobs-jump-20090212-85cg.html

Surprise jobs jump
Chris Zappone
February 12, 2009 - 3:19PM
Page 1 of 2 Single page view

Update Employers took on an additional 33,700 full-time employees in January, the most in six months, spurring hopes the economy may yet avoid a recession.


All up, the economy added 1200 jobs last month as firms cut part-time jobs. Even so, the result was much better than the overall 18,000 job losses economists had tipped.

''Employment is more doggedly resilient than expected,'' said HSBC chief economist John Edwards in a statement.

snipped

on the release of the jobs data by the Australian Bureau of Statistics,

 

[BillyIdol]

Not according to one FP that I saw present the other day....he asked if people would like to sell their house for 60c in the dollar (40% drop) and not many takers.

I felt like explaining to him that if something is unaffordable (like the recent NATSEM report showed), how on earth can people buy it ? As much as I'd like to buy something (e.g. house in Toorak), I can't, because I don't have (and can't borrow) enough money, simple as that !

But, at the risk of the crowd becoming hostile, I didn't bother.

 

[Lancelot]

Maybe you need to get a dose of reality and look in places you can afford.

Toorak is obviously not the place.

I cant afford a Maybach, but it doesn't stop me buying a Commodore.

 

[gfresh]

Unemployment was above 7% for *all* of the 90's... how we soon forget.

As long as we don't see GDP dive negative by several percent (UK, US), Australia will get through.

 

[Mofra]

Good to see the unemployment rate increase today.

Bet the bushfires had you in fits of laughter then

 

[sinner]

Unemployment was above 7% for *all* of the 90's... how we soon forget.

As long as we don't see GDP dive negative by several percent (UK, US), Australia will get through.

This has already begun though.

From CIA World factbook
https://www.cia.gov/library/publications/the-world-factbook/print/as.html
GDP - composition by sector:
agriculture: 2.5%
industry: 26.4%
services: 71.1% (2008 est.)

Manufacturing makes up just under half of "industry" at 10% of GDP, but importantly also 10% of employment.

http://www.abc.net.au/news/stories/2009/02/02/2479742.htm?section=justin

So manufacturing is still contracting. Anyone think we will see expansion soon? No? Then this will impact GDP negatively.

What about the rest of the economy? I saw on ABC news a few nights ago, Alan Kohler with his wonderful graph of internet job ads inverted and shifted seven months in advance, plotted against unemployment. The correlation was staggering. A decline in internet job ads was followed by a proportional increase in unemployment approx 7 months later.

Here is the article that inspired the chart

http://www.businessspectator.com.au/bs.nsf/Article/Job-ads-fall-for-9th-month-in-a-row-in-Jan-$pd20090209-P4365?OpenDocument

I am not looking forward to the corresponding spike in unemployment :/