House prices to keep falling for years

[satanoperca]

Nomore4S,

I agree, that taking on a loan as you have nothing to loose is irresponsible, but I can see the FHB situation, one that I am not in as I have assets to loose.

It is this notion, that some FHB believe that they have nothing to loose by going into debt that is off concern and it is possible this point which people as seeing a comparision between the US subprime and the FHBG. If the FHBG required an additional 10% saved deposit then at least the FHB would have some of their own money invested and would look more careful at the decision to go into debt.

So I do see a whole lot of problems occurring in the future with FHB as such :
1) Interest stay low because the economy is shot, unemployment raises, FHB loose their job and cannot make repayments. As the economy is shot, CG on housing is unlikely to have increased, FHB in negative equity.
2) Economy improves, interest rates go up, FHB cannot make repayments. FHB market has dropped in value, negative equity.
3) Economy improves, interest rates go up, unemployment low, housing market increases, everything is Ok.

It will be interesting to see how it pans out in the future.

Cheers

 

[gfresh]

I think there is maybe a lot of a backstop with 20-something buyers.. "if it all falls in a heap, we'll just move back with Mum & Dad.." The bail out mentality once again. And the parents are pretty much supportive of this, after all they were the ones letting them stay at home until 25 years old.

If any of you watched "The Nest" on SBS last year, it was amazing how little independence some people have even at 25 years of age!

 

[kincella]

the boat broke loose from its moorings...a different sound to .....
you might lose your money

the spelling is being either copied or tossed around a bit too much for me
??

 

[kincella]

gfresh I watched that show....the daughter of one...demanding everything..doing nothing....I think she even stated it would all be hers one day...so may as well take it now...including have the car at her disposal
even when the father needed it to take the wife to work and home...

stats out recently show them staying home, or sharing with others until 34...
and the mums and dads excuses...the kids could stay there so as to save up for the future home etc...yet none of the kids did save....but some of them actually did not want to go home later...they liked their new found committments in the shared houses...

if a lot of those parents go to tree/sea change places...it will cause the kids to rethink their choices...like mums place will not be an option due to employment or lack of it in those places

 

[aleckara]

I think there is maybe a lot of a backstop with 20-something buyers.. "if it all falls in a heap, we'll just move back with Mum & Dad.." The bail out mentality once again. And the parents are pretty much supportive of this, after all they were the ones letting them stay at home until 25 years old.

If any of you watched "The Nest" on SBS last year, it was amazing how little independence some people have even at 25 years of age!

Will play a little devils advocate here...

There are a lot of young people out there like this anyway. A lot of them don't want to compromise on lifestyle simply to get a property. I'm not talking about the lifestyle of spending money, and all that. Young people get used to the area they grew up in, the connections made in these areas. They don't see anywhere else as an option (unless travelling of course) because to them there is nothing out there for them - they might as well give up living completely. In Sydney this is particuarly true for the young people living close to the city - most of them would rather travel for the rest of their lives than move to the affordable areas where there are no contacts, no places to 'have fun', and whatever.

I'm not saying it is right - just saying this is how it is for a lot of them. Why have independence when it means you will have less freedom than before? To them most probably doing that would reduce their freedom and their perceived independence, particuarly with the way housing prices are nowdays.

Also youth unemployment is quite high atm. A lot of them wouldn't be moving out solely for the reason that they may not perceive their jobs to be as stable.

 

[Taltan]

If your young it also does not take a genius to work out that one day either inner city prices will drop or alternatviely you will get a good inheritence. One of the two gotta happen

 

[ryang57]

With today's news from Residex, that there have been widespread falls across Australia, I believe this thread is now appropriate. I therefore request that the 'House prices to keep rising for years' thread be closed, due to the fallacy of it's title.

Questions:

• How long will the falls continue?
• What is causing the falls
• What will arrest the falls?
• Due to Australia's real estate boom being even greater than other Western economies, can we assume that the bust will be even greater?
• Are these falls evidence that decoupling theory can be put to bed?

the real answers are as follows:

-until 2011-12 or so
- deflation (end of the credit cycle)
- the police? arrest? huh? What will stop the falls? collective global confidence to finally catch the falling knife without getting cut
- hmmm...there are other factors... prolly similar bust as uk/us
- decoupling of what? NOTHING is decoupled when it comes to macroeconomical inflation/deflation of a global magnitude

Ultimately, only morons invest in houses. And the only reason they go up is because there seems to be an unlimited supply of morons. It's paradoxical. But this wave of reality as everything returns to reasonable value, will have the majority of naive australians dumbfounded why they now have a $300,000 loan and a $150,000 house hahaha.

Technically, there is no good reason to really invest in houses, unless you could predict a major housing shortage in the near future. But even then, that is microeconomical, and macroeconomics always trump it. Considering the costs involved, all they are really doing is preventing money from being debased if it were held in your hand.

 

[singlefished]

Ultimately, only morons invest in houses. And the only reason they go up is because there seems to be an unlimited supply of morons. It's paradoxical. But this wave of reality as everything returns to reasonable value, will have the majority of naive australians dumbfounded why they now have a $300,000 loan and a $150,000 house hahaha.

Technically, there is no good reason to really invest in houses, unless you could predict a major housing shortage in the near future. But even then, that is microeconomical, and macroeconomics always trump it. Considering the costs involved, all they are really doing is preventing money from being debased if it were held in your hand.

The reality is however that you have to either pay rent to these morons or join the club and buy a house, like it or not. Unless however you're not prepared to cut the apron strings and are quite happy to stay at home with mummy for another few years, hoping for the 50% falls you so niavely quote....

 

[pilots]

the real answers are as follows:

-until 2011-12 or so
- deflation (end of the credit cycle)
- the police? arrest? huh? What will stop the falls? collective global confidence to finally catch the falling knife without getting cut
- hmmm...there are other factors... prolly similar bust as uk/us
- decoupling of what? NOTHING is decoupled when it comes to macroeconomical inflation/deflation of a global magnitude

Ultimately, only morons invest in houses. And the only reason they go up is because there seems to be an unlimited supply of morons. It's paradoxical. But this wave of reality as everything returns to reasonable value, will have the majority of naive australians dumbfounded why they now have a $300,000 loan and a $150,000 house hahaha.

Technically, there is no good reason to really invest in houses, unless you could predict a major housing shortage in the near future. But even then, that is microeconomical, and macroeconomics always trump it. Considering the costs involved, all they are really doing is preventing money from being debased if it were held in your hand.

Ryang57, we are some of your morons who invested in houses ten years ago, to day they have come back about 300k, but we are still ahead over 2.5Mil, add to this the rents we are getting and I can tell you we are VERY HAPPY MORONS.

 

[michael_t_f]

I'm also a moron that bought a house in 2000 then sold in 2005, I now have a managed business which pays for my lifestyle and plenty of cash in the bank, I'm also just a moronic sparky that doesn't touch his weekly wage ever, has zero debt and is 26.

 

[darnsmall]

the real answers are as follows:

-until 2011-12 or so
- deflation (end of the credit cycle)
- the police? arrest? huh? What will stop the falls? collective global confidence to finally catch the falling knife without getting cut
- hmmm...there are other factors... prolly similar bust as uk/us
- decoupling of what? NOTHING is decoupled when it comes to macroeconomical inflation/deflation of a global magnitude

Ultimately, only morons invest in houses. And the only reason they go up is because there seems to be an unlimited supply of morons. It's paradoxical. But this wave of reality as everything returns to reasonable value, will have the majority of naive australians dumbfounded why they now have a $300,000 loan and a $150,000 house hahaha.

Technically, there is no good reason to really invest in houses, unless you could predict a major housing shortage in the near future. But even then, that is microeconomical, and macroeconomics always trump it. Considering the costs involved, all they are really doing is preventing money from being debased if it were held in your hand.

Would it be fare to say the morons you're referring to are the FHB's getting into the market now; just before they lose their jobs?
I know a few seemingly smart people, that are getting into the housing market now. I was a little dumbfounded, but I guess performing at one particular area of education/work/life doesn't mean you don't have a weakness in other areas eg, investment

 

[investorpaul]

Would it be fare to say the morons you're referring to are the FHB's getting into the market now; just before they lose their jobs?
I know a few seemingly smart people, that are getting into the housing market now. I was a little dumbfounded, but I guess performing at one particular area of education/work/life doesn't mean you don't have a weakness in other areas eg, investment

I still believe the majority of people are ignorant to the potential for large wipe spread job losses. They still hold the view "it wont happen to me"

Every estimate now is pointing to job losses of 7.5% to 10%, thats hundreds of thousands unemployed. A fair portion of which would be first home buyers. I hope Mr Rudd feels like **** when these people lose their house, even though they thought it was a good time to buy because of Rudds handouts

 

[Temjin]

Just in case some of you missed this latest newsletter from Monday Morning.

Fact, Australian banking standards are better than overseas.

Fact, Australian borrowers are better placed to cope with the recession than those overseas.

Fact, Australian house prices will hold up better than overseas houses.

Or so we are told. Of course it's mainly the vested interests that tell us. But you know what, the numbers still don't stack up. In fact, all the statistics and 'facts' provided by the vested interests can easily be used to argue the case for a housing crash.

Now, we don't know for certain when a crash will happen, but the way the pump is being primed at the moment, it won't take long. And chances are we could even see a false rally in house prices in coming months as all the tax breaks and subsidies filter through.

But after that...

That's when it could get messy. You see, I still can't get past the 'bullish' statements on property without thinking, "surely that a top-of-the-market signal."

Let's take a couple of recent comments:

"We continue to believe that the market here will hold up better than overseas. There are a number of reasons why this is likely to be so, but perhaps the most important is that we did not have the same deterioration in lending standards that occurred elsewhere."

That came from Reserve Bank of Australia deputy governor, Ric Battelino. I'll address his comments on lending standards in a moment. But he also had this to say...

"In the period ahead, there will be forces pulling the arrears rate in opposite directions. On the one hand, as unemployment rises, more households will have difficulty continuing to service their housing loans. On the other hand, the very large reduction in interest rates has greatly reduced the debt servicing burden of households. On an average-sized mortgage, loan repayments are now $7,000 a year less than they were six months ago. This is a very large reduction, equal to about 8 per cent of average household income."

In other words his argument is "Recession, what recession?" Forget the concept of a perfect storm conspiring to make thing worse, Battelino argues that the recession will be a Perfect Summer or a Perfect Spring. Everything will be fine. Don't worry about it.

We can only think that Mr. Battelino is unfamiliar with recessions. Or that he's got the blinkers on. It is true that interest rates have come down to such as extent that the average borrower is saving about $500 per month on mortgage repayments.

But can it really be true that if someone loses their job they will be fine? Of course not. If your income drops from $60,000 per year to zero, then having a saving of $500 per month on your mortgage isn't going to be much comfort if you can't afford the other $1,500.

Also Mr. Battelino shouldn't forget that by this time next year, that half the saving from the interest rate cuts will have been eaten away by inflation. So even if interest rates stay low, the cost of other goods and services will have risen.

And think about this as well. Where is most of the boost in new home buying coming from? Most of it is from first home-buyers. They are the ones likely to have the least equity and least savings. What would happen to a first home buyer if they lose their job?

According to JPMorgan, the unemployment rate will hit 9% later this year. When companies start to cut staff, who will they chop first? Chances are the company will make the newer staff member redundant first, as the cost of terminating that employee will likely be less.

So if a first homebuyer loses their job, they are less likely to receive a significant severance package compared to those that have worked longer. Of course, that's all hypothetical. But even the most ardent property bull would probably agree it's not as rosy as saying "interest rates down, unemployment up, everything will be fine."

And what about Mr. Battelino's comments on the lending standards of Australian banks. It's a comment that we have seen written everywhere. In fact it is almost a cliché. If you say it often enough it must be true.

Again, the numbers don't stack up. If we quickly look at the commercial property sector, comments from Gail Kelly at Westpac and Mike Smith at ANZ clearly indicate the banks have over-exposed themselves to marginal projects. If they truly were as conservative as is claimed they should have little problem with taking market share by financing new projects now.

The reason they aren't, is because they are at the limit (if not over) of what they can lend.

But what about the residential property sector, and the claims of Australian banking superiority here.

Again, it is a fallacy.

Back in February, the Commonwealth Bank introduced a policy that required borrowers to provide an additional 3% on top of any government subsidy. Notice the emphasis? In other words, prior to February borrowers didn't need this. They could just get the cash from the government and that was all that was required.

Is a no-deposit mortgage Mr. Battelino's idea of a better level of lending standards?

At the same time the National Australia Bank announced it would cut its loan-to-valuation ration from 100% to 95%. Again, how is that a higher level of lending standards? The only reason a bank would lend 100% of the value of a property is because they believe the value would rise.

And why wouldn't they, that's what everyone has been told. The banks obviously started to believe their own spin.

But wait, it gets even better than that. Because of Australia's superior lending standards it means you can go to the Westpac owned RAMS Home Loans and take out a loan for 110% of the full purchase price.

Now that probably isn't news to you. 'Lo doc', 'no doc' and 'no deposit' home loans have been around for years. Except that the top brass at the RBA and the banks and the mainstream media appear to have forgotten that.

Because they have told themselves so many times that our banking system is so much better run than anywhere else.

Even the property spruikers are using the 'strength' of the Australian banking system as part of their sales pitch. In today's Australian Financial Review (AFR), chief executive of RP Data-Rismark Christopher Joyce says:

"The resilience of Australia's housing market has been underpinned by our robust banking system. The improvement [in house sales] highlights the absurdity of the sensationalist predictions by one or two economists in 2008 that prices would fall 30 to 40 per cent."

The paper also reports that RP Data-Rismark national research director, Tim Lawless claims the better sales figures represented a "return to stability" and that "In essence, it's static and we will see that for the next couple of quarters."

What we are seeing now in the property market is a 'suckers rally.' Just like the ones we've seen in the stock market since early 2008.

Despite what the policy makers claim about the banks being robust and lending standards being high, the reality paints a different picture. And right now the artificially low interest rates and government subsidies are just going to make things worse.

If you're after a property bargain, you're probably better off waiting until next year.

Of course, I'm not expecting this would be viewed upon favourably by those who have vested interests with real estate properties.

 

[Beej]

Just in case some of you missed this latest newsletter from Monday Morning.

Of course, I'm not expecting this would be viewed upon favourably by those who have vested interests with real estate properties.

Can you post the author/source of that article please?

PS: Many many holes in the logic there. The first and biggest is the author forgets about unemployment benefits and other social welfare payments that families effected by unemployment would receive, plus also makes no attempt to estimate how long many households could hold out for based on savings, forward payments on the mortgage against the contracted schedule etc etc. Most people don't remain unemployed forever.

Bottom line, I'm not saying that rising unemployment is not a factor that has the potential to place downwards pressure on house prices, but the potential impact is being over-estimated in articles like yours above. You would need a significant number of very forced sales across all area's in a city/country to see any dramatic downwards shift in median prices. Additionally a large amount of the newly and long term unemployed tend to be new entrants to the work-force unable to find jobs, plus lower skilled workers who have difficult finding new jobs after a lay-off. Home ownership amongst these groups would generally be minimal.

This perhaps explains why, As Rory Robinson from Macquarie Bank has pointed out in several articles, during past recessions house prices have actually continued to rise on many occasions in line with rising unemployment rate, so I think this issue is not as black and white as many would hope.

I also note that last year and the year before the housing bears arguments were all pinned on a great credit contraction forcing a wave of defaults and forced sales ala US sub-prime. Now that has failed to eventuate here, all the bearish outlooks seem to be pinned on rising unemployment triggering a wave of forced sales, something that in past recessions at least has actually not occurred!

Cheers,

Beej

 

[elmundotrade]

Hi Investorpaul.

Sorry for the question out of context or subject..lol
But I was wondering......Are you still day trading with Ig market cfd's..?
I noticed you were doing great with your results, and a while ago I asked you something in your blog but I never got any reply.... and all of a sudden you stop with the results. Just curious as to whether you will continue to day trade with Ig or not.?

Have a great day.

Paul.

 

[Knobby22]

I'm inclined to agree with Beej.
For house prices to fall a large amount, we would need unemployment at 12%, 8% just won't do it. Then Steve Keen's predictions may be correct.

The big question is how deep and long will this recession be? Many are saying that in Australia it will be over this year which doesn't sound too disastrous.

 

[Temjin]

Can you post the author/source of that article please?

I was expecting this from you, but sure Beej.

http://www.moneymorning.com.au/

Sign up for it because it does not hurt to learn something OUTSIDE the topic of real estate properties too.

PS: Many many holes in the logic there. The first and biggest is the author forgets about unemployment benefits and other social welfare payments that families effected by unemployment would receive, plus also makes no attempt to estimate how long many households could hold out for based on savings, forward payments on the mortgage against the contracted schedule etc etc. Most people don't remain unemployed forever.

Isn't all that hypothetical too? There is no prove to show that these unemployment benefits and other social welfare payments, etc, would be more than enough to cover for the lost in income and extreme low saving that would put pressures on house prices. You can speculate all you want, and we will only know the result in the next few years. And no, most people don't remain unemployed forever, but a lot of them WOULD remain so enough time to HAVE an effect on the economy in general. (i.e. reduced spending, reduced investment, increased government benefits payout, etc)

And if you feel the article is full of logic errors, go ahead and send him a reply on them. I would like to see his replies too.

But again, and as always, I'm not expected this article would change any of your opinions on this sensitive topic.

 

[satanoperca]

Bottom line, I'm not saying that rising unemployment is not a factor that has the potential to place downwards pressure on house prices, but the potential impact is being over-estimated in articles like yours above. You would need a significant number of very forced sales across all area's in a city/country to see any dramatic downwards shift in median prices. Beej

Just out of interest what would be a significant number of forced sales. Say 5% of the market. Anyone willing to guess what that would correlate to reduced prices. I would suggest that it would not take a great deal of forced sales to start seeing declines in property prices. It is also interesting to note that defaults on mortgages are on the increase even though IR are at an all time low and unemployment is just starting to increase

This perhaps explains why, As Rory Robinson from Macquarie Bank has pointed out in several articles, during past recessions house prices have actually continued to rise on many occasions in line with rising unemployment rate, so I think this issue is not as black and white as many would hope.
Beej

How much kudos do you give to Roy of Macquarie Bank when it share price has dropped more than 40%. If he was so good at predicting the future then I would expect their share price to be a little better – sorry off the topic. The relation b/w unemployment and mortgage rates defaults of the last recession to this one is hard to compare as household debt in relation to GDP has significantly increased since then. This was shown when interest rates went to 9% last year and people started hurting because they we over indebted, not like the last recession when IR were in the high teens.

I also note that last year and the year before the housing bears arguments were all pinned on a great credit contraction forcing a wave of defaults and forced sales ala US sub-prime. Now that has failed to eventuate here, all the bearish outlooks seem to be pinned on rising unemployment triggering a wave of forced sales, something that in past recessions at least has actually not occurred!
Beej

Don’t jump the gate there is still a long way to the finish line. Again, trying to draw comparison b/w this recession and the last is like trying to compare US & Oz, not to simple.

 

[robots]

Robots,

Picking the few suburbs (those will high FHB - government assisted) does not strengthen your arguement that house prices are not falling.

I reviewed the Sunday Sun list of property prices per suburb. Interesting some suburbs did Ok and some did not so well, the last qtr being more telling to the slide into recession that is now facing us.

Even our beloved PM sees we cannot swim against the tide any more. Given this statement, is property the only thing that is going against the current trend for assets - I hardly think so.

Like Steven Keens bet, how about we have a fun wavier to keep everything in good spirits. I will bet you that house and apartment prices in Victoria based on median will be negative after the 2nd qty results are released. This would be deemed a fall, how much, as long as it is negative. If I loose I will buy you a case of your favourite beer and vise visa. To finalise the deal, we meet in a pub in sunny St Kilda (a great place to live i agree), have a few beers and a meal and leave with our bounty.
On the issue of renter over mortgage, please factor in a value for if property prices fall, even 5%. I would rather be the renter - times are a changing.

Cheers

Benjamin

hello,

one up bro, looking forward to those ruskies and parma bro

we can debate all arvo and still walk out as friends man

thankyou
robots

 

[GumbyLearner]

hello,

one up bro, looking forward to those ruskies and parma bro

we can debate all arvo and still walk out as friends man

thankyou
robots

Lay another brick