House prices to stagnate for 'years'

[wayneL]

Have a read of this article folks:

http://www.ft.com/cms/s/92f7ee6a-a765-11db-83e4-0000779e2340.html

Whilst not directly about house prices, I believe current valuations are symptomatic of the scenario outlined, viz, the derivatives monster.

Check it out:

The unease bubbling in today's brave new financial world

By Gillian Tett

Published: January 19 2007 02:00 | Last updated: January 19 2007 02:00

Last week I received an e-mail that made chilling reading. The author claimed to be a senior banker with strong feelings about a column I wrote last week, suggesting that the explosion in structured finance could be exacerbating the current exuberance of the credit markets, by creating additional leverage.

"Hi Gillian," the message went. "I have been working in the leveraged credit and distressed debt sector for 20 years . . . and I have never seen anything quite like what is currently going on. Market participants have lost all memory of what risk is and are behaving as if the so-called wall of liquidity will last indefinitely and that volatility is a thing of the past.

"I don't think there has ever been a time in history when such a large proportion of the riskiest credit assets have been owned by such financially weak institutions . . . with very limited capacity to withstand adverse credit events and market downturns.

"I am not sure what is worse, talking to market players who generally believe that 'this time it's different', or to more seasoned players who . . . privately acknowledge that there is a bubble waiting to burst but . . . hope problems will not arise until after the next bonus round."

He then relates the case of a typical hedge fund, two times levered. That looks modest until you realise it is partly backed by fund of funds' money (which is three times levered) and investing in deeply subordinated tranches of collateralised debt obligations, which are nine times levered. "Thus every €1m of CDO bonds [acquired] is effectively supported by less than €20,000 of end investors' capital - a 2% price decline in the CDO paper wipes out the capital supporting it.

"The degree of leverage at work . . . is quite frankly frightening," he concludes. "Very few hedge funds I talk to have got a prayer in the next downturn. Even more worryingly, most of them don't even expect one."

Since this message arrived via an anonymous e-mail account, it might be a prank. But I doubt it. For, while I would not normally write an article about responses to an article (it is the journalist's equivalent of creating derivatives of derivatives) I am breaking this rule, since I have recently had numerous e-mails echoing the above points. And most of these come from named individuals, albeit ones who need to stay anonymous, since they work for institutions reaping profits from modern finance.

There is, for example, a credit analyst at a bulge-bracket bank who worries that rating agencies are stoking up the structured credit boom, with dangerously little oversight. "[If you] take away the three anointed interpreters of 'investment grade', that market folds up shop. I wonder if your readers understand that . . . and the non-trivial conflict of interest that these agencies sit on top of as publicly listed, for-profit companies?"

Then there is the (senior) asset manager who thinks leverage is proliferating because investors believe risk has been dispersed so well there will never be a crisis, though this proposition remains far from proven. "I have been involved in [these] markets since the early days," he writes. "[But] I wonder if those who are newer to the game truly understand the impact of a down cycle?"

Another Wall Street banker fears that leverage is proliferating so fast, via new instruments, that it leaves policy officials powerless. "I hope that rational investors and asset prices cool off instead of collapse, like they did in Japan in the 1990s," he writes. "But if they do, monetary policy will be useless."

To be fair, amid this wave of anxiety I also received a couple of "soothing" comments. An analyst at JPMorgan, for example, kindly explained at length the benefits of the CDO boom: namely that these instruments help investors diversify portfolios; provide long-term financing for asset managers and reallocate risk.

"Longer term, there may well be a re-pricing of assets as the economy slows and credit risk increases," he concludes. "But. there is a very strong case to be made that the CDO market has played a major role in driving down economic and market volatility over the past 10 years." Let us hope so. And certainly investors are behaving as if volatility is disappearing: just look at yesterday's remarkable movements in credit default swaps. But if there is any moral from my inbox, it is how much unease - and leverage - is bubbling, largely unseen, in today's Brave New financial world. That is definitely worth shouting about, even amid the records now being set in the derivatives sector.

Copyright The Financial Times Limited 2007

 

[GOYCO]

Hi Guys

If you ignore greed and fear you'll probably find that property is very much like the share market. Supply and demand, and the reasons for the supply and/or the demand. Right now the precursor to yields(rents) are vacancy rates. The Sydney Market and Inner City Melbourne Unit markets are a classic case. Vacancy rates have fallen from around 6% to below 1.5%. Rents are on the rise but the yields are not that fantastic yet. Investors are not entering the market. Population is increasing. No new properties. tighter vacancy rates. higher yields. investors start to come in. Cost of production is higher than4 years ago. prices rise. the reverse is also true. Unit market is oversold in Sydney and Melb. The property market seems to also be inversely proportional to the share market so it makes a lot of sense to me to borrow against property at it's peak to buy shares. Not a fan of margin lending after '87. The problem I see is that most people are a share person or a property person, but I think it's better if you use both. It's a lot safer.

Just my opinion

cheers

 

[Bronte]

And have a read of this:
http://www.theaustralian.news.com.au/story/0,20867,21124335-643,00.html

 

[YChromozome]

And have a read of this:
http://www.theaustralian.news.com.au/story/0,20867,21124335-643,00.html

INVESTORS are being urged to reconsider rushing the sale of their investment property to take advantage of superannuation changes, as property market fundamentals improve and the share market continues to defy gravity.

I guess that means Housing as an asset class isn't bloated and continues to defy gravity. Quick everyone, pile in.

 

[Smurf1976]

That article seems somewhat biased to me. They're arguing about long term fundamentals for shares but focusing on the short term for property. Pick whichever argument makes buying a house look good...

1. The share market has done well in the short term but we think it's getting a bit overvalued. Valuation's important so it might be a good time to get out despite no evidence to back this argument on a short term basis.

2. Property hasn't done so well lately but we're expecting it to do better in the immediate future despite being ridiculously overvalued on the same simple basis (yield) that is used to value shares.

Now, either valuation matters or it doesn't. If it does matter then going into property doesn't make too much sense if you're looking at yield, price to income or other simple means of valuing the market as a whole. If it doesn't matter then there goes the argument for getting out of the share market. Either you're focusing on the long term or you're looking at the short term. It's misleading at best to evaluate one market on the basis of the long term whilst looking at another on the basis of the short term.

It's a bit like saying that a big 4WD uses less petrol on a particular trip than a Toyota Corolla does on average. Just don't mention that the 4WD was going downhill during all 5 minutes of that trip whilst the figure for the Corolla is a long term average under all driving conditions.

Personally I think that valuation DOES matter in the long term but anything is possible in the short term whether it be shares, property or the 4WD travelling 5km downhill without using any fuel.

As for the argument about debt and the sharemarket, oh please! The very argument that house prices are so heavily influenced by a change in interest rates of a mere 0.25% says all you need to know about debt levels and housing. That's not to say that there aren't issues with debt and the share market but they're conveniently omitting to say that much the same applies to property.

 

[wayneL]

Access Economics on Today Tonight in Perth:

Synopsis

Perth boom to end in tears... bubble about to burst.... some suburbs already in decline (didn't say which)

Advise for people looking to enter the market... DON'T! You are better off renting! Wait at least 4 years.

Well DUH!

 

[juddy]

Thought you might enjoy the written article from the West Australian too Wayne.



Housing expert warns of sharp fall
30th January 2007, 6:00 WST

Perth’s housing market will slump sharply over the next two years, one of the country’s leading economic forecasters has warned, with prices falling as population growth slows on the back of an end to the mining boom.

In a worrying prediction for the city’s property market, Access Economics said yesterday homeowners would endure years of “grinding regret” as the boom turned to bust.



Access said prices being paid for Perth houses were 10 per cent above “fair value”. This meant that once commodity prices started to fall, the cycle that had underpinned the Perth economy would turn against it.

“We expect Perth’s housing prices to come a cropper soon, with years of grinding regret lying ahead before housing prices and fundamentals align once more,” Access said.

“Those of you old enough will know that now is the time to dunk your head in a bucket of ice water. Booms are not merely rare, they are also fragile. Every boom sows the seeds of its own destruction.

“It is precisely in the middle of big booms that businesses, families and governments make big mistakes. They assume that the experience of the past couple of years will be replicated into the future. Yet much of the last couple of years was the product of unsustainable trends.”

Access’ warning will stoke fears that some heavily mortgaged homeowners could face the scenario of negative equity, in which they owe more than their house is worth.

The forecast comes just a fortnight after the Real Estate Institute of WA revealed prices in some outlying suburbs had already fallen up to 10 per cent in recent months.

Despite this, REIWA expects the median house price, which was $460,000 in December, to rise 8 to 10 per cent this year.
Access said the extent of the turnaround would be determined largely by whether WA’s population growth, which is now the nation’s highest, started to slow.

“WA’s shift to the top of the population growth league ladder may ultimately prove temporary and the State’s current boom in housing activity could end like most booms ”” with a sudden oversupply of overpriced homes,” it said.

SHANE WRIGHT
ECONOMICS EDITOR


REIWA have absolutley no scruples as many youngsters are about to find out.

 

[YChromozome]

It's interesting watching the US market unfold. Late last year we saw some of the fastest plunges in the sales of new homes ever recorded, only for the new house market to close the year with sales down 17.3%.

On Friday night, it was reported new house sales jumped 5% for December - a recovery . . .

. . But the underlying figures are interesting. The inventory of completed but unsold new homes rose to finish the year up 50% yoy to a new record. With builders carrying this glut of houses on their books, they are offering free cars and vacations to help reduce new home inventories and provide incentives for people to buy.

Last night figures came out showing the number of Vacant homes for sale increased 34% yoy, by far the fastest increase ever recorded. One thing for sure, US housing is breaking a lot of records.

Now one has to wonder with the number of vacant homes so high, what is next? Is the next step falling prices? Will that follow current tradition and be a record?

New-home sales rise to highest since April - Market Watch - Jan 26, 2007.

Number of vacant homes for sale surges 34% - Market Watch - Jan 29, 2007

 

[wayneL]

Thought you might enjoy the written article from the West Australian too Wayne.

Yes Thanks. Bear music!

...prices being paid for Perth houses were 10 per cent above “fair value”.

I just had to LOL at that bit. I suppose they can't scare the horses too much

Cheers

 

[Smurf1976]

A boom that ends in a bust... What a surprise (not).

Next we'll be hearing that debt has to be repaid and that present interest rates are anything but high.

As I've said before, I have nothing against Perth as a city but to suggest that houses there are genuinely worth more than those in Sydney is outright madness. It just doesn't stack up on any basis other than pure market momentum which now seems to be slowing if not reversing.

 

[krisbarry]

Today the SA government released a new loan for low income earners. you can now borrow another 30% more to buy a house, but then when the house gets sold in the future, 1/2 of the capital gains must be re-paid back to the government.

This could be as evil as the loans that uni students used to have access to.

Remember the days you could give back 1/2 your Austudy payments back to the government, then they would double this payment and give it back to you in a loan. So effectively the interest was 100%.

Bloody filthy pricks I say!

Thats the way to keep the poor, very poor!

Another cycle of poverty, just a new tax within a tax, within a tax

 

[Kauri]

As I've said before, I have nothing against Perth as a city but to suggest that houses there are genuinely worth more than those in Sydney is outright madness. It just doesn't stack up on any basis other than pure market momentum which now seems to be slowing if not reversing.

I've thought about it and can't really understand why Sydney should be more expensive than Perth at the moment. Is there a reason..

 

[insider]

Today the SA government released a new loan for low income earners. you can now borrow another 30% more to buy a house, but then when the house gets sold in the future, 1/2 of the capital gains must be re-paid back to the government.

This could be as evil as the loans that uni students used to have access to.

Remember the days you could give back 1/2 your Austudy payments back to the government, then they would double this payment and give it back to you in a loan. So effectively the interest was 100%.

Bloody filthy pricks I say!

Thats the way to keep the poor, very poor!

Another cycle of poverty, just a new tax within a tax, within a tax

That's retarded...

 

[YChromozome]

Today the SA government released a new loan for low income earners. you can now borrow another 30% more to buy a house, but then when the house gets sold in the future, 1/2 of the capital gains must be re-paid back to the government.

I was laughing at this today. I guess one assumes there will be capital gains . . .

 

[wayneL]

I've thought about it and can't really understand why Sydney should be more expensive than Perth at the moment. Is there a reason..

You are joking right?

 

[Kauri]

You are joking right?

No..

 

[insider]

I was laughing at this today. I guess one assumes there will be capital gains . . .

That's probably the idea... Make them believe there are gains

 

[rockingham178]

A boom that ends in a bust... What a surprise (not).

Next we'll be hearing that debt has to be repaid and that present interest rates are anything but high.

As I've said before, I have nothing against Perth as a city but to suggest that houses there are genuinely worth more than those in Sydney is outright madness. It just doesn't stack up on any basis other than pure market momentum which now seems to be slowing if not reversing.

and Sydney has what over any other city?...have I missed something?

lived in Sydney and Perth....give me Perth any day..I like to catch fish and breath fresh air

 

[Freeballinginawetsuit]

Hi Mr Rockingham

How are the RE prices in Rockingham going, I'd presume surrounding areas such as PT Kennedy, Success, Atwell etc, might be the first to feel the pinch.
Or are they still holding up?.

Not much fresh air around Kwinana way .

 

[wayneL]

and Sydney has what over any other city?...have I missed something?

lived in Sydney and Perth....give me Perth any day..I like to catch fish and breath fresh air

Fresh air? Perth air quality is not that good.

You can catch fish and breath fresh air in a million places a hell of a lot cheaper than Perth.

Sydney, like it or hate it, is the financial capital of Australia, is the biggest city, has the highest per capita income, has a number of cultural augmentations relative to Perth. Sydney is a "world city", Perth is not.

Perth is a nice place for a certain type of lifestyle, but it should be relatively inexpensive... as it always has been up till about 3 years ago.