House prices to stagnate for 'years'

[It's Snake Pliskin]

Important reading on the subject.

http://www.smh.com.au/news/business...-into-a-shocker/2005/09/27/1127804477726.html

 

[krisbarry]

Yes the petrol issue looks to be the pivitol point.

If we do see fuel price rises into the 1.50 mark, that will certainly see interest rates rise and house prices to fall, even the RBA warns of high pertol prices!

 

[Rafa]

I really can't see how a rising petrol price means they need to increase interest rates...

rising petrol prices means prices go up... but it affects the supply side of the curve ... i.e. its not because there is too much cash in the system...

if petrol... and therefore food and other essentials become more expensive, that means less disposable income... which should have a contractionary effect on the economy regardless! So unless the aim of the RBA is to send the economy into recession, then why would they increase interest rates!

i really think this whole definition of inflation needs to be re-visited...
increase in prices of essential items should be considered contractionary (hold rates steady in contract the economy or reduce rates to boost economy... not needed in Oz) whilst increase in prices of non-essential items should be considered inflationary (hence increase interest rates).

hmmm... maybe i am missing something here!

 

[krisbarry]

If petrol costs rise, then everything we buy goes up too, including food, transportation, building supplies etc

The CPI (Consumer Price Index) is a list of items bought, and is a key measure of inflationary pressure. Along with wages, and employment.

When the CPI, rises above the 3% target set by the RBA, the need to cool the market takes affect and rates rise.

The hurricane season runs for another couple of months in the USA, so we are not out of the woods yet in terms of fuel prices.

 

[Rafa]

i think i need a lesson in how all this works...

Inflation is one thing... but then I came accross this article in the Australian... I don't understand most of it...excerpts below...

http://www.theaustralian.news.com.au/common/story_page/0,5744,16742518^12250,00.html

The weakness of US economic policy is its inability to curb its budget deficit, its reliance upon China to finance its debt and the fact that on present exchange rates a return of US protectionism is inevitable. Everybody knows the imbalance of US current account deficit/China current account surplus must be corrected; the question is how.

Macfarlane argues that the imbalance should be assessed from the Asian side. He says the origin of China's surplus strategy lies in the East Asian financial crisis; it has built up foreign exchange reserves as an "insurance" to withstand another crisis. Hence the counter-intuitive situation of the main developing nation lending to the richest developed nation.

Macfarlane's message to China is that, ultimately, a surplus may be "more difficult" to sustain than a deficit because of its monetary consequences and that China should move into further exchange rate appreciation not to help America but to help itself.

Garnaut says: "The least damaging method of adjustment is for the US to reduce its budget deficit because that would help to correct the imbalance while easing pressure on US and global interest rates. The alternative is for East Asia to appreciate its currencies but that has the painful incidental effect of raising US and global interest rates.

"However, because the imbalances are higher this year a substantial response is now needed. In the absence of policy action by either nation, the markets will shape their own solution - speculative capital inflow into China is likely to leave China with no good alternative to currency appreciation."

The widest lens, as usual, was opened by Paul Keating. In his August 3 speech in Singapore, Keating lamented China's "survival of the fittest" mercantilist policies, hoarding balance of payments surpluses to protect its economic and political status quo. He pointed out that to the extent China's economic success was measured in record reserves it meant the broad mass of the Chinese people were not growing as wealthy as they would otherwise.
"The currency will inevitably come under pressure for a revaluation," Keating said. "And if a series of discreet currency shifts, even large ones, did not satisfy the markets' lust for snappy profits or its expectation for value equilibrium, the authorities could be pressed into an earlier than expected float of the currency with all the attendant problems and, might I say, benefits."

As Keating conceded, it is not the conventional view. He argued, however, that "a mature set of institutions is China's best insurance against capricious behaviour by external organisations, whether it be the IMF or for that matter, private ones." Bob Zoellick, taking the long view on this partnership, would agree.


Is that why Tech/A you talk about the climate of low interest rates witnessing now a thing of the past?

Can someone please explain the article above and what it means? Why does East Asia appreciating its currencies mean that US and global interest rates will rise?

 

[tech/a]

Rafa
Is in fact correct.

chansw
I'll answer your query here as well but feel that giving you next weeks lotto results to be more accurate!

There are a number of factors all linked together in the monetary juggling of our economy.
Increasing fuel prices help decrease inflationary trends as there is less disposable income.
Increasing AU$ has an inflationary effect as it gives our money more buying power for imports so demand increases and spending along with it.
Exports become dearer to the end buyer,so demand decreases.
Government has curbed spending and as such has a surplus so this has a deflationary effect.

However slowly but surely we the consumers are pushing our demands for more surplus $$s through higher pricing of goods to cover overheads and maintenance of profits.
PAYE wage earners are now looking for wage increases to maintain their lifestyle---things are getting more expensive.
As these increase so will demand---demand will lead to a rise in CPI--which in turn will need to be controlled.

This will be done initially with interest rate increases--Unless the government starts spending like there is no tommorow---the AU$ jumps to 85c on the back of the US$ dropping dramatically---oil falls to $40 a barrel,and everyone is sucessful in increasing their earning capacity 20%--then I see these rises as small increments reflected by the pressures mentioned above.

Anything can happen particularly the decline of the US$.
My personal veiw and the one I'm working on in my business dealings now is.
Now is the time to lease machinery and lock down such low rates.
Now is the time to decrease loan gearing and maximise reward to risk in housing. I feel that right now you can get the best price you will get for sometime.Because as interest rates creep up then buyers will have a leverage to negotiate.

I also feel that there will not be run away inflation and hence interest rate unless we get a Labour government which decides to spend Billions.
I see a period of sustained growth of 2-3.5% for the Australian economy bought about by Asian demand in particular China.
There will be opportunity in the share market which will be as challenging as ever---but those who can take advantage of it will reap the benifits.

Gear low.
Lock in these low interest rates.
Time for consolidation.

 

[Rafa]

I agree with those sentiments... i certainly feel that now is the best time to get a cheap loan and locking in rates is the way to go... also agree with the Aus Budget surplus... tho i don't believe Labor would spend the billions... their deficits were mainly during a recession, which makes them legitimate policy... plus they cannot risk the negative public feedback...

I actually see the huge surplusses and the cheap interest rates a missed opportunity by the liberal govt to invest in badly lacking public infrastructure, rail, roads, water supply, eletricity, schools, traineeships, education, etc... if there is supply side pressures in future, it will be becuase of this!!! but thats another topic

What I am still trying to work out the role of Asia in all this...
We know they have massive amounts of surplus, as a result of loaning massive amounts to the US, by purchasing bonds (hopefully not junk bonds). We also know they gotta keep doing this otherwise their own economy will crash...

If they increase their currency valuation, then the US dollar will fall, and US debts to Asia (in US$ terms) increase... It also makes Asian goods more expensive, and cheaper for them to buy Australian/US goods...

But thats where I don't understand anymore...(from the article)... Why will this mean interest rates will rise... will the US raise interest rates to push up their currency... or is there something else that is going to happen???

 

[krisbarry]

A cheap loan but an expensive house

Better to wait for house prices to fall a little more and buy b4 the next interest rate rise. That way you are getting an even cheaper house with that very same interest rate. IMO

 

[tech/a]

Rafa.

Asian adjustment in currency valuation will force the US to raise rates to attract investment and decrease spending.
This in turn will cause an increase in our dollar which will have the effect of cheaper inports dearer exports the balance of trade will be skewed.
More spending so increased inflation and hence increased interest rates to dampen spending.Hope that clears it up.

Kris.
Would you really rather lower house prices and higher interest rates?
Whats better?
A $300k house at 6.5% interest OR
A $250K house (same house 15% less) at 7.5% interest---let alone 9%

What your saying isnt happening in the housing market generally.
Infact most areas are still rising slowly.

No one has been able to supply me with a suburb which I can verify that housing has slumped and will continue.There maybe a pocket or 2 but its rare.
I cant think of a reason why you'd wait if you found the house you want and can afford it!---someone else will buy it.

You and I will always differ I guess Kris---thats why I hold and develop real estate and you dont I guess. I dont even wait at bus stops.

 

[Rafa]

Yes, i see how a strengtening Aus$ will be inflationary... So, we raise interest rates to curb that spending... so just cause China strentens its currency... the US will have to raise rates to strenghten its... and eventually the whole world will have high interest rates...!!! So really the best thing is if the US reduces its deficit by tightening spending... ALAS... that ain't gonna happen!!!

Now... as for real estate...
Me and three others tried getting into the property developement business sometime back... but the biggest hassle was getting finance... cause none of us had real eastate! we had cash... but that wasn't enough...

So then we decided to each get a house... and build up some equity!

Hopefully when we next look at entering the property development market, getting finance shouldn't be as hard.

 

[krisbarry]

Think you will find most suburbs within Australia are dropping but there are pockets within WA, SA, NT that are still growing a little

 

[tech/a]

Kris
You really dont READ the posts do you--I'm addressing those buying a house to live in!
The comment about our differences is based upon the fact that your character is such that you would not be suited to property developement.
While you argue the pro's and cons opportunities would pass you by.
You have a bad habit of holding losers.

Anyone in Melb,Syd,Bris,Canberra.
Can you supply me with some suburbs that are likely to show these falls of 10% +

Even if they do exist my arguement is that its simply not blanket.
Why does someone have to be right or wrong?
Just take advantage of opportunities that present themselves.

What happened to the other "Nasty" post I liked it better!!!

Anyway I saw it and here is my reply.

 

[krisbarry]

What happened to the other "Nasty" post I liked it better!!!

Anyway I saw it and here is my reply.

I took it away becuase I am completely exhausted always trying to defend my position.

You seem to cause me much grief, anger and stress and it is becoming very unhealthy for the both of us and all the readers too.

You are always right tech/ a and I am always wrong!

BLAA BLAAA BLAAAA!!!

 

[Rafa]

I think there is a big difference between real estate for investing and real estate for owner occupier!

For Investing... key points are timing of entry, returns, etc, etc...

For Owner Occupier... only thing that really matters is if you like the place and you can afford it!

The fact is, you'll always have to live somewhere, so when the market it up, your property is up, and so is everyone elses..... so if you just move from one place to another... no nett gain or loss...

Again, when the market is down... you property is down... as is everyone elses... so again... when you move houses, its still no nett gain or loss!!!

So given that owner occupiers can't claim interest on tax... that really leaves you two options...
1. Buy when you find the right place for you...and interest rates low as possible...
OR
2. wait and hope for and if and when why how... the real estate prices do come down... maybe becuase interest rates have risen to some rediculous level and then buy the house with CASH!!!

Given that scenario 2 is unlikely, but even if it does... you can be gauranteed, its only the crappy houses in crappy suburbs bought by investors who don't really know what they are doing which will be put on fire sales and sold on the cheap... that and units/apartment...

Proper houses in blue chip suburbs will fall marginally if at all, cause most will work two jobs, etc, etc like in the 80's to be able to pay the rediculous high interest rates and get by!

 

[Bronte]

I think there is a big difference between real estate for investing and real estate for owner occupier!

I agree with that Rafa
One you buy with your head....
one with your heart.

 

[tech/a]

I prefer to look at it a little differently.

One you buy with YOUR money
The other you buy with YOUR TENANTS money.

Like higher highs dont you think?

 

[wayneL]

For Owner Occupier... only thing that really matters is if you like the place and you can afford it!

This is a subjectivity which has the capability of changing dramatically.

I have someone close to me who could "afford" his house last year. This year is a different story!

Cheers

 

[Bronte]

I really believe that it is so important to get onto the property ladder,
in any way you can...worst house / unit in best street / suburb etc
Put your money into something and then borrow against the asset.
Please do not wait too long....think long term.

 

[tech/a]

This is a subjectivity which has the capability of changing dramatically.

I have someone close to me who could "afford" his house last year. This year is a different story!

Cheers

Without knowing your friends circumstance Wayne---wouldnt it be fair to say that thats life in general--our situations can change dramatically sometimes through no fault of our own.---both positive and negative.

I doubt that you would be frozen in action by what "could happen"?
Many are.

 

[Bronte]

I prefer to look at it a little differently.

One you buy with YOUR money
The other you buy with YOUR TENANTS money.

Like higher highs dont you think?

Sort of....
Our investment properties are bought with the banks money.
The repayments are made using the tenants / tax relief money.