Property to boom under Labor Government

[lakemac]

The AFR has this graph today : (Source ABS/Comsec)

Interesting it also reports in another article that Household debt is no longer at record levels - Household Debt is now at 159.6% of disposable income, down 1 percentage point from last qtr. Amazing.

Oh my gosh! Quick send a press release. Tell someone. The Rudd government has achieved greatness.

We are not worthy to be in your presence oh great Kevin...

Good to see some quality cross referencing going on.
Base your arguments on facts not emotion, that's what I like to see

 

[numbercruncher]

Explain how wage increases (which is what I assume you mean by wage Inflation) can increase the cost of real estate?.

Yes I understand credit is the absolute ultimate fundamental.

But people reach peak debt, they reach a level where the can borrow no more , and with Australias realestate market the most unaffordable on the planet in relation to wages/prices - big wage increases to me seems the only ingredient to drive price growth.

This is currently running at double whammy with rising Interest rates, perhaps slashing Interest rates could spur some more growth.

 

[Lucky_Country]

Rising wages help too contribute towards rising interest rates thefore while wages are rising so do interest rates.
The mining industry is close too having a wages "breakout" and as it is such a big employer it will increase the potential for futher wage rises.
Oil is the other obvious that helps inflation as it contributes too about everything we buy.
Obvious stuff I know but dont forget the basics !

 

[lakemac]

Yes I understand credit is the absolute ultimate fundamental.

But people reach peak debt, they reach a level where the can borrow no more , and with Australias realestate market the most unaffordable on the planet in relation to wages/prices - big wage increases to me seems the only ingredient to drive price growth.

This is currently running at double whammy with rising Interest rates, perhaps slashing Interest rates could spur some more growth.

Correct - which is why the credit creation cycle is about to contract.

You may have noticed that lenders have tried all sorts of way to get people to borrow credit. No-doc, low-doc, take-it-we-don't-want-the-money, first-born-refunded kind of loans have proliferated. They have about exhausted it all including all the corporate side with mergers and aquisitions. Now the chickens are coming home to roost. Witness the CDO (collateralised debt obligations) or so called sub-prime credit issue. There was a fascinating article in the Australian newspaper about "hurricane norma" which went into details about how these CDO and SIV thingies came into play.

Of course my prediction is the real credit crunch is post Beijing Olympics (probably after the Para Olympics in Sept 08). Perfect timing for the October crash of 2008 (give the Chinese something to worry about as 8 is regarded as a special number to them - hence the games start 8-8-2008). Drop the credit convert the land from communist to private ownership. How clever are these super bankers...

So credit is extended to max, tighten up the interest rate screws then withdraw the liquidity and watch asset prices drop at least 20% (30% for stocks) whilst the world's population squirms.

2009 is not looking happy...

 

[lakemac]

By the way forum readers, I really do hope my analysis of all this is wrong.

I don't want to see my portfolio take a 30% dive for the next couple of years.
I want it to go up in value.

If anyone can refute or present a well reasoned argument backed by fundamental and technical data stretching back 300 years I am open to having my analysis altered or totally consumed by flamers LOL...

Seriously anyone have an alternative model that paints a less gloomy outcome.

 

[lakemac]

Rising wages help too contribute towards rising interest rates thefore while wages are rising so do interest rates.
The mining industry is close too having a wages "breakout" and as it is such a big employer it will increase the potential for futher wage rises.
Oil is the other obvious that helps inflation as it contributes too about everything we buy.
Obvious stuff I know but dont forget the basics !

On what basis do you state that rising wages contribute to rising interest rates?
(I assume you meant to say interest rates and not inflation rates).

Do you have any historical data that correleates wages and interest rates? If so what is the mathematical relationship between the two. Are there any known ratios between them? Is one lagging and one leading? Figures Lucky_Country. Give us figures.

Also what causes a wages breakout? My research indicates that when the demand for services (such as workers) exceeds the available supply then you have such pressure. However pressure is one thing - the ability to pay is another. Mining has surplus cash right now. Good profits. The companies actually pay above wages - and will continue to do so - market signal is telling people mining right now is where its at. But lets take another supply demand situation but with no capacity to pay - hospitals. To say hospitals are in demand is an understatement. But are nurses having a wages breakout. I am sure they would love to get a pay increase but their industry (controlled by government no less) restricts the increase.

Wages tend not to break out evenly - they break out as you put it in those industries already in demand situations. Mining has to pay a premium in order to attract the workers it needs. But that does not fuel inflation. Why? The money they have is not credit - it is earnt in the purest form of digging it out of the ground. Someone is paying for productive outcomes. Bank credit creation on the other hand does the exact opposite - it devalues the production of goods by issuing more "fake" money thus meaning you have more money chasing the same productive output. That is inflation (currency devaluation) right there.

Ok lets look at oil as an inflationary driver. Yes it is a cost input to almost everything we consume. But is it inflationary? If banks never lent money and the only money was say gold dug out of the ground, would oil cause inflation?
The intrinsic value of oil would go up as it becomes more scarce. Simple supply and demand - thus relative to other goods it would become more valuable. And since the other goods rely on it their intrinsic value would also go up. But hang on how can both go up as we have a fixed amount of "money" - it can't there is no currency devaluation or inflation in our model. What happens is that other items relative to oil become cheaper and cheaper relative to oil even if they rely on oil to make and/or transport them. The difference here is that those products not reliant on oil will devalue faster than those that do. Oil producers will accumulate more money but because there is only a finite amount of money in the model all other goods will devalue. But this is not reality. Banks do create (lots) more fake (sometimes called fiat) money ie. credit. Now we are back to the inflation model again but it is not oil that creates it. It is fiat money.

 

[noirua]

Will the subprime crunch arrive in Australia as it appears to have made it across the pond to the U.K.
Northern Rock Bank is now trying to dump half its mortgage book and hopes to chase away the loans to other lenders and get their money back.
Meanwhile the UK online Bank, First Direct, has abruptly stopped giving out any more new mortgages. Royal Bank of Scotland, as well as other banks, are raising interest rates on some loans. New mortgages approved in February fell 40%.
Can Australia ride out the storm from a distance, I doubt it. As this one is a giant and on its way.

 

[xoa]

This is what the "experts" were saying about the American market, in 2006:

Bulls are predicting that the median Australian home will cost $630k within 3 years. The most expensive in the entire world. That means the interest on the typical new home loan would be more than $50k pa, more than most people earn. I suspect hundreds of thousands of people would emigrate to greener pastures if that scenario panned out.

 

[tech/a]

This is what the "experts" were saying about the American market, in 2006:

Bulls are predicting that the median Australian home will cost $630k within 3 years. The most expensive in the entire world. That means the interest on the typical new home loan would be more than $50k pa, more than most people earn. I suspect hundreds of thousands of people would emigrate to greener pastures if that scenario panned out.

Havent heard that.Have however heard 20-40% in the next 5 yrs.

Being in the Building Industry I think this is highly likely.
Those expecting a cross the board falls will be bitterly disappointed.

WHY?

Inflation
Building costs are going balistik.
I import Steel
our indent orders are July +15%
Sept a further 10%
Nov a further 15%

Thats 35% in structural steel in the next 6 mths.
Labour/Concrete/Material costs all flying.

This alone will ensure prices dont fail. (Read Crash)

Bull? Dont think so.

 

[refined silver]

Havent heard that.Have however heard 20-40% in the next 5 yrs.

Being in the Building Industry I think this is highly likely.
Those expecting a cross the board falls will be bitterly disappointed.

WHY?

Inflation
Building costs are going balistik.
I import Steel
our indent orders are July +15%
Sept a further 10%
Nov a further 15%

Thats 35% in structural steel in the next 6 mths.
Labour/Concrete/Material costs all flying.

This alone will ensure prices dont fail. (Read Crash)

Bull? Dont think so.

They had the same in the US - huge inflation in all building costs.

However the drop in demand due to tightening credit and unaffordability (homes can only reach a certain multiple of average wages before it can't go any higher) meant the result was broke home builders.

US Home builders such as Toll Brothers were some of the biggest losers on the share market in the last 18 months.

 

[tech/a]

They had the same in the US - huge inflation in all building costs.

However the drop in demand due to tightening credit and unaffordability (homes can only reach a certain multiple of average wages before it can't go any higher) meant the result was broke home builders.

US Home builders such as Toll Brothers were some of the biggest losers on the share market in the last 18 months.

Ive spent sometime in the states having a look.Have friends in the US in the industry.

Firstly the housing rise in price wasnt due to inflation.
It was as it was here an in balance in supply and demand and low interest rates coupled with established housing being way way cheaper than replacements if building. You could positively gear anything.

The large builders operate very differently to Aussi builders.
Over there they will develope a community at onetime then open it for sale.
500 homes at once all completed,you choose cream,blue or white.
All similar price all similar build specs.

Demand drops,cashflow stops,builders go broke.
Less likely here---not impossible.