The future of Australian property prices

[GumbyLearner]

Use of a margin lending facility through your broker Gumby (otherwise known as trading on margin). On some stocks (e.g. big four banks) you can borrow up to 75% of the price of the stock towards the purchase. The size of this facility is limited by what you qualify for given your assets and income of course.

Does the same apply to mortagees?

 

[FxTrader]

Does the same apply to mortagees?

Yes it can, assuming you want to avoid the use of mortgage insurance, you need to come up with at least 20% down to secure the purchase if you qualify for the loan. There are some significant differences of course related to liquidity and transaction costs, the most onerous of those being stamp duty in buying and agent fees in selling a property. The impact of these charges is substantial, usually necessitating a much longer holding period to achieve a profit unless you have a rapidly rising market.

Profit however is something realized on a sale after deducting all transaction and holding costs, not a price appreciation estimate based on some assumed market value. When you sell a leveraged property (or stock), the profit is actually the cash on cash (total cash outlaid vs received) profit after deducting all costs.

Stocks prices are available in the market every day so position valuation is easy. Not so with property which is always an estimate.

 

[GumbyLearner]

Yes it can, assuming you want to avoid the use of mortgage insurance, you need to come up with at least 20% down to secure the purchase if you qualify for the loan.

Not so with property which is always an estimate.

What happens when someone provides the 20% CASH to buy stock and they only own a 20% stake in the real estate (mortgage) they are using as equity to borrow to buy the stock and they end up defaulting on the loan?

What happens if the real estate property is overvalued? Can the bank or margin loan lender take out insurance in that situation? Where the value of the property/collateral is overvalued at the time of the loan?

Specifically, what are the statutory requirements of the Australian lender to "inquire" into the borrowers capacity to repay the loan?

 

[FxTrader]

What happens when someone provides the 20% CASH to buy stock and they only own a 20% stake in the real estate (mortgage) they are using as equity to borrow to buy the stock and they end up defaulting on the loan?

With an equity margin loan, if you don't meet a margin call the stock is sold the same day. You must then fund any shortfall.

What happens if the real estate property is overvalued? Can the bank or margin loan lender take out insurance in that situation? Where the value of the property/collateral is overvalued at the time of the loan?

Don't know what insurance options are available to lenders to insure against bad valuations.

Specifically, what are the statutory requirements of the Australian lender to "inquire" into the borrowers capacity to repay the loan?

Not sure, someone else may be able to answer that question.

 

[basilio]

There a are a number of things coming together that give me a nasty feeling about the property market and our overall economic future

1) Steve Keens article really does demonstrate how hocked to the eye balls our general population is. Other analysis would show that excessive home home loans as well as credit card debt, store card debt(another variation of CC debt) are really squeezing many, many people.

2) The interest rate increases this year have to be having an effect consumers balance sheets and in particular cash flow. $400,000 loans with an extra 1.5% interest is eyewatering.

3) The sharp increases in gas, electricity and water costs is also pressuring people. Less net disposable income means a bigger than expected drop in retail sales. This already seems to be happening

4) Petrol is on the increase. Oil has gone up $10 a barrel in the last couple of months. That equals another 10c a litre at the bowser. All adds up.

It's worth remembering( and Steve Keen also pointed this out) that much of our previous economic growth was fueled by debt. We are now at the stage where this debt expansion seems incapable of being continued and in fact must contract.

In that context i just can't see how people can continue to pay even the current housing prices let alone any increases.

_______________________________________________________

Obviously some people, particularly those in and around the mining industry will be okay. I just can't see how the rest of the population will hold it together.

Anecdotally I can't remember a quieter Christmas around the shops.
I just can't see how

 

[GumbyLearner]

With an equity margin loan, if you don't meet a margin call the stock is sold the same day. You must then fund any shortfall.


Don't know what insurance options are available to lenders to insure against bad valuations.


Not sure, someone else may be able to answer that question.

Cheers mate. I know it took time but thanks for getting back to us.

My next question is: If the borrower can't meet the shortfall and the return on the loan doesn't occur from the borrower? Should the taxpayer meet the shortfall? ala the USA fiscal bailout of the overleveraged.

Do Australian lenders have policies in place to make sure there isn't a three-peat eg US, Europe, Australia etc. of this diabolical rip-off process?

 

[GumbyLearner]

Cheers mate. I know it took time but thanks for getting back to us.

My next question is: If the borrower can't meet the shortfall and the return on the loan doesn't occur from the borrower? Should the taxpayer meet the shortfall? ala the USA fiscal bailout of the overleveraged.

Do Australian lenders have policies in place to make sure there isn't a three-peat eg US, Europe, Australia etc. of this diabolical rip-off process?

Still waiting for the responses in droves....

 

[indeck]

basilio I agree, lets not forget the aud is protecting us in some ways with petrol prices. Me personally I am saving up a 20% deposit for a house, but unless there is some sort of correction i'm not going to bother. Has nothing to do with not being able to afford it rather refusing to pay for something clearly (in my view) overpriced.

 

[Agentm]

the usual contrived REIV results posted for melbourne were as false as ever

again those unreported auctions were actually not sold at all.. isnt that remarkable!! who would have thought??

so the actual figure was not at all the 61% bogus clearance rate

54% is the real figure..

takes till friday to figure it all out..lol and as usual the saturday RE sections of the papers have gone to print already so tomorrow melbournians will all read how the clearance rate last week was 61% when the buyers are blissfully unaware it was 54%

nothing like a good story to keep that bubble alive..


interestingly the buyers are on strike.. the unsuccessful sellers are going to have to adjust to make the market. will they continue to add to the sell price or will they need to adjust down to make the market..

week in week out those unsold auctions will have to have an impact on the prices imho..

this from Housing: Behold the supply-side crash



Lending to individuals for acquisition of investment homes (purple curve, second from bottom) and lending for acquisition of established homes for owner-occupation (blue, third from bottom) both recovered slightly in October. The continuing upward trend in weekly sales figures (not to be confused with clearance rates) suggests that November's lending figures will again show a rise. In contrast, RP Data-Rismark reports that prices in October, although slightly higher than in September, were still below the May peak. Since October, there has been another fall in action-clearance rates, which are correlated with prices changes. The combination of rising volumes and declining prices can be explained by a supply-side rush.

The post of Nov.11 concluded:

But whatever the explanation, prospective buyers who observe the peaking or “flat-lining” of prices will conclude that this is not the time to buy. I would expect that realization to show up as a renewed slump in lending, for both owner-occupation and investment, in the near future. Then I would expect the usual sequence — a slump in sales followed by a slump in prices — to reassert itself with a vengeance.

 

[TabJockey]

Cheers mate. I know it took time but thanks for getting back to us.

My next question is: If the borrower can't meet the shortfall and the return on the loan doesn't occur from the borrower? Should the taxpayer meet the shortfall? ala the USA fiscal bailout of the overleveraged.

Do Australian lenders have policies in place to make sure there isn't a three-peat eg. US, Europe, Australia etc. of this diabolical rip-off process?

You should read up on exactly what happened in the United States. Fantastic book by Michael Lewis (Liars Poker, The Blind Side) called "The Big Short" that I highly recommend.

The Australian Prudential Regulation Authority keeps a very close watch on the major banks especially, and they are subject to a virtual library of day to day regulations. Which is a stark contrast to the entrepreneurial jungle that the United States operates in.

Like I said before, if your worried about the Australian banks, the only thing that would threaten them would be high unemployment of the middle class.

 

[Mr Z]

There a are a number of things coming together that give me a nasty feeling about the property market and our overall economic future

1) Steve Keens article really does demonstrate how hocked to the eye balls our general population is. Other analysis would show that excessive home home loans as well as credit card debt, store card debt(another variation of CC debt) are really squeezing many, many people.

2) The interest rate increases this year have to be having an effect consumers balance sheets and in particular cash flow. $400,000 loans with an extra 1.5% interest is eyewatering.

3) The sharp increases in gas, electricity and water costs is also pressuring people. Less net disposable income means a bigger than expected drop in retail sales. This already seems to be happening

4) Petrol is on the increase. Oil has gone up $10 a barrel in the last couple of months. That equals another 10c a litre at the bowser. All adds up.

It's worth remembering( and Steve Keen also pointed this out) that much of our previous economic growth was fueled by debt. We are now at the stage where this debt expansion seems incapable of being continued and in fact must contract.

In that context i just can't see how people can continue to pay even the current housing prices let alone any increases.

_______________________________________________________

Obviously some people, particularly those in and around the mining industry will be okay. I just can't see how the rest of the population will hold it together.

Anecdotally I can't remember a quieter Christmas around the shops.
I just can't see how

It has been a bit of a head scratcher for simple folk like me.... but they keep saying its OK. Hmmmmmmmmmmmmmmmmmmm!?

 

[Mofra]

Puts the IMF squarely between the Steven Keen bears of the property world and the Shane Oliver perma bulls:

http://theage.domain.com.au/real-estate-news/house-prices-inflated-imf-20101217-18zx7.html

House prices inflated: IMF

Australia's house prices are overvalued by 5-10 per cent but any price correction is ''likely to be orderly'' and the result of income and rent rises rather than a collapse in prices, says the International Monetary Fund.

Analysis of Australian house prices by the IMF found cyclical factors such as low interest rates, the commodities boom and levels of disposable income contributed to inflated house prices, but their overvaluation appeared milder than in the past.

Australia's price-to-income ratios - the proportion of income spent on housing costs - was high, above 10-year averages by about 20 per cent at the end of June, an IMF working paper said.

Advertisement: Story continues below In Canada, similar ratios were at 15 per cent and in New Zealand 26 per cent.

The ratios were good indicators of overvaluation in countries such as Ireland that subsequently had a correction, the paper said.

By comparison, Ireland at the peak of its housing boom in 2006 had a price-to-income ratio of 40 per cent.

 

[TabJockey]

I am annoyed that the IMF lumps us with Ireland, the differences are enormous. Look at dynamic successful cities like new York London, hong kong and Singapore and consider their income to property price ratios. I believe the rise in worldly prominence of Melbourne and Sydney leads you to expect higher values. But I agree with their 5 to 10 percent estimates!

 

[explod]

As with the Moody's rating agencies, the IMF is a further instrument of the good ole us of A. The voting power of the US on the IMF board, without looking it up, is around 17% and for any decision to be passed it requires an 85% majority.

Moodies downgraded the PIGS at a time when the US debts were and still are much worse.

I would not and do not take any notice of such ratings propoganda that are there to hold the big guys ponzies together and to continually fool the sheeple.

 

[Agentm]

ONE of Australia's largest apartment tower projects, the $850 million Oracle Broadbeach complex on the Gold Coast, is in receivership. The 505-apartment complex at Broadbeach was being developed by Niecon subsidiary South Sky Investments.

South Sky Investment director Michael Nikiforides placed the company into receivership.

It is the second Niecon-related business to fail.

This month the Nirvana by the Sea residential Gold Coast project was also handed over to its financier.

It is understood that the completed Oracle project collapsed because of problems with settlements of up to 400 apartments within the towers that had been pre-sold before the global financial crisis.

After the crisis hit, many were unable to come up with the cash.

The apartments had been in the process of settling since October, sources said.

 

[Agentm]

on top of chinas 64 million empty homes there are chinas empty cities

obviously australia is riding high on the back of these amazing empty cities and empty homes, but will the real estate bubble in china continue? will australia continue to be "different"..

if things do change in china and there is a change of heart in making all these empty residential homes and empty cities, imho there will dramatic changes in china dependant economies like australia, and i think the aussie housing bubble may well start to grind to a halt..






















it just goes on and on....

 

[aramz]

Great post agentM thanks for sharing.

Also thanks for sharing too Basilio.

 

[robots]

hello,

yeah thanks fella's

thankyou
professor robots

 

[electronicmaster]

hello,

yeah thanks fella's

thankyou
professor robots

So Happy your still selling. Fantastic stuff

 

[tothemax6]

basilio I agree, lets not forget the aud is protecting us in some ways with petrol prices. Me personally I am saving up a 20% deposit for a house, but unless there is some sort of correction i'm not going to bother. Has nothing to do with not being able to afford it rather refusing to pay for something clearly (in my view) overpriced.

Exactly how I feel. As someone said to me the other day, "I don't want to be stuck with a 1M mortgage and a 500K house".
Incidentally, does anyone know where I can find current rent/mortgage 'spreads' (for search of a better word)? I.e. how much one pays in rent for a house versus mortgage payments for the same house. If it is high I figure it would be best to put the difference in a savings account each week rather than buy the house.

it just goes on and on....

Yes, those pictures are nuts. Again though, I think it seems to simplistic to compare housing situations in Australia and China to those in pre-2008 US. As far as I know, the Chinese government is responsible for building this stuff (and it runs surpluses as far as I know), so its more a case of government wastage than mad appreciation-speculation like what happened in the US.
Cheers