The future of Australian property prices

[Tysonboss1]

1,So both are one and the same, and have the same impact on residential house values?

2,IOW instead of directly hedging inflation with property, I can hedge inflation via mortgage/credit instruments, since they are all correlated?

3,With your other post mentioning a bubble - I am not analyzing/inferring anything regarding that - this is from a hedging perspective. If your asset is say driven by two variables, one which has a larger effect on your asset [e.g. credit & money supply, whether you agree or not] and it also drives the other variable e.g. inflation [multicollinearity, I'll leave the debate about causation aside], then is it worth using that asset to hedge the smaller effect?

Rental income, is separate, and I have already stated my view on that - so please don't bring that in.

1, Introducing more credit increases the total money supply in the economy, the money supply is not fixed it expands and can contract, as the money supply expands (inflates) faster than the total goods and services produced in the economy you will see inflation of prices accross the board, So expanding credit should generally see increasing inflation, thats why the RBA increases rates to try and slow inflation.

If the money supply contracted compared to the total amounts of goods and service moving deflation would occur, Inflation is regarded as the lesser evil hense the rba has a policy of allowing a small % of inflation to occur over time, rather than fact deflation and depression.

2, not sure how you would go about doing that

3, you lost from here in

 

[Tysonboss1]

It is about the devaluation of paper money. Houses going up is merely a match to the falling value of money.

A problem now, (not so much here yet), is that paper money is devaluing faster than property is going up.

However good land will hold its tangible value in the long term.

Yes, But I am not saying that property values are joined at the hip with inflation rates, the two can move indepentantly, But over time the effect of inflation will be factored into property prices, It may come all at once just as it did in 2001 for property and 2011 for coke at my local chinese shop.

For 5 years I have been buying cans of coke for $1.50 at my local chinese shop, Now all of a sudden the price has surged to $2.00, This boom in the price of coke may be seen as a bubble but the 33% increase would be partly due to inflation, now some would say that it may have over shot the market because 33% in 5 years is higher than inflation, So we may see the price of coke stagnate for a couple of years before we see another boom. This is how property works, except property has an other upward price pressure, the coke company can always just increase supply of coke to meet demand, the supply of land is some what fixed, So you have an extra >1% growth compounding from population growth and growth in households.

 

[Tysonboss1]

One could say that inflation itself is predominantly correlated to credit and money supply.

This video from the 3 minute mark touches on this subject.

.

 

[tothemax6]

This video from the 3 minute mark touches on this subject.

.

I've always wanted to make a set of rebuttal videos to the 'money as debt' series, but alas I cannot commit the time . There is so much wrong in that series it boggles the mind. But they got one thing right, mismatched debt maturities which rely on roll-overs (i.e. bank lending out 30 year loans and receiving instantly-callable loans) gives the illusion of there being more money in existence than there is. But in reality, since these loans to the bank (demand deposits) are usually not called in any large part, they effectively average a high debt maturity in aggregate.
The biggest thing about the videos that irks me is that it fails to point out that people can hold shares in these banking operations, and instead uses the concept of 'banker bogey-men'.

I guess the root of the issue is that people consider their account at the bank to be "money in the bank", rather than what it really is - "money the bank owes me".

 

[Tysonboss1]

I've always wanted to make a set of rebuttal videos to the 'money as debt' series, but alas I cannot commit the time . There is so much wrong in that series it boggles the mind. But they got one thing right, mismatched debt maturities which rely on roll-overs (i.e. bank lending out 30 year loans and receiving instantly-callable loans) gives the illusion of there being more money in existence than there is. But in reality, since these loans to the bank (demand deposits) are usually not called in any large part, they effectively average a high debt maturity in aggregate.
The biggest thing about the videos that irks me is that it fails to point out that people can hold shares in these banking operations, and instead uses the concept of 'banker bogey-men'.

I guess the root of the issue is that people consider their account at the bank to be "money in the bank", rather than what it really is - "money the bank owes me".

yeah, They also fail to point out that the banks pay out all the interest in the form of interest to depositors, wages + other overheads and dividends so the whole "Bankers going to own the world through forclosure" just isn't true,

But the reason I posted this video was to try and make the point that there is a direct relation between inflation and the credit.

 

[medicowallet]

This question is for Tysonboss

7/3/11 saw a drop in share value, with some "volatility" (asx200 down 66 points)

What volatility was experienced by house prices today?

 

[Tysonboss1]

This question is for Tysonboss

7/3/11 saw a drop in share value, with some "volatility" (asx200 down 66 points)

What volatility was experienced by house prices today?

I have no idea, ( and I think that is a positive )

But you can bet it was alot less, People just don't Buy or dump property every time the wind changes as they do shares.

I personally try and ignore the daily fluctuations of the share market unless it is working in my favour ( eg. dropping the prices of the businesses I wish to buy ), I don't follow the typical attitude that the daily fluctuations are making me richer or poorer, If I did I would be letting emotions into my investing and that is a fatal flaw.

 

[Tysonboss1]

This question is for Tysonboss

7/3/11 saw a drop in share value, with some "volatility" (asx200 down 66 points)

What volatility was experienced by house prices today?

One the thing I will just point out is that it was the share prices that dropped, Not the share values, their is a difference. Price is what you pay, value is what you get. Prices change by the minute, values rise or fall slowly over time with the earning power of the asset.

 

[medicowallet]

One the thing I will just point out is that it was the share prices that dropped, Not the share values, their is a difference. Price is what you pay, value is what you get. Prices change by the minute, values rise or fall slowly over time with the earning power of the asset.

is THERE?

It truly sounds like you have been listening to real estate agents too long.

http://www.google.com.au/search?hl=...e&sa=X&ei=QJl1TfDUJJGOvQO7l6DXBQ&ved=0CCAQkAE

Perhaps the top 5 will show that the word value can be used to infer price.

You failed to answer my question, and since you are a staunch believer that realestate is not as volatile as shares (btw I agree, but just not by the magnitude you infer), can you please quantify how much volatility was in the property on that particular day, because as you use the daily fluctuations in share values to support your argument, obviously you have a comparison rate for residential properties to support your claims.

So, are they justifiable claims, or merely beliefs?

 

[Tysonboss1]

is THERE?

1, It truly sounds like you have been listening to real estate agents too long.

2, You failed to answer my question, and since you are a staunch believer that realestate is not as volatile as shares (btw I agree, but just not by the magnitude you infer), can you please quantify how much volatility was in the property on that particular day, because as you use the daily fluctuations in share values to support your argument, obviously you have a comparison rate for residential properties to support your claims.

So, are they justifiable claims, or merely beliefs?

1, No, just some of the greatest investment minds of the past 100 years.

2, No, I can not quantify it on a daily basis, But if you look at the total percentage of property traded each compared to the market as a whole and then compared it to the total % of issued shares traded each day you would see that by far the share market has alot more buying and selling going on, this liquidity creates volitility.

But any way volitility is not a real concern to me, I don't really understand why you are obsessing over volitility. I think the only comment I have made on the subject is that "property is not as" volitile as shares, I never said property had no volitility, and I think most people would aggree with that.

 

[Tysonboss1]

Perhaps the top 5 will show that the word value can be used to infer price.

These are the top five you suggested,


•a numerical quantity measured or assigned or computed; "the value assigned was 16 milliseconds"
I don't think that relates to price

•fix or determine the value of; assign a value to; "value the jewelry and art work in the estate" You can value the jewelery and artwork in the estate, But it can then sell higher or lower than that figure on any given day, so again this is not infering price


•the quality (positive or negative) that renders something desirable or valuable; "the Shakespearean Shylock is of dubious value in the modern world" Again here value is not refering to the price somthing will trade at


•prize: hold dear; "I prize these old photographs" not price


•the amount (of money or goods or services) that is considered to be a fair equivalent for something else; "he tried to estimate the value of the produce at normal prices" again this is not refering to price, this is like saying, " The car is valued at $10,000 but he bought it for $8,000 at auction

 

[sinner]

Just for the record, I have been keeping track of the numbers supplied by realestate.com.au, specifically the ratio "Advertised property" which represents supply vs "People looking" which represents demand.

While most of the charts aren't declining as severely as they were during the later portion of last year, we are still way way down on supply/demand levels. Early last year we were seeing over 100 people per house in almost all the suburbs and now it's half of that. For example in Richmond, VIC demand is down 51% YoY. In Marrickville NSW 53% down YoY. In Windsor QLD 52% down YoY.

This is in combination with decreased home sales volume below preGFC levels which leads to an inherent increase in supply, an increase in the total number of new dwellings available in 2009 which remains unmatched by incremental demand (see previous posts by me for charts), continued stress in overseas credit markets (take a look at Eurodollar -not EURUSD- futures to see what I mean) which is the biggest threat to ongoing mortgage origination by our banks, continued lack of deposit growth to match loans growth, strong Aussie dollar introducing serious structural imbalances and reducing global competitiveness to the non resource portion of the economy, etc.

Meanwhile, I would ask, does anyones wage growth over the past 25 years match this curve?


Yet somehow, we are expected to believe that this time, it's different. To me, credit risk exposes this whole thing as a farce. If we wake up tomorrow and Aussie banks/corporates can't find overseas credit to rollover their ****ty short term debt (you know, the accepted practice of paying off debt with more debt), it will be all over a lot sooner than most think.

 

[Tysonboss1]

Here is a video if you want a brief explanation of the difference between "price" and "value".

If you don't agree thats fine, we can agree to disagree. But I think you will get a benefit from watching this.

.

 

[medicowallet]

•fix or determine the value of; assign a value to; "value the jewelry and art work in the estate" You can value the jewelery and artwork in the estate, But it can then sell higher or lower than that figure on any given day, so again this is not infering price

I was not referring to the value of property in 6 weeks, I was referring to the value of shares and properties on that particular DAY.

If you have just sold something, are you not establishing its price
If I have the exact same item, it is not my ideals which determine the value at the time, it is what people are willing to pay.

One the thing I will just point out is that it was the share prices that dropped, Not the share values, their is a difference. Price is what you pay, value is what you get. Prices change by the minute, values rise or fall slowly over time with the earning power of the asset.

Ok I'm sold on your idea,

I am going off to the bank now to take out a new loan.

I have determined that my 4 BR investment property in Cairns is valued at 2.4 million, so I am going to take a loan out against it and buy 5 more properties in the street, with that loan.

 

[medicowallet]

What I was saying here was that if,

Woolworths sold bought 10 cans of baked beans per year for $1 per can and sold at $2 a can and in 2010 made $10 profit, the crowd may value the business at $100, because they want a 10% return.

10years later after hyper inflation woolworth buys the baked beans for $1000 a can and now sell for $2000 a can and they make a profit of $10,000 per year, the crowd will probably value the business at $100,000.

So with nothing changing in the way of sales except inflation, the fair price for the business rose from $100 to $100,000.

Have you read this Tysonboss?

Oh dear, you just did?

Oh dear, you feel silly?

That is OK. I won't tell anyone.

 

[R35]

Just for the record, I have been keeping track of the numbers supplied by realestate.com.au, specifically the ratio "Advertised property" which represents supply vs "People looking" which represents demand.

While most of the charts aren't declining as severely as they were during the later portion of last year, we are still way way down on supply/demand levels. Early last year we were seeing over 100 people per house in almost all the suburbs and now it's half of that. For example in Richmond, VIC demand is down 51% YoY. In Marrickville NSW 53% down YoY. In Windsor QLD 52% down YoY.

This is in combination with decreased home sales volume below preGFC levels which leads to an inherent increase in supply, an increase in the total number of new dwellings available in 2009 which remains unmatched by incremental demand (see previous posts by me for charts), continued stress in overseas credit markets (take a look at Eurodollar -not EURUSD- futures to see what I mean) which is the biggest threat to ongoing mortgage origination by our banks, continued lack of deposit growth to match loans growth, strong Aussie dollar introducing serious structural imbalances and reducing global competitiveness to the non resource portion of the economy, etc.

Meanwhile, I would ask, does anyones wage growth over the past 25 years match this curve?


Yet somehow, we are expected to believe that this time, it's different. To me, credit risk exposes this whole thing as a farce. If we wake up tomorrow and Aussie banks/corporates can't find overseas credit to rollover their ****ty short term debt (you know, the accepted practice of paying off debt with more debt), it will be all over a lot sooner than most think.

****
"Meanwhile, I would ask, does anyones wage growth over the past 25 years match this curve?"

Just taking the last 15years for example..

I think the answer is yes....assuming 1995 = 200 and 15 years later = 600. So triple salary overall....

When I left Oz in 95 the average accounting Graduate salary was around $30k...most of my mates are pulling down $100k+ now that stayed in that space....thats over triple increase in base.

I know others that moved into Investment Banking and are pulling down 10times+ the starting Acctg salary now.

Property is to some extent linked to affordability otherwise the masses could not afford to own it.

 

[againsthegrain]

****
"Meanwhile, I would ask, does anyones wage growth over the past 25 years match this curve?"

Just taking the last 15years for example..

I think the answer is yes....assuming 1995 = 200 and 15 years later = 600. So triple salary overall....

When I left Oz in 95 the average accounting Graduate salary was around $30k...most of my mates are pulling down $100k+ now that stayed in that space....thats over triple increase in base.

I know others that moved into Investment Banking and are pulling down 10times+ the starting Acctg salary now.

Property is to some extent linked to affordability otherwise the masses could not afford to own it.

hmmmm those figures don't march, graduate accounting salary on 100k? more like $25 ph thesedays with everything being outsourced and nobody wanting to take on overheads.

Check out seek, any job 65 - 100k you are looking at 5 - 10 years experience with a shopping list 2 pages long of skills and education

Not talking about accounting specifically but average graduate programs range between 32 - 55k thesedays, take my word for it I still have plenty of friends who are at uni or just finished.

 

[So_Cynical]

****
"Meanwhile, I would ask, does anyones wage growth over the past 25 years match this curve?"

Just taking the last 15years for example..

I think the answer is yes....assuming 1995 = 200 and 15 years later = 600. So triple salary overall....

I know the answer is no...i am not making 3 times what i was 15 years ago, that's nuts..im making about 30% more than i was 15 years ago...200%

 

[white_goodman]

When I left Oz in 95 the average accounting Graduate salary was around $30k...most of my mates are pulling down $100k+ now that stayed in that space....thats over triple increase in base..

really lol...

so your mates in 95, some 15 years ago are still at the graduate accounting level? So your comparing graduate accounting level in 95 (30k) and their current jobs in 2011 after 15 years in the field (100k) and are deducing that wages have gone up 300%?

wow just wow

 

[mazzatelli]

1, Introducing more credit increases the total money supply in the economy, the money supply is not fixed it expands and can contract, as the money supply expands (inflates) faster than the total goods and services produced in the economy you will see inflation of prices accross the board, So expanding credit should generally see increasing inflation, thats why the RBA increases rates to try and slow inflation.

If the money supply contracted compared to the total amounts of goods and service moving deflation would occur, Inflation is regarded as the lesser evil hence the rba has a policy of allowing a small % of inflation to occur over time, rather than fact deflation and depression.

2, not sure how you would go about doing that

3, you lost from here in

lol, thanks for the 101 on monetary policy
correlation doesn't imply ratio =1. Yes housing should only increase with inflation, but that relationship has broken down in recent times.
My point is hedging for inflation atm with residential capital value is not optimal.

No I'm not lost, I make my living from hedging - if your option knowledge is up to scratch, the example I gave is analogous to hedging something with a delta of 0.9 with another of 0.2 and differing convexity. Even though they may be related, the replication is not perfect.

But I'll leave it at that, we can agree to disagree.