Real life examples of downturn

[Peter 14.7]

There is a physics law that says Energy is neither created or destroyed, it simply changes form. From motion to heat from heat to light.

Money can act the same. The market has crashed because someone sold out and someone bought. That means someone got out with cash and it has to go somewhere. In the bank at 8%? Into property at 4%? plus CG.

I cannot say about other states but NSW inner CBD rents are rising because stock is falling. Will this stop? All this gloom make property a safer bet. Last big drop was tech crash in 2001 and look what happened there.

The USA has an excess of housing. We do not.

Peter

 

[joeExpat]

There is a physics law that says Energy is neither created or destroyed, it simply changes form. From motion to heat from heat to light.

Money can act the same. The market has crashed because someone sold out and someone bought. That means someone got out with cash and it has to go somewhere. In the bank at 8%? Into property at 4%? plus CG.

I disagree completely. Wealth is currently being destroyed, not transferred. The conservation analogy does not apply.

As for property... I highly doubt 2008 will be the bottom, Australia has a way to go down yet.

 

[Peter 14.7]

Hello JoeExpat

Good to see you on line.

If you disagree what so you say to the fact that Merril Lynch was worth say $100 and now is worth say $10 (hypothetical numbers of course). As such some got paid $100 at one point and may wellhave the cahs and if they did buy another share, then they gave it at the inflated prices to another buyer?

We have Banks, Miners, etc announcing record profits here is Aus. A lot of people are making a lot of money.

If they are spooked to go back into shares then where else will they invest? Cash or Property?

Regards Peter 14.7

 

[Ausprop]

yeh but it may have only been one person that ever got the $100. Prices are set at the margin, both on the way up and the way down.

 

[Bill.L]

Hi all,

Peter, your analogy is wrong and right in some ways.

Wealth is not destroyed, because it was not created in the first place. however many people believed it was created in the first place, and borrowed/spent against that wealth.

Taking the Merrill hypothetical example, in 1994 it was $10 then went to $100 and now back to $10. People/institutions who bought at $10 and held to $100 still only have the piece of paper that says they owned one share of the company, yet they treated it as if it was money they had made, and spent/borrowed accordingly.

Now that the price has gone back to $10, they consider that wealth ($90) has evaporated, when in reality it only existed if they had sold at $100. As Ausprop stated the value is set at the margin where only a very small % of shares change hands.(and often it is the same shares that are traded by traders between each other)

Money itself is created (there wasn't any 10,000 years ago) and is really only an idea. It has no intrinsic value itself, only what someone else is prepared to give you for it. Right now the value of money is rising, which is the hint from the market of where best to put your cash. This will of course change over time.

bye

 

[craigb]

gc thats awsome , i bet youve never looked back since, since you sold of course?

 

[Peter 14.7]

Hello All

Following my anology, which I think we all accept that money is a gov guarantee of buying power and therefore is created but the pont is.

Again with ML some traders would have sold at $100 or $80 or $75 due to other reasons than picking the top. Perhaps they wanted the money to invest elsewhere into say a new Electirc Car like the Volt? Or they had to pay out someone super drawdown and the retirees are presently on a world holiday, spending that cash?

So my point is money goes around. In 2001 the tech crashed and lot of money flowed into property. This time there is huge amounts in super and the new Gov laws allow ( I understand) direct investment in property.

And using you same analogy, those holding $10 shares, unless they go bust should eventually see those shares rise again as confidence returns.
Some are clearly buying at $10 (since that is thier worth) as they see the risk worth the potential return.

Unitl this country loses jobs big time, the present slowdown is probably a healthy rest form excess. It means those in middle managment achieve nothing jobs will be sacked and find more productive employment elsewhere. Businesses tighten margins as sales drop and get rid of excess. Unsustainable operations die and that is all the better for the economy.

I am way off topic by the way. Sorry Jacque.

On the down turn it is real and driven by the above false expectations of the GENY and Xers who spent like no tomorow and instead of 80's personal loan, 90's credit card they used the magical 2000 invention the LOC linked to thier home.

Trouble is where personal loans were 15% interest and CC were 20% , the LOC were only 7%. So people had unlimited equity as security and afford twice as much due to the lower servicability needs. No it has gone to 9.5% and values dropped 20% it is all unravelling.

Peter

 

[jagmcmanus]

This from todays SMH:

A five-bedroom 1880s Summer Hill residence has been sold for a record $2.03 million, bettering the suburb's record of $1.8 million.

The auctioneer Nicholas Lyell accepted bids that progressed $90,000 above its reserve price. It last sold for $650,000 in 1997.
________

Thats not bad over 11 years, although it would be a unique property (heritage listed)

 

[WinstonWolfe]

This from todays SMH:

A five-bedroom 1880s Summer Hill residence has been sold for a record $2.03 million, bettering the suburb's record of $1.8 million.

The auctioneer Nicholas Lyell accepted bids that progressed $90,000 above its reserve price. It last sold for $650,000 in 1997.
________

Thats not bad over 11 years, although it would be a unique property (heritage listed)

10.9%pa, not allowing for capital expenditure, of which I bet there was a lot

 

[Ajax]

Inner city Sydney house prices are rising (welll specifically Redfern).

Redfern Region: City and East (data in blue)

Houses 6 mths to Feb 08 $611,000 median 6 mths to Aug 08 $670,000 median 10% Change

Did some searches on development applications around Walker and Morehead Streets...found 2 that in total were over $100m in estimated development costs-demolition of low level housing commission flats and construction of new apartments and retail/commercial space.

D/2007/1055/A 44 Morehead Street REDFERN Section 96(2) development
application to modify Condition No. 1 (Approved development), Condition 22
(Fire isolated stairway for buildings 2 & 3), Condition 37 (Footpath Damage
Bank Guarantee), Condition 54 (Hours of work & noise), add Condition 49A
(Details of grey water treatment system and rainwater tanks), and delete
Condition No. 19 (Loading within site) and Condition 21e (Minimum 3 month
tenancy agreement) of the approved redevelopment scheme (Ref: D/2007/1055).
The approved development scheme comprises the demolition of 10 existing
buildings, tree removal and the erection of 4 apartment buildings, 40
townhouses and 2 community rooms on the site bounded by Walker, Kettle,
Morehead and Phillip Streets, Redfern (Redfern Estate). 14/07/08 Being
assessed David Hannam $34,212,338

D/2008/203 66 Walker Street REDFERN Demolish existing buildings on
site and construct two five-storey buildings comprising of 149 residential
apartments, 152m2 commercial/retail space, 130 basement car parking spaces
and 70 bicycle parking spaces. 15/02/08 Being assessed Bridget Boyes
$68,272,713


Over $1bn in development dollars being spent on Redfern in the next few years.

 

[Witzl]

This is a good thread

On the topic of where the wealth is moving, i definitely think that over the next 12 months or so, we will see a lot of wealth move into property.
More and more you read/watch the mass media, and they are talking up property, saying that is where all the investors are going to start parking their money - as the faith in the stock market is gone.
Just last night, channel 10 news was talking up property like it was the best thing since sliced bread! I believe they interviewed one financial dude who said "you'd want to get in quick, because the best deals are going to dry up in the next few months".
.... thats a stark contrast to just a few months ago!!

I'm no expert, and i certainly wasnt around during previous stock market crashes..... but i definitely think its going to be a similar story to what happened in the past:
# 1987 crash - investors pumped money into property, property boomed in following years
# 1999 dot-com bubble burst - investors moved away from shares to property, and property boomed in following years

Of course there were other factors that compounded with the above events to help with a boom in property - for example in 2000 we had the FHBG.
I think that this time around, so far we dont have any strong factors like the FHBG helping to push up property prices, so the boom might not be quite as strong.
HOWEVER - i think that the record low levels of construction, high immigration, and (in sydney) the long time between booms will all combine to make the coming boom a good one.

As for timing - WHO KNOWS? I certainly dont claim to have any idea. I do however, intend on buying asap so that i am prepared for what will come. If it takes 12 months or 3 years..... doesnt matter. Buy right, and the profits will come - thats what i keep saying to myself.

 

[BayView]

Another real life example of why you should always consider property as a LONG TERM (ie: at least one property cycle of approx 8-10 yrs) investment.

Tonight I attended an auction and witnessed one very happy buyer purchase a near new 2 bed 2 bath unit on the Baulkham Hills/Castle Hill border for an amazing $301,000. The vendor must have been one very desperate seller, as he paid $470,000 for it as a new unit (or possibly OTP) back at the peak of the Sydney boom, end of 2003
Very sad for the vendor, but what a bargain for the buyer
My pre-auction estimate had actually been low $400K's
I wonder how much more the vendor could have got if he'd sold it private treaty. One wonders.....

That's not an example of a downturn.

That's an example of a bad investor, selling to a good investor.

Happens every day, all over the world.

 

[jagmcmanus]

This is a good thread

On the topic of where the wealth is moving, i definitely think that over the next 12 months or so, we will see a lot of wealth move into property.
More and more you read/watch the mass media, and they are talking up property, saying that is where all the investors are going to start parking their money - as the faith in the stock market is gone.
Just last night, channel 10 news was talking up property like it was the best thing since sliced bread! I believe they interviewed one financial dude who said "you'd want to get in quick, because the best deals are going to dry up in the next few months".
.... thats a stark contrast to just a few months ago!!

I'm no expert, and i certainly wasnt around during previous stock market crashes..... but i definitely think its going to be a similar story to what happened in the past:
# 1987 crash - investors pumped money into property, property boomed in following years
# 1999 dot-com bubble burst - investors moved away from shares to property, and property boomed in following years

I don't know if property saw any real capital growth after 1987, we had high inflation and interest rates were on the rise, topping out in early 90's and this is on top of the 'recession we had to have'...

Although I agree with some of the points you raise.

The cycle is always turning and there are a lot of factors to be optimistic about.

In Sydneys hills district, western suburbs, and lower north shore a lot of older houses in established (older) streets are selling for land value. So many properties are 'roughly' feasible for a subdivision and duplex especially if you are selling in 2 or 3 years into a rising market.

This (and its debatbale) has been a previous indicator for when the market is close to a bottom, - If a layman can run the numbers and make a profit out of a simple duplex in seven hills or baulkham hills then there must be low demand, but with rates getting lowere these opportunities are too hard to most of the people on this forum to miss...

 

[BV]

Tonight I attended an auction and witnessed one very happy buyer purchase a near new 2 bed 2 bath unit on the Baulkham Hills/Castle Hill border for an amazing $301,000. The vendor must have been one very desperate seller, as he paid $470,000 for it as a new unit (or possibly OTP) back at the peak of the Sydney boom, end of 2003
Very sad for the vendor, but what a bargain for the buyer
My pre-auction estimate had actually been low $400K's
I wonder how much more the vendor could have got if he'd sold it private treaty. One wonders.....

That's the reason for putting a reserve price

 

[topcropper]

I don't know if property saw any real capital growth after 1987, we had high inflation and interest rates were on the rise, topping out in early 90's and this is on top of the 'recession we had to have'...

Property had a massive boom in 1987, that fizzled out by 89/90.

See ya's.

 

[topcropper]

I'm no expert, and i certainly wasnt around during previous stock market crashes..... but i definitely think its going to be a similar story to what happened in the past:
# 1987 crash - investors pumped money into property, property boomed in following years
# 1999 dot-com bubble burst - investors moved away from shares to property, and property boomed in following years

.

I think comparing 1987 and 2000 and linking them to what might happen today is irrelevant.

Property certainly did boom after both the 87 share crash and the 2000 tech crash. But if you look at share and property valuations at both times, shares were extremely over valued, and property was very cheap.

In 1987, shares had average PE's of over 20, and dividend yields of 3%.
Capital city property had rental yields of 8%. Rural rental yields were much higher still.
Interest rates were double didget with high inflation, so shares at a 3% dividend yield were at never before seen levels of overvaluation.

Similar to 2000. Tech stock valuations were just a joke, but property had good rental yields. The tech bust mainly effected tech shares. Anyone who owned proper companies like woolworths or the banks weren't effected much at all.



Whats happening to shares at the moment is to do with a world wide asset devaluation, due to too much debt and too much financial engineering, rising inflation and increased interest rates. Where will the money come from to pump property prices even higher if the economy is slowing?



This chart shows the disconect between rental yields and share yields in 1987,...

See ya's.

 

[evand]

Great post TC and my thoughts exactly. Investors wont pour into property if the fundamentals are crap. Frying pan into the fire lol

Its a totally different scenario to 87/88. Kudos.

 

[Witzl]

Topcropper - thanks for your post, obviously you know a heap more about what happened in the past than i do (well i am just 26), so thanks for the info!

jagmcmanus - its funny that you talk about the hills and properties selling for land value. I actually had a look in on of the recent property magazines (forget which one), and it showed that the number of sales in Castle Hill and Baulkham hills were HUGE - more than double most other suburbs. I dont know what that means, but it was an interesting statistic.

 

[jagmcmanus]

Topcropper - thanks for your post, obviously you know a heap more about what happened in the past than i do (well i am just 26), so thanks for the info!

jagmcmanus - its funny that you talk about the hills and properties selling for land value. I actually had a look in on of the recent property magazines (forget which one), and it showed that the number of sales in Castle Hill and Baulkham hills were HUGE - more than double most other suburbs. I dont know what that means, but it was an interesting statistic.

Well Kellyville was the 4th most popular suburb in the country for mortgage defaults (not foreclosure) in the 30-90 days arrears category - meaning people who are overdue by more than one month.

I assume that is overborrowing, then there is also a lot of retirees in the Hills too, maybe they are moving into retirement villages slowly...

Another factor is oversupply of townhouses in baulkhma hills, developers need to sell ASAP

 

[Witzl]

Kellyville is a very different kettle of fish to Castle Hill/Baulko.
95% of houses out in Kellyville are newish, and most were bought in the megaboom time at stupidly high prices (seriously, STUPIDLY high) and low interest rate... and then shortly afterwards, those same financially inept families used their "equity mate" to buy a few new cars, a boat, and a holiday to europe for the whole family.

So obviously they would be in mortgage default and overborrowed.

I've seen it first hand - i know a few families that were caught in this trap and either had to sell at a loss, or are paying off mortgages 20% (or more) higher than their house is worth, and struggling to do so.

... by contrast, properties in Castle Hill generally didnt experience this retard phenominon. There wasnt much stupid overpaying and insane valuations in CH/BH, i can only assume its because there wasnt any "brand new" houses to get all excited and emotional about, just good, sensibly priced slightly older property.

... well thats my take on it anyway, having lived in castle hill since i was 2.