Steven Keen may have been right all along...

[topcropper]

What is the catalyst that will propell the world into its pre-2007 economic growth conditions]

Umm. well,....thinking,...??....

Thus western nations are going to have to get off their backsides, start saving, permanently reduce consumer expenditure as a % of GDP to more realistic levels of around 60% (from current 70% odd). This will involve huge structural changes in the economy which will take several years to work themselves out.

Yes, yes, that's what i was going to say. That's why we are in the crapper. Western nations produced not enough and spent too much and it was all 'booked up'.

So are you bullish or bearish then?
You must be bearish?


See ya's.

 

[Shadow]

Lol ...pushki I just love your blind faith. The deck chairs on the SS Australis have been rearranged while the ship is sinking and your hanging onto "Its different in Australia Your going to need more than your wellingtons sweetie

Hi nonrecourse,

I posted this question to you in another thread, but you may have missed it...

You have said that you expect the 'soft depression' to exhibit the following attributes:

- Unemployment to remain a reasonably low levels
- Very low interest rates
- Increasing rents

If we have low unemployment, low interest rates, high demand for property and higher rents, then what exactly will force so many people to sell that it causes a 50% dive in residential property values.

For prices to drop 50% we would need to see massive levels of forced sales. Unless you are a forced seller, why on earth would you sell for a 50% discount? What will cause all these forced sales?

For prices to fall 50% there needs to be no buyers at 5% down... no buyers at 10% down... no buyers at 15% down. There are plenty of buyers ready to jump in right now (even before any significant falls) and even more ready to jump in at 10% down. Most people just want a house to live in and will buy when they can afford it. Many can afford it right now.

Property investors are already seeing cashflow positive opportunities without any significant falls in house prices required. Why sell for a 50% loss if you're cashflow positive?

I'm really interested to hear what you think will actually trigger this big crash. What aspect, specifically, of the 'soft depression' will force enough fully employed cashflow positive Australians to sell at a 50% loss that it causes the Australian median house price to crash by this amount?

Cheers,

Shadow.

 

[VYBerlinaV8]

I don't think the general property market is going to grow much in the next few years, but nor do I think it's going to dramatically slide. Frankly, I think it will stagnate for several years, waiting for wages to catch up again. Effectively a small to medium drop in real terms over a several year period.

Of course, I could be wrong, but I figure that I'm happy to collect rent on a cashflow positive portfolio while I wait for (eventual) capital growth.

 

[austini]

Hi Gang,

I was reading the following article the other day and found the statistics relating to Recessions/Depression interesting. Who knows what the future holds but it sort of put things into perpective:

Dividend Yields, Recessions and the Stock Market

http://www.investing101.com.au/Club/Newsletter - Feb 2009 - Div Yields & Recessions.pdf

For those who aren't as interested in dividend yields as a possible predictor of future share market performance just read the section on Recessions and Depressions.

Cheers - Gordon

 

[kaf]

I'm with Rolf on the doom and gloom thing - a bit of a scientist. You can fret no ends about each end of the bell-shaped probability curve ("property values will drop to nothing" or "There will be a massive boom in the very near future and you all going to miss it") or you can go by what has happened before in bad economic times and work on the fact that something in the middle is going to have the highest likelyhood of happening. No or little growth for a while, anxiety in the market but really everyone battening down the hatches and waiting for the sun to come out again. Don't over-leaverage, keep a good buffer, consider your job security while keeping you ears to the ground for good opportunities if you are able to pounce, keeping all of the above in mind.

That's how I'm going to approach it but then I'm no associate prof in economic like other smart people

kaf

 

[chilliaa]

Umm. well,....thinking,...??....


Yes, yes, that's what i was going to say. That's why we are in the crapper. Western nations produced not enough and spent too much and it was all 'booked up'.

So are you bullish or bearish then?
You must be bearish?


See ya's.

Its not a case of being bullish or bearish, if one just looks at long term economic growth forecasts to make their investment decisions, they run the risk of taking their EYES OF THE BALL OF CURRENT OPPORTUNITIES.

Instead i look at asset prices RELATIVE to their future earnings potential.

Right now because EVERYONES CRYSTAL BALL of the future is uncertain, asset prices are reflecting that uncertainty. So you are being compensated in many cases for the risk of that uncertainty in terms of depressed asset prices.

 

[rugrat]

I think the problem is that there are so many 'experts' out there and all of them have differing opinions. Quite simply it is all speculation and if one of these so-called experts actually sees their 'prediction' bear fruit, who isn't to say it is just dumb luck. I mean after all statistically speaking someone has to be right - but it doesn't mean they had sound judgement, they may have merely got 'lucky' (or unlucky as the case may be).

My advice is that everyone needs to stop focusing on the 'experts' so much and start focusing on their own situation. If you have job without increased risk of unemployment and you are able to survive on your wage 'if the poo hits the fan', then don't stress too much. If your employement is in an area that may well be considered unstable, have a look at what you may need to do to ensure your 'survival' if this happens. If you are in a postition where employment and holding onto investments doesn't appear particularly threatened in the worst case senario, sit back, enjoy the show and make some extra money.
Just make sure you look at your situation regularly and check how things are going.

Personally, the worse the economy has been going, the better it has turned out for DH and I, so I cann't really complain. I also have enough extra paid off my mortgage to maintain that for a year (at least) if we couldn't afford payments for whatever reason. And DH is a federal public servant, with a very secure job, so that it is unlikely we would become one of the unemployed.

I think everyone forgets that even with very high unemployment rates (say 10%) that means that 90% of people still have a job. The GFC may not be good for the economy as a whole, but on an individual basis it affects everyone differently.

In canberra (and other canberrans can correct me if I am wrong), I don't see the housing market sliding too much on a whole, there is simply too much demand and not enough supply. If some people loose there houses, it may mean a slight decrease in prices in some areas, but should still be alright for a longterm investment by someone else, because people still need to live somewhere.

 

[Pushka]

I think the problem is that there are so many 'experts' out there and all of them have differing opinions. Quite simply it is all speculation and if one of these so-called experts actually sees their 'prediction' bear fruit, who isn't to say it is just dumb luck.

In canberra (and other canberrans can correct me if I am wrong), I don't see the housing market sliding too much on a whole, there is simply too much demand and not enough supply. If some people loose there houses, it may mean a slight decrease in prices in some areas, but should still be alright for a longterm investment by someone else, because people still need to live somewhere.

Ah. nonrecourse would have you labelled as being in denial for writing that! I am with you!

 

[Antom]

Hi everyone,.

First post so go easy on me. I have a question to ask. Can someone tell me why if over the long term median house prices have been around 3 times average weekly male earnings (and by long term I mean since about 1902 to the 1980's/90's) how can prices be justified now at around 6-8 times AWME?

I'm not trying to start arguments or upset anyone and I am new to the property investment field but I do have experience as a stock market investor and I feel it is a legimate question to ask particularly when people such as Steven Keen, AMP's Shane Oliver, The Intelligent Investor newsletter and quite a few others are saying that Australia's housing market is now the most overvalued market in the world today! That we are in a bubble caused largely by irresponsible lending of huge amounts of money (low doc/no doc) loans etc at cheap rates for quite a few years now and that prices have to fall by some magnitude in order for the long term relationship to be restored.

I know long term relationships tend to hold true in the stock market, whenever the market gets ahead of itself it always corrects this was obvious before the falls which started in 2007 and its obvious now with the market trading well below the long term trend line that stocks are cheap. You can see the same behaviour if you look at a graph of Australian property prices over the last 100 odd years - long periods of over and undervaluation around the trend line.

If that long term relationship between wages and house prices is no longer valid can someone please tell me why? Every capital city in Australia now has median house prices at somewhere around multiples of 6-8 times - twice the long term average. I have thought that perhaps is it due to the number of dual income families these days and therefore the old relationship based just on one income no longer applies ie because households are earning twice as much they can pay twice as much. This might be valid if every household had two incomes but if anything the stats say that the number of single person households is increasing. Does anyone have stats on how many dual income households there are?

Does anyone have anything to offer that might answer this question? If we are in a new paradigm what's the justification and why is this not a bubble as quite a few people far smarter and more experienced than me seem to saying? Why will Australia escape the same fate that has befallen other similarly overvalued markets such Japan, USA, Spain and the UK?

 

[Artie70]

Antom....perhaps wages are undervalued compared to house prices, rather than the other way around

 

[topcropper]

Hi everyone,.

First post so go easy on me. I have a question to ask. Can someone tell me why if over the long term median house prices have been around 3 times average weekly male earnings (and by long term I mean since about 1902 to the 1980's/90's) how can prices be justified now at around 6-8 times AWME??

This subject gets done here all the time.

Median wages to house prices aren't really very relevant. What's relevant is disposable income per house hold. As society gets ever more efficient, we all get more wealthy. As we get more wealthy, we have more disposable income that can be spent, and a lot can be spent on housing.

For example, food used to be a major part of a households budget. perhaps 50%, 100 years ago. Now, with industrial farming, and only a tiny percentage of the workforce as farmers, it's a lot less. Maybe just 20%. Same with everything, cars, electrical goods, etc.

I bought a brand new falcon 20 years ago for about 25k. Today, a much better falcon is only worth about 35k. That's great value, as wages have probably quadrupled, but the cars only gone up 30%. That leaves more money that can be spent on a big house and nicely situated block of land.

Also duel incomes. Both partners working, where before mum stayed at home.

Why will Australia escape the same fate that has befallen other similarly overvalued markets such Japan, USA, Spain and the UK?

Dunno. Just hope we will. Apparently we have a housing shortage. Bit hard to see that living in the bush, but my brother knows all about it, living in Sydney. I'd think if things get real bad though, households will fill up with more people, move back with mum and dad, etc. Also, immigration will get slashed you would hope if unemployment goes up to far.

See ya's.

 

[ok180]

Hi everyone,.

First post so go easy on me. I have a question to ask. Can someone tell me why if over the long term median house prices have been around 3 times average weekly male earnings (and by long term I mean since about 1902 to the 1980's/90's) how can prices be justified now at around 6-8 times AWME?

Households are generally dual income these days. Hence 6-8 times dual income.

 

[Sunfish]

It's my theory that homeowners can (and are willing to) pay more for the "house" because the discretionary (after the basics) part of the wage has grown and the cost of fitting out the house (the manufactured items we all "need") has dropped, possibly by 90%, so that wage earners no longer need to get into a debt trap.

In the '70s cars, washers, TVs, radios, mowers were extravigantly priced and the majority were bought on the "never-never". It was about this time that phrase was coined. But HP interest rates were 10% flat from Custom Credit. That's actually 20% reducing. These items weren't real good either, and needed regular repair and were unlikely to outlive their repayments by much.

There are enough sane people out there now who can stay out of "minor" debt and commit to a large one.

Ease of finance has a lot to do with it too, but that is well known. The debt-trap thinngy isn't.

 

[Aaron Sice]

It's my theory that homeowners can (and are willing to) pay more for the "house" because the discretionary (after the basics) part of the wage has grown and the cost of fitting out the house (the manufactured items we all "need") has dropped, possibly by 90%, so that wage earners no longer need to get into a debt trap.

In the '70s cars, washers, TVs, radios, mowers were extravigantly priced and the majority were bought on the "never-never". It was about this time that phrase was coined. But HP interest rates were 10% flat from Custom Credit. That's actually 20% reducing. These items weren't real good either, and needed regular repair and were unlikely to outlive their repayments by much.

There are enough sane people out there now who can stay out of "minor" debt and commit to a large one.

Ease of finance has a lot to do with it too, but that is well known. The debt-trap thinngy isn't.

wow - very cool thinking there.

 

[yieldmatters]

Median wages to house prices aren't really very relevant. What's relevant is disposable income per house hold. As society gets ever more efficient, we all get more wealthy. As we get more wealthy, we have more disposable income that can be spent, and a lot can be spent on housing.

Only if supply is constrained or construction costs are up or government taxes are rampant. If higher disposable income means higher prices then why didn't your Falcon go up in price?

 

[Peter 14.7]

Hi nonrecourse,

I posted this question to you in another thread, but you may have missed it...

You have said that you expect the 'soft depression' to exhibit the following attributes:

- Unemployment to remain a reasonably low levels
- Very low interest rates
- Increasing rents

If we have low unemployment, low interest rates, high demand for property and higher rents, then what exactly will force so many people to sell that it causes a 50% dive in residential property values.

For prices to drop 50% we would need to see massive levels of forced sales. Unless you are a forced seller, why on earth would you sell for a 50% discount? What will cause all these forced sales?

For prices to fall 50% there needs to be no buyers at 5% down... no buyers at 10% down... no buyers at 15% down. There are plenty of buyers ready to jump in right now (even before any significant falls) and even more ready to jump in at 10% down. Most people just want a house to live in and will buy when they can afford it. Many can afford it right now.

Property investors are already seeing cashflow positive opportunities without any significant falls in house prices required. Why sell for a 50% loss if you're cashflow positive?

I'm really interested to hear what you think will actually trigger this big crash. What aspect, specifically, of the 'soft depression' will force enough fully employed cashflow positive Australians to sell at a 50% loss that it causes the Australian median house price to crash by this amount?

Cheers,

Shadow.

Exactly what I would have posted. Kudos coming.

I don't really care if on paper my property is worth 20% less if it costs me nothing to own and makes money at low interest rates. If I renting high end to and investment banker about to be shafted I would worry but I dont.

I only have an issue if I am forced to sell when low and why would I when I

1. dont margin loan on shares
2. have no debt bad
3. secure business

Still cannot see the issue.

Peter

 

[keithj]

Only if supply is constrained or construction costs are up or government taxes are rampant. If higher disposable income means higher prices then why didn't your Falcon go up in price?

You must be getting forgetful YM ..... you asked this question 2 weeks ago here (post #56).....

Can you think of some differences between the demand/supply of falcons & houses ?

 

[Project1080]

Steven Keen?
Wasn't that the guy who made a bet with someone that he'd walk up Mount Kozzie naked if property prices didn't fall 40%+? And the other guy said he'd do it if they did fall 40%+? IICCHH!!! Either way we lose. I'm moving to the moon so I can buy up before the "moon boom" starts.

Project 1080

The Project: 10IPs in 80 mths.

 

[Shadow]

Originally Posted by topcropper
Median wages to house prices aren't really very relevant. What's relevant is disposable income per house hold. As society gets ever more efficient, we all get more wealthy. As we get more wealthy, we have more disposable income that can be spent, and a lot can be spent on housing.

Only if supply is constrained or construction costs are up or government taxes are rampant. If higher disposable income means higher prices then why didn't your Falcon go up in price?

Haven't you just answered your own question there? Supply of property IS constrained. Construction costs ARE up. Government taxes ARE high.

Another key point is the emotional attachment caused by the uniqueness and individuality of housing. Most houses have certain unique features or attributes that make them desirable on an emotional level to certain people, who will often pay as much as they can afford, and bid against others, based on their emotional attachment to the house. This emotional attachment also makes house prices sticky on the downside, since people are reluctant to sell even when it may be financially prudent to do so.

Can't really say the same about Falcons (or Big Macs as per your example from last week) because if you miss out on one Falcon then there are thousand of identical ones to choose from. If you already own a Falcon, and you're strapped for cash, then you can trade down, knowing that a virtually unlimited supply of identical or better models will be available in the future.

On the other hand vintage sports cars do often trade for ridiculous sums due to their rarity value, and to the emotional attachment of the buyers.

 

[Trogdor]

As I've said before, Keen misses the point that govt's and reserve banks around the world will act in unorthodox ways to stave off unrest and unhappiness in the populace.

Look at the $1 trillion quantitative easing announced by the US fed last night (and the effect it had on devaluing the USD). UK is doing the same and so will likely the EU.

If it isnt enough they will just do more.

Print money and buy govt bonds - 2 effects:

- "finances" the govt stimulus packages for nothing (i.e. fed prints money and hands it over to the govt, via the indirect route of buying govt issued bonds on the secondary market)

- by buying long dated treasuraries it drives down long term interest costs (so you can fix for 10 years for much less - i.e. flattens yield curve.

THe next step is to print more money and buy up the toxic assets for higher prices - if it comes to that.

The reason UK/US house prices have fallen so much is their banking systems are largely stuffed - and they will be fixed sooner or later. Ours arent but we will be swept up in the global reinflation.