Australia vs the USA

[HiredGoon]

As you may know, the USA is seeing widespread falls in property prices.

Here is why I believe Australia will fare WORSE than the USA.

-Australia has higher interest rates than the USA

-Australia has a higher percentage of variable rate loans vs fixed

-2/3 of landlords and the landlord industry overall declared a loss last financial year, while the lack of negative gearing means that most US landlords are cashflow positive.

This also means that the property investor business model RELYS on capital gains, meanwhile Australia is now heavily indebted and many people are priced out.

-House prices to income ratios are 3.1 in the USA and over 6 in Australia.

-World bank says Australia has 2nd most overpriced property in the world, compared to rents & wages.

-We have low-doc 100% loans given by non-bank lenders packaged and into international credit markets - just like Subprime. Rams & Bluestone for example.

-Rents have kept track with wages, it is prices that have disconnected from fundamentals causing terrrible yields. Rents would have to double for houses to be worth anywhere near their current price and yield more than the risk-free cash rate. There is no capacity in the renters wages for this to happen.

The supply argument:

-The census shows that construction of new households has exceeded new arrivals divided by average household size (2.6) thus any shortage is due to an increase in demand above long term trends.

-830,000 houses (or 10% of total) were vacant on census night.

-Number of people per dwelling (2.6) has remained the same since the 2001 census.

-The number of households increased by only 80% of the number of new dwellings constructed since 2001, thus in effect 20% of new developments remain empty.

What do you think?

 

[letiha]

ok, so 10 % of homes were vacant on cenus night...... hhhhmmm maybe people were out to dinner!!!! did not mean that the houses we actually empty.

 

[MPmelb]

who knows, anything could happen really.

The housing market is very highly priced.

But in the USA, there is a lot more lending in the risky subprime whereas in Australia our regulations are a lot tighter.

In terms of interest rates, some regions of the country are threatening to overheat more than others - for example WA, Qld where the mining boom has made the ecomomy rich. I think it is unfair to lump everyone with an interest rate rise as a result.

 

[HiredGoon]

ok, so 10 % of homes were vacant on cenus night...... hhhhmmm maybe people were out to dinner!!!! did not mean that the houses we actually empty.

Don't you remember filling in the census? You get the census form for a couple of days, and fill it in on that night. You get pestered if you don't fill it in. The stats are accurate.

The number of empty houses went up since 2001 in the capitals but up far more in the non-capitals, which suggests a lot are holiday homes.

 

[HiredGoon]

But in the USA, there is a lot more lending in the risky subprime whereas in Australia our regulations are a lot tighter.

Thank God Australia doesn't have low-doc 100% no-deposit loans!

In terms of interest rates, some regions of the country are threatening to overheat more than others - for example WA, Qld where the mining boom has made the ecomomy rich. I think it is unfair to lump everyone with an interest rate rise as a result.

The whole purpose of the reserve bank is to protect the currency of Australia. House price inflation over the last 10 years has dwarfed returns in a saving account, thus if anything rates are too low.

The overnight rate that banks charge each other spiked heavily due to global credit worries, and the RBA printed 5 billion dollars and injected that liquidity into the system until rates returned to their target rate (which had just been raised)

The free market in credit is pricing in much higher rates, and the RBA printing 5 trillion dollars and dumping it into the economy is not going to slow inflation! Rate rises ahoy.

 

[WildDog]

who knows, anything could happen really.

The housing market is very highly priced.

But in the USA, there is a lot more lending in the risky subprime whereas in Australia our regulations are a lot tighter.

In terms of interest rates, some regions of the country are threatening to overheat more than others - for example WA, Qld where the mining boom has made the ecomomy rich. I think it is unfair to lump everyone with an interest rate rise as a result.

we don't have any tighter regulation(our subprime equiv is low doc/no doc), we just do it a little differently, that what the banks has been telling us, but I still hold reservation on their comments. I believe we will see some shake down in some of our low doc/no doc lenders come out of the wood soon.

what they did with the US debt is they package and sell and resell and pass the parcel around... this problem is no longer mine type of thing...
and we don't know who end up with a bad parcel of unpaid debt

we may not pass the parcel around but I notice some lender here take a gamble on taking the mortgage insurance on themselves to pocket the extra $$$ instead of using that money to insure the mortgage through an underwriter, so when people default and they cant recover the cost the lenders cop the lost, not the underwriter. Easy credit makes people takes higher risk and with higher risk you know the drill .. Westpoint...ACR..Fincorp

RAMS came out of the wood a couple days ago advise the stock market they maybe expose to this subprime stuff because 43% of their cash comes from US ..so it may cost them more to borrow and may have to jack up higher than 0.25 to cover their cost on their low doc loan etc...
down go the stock 40% ...

imagine the consequences when low-doc people cant afford the repayment, then comes 0.25 increase by RBA but oops they wont cop 0.25 increase they may cops 0.5 increase and their go the begin of the end for this home buyer.

this stuff is like a chain reaction one a few cards blow up, the whole house comes down ... and the bad things is now one know how much money people going to loose until the whole thing settle down and people work out who got what on their books and the thing still kicking dust and no sign of settling down so we may see more bad news coming out in the near future.

PS: Macquaries Bank is one of the bank that expose itself to this stuff
and came out and said it may faces lost of millions in one of their Fortress fund so much for the word Fortress

Cash is King right now and the day of cheap credit are over so buckle up for more rate rise
age old wisdom...higher return, higher risk just we had it so good people don't believe in that stuff any more they just focus on high return

 

[BV]

Cash is King right now and the day of cheap credit are over so buckle up for more rate rise
age old wisdom...higher return, higher risk just we had it so good people don't believe in that stuff any more they just focus on high return

Cheap credit maybe over but easy credit probably won't be.
Due to our higher interest rates that the US, EU etc,
lots of overseas money would be queing up to enter our market. No?
The risk for them is small, it's not that they are lending us money with no security.
Cheers

 

[HiredGoon]

lots of overseas money would be queing up to enter our market. No?

No. We've seen overseas money leave big time - our dollar dropped 3% over the last few days.

credit crunch => yen carry trade unwinding. With a lower dollar CPI is also likely to go up, causing higher rates.

 

[super_sam]

-We have low-doc 100% loans given by non-bank lenders packaged and into international credit markets - just like Subprime. Rams & Bluestone for example.

A minor point. I dont know of any lender that will do over 95% low doc and 80% no doc. Rams only do 85% low doc Bluestone I think do 95%

 

[Sunfish]

Does anyone else remember NatR on the Derivex threads swearing that there was no "cheap" finance coming into Oz? She claimed to work in international banking and dumped on me whenever I spoke of a carry trade.

 

[willair]

No. We've seen overseas money leave big time - our dollar dropped 3% over the last few days.

credit crunch => yen carry trade unwinding. With a lower dollar CPI is also likely to go up, causing higher rates.

HG,How many investors do you think this will worry,not the sideline
soap/box dropkicks who every time the media bounce around the
next black swan to land in Australia Idea everybody thinks it's
1929 all over again,the problem is the stupidity that lurks
within the Media these days is a joke, does not worry me if the
ASX drops another 500 points then we will see who still has
their pants on when low tide comes in..willair..
BTW i'm only back to the levels where i started in JAN this year,but that is 375% up from 2004..

 

[alexlee]

And why is a bust a bad thing for people who are still in the accumulation phase? I'm looking to buy. That means lower prices are good. Sure it may mean that it's harder to find loans, but that's for everyone. Those with strong balance sheets and cashflow will still be able to find loans. If not, the market is going to get so bad that buying even one property at a really cheap price will mean higher profits in the future.

Don't get me wrong: I think people should batten down the hatches. Keep the LVR low. Save more money. But a bust would be an opportunity, because I still believe in the long term growth of the Oz property market.
Alex

 

[meatgroup]

"Keep the LVR low"

Alexee, this makes an interesting point. What is a "low" LVR in times of measured uncertainty?

 

[BoatBoy]

And why is a bust a bad thing for people who are still in the accumulation phase? I'm looking to buy. That means lower prices are good. Sure it may mean that it's harder to find loans, but that's for everyone. Those with strong balance sheets and cashflow will still be able to find loans. If not, the market is going to get so bad that buying even one property at a really cheap price will mean higher profits in the future.

Don't get me wrong: I think people should batten down the hatches. Keep the LVR low. Save more money. But a bust would be an opportunity, because I still believe in the long term growth of the Oz property market.
Alex

MMMmmmmm LOC, nice big warm and fuzzy LOC.

Me feels quite good.

Dave

 

[alexlee]

"Keep the LVR low"

Alexee, this makes an interesting point. What is a "low" LVR in times of measured uncertainty?

As low as possible, anyway. If you assume, say, that the current market will fall by 20%, then a 60% LVR (at current prices) will mean that after a 20% fall you're still at roughly 80% LVR. My own is about 56% at current (probably due to fall) market prices, so I'm quite happy to just sit here and wait it out. If I'm wrong and it bounces back tomorrow and a new boom starts, my existing IPs will still go up.

I would probably define low as where your cashflow is still manageable even with interest rate increases, and at a level when the bank won't call in the loan (of course I have no idea whether or on what criteria the banks will do that).

Remember, though, I've never been through a bust. That flat period in 2003 in Brisbane doesn't count. This is all new to me too.
Alex

 

[BV]

MMMmmmmm LOC, nice big warm and fuzzy LOC.

Me feels quite good.

Dave

Unless the bank pulls the plug on our LOC's in which case we are gone...
Cheers
Bill

 

[Peter_Tersteeg]

Thank God Australia doesn't have low-doc 100% no-deposit loans!

Your own example debunks your argument. All of the search results showed lenders who offer 100% loans and lo doc loans - in different products.

The Australian equivalent of the US sub-prime makes up less than 5% of the Australian market whilst in the US I believe it's over 20% of the market place. Lo doc loans are not the same as US sub-prime loans.

Certainly the US sub-prime melt down is having an effect on the Australian and world markets, but the US will feel it a lot more than anyone else.

 

[alexlee]

I think the US loan practices were / are worse.

As far as I know we didn't have 2% hybrid ARMs (basically variable rate loans that have 2% payments for the first 2 or 3 years, then rates adjusting upwards INDEPENDENTLY of Fed rates). People are facing rate adjustments of SEVERAL % points.
Alex

 

[Christie Lee]

Our loans are low doc and through wizard home loans. I rang my wizard guy this morning and he said that wizard loans won't be affected by the non RBA interest rises because they're prime loans.

We were going to buy another investment property very shortly but will wait now to see what happens to prices. Hopefully they will go down a bit and we can get a couple "bargains"

I am wondering though if we should fix our interest rate as they are talking about another rate rise in Novemeber. What is everyone else doing?

 

[alexlee]

Though Wizard has the banking of GE, which makes it different from, say, RAMS or Bluestone.
Alex