Brace yourself for the next stage of the property boom

[chilliaa]

Property prices fell by a few percent in 2008 after mortgage rates started to approach double digits.

What do you believe will be the catalyst for a more significant fall?

Potential risk factors:
1) Ceasation of government stimulas due to worries about financing deficits. This in itself is not a big headache, but in conjuction with the fact that we havent done anything to rectify the global trade imbalance, it could poss a risk.
2) Increases in interest rates, with most people on variable rates (this was a positive as rates came down, but it will be a negative as rates go up).

These are only potential catalysts, im not saying that property will fall significantly, only that intelligent investing involves looking at downside risk.

 

[boz]

To prop up commodity prices you don't need tril$, China alone can do it with only part of his trade surplus. Don't understimate also the power of leverage and speculation, on commodity futures leverage is usually 100 to 1, so, with 10 bil$ you leverage around 1 tril$. I think it is quite obvious commodity prices are up because of loss of confidence in FIAT money. If FIAT money or some currency collapse or some country imlode or inflation goes very high, with commodity you have a hard assets with a worldwide market ready to buy it at any moment. Also, Chinese government are not idiots, if they buy commodity instead US$ bonds is not because they love to gamble...

Yes and no. Apart from being a commodity gold carries the function of universal money. And it is different from paper, copper and nickel money as it is inflationproof.

how come that gold from 1980 to 1999 lost value big time? those were much more inflation years then the last 10 years? these days gold is tracking more uncertainty and trust in money system. So, do you think copper, oil, silver, etc. didn't quote within a range with gold price, don't you think they might be inflation proof in the long term?

If you are able to distinguish brilliant analysis from sour grapes - you will be on easy street for the rest of your life.

I think i can distinguish good analysis. Not sure weather K Marx was on the easy street for his life. In any case, I think the economic system and globailsation of today society is very difficoult to predict from anyone today, I can imagine it was beyond anyone immagination at those times.

 

[ToDo]

Potential risk factors:
1) Ceasation of government stimulas due to worries about financing deficits. This in itself is not a big headache, but in conjuction with the fact that we havent done anything to rectify the global trade imbalance, it could poss a risk.
2) Increases in interest rates, with most people on variable rates (this was a positive as rates came down, but it will be a negative as rates go up).

These are only potential catalysts, im not saying that property will fall significantly, only that intelligent investing involves looking at downside risk.

Mate, your "wealth" is not for long.

Government stimulus is a temporary measure to get construction going again. No construction recovery means no economic recovery means no withdrawal of stimulus. And there will be no construction recovery uintil property prices go up 50%. Each and every downturn property market gets us out of troubles.

Until construction picks up and reaches normal levels, rates are not going anywhere. 2008 official rate reached 7.25% and economy collapsed. It will never be near that mark again. I actually agree with Glen Stevens that 2% rise is what RBA can ever afford. rates are going to fluctuate in the band 0 - 5% for the rest of your life.

 

[Shadow]

Potential risk factors:
1) Ceasation of government stimulas due to worries about financing deficits. This in itself is not a big headache, but in conjuction with the fact that we havent done anything to rectify the global trade imbalance, it could poss a risk.
2) Increases in interest rates, with most people on variable rates (this was a positive as rates came down, but it will be a negative as rates go up).

These are only potential catalysts, im not saying that property will fall significantly, only that intelligent investing involves looking at downside risk.

I don't believe removal of the FHOG boost will have any significant impact at this stage. If they completely removed the FHOG altogether then it might, but I don't think that would be politically palatable.

The key factors for me are interest rates, physical supply vs demand, and unemployment.

We did have mortgage rates at close to 10% last year, and property prices only fell by a small amount. I think if interest rates rise by only 1-2% from here then there would be no major impact to house prices. A 3-4% rise may start to have an impact, but it would destroy the wider economy long before impacting house prices, so again I don't believe it will happen.

Excessive supply could become an issue if we over-build during a construction boom, but it is pretty easy to keep an eye on building approvals and completions to see whether this is happening. If immigration rates are reduced then that would dampen demand, but with population growth currently running at 1.9% per annum, immigration would need to be really slashed heavily to make a significant dent in the growth rate.

Unemployment so far seems to be remaining low, but definitely worth watching, in conjunction with mortgage arrears and repossession statistics. Need to keep in mind that we have had much higher unemployment rates in the past, with no significant impact to house prices.

 

[ToDo]

I think the economic system and globailsation of today society is very difficoult to predict from anyone today, I can imagine it was beyond anyone immagination at those times.

Economy is EXTREMELY easy to predict. I can not predict what you will have for breakfast tomorrow, but with what herd will do on markets - the only uncertainty is timing.

 

[ToDo]

I don't believe removal of the FHOG boost will have any significant impact at this stage. If they completely removed the FHOG altogether then it might, but I don't think that would be politically palatable.

The key factors for me are interest rates, physical supply vs demand, and unemployment.

We did have mortgage rates at close to 10% last year, and property prices only fell by a small amount. I think if interest rates rise by only 1-2% from here then there would be no major impact to house prices. A 3-4% rise may start to have an impact, but it would destroy the wider economy long before impacting house prices, so again I don't believe it will happen.

Excessive supply could become an issue if we over-build during a construction boom, but it is pretty easy to keep an eye on building approvals and completions to see whether this is happening. If immigration rates are reduced then that would dampen demand, but with population growth currently running at 1.9% per annum, immigration would need to be really slashed heavily to make a significant dent in the growth rate.

Unemployment so far seems to be remaining low, but definitely worth watching, in conjunction with mortgage arrears and repossession statistics. Need to keep in mind that we have had much higher unemployment rates in the past, with no significant impact to house prices.

My 2 cents - while you are 99% correct, unemployment is NOT a factor. Property boom creates construction boom, construction creates flow on effect on the economy and boosts overall employment. To be precise, it is not a factor at the current conditions. 90s - yes, it was, but back then we had plenty of land, therefore slump was mainly due to oversupply of property. Of course, collapse of Soviet Union and subsequent contraction of military complex in US has added to troubles.

Over build is also something not to worry about. Days of massive land releases in Syd and Mel are over, planning laws have become real nightmare. Even in NSW where they got relaxed a bit - main land release functions like subdivisions and rezoning still controlled by Local Councils, which are hijacked by anti-everything extremists (aka greens).

And argument about 7K FHOG boost is simply ridiculous. People spending half a million not because they want $7K discount. They buy simply because they no longer believe into "double digit interest rates" myth.

 

[MichaelW]

There are four factors that can cause the property crash in Australia:

1. People start to dissolve in the thin air en masse
2. Houses start falling from the sky
3. Benevolent dictatorship will replace democracy, and all greenies will be deported from the country thus paving the way for relaxed planning laws
4. Next Jesus Christ will be born and will make more land in our capitals

I exclude some fairy tale scenarios like builders all of the sudden start building at a loss.

OK, that WAS funny...

Thanks for the chuckle. And, for what its worth, I actually tend to agree with both your sentiment and your arguments for the most part. What I'd be careful with, if you intend sticking around here on SS for a while, is your tone. Its OK to be right, but you don't need to denigrate others' opinions in order to make your point. And gloating about past successes does not lend any weight to your arguments.

I think you've got a fair bit to offer the forum and hope you stick around, but I also hope you step back the tone and hubris a bit and start to offer your opinions in a more congenial and even mildly deferential tone.

Just my 2c, I'm not a Mod.

Cheers,
Michael

 

[topcropper]

Thanks for the chuckle. And, for what its worth, I actually tend to agree with both your sentiment and your arguments for the most part.

OK, so you agree with todo..??

So the GFC is not over, the sharemarket rally is all a bubble, a sucker rally? The real share crash is about to start, with the market way lower than 3150? So unemployment will really go into double figures like some forecast? Companies going bust everywhere?

And we are going to have a resi property market boom like never seen before with all the carnage that's about to happen..??



Sometimes I wonder what the hell I'm doing here?


See ya's.

 

[MichaelW]

OK, so you agree with todo..??

And, for what its worth, I actually tend to agree with both your sentiment and your arguments for the most part

But not in their entirety...

I was specifically talking about the arguments I quoted and not any of the stuff you've mentioned above. I've had him on a bit of mental auto-filter for the tone reasons I outlined in my post above.

I'll go out on a limb and put my 100% intuitive, gut-feel thoughts out there in public forum land... I think resi property is about to take off for reasons I just posted at length in another thread. I also think there is a big correction coming in the US yet as their economy still stinks big time and their bounce was way too big. I've got about $100K in gold at the moment as I think the US is dead and their currency with them. I think the ASX will be a tad more robust, but will probably cop a bit of a ripple effect when the Dow tanks. We're more aligned to China now and will benefit from that to some degree. A lot hinges on the strength of the Chinese economy and the ability of the world to transition to Chinese consumer demand away from the dead US consumer.

I don't know that we'll test previous lows, but I do see a serious equities market pull back coming. But that's all just tummy rub stuff. I binned my crystal ball months ago.

Cheers,
Michael

 

[topcropper]

I also think there is a big correction coming in the US yet as their economy still stinks big time and their bounce was way too big. I've got about $100K in gold at the moment as I think the US is dead and their currency with them.

If the US is dead, then how could you be such a bull? The US accounts for such a large amount of world consumption and GDP output.

What's happening over there is a big flushout. But once the US dollar drops low enough, their massive manufacturing industries become competitive again. They start employing again, and consuming.

At least the US still has it's manufacturing industries. Unlike the other places that are in far more trouble, like the Poms.

I just can't understand how anyone could have an even slightly bullish view about what's coming if they thought the US was buggered?

A lot hinges on the strength of the Chinese economy.

Agreed. China and the rest of Asia. China has been stockpilling commodities. It's all been a punt, and looks like paying off if the US and Europe can pull themselves together in time for China to ramp up again.

If the US is buggered, who the hell are they going to be producing for? Why would they then want our commodities? With commodities in the crapper, we are just one enormous services consuming country. No different to England, Ireland and Iceland.


See ya's.

 

[MichaelW]

If the US is dead, then how could you be such a bull? The US accounts for such a large amount of world consumption and GDP output.

I just can't understand how anyone could have an even slightly bullish view about what's coming if they thought the US was buggered?

TC,

For me its just a question of timeframe I suppose. When I say buggered, I mean for at least the next 2-3 years. I've probably been reading too much John Mauldin and his muddle through economy analogy.

I just can't see their unemployment rate turning the corner any time soon, and if it does it will be from a record high number. They're in pain and will be for a few years yet. Add to that the wealth destruction effect from their massive property bubble collapse and their consumer is severely hurt which has a negative feedback loop impact on their economy. They just keep printing money and monetising the debt through quant easing. Its gonna hurt.

Hence my view that their currency as the global reserve is also a bit of a stupid call. I note China just bought the first IMF offering under their special drawing rights using a basket of currencies. The Chinese are also buying up all their domestic gold production and advocating that all their citizens do likewise and they're buying hard commodities across the board instead of us government backed debt.

There's big moves in play at the moment and a return to the old normal of a few years back is not going to happen any time soon IMHO. But I sincerely hope I'm wrong.

Cheers,
Michael

 

[aussierogue]

Topcropper - i think that most people would admit that the old adage of the USA getting sick the rest of the world catches a cold is not longer necessarily true. Things have changed.

But yes that is a major connundrum - that we are all relying on china yet china relies heavily on the usa to consume their goods!. On the ground in China they are dead scared about the weakness of the US economy.

There is an arguement that the current rebound is all about the stimulus packages and hence mostly public funded - not private sustainable invesments...

And who says the usa economy wont be rooted for years to come? its happened aleswhere..

 

[MichaelW]

There is an arguement that the current rebound is all about the stimulus packages and hence mostly public funded - not private sustainable invesments...

This is my perspective too. And the US citizens and senate are starting to latch onto this problem too and challenge all the quant easing. Germany and others have openly stated their opposition to this approach. The US is basically underwriting all the bad debts taken on by banks with their massive application of leverage in the derivatives market with the issuance of new public debt. This should put a floor under the market as those bad debts then don't have to be written down.

But, there was so much of it that the quant easing is enormous and has huge ramifications. The US consumer is hunkering down and their finance markets are in disarray. Obama has two pretty stark choices: deflation or inflation. And, to be fair, its no choice at all really. He'll keep printing his way out of this mess. Inflation is the dead set winner in that weigh up. China knows this so is moving to get out of US denominated assets and into hard commodities. In parallel they're moving to replace the USD as the global reserve.

As I read one US commentator to say the other day: "You better hope we can get inflation".

I'm betting on their ability to do so by taking out my gold hedge. Helicopter Ben has been replaced by Helicopter Obama. Hopefully their senate allows it to continue as the flipside is too painful to consider.

Cheers,
Michael

 

[chilliaa]

What's happening over there is a big flushout. But once the US dollar drops low enough, their massive manufacturing industries become competitive again. They start employing again, and consuming.

At least the US still has it's manufacturing industries. Unlike the other places that are in far more trouble, like the Poms.

see ya's.

I agree 100% with this post. But how do we profit from it.
To profit we need to buy US non-consumption based companies in US$. But we have to be careful because of our exchange rate. There is no point getting a 20% profit in US$ terms if our currency appreciates 20%.

I really wanted to go hard early this year in buying US companies. It was the buy of the century, unfortunately our dollar was low back then.

I made my first investment at AU/US$0.75, i made another investment at AU/US$0.8, my next step will be at AU/US$0.85-0.9.
Softly softly is my approach to this investment theme.

 

[topcropper]

Topcropper - i think that most people would admit that the old adage of the USA getting sick the rest of the world catches a cold is not longer necessarily true. Things have changed.
..

Well, we don't know yet do we? Since the rest of the world is in such a state, I'd think you could say the rest of the world does catch the cold when the US gets sick.

However while commodities demand hangs in there we have been uneffected. All depends if global consumption picks up in time for China to continue on as before.

And who says the usa economy wont be rooted for years to come? its happened aleswhere..

Depends on our definition of rooted? If growth is flat, or slightly negative, then the US will still be consuming say a third of the worlds resources and economic output. That'll do me just fine. I think this is the scenario.

If the US is rooted in a more serious way, we are in trouble, because China and India and the rest can't fill the spot. Not yet anyway.


See ya's.

 

[topcropper]

I agree 100% with this post. But how do we profit from it.
To profit we need to buy US non-consumption based companies in US$. .

Check out Deere and Company chilli.


I ordered a new header a few months ago. 480k. If lunatic little Gough and the other idiots running the show are going to give me a 50% tax break, I'll take it. Sure as hell makes up for those handouts I didn't get.

Won't get one till Feb as too much demand globally.

See ya's.

 

[Ausprop]

Check out Deere and Company chilli.


I ordered a new header a few months ago. 480k. If our lunatic prime minister and the other idiots are going to give me a 50% tax break, I'll take it. Won't get one till Feb.

See ya's.

there really is no excuse for a profitable small enterprise to be paying much tax over the next year or so. what an excellent opportunity this has been - cheap stocks, real estate, low IRs and tax subsidised capital! You can even buy art - how often do you get the chance to get a 50% tax write off on an appreciating asset??

 

[topcropper]

there really is no excuse for a profitable small enterprise to be paying much tax over the next year or so. How often do you get the chance to get a 50% tax write off on an appreciating asset??

A header is not really an appreciating asset.

But I reckon it's a hell of a good asset.

The current one cost $340k 8 years ago.
Just got $250k trade in for it.
So cost me 90k over 8 years. [OK, simplistic. Much more than that, opportunity/running cost etc. ]
Did 1300 separator hours in 8 years.
At contract rates, $300 hour conservative, that's $390k worth of harvesting on my farm.

Now I'm getting half $480k off my taxable income.

It's all a no brainer.


Idiots.


See ya's.

 

[aussierogue]

Good arguements topcropper, but i reckon the gfc also just happen to coincide with the olympic games, beijing closing industrial shop, creating shipping chaos, etc etc..

Its one big juggling act out there these days, everything and everyone is intertwined like never before. And with derivatives, hedge funds etc we cant even effectively see past the bow!

IS there anyone in charge of this boat!!!!!!!!!!!

 

[chilliaa]

A header is not really an appreciating asset.

But I reckon it's a hell of a good asset.

The current one cost $340k 8 years ago.
Just got $250k trade in for it.
So cost me 90k over 8 years. [OK, simplistic. Much more than that, opportunity/running cost etc. ]
Did 1300 separator hours in 8 years.
At contract rates, $300 hour conservative, that's $390k worth of harvesting on my farm.

Now I'm getting half $480k off my taxable income.

It's all a no brainer.


Idiots.


See ya's.

TC are there any substitute products for Deer &Co.
Based firstly on:
1) are there any substitute products full stop; and
2) are Deer products so good that farmers are happy to pay a premium in price against substitute products.

Good to hear your views as a farmer.