bubbles defined

[L Bernham]

After a few good threads about the current state of the property market in Australia I thought I would post an interesting read.

http://www.abc.net.au/pm/content/2003/s927891.htm

I liked this bit -
"KARL CASE: Here's the way housing bubbles stop: somebody blows a whistle that only dogs and buyers hear. Buyers stop looking, stop making offers, sellers tend to hold out because they know what their house is worth – of course, what a house is worth is what somebody's willing to pay you.

But they don't see it that way – they saw one down the street sell for $450,000 and they know that's what it's worth. So they hold out, they won't lower their price. So transactions dry up. The difference between offering prices and asking prices widens, time on the market goes up, and the market simply stops.

Then if the economy is slow or if the market doesn't come back in a short enough time period then people ultimately have to sell, investors will sell and prices will start to fall, and prices can fall dramatically – in Los Angeles they fell 30 per cent in a period of about 18 months a few years back. "

 

[TheBacon]

– in Los Angeles they fell 30 per cent in a period of about 18 months a few years back. "

An LA taxi driver told me he'd seen LA's population go up and down by about 2 million in the last few years, possibly earthquake related. This may have been one of the reasons for the 30% drop.


The Bacon


P.S. Half of the population of Melbourne may leave if the Pies win. Just imagine how painful McGuire would be if they won !!!! This may be more devastating than an earthquake.

 

[Peter_Tersteeg]

Originally posted by TheBacon
Half of the population of Melbourne may leave if the Pies win. Just imagine how painful McGuire would be if they won !!!! This may be more devastating than an earthquake.

I know what you mean. I'm leaving the country mid next week. If the pies win, McGuire gloats, if they loose, he crys. Either way, he's still insufferable.

 

[BUNDY]

When the Pies loose 30 % may jump the fence and leave Melbourne for Sunny Bris Vegas and join the Lions!!!!

I'd love to see the lions win and have Eddy's audience full of lions supporters for his next "Who want's to be a millionaire show".

Even have all of the contestants dressed as lions supporters.

That should rub it in.

BUNDY

 

[MarkB]

Originally posted by L Bernham
"KARL CASE: Here's the way housing bubbles stop: somebody blows a whistle that only dogs and buyers hear. Buyers stop looking, stop making offers, sellers tend to hold out because they know what their house is worth – of course, what a house is worth is what somebody's willing to pay you.

But they don't see it that way – they saw one down the street sell for $450,000 and they know that's what it's worth. So they hold out, they won't lower their price. So transactions dry up. The difference between offering prices and asking prices widens, time on the market goes up, and the market simply stops."

LB

Nice example.

MB

btw. Not that I follow AFL but "Go the Lions!"

 

[bundy1964]

But who here will sell if the market is flat?

Interest and/or vacancy rates need to be high to incourage investors to bail out.

bundy

 

[MarkB]

Originally posted by bundy1964
But who here will sell if the market is flat?

Interest and/or vacancy rates need to be high to incourage investors to bail out.

bundy

Probably no-one here, but then what percentage of the property investing public are represented on this forum?

As to who will sell in a flat market?

The gamblers, that's who.

Of which I suspect there are many.

They'll see the share market or some other investment performing better and press the eject button.


MB

 

[BUNDY]

All the sheep will bail out - and there's herd's of them. That's what fuels our property/share cycles.

"Better get out while we can still make some money!!"

Short term misinformed, out to make a quick buck.

One buck's better than none, then on to the next venture.

They like to take the money and run, then spend it on depreciation items like Plasma TV's, new car etc etc, then have to start all over again.

Each to their own I suppose.

BUNDY

 

[bundy1964]

If they bail we buy, then the sheep come back

bundy

 

[multi]

Originally posted by L Bernham
I liked this bit -
"KARL CASE: Here's the way housing bubbles stop: somebody blows a whistle that only dogs and buyers hear. Buyers stop looking, stop making offers

Interesting. So 18% interest rates that killed the whole economy and abolition of negative gearing that caused the only stop to "housing bubble" was heard by dogs and buyers only.

Very intelligent dogs, I would say. Unlike people who spread this kind of bulldust.

 

[MarkB]

Re: Re: bubbles defined

Originally posted by multi
Interesting. So 18% interest rates that killed the whole economy and abolition of negative gearing that caused the only stop to "housing bubble" was heard by dogs and buyers only.

Very intelligent dogs, I would say. Unlike people who spread this kind of bulldust.

Multi

Unless I am mistaken, negative gearing was reintroduced in late 1987.

Rates went skywards afterwards:

http://www.rba.gov.au/MonetaryPolicy/about_monetary_policy.html


IMHO it would not require interest rates to jump to 18% to precipitate the popping of the "bubble".

It could well be enough for:

- buyers to expect interest rates to rise, thus leading them to seek other opportunities and/or spend their money, and / or

- potential property buyers to observe better opportunities elsewhere.


The line I am running here is akin to Robert E Lucas Jr's "rational expectations" hypothesis. And even if the expectations are not "rational", if enough people believe them, they will eventuate.

Interest rates are a very important factor and will kill the economy.

But they are still only one factor.

MB

For those who want to know who the bloody hell Robert E Lucas Jr is, see:

http://www.nobel.se/economics/laureates/1995/index.html

One of my favourite Economists.

 

[multi]

MB,

As an economist you should know that there is no such thing as an immediate reaction in the economy.

Did you see crowds of share investors flloding property market next day tech bubble burst?

Have you ever seen economy picking up speed straight after interest rates are reduced?

Even your car does not speed to 200 miles per hour straight after you press accelerator to the floor, and it does not stop dead as soon as you hit brakes - some time is needed.

In economy inertia is even higher than the physical one.

Same with the property market. It took 2 (two) ENORMOUS blows to stop late 80s property boom, not some misterious "whistle".

 

[MarkB]

Multi

I don't recall saying anything about it being immediate - these things do take time.

Though of all the possible scenarios, the one you have flagged (very tight MP) would *probably* cause the sharpest decline in the market.


Rewind a little.

Accruate or not, the posting by LB was, IMHO, a nice example of the mentality of many markets - and of many humans.

Fast Forward a little.

The comments you made about MP are equally as valid.



To be honest I am becoming increasingly wary of the comparisons being made between this boom and the last one.

And also the references to the property market as though it is just one market and not many (and I am guilty of this in my last post).

IMHO, the the ground has shifted significantly and permanently since the the last boom.

It has shifted economically, demographically, politically.

As such I am sitting on the fence with this one.

While I don't think that we will see double-digit mortgage rates (so a cash rate of about 8.25-8.5%) in the near future.

IMHO that doesn't mean that some correction isn't around the corner - at least in localised markets, aka, Sydney units for example.

MB

 

[L Bernham]

Exactly...

Expectations... sitting on the fence...
The sentiment is shifting.

The herd is slowly changing their collective opinions from "property always goes up" to "a bunch of experts smarter than me are saying property can also go down so maybe they could be onto something"

So if there is 50% chance of it going up and 50% chance of it going down, unbiased investors measure the expected growth rate as 0. (of course you can just read the things that tell you what you want to hear, but at least realise that not everyone will do this).

In the end people will find that they need to return to their old friend - rental income. Remember him. He's the one who, like and old schoolmate will always be there for you when you need him and even though others will come and go, hes the one you can always trust and rely on.
Unfortunately, he's been ignored for so long and his steady friendship may not compare to those of late, there could be a bit of a healing process to go through.
But thats life.
Cheers
L Bernham

 

[L Bernham]

The reason the market is looked at as one big market rather than many small ones is because we want to know what the "average" property will do because its this that will affect the economy going forward.

There will still be those that make money from individual properties in certain areas but these only make up a small portion of the overall average.

You could have fooled me that there has been a bear stockmarket for the last 3 years. most of my individual stocks have been performing well, but that hasnt helped the "average" stock price.

The concerns for the overall property market are the ramifications involved for the overall economy.

Remember its the average person in the average house thats pulling equity out to get into unmanageable debt. Its these people that IMF, RBA et al are concerned about. And because they make up the majority its these peoples spending power that is reduced when they cant continue to increase the debt that allows them to live the lifestyle they want and that the economy has gotten used to.

LB

 

[always_learning]

Originally posted by multi


Same with the property market. It took 2 (two) ENORMOUS blows to stop late 80s property boom, not some misterious "whistle".

The Japan property bubble of the century ended with a "whistle" nobody really could hear, a small rise in interest rates, the reserve bank of japan publically raised some "concern" and asked banks to tighten lending practices (with a few tricks you could get 100% plus costs finance). The bubble was burst with the smallest of pricks!

BTW, I was reading this Domain.com.au article about Sydney's Newtown; prices for unrenovated single fronted houses on 100m2 of land are now $500-$600K. Doesnt somebody think this is a little crazy? If one person pays $600K for a property worth $250K (rental return value) they are crazy, but if there is a mob fighting to buy at $600K then this is rational behavior?

In Japan the worlds second biggest economy, in Tokyo one of the worlds biggest cities(including satalite cities a population of 20M), in tokyo 1.5KM from the "central" business district of Otemachi ( translation "big gate area of the imperial castle") I can buy near new house in a great area on 100m2 for $600K and I can get a return of 8%! A quick reality check would say "how can this be?"

 

[L Bernham]

Well I'm one of the few (but growing number) of those who realise that this is crazy.

I also think its crazy when I see properties selling for more than double the present value of all future net cash inflows for the next 1000 years.

Why wouldnt you buy a government bond for half the price and double the cash flow.
Its greater fool theory in its purest form being demonstrated at the moment.

LB

 

[abcdiamond]

Originally posted by L Bernham
I also think its crazy when I see properties selling for more than double the present value of all future net cash inflows for the next 1000 years.

LB

Can you give figures for this calculation please ?

I just worked out 1,000 years x 52 weeks x $240pw at $12,480,000 but I think thats a bit high selling price for my property.

There must be a logcal answer, but ??

 

[always_learning]

Double the cash inflow for the next 1000years?...it sounds too much...even 20 years is too much, 100 years extraordinary...please explain?

 

[abcdiamond]

oops, I made a mistake, you said "double the present value of all future net cash inflows for the next 1000 years."

That makes my property value $24.96Million ? I think I might get closer to $249,600.