Bust And Then What??? - Part 2

[Kennethkohsg]

Dear All,

1. This thread was originally started by Harris in August 2003, whereby L_Bernham has previously suggested some 30%-50% impending fall in housing prices in Australia after the post-2003 period. This has subsequently resulted in a good debate and vigorous exchange of views between L_Bernham and his critics.
http://www.somersoft.com/forums/showthread.php?t=11113.

2. On hindsight and wisdom learnt over the last 4 years from our own property investing experiences and having known how the various Australian property markets have actually evolved out during the last 4 years, it will be interesting to re-visit this debate and re-examine the same issue from a more enlightened view as well as to review our own previous related thoughts, for our own self-education purposes.

3. With some qualifications, I must say that (as L_Bernham has correctly predicted), some of the Western suburbs in NSW, like Cabramatta, Blacktown and Liverpool suburbs, did suffer some heavy 40% fall from its last market peak housing price levels in 2003 since then. This has been widely reported in the local newspapers in 2006.
http://www.smh.com.au/articles/2006/09/16/1158334735688.html?from=top5#
http://www.domain.com.au/Public/Article.aspx?id=1158431757475&index=NationalIndex

4. Fortunately, even upto this day, the majority of the housing markets in Perth, Melbourne and Brisbane, Adelaide, Darwin did not suffer a similar heavy price correction, as previously suggested by L_Bernham.

5. Some of these property markets especially those in Perth and in Darwin, even saw their biggest housing booms over the last few years, instead, following the recent "once-a-decade" strong resource boom.

6. This is in spite of the recent openly acknowledged increasing levels of housing/land "un-affordability" seen in the various capital city property markets.

7. Today, the Melbourne, Brisbane and Adelaide property markets are still rising, after a brief/slight market correction post-2003 period.

8. I wonder what are L_Bernham's own present personal views on this same issue, in view of the actual property markets developments over the last 4 years.

9. Is L-Bernham still "predicting" of the same impending housing market crash in Australia as he was doing so in 2003, given the recent housing market slump and the sub-prime credit crisis in USA.

10. What are the investing lessons learnt or/and yet to be learnt for each one of us who have previously participated in the last discussion in 2003.

11. As for myself, despite the L_Bernham's previous gloomy property market prediction then, I have proceeded ahead to invest in the Perth property market in 2003. Since then, I have greatly profited from these investments over the last few years.

12. Having sold off a few properties in Perth towards its market peak in 2006, I am now "re-positioning" myself for the strong market recovery in Sydney, which is expected to take place in the 2008-2009 period.

13. For your kind update and further comments/discussion, please.

14. Thank you.


regards,
Kenneth KOH

 

[JIT]

2. On hindsight and wisdom learnt over the last 4 years...

Not sure if you saw this thread...

http://www.somersoft.com/forums/showthread.php?t=36570

8. I wonder what are L_Bernham's own present personal views on this same issue, in view of the actual property markets developments over the last 4 years.

9. Is L-Bernham still "predicting" of the same impending housing market crash in Australia as he was doing so in 2003, given the recent housing market slump and the sub-prime credit crisis in USA.

Kenneth,

I wondered the same thing and so had some PM discussions with L_Bernham two months ago or so, who is still lurking here but not posting (I suspect because they won't have much credibility here now).

He (or she) has not changed their personal views at all. They still feel that widespread and massive falls (not 40%, but closer to 50% now) in property values may occur. They are still clinging to the hope, as a few others here are too eg. YM, that they may yet be proven correct in time (whenever that may be).

 

[alexlee]

He (or she) has not changed their personal views at all. They still feel that widespread and massive falls (not 40%, but closer to 50% now) in property values may occur. They are still clinging to the hope, as a few others here are too eg. YM, that they may yet be proven correct in time (whenever that may be).

So, LBernham expected prices to fall 40% from 2003 levels. Fact is the middle to higher segments of the market in Sydney has seen some growth in the last 4 years, to say nothing of the exceptional increases we've seen in Perth and Adelaide, and good increases in Brisbane and Melbourne. A 40%, even 50% drop from current 2007 levels will give you higher values than a 40% decrease from 2004 levels.

I mean, a Perth place I bought in 2004 is now worth maybe 80% more than what I bought it for. If it falls by 50%, it'll be just below my purchase price. Which is still a lot more than if it'd fallen 40% from my 2004 purchase price!

The risk in making those 'everything on red' sort of bets by selling everything and expecting huge fall is that you might be wrong. Me, I'm sticking to my 'I don't really know what the market will do so I'll just keep buying as cashflow allows'.
Alex

 

[Sunfish]

I suspect LB was strongly influenced by the US market. I am too because we can get good independent analysis of that market.

Looking at the US market alone LB was spectacularly correct.

The ticket price has seen drops (not yet in the order he spoke of) in most markets. But (there is always a but) the US$ is down >10% against a basket of currencies and 150% against GOLD the only real money.

Five years ago, in America, 500 oz of gold would cost $250k or about the cost of a house. Today that gold would sell for $400k and the house half that or a 50% loss.

The effect in Australia is more muted because of the minerals boom but there is an ill wind blowing. I was talking like this four years ago and I know things have gone quite well but I gave till the end of the decade as the limit of the good times so I may have been just a couple of years too early. The severity of the impending bust remains great however.

I would warn against being too daring or too complacent even if you are laughing at LB. It may be that only his timing was off and that's the hardest part.

 

[BV]

Kenneth,

Don't believe what the newspapers are reporting mate.
Cases like this one "Bought for $262,500 in 2003, sold for $95,000 last week" are non existant.

You could say that particular distressed sales for whatever reason had a big discount but that's all.
Btw, lower prices for us buy and hold property investors is not necessarily a bad thing. It enables us to buy more IP's

I am always looking to buy more IP's but the yields have to make sense.
I was actually hoping that prices for properties below the Sydney median
would come back a bit more but I don't see it happening now.
That train is long gone I am afraid.

I am actually ready to buy again but we could have a change of government, the US stock market is likely to come down and the credit squeeze is starting to worry me so I will have to wait a bit longer.

Cheers

 

[yieldmatters]

It may be that only his timing was off and that's the hardest part.

It was only his timing that was off - he is absolutely correct to call it a bubble. It was then and now it is an even bigger one.

I see 'some' fundamentals in 'some' areas - e.g. lack of infrustructure to suburbs, lifestyle changes for inner city etc so my pick is a return to 2003 real prices and then a levelling off. That would be at least 50% decline wouldn't it? Bit tough for those with LVRs over 50% I imagine.

The biggest proof to me that it is a bubble is that I have not met a property 'investor' that is buying for yield - they all buy for capital gain. Rather than try and word this myself I will borrow a fantastic quote from a time magazine article:

Whenever the price people will pay today depends on the belief that other people will pay even more tomorrow, you've got a bubble. It takes only a slight letdown in those expectations to send the whole delightful, self-feeding process into reverse.

http://www.time.com/time/magazine/article/0,9171,1655723,00.html

 

[BV]

It was only his timing that was off - he is absolutely correct to call it a bubble. It was then and now it is an even bigger one.

The biggest proof to me that it is a bubble is that I have not met a property 'investor' that is buying for yield - they all buy for capital gain. Rather than try and word this myself I will borrow a fantastic quote from a time magazine article:

http://www.time.com/time/magazine/article/0,9171,1655723,00.html

YM
Nice article
Look mate, IMO we don't have 1 single bubble, we have a series of bubbles across the country and they are all different shapes and sizes. The only area that had a nice correction was W Sydney.

We have not seen massive forced selling in other areas/ cities because credit is still easy, interest rates are still low and people still have jobs etc. This could change ofcource, elections are coming...

Cheers

 

[Aimjoy]

And if Kevin07 gets in, there will be even more impetus for rising prices already underway.

http://www.news.com.au/story/0,23599,22700331-5012863,00.html

Aimy

 

[Harris]

And if Kevin07 gets in, there will be even more impetus for rising prices already underway.

http://www.news.com.au/story/0,23599,22700331-5012863,00.html

Aimy

and besides banks gearing towards co-owning the prop, tax breaks for first home buyers and 50 year loans the following article confirms the changing shape of home lending for years to come... As the affordability decreases creating a vaccum for low- middle income earners wanting to buy their first home, there are new products & strategies sprouting up to meet that demand -

this artcile talks about buyers teaming up to buy property

http://www.news.com.au/business/money/story/0,25479,22695905-14327,00.html

Harris

 

[alexlee]

I still say first home buyers will just downgrade their expectations. More smaller units further away from the CBD to come.
Alex

 

[yieldmatters]

As the affordability decreases creating a vaccum for low- middle income earners wanting to buy their first home, there are new products & strategies sprouting up to meet that demand -

these new financial products sounds a lot like Japan in the peak of their bubble.

 

[alexlee]

An interesting article from the Japan Times:
http://search.japantimes.co.jp/cgi-bin/fd20071104pb.html

Quote:
I'm special, so I deserve to live in Aoyama, even if my place is smaller than a chicken coop. It's the Japanese housing situation in a nutshell: Location is paramount, and quality-of-life can wait until I retire.

Australia has a long way to go yet.

 

[spark]

I was backing L Bernham then, based on my o.s. experience. I would be more cautious about predictions of 50% falls now, and have revisited my thoughts of an impending crash.

Also I would like to invite everyone to read this interesting article about a 400 years history of a house in Amsterdam:
http://www.nytimes.com/2006/03/05/magazine/305tulips_shorto.1.html

My theory of pricing (of whatever there is) is the "spare cash" theory - people pay for important things as much as they can afford.
Meaning that the price of almost everything is always set by the buyer, not by the seller - by the buyer's ability and willingness to posess the item that is being sold. (This is why I think that the auctions are the fairest way to determine a price for property).

After reading the article above, I believe that the comparative appreciation of real estate assets in the last two decades in most of the Western countries comes actually from the comparative depreciation of other necessities of daily life, leaving the potential buyers with more "spare cash" to prop the prices up.

The emergence of China and the increased supply competition in every market for goods made many things cheaper: clothes, TVs, furniture, cars - all became comparatively cheaper in the last two decades. Cheaper in real purchase power value, meaning that the average Joe with his average income needs to work less hours now than 2 decades ago to buy himself a car or a pair of shoes or a nice leather sofa for his lounge.

When the average Joe is left with some "spare cash" (dollars/paid hours) his healthy and understandable inclination is to spend more of it on his lifestyle and security - meaning he has more money to spend on real estate.

And it is not only the buying Joe, it is also the renting Joe - more "spare cash", more ability to pay for higher and higher rents, which by themselves bring justification for higher property prices on their yield value.

The ongoing abundance of "spare cash" (the change that is actually left after Joe is buying the cheaper and cheaper $1000 sofas and $3 thongs and $19990new cars) is sucked by the area that is not affected by cheap imports, something that is only and only locally made and cannot be imported - land. Both purchase prices and rent prices enjoy Joe's ability and willingness to allocate his "spare cash".


As long as the trend of cheap imports and high supply of everyday goods competing on price continues, average Joe will keep his ability to allocate more and more to real estate.


A reversal to the trend above cannot and I believe will not happen overnight, though I don't want to say that it cannot happen at all:

1) If China revalues the yuan then the imports are not going to be so cheap, prices for most aspects of life will start rising = less "spare cash" for average Joe to be able to pay for either purchasing r.e. or renting it.

2) If food prices go up (not because food really costs more but because food suppliers also understand that without good competition they can actually charge whatever they want and still nobody will go hungry) = less "spare cash", less ability to purchase real estate and less ability to pay higher rents.

3) A possible devaluation of a local Western currency is actually similar to number 1 above.

What I'm trying to say is that not the higher interest rates are the main danger to r.e. prices and rent values but the possible outbreak of inflation for everyday items, which were enjoyng an ongoing trend of disinflation for the last 20 years or so.

From here - as long as cheap imports from China and neighbouring countries make average Joe's life cheap and easy, no real crash of 50% in real estate values is at sight. (adjustments of 10~15% are not a crash but fluctuations).

It is unlikely is that some Western government will put high import tariffs, or some politicians do watever they can to devalue the local currency significantly. These are not likely to happen tomorrow, or in the next quarter or in the next year.

Though, if the long trends change and average Joe's life will cost him comparatively more of his paid hours, he will be less able to pay for the house he wants to buy or rent, which will have a downward impact on their value. But again, not as an overnight crash but as a long trend if at all.

Will it happen at all and when will it happen (Costello's tsunami???) - nobody is able to tell.

 

[Kennethkohsg]

Kenneth,

Don't believe what the newspapers are reporting mate.
Cases like this one "Bought for $262,500 in 2003, sold for $95,000 last week" are non existant.

You could say that particular distressed sales for whatever reason had a big discount but that's all.
******************************
Dear BV

1. Do you have alternative reliable data to show otherwise?

2. While I know that the actual accuracy of the newspaper is questionable as most press agencies like to "sensationalise" on their news reporting, personally, I also believe that the basic reported facts are still there;- otherwise I do not think that these news agencies will want to report them subsequently.

3. Perhaps, beside BV, other members who are monitoring the house prices in these Western and South-Western suburbs or have the relevant reliable data, can kindly share their data to further confirm/disconfirm the present market trends being reported.

4. Looking forward to your data sharing and learning from each one of you please.

5. Thank you.

regards,
Kenneth KOH

 

[Kennethkohsg]

The effect in Australia is more muted because of the minerals boom but there is an ill wind blowing. I was talking like this four years ago and I know things have gone quite well but I gave till the end of the decade as the limit of the good times so I may have been just a couple of years too early. The severity of the impending bust remains great however.

*******************************
Dear Sunfish,

1. Are you then suggesting that there are existing housing bubbles in the various Australian property markets at this point in time?

2. What are your basis for coming to such a conclusion? What are the relevant supporting market indicators seen today?

3. Based on your a/m post, are you then further suggesting that a similar housing slump is likely to occur in Australia before 2010, similar to the present USA housing slump being reported now?

4. Looking forward to your kind clarifications and further discussion, please.

5. Thank you.


regards,
Kenneth KOH

 

[Kennethkohsg]

these new financial products sounds a lot like Japan in the peak of their bubble.

&&&&&&&&&&&&&&&&&&&&&&&&&
Dear YM,

1. Interesting comments indeed.

2. What are these "similar financial products" being introduced in Japan before the peak of their housing bubbles? Can you please provide us with some specific examples, please.

3. Do you happen to have data or/and know how many years in advance of the Japanese housing boom peak when they were first being introduced in Japan? What happened to these financial products after the housing market crash in Japan and do they continue to exist in Japan today?

4. Looking forward to learning from you, please.

5. Thank you.


regards,
Kenneth KOH

 

[Kennethkohsg]

The biggest proof to me that it is a bubble is that I have not met a property 'investor' that is buying for yield - they all buy for capital gain.

***********************************
Dear YM,

1. I personally know of some investors who are specifically going after "Positive Cashflow" Properties and looking for higher rental yields, which are being popularised by Steve McKnight, Rick Otton, Margaret Lomas etc.

2. Many market analysts are also presently projecting/expecting housing rentals in Australia to significantly increase over the next few years, as a result of the existing low vacancy rate and shortage of rental properties supply in today's housing market.

3. In following your (similar) line of reasoning, does this mean therefore that there is no housing bubble in Australia at this point in time, given the current context when rental yields are being emphasised?

4. What are the other reliable market indicators that you can further provide to support your claim that there are existing housing bubbles in the various Australian housing markets at this point in time?

5. Looking forward to learning from your further discussion, please.

6. Thank you.

regards,
Kenneth KOH

 

[BV]

Dear BV

Do you have alternative reliable data to show otherwise?
Looking forward to your data sharing and learning from each one of you please.
regards,
Kenneth KOH

Ok here it is
House prices for postcode 2148 Blacktown (from the CBA property value guide)
April 2003 median approx $310K
July 2004 median approx $387K Market Peaked
Aug 2005 median approx $368K
Aug 2006 median approx $378K
Aug 2007 median approx $360K
Oct 2007 median approx $372K

It also states that in the last 3 months, median property values for postcode 2148, NSW (Kings Park / Marayong / Prospect / Blacktown Westpoint / Blacktown Dc / Arndell Park / Blacktown / Huntingwood) have increased by 3%.

If you look at the figures above they speak for themselves.
Sure in the past couple of years some people picked up a few bargains and those sales brought prices down a bit but overall the market hasn't suffered too much.

The results for the South Western suburbs will be similar.

Edit: It could be that Blacktown is pulled up by other suburbs belonging to the same postcode because I've just checked Domain and they state that the median for postcode 2148 Blacktown is $305K which brings the median down by about 20% since the peak in 2004.
-20% seems about right actually.

Cheers

 

[yieldmatters]

An interesting article from the Japan Times:
http://search.japantimes.co.jp/cgi-bin/fd20071104pb.html

Quote:
I'm special, so I deserve to live in Aoyama, even if my place is smaller than a chicken coop. It's the Japanese housing situation in a nutshell: Location is paramount, and quality-of-life can wait until I retire.

Australia has a long way to go yet.

Japan has less space, more people, and yet I'd argue it has cheaper housing ... go figure. I'd say Australia does have a long way to go yet - in the crashing of prices direction.

 

[yieldmatters]

I'm sure most of you have seen this - a chart from the economist that was rather interesting. Could be meaningless - I don't know - but it is food for thought.