Fiscal trogolytes and property values

[chilliaa]

Actually its the first valid point Non Recourse has raised.
In very simplistic terms (and please dont pick on the figures they are deliberately simplified to highlight the risk):

If banks allowed 95% lending with a 5% deposit on say 40% of gross wages, with interest rates of say 6% then a typical borrower on say $50,000 per year could support a loan of say $330,000. Add in the 5% deposit and it would support a home price of say around $347,000 with a deposit of $17,000

Now assume this scenario has been going for a while, so the market adapts to the scenario and the 'fair value' of the asset is $347000. But is this actually the fair value of the asset, or is it just the market accepted fair value due to the scenario?

If we permanantely change the scenario to say a 20% deposit and and 30% of gross wages: would the market fair value hold up? What happens to those marginal new borrowers that are now forced to save the additional 15% deposit and those borrowers that can only justify the transaction on a 40% gross wage and not 30%: they are excluded from demand.

This is already being seen in commercial property where capitilisation rates are on the increase which are leading to material writedowns in the appraised value of commercial property.

Now again i emphasise we dont know how the future will play out, and to make investment decisions based on speculated future inputs (either bullish or bearish) is foolish in my opinion.
Just as in prior times listening to 'blue sky' bulls, listening to current D&G'ers is also risky (as you can suffer from ananalys paralysis).

 

[yorke]

I've got a better idea .

I could Build my own cave !!!!

I could get some land . Now I'd just have to get building permission from the local council. Hopefully all the guidlines / restrictions that apply to houses don't apply to cave.

Actually they are worst , on top of the normal restrictions you also have to worry about cave-ins, asphyxiation due to lack of oxygen and even flooding. You try building your own cave in Cobber Peddy and see how unaffordable it is.

Maybe I don't need permission . Plenty of people used to live in caves without planning permission.

Yes but that was before the caveman invented councils and bureaucrats.

 

[nonrecourse]

You just never give up do you NR.... you've clearly represented yourself as not having a single original thought in your head, and have to resort to quoting nursery rhymes & D&Gers........ yes the last couple of paras of that article gives quotes from a certain Mr Keen...... 'nuff said.

That's a pretty dumb thing to quote..... it's roughly equivalent to saying 'if all that oxygen in the atmosphere was stripped away then we'd all die......' possibly accurate, but not a likely scenario.

Sigh.... Keith my boy you are a difficult possum to please. You are critical because early in the piece you posted that I didn't have references to back up my position and according to you I wasn't clear in my thought process in explaining it on the board.

To be truthful over 12 months ago when I started to post about what I could see coming it wasn't clear that what has transpired would actually occur. It was difficult to find a lot of information that spelled it out with me spending more time than I had available.

When I did make my position clear and set out what I believed was occurring I was sneered at, jeered at and had abuse posted at me. I was told prove it

Well Keith the depression is here and all that I have outlined unfortunately continues to roll out. Now I am told that I don't have an original though?

The fact that you don't want to admit that yes things really are precarious... is your problem get over it.

I have tried to be constructive by posting threads about how to deal with the crisis but I get a continual carping and personal attacks.

At times I have bitten back and I am thankfull the moderators have deleated my posts that got down to the snipers level.

 

[ffc1883_1996]

NR,

I especially like how you call property investors “luddites”, “Fiscal trogolytes” and participants in a “huge Ponzi scheme” on a property investors website and THEN claim the high ground with a post like that. Well done!


Regards - Ben

 

[keithj]

Sigh.... Keith my boy you are a difficult possum to please. You are critical because early in the piece you posted that I didn't have references to back up my position and according to you I wasn't clear in my thought process in explaining it on the board.

Hi NR, . There's a difference between references & credible references. Mr Keen & this Beavan guy hypothesising about a housing market without ANY debt just don't cut it.

When I did make my position clear and set out what I believed was occurring I was sneered at, jeered at and had abuse posted at me. I was told prove it

I'm still not really clear on your position . I thought I had it nailed earlier this week, but I was wrong.

Well Keith the depression is here and all that I have outlined unfortunately continues to roll out. Now I am told that I don't have an original though?

The depression is here ? ... in Australia ? Do you have (credible) links ?

Or are you referring to a 'soft depression', I don't recall you telling us what you mean by it yet ? Is it worse than a recession, or something different entirely.

The fact that you don't want to admit that yes things really are precarious... is your problem get over it.

I agree that things are really precarious. If you look at some of my posts from before you joined, you'll see I have been cautious for a while. This one from 18 months ago springs to mind - Demise of the Lo-Doc ?

I have tried to be constructive by posting threads about how to deal with the crisis....

Hmmmm.... constructive. Reduce LVRs to < 30% & buy a little gold is the only constructive suggestion that I recall.

Can you tell us exactly what you perceive the crisis to be ? Inflation, deflation, banks foreclosing, banks demanding reduced LVRs, all currency becoming worthless, IRs skyrocketing, ZIRP, countries defaulting in debt, China invading ? There's a lot of potential crises that could occur, and all need different strategies. You've told us your solution, but we don't know what you think the problem is. Can you tell us the sequence of events that will lead to resIP falling by 50% within 12 months ?

 

[kum yin lau]

Hi KeithJ, some tongue in cheek answers.

Land price falls 50% [someone please please sell me a block of land 5km of CBD for $10000!]
Cement price falls 50%; bricks cost 50% less; etc etc
Brickies, engineers, truckies, sparkies etc etc all work for $10 per hour
Councils don't charge any fees
Water & electricity costs fall 50%

Then we may be able to price a conventional 3BR house at $150000.

Which is why we have been so sceptical of the Keens and NRs.

It's not that we are oblivious to the downturn and the points you have raised, NR, it's that you have veered too far. More mid ground is more believable.

AUD @60 cents is very plausible, maybe even 50 cents if our economy goes to the dogs. But 38 cents? We're comparing AUD/USD. Which currency is crappier?

So house prices fall 10%, very believable. If things get ugly, maybe 20, even a tad more. But 40, 50%? Might as well dig a hole and bury ourselves right now.

KY

 

[willair]

To be truthful over 12 months ago when I started to post about what I could see coming it wasn't clear that what has transpired would actually occur. It was difficult to find a lot of information that spelled it out with me spending more time than I had available.

When I did make my position clear and set out what I believed was occurring I was sneered at, jeered at and had abuse posted at me. I was told prove it

NR,maybe the Rudd Government willput a ceiling on all rents Australia wide,and give more welfare payments to a greater degree to recipients in order to balance the books, I just cant see the drop in property values
you are talking about, or the price of the aussie dollar, in Germany in Jan 1921, a daily newspaper cost 0.30 marks,two years on in November 1922 the same newspaper cost 70,000,000marks,everybody always talks about the big bust up in the 1930"s in the US,do you think the same can happen here over a 2 year period?,preception versus rerality..willair..

 

[steveadl]

I think you're missing the point. The point is whether the growth in housing debt that has enabled historical house price growth will continue at similar levels and at comparable terms in the future.

There will be debt.

It's just a question of will there be enough.

No this guy was referring to fairy land where there is no debt:

Beavan believes that if all that debt were stripped away, irrespective of land shortages, property prices would be half to two-thirds of what they are today. ''If homebuyers don't have money on loan from the banks, then they could not afford to pay the higher housing price - so the price would have to fall or the market would stagnate''.

Which is why I think it's a pointless, idiotic statement to make.

And while we're on it - how NR continues to provide articles like this when asked to provide evidence of his belief that property will fall 50%, I also have no idea. It's just a guy expressing his opinions - how is that evidence of what he believes will happen? If that's the case, may as well just link to some choice posters on ****, they'll give him plenty of theories that he can quote. Beavan has his beliefs as do many other economists that would be conflicting. Why are his theories - that NR happens to like - provided as evidence?

 

[nonrecourse]

Hi NR, . There's a difference between references & credible references. Mr Keen & this Beavan guy hypothesising about a housing market without ANY debt just don't cut it.

I'm still not really clear on your position . I thought I had it nailed earlier this week, but I was wrong.

The depression is here ? ... in Australia ? Do you have (credible) links ?

Or are you referring to a 'soft depression', I don't recall you telling us what you mean by it yet ? Is it worse than a recession, or something different entirely.

I agree that things are really precarious. If you look at some of my posts from before you joined, you'll see I have been cautious for a while. This one from 18 months ago springs to mind - Demise of the Lo-Doc ?

Hmmmm.... constructive. Reduce LVRs to < 30% & buy a little gold is the only constructive suggestion that I recall.

Can you tell us exactly what you perceive the crisis to be ? Inflation, deflation, banks foreclosing, banks demanding reduced LVRs, all currency becoming worthless, IRs skyrocketing, ZIRP, countries defaulting in debt, China invading ? There's a lot of potential crises that could occur, and all need different strategies. You've told us your solution, but we don't know what you think the problem is. Can you tell us the sequence of events that will lead to resIP falling by 50% within 12 months ?

Keith you want credible proof that we are in a world wide depression Good on ya keith put your head in the sand and leave your posterior waving in the wind. I will let someone else drive the point home

 

[contrary]

So house prices fall 10%, very believable. If things get ugly, maybe 20, even a tad more. But 40, 50%? Might as well dig a hole and bury ourselves right now.

KY

I would not invest based on the premise that only what I think is possible can occur. It is easier to imagine something when it occurs !

I agree with a lot of what NR has to say. I think it is very possible residential property will fall by 50%. That's just my view. I also think it is very reasonable for him to continue holding his property.

Not everyone is in the same situation. You can hold property and expect it to decline. The transaction costs and CGT need to be taken into account. Then there is also the fact that no one can predict the future and so it is not unreasonable to maintain some weighting.

Some of us hold a significant amount of property and expect it to decline. In my case my adjustment has been to reduce my portfolio LVR to 30%. In the next 3 years I hope to have all my debt paid off.

Analysis paralysis - I'm sure it occurs. Sometimes though it requires more fortitude to do nothing. I've struggled in the last year from buying any shares or property and that's been hard. But it has saved me a lot. It is just my opinion but I think now is a good time to do nothing and pay off debt, which is what I am doing. Others no doubt have their own strategies and hopefully this will work out for them.

I get a lot out of NR's posts. It reminds me that I am not alone in holding property AND playing the current period conservatively in terms of aiming for a portfolio LVR below 30%. If this is confronting then it is probably because he is more likely to survive a severe downturn. He also loses a bit from potential return from leverage but he is obviously comfortable with this payoff.

 

[turk]

Keith you want credible proof that we are in a world wide depression Good on ya keith put your head in the sand and leave your posterior waving in the wind. I will let someone else drive the point home

Hi NR

Been following this thread with interest, I'm not that interested in what people may think will happen but more in why they think it will happen,
as this will assist me in making my own decisions.

I would have thought Keiths question was straight forward, your statement was

"Well Keith the depression is here and all that I have outlined unfortunately continues to roll out. Now I am told that I don't have an original though?"

Keiths question was

"The depression is here ? ... in Australia ? Do you have (credible) links ?"

You've ducked Keiths question with your answer however I'm also curious
as to whether you consider Australia to be in a depression and what is your definition of a depression?

Cheers

Pete

 

[contrary]

And these aren't tin-pot states, they're talking about Spain, Ireland, Greece, Portugal and Italy.

The likelihood of any of the doomsday scenarios occurring has probably increased from 0.0001% 2 yrs ago to 0.01% today - a hundredfold increase... but still not a v. likely scenario.

Actually Keith, the CDS's on spain and ireland have increased massively in the last week. For Ireland 5 year credit default swaps on government bonds are about 250 basis points (2.5%) or a 1:40 chance for their government to default on government debt in the next 5 years. Now that is pretty interesting. It will be more interesting to see where this peaks out and what the 10 or 20 year rate estimate is. Most interesting of all would be it actually occurring.

 

[Bill.L]

Hi all,

nonrecourse, it is interesting how you dodge the harder questions, perhaps you missed this from before....

Currencies collapsing would be inflationary. Owning properties with debt and fixing interest rates when low would be the smartest thing to do in such a situation. If we continue to have asset deflation, without rent deflation, then + cashflow properties are money for jam. Again a positive for property.

NR, your arguments are positive for property whichever scenario plays out, baring financial armageddon, in which case it would not matter what you did, we would all be history anyway.

and I think it is what Keith is asking as well.

What is our trigger for the 50% falls, especially as the bottom end is now picking up because of low interest rates and FHOG, and then does it really matter if you have cashflow +ve property as an investment??

bye

 

[Aaron Sice]

No this guy was referring to fairy land where there is no debt:



Which is why I think it's a pointless, idiotic statement to make.

And while we're on it - how NR continues to provide articles like this when asked to provide evidence of his belief that property will fall 50%, I also have no idea. It's just a guy expressing his opinions - how is that evidence of what he believes will happen? If that's the case, may as well just link to some choice posters on ****, they'll give him plenty of theories that he can quote. Beavan has his beliefs as do many other economists that would be conflicting. Why are his theories - that NR happens to like - provided as evidence?

there's a guy standing in the back of the quiet room standing and clapping his heart out with a "whoopwhoopwhoop!"....








oh wait, it's me.

 

[Aaron Sice]

I would not invest based on the premise that only what I think is possible can occur. It is easier to imagine something when it occurs !

I agree with a lot of what NR has to say. I think it is very possible residential property will fall by 50%. That's just my view. I also think it is very reasonable for him to continue holding his property.

Not everyone is in the same situation. You can hold property and expect it to decline. The transaction costs and CGT need to be taken into account. Then there is also the fact that no one can predict the future and so it is not unreasonable to maintain some weighting.

Some of us hold a significant amount of property and expect it to decline. In my case my adjustment has been to reduce my portfolio LVR to 30%. In the next 3 years I hope to have all my debt paid off.

Analysis paralysis - I'm sure it occurs. Sometimes though it requires more fortitude to do nothing. I've struggled in the last year from buying any shares or property and that's been hard. But it has saved me a lot. It is just my opinion but I think now is a good time to do nothing and pay off debt, which is what I am doing. Others no doubt have their own strategies and hopefully this will work out for them.

I get a lot out of NR's posts. It reminds me that I am not alone in holding property AND playing the current period conservatively in terms of aiming for a portfolio LVR below 30%. If this is confronting then it is probably because he is more likely to survive a severe downturn. He also loses a bit from potential return from leverage but he is obviously comfortable with this payoff.

and there's absolutely nothing wrong with a lower risk profile. kudos for explaining your WHY.

 

[yorke]

To be truthful over 12 months ago when I started to post about what I could see coming it wasn't clear that what has transpired would actually occur.

To be truthful ? Whenever I hear that or "to be honest with you" alarm bells start ringing. Like you are normally lying through your teeth and now for a change you want to be truthful or something.

Well Keith the depression is here and all that I have outlined unfortunately continues to roll out. Now I am told that I don't have an original though?

Oh so now a depression is here ? Did Stevie say that or did you read it on a foreign website and got confused ?

The fact that you don't want to admit that yes things really are precarious... is your problem get over it.

If you believed Stevie Wonder or the dribble coming from the other site then yes things are going to be bad and we should all stock up on gold bars and baked beans and head for the hills. Have you ever stopped to think and ask yourself why despite all the rhetoric and D&G predicted some of your good buddies decided to become home owners in such precarious times ?
I'm afraid that the only things precarious are your assumptions that we are in a depression and that properties in our major cities will fall at least 50%.
If the only reason you are calling for a crash is because you missed on the last boom then you need to get over it and move on with life.

At times I have bitten back and I am thankfull the moderators have deleated my posts that got down to the snipers level.

Come on now, did the old "dog ate my homework" excuse ever worked for you ?

 

[yorke]

Your correct it doesn't. Property collapses first destabilizing the financial markets and banks then the fiat currency is worthless and yes hard assets like gold, silver and property hold real value.

Unless you bought silver at $20+ in which case you'd wish you bought property instead.

 

[kum yin lau]

Hi Contrary and Bluecard's answer to you says it all.

At least your explanation is reasonable.

Other investors may also be in the same state. Probably can name you a few on this very forum, myself included.

% LVR is related to personal circumstances such as age and job status.

At 25, there's little danger of holding a high LVR. If the worst case scenario happens, the young person dusts himself off and start again.

Older people like myself will most likely not have high LVR.

In the event of deleverage, [we don't assume that it may not happen], other variables will also change. There should be a corresponding deleverage in ALL other stuff even cabbages and bread. Then my rental that's halved will STILL buy the same amount of goods and services.

What we object to NR's 'position' is the assumption that house prices and currencies collapse while other things remain constant.

What is very real and what we fear is the window period such as the 9 months of high interest rates we endured last year when we have to survive before a new equilibrium exerts itself.

And as to gold and silver maintaining value, if the gold standard didn't work before, what 'triggers' will make world governments agree to go back to it? Industry demand for gold doesn't support the $1500 an ounce stance.

Sure currencies are 'fiat' as NR says, but what is the alternative? Cowrie shells?

KY

 

[keithj]

It is easier to imagine something when it occurs !

Agree. A couple of years ago it was hard to imagine several ASX100 cpys failing. It's currently hard to imagine all non-gold backed currency being worthless after several hundred years.

I agree with a lot of what NR has to say. I think it is very possible residential property will fall by 50%. That's just my view. I also think it is very reasonable for him to continue holding his property.

Not everyone is in the same situation. You can hold property and expect it to decline. The transaction costs and CGT need to be taken into account. Then there is also the fact that no one can predict the future and so it is not unreasonable to maintain some weighting.

Sure... it's unreasonable to expect property to ALWAYS go up, there will be short term fluctuations. It's NRs strong (but not 100% guaranteed) belief that resIP will fall 50% and commIP will fall 70%. CGT & Txn costs are guaranteed be less than the CG he'd lose.

There may be good reasons why he doesn't want to sell - put/call options over it, been in the family for generations, his lease may require sale to tenant on disadvantageous terms, lease requires payment in gold sovereigns on demand, unable to sell as market value is less than mortgage. But NR hasn't offered any reasons. He has a strong belief in huge falls, but fails to tell us

• why he is not acting on his own beliefs
• the sequence of events that will lead to them occurring
• how he expecting seemingly contradictory outcomes to occur
• how he can be so sure that his outcomes will occur

I'd agree that there is the possibility of some property falling by 50%. A couple of LPTs have already fallen by 100%, a few more are expected to fold within the year.

I can think of a few scenarios that could cause property to fall by 50%+...... the global economy turns really bad, unemployment > 15%, civil unrest, revolution in China, terrorists do their worst, return to gold standard, synchronised runs on banks.... anyone can think up a bad scenario and make it googleable. I can imagine them happening, but I think they are currently unlikely and I've allocated my assets accordingly.... you & NR have done likewise.

However, currently all sub $500K property is supported by FHB, anecdotally it's a strong market in some areas. I'd expect medians to be flat (+/-10%) for a few yrs, inflation could be high, so in real terms there are likely to be falls.... and more c/f +ve IP.

Most here don't care (much) about falls in the short term, they care a lot more about the long term, there are only a few market timers/traders here.

Some of us hold a significant amount of property and expect it to decline. In my case my adjustment has been to reduce my portfolio LVR to 30%. In the next 3 years I hope to have all my debt paid off.

Well done. As a market timer you'll be in a strong position when the upturn happens, and be at much lower risk if it doesn't happen for a while.

I get a lot out of NR's posts. It reminds me that I am not alone in holding property AND playing the current period conservatively in terms of aiming for a portfolio LVR below 30%. If this is confronting then it is probably because he is more likely to survive a severe downturn. He also loses a bit from potential return from leverage but he is obviously comfortable with this payoff.

I'm sure he is more likely to survive a certain type of severe downturn. With IRs & vacancy rates so low, many here will also survive certain (different) types of severe downturn. Without knowing many details of his assets, I'd say he was at far higher risk with his overweighting towards commercial property.

NR appears to have his eye on a specific event that will cause his expected outcomes to occur.... but he can't tell us what it is ???

Most here have their eye on c/f +ve IP, short term price fluctuations (possibly more negative than at any time in the last 50 yrs), and long term return to trend.

 

[sparky23]

It seems to me that for prices to fall 50% people have to stop buying real estate, well here is the wake up call - that was last year!

Guess what this year they ARE buying real estate as people selling it for a living have been advising on this site for a little while now which auction clearance rates and in fact even the media are now reflecting. How will 70% + clearance rates translate into 50% price falls?

Please explain!