Garbage Journalism - article on the "imminent property bubble bust"

[Intrinsic_Value]

I wanted to post this under a seperate post:

I strongly recommend property investors read George Soros's
"The New Paradigm for Financial Markets"

It is really heavy reading (and i mean heavy, even for someone who enjoys finance)

But this book has been a 'life saver' for myself. It got me through the credit crisis, and it provided the missing frame work that i have been searching for my whole life.

I have always been a 'value based' investor, but i lacked the missing link, and this book provided it.

If you go through this forum back to late 2008/early 2009, i wrote some detailed explanations using the knowledge from this book and how i adapted it to australia.


Anyway although it details with more financial based transactions, it is still very relevant to property holders in australia.
Especially the points about positive re-enforcement.

 

[Amadio]

Dr Joes flood point is very very relevant, in fact its incredibly relevant.

Agree.

I've just had an unnerving conversation with a friend very much into property who bought a beautiful home in Santa Cruz of California in 2006 for $750,000. They are now seriously underwater, with a similiar house on the market in their street for, firstly $300K and now $200K - no takers.

She asked what the property market was like in Oz and I rambled on about the same stuff that we all said when I was living in Ca - oh, it's great, loads of immigration, lack of supply...market looking fantastic...limited land releases...can only go up.. blah blah blah.

There was a dead silence and she said "Do you know how idiotic you sound?".

 

[JulieW]

I'm a bit of a contrarian I must say and the fact that 'everyone' is hot for property investment - public debt is extraordinary - and 100 plus people are at auctions points me toward being very conservative. That is take profits where one can and batten down the hatches. Perhaps Keen is right, perhaps not, but risk never sits comfortably with me so I'm watching every indicator I can.

As has been pointed out numerous times - USA has a vastly different market to Australia - but there's no arguing with cash flow versus interest payments versus market value. I can't help feeling that there is a lot of future pain being sown at the auctions here in Melbourne where 20 percent above reserve seems to be the norm.

We seem to have lost about 10 percent in prices overall when the potential of the GFC was mooted here in Australia. I'd expect Keen's projections to be close in some areas should the potential become an actuality. Of course it will all rise again, but it might mean some very painful times. Point taken Amadio.

 

[Witzl]

Agree.

I've just had an unnerving conversation with a friend very much into property who bought a beautiful home in Santa Cruz of California in 2006 for $750,000. They are now seriously underwater, with a similiar house on the market in their street for, firstly $300K and now $200K - no takers.

She asked what the property market was like in Oz and I rambled on about the same stuff that we all said when I was living in Ca - oh, it's great, loads of immigration, lack of supply...market looking fantastic...limited land releases...can only go up.. blah blah blah.

There was a dead silence and she said "Do you know how idiotic you sound?".

• US immigration = predominantly unskilled migrants from south of the border
• AUS immigration = skilled workers only, or people flush with cash. Very very small numbers of unskilled migrants
• US lack of supply = fallacy. They were building at RECORD rates a few years ago, and at the same time handing out subprime mortgages like pamphlets on election day, and have non-recourse loans. We all know where that ends
• AU lack of supply = truth. Construction is at an all time low COUNTRY WIDE.
• US land releases = they were creating whole new towns and suburbs like they were photocopies on a xerox machine.
• AU land releases = virtually non-existant in most of the country.

Whilst annecdotally, the argument seems valid that what happened in USA will happen here.... i dont believe it myself. There are too many differences, as has been argued here before ad nauseum.

 

[Belbo]

All very good points, Witzl, but the kicker has to be that we don't have non-recourse housing loans like they do in the US. They have to be most insane thing I've ever heard of! I can't beleive the US still hasn't outlawed them.

 

[BayView]

Actually, one option, assuming you weren't behind on your original loan. Buy the house next door for 50% what you bought it for, then default on your original home. Assuming your state does non-recourse loans and a homestead exemption (that is, your PPOR is specifically excluded from bankruptcy proceedings), this can work. Your credit will be trashed, though. There's tons of supply out there.

Of course, Australians can't do this.
Alex

My S-I-L was looking at property in both Santa Monica and Venice Beach the other day - no reason, other than she visited there when she came over to see us a few years ago.

She said there were 58,000 properties for sale in her targeted area.

 

[Token Funder]

All very good points, Witzl, but the kicker has to be that we don't have non-recourse housing loans like they do in the US. They have to be most insane thing I've ever heard of! I can't beleive the US still hasn't outlawed them.

<Insert TF's usual comment about the non-recourse myth here>

 

[andrew_de_a]

<Insert TF's usual smart ***/ sarcastic comment here>

oh really?

 

[alexlee]

She said there were 58,000 properties for sale in her targeted area.

But you have to exclude a lot of them (new developments that are only half built with none of the promised amenities, ones trashed by the previous owners, ones damaged (rot, etc) due to being exposed to the elements).

Part of the reason why there is such oversupply is that local governments depend on property taxes to operate services like schools, police, fire departments, etc. More developments --> more residents --> more taxes collected. This is especially an issue in California because proposition 13 essentially caps property taxes for people who remain in their homes. As a result, long-time residents of a home would be paying ridiculously low taxes compared to the market price. In order to open up new sources of tax revenue, local councils in CA went nuts approving new developments and were lax in curbing mortgage companies.
Alex

 

[Bill.L]

various posters,

Run for the hills

and what do we do when we get there?? live in caves??

bye

 

[Intrinsic_Value]

• US immigration = predominantly unskilled migrants from south of the border
• AUS immigration = skilled workers only, or people flush with cash. Very very small numbers of unskilled migrants
• US lack of supply = fallacy. They were building at RECORD rates a few years ago, and at the same time handing out subprime mortgages like pamphlets on election day, and have non-recourse loans. We all know where that ends
• AU lack of supply = truth. Construction is at an all time low COUNTRY WIDE.
• US land releases = they were creating whole new towns and suburbs like they were photocopies on a xerox machine.
• AU land releases = virtually non-existant in most of the country.

Whilst annecdotally, the argument seems valid that what happened in USA will happen here.... i dont believe it myself. There are too many differences, as has been argued here before ad nauseum.

I agree and i dont agree.
US immigration: i dont have the facts. Australian immigration: part of the potential bubble in australia is caused by Chinese investors 'assuming australian prices are cheap' because they compare it to back home. We have been here before, first with the japanese then with the Taiwanese/Hong Kong immigrants. At the end of the day this just supports a falicy, it does not determine intrinsic value.

Your point about increased supply of increased US housing stock is very relevant as to the cause of the bubble burst, no argument from me there.

Your point about low construction in australia limiting supply is true for the short/medium term, but not for the long term. Intrinsic value will determine long term prices, but the market can trade above/below intrinsic value for short/medium periods of time (and for property the medium term can mean a number of years.

The point im trying to make here, is what ipediments (spelling) to construction is effecting new construction. A few that come to mind:
1) GFC effecting construction lending;
2) government interference, eg levies
3) unionised labour force with no 'imports from china'.

Some of the above act as impediments to trade, so long as the impediments exist, then you have support of artificial prices (effectively price gouging).
Over the long term those impediments tend to get removed, once this occurs the market re-adjusts, and when it occurs there is termoil because percieved value is not actual value.

If you want an example of this just look at telstra and the poor suckers who bought into the original concept back when T1 and even worse T2 was sold.

 

[Intrinsic_Value]

Alot of what i am reading on this forum reminds me so much of share investors prior to 2008.
Many share investors where comming out with 'sensible' statements, especially with regards to the australian share market.

But when the **** hit the fan, those same share investors couldnt handle the pain and suffered significant fincial loss.

Its easy to stick to your guns when the market is rising.
But i cant emphasise enough, make sure you truely have your risk strategies in place if you want to adopt the buy and hold strategy.

I am not suggesting buy and hold is wrong by anymeans, what concerns me is the lack of strategic risk management.

 

[Intrinsic_Value]

various posters,



and what do we do when we get there?? live in caves??

bye

Its not an issue about 'what do we do when we get there, live in caves'.
For the majority of the population, most people will just get on with their lives. Why? because they dont own numerous properties financed without due consideration that an asset class doesnt 'double every 10 years' over the long term.


The majority of the population also didnt liquidate their superannuation into 'cash holdings' during the GFC. They just went about their daily lives. Those that did have probably got through this GFC better than those who tried to be 'smart'.

The point i am trying to make is that over the long term Jan Sommers is correct. I am still convinced that over the long term, and for the average person, residential property is still the ultimate 'wealth creation vehicle'.

But the long term can sometimes mean just that, and what concerns me is the popularity of the asset class.
Holding for the long term, and BEING ABLE TO HOLD for the long term can sometimes be two different issues.

 

[john_smith]

Interesting things about the US

I find it amazing that in the US if your mortgage is underwater you can simply just walk away from it, with the bank being unable to chase you down for the difference. It's insane.

Another equally amazing thing a friend told me recently (still not quite sure if I can bring myself to believe this), is that in the US you can refinance a fixed rate mortgage without any penalty!!! That is, you can take out a 30 year fixed rate loan at say 5%, and if it turns out that rates drop to 4%, then just refinance without penalty down to 4%. That way, if rates go up you win, and if rates go down, then just refinance and the bank loses.

I'm not sure how banks can stay in business like this? Or perhaps my friend was wrong. He's a 'realtor'(TM) in the US, but that doesn't mean he actually knows anything .

 

[Amadio]

Another equally amazing thing a friend told me recently (still not quite sure if I can bring myself to believe this), is that in the US you can refinance a fixed rate mortgage without any penalty!!! That is, you can take out a 30 year fixed rate loan at say 5%, and if it turns out that rates drop to 4%, then just refinance without penalty down to 4%. That way, if rates go up you win, and if rates go down, then just refinance and the bank loses.

I'm not sure how banks can stay in business like this? Or perhaps my friend was wrong. He's a 'realtor'(TM) in the US, but that doesn't mean he actually knows anything .

Well, some banks didn't stay in business and some were bailed out with taxpayer (ours) money.

But your friend is correct - it's true - we did this for decades with our PPOR. We used out house as an ATM. Need to remodel the kitchen for $60,000? Just refinance. Need to send the kid to aviation school for $80,000, just refinance. Need a deposit on an IP for $30,000? Just refinance.

There were small upfront costs involved, so you did have to weigh the costs versus the benefits, but generally there were no penalties to refinance. With spiralling upwards equity with no end in sight, everyone we knew were constantly refinancing.

It was a jawdropping surprise to learn that in Australia if you fix a loan for a puny 5 years, and then want to refinance, there were large break fees.

Of course, what many homeowners in the USA found out is that all this refinancing means that the principal became ever larger.

 

[markpatric]

I find it amazing that in the US if your mortgage is underwater you can simply just walk away from it, with the bank being unable to chase you down for the difference. It's insane.

Another equally amazing thing a friend told me recently (still not quite sure if I can bring myself to believe this), is that in the US you can refinance a fixed rate mortgage without any penalty!!! That is, you can take out a 30 year fixed rate loan at say 5%, and if it turns out that rates drop to 4%, then just refinance without penalty down to 4%. That way, if rates go up you win, and if rates go down, then just refinance and the bank loses.

I'm not sure how banks can stay in business like this? Or perhaps my friend was wrong. He's a 'realtor'(TM) in the US, but that doesn't mean he actually knows anything .

It is called fractionalised banking, it is no secret at all that this system has a rapidly approaching use by date.
And we wonder how bubbles are created?.
Any given land or home is only worth what we think it is, that can change fast.
It is up to the individual to decide whether or not to watch for an oncoming bus.

 

[markpatric]

All very good points, Witzl, but the kicker has to be that we don't have non-recourse housing loans like they do in the US. They have to be most insane thing I've ever heard of! I can't beleive the US still hasn't outlawed them.

So what would you prefer?, that the loans were structured like they are in Australia and that a huge % of the US population would be paying back the banks for the rest of thier life for money loaned to them which was never there in the first place?, but due to the fractionalised banking system is created by the stroke of pen (exactly as is in aussie by the way.)

 

[Plan_Trader]

Amadio,

I just tried searching for houses in Santa Cruz. For 200k you get a one bathroom/2 bed shoebox unit on the site I looked at. What street are you talking about?

 

[Sunfish]

I've spent hours this weekend looking at Florida RE and I could sell my old sbox wooden house here and trade it for a mansion there.

Came across a 2 bed 2 bath home built in a golfing estate in '05 for $104k while there is another in the same complex almost identical advertised @ $216. Clearly one is desperate and the other unrealistic.

But there is no free lunch. Rents are low by our standards and simply buying as an investment commits you to the US economy which is still on life support. If I can find a good PM I may buy one only, simply as diversification. The prices really are hare to refuse.

 

[markpatric]

I've spent hours this weekend looking at Florida RE and I could sell my old sbox wooden house here and trade it for a mansion there.

Came across a 2 bed 2 bath home built in a golfing estate in '05 for $104k while there is another in the same complex almost identical advertised @ $216. Clearly one is desperate and the other unrealistic.

But there is no free lunch. Rents are low by our standards and simply buying as an investment commits you to the US economy which is still on life support. If I can find a good PM I may buy one only, simply as diversification. The prices really are hare to refuse.

And the worst part is the banks are withholding from the market massive portfolios of foreclosed homes which further inflates the market, and they can only do this due to the government bailing them out with taxpayers dollars!.

So anyone buying back in would be paying artificially inflated prices.