Here's a plot of the indices data for the time being.
Housing Affordability
- Thread starter karina
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willair said:
This is called the...
Paradox of Thrift
The paradox is the inconsistency between the apparently virtuous nature of household saving and the potentially undesirable consequences of such saving.
If most households decide to save a larger proportion of their incomes then they will consume less and this reduce expenditure will lower aggregate demand and so lead to lower levels of output and employment. Thus an increase in savings will reduce the level of national income (so yes, it is a slowdown in the economy).
However, thriftiness, or saving, is beneficial to the economy as it releases resources from the production of consumer goods to be used for producing "investment goods" (which for an economist, means "productive capacity").
However, if households save more than businesses plan to invest at a given level of national income, then this will cause the equilibrium level of national income to decline, therefore reducing also the actual amounts saved and invested.
Mark
Yes, household saving is an ambiguous term. To simplify, saving to me is an outdated concept.
I like to clarify things by thinking of every dollar spent as invested.
If you have the opportunity to invest a dollar in:
perfume
pizza
porsche
property
new manufacturing process to create clean sustainable alternative to petroleum
feed educate and house offspring
you start to get an idea of the true value of money, and the relative importance of staples vs discretionaries vs building an evolving sustainable world.
I like to clarify things by thinking of every dollar spent as invested.
If you have the opportunity to invest a dollar in:
perfume
pizza
porsche
property
new manufacturing process to create clean sustainable alternative to petroleum
feed educate and house offspring
you start to get an idea of the true value of money, and the relative importance of staples vs discretionaries vs building an evolving sustainable world.
Pitt St said:
I suppose we can be gratefull that most people don't behave in a financially responsible way
See Change
This article raises some pertinent points re affordability
- long term trend in debt serviceability
- new debt instruments such as LOC
- higher real incomes
- new homes are larger and better quality than 15 years ago.
- and low inflation equaling low interest rates
http://research.comsec.com.au/ResearchFiles/H/Houseprice.pdf
- long term trend in debt serviceability
- new debt instruments such as LOC
- higher real incomes
- new homes are larger and better quality than 15 years ago.
- and low inflation equaling low interest rates
http://research.comsec.com.au/ResearchFiles/H/Houseprice.pdf
Great link Bruce,thefirstbruce said:
I'm wondering if anyone can explain why according to one of the graphs in the above CBA report (link), extablished house prices have shot far ahead of project homes. Currently approx 90k difference ... fairly significant, especially when seen against history over past 30 years.
Given that larger size of newer homes is used as an arguement supporting higher prices now ... I'd expect this to be reflected in new homes.
Pat re project home price being cheaper, only guessing but it may be because they are in the outer suburbs where land is cheaper.
You might also find this article interesing:
HOUSE PRICES IN AUSTRALIA: 1970 TO 2003 FACTS AND EXPLANATIONS
http://www.econ.mq.edu.au/research/2005/HousePrices.pdf
You might also find this article interesing:
HOUSE PRICES IN AUSTRALIA: 1970 TO 2003 FACTS AND EXPLANATIONS
http://www.econ.mq.edu.au/research/2005/HousePrices.pdf
Hi all,
I thought you might find this link interesting. It's a US article but still has some relevance.
In a nutshell, it tracks 'the most an economic unit/household can borrow and median house prices over time'. I like it as it's nice, simple and seems to be an OK indicator.
Using the 'how much the average house can borrow themselves to the hilt' figure takes into account interest rates, inflation, more flexible lending products from the banks, wage increases and demographic changes.
http://efficientfrontier.com/ef/405/housing.htm
I thought you might find this link interesting. It's a US article but still has some relevance.
In a nutshell, it tracks 'the most an economic unit/household can borrow and median house prices over time'. I like it as it's nice, simple and seems to be an OK indicator.
Using the 'how much the average house can borrow themselves to the hilt' figure takes into account interest rates, inflation, more flexible lending products from the banks, wage increases and demographic changes.
http://efficientfrontier.com/ef/405/housing.htm
see_change said:
As Peter posted here there are some who believe that banks caused the property boom by way of their influence in the supply of money.
SC, essentially the question you are asking is almost the opposite.
If an increase in the money supply caused (or was, at the least, a major contributor) to the boom, could a decrease in the money supply cause a downturn?
Short answer - yes.
What is the money supply?
The RBA defines the money supply (broad money) as:
The widest definition of money published by the Reserve Bank of Australia (RBA). Broad money is defined as currency plus bank current deposits of the private non-bank sector, plus all other bank deposits of the private non-bank sector plus borrowings from the private sector by non-bank financial intermediaries (NBFIs), less the latters' holdings of currency and bank deposits.
So how could the money supply change?
Well it can change in numerous ways, such as:
- more notes are printed and coins issued than are taken out of circulation
- deposit levels change
- lending levels change
How do banks influence the money supply?
Most notably through a process called "the multiplier"
There are a number of different ways of expressing the multiplier, and one of them is as follows:
total change in bank deposits = (1 / reserve ratio) x initial change
So if banks have a reserve ratio of 20%, then a $500 million initial change in bank deposits will (in this simple model) result in a total change of $2.5 billion in bank deposits.
What is a reserve ratio?
The Australian Prudential Regulation Authority acting in cooperation with the RBA sets minimum % of deposits that deposit-taking institutions are required to keep in specified asset classes.
If the reserve ratio changes, this could very well flow through to the money supply.
Why would the multiplier change?
- Changes in the reserve ratio
- Changes in lending practices
So where to from here?
Clearly, because most property is bought with borrowed funds, changes to either the reserve ratio of deposit taking institutions, or to lending practices, have the capacity to impact upon the supply of funds for lending.
Reserve Ratios
As far as I know no-one really talks about reserve ratios. The reason being that (my understanding) r/r's are institution specific. The r/r of the CBA will not neccesarily be the same as the r/r of the NAB, ANZ, or Westpac. Reserve Ratio's reflect APRA's assessment of each banks risk. If you are assessed to be "riskier", you're r/r goes up, and vice-versa. Of course, no-one wants to be seen publicly as being more risky than someone else, so it is all hush-hush.
Lending Policies
The property "market" (as a whole) is past its peak at this stage of the cycle and indeed price falls have been seen in the market (and there is lots of evidence in Sydney and Melbourne - 40% of Australia's population - to support that). From a lender's perspective, this is obviously cause for concern.
So how do lenders react?
They increase servicibility requirements, decrease LVRs, or stop lending on some types of property altogether, and so on.
This restriction (reduction) on lending reduces the money supply.
I haven't gone to the trouble of checking what the top economists at the big banks are saying at the moment, but I would be surprised if any of them are predicting the next property boom is due to start next month. Last I looked into it the general consensus was that property would be in the doldrums for a few years.
Now, it does not seem to be too big an assumption to make that if the Chief Economist at ACME Bank is saying "property is off the boil" that the Bank's attitude towards lending for property will be more risk-averse than at times when the Economist is saying "property is getting hot again".
Of course, by the time that same bank economist comes out and again says that "property is heading for a boom", you can bet that the boom is well and truly underway.
But it will be at that time that lenders will fall over themselves to loan money to property investors. Lending requirements will ease and the masses will jump on the bandwagon and the roller-coaster ride will begin all over again.
But by that stage, the smart investors (ie. people on this forum) will have already taken up their positions in the market. And it is they who will benefit the greatest from the masses that follow.
* * *
For those that are interested in the money supply and the reserves ratio, check out the attachment (something I first posted many moons ago in this thread. Again, full acknowledgement to Associate Professor Glen Otto at the University of New South Wales (he is the author of the document).
Mark
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Pitt St said:
Although I haven't heard this expression for ages, I wonder if during such times, people will once again say 'Cash is King', as opposed to now, where equity in property is seen as being nearly as good.
Although during such times banks might drop maximum allowable LVRs (or require mortgage insurance even for 80%), do you foresee banks ever refusing to lend anything against the equity of existing property holdings (even if it's LVR is small or zero)?
Rgds, Peter
Excellent post Mark.
Spiderman said:
Peter, I hear it almost every day, in small business. And we threw it around in a recent thread.
The other one we don't tend to touch here is "equity is the most expensive form of capital", as it is heresy in the church of the private individual leveraging into ever more property.
thefirstbruce said:
Let's touch it then; I'm game if you are
To determine the truth or otherwise of this, I suppose we need to look at all other means of raising capital and their relative merits, costs and risks.
Eg:
- Earning more and/or spending less thus saving more
- Increasing yields on assets and/or reducing holding costs to boost cashflow
- Renovations that add more value than they cost
- Changing financing structure, loan type or loan term
- Sale of some of the portfolio for better opportunities elsewhere
- Getting relatives to help or a 'money partner'
- Put it all on Bankcard!
Then there are matters of security (eg using home equity to fund deposits for IPs) that some may be uncomfortable with. If the IPs have heavy outgoings and don't appreciate in value, then yes, it could be an expensive use of equity.
Peter
I'll need to think about this one after a few wines. Need to put the right spin on it And think of all the permutations and combinations that crossover from enterprise to personal investment. Which reminds me, the older I get the more I see the advantages of running a household like a business.
- minimize spending on anything that doesn't appreciate or generate cost effective income streams.
- maximize time management efficiency by being super organized with an overlay of clear short and long term goals.
- get the best advice re everything you do.
- associate with successful ethical people.
- mimimize risk by understanding your market
- look for opportunities to diversify or capture market share.
- have a backup plan in for disaster recovery.
Gawd, the mind boggles.....
now back to that bottle of shiraz and to catch Allan Kohler on the ABC news.
And think of all the permutations and combinations that crossover from enterprise to personal investment. Which reminds me, the older I get the more I see the advantages of running a household like a business. - minimize spending on anything that doesn't appreciate or generate cost effective income streams.
- maximize time management efficiency by being super organized with an overlay of clear short and long term goals.
- get the best advice re everything you do.
- associate with successful ethical people.
- mimimize risk by understanding your market
- look for opportunities to diversify or capture market share.
- have a backup plan in for disaster recovery.
Gawd, the mind boggles.....
now back to that bottle of shiraz and to catch Allan Kohler on the ABC news.
Hi Bruce,
Upon reading about the household like the business, and after a couple of glasses of white, I interpret the following.....
1/minimize spending on anything that doesn't appreciate .
means spend more on the wife and less on self.
2/maximize time management efficiency by being super organized with an overlay of clear short and long term goals.
means do more housework and set timetable for the repainting what the wife wants done.
3/get the best advice re everything you do.
obvious... means ask wife.
4/associate with successful ethical people.
whoops there go the mates.
5/mimimize risk by understanding your market
means.... keep listening to she who must be obeyed..... or else.
6/ look for opportunities to diversify or capture market share.
means..... mistress perhaps????
7/have a backup plan in for disaster recovery.
means..... divorce..or perhaps med insurance for when wife finds out about the increased market share!!!
bye
Upon reading about the household like the business, and after a couple of glasses of white, I interpret the following.....
1/minimize spending on anything that doesn't appreciate .
means spend more on the wife and less on self.
2/maximize time management efficiency by being super organized with an overlay of clear short and long term goals.
means do more housework and set timetable for the repainting what the wife wants done.
3/get the best advice re everything you do.
obvious... means ask wife.
4/associate with successful ethical people.
whoops there go the mates.
5/mimimize risk by understanding your market
means.... keep listening to she who must be obeyed..... or else.
6/ look for opportunities to diversify or capture market share.
means..... mistress perhaps????
7/have a backup plan in for disaster recovery.
means..... divorce..or perhaps med insurance for when wife finds out about the increased market share!!!
bye
hehehe....glad to see you have a successful domestic enterprise happening there Bill...
they reckon it is hard to diversify successfully. requires a very heavy investment of capital and time, and difficult to measure and manage the risk.
better to stick to core business, at least until you are market leader, and have deep cash reserves. then you can become a corporate raider, an asset stripper. though the 80s showed you can only do that a few times too, before no one will talk to you
I've always felt buying a competitor's market share was an efficient growth strategy......though I guess you have to pick the competitors that are nearing retirement.........Gawd, where is this going......
they reckon it is hard to diversify successfully. requires a very heavy investment of capital and time, and difficult to measure and manage the risk.
better to stick to core business, at least until you are market leader, and have deep cash reserves. then you can become a corporate raider, an asset stripper. though the 80s showed you can only do that a few times too, before no one will talk to you
I've always felt buying a competitor's market share was an efficient growth strategy......though I guess you have to pick the competitors that are nearing retirement.........Gawd, where is this going......
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