Investor psychology - please post your state of mind

[HiredGoon]

Hi, I think it would be great to record for historical purposes what everyone is thinking at this time....

In July 2007 the US Sub prime debt problems became mainstream financial news in Australia. The phrase "US housing bubble" was also used in mainstream press.

New financial innovations in the mortgage industry, lower interest rates and a MASSIVE increase in debt, widespread purchasing of houses for capital gains by investors, and a belief that you can't go wrong buying a house, no matter how low you pushed the yield caused house prices in both countries to record highs.

The idea that our country was decoupled died early in 2008 when our securitised debt market completely locked up just like America and our financial sector was hit far harder than the US stocks.

The spread of interest rates also increased far about the underlying cash rate in both countries as international credit conditions tightened.

However - most Australian investors and media commentators remain bullish on Australian property.

My question to you is, in these 2 events:

July 2007 - sub prime/US housing bubble
Q1 2008 - interest rates spread & financial share correction

How did you look at internation conditions, see other countries experience massive real estate booms and then subsequent busts but retain bullish outlook on Australia?

Do you believe Australia is fundamentally different? Do you think the foreign markets now in decline were bubbles?

Do you believe foreign markets were bubbles but Australia's boom was driven on fundamentals?

Thanks for all of your comments, I won't comment on anything you say in this thread - strictly an observer - I genuinely want to see what everyone is thinking - I think it will be useful historically to see investor psychology at these points in time. Thanks

 

[Pablo]

Hiredgoon,

Since I am in property investment for the long term I have no problems buying in the current climate, I will keep on buying when I can afford to.

Pablo.

 

[WBG Redcliffe]

Hiredgoon,

I believe there is money to be made in any market. You just need to understand the fundamentals of the market you are in and buy with the correct motivation; this includes both you and the vender.

 

[wylie]

I believe that because house prices have been steadily rising (like almost every other cost involved in living the life we have here in Australia) since Australia was settled, through world wars, booms and busts, etc, that I will do what I have been doing for about 30 years now, and hold what I have, buy if I can buy again, sell if I need to fund something important to my family and keep on keeping on.

Investment houses for us are something that just hums along nicely in the background, rising, sitting stagnant, sometimes dropping slightly, rising again. I just don't see it changing. If things for some reason change drastically, we will adjust our direction accordingly.

When I think worst case scenarios, I think of Europe during the war or Australia during the depression. If society as we know it breaks down, at least we can provide housing (even for free) for a few families rather than have them in the street. Or the bank could take it all and we might have to live in somebody's garage. If life gets that tough, keeping alive will be a bigger priority than asking for rent.

 

[alexlee]

Pessimistic about the short term, optimistic about the long term. I'm still going to buy. Having stayed out of the market from about the end of 04 to the end of 07, I have plenty of equity saved up to survive the recession I expect.

I'll still be buying even in the short term. Why? I don't really know how the market will turn out. I'll do what I've always done: buy when I believe I have the ability to hold for the long term.

Was the Australian boom based on fundamentals or a bubble? Both. some of it was from fundamentals, some from euphoria and loose lending, which is ending (for the time being). So I wouldn't be surprised if we see price falls.
Alex

 

[MichaelW]

How did you look at internation conditions, see other countries experience massive real estate booms and then subsequent busts but retain bullish outlook on Australia?

Do you believe Australia is fundamentally different? Do you think the foreign markets now in decline were bubbles?

Do you believe foreign markets were bubbles but Australia's boom was driven on fundamentals?

Hi HG,

In short, we are fundamentally different. Here's how:

1. We have massive housing under-supply which is the complete opposite of the US, UK, Ireland and Spain.

2. The Sydney market in particular has been largely flat since the last market boom peak in 2004, which represents 4 years of real inflation adjusted negative growth, so in part the hit has already been taken.

3. Our economy is an export economy unlike the US economy which is driven by consumer consumption. Our terms of trade have never been better and are likely to remain strong. China, while slowing, is unlikely to slow sufficiently to change this relationship. Hence, our economy will continue to grow whilst the US bumbles on through their slow recession.

4. I believe there is not a debt bubble propping up the Australian property market. Servicability remains managable, and on par with historic norms when allowing for salary growth and reduced costs of other items in the purchase pool. Although the % of take home pay has increased that is now allocated to mortgages, this has not reduced the standard of living of households.

5. Rents are exploding, making the servicability equation much better for investors at the same time as interest rates are peaking. We are at the tail end of the pain cycle and all indicators suggest things are starting to improve.

Just my thoughts. I believe some mortgage stretched pockets will take a hit in the coming couple of years, but for the large part it will just be a small blip on the property radar and all part of the usual boom/bust cycle. There's nothing new on this world after all...

Cheers,
Michael.

 

[grossreal]

hi all
my mind is not one real estate at the moment but commodities
and no not coal or oil or iron but food.
in partcular the two main ingrediants one rice and the other wheat.
both are and will rise and they will rise because the numbers are increase but production is not.
and just as I predicted that rents would start to rise as demand out strips supply the same I think with happen to food.
now you can throw more money into a market and try( though thats not that case at the moment) to kick start a economy thats not the same with food stuffs.
you can't suddenly increase land availability or suddenly increase production.
all the indicators I see are telling me that with 10 years there is going to be a very big shortage of both these food stuffs.
and
no its not the time to start to stock to pantry.
it would have gone of any way
but it there is going to be a shortage of food stuffs then you have to get in early hence my focus.
and I look at lots of markets I am into com at the moment but that may change within 6 months if a couple of deals come off.
these are not investing but gambles.
they are not listed funds but unlisted and are aimed at a very particular market.
I have a been watching these market for some time and I think you will see alot of funds doing the same over the next year or so.
you have some very hungry countries out there eating every bit of steel or concrete they can get there hands on and those economies are going gang busters to get to the end of the race.
and what happens when ever you do a sport or run a race.
first you have a big drink.
and then a big meal
and yes if you quessed that we have a limited supply of fresh water and a finite amount of food.
so wait to see rises in both

 

[HiredGoon]

Thanks

Thanks for the replies.

Grossreal - I agree with you. My share portfolio is 40% energy, 30% food producers/agriculture and 20% other (mostly materials)

I probably own more Australian land than most people (certainly more than 1/4 acre!) it's just it's a share of companies land, and it's covered in food or trees or has resources underneath it.

 

[pudestcon]

I'm with Pablo; in for the long haul and will buy when the numbers stack up. I'm not restricted to one area so will buy in all main areas around Australia if the deal works.

 

[twobobsworth]

Bought last year, bought this year & will buy next year if I can afford to.

 

[Xenia]

We aim for 5 properties per year as well as looking for other opportunities: shares, businesses etc.

My main aim is towards personal and professional development. We have found that we can actually see better and better deals and opportunities if we have a positive outlook and a continous growth of knowledge in all markets. To continue this growth we keep away from anything negative including any trashy sensationalised media, negative people or those who choose to focus their attention on what is not working.

So no we are not worrying about any of the above, people make their own realities!

That is my state of mind.

 

[TheAnalyst]

Hi Xenia,

Although I share your positive attitude towards investing, however, ignoring could be a crime to yourself or family in my view.

If you have many millions for you to use, you do not have to worry and you could pick up a very good deal. However, if you do not have that much and run a small portofilio, I do not think it is a good idea to ignore the market.

We aim for 5 properties per year as well as looking for other opportunities: shares, businesses etc.

My main aim is towards personal and professional development. We have found that we can actually see better and better deals and opportunities if we have a positive outlook and a continous growth of knowledge in all markets. To continue this growth we keep away from anything negative including any trashy sensationalised media, negative people or those who choose to focus their attention on what is not working.

So no we are not worrying about any of the above, people make their own realities!

That is my state of mind.

 

[TheAnalyst]

Hi Alex

I have read your posts for a while and you keep saying buying all the time. But since end of 2004, you have not bought anything from your post.

I previously said the rate would not go up to 10%. It was my misunderstanding on how the RBA runs the monetary policy -- they run like a machine not an expert. For example, it should clearly cut the rates but they keep raising the rates. They are also very supportive on the Banks to raise rates independantly!!! US cash rates at 2% not while Australia at 7.25%. In other words, if ANZ, CBA or NAB just borrow money from US and sell here by doing nothing, they could make 5.25%; let alone now they lend at 9.75%. If not ANZ, CBA or NAB, but Citibank etc certainly can, so can the private equities.

Now most of my bank rates reach 9.75%, I decide to sell my houses even it may not a good time. We may see a 17% rate under the labor and the rate machine RBA

Regards

Pessimistic about the short term, optimistic about the long term. I'm still going to buy. Having stayed out of the market from about the end of 04 to the end of 07, I have plenty of equity saved up to survive the recession I expect.

I'll still be buying even in the short term. Why? I don't really know how the market will turn out. I'll do what I've always done: buy when I believe I have the ability to hold for the long term.

Was the Australian boom based on fundamentals or a bubble? Both. some of it was from fundamentals, some from euphoria and loose lending, which is ending (for the time being). So I wouldn't be surprised if we see price falls.
Alex

 

[kaf]

Maybe I lack imagination but my feeling is that mild up and down swings are a lot more likely than the sky-falling-in and the once-in-a-lifetime-boom scenario. We are about to revalue and then I'll start looking again this year. Will be harder to make the numbers work because of higher interest rates but on the other hand you'll have more time to select as the market will be quieter. So really business as usual for us.

kaf

 

[alexlee]

I have read your posts for a while and you keep saying buying all the time. But since end of 2004, you have not bought anything from your post.

Bought my PPOR a few months ago (much more expensive than my usual IPs), and I'm planning to buy again son. Yes, there was a gap between Dec 04 and Dec 2007 when I didn't buy anything. As I've also said in other posts, that's because I have the luxury to sit out temporarily, because I'm already exposed to the market. If I didn't have any property I would have been buying, and that is usually what I say to newbies.

Since I already have property, it's not as big a deal if I sit it out a while. If I mistime it (and I obviously mistimed it in Brisbane since it's been rising strongly for the last 3 years) I just make less than I otherwise would. My existing properties have risen strongly. I now have a nice chunk of equity I can put into new purchases, and I plan to.

I previously said the rate would not go up to 10%. It was my misunderstanding on how the RBA runs the monetary policy -- they run like a machine not an expert. For example, it should clearly cut the rates but they keep raising the rates.

That's just YOUR opinion of the RBA. Not everyone agrees with you: I certainly don't. I don't think it's 'clear' that they should cut at all, given the implications for inflation.

In any case, from a selfish perspective (the greed you so object to), I want higher rates. Why? Most people are less financially secure than I am. With double digit interest rates I'll be hurting: they fall off the cliff. I can then buy more property at cheaper prices (hence why I really don't mind if the market tanked) and get in for the next boom (the bigger the crash now, the bigger the boom next time). Welcome to capitalism.

They are also very supportive on the Banks to raise rates independantly!!! US cash rates at 2% not while Australia at 7.25%. In other words, if ANZ, CBA or NAB just borrow money from US and sell here by doing nothing, they could make 5.25%; let alone now they lend at 9.75%. If not ANZ, CBA or NAB, but Citibank etc certainly can, so can the private equities.

Yes, because if the banks raise rates independently, the RBA doesn't have to do it. The RBA raising rates has more implications for the currency compared to just an increase in rates by the banks.

In any case, the banks are still charging 'less' than what they used to: we're still getting discounts to the standard variable rate, which we didn't get in the last cycle.

In practice, banks will also hedge their FX exposure, and in theory a FX swap should 'cost' 5.25%, in your example. Obviously in practice it isn't that efficient, but bank margins aren't as high as you think. Simply borrowing in USD and lending in AUD creates FX exposure that can hurt you very quickly if the currencies move (and they have been moving).

In any case, what you're describing is a form of the 'carry trade' and it's nothing new. The carry trade was one of the main things driving the yen weaker in prior years. You're not saying anything that hasn't already been discussed to death in the business press.

Now most of my bank rates reach 9.75%, I decide to sell my houses even it may not a good time. We may see a 17% rate under the labor and the rate machine RBA

If you're paying 9.75% and you're on a full-doc, call your mortgage broker. You're paying way too much.

Go ahead and sell, analyst, if that's what you believe is best for you. If you believe the market is going to tank and rates go to 17%, then it probably IS a good time to sell.

If you believe the RBA and govt are collectively screwing up the country, move somewhere else. I agree that there will be pain up ahead: I plan to profit from that. I refinanced a property, am still saving money, and will be looking to buy in Sydney. I don't believe we'll see 17% interest rates: consumer spending will collapse way before we hit that level.

As I always say, I plan the game as the rules actually are, not as I wish them to be.
Alex

 

[WinstonWolfe]

July 2007 - sub prime/US housing bubble
Q1 2008 - interest rates spread & financial share correction

How did you look at internation conditions, see other countries experience massive real estate booms and then subsequent busts but retain bullish outlook on Australia?

The US entered the sub prime crisis with a higher level of household debt, a weaker domestic economy, and without the benefit of a resources boom. Therefore they were more at risk.


Do you believe Australia is fundamentally different? Do you think the foreign markets now in decline were bubbles?

I have stated consistently that property growth is driven primarily by the cost and availability of credit. Credit is exponentially more important than population growth and supply/demand mismatches. Why? because 99.9% of FHBs cannot afford to pay cash for a house, and if prices get too high people will always form larger households.

Further, if the FHB house purchase rate slows, as it is, price growth will slow for existing owners, who then cannot afford to upgrade to more expensive houses. ...and that flows up the chain to higher end property.

I have also argued that property appreciation has traits similar to a Ponzi Scheme. Slow the entrants into the market, and there's no way for current holders to get expected returns.

Back in the middle of 2003, when Brisbane prices were moving above 6x median household income, It took me some time to understand how this could be. Through Somersoft and other reading, I concluded DSRs had been loosened significantly by lenders. i.e. a higher proportion of new housing finance utilized
- >25 year P&I terms
- lo docs, IOs,
- >80%LVR.

That in combination with more households channeling more income to property acquisition and therefore debt, pushed prices.

I used to think investors were responsible for much of the noughties property boom...but I am to so sure.. I don't think there has been clear data on this since 2004.

If investors had significantly increased % share of property, then we should have seen a significant increase in the number of renters via ABS stats. But we haven't. The number is still around 29-30% of the population, as it has been for ~15 years.


Do you believe foreign markets were bubbles but Australia's boom was driven on fundamentals?


I agree with Steve Keen that the west has been funding lifestyle and assets on an increasing debt binge. Debt in and of itself would be ok if it was used to increase productivity or GDP at a rate that exceeded the cost of servicing debt on ever inflating property prices.....i.e. income would grow, and a 35% DSR would service more debt as asset prices grow.

However, GDP, productivity, and therefore wages, have not grown at the rate of debt growth. hence debt serviceability has hit a ceiling, ergo asset prices cannot move higher. And if you throw more expensive credit terms on top, then asset prices have to come down.

That's what has happened in the US and increasingly in Australia. If you want a sensitive barometer, track any outer ring working class suburb of BrisSydMelb. Listings are up and prices stagnant or falling this year.

Why hasn't GDP moved up? because inherently, residential property inflation is a zero sum game. Residences have comparatively little productivity flow on effect to the economy. Investing in property not does have the same benefits to an economy that investing in an export earning business does, nor a company that produces goods and services more efficiently at reduced cost to the consumer. Using $500k of debt to simply sit passively in a house is not productive. Sure the construction of that house kept a few guys employed for 6 mths, but then zilch.

So when we talk of property price inflation being based on fundamentals, fundamentals will restrict property growth to the rate of GDP growth.

Immigration in and of itself is not enough to justify proprety price growth. If we had 500,000 Sudanese refugees or 500,000 savvy multimillionaire HongKongese arrive tomorrow, would they have equal effect on property prices? Of course not. The latter would contribute dramatically more to GDP growth then the former, via higher levels of consumption, investment and superior entrepreneurship.

So where to from here? It all depends on the cost of credit and what happens across the broader domestic economy. I see the domestic economy weakening in Australia, and that continues to be masked by resources. BHP, WPL, RIO, and other resource companies are growing their share of the XAO, and that is masking deteriorating conditions in discretionary expenditure, manufacturing, and finance sectors.

Increasingly, if you aren't working in mining related activities, then your wage rises aren't likely to be significant, and that;ll be accompanied by less job security too.

I figure we have about 10 years of opporunity to diversify mining profits into pursuits that likely to produce other sources of export income. If we don't, then Gen XYZ are guaranteed to have a seriously inferior standard of living to their parents.

..........................

 

[TheAnalyst]

Alex,

1. I did not say what I see is new or different. It is only my view -Greed contributes to the inflation.
2. RBA runs based on the ABS statistics on inflation. Who knows ABS? I used to work for a State Government agency and deal with ABS a lot. We had a lot of questions which they simply could not answer. The methods and samples are simply wrong.
3. You have your view on RBA. I have mine. The way and decision they make does not need a few hundread fat cats sitting there to do it. It only needs a small branch say 10 people and a dice.
4. You continue to buy is good for you. So only I see you buy one over 3 years while you have been saying for 3 years.
5. Draw down the equity (I do as well) does not mean you create any wealth. It does not mean your property value is growing, on the contrary, it diminishing by the market. Do not fool yourself on this. If the market falls, your portifolio suffers as well. I may only help you to pay for your loan repayment.
6. Capitalism does not have to be unethic or immoral in explore the poor or average, although a lot of them do. For example, the increase of oil price, it purely help companies like Woodside. Why they have to charge so much on the society? It is purely greedy. I do not have problem everyone (inc me) to make money. However, to make money at the other party's extra suffering is the least thing I want to do.
7. Rates I am paying origionally was a 0.75% discount because of the last many 0.25% increase.

 

[alexlee]

2. RBA runs based on the ABS statistics on inflation. Who knows ABS? I used to work for a State Government agency and deal with ABS a lot. We had a lot of questions which they simply could not answer. The methods and samples are simply wrong.
3. You have your view on RBA. I have mine. The way and decision they make does not need a few hundread fat cats sitting there to do it. It only needs a small branch say 10 people and a dice.

The above being your view. I don't see the RBA as being a bunch of fat cats: their pay isn't all that great. Any of those analysts could make much better money working for a bank or hedge fund.

4. You continue to buy is good for you. So only I see you buy one over 3 years while you have been saying for 3 years.

To be fair, given the price of my PPOR, it probably equals about 2-3 of my usual IPs. I don't see your point?

5. Draw down the equity (I do as well) does not mean you create any wealth. It does not mean your property value is growing, on the contrary, it diminishing by the market. Do not fool yourself on this. If the market falls, your portifolio suffers as well. I may only help you to pay for your loan repayment.

The cash sitting in my offset account, based on the equity of my property, says different. It's not creation of wealth, it's merely turning equity into cash.

I believe that even if prices fall now (and I expect them to) they will eventually come back up. In the meantime, the bank has lent me real cash based on the (arguably too high) current value of my properties. So when the market falls, I can use this cash based on the peak value (which may not exist anymore, but it doesn't matter if the bank doesn't yank the loan back) to buy properties that have fallen in value. Basically the bank has lent me more than it should have, and I can use that to buy more properties. When the market turns, wealth WILL be created. To my benefit.

You have your beliefs, I have mine.

6. Capitalism does not have to be unethic or immoral in explore the poor or average, although a lot of them do. For example, the increase of oil price, it purely help companies like Woodside. Why they have to charge so much on the society? It is purely greedy. I do not have problem everyone (inc me) to make money. However, to make money at the other party's extra suffering is the least thing I want to do.

Increased oil prices also helps the shareholders of Woodside. Are you one?

Those are YOUR principles. I respect your empathy for other people. I don't share them.

My care factor diminishes with the further removed I am from the suffering person. If my friend or family member is suffering, I'll help them. If a lot of suffering in the mortgage battler belt results in me being able to buy some properties on the cheap, and makes me money in the next boom, I have absolutely no problem with that. The other party's suffering just doesn't register on my conscience. I have no problem with greed. I think it's what drives human advancement. But then, given my background, what did you expect me to say?

As you say, we have different views. My views seem to be closer to what's actually happening in the real world, though.
Alex

 

[DebtEquity]

Damn Straight! I love reading your posts Alex very informative and straight to the point.

I to am expecting a Recession to hit around 2010-2014. Harry S Dent Junior has predicted previous recessions based on population declines and consumer spending habits. He advised that the Japanese economy would go into a deep recession after it's 80's boom.


Food for thought though i am also waiting and looking for more properties to come up as alot of people over borrowed.

 

[alexlee]

I to am expecting a Recession to hit around 2010-2014. Harry S Dent Junior has predicted previous recessions based on population declines and consumer spending habits. He advised that the Japanese economy would go into a deep recession after it's 80's boom.

Food for thought though i am also waiting and looking for more properties to come up as alot of people over borrowed.

Admittedly I don't expect Australia to have a recession and stay there for 20 years like Japan. However, I believe I know enough about the Japanese recession to say that it is unlikely to happen here (or in the US). i.e. we will have a recession, but it's unlikely to last as long as the Japanese one.

I just expect a cycle. It booms. It busts. It booms again. And busts again. Basically a long term uptrend punctuated by excessive confidence and pessimism. While I have a couple of properties, I hope to have much more by the time the next boom rolls around. That might be 5 years, or 7 years, or 10 years from now. Who knows?
Alex