Is the Sub-Prime Crisis in US going to affect IPs in Australia ?
- Thread starter xQuIz8
- Start date
Hi xquiz,
im no expert, but my view is that its allready having an indirect impact:
- higher credit costs, thus higher mortagage rates
- more people going to the banks rather than low doc type lenders
- banks pand other lenders placing tighter credit controls and lending practises
all this is reducing the supply of money, thus demand ..
That question is the million dollar question right now isn't it. But there's a lot of threads to that question. Let me spell it out in a bit of detail then give my opinon.
The real question is whether the sub-prime crisis in the US will drive the US economy into recession. US consumer spending is the backbone of their economy and so far consumer sentiment has remained bouyant despite the property market bubble and the sub-prime crisis. But the sub-prime crisis has caused a lot of balance sheet writedowns on some big lenders and is currently hurting credit rates the world over. It has spilled over into a global credit squeeze due to the lending nations (Japan, China etc) deciding that US debt instruments such as Collatoralised Debt Obligations (CDOs) are not the AAA rating they purported to be. So, they're holding onto their cash and threatening the carry trade. But this is now stabilising as the big US banks write down their assets and debt is re-priced. I think current estimates in Aus place the increased cost of borrowing on the global equity market at about 0.25% (or the cost of a single RBA rate rise).
So now we're back to the risk of a US recession. Will the heavily geared US consumers see the write down of their assets on Wall St and the write down on the value of their homes as a reason to stop spending. So far they've proved pretty resilient, but this is the big question right now. And if they do stop spending and drive the US into recession, will this have global ramifications? That extends the question to the degree to which the global economy is still US-centric. China used to export a lot more to the US than they do currently. China's economy is now predominately based on domestic demand. They're US exports are only 19% pf total exports so arguably we are less US-centric than previously. For a detailed account of China's economic outlook here's a recent article by Dr Shane Oliver of AMP Capital.
http://www.amp.com.au/display/file/...e=China+-+growth+and+shares+-+OI+#39+2007.pdf
So, if the US goes into recession, then arguably the world no longer need follow them down that route. Australia can keep growing within the RBA's bounds on the back of export demand to China. China isn't going to slump as they're no longer reliant on US exports. By extension then, the US subprime issue should not directly impact Australian real estate prices beyond a quarter of a percent rate rise (that the big banks are already threatening to pass on).
But, that is all predicated on a steady re-pricing of debt, and hopefully the avoidance of a US recession which most commentators still suggest is unlikely. Its a big deal, but the global market should pull through OK, which means the little Aussie battler property market should pull through OK too.
All just my opinon.
Cheers,
Michael.
The real question is whether the sub-prime crisis in the US will drive the US economy into recession. US consumer spending is the backbone of their economy and so far consumer sentiment has remained bouyant despite the property market bubble and the sub-prime crisis. But the sub-prime crisis has caused a lot of balance sheet writedowns on some big lenders and is currently hurting credit rates the world over. It has spilled over into a global credit squeeze due to the lending nations (Japan, China etc) deciding that US debt instruments such as Collatoralised Debt Obligations (CDOs) are not the AAA rating they purported to be. So, they're holding onto their cash and threatening the carry trade. But this is now stabilising as the big US banks write down their assets and debt is re-priced. I think current estimates in Aus place the increased cost of borrowing on the global equity market at about 0.25% (or the cost of a single RBA rate rise).
So now we're back to the risk of a US recession. Will the heavily geared US consumers see the write down of their assets on Wall St and the write down on the value of their homes as a reason to stop spending. So far they've proved pretty resilient, but this is the big question right now. And if they do stop spending and drive the US into recession, will this have global ramifications? That extends the question to the degree to which the global economy is still US-centric. China used to export a lot more to the US than they do currently. China's economy is now predominately based on domestic demand. They're US exports are only 19% pf total exports so arguably we are less US-centric than previously. For a detailed account of China's economic outlook here's a recent article by Dr Shane Oliver of AMP Capital.
http://www.amp.com.au/display/file/...e=China+-+growth+and+shares+-+OI+#39+2007.pdf
So, if the US goes into recession, then arguably the world no longer need follow them down that route. Australia can keep growing within the RBA's bounds on the back of export demand to China. China isn't going to slump as they're no longer reliant on US exports. By extension then, the US subprime issue should not directly impact Australian real estate prices beyond a quarter of a percent rate rise (that the big banks are already threatening to pass on).
But, that is all predicated on a steady re-pricing of debt, and hopefully the avoidance of a US recession which most commentators still suggest is unlikely. Its a big deal, but the global market should pull through OK, which means the little Aussie battler property market should pull through OK too.
All just my opinon.
Cheers,
Michael.
That was a very elaborate reply. Thankss Michael.
The thing is, I was thinking to purchase an IP in the near future but I am abit cautious due to the fact of this constantly talked about issue.
Should I perhaps wait for 6 months/a year or just go straight ahead with the plunge ? Like you said, its the million dollar question..
I've been getting mixed opinions about this. Its hard to tell at this point and all we can do is speculate.
The thing is, I was thinking to purchase an IP in the near future but I am abit cautious due to the fact of this constantly talked about issue.
Should I perhaps wait for 6 months/a year or just go straight ahead with the plunge ? Like you said, its the million dollar question..
I've been getting mixed opinions about this. Its hard to tell at this point and all we can do is speculate.
I agree with everything you said. Your point is? I plan to buy at least one $250k property every 6 months for the next couple of years. I think that's pretty decent averaging. Better than just buying ONE property, anyway.
Alex
Currently looking for (and finding, though I haven't bought any yet) cheap weatherboard houses. About 5% rental return.
Alex
If it helps
I had a pd day yesterday... i was there with a nice fever so parts were a bit hazy.
the chief economist from nab spoke, it was 61 powerpoint pages of graphs...
To paraphrase...
hes seeing the cash rate at 7% inside the next year.
if i'm right in recalling thinks the us subprime issues will come to a head aug next year
But hes still positive overall... kept saying his stock portfolio near doubled in the last 2 years, as did his house, and when he hits 60 he can access super tax free... so he's keen on oz, and sees this continuing - not as fast though.
He also links the property prices in WA & Qld to the iron ore prices... so as long as china doesnt bust....
Sees sydney in for more pain over the next year.
Their strategy is keeping rates low(er) while the non bank lenders have to raise rates, and the bigger banks have been gaining massive market share so as long as this continues.
Dig around the nab website, they do a monthly commentary which might help you make your own decisions.
http://www.nab.com.au/Business_Solutions/0,,148,00.html
I had a pd day yesterday... i was there with a nice fever so parts were a bit hazy.
the chief economist from nab spoke, it was 61 powerpoint pages of graphs...
To paraphrase...
hes seeing the cash rate at 7% inside the next year.
if i'm right in recalling thinks the us subprime issues will come to a head aug next year
But hes still positive overall... kept saying his stock portfolio near doubled in the last 2 years, as did his house, and when he hits 60 he can access super tax free... so he's keen on oz, and sees this continuing - not as fast though.
He also links the property prices in WA & Qld to the iron ore prices... so as long as china doesnt bust....
Sees sydney in for more pain over the next year.
Their strategy is keeping rates low(er) while the non bank lenders have to raise rates, and the bigger banks have been gaining massive market share so as long as this continues.
Dig around the nab website, they do a monthly commentary which might help you make your own decisions.
http://www.nab.com.au/Business_Solutions/0,,148,00.html
The problem in the US is oversupply of houses, and low demand, because so many have gone broke and can't afford houses.
In Oz, we have an undersupply of property by around 30,000 houses a year (there was an article posted on this yesterday).
We also dont have sub-prime loans here, just lo-doc (which arent anywhere near as scary as sub-prime loans) so this problem wont affect us.
In Oz, we have an undersupply of property by around 30,000 houses a year (there was an article posted on this yesterday).
We also dont have sub-prime loans here, just lo-doc (which arent anywhere near as scary as sub-prime loans) so this problem wont affect us.
Don't forget the USA had a shortage too in the middle of their boom - or so the realestate industry was saying at the time.
It was sub-prime that triggered the fallout but the core of the reason was absolutely no fundamentals holding up house prices. Even house prices in areas where 0.1% of people are subprime are now dropping in value.
USA Shortage
See below for a few older articles I found. I suppose the oversupply could have all been built in 2006/2007 so maybe this doesn't prove anything. Interesting to read though. Very similar in style to the crap our industry bodies feed us.
Sep 22, 2005
http://realtytimes.com/rtapages/20050922_housingprices.htm
July 26, 2005
http://query.nytimes.com/gst/fullpage.html?res=9F05E2D6123FF935A15754C0A9639C8B63
See below for a few older articles I found. I suppose the oversupply could have all been built in 2006/2007 so maybe this doesn't prove anything. Interesting to read though. Very similar in style to the crap our industry bodies feed us.
Sep 22, 2005
http://realtytimes.com/rtapages/20050922_housingprices.htm
July 26, 2005
http://query.nytimes.com/gst/fullpage.html?res=9F05E2D6123FF935A15754C0A9639C8B63
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The other reason why we won't have foreclosures like in the USA is because of our lending rules.
In the States they have a "credit score" and the higher it is, the better credit risk you are. This opens up a lot more options for finance for people, even though their servicability might not be that good. So, you can have massive amounts of debt, but as long as you can keep paying the minimum balances each month, the better credit risk you are. Weird.
We don't have a credit score over here at all, as we have no debt here. We have no USA credit card or loans, and all our utilities are paid for by my wife's agency.
We have savings and earn a very good income over here, we own our car, so you think we would be a good credit risk, but without the credit score we are losers in the eyes of the financial institutions.
Just last week I went to buy some clothes at one of the zillion sales they have, and I was asked if I wanted to save a further 15% off the total by taking out a store card. I said yes, and the check-out person (how politically correct was that?!) put through the application to head office on the spot. She then had to ring through for a confirmation and then told me the application was rejected. No credit score.
And, after 2 years of transactions with the same bank, we still can't get a credit card (unsecured) with that bank. Not that we want one, but we did ask the question just out of interest.
So, back to buying houses; the worse your credit score is, the more likely you are to get those dodgy loans that no-one with a bad credit history should be allowed to get. Loans like the A.R.M loans etc.
Then, of course, the interest rates go up, and these marginal mortgaees get in trouble and have to bail.
This is particularly the case for the middle income and higher income earners; they have bad money habits, consume like there's no tomorrow and go broke.
They have lots of student debt, credit card debt, bad credit scores and get the ddogy loans to buy the you-beaut home to impress the Joneses and then can't handle the repayments.
Fortunately for Aus we don't have the credit score system; ours is based more on servicability. I think the USA is now starting to follow this path after the sub-prime mess.
The problem is the "creative" loans that keep coming out that allow people to get around the problem of not qualifying for loans, and you can bet that the more creative the loan, the more money in it for the banks.
Interesting point.....then....market sentiment/buyer psychology will by far be a greater influence in the short term on prices of property than 'market fundamentals'. Prophecies of doom and gloom or alternatively of never ending sunny days of increasing RE prices are self-fulfilling prophecies. So overshooting and undershooting of prices over the true maret rate occurs.
Yes - excellent point.
