Is the Sub-Prime Crisis in US going to affect IPs in Australia ?

[Kennethkohsg]

Dear Dave,

1. My corresponding comments are as per outlined below.

Cheers,
Kenneth KOH
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With inflation coming through for the March quarter at 4.2%, I very much doubt we'll see downward movement in rates this year or even early next year. Clearly the Australian economy was still booming Jan-March, despite all the D&G. There has been no decrease in demand so far.

In fact, if inflation does not fall next quarter, there may even be another 0.25% hike. 4.2% is VERY high, well outside Steven's comfort zone. He must be very confident that inflation is on the way down to hold rates steady. He won't cut them unless inflation falls to 2% or lower I reckon.

Comments:

1. Please give some time for the various global D&G issues to work itself fully through the Australian Economy and you will know that the Australian Economy is likely to slow down by itself, even without the RBA having to increase its interest rates.

2. As it is, the ASX has already lost 15% of its market value off its last market peak in Oct 2007. Corporate causualties are beginning to surface, such as the RAMS Homeloans, Centro Property Group, Allco Finance, Opes Prime etc.

3. To me, the RBA is more likely to "stall" the Australian Economy in the near future if it continues with its previous "hawkish" posturing by continuing to pro-actively and automatically increases its interest rate further "unneccessarily";- simply because the local inflation rate has merely exceeded its targetted 2%-3% figures by less than 1%.

Kenneth, you can see that even with 3 quick rate increases, inflation is still very high. What might it have been if Stevens had followed your "natural" approach to constraining demand? 6%?

Comments:

1. With or without all the recent interest rate increases by the RBA, I do not recall reading that inflation in Australia has actually exceeded 5%p.a to date, not to mention your 6%p.a annual inflation rate projection which is being presently referred to.

2. In other word, whether the RBA actually increases its interest rate or not, particularly in 2001, 2002, 2003, 2004, ( as well as in 2005, 2006, 2007 and during the first quarter of 2008), the local inflation rate in Australia, has always been hovering between 2%-4.5% pa. during all this while since 2000.

3. On hindsight, consequently, economically speaking, I personally believe that the Liberal Federal Govt was fully "justified" to allow the local Australian Economy to continue to expand further by itself through more new job creations and increase in local employment opportunities, by reducing its local unemployment rate to its lowest levels in history as well as to continue generating economic prosperity for Australia, without neccesarily generating a "run-a-way" inflation ill effects scenario for Australia during its past 2 office terms.

Remember that while US mortgage defaults are very high at 3% of prime loans and over 10% of sub-prime, Australia's default rate on prime is 0.3%. It's higher than last year, but still very low overall. There's not been much pain here yet, and that's reflected in continuing robust demand.

Comments:

1. Given the time lag for the various D&G issues to work through the Australian Economy, the initial pains have just begun to surface in Australia, as was recently felt by many local Australian housheholds, on the ground.

2. I personally think that it is still to early and pre-mature to make any valid conclusion at this point in time, regarding the full ill effects of the D&G issues on the Australian Economy.

 

[frehnejc]

Home Vacancies Set Record In 1Q
Putting further downward pressure on home prices, the number of vacant homes in the United States increased by 1 million over the past year to a record 18.6 million, according to government data released Monday.

The vacancy rate for homes usually occupied by the owners rose to a record 2.3 million homes from 2.2 million in the fourth quarter and about 1 million more than was typical before the housing bubble burst.

Analysts say the housing market won't recover until the glut of vacant homes on the market can be worked down.

"There is clearly still substantial excess housing supply that will take time to work off," wrote economists for Goldman Sachs. "We think it unlikely that prices begin to stabilize until vacancy rates start declining."


With regards to the above can anyone see any reason why the same does not happen here? If everyone needs a roof over their head and demand and supply constraints are balanced, then why is there a huge supply coming through? Is it due to the "irrational exuberance" of property in the US. Is there an "irrational exuberance" in Australia caused by low interest rates, propery spruikers etc? I know the US is different to australia but how different are we?

 

[feihong]

I would be more interested in how the states that boast more immigrants are performing, rather than the US as whole, as these states can probably provide a better gauge to future Australian movement. Traditionally, NY and CA attract a large numbers of immigrants, with Texas resembling "mining boom". If we could extract more details on the dynamics of these states we could probably extract a more meaningful comparison to Australia. For example, CA is one of the worst states hit by subprime, and houses that are closer to Nevada are being hit hard, but how can we put this in Australian context? I vaguely remembered that LAAussies have mentioned somewhere that places within "conventional" LA boundaries are not doing so bad.

 

[MichaelW]

Home Vacancies Set Record In 1Q
Putting further downward pressure on home prices...

Analysts say the housing market won't recover until the glut of vacant homes on the market can be worked down.

"There is clearly still substantial excess housing supply that will take time to work off," wrote economists for Goldman Sachs. "We think it unlikely that prices begin to stabilize until vacancy rates start declining."

With regards to the above can anyone see any reason why the same does not happen here?

OK, you've got me. What's the catch? You're kidding right?...

I'll assume you're not and state the bleeding obvious anyway, but if you come back and lampoon me for being stupid then I'll claim the caveat that I saw it coming as it was such a loaded question.

Bleeding obvious: We are at cronic under-supply of housing nationally with no end in sight. There is a major shortfall of new housing commencements and demand is running well above supply. i.e. We are the polar opposite of the USA. We are at the opposite end of the property cycle. We have worked off our glut from the last housing boom and are now nearing the bottom or beyond of the cycle where rental yields are exploding, positioning the market for supply to come back on line and the boom to start again. It will take a little while for yields to be attractive enough to bring on more supply, but that's definately the way it is trending, not the way its trending in the US.

OK, now lampoon me.

Cheers,
Michael

 

[alexlee]

With regards to the above can anyone see any reason why the same does not happen here? If everyone needs a roof over their head and demand and supply constraints are balanced, then why is there a huge supply coming through? Is it due to the "irrational exuberance" of property in the US. Is there an "irrational exuberance" in Australia caused by low interest rates, propery spruikers etc? I know the US is different to australia but how different are we?

Pretty much, yeah. In the US there were a lot more 'spec' homes (builders build before they have buyers). And they were building brand new suburbs everywhere. In oz, we didn't have that to the same extent. Probably because we lack the infrastructure (in the US you just need a freeway that already exists, and you just build an exit to it), and the developer levies are much higher.

The irrational exuberance in Oz, for whatever reason, did NOT result in a massive oversupply of properties being built. There was oversupply in Sydney in 03, but that has worked itself out (as shown by the low vacancy rate).

The risk, though, is what happens in a recession. If there is a significant number of people who don't move out of home, share more, etc then demand will fall too. I don't exactly see a lot of empty properties in Oz unless it's by the landlord's choice.
Alex

 

[tubs]

No lampooning here Michael!

You're spot on. So many householders in the US have walked away from their homes and moved in with family its caused oversupply.

And what's worse, with the lending free for all (aka subprime crisis) they had, there was so much moneth that builders were building like crazy, and now these are also causing oversupply.

 

[FrankGrimes]

I would be more interested in how the states that boast more immigrants are performing, rather than the US as whole, as these states can probably provide a better gauge to future Australian movement. .

This is an important point as well (Just adding to what has already been said). Alot of the subprime morgages are linked to cities where the population is also declining and with a slowing economy. I would be interested in some stats for LA (not outerlying sub prime areas), New York, Boston, San Fran etc.

 

[alexlee]

This is an important point as well (Just adding to what has already been said). Alot of the subprime morgages are linked to cities where the population is also declining and with a slowing economy.

Frank, where are you getting this from?

I would be interested in some stats for LA (not outerlying sub prime areas), New York, Boston, San Fran etc.

I'm not sure you want to live in downtown LA, Frank. I suggest reading those cities' local newspapers. Gives you some interesting 'on the ground' views.
Alex

 

[FrankGrimes]

Frank, where are you getting this from?

Fox business - I've seen it mentioned alot now by various "experts". I'm not saying that its not happening elsewhere but its alot worse in cities like Cleveland. And it would be interesting to see some comparisons between the US cities. Tried searching around but can't find anything meaningful.

 

[yieldmatters]

Bleeding obvious: We are at cronic under-supply of housing nationally with no end in sight. There is a major shortfall of new housing commencements and demand is running well above supply. i.e. We are the polar opposite of the USA. We are at the opposite end of the property cycle. We have worked off our glut from the last housing boom and are now nearing the bottom or beyond of the cycle where rental yields are exploding, positioning the market for supply to come back on line and the boom to start again. It will take a little while for yields to be attractive enough to bring on more supply, but that's definately the way it is trending, not the way its trending in the US.

Some interesting links on the massive shortage in California from 2004 to 2006..... interesting how things change so suddenly.

( I could find heaps more of them too - only spent a few minutes to get these)

http://www.ppic.org/content/pubs/rb/RB_304HJRB.pdf (2004)
http://www.rebuildca.org/shortage.html (2006)
http://www.reason.org/commentaries/gilroy_20060413.shtml (2006)

 

[Goyco]

Some interesting links on the massive shortage in California from 2004 to 2006..... interesting how things change so suddenly.

( I could find heaps more of them too - only spent a few minutes to get these)

http://www.ppic.org/content/pubs/rb/RB_304HJRB.pdf (2004)
http://www.rebuildca.org/shortage.html (2006)
http://www.reason.org/commentaries/gilroy_20060413.shtml (2006)

California does not a country make..PS check out the prices in San Fran...Not much of a discount if you ask me..

best to check the facts just in case you look silly

cheers

 

[MichaelW]

Some interesting links on the massive shortage in California from 2004 to 2006..... interesting how things change so suddenly.

Agreed, very interesting how these things change suddenly. But if you read my other post on HGs essay thread, you'll see that underlying demand/supply is in shortfall if you look at household formation aspiration. However, I concede happily that when times get tough people make compromises and this distorts the underlying demand/supply equation. But rest assured, that when interest rates ease again, this underlying position will re-assert itself and we'll be back in massive shortfall just as affordability starts to improve. Can you guess what will happen then?

Stats can distort facts mate. This is all just a point in time in the usual boom/bust cycle. But, don't tell me, this time its different right? I disagree, it almost was, but it isn't now.

I actually think the US will successfully reflate the credit bubble. Bear Stearns was the turning point. Rates have peaked and you'll see trust come back to the market over the next 18 months. All your mates at GHPC were right to raise the risk though, it could have easily gone the other way but for the fed bailing out Bear Stearns. It was a very near thing. But they did it, just, and are now reflating. It will take some time with a few more hiccups along the way and a slow bumbling economy in the US for 2008. But they pulled it off. This is not the end of the world, get ready for the boom to end all booms when financial markets are re-engineered to be even more robust with more checks and balances introduced to stop this happening again any time soon.

Here's a snippit from an email from me old mate John Mauldin the day the fed bailed Bear Stearns:

As I have been writing, the Fed gets it. Their action today is actually re-assuring. I have been writing for a long time that they would do whatever it takes to keep the system intact. As one of the notes below points out, this was the NY Fed stepping in, not the FOMC. The NY Fed is responsible for market integrity, not monetary policy, and they did their job. And you can count on other actions. They are going to change the rules on how assets can be kept on the books of banks. Mortgage bail-outs? Possibly. The list will grow.

Yes, tax-payers may eventually have to cover a few billion here or there on the Bear action. But the time to worry about moral hazard was two years ago when the various authorities allowed institutions to make subprime loans to people with no jobs and no income and no means to repay and then sold them to institutions all over the world as AAA assets. And we can worry in the near future when we will need to do a complete re-write of the rules to prevent this from happening again.

But for now, we need to bail the water out the boat and see if we can plug the leaks. Allowing the boat to sink is not an option. And get this. You are in the boat, whether you realize it or not. You and your friends and neighbors and families. Whether you are in Europe or in Asia, you would have been hurt by a failure to act by the Fed. Everything is connected in a globalized world. Without the actions taken by the Fed, the soft depression that many have thought would be the eventual outcome of the huge build-up of debt would in fact become a reality. And more quickly than you could imagine.

As I have repeatedly said, recessions are part of the business cycle. There is nothing we can do to prevent them. But depressions are caused by massive policy mistakes on the part of central banks and governments. And it would have been a massive failure indeed to let Bear collapse. I should note that this was not just a Fed action. Both President Bush and Secretary Paulson signed off on this.

The Fed risking a few billion here and there to keep the boat afloat is the best trade possible today. Their action saved trillions in losses for investors all over the world. It is a relatively small price. If you want to be outraged, think about the multiple billions in subsidies for ethanol and the hundreds of billions of so-called earmarks over the past few years to build bridges to nowhere. And think of the billions in lost tax revenue that would result from the ensuing crisis. I repeat, this was a good trade from almost any perspective, unless you are from the hair-shirt, cut-your-nose-off-to-spite-your-face camp of economics.

She's going to reflate mate, bank on it! I want in to that ponzi scheme while it lasts. Make money while the sun shines and play the cards your dealt. Don't bang on and on about a point that was valid 6 months ago, but has now past its used by date. Even my old mate John Mauldin has turned slightly bullish now...

Cheers,
Michael.

 

[yieldmatters]

best to check the facts just in case you look silly

Likewise!

California does not a country make..PS check out the prices in San Fran...Not much of a discount if you ask me..

Califronia is way bigger than Australia - the population and the economy so it certainly does make a country and is a fair comparison. Then there is Utah, Nevada, Florida (the list goes on). They are all a mess after the debt dried up.

The bay area which covers around 7M people is down 15 or 20% - you are referring to San Francisco itself which is only 700 thousand people. For the time being that particular part is holding up.

The point though is people are saying we are different because we have a shortage. I am saying a shortage is rather fickle as it depends on household formation and mood and that California also appeared to have a massive shortage before it fell apart.

 

[willair]

Likewise!



Califronia is way bigger than Australia - the population and the economy so it certainly does make a country and is a fair comparison. Then there is Utah, Nevada, Florida (the list goes on). They are all a mess after the debt dried up.

The bay area which covers around 7M people is down 15 or 20% - you are referring to San Francisco itself which is only 700 thousand people. For the time being that particular part is holding up.

The point though is people are saying we are different because we have a shortage. I am saying a shortage is rather fickle as it depends on household formation and mood and that California also appeared to have a massive shortage before it fell apart.

Depends on who you talk too,my sister-inlaw lives just down the road in San Jose a few blocks from Cisco Systems,as she tells several areas in the US have serious problems but it no way as bad as the media makes,but then again we may well go the way the US has ,how will you be working for ten bucks an hour plus tips and renting a room in someones house for 500
bucks a month,because the only way the rents will go in this country is skyward,makes you think YM Logan City is looking better each day,you have said several times about the million dollar house you rent for peanuts
enjoy it while you can because it's not going to last long,your days are numbered,with cheap million dollar rentals but you will find that out soon enough..
willair..

 

[yieldmatters]

the only way the rents will go in this country is skyward,makes you think YM Logan City is looking better each day,you have said several times about the million dollar house you rent for peanuts
enjoy it while you can because it's not going to last long,your days are numbered,with cheap million dollar rentals but you will find that out soon enough..
willair..

Actually it is probably about $850K to buy ... should clear that up. Very nice as far as Brisbane goes but not 'that' nice. It's fairly easy to get a place at that end of the market too I'll add - I think the rental shortage is more at the lower end.

But this is the beautiful thing about my situation - if you are correct and rents go up to the point where buying is attractive then I will simply wait until that point arrives and then buy. The only way I am going to lose is if from here on in house prices AND rents both skyrocket and stay there. Unlikely combination so I'm willing to risk it.

The point about the USA though was to make a comparison about their shortage - I hear too often that we have one and the USA doesn't so all will be rosy.

 

[myla]

hello,

gee yield, what an achievement renting a 850k house,

thanks

myla

 

[NonResident]

Is whether it will happen or not really that interesting?

I can see there is a wealth of knowledge and insight here, can we explore in more detail how such an crisis could play out in Australia and what kind of opportunities that may create. If I wasn't already fully committed to the Australian market, I would very seriously think about flying to the US and spend 3 months hunting down deals... in that sense i wouldn't mind a 'correction' in the australian market.

I know that what may happen depends on how different the Australian economy and housing market is/was/will be, but still I'm sure we can get some interesting scenario's on the table??

 

[Goyco]

Likewise!



Califronia is way bigger than Australia - the population and the economy so it certainly does make a country and is a fair comparison. Then there is Utah, Nevada, Florida (the list goes on). They are all a mess after the debt dried up.

The bay area which covers around 7M people is down 15 or 20% - you are referring to San Francisco itself which is only 700 thousand people. For the time being that particular part is holding up.

The point though is people are saying we are different because we have a shortage. I am saying a shortage is rather fickle as it depends on household formation and mood and that California also appeared to have a massive shortage before it fell apart.

Tha US was not in a shortage.before the correction..vacancy rates were increasing and they ran out of people to flog their houses and CDO's to. "Flipping was rampant. Every second advert on TV was " How to make money out of Real Estate- No money down".

Besides the figures to show this was the case I also visit the US about 5 times a year. And Yes I do go to California.

YM I think you just try and find other peoples unvaladated opinions to try and justify your inaction. Good luck mate fighting fundamentals you will of course lose, but hey we can't all be winners.

Enjoy your cheap rent while it lasts because once rents return to their hisroical averages you will be stuffed.

What I don't understand is why you can't make a decision to invest when fundamentals of this particular market ( property ) are very sound ATM.
The best they have been for years. Much better than say 2003.

Either way good luck but the biggest risk in life is not taking one.

cheers

 

[yieldmatters]

Tha US was not in a shortage.before the correction..vacancy rates were increasing and they ran out of people to flog their houses and CDO's to. "Flipping was rampant. Every second advert on TV was " How to make money out of Real Estate- No money down".

Then why is it so easy to find links about a shortage pre-boom (2006 for example) ?

Enjoy your cheap rent while it lasts because once rents return to their historical averages you will be stuffed.

I don't know why people think this (you are the second). Even if you are correct and rents go up I will simply buy at that point and be ahead for waiting. No chance of being stuffed unless house prices AND rent skyrocket - in my view it's unlikely.

By the way rents ARE at their historical averages. Long term they haven't really left CPI. I think you mean rental "yields" return to their historical averages - I expect that will happen but I don't think it will be because of rent prices rising.

What I don't understand is why you can't make a decision to invest when fundamentals of this particular market ( property ) are very sound ATM.
The best they have been for years. Much better than say 2003.

I think the fundamentals are shocking. People at all ends of the realestate spectrum can't afford to pay for the properties they are buying. Relationships to wages, relationships to rent are all well out of long term balance. The only fundamental possibly underpinning prices is a supply issue which MAY be true or MAY just be realestate spruiker spin - hence I bring up the California example just to challenge the thinking there. Even if it is true it makes little difference because if people can't afford to pay (get credit) then it simply won't be rising in price regardelss of any shortage.

I think 12 months from now will be a good time to buy but I may put in a few low-ball offers earlier just to see what happens. When I do buy I'll continue to rent myself and then rent out the place I buy. Crazy tax system in this country encourages this sort of strange behaviour (no tax deductions for your own place!).

 

[Goyco]

Then why is it so easy to find links about a shortage pre-boom (2006 for example) ?


I don't know why people think this (you are the second). Even if you are correct and rents go up I will simply buy at that point and be ahead for waiting. No chance of being stuffed unless house prices AND rent skyrocket - in my view it's unlikely.

By the way rents ARE at their historical averages. Long term they haven't really left CPI. I think you mean rental "yields" return to their historical averages - I expect that will happen but I don't think it will be because of rent prices rising.



I think the fundamentals are shocking. People at all ends of the realestate spectrum can't afford to pay for the properties they are buying. Relationships to wages, relationships to rent are all well out of long term balance. The only fundamental possibly underpinning prices is a supply issue which MAY be true or MAY just be realestate spruiker spin - hence I bring up the California example just to challenge the thinking there. Even if it is true it makes little difference because if people can't afford to pay (get credit) then it simply won't be rising in price regardelss of any shortage.

I think 12 months from now will be a good time to buy but I may put in a few low-ball offers earlier just to see what happens. When I do buy I'll continue to rent myself and then rent out the place I buy. Crazy tax system in this country encourages this sort of strange behaviour (no tax deductions for your own place!).

YM The fundamentals IMO are not shocking but that is a difference of opinion.

I guess the main point is that If you do start buying at the end of the year at least you have made a start and good on you when that happens.

Property is definitately not the be all and end all of investing but it will be at the base of most successful investors' portfolio for some very compelling reasons.

Can't wait to congratulate you on your first purchase.

cheers