It's a Great Time to Buy a New Home

[WinstonWolfe]

Just so some don't think I only post info to support a particular slant, here's the latest Conference Board's Composite Leading Economic Indicator, arguably the most respected indicator of its type in the USA....it shows the uptick in confidence and real economic activity. For those interested in the components of the index and their weighting, go here

Below is a plot of some Aussie bank bills and treasury bonds.
It shows clearly how the yield curve inverted in mid 2006, then interest fell off a cliff with the flight to cash aug/sep 08.

Since nov 08, the bond yield curve has reversed the inversion, so long term risk begins to be priced at a more normal premium to short term risk.

More recently, it shows the sell off of bonds as money has gone back into equities and commodities, thus dropping bond values and raising their interest rate.

Nevertheless, I still think the fundamentals don't support a strong recovery and we'll have a muddle through in the US, Europe and Australia for years...with lower gdp growth than average for the last few decades....

 

[boz]

HI WW,
the news is reported on bloomberg, it was slightly higher then predicted, it usually has little impact on markets.
These days I don't monitor much libor or banks bills anymore as with all these money printing from CB is pointless. I do monitor regulary the 10 year bond (and 30 year for USA). The latest news is that despite the stock market stop rising those yileds are still rising and the Australia one was 5.25% today. The best rated country are the one where it is rising more while less rated country or corporate bonds have stable yields.

 

[WinstonWolfe]

HI WW,
the news is reported on bloomberg, it was slightly higher then predicted, it usually has little impact on markets.
These days I don't monitor much libor or banks bills anymore as with all these money printing from CB is pointless. I do monitor regulary the 10 year bond (and 30 year for USA). The latest news is that despite the stock market stop rising those yileds are still rising and the Australia one was 5.25% today. The best rated country are the one where it is rising more while less rated country or corporate bonds have stable yields.

Ciao, come stai Boz...

I think cash and interest is derivative too Boz.....don't know about its forecast value, but might be ok in validating money flows.

Ultimately, imho CBs and smug bank boffins manipulate things like LIBOR to the benefit of the few.

And after Greenspan and recent US Investment Bank fiasco, I don't think it pays to trust any of these guys. Even our RBA was pumping rates and spin right up to Sept 08....inferring confidence in the system was a greater priority than talking straight.

Bond yields and curves might mean more when the world isn't dealing with a serious structural adjustment from a 30 year debt binge.

But now I think the fundamentals are much more important.....which is why I take the bank analyst Meredith Whitney seriously, and Jeremy Grantham and Bill Gross (sans their self interest)....and I continue to dig deeper into ultimate causes...

Am always interested in how you derive your views on these things Boz. i.e. why do you take note of the 30 year US yield?

 

[keithj]

Westpacs released Australia: consumer house price expectations today.

A few interesting graphs, including affordabilty dating from 1965. And also showing that the 'Time to Buy a House' index remains a little above the long term average, unlike the last 6+ years when it's been at or below average.

The Westpac-Melbourne Institute Consumer Sentiment survey included an extra question in May on consumer expectations for house prices over the next 12 months. Overall, a net 0.6% of respondents expected prices to decline with pessimists marginally outnumbering optimists. A third of respondents expected prices to stay the same, with 32.7% expecting them to fall and 32.1% expecting them to rise.

......

Perhaps most notable though is the degree of pessimism in segments that typically drive investor housing demand (45-54yos and mid to high income groups). Despite record low interest rates and rising rental yields, demand from investors has remained subdued to date. ....

 

[boz]

Ciao, come stai Boz...

I think cash and interest is derivative too Boz.....don't know about its forecast value, but might be ok in validating money flows.

Ultimately, imho CBs and smug bank boffins manipulate things like LIBOR to the benefit of the few.

And after Greenspan and recent US Investment Bank fiasco, I don't think it pays to trust any of these guys. Even our RBA was pumping rates and spin right up to Sept 08....inferring confidence in the system was a greater priority than talking straight.

Bond yields and curves might mean more when the world isn't dealing with a serious structural adjustment from a 30 year debt binge.

But now I think the fundamentals are much more important.....which is why I take the bank analyst Meredith Whitney seriously, and Jeremy Grantham and Bill Gross (sans their self interest)....and I continue to dig deeper into ultimate causes...

Am always interested in how you derive your views on these things Boz. i.e. why do you take note of the 30 year US yield?

I agree with you,
the 30 year treasury yield is not that important but gives an idea of something dodgy happening if it diverge from the 10 year (it never really happen). I like to compare the 10 year US with the 10 year canadian and the 10 year UK or France or Italy from the 10 year german. I recommend to watch the 10 year UK as you can see when the bank of England goes in the market. It is very funny to see their intervention last few hours and then the rate goes back up closer to the french rate then the german one. The good thing of the 10 year bond is that CB can't control it, a bit like the currency rate, they can do very little.
I like Meredith W. very much too, haven't seen any video of her for a while, I think I'll go on youtube to see if something recent came out, I would like to see her view on banks now after the stock rally.

 

[chilliaa]

WWW, some very good posts above, thanks for those.
I totally agree with your views with regards to global economic growth for the foreseable future.

 

[BayView]

Sorry boz, if you dont own any property, it really does make sense to buy one now.

When wouldnt it make sense?

If I expected a protracted (i.e. multi-year) recession, with deflation.

Which not many people would expect.

Otherwise you will be left behind.

As for a 2nd, 3rd, nth property as opposed to shares, commercial IP, paying down debt, bonds, art, etc.. thats a seperate discussion.

It has always made sense to me to buy a property when I could afford one. So that's what we've always done.

I wished I'd had the hindsight 20 odd years ago to make better selections in regards to position, timing and quality etc. I'd probably own Australia by now.

But, you can only do what you know at the time.

All of us here should have a bit more of the "know" by now.

The position and quality are the easy ones, the timing and if you can afford it are the harder ones.

To me; if you can afford it then the timing is good now or soon - houses are getting cheaper and rates are low.

They might get cheaper, but I wouldn't think by huge amounts - and then they'll simply go back up again - like they always have.

 

[Strannik]

it will be even better time to buy when the FHOG boost is over, maximum LMI is at 80-85% and all the FHOBs who bought a house now will be selling due to being unable to meet repayments

 

[sparky23]

I doubt it, a lot of them will be paying the same or less in repayments than they were paying in rent!

 

[Strannik]

not if the IR go up

 

[Electro]

it will be even better time to buy when the FHOG boost is over, maximum LMI is at 80-85% and all the FHOBs who bought a house now will be selling due to being unable to meet repayments

FHO will only be unable to meet repayments if they have either bitten off more than they can chew or loose their jobs. Now steps have been taken by the government and banks to make sure this does not happen.

First the banks (via the government) have introduced a "feature" which will allow home owners to forego their payments for a period of 12 months in the event of loosing their jobs.

Second the banks have tightened their lending criteria which will, to a degree, ensure those who buy can afford to meet the repayments.

So yes although IR going up and other events occuring may cause some FHO to loose their homes steps have been taken to minimize the number who do.

 

[simo74]

First the banks (via the government) have introduced a "feature" which will allow home owners to forego their payments for a period of 12 months in the event of loosing their jobs.

More spin by the government. Most banks already have flexible payment options. This "feature" as you call it will not be mandatory. The banks will assess it on a case by case basis.
This is not a get out of jail free card. Interest will be capitalised and all deferred payments will have to be paid.

 

[kum yin lau]

Hi all,
Strannik, what data do you have to suggest that FHBs cannot meet repayments?

KY

 

[evand]

Which of course they will.......theres only one way to go from a 3% cash rate.

not if the IR go up

Re electros post. As the old saying goes: "You cant legislate against stupidity"

Beside that, banking on this stuff is hardly the basis for solid property investment performance. It has to make sense in its own right.

Any small rises in prices now or small falls is only because of government/RBA stimulus/intervention...call it what you will. When thats done, IR's rise and unemployment rises...run for cover.

Some surpisingly shallow and short term thinking on this forum.

 

[boz]

Hi all,
Strannik, what data do you have to suggest that FHBs cannot meet repayments?

KY

There is data that suggest both possibilities.
The main one in favour of FHB to meet payment is that at present defaults are very low and even with 100% up to 1000% or more increase will still be manageble, also government would eventually step in to help mortgage holder.
On the other hand, data like rising unemployment, rising interest rates (fixed rates are on the way up and banks funding costs will go with it as banks don't borrow on international markets at variable rate), also if home prices fall in value even if FHB can afford payments they still might be better off to default into bankrupcy (even if not at the extend of USA)

 

[chilliaa]

Which of course they will.......theres only one way to go from a 3% cash rate.



Any small rises in prices now or small falls is only because of government/RBA stimulus/intervention...call it what you will. When thats done, IR's rise and unemployment rises...run for cover.

Some surpisingly shallow and short term thinking on this forum.

some surprisingly shallow and short term fear thinking on this forum of negative factors on the market that create the scare mongering of a 'run for cover'.

 

[evand]

Couple of questions:

What do you think is holding the market up and what will happen when that is removed/finished?

Do you agree that property investing is about a longer time frame than the duration of artificial stimulus?

some surprisingly shallow and short term fear thinking on this forum of negative factors on the market that create the scare mongering of a 'run for cover'.

 

[chilliaa]

Couple of questions:

What do you think is holding the market up and what will happen when that is removed/finished?

Do you agree that property investing is about a longer time frame than the duration of artificial stimulus?

No argument from you on those factors, but that doesnt dictate a 'run for cover' response given that you have identified risk factors, we just dont know the estent to which those risk factors will effect the market.


There are push factors which will push prices higher
*fundamental under supply of housing (this factor is the underlying key factor in my opinion);
*lending institutions hightened awareness of the risk of lending (this will depress in the short term, but will support in the longer term)
*positive immigration which will continue (there are a billion chinese trying to get australian PR)
*others just ask shadow to outline them all.

There are pull factors which will ppush prices lower:
*reduction in FHB grants in the future
*increases in interest rates
*unemployment (but this will only be a factor over the next 12months, after that unemployment will trend down, but not to levels seen pre 2008)
*increased proportion of refinancing that is done on a variable level (people got caught out fixing into the last cycle, and so will be 'smarter' the next time round, the problem with this is the risk that they get caught out).

Conclusion:
Neautral medium term outlook (5yr view point).
There is NO WAY property prices are going to plummit (ie more than 20%), until we have a significant increase in the SUPPLY OF NEW HOUSING.

The supply of new housing is the key future risk in my opinion, and until this happens i will NOT BE A PROPERTY BEAR.

 

[evand]

I suppose your points about under supply and immigration are related and i agree to a point. If it was Sydney prices only that is holding its head above water then i'd buy that argument. But the fact is property pretty much everywhere is being held up (with some exceptions), even in non large immigration areas.

Surely the birth rate isn't supplying the demand to hold prices up (or slight increases). Sure there are a few minor factors but its predominately the various stimulus and temporary low interest rates that are doing it.

I'd say increased lending risk will remain until an economic recovery is well under way. And that could be quite a while.

By the way, i've always said i don't agree with nonrecourse' views that property prices will crash 40%+ in 09-10. Thats too extreme.

But my opinion is they will fall and in an amount that could surprise a lot of people. Especially those that haven't seen that side of a property cycle before. A 20% - 25% drop by Q3 2010 in a lot of areas and across a lot of price ranges wouldn't surprise me. Combined with inflationary risk and low returns (mostly neg geared) i say 'run for cover'.

As an added thought, areas that are not holding up in price at the moment (falling prices recently and now across price sectors) i think will absolutely tank when the stimulus is finished, unemployment and interest rates rise.

If they cant be supported now, god (or the deity of your choice) help them when the legs are pulled out from under them. In these examples i could possibly see nonrecourse' scenario playing out.

 

[boz]

No argument from you on those factors, but that doesnt dictate a 'run for cover' response given that you have identified risk factors, we just dont know the estent to which those risk factors will effect the market.


Conclusion:
Neautral medium term outlook (5yr view point).
There is NO WAY property prices are going to plummit (ie more than 20%), until we have a significant increase in the SUPPLY OF NEW HOUSING.

The supply of new housing is the key future risk in my opinion, and until this happens i will NOT BE A PROPERTY BEAR.

to me seems there is not much logic...