Money morning readers?

[Zeddy]

People who are subscribed to this free ezine have been told over the past month of so that a property market crash is occurring/imminent.

A few of the articles:

What Property Price Crash?
http://www.moneymorning.com.au/20090326/will-there-be-a-property-price-crash.html

Will the Property Market Crash?
http://www.moneymorning.com.au/20090325/will-the-property-market-crash.html#more-1465

Possible False Rally in House Prices in Coming Months
http://www.moneymorning.com.au/2009...-house-prices-in-coming-months.html#more-1501

Commercial Property Market Susceptible to a Crash
http://www.moneymorning.com.au/2009...-market-susceptible-to-a-crash.html#more-1481

Why the Banks Are Still Too Risky
http://www.moneymorning.com.au/20090227/why-the-banks-are-still-too-risky.html#more-1353

For those who say "tl;dr", to my uneducated eyes their views can be summarised as follows:

1) People are leveraging too much in a low interest rate environment. When rates rise and people lose jobs, defaults will rise and property prices drop.
2) The FHOG is distorting supply and demand, and artificially keeping prices inflated.
3) The banks are not as well placed to "weather the storm" as previously claimed.

They also refer to "property spruikers" who are blindly saying that the property market will not crash badly. My question is as follows:

Are we part of the group blindly believing the property market is safe enough to purchase this year, or are they "fringe" economists?

I do follow the long term holding approach, and thus don't feel as threatened by temporary spikes in market prices, but my partner is looking at purchasing this year and feels very unsure about whether to hold off or dive in.

 

[Aaron Sice]

mmm interesting.

i would say that

#1 - property prices are ALWAYS artificially inflated. what is a fair price for a property? it's sometimes MORE than you're willing to pay. if someone else is willing to pay it, then your own opinion about it being overvalued is moot - because the market (the other person) just met that price.

#2 - the GST boom was meant to create a "bubble". it did - a bubble that lasted for seven years here in the west. if you jumped on board it would have netted to you a 200-300% increas ein the price of your property, which is why most who did buy then aren't worried about a 20 or 30% correction. trade with the trend.

#3 - banks still haven't released any REAL figures on their current exposure(s). how can you be certain?

i plan on buying and holding for a long time. that makes today more attaractive than 12 months ago for buying because property is lower in price. will it go lower? not my concern. not my bank's concern.

as long as i meet the CURRENT LVR and serviceability requirements, then no-one seems to have a problem.

D+G is dead.

 

[Zeddy]

That's the point they're getting at. It is currently inflated, yet people are leveraging excessively to enter the market with the aid of the FHOG. They are tipping future distress sales to cause a crash after interest rates start to rise again, or as more people begin to lose their jobs with the current financial downturn.

Point #3 - I have no idea, I don't understand all the banking jargon. My eyes glaze over as I try to pick out the meaning behind it. That's why I posted here for the smarter people to comment on. ^_~

If for instance my partner was to purchase a property today, and it dropped in value by 5% (as quoted buried somewhere in Money Morning's ezines), that would mean a loss in equity of $22.5k. This is a significant chunk of money, and would slow further acquisition of investments in future. Saying that I can ride out rises and falls is tempered by the desire to avoid having to do it in the first place!

And finally - do note that I am not disagreeing or agreeing with their postulated scenarios. I lack the experience and knowledge to really understand this issues in depth. That's why I posted them up for discussion by here that are more knowledgable than I.

 

[Propertunity]

1) People are leveraging too much in a low interest rate environment.

Surely, this would be the BEST time to leverage wouldn't it? Borrowing at low IR's to purchase on a dip in house prices in a rising rental income environment. How often to the planets align like this? What shade of green are you looking for on the traffic light of investor avenue?

When rates rise

I know I'm sounding like a broken record but as I said in this post http://www.somersoft.com/forums/showthread.php?t=51494
has no-one heard that you can actually fix mortgage rates for 1,2,3,5 and yes even 10 - 12 years?
And before ppl start saying, "yes, but what about the break costs?" When you break a fixed rate mortgage and the variable IRs at the time are more than what your fixed rate is - the break costs are almost non-existent

and people lose jobs, defaults will rise and property prices drop.

Well Westpac bank disagrees with you. To quote from http://www.westpac.com.au/manage/wrap.nsf/vPdfUrls/29038F3556ADBA95CA25759100267801/$File/MarketInsightsApril2009.pdf?OpenElement

The housing recovery arguably is already on track and the last two recessions confirm that the housing recovery will not be derailed by rising unemployment.

2) The FHOG is distorting supply and demand, and artificially keeping prices inflated.

Your point being........?
The government is always artifically intervening in the housing market. The RBA does it with IRs. The govt. does it with Grants & neg. gearing. Get over it. and use it to your advantage.

3) The banks are not as well placed to "weather the storm" as previously claimed.

Nonsense. Their refusal to pass any (in the case of NAB) or all (in the case of the other 3) of the latest RBA cuts just added $Billions to their bottom line. The govt. just guaranteed all depositors funds. What the?

They also refer to "property spruikers" who are blindly saying that the property market will not crash badly.

"Blindly" is such a strong word. I'm not sure which spruikers you are referring to but those that have been around the traps for a while are probably seeing what I am seeing - some fantastic opportunities.

 

[myoung]

Seems to be more in line with the D&G economists etc.

It will happen
It will happen
It will happen
It will happen
It hasnt happened yet like i said it would
Excuse
Excuse
It will happen
It will happen
It will happen
It hasnt happened yet like i said it would
Excuse
Excuse
It will happen
It will happen

They dont like to admit their mistakes.

 

[Propertunity]

If for instance my partner was to purchase a property today, and it dropped in value by 5% (as quoted buried somewhere in Money Morning's ezines), that would mean a loss in equity of $22.5k. This is a significant chunk of money, and would slow further acquisition of investments in future.

Well bu@@er me! Look, investments do rise and fall. Take shares for instance. I may buy BHP at $30 today and its selling at $27 tomorrow. Did I just lose $3 or 10%?
Well if I sell tomorrow - Yes.

What if I hold on past tomorrow and it goes to $31? Did I just make $1?
Well only if I sell.

You only crystalise a gain or a loss by selling. If you hold long term (which is what RE is as an investment) - no-one (including the lender) gives a damn on the day to day movements.

They are not going to make a margin call on your girlfriend's one and only property IMO. What the hell are they going to do with her house? They want their return on their investment - which is the interest (or their margin on whay they buy money for and sell money for).

 

[Zeddy]

Surely, this would be the BEST time to leverage wouldn't it? Borrowing at low IR's to purchase on a dip in house prices in a rising rental income environment. How often to the planets align like this? What shade of green are you looking for on the traffic light of investor avenue?

Actually I bought an investment property last December. I did my DD, and figured that even with the economy going the way things are, the CG potential and cashflow (almost neutral) were too good to pass up. ^_^

has no-one heard that you can actually fix mortgage rates for 1,2,3,5 and yes even 10 - 12 years? And before ppl start saying, "yes, but what about the break costs?" When you break a fixed rate mortgage and the variable IRs at the time are more than what your fixed rate is - the break costs are almost non-existent

I'm actually looking to fix my loans as well, and am keeping a close eye on the 5 year fixed rates thread. I am doing that for cashflow security, but that does not mean everyone else is doing it too. Since I'm hoping to leverage off CG in future, I hope you can forgive me for trying to peer into the crystal ball?

Well Westpac bank disagrees with you. To quote from http://www.westpac.com.au/manage/wrap.nsf/vPdfUrls/29038F3556ADBA95CA25759100267801/$File/MarketInsightsApril2009.pdf?OpenElement

I'll read it tonight after work, but I hope you'll understand if I come out looking even more confused and vacant than when I went in. I am not a finance savvy person in that regard.

Your point being........?

Money Morning has been kind of bashing the FHOG as an example of what not to do, if I understand it correctly. They seem to be a rabid believer that the "free market" will fix itself without government intervention, and subsidies would drag things out/throw them further out of balance.

Hey, don't look at me for further explanation, I said I didn't understand the basis of all their claims, right? That's the whole reason for this thread!

Nonsense. Their refusal to pass any (in the case of NAB) or all (in the case of the other 3) of the latest RBA cuts just added $Billions to their bottom line. The govt. just guaranteed all depositors funds. What the?

Can't comment - I don't have any expertise apart from watching those "in the know" debating and disagreeing with each other.

"Blindly" is such a strong word. I'm not sure which spruikers you are referring to but those that have been around the traps for a while are probably seeing what I am seeing - some fantastic opportunities.

Let me re-iterate a point. Is it not ME who are calling them "spruikers". That was the term used by Money Morning. "Spruikers" included on the list were RP Data, Ryder, and Lomas, if I recall correctly.

 

[BayView]

Are we part of the group blindly believing the property market is safe enough to purchase this year, or are they "fringe" economists?

I do follow the long term holding approach, and thus don't feel as threatened by temporary spikes in market prices, but my partner is looking at purchasing this year and feels very unsure about whether to hold off or dive in.

If your investing strategy is:

to buy assets during times of downturn when they are at better value, with good returns from rents/dividends and tax advantages, with the view to hold them for the long term with the (reasonable) expectation that they will maybe go back in price possibly in the short term, but will more than likely go up appreciably in value over the longer term, then I'd say buy this year.

Basically; when everyone thinks the investment stinks and the values have dropped; it's time to think about buying.

For example; if you could buy the $1 mill dream home right now for $750k and the media are all saying property sucks, and no-one will go near the property with a barge-pole, then is it still bad?

 

[Zeddy]

You only crystalise a gain or a loss by selling. If you hold long term (which is what RE is as an investment) - no-one (including the lender) gives a damn on the day to day movements.

I'm not looking at day to day investments - I'm looking at how it slows our acquisitions in future. Sorry if I sound daft, I'm not a finance savvy person, but losing $22.5k in equity to leverage off sounds like a definite risk to be weighed up. Are you saying that $22.5k is a reasonable risk/price for entering that particular property market? If so, then I can understand your viewpoint.

They are not going to make a margin call on your girlfriend's one and only property IMO. What the hell are they going to do with her house? They want their return on their investment - which is the interest (or their margin on whay they buy money for and sell money for).

This property will be her third one, so we are trying to be a bit more careful in assessing the impact on her cashflow. We are concerned of overexposing ourselves, and will be probably seeking a fixed loan for it.

I think the background has been missed here. My gf and I are both property investors. Collectively we own 4 properties. We do not promote or bash the views of Money Morning. I am simply curious whether to place then in the "fringe economist" basket, or re-evaluate whether we have been too complacent in our view on the strength of the property market.

 

[Zeddy]

Bayview, I understand and agree with your assessment. I know it's been said a million times, but it's another thing to apply it in person. You can call it a case of me being too close to the problem to see clearly. I guess you can accuse us of trying to time the bottom of the market. Whilst I don't mean to say we want the best, best, bestest price, short term drops still hurt.

It's also that if someone is calling a disaster, I'd like to at least check out their claims before dismissing it.

 

[simo74]

Bayview, I understand and agree with your assessment. I know it's been said a million times, but it's another thing to apply it in person. You can call it a case of me being too close to the problem to see clearly. I guess you can accuse us of trying to time the bottom of the market. Whilst I don't mean to say we want the best, best, bestest price, short term drops still hurt.

It's also that if someone is calling a disaster, I'd like to at least check out their claims before dismissing it.

I don't know Zeddy... you sound pretty switched on to me.
Too many fools rush in to property without ever asking the questions your asking.

 

[evand]

For now.

D+G is dead.

And only thanks to the artificial stimulus of FHOG, pumping billions into the economy and 50 year low interest rates. Anything else?

The forward effects of all this wont be good and it will only postpone serious D&G, which - with the aid of rising unemplyment - will be back with a vengeance. That is short term thinking at its best BC.

 

[Aaron Sice]

Zeddy, if IRs go up because inflation - the debt is eroded to suit. the unsustainability only comes if people are unable to service their debt - ie unemployment - like evand points out.

i don;t feel that i'm being short sighted. i see another boom coming because of all the band-aid solutions providing confidence back to the market. are they sustainable? no. do they cause value to rise anway? yes. when will it crash.....?

this was the same situation spouted around the GST boom time. "unsustainable", "bubble" etc. THIS was what caused the sydney market fail IMO, not the "GFC". why WA can still be reasonably strong 8 years later and Sydney still be in a slump that's lasted 5 years in beyond me.

but there's activity where there was none. "some" good news to the hype mongers is sunshine, lollipops and rainbows, which equals confidence.

just as the media destroyed confidence, it will also renew it.

 

[BayView]

Bayview, I understand and agree with your assessment. I know it's been said a million times, but it's another thing to apply it in person. You can call it a case of me being too close to the problem to see clearly. I guess you can accuse us of trying to time the bottom of the market. Whilst I don't mean to say we want the best, best, bestest price, short term drops still hurt.

It's also that if someone is calling a disaster, I'd like to at least check out their claims before dismissing it.

Absolutely; a smart investor is going to check out all facts themselves and not act based on only opinions. Weigh up all the D&G, all the hype and razzamatazz and then decide yourself.

With short term drops; it's a case of how long term you think. If you are worried by a 25% drop in the near future from the point of view of your next aquisition, you may never act at all.

It depends on what your strategy is as well; if you are more concerned about cap growth, then short term is not looking good for property - maybe a few areas where the FHOB's are still biting. .

Conversely, if you are about cashflow, then now is lovely - low rates and improving rent returns. This is an excellent hedge against any cap gain loss until it kicks in again (and will), and if you are able to do some debt reduction as well, reinvest some returns (tax return) you can wipe out any possible drop that might occur. Emphasis on might.

I say; back your ability and go for it. You sound like you have the knowledge; just need the faith. There are areas out there that will not go backwards no matter what the media spin is. Just have to find them. Higher-end suburbs always suffer in these climates, but a middle-ring suburb with all amenitites will hardly see a hiccup often times.

Why? because of demographics, income levels and demand. An area like Mt. Waverley for example in Melb. Near everything, nice area, affordable by most; hardly a murmur out there. Your classic (nice) suburbia in demand by the masses.

All you can do is maximise what you can do now, and if you have done all you can do, then hopefully the gain will materialise as you expect. You will be able to buy again sooner.

Don't wait for every light down the road to be green before you move forward.

 

[Propertunity]

Is it not ME who are calling them "spruikers". That was the term used by Money Morning. "Spruikers" included on the list were RP Data, Ryder, and Lomas, if I recall correctly.

Let me just clarify things Zeddy, I was not having a go at you in any way at all, you sound pretty switched on - I was merely replying to the D&G merchants you were quoting. You'll have to forgive me - I get a bit excited sometimes

I feel a bit like, if you'll forgive the analogy, John the Baptist - i.e. one crying in the wilderness . I really am a bit passionate about PI and I get really, really annoyed when ppl who should know better are peddling doom & gloom in what may well turn out to be one of the biggest opportunities for wealth creation........time will tell.

RP Data, Ryder, and Lomas are all pretty well respected in the industry.

 

[craigb]

sounds like a dose of D&G for breakfast, i ll stick to my cornflakes and coffee thanks anyway!

 

[Aaron Sice]

Don't wait for every light down the road to be green before you move forward.

i'm no fan of sitting at a red light at 2am in the morning with no traffic around - i'll just stop - check it's all clear, no camera, and then keep on driving.

i guess that sums up my investment style really.

there'll be the folk who bring up the fact that it's the law to stop, so you should.

there's those that say "i just follow the lights. the're there to make my life easier"

there's others who take it too far and talk about the current govt and their stance on road trauma and why there'll be more lights and how the party is sponsored by the road traffic authority and speed limits are too fast and it's all related and if you don't know the lot then you shouldn't be driving....

there's those that say you'll die at the first intersection you come to. and if not that one, then the next. or the next. or the next. so don't bother. just stay home and buy foxtel.

i say

"but there's no cars in sight, and nothing is coming the other way......"

 

[Zeddy]

Conversely, if you are about cashflow, then now is lovely - low rates and improving rent returns. This is an excellent hedge against any cap gain loss until it kicks in again (and will), and if you are able to do some debt reduction as well, reinvest some returns (tax return) you can wipe out any possible drop that might occur. Emphasis on might.

Thanks BayView. The CF path is pretty much the one I've taken thus far for those exact reasons. The primary reason I'm a bit concerned right now is that the GF is looking for an acquisition that would be much more negatively geared than our last purchases. Without the CF to back things up, we are at a crossroads of sorts, looking at slightly more unfamiliar territory.

Higher-end suburbs always suffer in these climates, but a middle-ring suburb with all amenitites will hardly see a hiccup often times.

Glad to hear it! This reasoning is what spurred my purchase in December - a middle ring suburb, low cost, all amenities and good cash flow.

Don't wait for every light down the road to be green before you move forward.

Will do, thanks for your wise words and motivation.

Let me just clarify things Zeddy, I was not having a go at you in any way at all, you sound pretty switched on - I was merely replying to the D&G merchants you were quoting. You'll have to forgive me - I get a bit excited sometimes

No problems, I think a lot of people here would have a similar response, myself included. It's just recently I looked at myself and wondered if I was looking at my property investments through rose coloured lenses. I wanted to make sure that I wasn't blinding myself with my own desire to get ahead.

RP Data, Ryder, and Lomas are all pretty well respected in the industry.

I would hope so - I own five of Lomas' books, and used what I learned from her and other sources (like RP Data) to choose my properties. Despite that, it cannot be denied that such sources have a vested interest in promoting property as an investment tool. That was partially what prompted me to start this thread - I had Money Morning on one side calling them "spruikers", and I wanted another point of view since I lacked all the knowledge myself.

 

[sash]

Interesting....I have been thinking the same thing.....

I am not D&Ger....as a matter of fact I am buying some properties and selling some....

I do agree with the point the current FHB market is going to get to a bubble if some sort of caution is not exercised.

Having seen one recession......one really nows how well the party is going when unemployment get to about 8%....at that point ....most people will know someone who has lost their job. This will affect confidence. For the record.....I know at least 5 people who have lost professional jobs in IT in the last 2-6 months.....and all of them are still looking.

I like some on this site can only be tempted to dip my toes in the property market if an absolute bargains comes along.

The acid test will be June 2009....unemployment rose to 5.7% in April....will be interesting if it hits 7%....because the unemployment figures need to be readjusted to 10%....by june 2010!

 

[Propertunity]

Despite that, it cannot be denied that such sources have a vested interest in promoting property as an investment tool.

Zeddy, obviously I have an interest to declare also, as I could be seen to make money out of promoting property as an investment tool also. But my signature pretty much says it all up front anyway

Having said all that, my views as stated in this thread are from an PI stand-point not a BA one.