Property doubles every 14 years, not every 7
- Thread starter MichaelW
- Start date
I hope people are not so offended by some of my posts that are in line with D&Gers. Just sharing my honest opinion. Hoping for some interesting discussion, not trying to upset people who don't like hearing negative opinions.
I saw a comment about Steve Keen. I admit he hasn't be proved correct yet, but he also hasn't been proven wrong in my opinion. In places like the US people make dire predictions years ago and they are being acted out in what is happening in the US.
Why should things be different here in Australia? Why wont it happen here? Why do people think prices will not crash and continue to grow at the every 7 or 14 year rate? (really, I am asking for your thoughts about that - why is Australia different?).
I saw a comment about Steve Keen. I admit he hasn't be proved correct yet, but he also hasn't been proven wrong in my opinion. In places like the US people make dire predictions years ago and they are being acted out in what is happening in the US.
Why should things be different here in Australia? Why wont it happen here? Why do people think prices will not crash and continue to grow at the every 7 or 14 year rate? (really, I am asking for your thoughts about that - why is Australia different?).
Because our financial system isnt screwed...:
- The RBA cutting rates actually flows on to the public as most are on variable morgages (not 10 - 25 year fixed like the US) and all banks are still well capitalised and profitable
- Our economic fundamentals are a lot healthier than the US (GDP falls much, much smaller than the US, govt surplus until last year, still a small deficit compared to other western countries (though comrade KRudd is trying!))
- We never had the bubble built on pure speculation - both on the 'exotic' financing side (read up about ARMs, aggressive lending to very poor people) and also supply side (estates springing up in the middle of nowhere to sell to investors, which are now vacant)
Thats why our prices havent fallen by a large amount, and wont.
Now, that said, with interest rates at a historic all time low, and Krudd's housing grants shooting up, there is a massive stimulus to housing, which is seeing prices remain largely flat. These will be removed at some stage, but not until there is a counteracting upward pressure on house prices (which may take a while due to rising unemployment). The security of our financial system depends on house prices remaining stable, hence the RBA and the govt will do all they can to support them (and for good reason).
The summary - dont expect any large falls, but by the same token, I wouldnt expect any large across the board gains in many demographics / areas.
- The RBA cutting rates actually flows on to the public as most are on variable morgages (not 10 - 25 year fixed like the US) and all banks are still well capitalised and profitable
- Our economic fundamentals are a lot healthier than the US (GDP falls much, much smaller than the US, govt surplus until last year, still a small deficit compared to other western countries (though comrade KRudd is trying!))
- We never had the bubble built on pure speculation - both on the 'exotic' financing side (read up about ARMs, aggressive lending to very poor people) and also supply side (estates springing up in the middle of nowhere to sell to investors, which are now vacant)
Thats why our prices havent fallen by a large amount, and wont.
Now, that said, with interest rates at a historic all time low, and Krudd's housing grants shooting up, there is a massive stimulus to housing, which is seeing prices remain largely flat. These will be removed at some stage, but not until there is a counteracting upward pressure on house prices (which may take a while due to rising unemployment). The security of our financial system depends on house prices remaining stable, hence the RBA and the govt will do all they can to support them (and for good reason).
The summary - dont expect any large falls, but by the same token, I wouldnt expect any large across the board gains in many demographics / areas.
asdlellel,
Inflation....
There is no limit on money. It is a creation of man out of thin air.
Why do you think there is a limit of money to stop growth??
In the late '50's my father earned 10 pounds a week ($20 for the youngsters). Without being any more productive I can earn $20/hour. In 50 years time, my grandchildren will probably be earning >$600/hour with inflation never going above 10% pa.
bye
Inflation....
There is no limit on money. It is a creation of man out of thin air.
Why do you think there is a limit of money to stop growth??
In the late '50's my father earned 10 pounds a week ($20 for the youngsters). Without being any more productive I can earn $20/hour. In 50 years time, my grandchildren will probably be earning >$600/hour with inflation never going above 10% pa.
bye
You would need 7.04% inflatation for wages to go from $20 ph to $600ph in 50 years, but we get the point!!
asdlellel - look at the M's (M0, M1, etc..) money supply on wikipedia / google. Also read up old bank reports and look at the combined loans of the big 4 and shareholder capital... Its called "system growth" and it just steadily grows.... Too fast is bad, and too slow / negative is even worse.
I'm quite pessimistic about the prospects of capital growth in Australia for the next 5 years or so (at least), and I do think our prices are still a bit too high, but I don't think we'll see absolute drops of any substantial size. There are several reasons for this, but here are my two primary culprits for the reasons why Australia's market is different to the USA:
1) US' split market for properties
The USA has always had a split wholesale/retail market for property. I don't 100% understand why market forces don't collapse the dichotomy, but it seems that they don't. A property which would sell for $100K retail (eg a "normal" transaction between a willing buyer and willing seller), has always sold for around $60K "wholesale" (in distressed circumstances - could be that it needs some rehab, is in foreclosure, is sold on the courthouse steps due to back-taxes, etc). For some reason, homeowners don't tap into the wholesale market, even though there's no reason that they couldn't; I think it's partly because they're not aware of this market, and partly because it seems risky (may not be able to put as many conditions in). It's so entrenched it's a "rule of thumb" for investors - at foreclosures and auctions, you never offer more than 60% of appraisal (market value).
When, in 2007/8, US prices began to drop a little (rather than the anticipated rises), and then mortgage rates adjusted (5-year honeymoon rates from 2002/3 "early peak" began expiring), the market began to shift. Whereas beforehand it might have been 80% of properties sold "retail" and 20% "wholesale", more people went into foreclosure, or couldn't afford their taxes, at the same time as fewer people were buying retail because the market was weak. Gradually the ratio of wholesale and retail sales changed, to the point where now, in some areas, 80% are sold "wholesale" and 20% "retail". So, even if the market had not moved at all in the past 5 years, if prices were absolutely the same, the median sale price of $100K 5 years ago, is now a median sale price of $60K, because the median is now within the wholesale market.
2) Enthusiasm for ownership and investing in Australia
In the USA, they primarily buy their own homes because of 1) the tax deductibility of your own mortgage (yes! You can claim PPOR interest and expenses!
), and 2) high yields mean that in many places it's cheaper to buy than rent. (Excluding some of the very high value markets such as southern California and NYC.) Both factors are related to cashflow, not equity. In Australia, we almost exclusively buy our own homes for capital growth (from a financial perspective). Thus we're much more sensitive about capital values, and movements in value. Americans don't consider their homes an appreciating asset (to anywhere near the same extent). In Australia, those who don't yet own their own home are always concerned that they'll either miss out on spectacular growth, or be priced out of the market, because growth is historically strong and has been our focus. So as soon as prices drop 5 or 10%, both homeowners and investors are thinking that "it's a great opportunity to buy" and rush in to buy, propping the market up. This puts a natural floor on prices. Whilst prestige property (>$800K) is somewhat different (because not everybody can afford to play in that market), and has seen larger drops in some areas, I can't see the sub-$800K market dropping more than 10%, due to the above dynamic. It may drop more than that in real terms by having slower growth over a number of years - ie only 2% absolute price increases in a period of 3.5% inflation for 10 years - but I don't believe that absolute prices will retract more than about 10% from peak (unless there are further major structural changes, eg more credit tightening etc).
I'm quite pessimistic about the prospects of capital growth in Australia for the next 5 years or so (at least), and I do think our prices are still a bit too high, but I don't think we'll see absolute drops of any substantial size. There are several reasons for this, but here are my two primary culprits for the reasons why Australia's market is different to the USA:
1) US' split market for properties
The USA has always had a split wholesale/retail market for property. I don't 100% understand why market forces don't collapse the dichotomy, but it seems that they don't. A property which would sell for $100K retail (eg a "normal" transaction between a willing buyer and willing seller), has always sold for around $60K "wholesale" (in distressed circumstances - could be that it needs some rehab, is in foreclosure, is sold on the courthouse steps due to back-taxes, etc). For some reason, homeowners don't tap into the wholesale market, even though there's no reason that they couldn't; I think it's partly because they're not aware of this market, and partly because it seems risky (may not be able to put as many conditions in). It's so entrenched it's a "rule of thumb" for investors - at foreclosures and auctions, you never offer more than 60% of appraisal (market value).
When, in 2007/8, US prices began to drop a little (rather than the anticipated rises), and then mortgage rates adjusted (5-year honeymoon rates from 2002/3 "early peak" began expiring), the market began to shift. Whereas beforehand it might have been 80% of properties sold "retail" and 20% "wholesale", more people went into foreclosure, or couldn't afford their taxes, at the same time as fewer people were buying retail because the market was weak. Gradually the ratio of wholesale and retail sales changed, to the point where now, in some areas, 80% are sold "wholesale" and 20% "retail". So, even if the market had not moved at all in the past 5 years, if prices were absolutely the same, the median sale price of $100K 5 years ago, is now a median sale price of $60K, because the median is now within the wholesale market.
2) Enthusiasm for ownership and investing in Australia
In the USA, they primarily buy their own homes because of 1) the tax deductibility of your own mortgage (yes! You can claim PPOR interest and expenses!
Kudo for you for an elegant explanation and for your Startrak experience in US.
Hi OzPerp,
I tend to agree. I definitely think Steve Keen will be proved wrong over the coming few years and it seems the RBA agrees.
Here's an article out today which shows how much better off we are already given where we were just a few years back:
Home prices better than 5 years ago
SMH said:
And this is the price to income ratio that is improving. It doesn't even allow for the improved affordability driven by substantially lower interest rates. That just makes the picture even better.
In real terms prices are falling, but in nominal/absolute terms they're holding pretty steady. Inflation does its thing and the multiple of price to incomes improves. I expect this to play out in the same manner for another year or two until the multiple is back around 3 and given substantially lower interest rates (expansionary setting) and an improving economy we should see prices start to turn North again in both real and absolute terms and run ahead of inflation for a while and re-test those upper multiples. Ain't business cycles fun!
Cheers,
Michael
Please excuse my happy feeling today but a share of mine, last night, doubled for the third time since I bought it six (about) years ago.
Excel shows a 701% gain.
I couldn't post the chart but any who care can look at the 5 year chart of RBI.TSX, consider that I bought earlier, cheaper and that the price is quoted in Loonies.
Gross profit is also net profit because it does not cost a cent annually to own the shares.
I am still well below where I was early '08 overall, but I survived and, recently, I'm thriving.
Never leave yourself so vulnerable to a bad outcome that you are wiped out. Without capital you are a wage slave. If you "only" lose 50% you still have cash to buy assets that show a 50% discount. If you are broke you can't buy them at 10c in the dollar.
Excel shows a 701% gain.
I couldn't post the chart but any who care can look at the 5 year chart of RBI.TSX, consider that I bought earlier, cheaper and that the price is quoted in Loonies.
Gross profit is also net profit because it does not cost a cent annually to own the shares.
I am still well below where I was early '08 overall, but I survived and, recently, I'm thriving.
Never leave yourself so vulnerable to a bad outcome that you are wiped out. Without capital you are a wage slave. If you "only" lose 50% you still have cash to buy assets that show a 50% discount. If you are broke you can't buy them at 10c in the dollar.
Good on you Sunfish.
I have the same perspective on stockmarket gains. In my business for me to put $100k in my pocket it needs to make approx $300k.
In the stock market for me to put $100k in my pocket i need to make $100k!
Love it.
As for your last sentence. The wealthy have a saying: "Never, ever run out of money" So true.
It's why i am so risk averse and keep my feet firmly on the ground (some people mistake this as negativity). I will ALWAYS be in the game. I make sure there is absolutely no risk of being wiped out.
I have the same perspective on stockmarket gains. In my business for me to put $100k in my pocket it needs to make approx $300k.
In the stock market for me to put $100k in my pocket i need to make $100k!
Love it.
As for your last sentence. The wealthy have a saying: "Never, ever run out of money" So true.
It's why i am so risk averse and keep my feet firmly on the ground (some people mistake this as negativity). I will ALWAYS be in the game. I make sure there is absolutely no risk of being wiped out.
Thommo,
Awesome result mate! Kudos to you for sharing the outcome and mindset.
As you know, I didn't dance close enough to the doors with my long ASX position and wore a pretty hefty haircut when I exited at 5400. In hindsight though, even a 5400 exit was a good call over a year ago now. And in doing so I protected an awful lot of my capital and lost an amount I can recover from.
For now, I'm long gold. I've still got that kg bar bought at $800AUD/Oz some time back and current prices have me up 40-50% odd I think. I've also put another small $50K on a solid junior gold producer with solid tenements on the ASX which is up 10% from my buy price already.
Inflation is coming and Gold is the age old hedge. I'm still positive residential property in Sydney over the long term so am holding my development site and PPOR because inflation will serve me well here too.
Watching it all unfold with keen interest.
Cheers,
Michael
Well said sunfish.
This goes for any market your in.
Here's the chart link:
http://www.stockhouse.com/charts/Ba...21/2009&ticker=T.RBI&t=0&w=384&h=280&sl=0&i=0
The main reason - right now - is the supply versus demand situation I'd say, and the FHB grant.
We have a shortage of supply apparently, and immigration still continues. Our lending practices are a fair bit tighter as well here.
In the USA, they had a deadly coctail of easy credit and a lot of speculation on the back of a boom with flips and construction.
Lots of supply, and then when the ARM loans reverted to the proper rates, a lot of people were caught, and these added to the supply and no buyers.
The main reason for me is that Australia is a growing and young economy with our net migration into the country. There is plenty of building construction and infrastructure being built.
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