Some nice Supply Side numbers and charts

[MichaelW]

Hi Guys,

Thought you might be interested in these two pages out of an industry report we use to inform our senior executive in my company on the construction market economics. This report paints a scary picture around the level of housing commencements in the near future. It would be in their best interests to state otherwise given their audience, but they call it as they see it. Its a long report and in PDF so I can't post the whole thing, but it also models household net worth and house prices etc too. Lets just say that they don't see house prices falling much if at all...

I also can't see rents softening too much if those vacancy rate projections prove valid. That bottom graph on the first attachment is an interesting one don't you reckon? How is it that certain so-called "experts" always fail to model the impact of the underlying demand/supply equation when making price projections. Finance is only part of the picture...

Enjoy.

Cheers,
Michael

 

[Max Carnage]

How is it that certain so-called "experts" always fail to model the impact of the underlying demand/supply equation when making price projections.

True experts understand that there is no such thing as 'underlying' or 'fundamental' demand. Demand is what demand is. And demand is subject to the influence of price. Typically, higher prices reduce demand. If there is a surplus of people who would like a home, but not at current prices, this would be indicatative of a roof on prices, not a floor under prices.

 

[MichaelW]

True experts understand that there is no such thing as 'underlying' or 'fundamental' demand. Demand is what demand is. And demand is subject to the influence of price. Typically, higher prices reduce demand. If there is a surplus of people who would like a home, but not at current prices, this would be indicatative of a roof on prices, not a floor under prices.

MC,

Not quite right. You're heading in the right direction a bit, but you missed the mark. I'll quickly explain how limited supply impacts price using basic economics 1.01.

OK, firstly, given we're modelling supply only then demand "at any given price" is set as a constant. There are things that move the demand curve too, but I'm only modelling price now. As prices increase then the level of demand at that price decreases. i.e. Less people are willing to pay a higher price "for the exact same product" than are willing to pay the current price. Prices go up for that product, demand diminishes. This is the demand curve (drawn as a straight line) in the demand / supply chart attached.

Secondly, supply "sets the price" based on the level of demand at that price. As the level of supply increases, i.e. the volume of units available, the price decreases. This is called demand elasticity. Inversely, as the level of supply decreases, i.e. the volume of units available, then the price increases.

The supply curve (the other straight line) is moved to the left in a falling supply environment and moved to the right in an increasing supply environment. It is this supply dynamic that sets the price.

The more constrained supply is, the more people pay to procure that item in limited supply. Its really simple in principle. What you fail to realise is that there is no such thing as a price ceiling. Just less people "willing" to pay the higher price unless the supply dynamics change.

Imagine a severe shortage of dwellings in Australia, and I mean severe. All this would do would force purchases to compromise on quality at their affordability limit. The $1.5M property buyers of today would still spend $1.5M tomorrow but get a much lower quality product as supply is constrained and there is more competition for stock. So, if this "lower quality" product now attracts the $1.5M buyer where it used to only attract the $1M buyer, can you see what happened to the price of that property?

Got it?

Cheers,
Michael

 

[vbplease]

Michael,
But have you seen the effects of this chronic undersupply and vacancy rates on Sydney's median house prices over the last 5yrs?

 

[nonrecourse]

Property play pans out

Hi Guys,

Thought you might be interested in these two pages out of an industry report we use to inform our senior executive in my company on the construction market economics. This report paints a scary picture around the level of housing commencements in the near future. It would be in their best interests to state otherwise given their audience, but they call it as they see it. Its a long report and in PDF so I can't post the whole thing, but it also models household net worth and house prices etc too. Lets just say that they don't see house prices falling much if at all...

I also can't see rents softening too much if those vacancy rate projections prove valid. That bottom graph on the first attachment is an interesting one don't you reckon? How is it that certain so-called "experts" always fail to model the impact of the underlying demand/supply equation when making price projections. Finance is only part of the picture...

Enjoy.

Cheers,
Michael

Hello Michael;
Although the vacancy rates and falling interest rates are a plus for property investors this will be counter balanced by the rationing of new borrowings and refinancing as a consequence of the world financial tragedy that is unfolding. The end result of this will be a drop in property sales with a corresponding drop in values by 40-50% in most areas and a worse case scenario of up to 70% at the top of the market and for some sections of the commercial market.

 

[Max Carnage]

The supply curve (the other straight line) is moved to the left in a falling supply environment and moved to the right in an increasing supply environment. It is this supply dynamic that sets the price.

The more constrained supply is, the more people pay to procure that item in limited supply. Its really simple in principle. What you fail to realise is that there is no such thing as a price ceiling. Just less people "willing" to pay the higher price unless the supply dynamics change.

Chuckle.

You don't think there's a causal link between the quantity demanded at a price level and the amount supplied?

Supply (of additional dwelling units) isn't constrained, least of all in Sydney. There is plenty of land zoned for additional dwellings. There is plenty of construction capacity (compare construction levels today to those of 5 years ago). The reason supply (of additional dwellings) is down, is because people are unwilling or unable to pay the asking prices!

Now market supply tells a whole different story. Over to Louis Christopher from Advisor's Edge:

"This week, the online real estate listings portal Domain.com.au had over 33,000 property listings within the greater metropolitan Sydney region. This compares starkly with the number of listed properties back in November 2005 when the count was just 12,000 listings."
http://au.pfinance.yahoo.com/b/michael-pascoe/111/real-estate-vs-bank-shares

The picture is bleaker in other parts of the country, and listings (which I track, and believe me they were already high) have positively rocketed upward in the last 3 months). This indicates very strongly that any constraint is on the demand side, not supply.

Got it?

 

[tcocaro]

Do you actually believe what you write?? - seriously...

What exactly do you mean by "rationing of new borrowings"? You simply throw it out there like it means something beyond a trendy catch phrase media commentators say from time to time?

Do you mean our banks are running out of capital and hence are rationing whats left? - i.e. the true definition of credit rationing?

Or mistakingly do you mean they are tightening credit i.e. removing 100% and 105% loans etc?

Since there is no rationing occurring beyond banks being more conservative your statement makes no sense.

And spare me by not mentioning funds which have been frozen... they lend to developers in the most part and either way represent single digit percentage of the mortgage industry. Which in any case has the net result of making shortage worse by limiting new stock coming onto the market.

70% falls? - no comment lets just make it 99% falls and tomorrow ill put a deposit down on a city sky rise.

40-50% falls? dont make me laugh, your projecting falls up and beyond those figures being purported by the rapidly vanishing presence of S.K?

I think you need to take a reality check, come back to earth... take a deep breath... and stop this nonsense.

Although the vacancy rates and falling interest rates are a plus for property investors this will be counter balanced by the rationing of new borrowings and refinancing as a consequence of the world financial tragedy that is unfolding. The end result of this will be a drop in property sales with a corresponding drop in values by 40-50% in most areas and a worse case scenario of up to 70% at the top of the market and for some sections of the commercial market.

 

[aussierogue]

Interesting discussion guys. Nice figures Michael. I think if anything Michaels figures show that there will be resistance to a quick downturn. It could result in dropping prices but over a longer period - lets hope so. They are fairly compelling figures. NR - I tend to agree with your basic assumptions. What I would like clarification with is why would the top end fall more than the medium and lower ends over the long term. Wont they just all pan out the same. cant see whya 700 k house will be worth the same as a 550k house in 1 years time...

 

[Shadow]

There is plenty of land zoned for additional dwellings.

Just a pity most of the land is in places with no infrastructure where people don't want to live. That's why house prices in places where people do want to live just keep going up. Northern Beaches is up 9% in the 12 months to September 2008.

The reason supply (of additional dwellings) is down, is because people are unwilling or unable to pay the asking prices!

Different story though when mortgage rates have fallen from near 10% at the peak this year to 5% or less (soon). Servicing costs halved. Affordability improves significantly.

Now market supply tells a whole different story. Over to Louis Christopher from Advisor's Edge:

"This week, the online real estate listings portal Domain.com.au had over 33,000 property listings within the greater metropolitan Sydney region. This compares starkly with the number of listed properties back in November 2005 when the count was just 12,000 listings."

Sydney sales volumes this year are much the same as last year and better than the two years before.

The picture is bleaker in other parts of the country

Agreed. That's why Micheal and I keep telling you that Sydney is the next to boom. But even in Victoria where you recently sold your beach shack, I very much doubt prices will fall enough for you to be much better off when you buy back in - considering stamp duty, buy & sell costs etc.

 

[MichaelW]

Funny!

I post some nice charts and title the thread on "supply side" and the Doom and Gloomers immediate respond with "demand" drivers!! What's more, it seems they've now split into two factions. They're still running the old "affordability" argument (Max Carnage), but this argument is getting weaker and weaker as interest rates collapse and rental increases assist investors. So now there seems to be a new faction, the "credit rationing" faction (Non Recourse).

I guess when the old arguments lose traction, you've got to go digging for new ones. But I can safely say that credit rationing is not happening anywhere I look at present. I've got pre-approval for the $1.2M I need to develop Mona Vale and didn't need to work to hard for it either.

Ah well, there's no pleasing some people...


Michael

 

[feihong]

Funny!

I post some nice charts and title the thread on "supply side" and the Doom and Gloomers immediate respond with "demand" drivers!! What's more, it seems they've now split into two factions. They're still running the old "affordability" argument (Max Carnage), but this argument is getting weaker and weaker as interest rates collapse and rental increases assist investors. So now there seems to be a new faction, the "credit rationing" faction (Non Recourse).

I guess when the old arguments lose traction, you've got to go digging for new ones. But I can safely say that credit rationing is not happening anywhere I look at present. I've got pre-approval for the $1.2M I need to develop Mona Vale and didn't need to work to hard for it either.

Ah well, there's no pleasing some people...


Michael

I do think bank values each loan application case by case, and I wouldn't think small time developer with 1 site holding and high income who exceeds full-doc criteria by miles would have too much trouble getting loan approval from banks unless the banks are absolutely stuffed. However, I do take grossreal's opinion very seriously, and he mentioned the funding for developers in general could be drying up as banks start to protect their backside (just look at numerous posts about lo-docs on this forum!!), and as the result places with a lot of development activities could take a big hit.

 

[Token Funder]

Since there is no rationing occurring beyond banks being more conservative your statement makes no sense.

*sigh*

Hands up if you in the "supply of money business".

[TF puts up hand]

Hands up if you and your peers are actively managing capital and liquidity by capping your asset growth to below what the market would deliver if you didn't.

[TF puts up hand again]

 

[JIT]

Token Funder,

Would you be willing to elaborate on your work/industry experience/background?

You seem quite knowledgeable on matters of credit....

 

[nonrecourse]

Do you actually believe what you write?? - seriously...

What exactly do you mean by "rationing of new borrowings"? You simply throw it out there like it means something beyond a trendy catch phrase media commentators say from time to time?

Do you mean our banks are running out of capital and hence are rationing whats left? - i.e. the true definition of credit rationing?

Or mistakingly do you mean they are tightening credit i.e. removing 100% and 105% loans etc?

Since there is no rationing occurring beyond banks being more conservative your statement makes no sense.

And spare me by not mentioning funds which have been frozen... they lend to developers in the most part and either way represent single digit percentage of the mortgage industry. Which in any case has the net result of making shortage worse by limiting new stock coming onto the market.

70% falls? - no comment lets just make it 99% falls and tomorrow ill put a deposit down on a city sky rise.

40-50% falls? dont make me laugh, your projecting falls up and beyond those figures being purported by the rapidly vanishing presence of S.K?

I think you need to take a reality check, come back to earth... take a deep breath... and stop this nonsense.

You must have been away or asleep. Go back into the property Economics section and have a look at The soft depression we had to have and read my first post that started the discussion; then get back to me and we can discuss my rational in a civil manner

 

[nonrecourse]

Interesting discussion guys. Nice figures Michael. I think if anything Michaels figures show that there will be resistance to a quick downturn. It could result in dropping prices but over a longer period - lets hope so. They are fairly compelling figures. NR - I tend to agree with your basic assumptions. What I would like clarification with is why would the top end fall more than the medium and lower ends over the long term. Wont they just all pan out the same. cant see whya 700 k house will be worth the same as a 550k house in 1 years time...

Hi aussie; The 40-60% share market collapse has left a lot of well to do individuals a wee bit light on the folding stuff. Demand for those properties is much less than the median. Those areas also tend to drop away first and come back up first. I think a lot of working class and some middle class Australians are oblivious to the carnage that has occurred in the old money elite circles. A lot of serious old money has gone down the gurgler in New York and London.

 

[nonrecourse]

Funny!

I post some nice charts and title the thread on "supply side" and the Doom and Gloomers immediate respond with "demand" drivers!! What's more, it seems they've now split into two factions. They're still running the old "affordability" argument (Max Carnage), but this argument is getting weaker and weaker as interest rates collapse and rental increases assist investors. So now there seems to be a new faction, the "credit rationing" faction (Non Recourse).

I guess when the old arguments lose traction, you've got to go digging for new ones. But I can safely say that credit rationing is not happening anywhere I look at present. I've got pre-approval for the $1.2M I need to develop Mona Vale and didn't need to work to hard for it either.

Ah well, there's no pleasing some people...


Michael

Hello Mike; I don't tend to travel in packs and last time I looked their is a significant section of the board that thinks I'm from the dark side. Reality is I am a long term property investor who intends to come out the other side of the financial tragedy that is unfolding. Nothing would please me more than if you were correct and I was out in left field.

We are very early into the liquidity squeeze. If you go back and read my postings about how things will unfold under the soft depression we had to have thread and my various postings back to February 2008 you will see I have not changed my tune at all

 

[Max Carnage]

Funny!

I post some nice charts and title the thread on "supply side" and the Doom and Gloomers immediate respond with "demand" drivers!! What's more, it seems they've now split into two factions. They're still running the old "affordability" argument (Max Carnage)

No. I'm saying that the supply is not constrained by anything other than demand at current prices. Do you understand that? Or do you really believe it's the evil government to blame for falling construction, despite various cities having between 7 and 24 years of land zoned for residential construction? Or do you believe it's a shortage of labour, despite evidence that we were very recently able to build at a much higher rate? Come on then, tell us about the supply side - only. If construction is being crippled - how?

By posting a chart of this nonsensical so-called 'underlying demand', then supportive comments of same, you've effectively opened this thread up to demand side talk. You do believe that demand is exceeding supply, right?

I on the other hand believe the two are in lock-step.

 

[Token Funder]

Token Funder,

Would you be willing to elaborate on your work/industry experience/background?

You seem quite knowledgeable on matters of credit....

Short version: manage most of the mortgage business for a financial institution.

 

[aussierogue]

Hi NR - I understand your premise regarding whole numbers but why would the top end fall more than the medium end in percentage terms? IMO over a period there will be a balance in terms of Spread and hence i cant see top end falling 70 pct and lower end falling 40 pct. ie The spread will return to normal...

 

[DavidMc]

Now market supply tells a whole different story. Over to Louis Christopher from Advisor's Edge:

"This week, the online real estate listings portal Domain.com.au had over 33,000 property listings within the greater metropolitan Sydney region. This compares starkly with the number of listed properties back in November 2005 when the count was just 12,000 listings."
http://au.pfinance.yahoo.com/b/michael-pascoe/111/real-estate-vs-bank-shares

So, unless you believe the 'hordes of empty houses' theory, where are all these people going to live?

Also, what are these asking prices? What has happened in the past is that they'll list their property for sale at a nice price (i.e. what you would have gotten 1 year - 6 months ago) but then when the realise nothing is happening they just take them off the market. Most of these people don't have to sell. They already have plenty of equity, own outright or have jobs.

I think the key factor will be the unemployment figure.