The 'no housing bubble' myth can't last

[wylie]

I presume from your handle that you were born in '74. If you've been investing for decades, then you must have started as an infant Or maybe I'm being presumptious - maybe you are 74 years old.

I am 50 and bought my first IP when I was about 19. I have been investing for decades but I'm a fair way from 74 .

 

[Aaron Sice]

I have maintained for some years now that the issue with tight development controls is what happens if the demand curve does shift? The government then is left with a choice; subsidise development to prevent unemployment, or as they do in Australia subsidise the demand side with first home buyer boosts, covered bonds, capital gains tax exemptions etc etc. Is it not better to have a supply side which is responsive leading to more stable house prices in line with general inflation over the long term. This would take out the speculative component and again people would buy homes based on yield if it's an investment with the inflation hedge as a built in bonus.

Thus far we have always adopted the latter approach (demand side stimulous) but is this sustainable? Is it not better to have an efficient development industry where the government is on the side of developers / development. I suspect to a large extent this is the change in Perth since the liberals got into power at the state level. They seem to be going local councils with a stick to get developments up but the resident developers here would likely know more?

I have sees the councilors on the news complaining about some old heritage factory that has sat idle for decades or has been used for the local swap meet the second sunday of every month and what an outrage that it should be turned into a more intensive use. My local area has a state residential development going ahead and it was rammed straight through with a lot of local criticism.

Sorry if it's not clear how this is on topic, what the business spectator article is getting at is with an unresponsive controlled new supply side you get bigger bursts in price when the demand side shifts. Whether that shift is to the right (FHOGBoost say) or too the left (unemployment, higher credit costs).

i know what you're getting at.

they have too much leverage on their books.

banks stop funding development in order to drive up existing stock prices (or hold up existing stock prices - whatever).

existing prices remain steady, banks' equity balances remain steady, no one ends up being caught out trading insolvent, unlike 2 major banks before their Fed cash buy-up.

 

[tom32]

i know what you're getting at.

they have too much leverage on their books.

banks stop funding development in order to drive up existing stock prices (or hold up existing stock prices - whatever).

existing prices remain steady, banks' equity balances remain steady, no one ends up being caught out trading insolvent, unlike 2 major banks before their Fed cash buy-up.

I don't know if it is sustainable in the long term though?

It is very easy for a government to introduce lots of costs to the development game. These extra costs see prices of existing stock (i.e. existing homes) rise and the initial overwhelming effect on the economy is for GDP to increase through the wealth effect what we have seen for the last 15 years in Sydney and 10 years elsewhere. As a side effect the government also receives a whole lot more tax and with the suppressed building activity pays for less global infrastructure. they think win / win I am not so sure in the long term this is the case.

What of the long term? Can the costs for developers always be pushed up year on year? Does there come a time where things stabilise and then over time as more recent entrants (home buyers) get into their homes with high debt levels but no instant equity through tighter development controls there is eventually a counteracting effect on the economy to the wealth effect, i.e. a debt effect due to interest costs.

Maybe I am going to sound a bit socialist here but;

I think if the government looked at the supply side and encouraged development especially in regional areas in the longer term the country would be more prosperous with all people. In this country especially in the likes of Sydney it would seem due to NIMBYISM the best thing for a government whether it be state or local is to knock any potential development on the head.

Around banks I think the government knows what affect it has on our big lenders should development suddenly get freed up. Even developers themselves I don't think would be that happy if it was freed up as it would affect their current projects deleteriously. Only on new projects would there be hay to be made with costs suddenly far below market price. Of course this is how you deal with a "shortage", but in this country stating the glaringly obvious is difficult with much hand wringing around why is building activity falling etc but no real action. then when there is action it is on the wrong side of the equation, i.e. demand side (to protect banks and existing homeowners) not supply side (ultimately seeing developers profit for a short time till prices adjust to the new costs of production).

 

[Token Funder]

i know what you're getting at.

they have too much leverage on their books.

banks stop funding development in order to drive up existing stock prices (or hold up existing stock prices - whatever).

existing prices remain steady, banks' equity balances remain steady, no one ends up being caught out trading insolvent, unlike 2 major banks before their Fed cash buy-up.

As someone who spends a bit of time on the pricing and risk committees of a bank, I can assure you we don't have the time nor the necessary delusions of grandeur required.

Of course, what the International Bankers Running The Global Conspiracy In Conjunction With The United Nations and The Knights Templar are doing, I just don't know. They don't return my calls.

Black balling *******s.

 

[tom32]

As someone who spends a bit of time on the pricing and risk committees of a bank, I can assure you we don't have the time nor the necessary delusions of grandeur required.

Of course, what the International Bankers Running The Global Conspiracy In Conjunction With The United Nations and The Knights Templar are doing, I just don't know. They don't return my calls.

Black balling *******s.

The government however can manipulate this.

When in 2008 commercial developments which had already been flagged as goers and commenced looked like collapsing, i.e. those in development and at a point beyond return they assisted funding these by buying securities but any new developments were virtually excluded from assistance. They only pursued those that they called viable and yet what it really meant is those already commenced and looked like a risk to bank balance sheets.

These developments would have been finished whether it was after a liquidation or otherwise and the only ones really feeling the pain were the banks if this was left to run its course. Some punter would have bought them at face value ex GFC and finished them off with a big hit to the banks loan assets along the way. They did not protect workers as they claimed was the goal. If they were really wanting to protect workers they would have funded new projects in the pipeline i.e. the ones which were struggling to attract funds and continue to struggle to attract funds.

I don't mind them doing this but they should not wrap up a policy for the banks to protect their balance sheets as a policy to protect workers liveliehoods. In fairness most of the banks exposed were not the big four.

 

[.toe]

I have maintained for some years now that the issue with tight development controls is what happens if the demand curve does shift? The government then is left with a choice; subsidise development to prevent unemployment, or as they do in Australia subsidise the demand side with first home buyer boosts, covered bonds, capital gains tax exemptions etc etc. Is it not better to have a supply side which is responsive leading to more stable house prices in line with general inflation over the long term. This would take out the speculative component and again people would buy homes based on yield if it's an investment with the inflation hedge as a built in bonus.

Thus far we have always adopted the latter approach (demand side stimulous) but is this sustainable? Is it not better to have an efficient development industry where the government is on the side of developers / development. I suspect to a large extent this is the change in Perth since the liberals got into power at the state level. They seem to be going local councils with a stick to get developments up but the resident developers here would likely know more?

I have sees the councilors on the news complaining about some old heritage factory that has sat idle for decades or has been used for the local swap meet the second sunday of every month and what an outrage that it should be turned into a more intensive use. My local area has a state residential development going ahead and it was rammed straight through with a lot of local criticism.

Sorry if it's not clear how this is on topic, what the business spectator article is getting at is with an unresponsive controlled new supply side you get bigger bursts in price when the demand side shifts. Whether that shift is to the right (FHOGBoost say) or too the left (unemployment, higher credit costs).

I agree with all the sentiments you've expressed, but do you really think it'd be a politically astute thing to do? Let's say you had to go to election arguing that you'll make life easy for developers, and you'll stop councils from allowing rate payers to block developments. Of course the other party will go head to head with you on this issue and successfully avoid the issues that are tough for them. Could be a hard sell I think.

 

[hobo-jo]

you need to log in or have an account to view the article?

You can view Business Spectator articles by googling the article title (e.g. "The 'no housing bubble' myth can't last") then click the link from there. Also works for Wall Street Journal and some other sites that block content if you come from as posted link...

 

[hobo-jo]

Early 90s. Family has been at it for much longer.

Cash Flow + is a nice situation to be in. I'm curious: Did you buy many years ago? In a regional location? Please share, maybe we can learn from your experiences.

meconium, the way you posted this sounded like you aren't in a positive cash flow position yourself, yet you started investing in the early 90s??

 

[Ausprop]

When in 2008 commercial developments which had already been flagged as goers and commenced looked like collapsing, i.e. those in development and at a point beyond return they assisted funding these by buying securities but any new developments were virtually excluded from assistance. They only pursued those that they called viable and yet what it really meant is those already commenced and looked like a risk to bank balance sheets.

as someone at the receiving end of westpac's nervousness and policy changes, I learnt a valuable lesson about development risk and leverage! there were no friends for holders of development sites in 2009

 

[meconium]

meconium, the way you posted this sounded like you aren't in a positive cash flow position yourself, yet you started investing in the early 90s??

Whatever I bought in the early 90s has long since been traded in for other stuff with greater potential for capital gain. I'm mostly into multi-unit sites these days and hope to hold these for the long-term. I rarely ever buy single residential homes, townhouses or apartments.

For me, property investment is about capital gain as well as tax minimization. I have a significant tax bill every year and, at the current time, have no special desire to be cash flow positive. But that will eventually change.

I'm interested in situations where I can obtain a 100% lend on a property and still be cash flow positive. But such situations are few and far between. Perhaps in rural areas, which are often fraught with risk.

How about you Hobo Joe? With your negative views about the prospects for property, I would suspect you sold your portfolio a long time ago? Please explain.

 

[Intrinsic_Value]

I have maintained for some years now that the issue with tight development controls is what happens if the demand curve does shift? The government then is left with a choice; subsidise development to prevent unemployment, or as they do in Australia subsidise the demand side with first home buyer boosts, covered bonds, capital gains tax exemptions etc etc.

You have hit on a real 'worry' nurve of mine.

Alot of people dont talk about the issue you have raised.
Kudos for you bringing it up.

Was it Keynes who stated that 'distortions' are eventually removed from the system. It was phrased far better than that, unfortunately i cant remember the exact phrase. Just the implied warning.

But basically a market impediment to natural pricing will be removed in the long run. Those who rely on that market impediment to justify their investment model do so at their own peril.

 

[Intrinsic_Value]

As someone who spends a bit of time on the pricing and risk committees of a bank, I can assure you we don't have the time nor the necessary delusions of grandeur required.


Black balling *******s.

No but you do suffer from near term data bias. Maybe not the risk committee such as yourself, but definately the person(s) above you who take your opinions into account.

 

[Intrinsic_Value]

I agree with all the sentiments you've expressed, but do you really think it'd be a politically astute thing to do? Let's say you had to go to election arguing that you'll make life easy for developers, and you'll stop councils from allowing rate payers to block developments. Of course the other party will go head to head with you on this issue and successfully avoid the issues that are tough for them. Could be a hard sell I think.

Not if you extrapolate this into the long term and nobody on average wages can afford a 'medium priced property' - 30%.
By then the 'voters' will be howling for change. At this point a politican's life becomes easy.

 

[Token Funder]

No but you do suffer from near term data bias. Maybe not the risk committee such as yourself, but definately the person(s) above you who take your opinions into account.

No so much.

Pricing and credit committees make the decisions. If banks could individually or as part of the Secret Meetings That The ACCC Doesn't Know About Where We Discretely Manipuate the Country control the supply side of the real estate market, we'd be owning propoerty, not lending against it.

Oh, and I'm not sure you're using "near term data bias correctly" unless your referring to my age-induced long-term memory faiilures.

 

[Intrinsic_Value]

No so much.

Pricing and credit committees make the decisions. If banks could individually or as part of the Secret Meetings That The ACCC Doesn't Know About Where We Discretely Manipuate the Country control the supply side of the real estate market, we'd be owning propoerty, not lending against it.

Oh, and I'm not sure you're using "near term data bias correctly" unless your referring to my age-induced long-term memory faiilures.

i'm not talking about conspiracy theories. I am talking about the degree to which the risk committees influence the overal strategic direction of a lending institution.

Obviously post GFC they have a much more dominant hand. Prior to the GFC much less.

 

[.toe]

Not if you extrapolate this into the long term and nobody on average wages can afford a 'medium priced property' - 30%.
By then the 'voters' will be howling for change. At this point a politican's life becomes easy.

Sure, and there's already a degree of frustration at prices. Though I think this can probably go on a long time before the public as a whole actually understands the problem enough to force politicians into action. Politicians have a way of muddying the view of what's really going on in order to achieve their own ends, especially in a case like this where both major parties are implicated in causing the problem.

 

[Graemsay]

In some of the more unaffordable areas, I'd say Intrinsic_Value's comment about a house worth 70% of the median is already unaffordable, if not out of reach.

Using the figures from my calculations in a post about the Demographia report.

• 70% of the median house price: $444,010.
• Interest only mortgage for this: $31,152.91 per annum
• Principle and interest mortgage over 30 years: $34,795.32 per annum
• Net income: $62,000 to $70,000 per annum depending on earnings split

The mortgage costs assume a 10% deposit.

Repayments would cost our Sydneysider family over 40% of their gross income, and the best case is 50% of their net income. That doesn't strike me as being that affordable.

If mortgage rates hit 9.45% (the peak in 2008) then the annual cost would be $40,457.76, or nearly 60% of net household income in the best case.

And there's a broader question as to whether banks would actually lend on those terms. I'd expect not.

I don't know how affordability issues play out in Australia, but in the UK I reckon that the groups affected are the twentysomethings trying to buy their first home, and thirtysomethings looking to upgrade.

The trouble is that politicians tend to be a bit old, and have benefited from property price rises to a greater extent, plus the older generations tend to have most of their assets tied up in bricks and mortar. So the solutions tend to be seeking to keep values stable, and providing financial assistance, be it the First Home Owners Grant or (over here) shared ownership schemes.

(You can tell that there's something deeply wrong when schemes to help buyers in the UK are open to those earning up to twice the median wage. )

So I can't see politicians trying to move the market downwards. That might change if prices are still high in ten to twenty years time when Generation X and Y are in charge.

 

[Gremlin]

A good, balanced post.

Cash Flow + is a nice situation to be in. I'm curious: Did you buy many years ago? In a regional location? Please share, maybe we can learn from your experiences.

I have a pretty simple formula for buying property:

Must be free standing house on own title
Must be within 10km of Bris/Syd/Melb or 5km of Adel/Per
Must be in a median or higher suburb on a socioeconomic scale
Must be cashflow positive at current interest rates
Must be cashflow positive at 9% (my view on long term interest rates)

...and I've bought heaps that meet that criteria. Most of my purchases were in the 90s, but so be it - I had plenty of people telling me at the time I was stupid for investing in property. I didn't (and still don't) care what happens in terms of capital gains, I've bought a series of income streams at far less than what I thought they were worth.

I bought when it was unfashionable to do so. Unlike the spruikers, I don't believe that it's always a great time to buy property. I don't think now is a great time to buy property as there's not many properties that fit my purchasing criteria. At some point in the future, there will be again. If it's within my lifetime, I'll be buying again.

 

[tcocaro]

I wont get into a slinging match with you but please re-read the following line you wrote as it really did make me laugh..

Thats a great article and its points are unarguable.

unarguable? really... is there such a thing? cammon... I dont think we can place that article on par with facts of life like the sun will rise tommorow.

Also;

I wouldn't be surprised to see steady falls for years. But i think a crash is unlikely. Ive been wrong before tho.

Steady fall for years is a crash and a pretty big one at that. A fall of just 1% together with inflation means a real fall of 3-4% and if this occurs over years the componded affect will be pretty huge and thats just 1%.

Also;

...but there is no such thing as slow, steady gains in property prices. There are long periods of nothing or negative growth and spurts of positive growth. It is certainly not linear.

This is nonsense.. prices can go up steadily just as they can go up dramatically, down, down dramatically, zig zag or dead flat... pick your direction and prices can do it..