The soft depression that we had to have

[nonrecourse]

Just a little more on the reality check about what is happening in the real world if you can stop your naval gazing


http://finance.yahoo.com/tech-ticker/article/126117/Bailout-Price-Tag-3.5T-So-Far-But-%27Real%27-Cost-May-Be-Much-Higher?tickers=AIG,FNM,FRE,XLF,^DJI,^GSPC,C

As Peter 14.7 pointed out some are not geared to 80% or more. If your gearing is under 50% you may survive. If your gearing is under 25% or less you might even prosper if you keep your gun powder dry for another year

 

[stingray]

Peter,
What you are saying is correct. But what you may not realise is that lending practices are starting to go back to what they were 25 years ago. The non bank lenders are hardly the force they were 1 or 2 years ago (they are in real trouble actually because they have relied on cheap overseas debt which has now dried up)), low doc home loans are being 'ridded' from the market, getting a loan is not as easy as it was 12 months ago, banks are being much more cautious these days and using stricter criteria. The ludicrous practices of the last 10-15 years are changing. I personally feel it is too late for the banks. The damage has been done, and they are going to have to pay for these asset bubble's. Their will be no hiding for them (especially Westpac, St George and ANZ who have taken extra risk by 'self mortgage insuring' in recent years). They will be extremely exposed to badt debts as the RE markets move lower. Some of them (and possibly all of them) may go under. If this happens, they will be nationalized. Eventually, everyone will have to have large 'cash deposits' or substantial equity to get a home loan. 20% mortgage insurance will not be enough. Speculators will not be catered for accept those with very strong net asset positions).

Non recourse,
I totally agree with you about gearing levels. This is the key to survival. Those under 50% gearing will likely survive. Those over 50% are in serious danger. Those with over 60% I am very sure that that the game will be over for them, they will eventually lose everything, it amy happen inside 2 years. I doubt it will take longer than 4 years.

 

[urchin]

@ Peter - good on you mate--it sounds like you are in a very enviable position! but i don't think you are the norm. you are not over leveraged and you are cash flow positive, you are a professional. for professionals you might well be the norm, but i don't think professionals are the norm for the property market. everyone, it seems, has become an investor and that is one of the strongest indicators of a bubble--just think back to the heady dot com days....

i think that, if the housing market tanks (instead of simply stagnating for 5-7 years) it will tank because:

1. reckless banks gave heaps of money to reckless amateur investors based on overinflated valuations

2. because individual owners made bad financial decisions on the basis of over-inflated paper valuations of their own homes. whether this is overextending themselves to get the first home, taking out "equity loans" against equity that didn't really exist or whatever.

the trigger will be unemployment. if unemployment rises appreciably people without the necessary margin of safety will be forced to liquidate and that will have a cascade effect, eroding what little confidence the housing market retains. how far unemployment will have to rise before it hits the tipping point... i don't know. it may have to reach 25% before it effects you, but i think it is safe to assume that much lower figures would still dramatically impact sizable segments of the population.

in any case, don't interpret my bleak view of the market as a whole as any sort of desire that people on this forum suffer--i have nothing against wealthy people and, given the opportunity, i imagine i wouldn't mind being wealthy myself. my comments are simply based on what i see and read as well as what limited experience i have in finance-related endeavours.

 

[gman65]

Current concerns:

Remember that renters have to have income to pay rent. Unemployed they have no income. Maybe they will have to stack up in one place, reducing overall rental demand?

Certain segments of the market seem very stagnant to me, with 100's of properties in the $500k+ bracket especially (out of FHB reach). I cannot see in a falling economy, less money being generated in the economy, even with very low interest rates, people will be upgrading to those sort of properties as buyers.

If these cannot be sold at acceptable prices, they no doubt become rentals on the market to hold the property for better times. This gives a greater supply, and people can shop around for a better/low rent.

Over 100,000 people will be becoming unemployed if we go from current unemployment to 6%. How do they pay their rent ?

I'm not trying to be too negative, but just not convinced on the whole "investor nirvana" coming, it just sounds too easy (low rates, large rental demand, easy profits). Any thoughts?

 

[Shadow]

The reality is there has not been a financial melt down like the world is experiencing this time since 1929. Talk that here in Australia the worse case scenario is a 1970's like recession or a 1987 crash is just ludicrous.

We are only at the beginning of a very long and painful adjustment. I am not anti-property, my continued concern is with the mentality that you can continue to finance your property acquisitions with 80% borrowed funds. Yes interest rates are going to continue to decline and yes rents will continue rise and the yields will go up to historical means, for residential property of about 7-8% during the prolonged soft depression.

You are seeing the results of greed and now fear that is taking hold of every asset class. If things really turn nasty then some form of rent control will be implemented like what occurred in the dirty thirties here in Victoria.

The nonsense about how the stock market/aka/ property markets bounced back in 1931 and if you were not in the market you missed out beggars belief. Share values and property markets did not recover their pre 1929 value until 1953/54.

There will always be property nuggets that some people will point to during the hard times as proof that property is a safe sure bet. In the next two years there will be a lot of purchases undertaken with the idea that time in the market beats timing. What a lot of property disciples are going to discover is that that so called golden nugget is nothing more than fools gold.

The laws of sound property fundamentals is all about numbers. In the recent past this has been corrupted by the negative gearing slant. In the 1990's it could be justfied. With the tax rates today, plus the state government and council bandits the equation has changed.

In the recent past I have been able to call the stock market crash because of all the signs using the internet. Until recently a lot of SS posters scoffed when I spoke about the reserve bank dropping its rates to 2%. I note at the moment the call is for the reserve rate to drop to 3.5%

We also have a lot of misinformation put out by the real estate industry, the banks and the government continuing to spin the Australia is different our banks and property markets are rock solid. If you wish to continue to believe in a fairy tale......

Most SS investors are exposed because they have too much gearing. Gearing is a double edged sword. In good times it multiplies gains in bad times it eats you alive particularly when faced with a collapse in values.

Hi NR,

All very interesting, but none of that addresses the points I made in my post that you were responding to. Let me remind you...

1. For prices to drop 40% we would need to have massive forced sales. Unless you are a forced seller, why on earth would you sell for a 40% discount?

2. What will be the cause of all these forced sales? High interest rates? Don't think so. High unemployment? Possible, but how high would it need to get? We have had much higher unemployment in the past and house prices just kept rising.

3. For prices to fall 40% there needs to be no buyers at 5% down... no buyers at 15% down... no buyers at 25% down. There are plenty of buyers ready to jump in right now (before any significant falls) and even more ready to jump in at 10% down. How many people are going to wait years for a 40% fall? A lot of people just want a house to live in and will buy when they can afford it.

4. Investors are going to be seeing a lot of cashflow positive opportunities next year without any significant falls in house prices required. Why sell for a 40% loss if you're cashflow positive?

NR - I'm, really interested to hear what you think will trigger this big crash. What will happen in Australia to force enough people to sell at a 40% loss that it causes the Australian median house price to fall 40%?

Cheers,

Shadow.

 

[Peter 14.7]

Hello Urchin and StingRay

Good points but what I read was if loans are going to tighten up that much then no more new housing and rents will, to be blunt, fricking skyrocket. Now they may put in rent control.

In this case we are back in 1930's and I admit I dont follow enough to have an opinion. Only time will tell. If so we are all stuffed.

I cannot argue for or against this as no-one can predict the future. The US is clearly in trouble. China seems to be addressing the issue. Europe tied to US via loans. SO far it seems like 1987 again not 1929 to me.

Again, time will tell, Peter

 

[evand]

I'm not sure what your real world experience in property investing is but i think this is wrong.

If a 40% fall occurred within 6 or 12 months (a crash) it would be correct with the forced sales scenario but my opinion is we will see a large fall over a few years, which is entirely possible.

I dont know if its going to be 40% but it aint going to be pretty and will be large, even ex inflation.

As in the 90s property values were eroded by stealth , no one except the switched on really notices it happening over say 5 years.

Hi NR,


1. For prices to drop 40% we would need to have massive forced sales. Unless you are a forced seller, why on earth would you sell for a 40% discount?

 

[Shadow]

But what you may not realise is that lending practices are starting to go back to what they were 25 years ago.

Completely untrue. You can still get 100% loans, interest only, shared equity, vendor finance, low-doc, both partners income considered, negative gearing, interest capitalisation etc. None of this has gone.

The non bank lenders are hardly the force they were 1 or 2 years ago (they are in real trouble actually because they have relied on cheap overseas debt which has now dried up))

Really? You'd better let John Symond know. He keeps dropping the Aussie Home Loan rates below the bank rates, and preempting the RBA cuts! He must not have got the message about the cheap overseas debt drying up...

Those under 50% gearing will likely survive. Those over 50% are in serious danger. Those with over 60% I am very sure that that the game will be over for them, they will eventually lose everything, it amy happen inside 2 years. I doubt it will take longer than 4 years.

Do you mind if I ask about your investment experience? What have been your major investments over the past say 5 years, and how have these played out? What do you invest in today?

Cheers,

Shadow.

 

[willair]

It remains to be seen if the economy can turn around, if employment can hold up and if interest rates can stop the 'rot'. However, if it does not turn around, specufesters are going down at a rapid rate. PI's with 60% LVG will have lost everything within 20 months. PI's with 70% LVG will have lost everything with 15 months. And specufestors with 80% LVG will have lost everything within 10 months. Specufestors or OO's with 90% LVG or more may well be in negative equity already !

Perhaps highly leveraged PI's should consider lowering their gearing ratio's for their own survival, which I suspect many are doing already. I am sure Bill and the other bulls will disagree.

You seem to miss a few items,one is what about the property investors
that don't owe the "Banks"anything ,and have not bought any property
is over 5.5 years?they would not give a toss what you think..

Then as iv'e said many times real estate has markets within markets some
property has not gone backwards in 15 years,it's about time you start
examining the facts and figures in some locations and we all believe what we want to believe..

This is another item you don't understand is that,"Median Prices can still Rise in a Falling Market", they did in the mid 1990's in inner Brisbane but it took investors several years to work that out??,the lower end drops as does the high end properties,but the mid range still goes up,just check the cheapest sales ,then check the high end sales,both drop in a down market but the mid range still holds ground,we have had a decade of strong growth and 2007 was one of the steepest growth periods,i don'tcare what happens next,iv'e seen what is now happening in Australian property investing 2 times in my life this time will be no different,just part of the cycle, you only have to look how much money has been lost on the ASX over the past 12 months just part of the cycle ,still a few
"BLACK SWANNS to land yet..imho willair..

 

[evand]

Property investing is simple. People try to make it complicated.

What i mean by timing relates to where we are in the curve (cycle) on both price growth and rental yield.

Buying at, near top or on the way down of the curve on low yields is asking for trouble. Its easy to pick as the price grows, the yield falls. As the price stagnates or falls the rental yield grows.

I'd bet that most of the people who have made an absolute killing from property on this forum have bought at the right in regards to the above and the ones who struggle with neg gearing and falling prices (neg equity) have bought at the incorrect time.

Just my opinion of course but it works for me.

In all due respect, thats a matter of personal opinion, and a rather simplistic approach that may serve YOU well but not others.

 

[nonrecourse]

A very comprehensive look at what brought down the gang of five on wall street.

http://www.portfolio.com/news-marke...2008/11/11/The-End-of-Wall-Streets-Boom#page1

 

[stingray]

Peter,
'Rents' is an interesting one. 'Rents' certainly are not overvalued like house prices are and if anything they are still behind fair historical values in some cities
(in particular Melbourne). Rents are currently behind wages growth by about 10% and about 10% in front of CPI. Generally, there is fair reason to be bullish on rents. Certainly longer term, rents will do well. But in the shorter term, if unemployement goes up dramatically and we go into recesssion (there is still a strong possibility of 'deep' recession), then rents may suffer. but longer term, the fundamentals look good.

 

[Peter 14.7]

Property investing is simple. People try to make it complicated.
.

Great Post!

In the end, a good friend and very sucessful investor mate of mine says this:

Your either a dooer or a gunna.

"Gunnas" are going to (gunna) invest when it's right, which is when they have more security, market up, market down, have money, time, experience, etc...

"Doers" simply do it and accept that in taking action they may make a mistake but if they do nothing.... then they made a mistake straightaway.

Peter 14.7

 

[Peter 14.7]

Peter,
'Rents' is an interesting one. 'Rents' certainly are not overvalued like house prices are and if anything they are still behind fair historical values in some cities
(in particular Melbourne). Rents are currently behind wages growth by about 10% and about 10% in front of CPI. Generally, there is fair reason to be bullish on rents. Certainly longer term, rents will do well. But in the shorter term, if unemployement goes up dramatically and we go into recesssion (there is still a strong possibility of 'deep' recession), then rents may suffer. but longer term, the fundamentals look good.

I am please to see you say that.

And I ackowlege that if my rents were paid by shiny 30 something investment bankers I would be worried. Thankfully I am working class borna nd bread and i stick to my roots. All my tenants are welfare assisted and in simple jobs or trades that dont go away. My ips are not $500k plus but that the deal.

Peter

 

[quoll]

but i dont see it as good value yet. another 10% down and it will be marginally acceptable. 20% down and i will be able to buy without regrets.

why wait? just run around and look at enough houses and put in some low offers and see what happens, if you put in enough offers you are bound to end up with something around 10% even 20% less than current value.

 

[eternit]

why wait? just run around and look at enough houses and put in some low offers and see what happens, if you put in enough offers you are bound to end up with something around 10% even 20% less than current value.

In my experience this works really well in Western Sydney and south east Brisbane but not in Canberra. If I put an offer for any property under $20K of listing price even if the listing price is $500K+, the owner wont look at you.

I dont maybe the people in Canberra are more greedy

 

[quoll]

As in the 90s property values were eroded by stealth , no one except the switched on really notices it happening over say 5 years.

My current punt on property is on this scenario, a slow erosion of price due to stagnation over time.

What proof have I got. Bugga all.

But from talking to agents and other investors. Currently houses are getting sold by owners that can't afford them, most are not forced sales but if they didn't sell they would have been forced sales. Devine seems to be taking back a lot of houses in outer suburbs. The OO decide to keep the new cars and new furniture and new tv and go back to renting.

Plenty of investors seem to have houses up for sale but they are not selling. Not many offers and the low offers are being rejected. If most don't need to sell but would like to sell then you will see properties selling at 10% discount, but how do you measure the discount is it against bank values or the orginal listed value, where the selling was trying to get top dollar!

There will always be OO buying because they don't care what the market is doing they only care about their deposit and what they can afford, do they consider their job secure? Most do.

It will be fun to have a look back at some of these posts in 2-3 years and see just what we were thinking compared to what has happened.

Enjoy!
Graeme

 

[quoll]

In my experience this works really well in Western Sydney and south east Brisbane but not in Canberra. If I put an offer for any property under $20K of listing price even if the listing price is $500K+, the owner wont look at you.

I dont maybe the people in Canberra are more greedy

maybe they just have cushy (secure) gov jobs and don't need to sell but would like to sell?

 

[BayView]

I did post in this thread earlier that things in our area are still "holding their own".

Latest update:

Just got off the phone to one of the local real estate agents near us - we bought our PPoR from him in 2000. Very experienced agent and straight shooter.

I asked him what's happening (in our area), and he said the buyers are gone, more stock is coming on the market, a few "bank sales" as well.

Across the board about a 15% drop he reckons.

Time to buy, kids. Not time to sell though.

One developer had 4 townhouses for sale last xmas; sold 2 @ $550k, and sold the other 2 at auction last week for $450k and $435k. Needed to sell.

Imagine the two current owners who bought last xmas if they went for a revaluation right now.

There are still sales, but less of them, and the prices for anything other than really quality properties are not that good.

People are basically sitting on their checkbooks for the time being.

 

[J Martin]

Hi NR,

All very interesting, but none of that addresses the points I made in my post that you were responding to. Let me remind you...

1. For prices to drop 40% we would need to have massive forced sales. Unless you are a forced seller, why on earth would you sell for a 40% discount?

2. What will be the cause of all these forced sales? High interest rates? Don't think so. High unemployment? Possible, but how high would it need to get? We have had much higher unemployment in the past and house prices just kept rising.

3. For prices to fall 40% there needs to be no buyers at 5% down... no buyers at 15% down... no buyers at 25% down. There are plenty of buyers ready to jump in right now (before any significant falls) and even more ready to jump in at 10% down. How many people are going to wait years for a 40% fall? A lot of people just want a house to live in and will buy when they can afford it.

4. Investors are going to be seeing a lot of cashflow positive opportunities next year without any significant falls in house prices required. Why sell for a 40% loss if you're cashflow positive?

NR - I'm, really interested to hear what you think will trigger this big crash. What will happen in Australia to force enough people to sell at a 40% loss that it causes the Australian median house price to fall 40%?

Cheers,

Shadow.

Remember, it only takes a few forced sales to revalue a whole area down, so 20% plus is not out of the question( I personally don't think we'll see 40%) if we see a significant increase in unemployment. Just as the "equity" and "worth" of your house increased based on a small number of people bidding up prices on the way up.

IN regards to low IR's making property cashflow positive? Do you think IR's are going to stay low forever. At some point, they will go up to fight the future fight against inflation. So all these investors will find themselves massive cashflow negative in a few years time anyway. The "honeymoon" investing is not the most wise investment when you buy an overpriced house at record low IR's. There'll be definate pain instore.

The inevitable must happen. House prices must correct.