Unemployment is not a threat to property market.

[topcropper]

You remind me of one nice guy who used to post to this forum - Tibor Bode. Back in 2001 he was arguing that world is going to fall apart because IT people were loosing jobs by crowds. I still feel sorry that I failed to convince him that property boom is underway.

I repeat the same I told Tibor back then - One in 30 people lost their jobs. You are that one. You are not that important. Important is that 29 people did not lose their job. Important is that sharemarket crashed and money from there are going to be poured into property market. Important is that there is no more land releases in Sydney.

Sounds familiar? Applied to today - add rental crisis and housing industry in ruins.

I am so pleased that I am going to be busy from tomorrow and will not have time to write to this forum for a while. So depressing to talk to people who fail to see the blatantly obvious.

So who were you back then on the forum..??

I don't understand why someone would come back to a forum under a different nick and start bragging about good calls made.



As for the blatently obvious..?? All I know is that Australia generally outperforms the rest of the world in boom times, and we generally bust harder than the rest in the bust. This has all happened before. It's all there in history. Plus, our boom extended an extra 12 months thanks to the commodities boom so we haven't even seen much of a bust yet. We are 12 months behind everyone else.

Another thing. Australia is one of the few places that suffers from a commodity bust. Most other countries are now enjoying lower commodity prices.

Margaret Lomas made an interesting point in the Feb 'Your investment property'. She pointed out that the average US household has debt levels 3.6 times wages. Australian households have debt levels 7 times wages. Any deleverageing will effect us as much as anywhere else.


Essence, I'm almost convinced your a troll from that unmentionable forum, what is it..?? World home cost drop or something, having some fun with our eternal optimist members. Your incredible bullishness is unbelievable considering what is so blatently obvious.

See ya's.

 

[Aaron Sice]

i don't think Sydney is the worry if unemployment jumps.

yes, of course there will be more people unemployed in Sydney vs , say, Adelaide because of the population base.

I worry about Perth and Brisbane if state revenues drop as a direct result from continued distressed commodities prices.

if more mines keep being put on hold, and more people keep pouring into the state looking for this work-that-ain't-there, then Perth and Brisbane UE figures might be skewed towards the negative in a few months time - but as rightly said, it's an indicator of where we've been, not where we're going.

i'm still not convinced that the stalling of the US economy will have major global ramifications. yes, there will be knock-on effects, yes there will be issues, but globalisation seems to have created regions of strong economies. The world aint US-centric anymore, but their region will be, and of which i think that the UK is torn between the two (EU and US).

anyhoo, my point is that our region is still doing well. Australia is stagnant but the old India/China argument still holds true, regardless of how "passe" it all is - we got what they want, and they want it bad.

 

[evand]

**Deleted insults and sarcasm**

Essence,

You are forgetting 2 important points in your post.

1. There is up 2% per annum of the property value in costs associated with owning a property. You can add that to your loan interest amount. (and where can you get 5% interest?)

2. You are buying close to the bottom of an interest rate environment. Rates will, of course, can only head up eventually. I know you can fix, but when they reset that's where the pain is if yields havn't increased accordingly. And i don't think they will if you're getting 8% gross now.

3. The buying activity you are seeing is caused by government/RBA intervention to prop up the economy and property market. It wont last long and will actually extend the period of flat or falling prices when the artificial stimulus is finished.


OK, that's 3.

So when I stocked up on property returning 8% on average (and rising) while paying around 5% in interest (and falling) it surely will send me broke. Thank you, I was completely ignorant that profits actually might hurt.

 

[evand]

Great post and i agree entirely. Kudos.

Unemployment is only just starting it's run. The real economy is just starting it's slump.

Essence, I reckon you have made a complete balls up of your timing. Good luck, because you will need it.

Finally, Sydney will be hit the hardest in the slump. It has almost no manufacturing left, and benefits least from commodities. Sydney is almost entirely a services economy with financial services as Sydneys biggest industry. Financial services may never recover to previous levels.

I wouldn't be gearing heavily into property until the share market starts it's recovery. Too risky other wise as you can't have booming property prices with poor business health.

See ya's.

 

[HiEquity]

3. The buying activity you are seeing is caused by government/RBA intervention to prop up the economy and property market. It wont last long and will actually extend the period of flat or falling prices when the artificial stimulus is finished.

Not so sure about this one. We are still well above other economies in our interest rates - there is still plenty of room to move. The risk of high unemployment is very real and I don't wish to down play it but we have to remember that if unemployment keeps rising then the RBA will keep dropping - bugger the longer term inflationary consequences - employment is more important as we have seen in other countries.

If interest rates get down to US/UK levels due to high unemployment and these IRs are available to most people in the market (as most loans are variable unlike elsewhere) then the path of property prices isn't as easy to predict as some might argue. There will suddenly be a lot of investors buying positively geared property all over the place (as we know!) and this will add a lot of demand. It may or may not be enough to stop prices dropping in the short term (as per US / UK) but it will definitely put a floor under values (esp in the cheaper end of the market where most of this forum seem to invest) and provide longer term price growth on the back of the resultant inflation.

If you end up unemployed you will do very badly out of all this but there is a lot of upside for those with stable personal cash flows... even with higher unemployment. It's never that simple!

 

[yorke]

. (and where can you get 5% interest?)

You are right. I haven't seen any 5% either but did see some 4.99% offers.

 

[BayView]

Otherwise everyone would sell their shares and the company would be just about worthless?

What intrigues me is if the share price is tanking, and no-one wants them anymore, and everyone wants to sell them, who are the buyers?

Surely at some point everyone stops buying these supposedly dud shares, and the owners are left holding a worthless share?

 

[Oynas]

Relax, Essense. Flashing your net worth around like that and putting others down looks like you're letting emotion override reason. We all make mistakes. I think you are right in that a 0.1% increase in unemployment seems small and may just be the result of random fluctuation. Nevertheless, this global economic recession looks very bad and it's not easy to ignore it. We'll have to wait and see.

WA's unemployment rate actually fell in the latest figures. While 100 workers losing there jobs is high profile and may effect public sentiment it does not have a huge impact on statistics. I think a lot of businesses in WA (including mining) had so many problems attracting quality staff they will try to hang in there and not lay people off.

So they would reduce their dividend payout amounts and watch their share price drop?

This is what I don't like about urban property. They are linked to share market performance. If you want to be a pure property investor, you need to invest in rural areas where land is not affected by company profits/losses. Otherwise you are a closet share investor.

Yes but surely they cant keep doing this, there will come a time when they have to cut staff to keep dividends at a reasonable level.

If dividends drop, share prices will drop since investors don't want to hold low-yield investments and will sell the shares off.

If share prices are low, management will be worried other firms with deeper pockets will buy them out, restructure the firm, and possibly fire them.

Firms usually borrow money from banks using their share price as security, so lower share price means credit may be harder to get.

Australia is not a land filled with cheap labor. Our workers are expensive. A very easy way of freeing up money is to fire people.

If hardly anyone is spending then having workers standing around doing nothing is a waste. Imagine you had a furniture store that has one customer per hour, yet you have 10 salespeople that you employed during the boom time. If one customer comes in every hour then you only need one salesperson. If you had ten then it's better to fire nine of them.

Unfortunately many Australians now are just not spending much. They are hoarding money and paying off debt. This is bad for employment and bad for the Australian economy.

The RBA's lowering of interest rates and the FHOG will help keep property prices up.

Whether property prices go up or down depends on the relative magnitudes of forces pushing prices up (FHOG, lower interest rates, etc) and forces pushing prices down (unemployment, high interest rates, etc).

What intrigues me is if the share price is tanking, and no-one wants them anymore, and everyone wants to sell them, who are the buyers?

Super funds. Not only do they always buy but they also rent out shares to short sellers.

 

[evand]

I'm talking about normal resi loans, not honeymoon rates or other fancy stuff to suck newbies in. Who then get into trouble when the loan resets to normal variable rates and/or includes useless bells and whistles/hidden fees to make up for the low rate.

http://www.somersoft.com/forums/showthread.php?t=48829

You are right. I haven't seen any 5% either but did see some 4.99% offers.

 

[coastymike]

Empty vessels make the loudest noise.

 

[evand]

?????

Empty vessels make the loudest noise.

isnt this character limit annoying?

 

[Bargain Hunter]

This is what I don't like about urban property. They are linked to share market performance. If you want to be a pure property investor, you need to invest in rural areas where land is not affected by company profits/losses. Otherwise you are a closet share investor.

Rural Residential Investement - large areas with fewer people where forces outside of anybody's control (floods, drought and locusts) can reek havoc on the returns at anytime. Where the failure of one or two businesses results in the loss of the community.

Urban Residential Investment - Where a plethora of businesses set up shop to support a burgeoning economy which once in a while hits a speed hump.

People who invest in the suburbs aren't investing in shares (closet or otherwise) they are investing where the people are, this brings a stability to their returns which rural investing cannot.

Andrew

 

[coastymike]

Terribly annoying. Just commenting about people who generally boast about something sometimes not having the very things they boast about. Thus the comment. Not directing it toward anyone just a general observation. And one thing money can't buy is class.

 

[stumunro]

And one thing money can't buy is class.

I think you are spot on coastymike

 

[fald1]

can so buy class: Scott Alexander
so much intelligence and integrity


edit-structural heh

 

[MichaelW]

Finally, Sydney will be hit the hardest in the slump. It has almost no manufacturing left, and benefits least from commodities. Sydney is almost entirely a services economy with financial services as Sydneys biggest industry. Financial services may never recover to previous levels.

Hi TC,

I know Evand Kudo'd you for this insight, but I still disagree with your projections for Sydney as I outlined in post 38. An article today supports my proposition that Sydney is actually already hurting more than most and set to outperform the resource dependent states in the ensuing downturn. There's not much scope for NSW to get worse, and all the monetary policy actions will support NSW the most.

If you were trying to pick winners and losers at a state level during the next 12-18 months I would have NSW at the winners end of the spectrum, which seems the opposite end to where you and Evand would have them. Just some more food for thought.

Here's that article:

http://www.smh.com.au/news/national/nsw-in-recession/2009/01/18/1232213448316.html

Cheers,
Michael

 

[Token Funder]

There's not much scope for NSW to get worse, and all the monetary policy actions will support NSW the most.

Possibly, but Access it ain't exactly painting a rosey picture. They seem to be saying NSW is stuffed, but on the upside a) the rest of the country will be equally stuffed soon enough and b) getting stuffed first means NSW should come out of it first.

From the article:

The good news for NSW residents was that their days at the bottom of the economy heap might be numbered, as weakness infected the rest of Australia.
"The combination of a commodity price collapse and a recession should be a great leveller," Mr Richardson said. "By 2009-10 most regions in Australia are forecast to be travelling at much the same pace."

A falling dollar would help the state's manufacturers and tourism operators to recover, while tumbling commodity prices would reduce the relative attractiveness of the sun-belt states and help stem the flow of NSW residents leaving the state.

Falling rates would help relieve pressure on mortgage holders, and stagnant or falling house prices could make NSW a more attractive place to migrate to.

"Lower interest and exchange rates mean the preconditions for NSW's eventual economic revival are increasingly in place. We think - finally, finally - the worst will soon be over [for NSW].

However, 2009 was shaping up as a difficult year in NSW, as the economy contracted at "US-style rates". "NSW is drowning, not waving, and 2009 will be a long year. Pretty much anything that could go wrong in NSW has gone wrong," Mr Richardson said, pointing to finance sector job losses, a too-tough mini-budget, late rains for wheat crops, a stagnant housing market and flagging exports

Of course, why such "experts" don't recognise the prophylactic effect of the internationally recognised IIDH Paradigm is beyond me

 

[MichaelW]

Possibly, but Access it ain't exactly painting a rosey picture. They seem to be saying NSW is stuffed, but on the upside a) the rest of the country will be equally stuffed soon enough and b) getting stuffed first means NSW should come out of it first.

Yep, that's about the gist of it...

Hey, TF, at least banks have heaps of scope to drop rates to distressed mortgage holders now:

http://www.businessspectator.com.au...n-Kevin-heaven-$pd20090116-NBQUW?OpenDocument

The banks are like kids let loose in a lolly shop: they are paying as little as 100 basis points over the bank bill swap rate (BBSW) and getting plenty of money at that price. (BBSW is Australia’s version of Libor; yesterday it was set at 3.86 per cent, 40 points below the RBA cash rate, in anticipation of a rate cut in February. Usually BBSW and cash are roughly the same.)

On top of that margin, the banks have to pay the government 70 basis points for the guarantee, but it’s worth it. Oh yes, indeed.

So, if the BBSW pretty much tracks the cash rate, then we can expect 2.5% BBSW in a few months time. Add 170 points for bank funding costs makes their cost 4.2%. Add another 150 points for spread and they can charge mortgage holders mid 5's. Happy days! And if that 100bp cost above the BBSW eases back to 10 points odd as before then that's another 90bp they can pass on. Anyone ready to suggest high 4's for the bank mortgage rates?

The thing is, they're already offering low 6's as they are getting it back from their commercial customers to keep the moms and dads happy. Today, their funding costs should be around 6% (4.25% + 1.7%), so they should be lending at 7.5%+ to maintain a healthy spread. The fact their landing rate is sitting at 6.0% odd after pro pack discounts suggests they're massively discounting it to homeowners. If they keep this up, all the way down to a cash rate of 2.5%, then its happy days for mortgage holders. I guess the ever cheaper depositor cash rate is helping in their funding mix, but not so good for cash holders...

Cheers,
Michael

 

[BayView]

Terribly annoying. Just commenting about people who generally boast about something sometimes not having the very things they boast about. Thus the comment. Not directing it toward anyone just a general observation. And one thing money can't buy is class.

I think the use of that comment in your context is off the mark Mike.

from my memory, it refers to people with fewer brains being the loudest in the room.

 

[Token Funder]

So, if the BBSW pretty much tracks the cash rate, then we can expect 2.5% BBSW in a few months time. Add 170 points for bank funding costs makes their cost 4.2%. Add another 150 points for spread and they can charge mortgage holders mid 5's. Happy days! And if that 100bp cost above the BBSW eases back to 10 points odd as before then that's another 90bp they can pass on. Anyone ready to suggest high 4's for the bank mortgage rates?

The thing is, they're already offering low 6's as they are getting it back from their commercial customers to keep the moms and dads happy. Today, their funding costs should be around 6% (4.25% + 1.7%), so they should be lending at 7.5%+ to maintain a healthy spread. The fact their landing rate is sitting at 6.0% odd after pro pack discounts suggests they're massively discounting it to homeowners. If they keep this up, all the way down to a cash rate of 2.5%, then its happy days for mortgage holders. I guess the ever cheaper depositor cash rate is helping in their funding mix, but not so good for cash holders...

Cheers,
Michael

Not quite so cheery, I'm afraid.

The (90) bill rate already reflects expected moves in the cash rate so in this environment it's essentially a spread relative to what the cash rate is expected to be rather than what it actually is. We're not really seeing any evidence of a return to a cash/bills spread of *anywhere near* 10bp, as much as I would like to be saying otherwise.

The pricing of mortgages is interesting particularly when you compare it to commercial credit. And you're right, a cynic *might* suggest that while the government is doling out guarantees and providing liquidity, banks are keeping some of the pain away from the group carrying the largest number of votes and capable of delivering the Feds the greatest amount of grief.