"We are not in a property bubble"

[MarkB]

I really couldn't be bothered to read all of the posts in this thread - so it is possible that what I am about to say has been said before (apologies if it has).

What follows is an extract from a recent article.


* * * * *
Sydney growth belies the bubble

If contrarian is right, Sydney will see 5 - 15 % growth in 2004.

The existence of a Sydney house price bubble has neen debated ad nauseam for the past 18 months.

One analyst is arguing that the rate of increase in Sydney home prices has ben remarkably consistent over the past 20 years with out almost in a straight line, except after the 1987 stock market crash when they rose and fell veery quickly.

"That was a bubble," says Commonwealth Securities' head of quantitative equities research Ron Bewley, "just like Canberra in the Whitlam years".

CommSec looked at total returns from Sydney houses, including rents, on an inflation adjusted basis. The broker argues that the rate of growth in Sydney home values peaked in June 2000 and there followed six quarters of flat returns, until the end of 2001. Recent increases in home price growth rates have only bought the market back in line with the long-term trend.

"We've only been playing catch-up in the last 18 months," says Bewley.

It is a view not popular with the boom and bust theorists.

[That is a quote from the article.]

Source: "Sydney growth belies the bubble", Primespace, p. 16, The Australian, Thursday November 27, 2003.

* * * * *

I would have posted the full article, including the graphic, but the PDF file was too big.

Interested parties please PM with an e-mail address and I will send you a PDF copy.

MB

 

[Garry K]

Originally posted by L Bernham
OPM

It suggests to me that the huge capital growth is over because Mr Macfarlane is going to keep raising interest rates to prevent prices rising more.

cheers
LB

Hi LB, I agree with your sentiment, however I have heard the Reserve Bank quoted as saying it does not use interest rates to control the price of houses. Interest rates have a far greater purpose. eg The impact on the value of our currency, and that's why J Howard wasn't pleased with the latest rise, as it pushes up our currency and hurts our exporters. Just look what happened since, the AUD on its way to -75c.

I don't think JH will be happy to see company profits dropping, with expected higher unemployment, just to stablise the price of a house in the burbs.

Garry K

 

[MarkB]

Originally posted by Garry K
Hi LB, I agree with your sentiment, however I have heard the Reserve Bank quoted as saying it does not use interest rates to control the price of houses. Interest rates have a far greater purpose.

Go to the head of the class Garry!

Originally posted by Pitt St
Certainly the "property market" has, for whatever reason, reacted strongly to the last rate rise.

Obviously the "property market" has been a major factor in RBA decisions of late (including the decision not to do anything).

However, we should all remember that, for the RBA at least, there is more to life than the property market (in spite of what the REIA and the HIA may cry about).

If the rumours and speculation are to be believed we will see some very strong GDP growth figures for the september quarter will be announced very soon.

While "asset price booms" may come and go, in between (and even throughout) the RBA is tasked with responding to economic fundamentals in its key role in macroeconomic management.

We should never forget this.

MB

 

[Sim]

Originally posted by Garry K
Hi LB, I agree with your sentiment, however I have heard the Reserve Bank quoted as saying it does not use interest rates to control the price of houses. Interest rates have a far greater purpose.

Hangon - I'm no economist, but I thought that while interest rates were used to control the cost of finance, one of the primary intentions in adjusting them was to keep control over the rate of inflation.

Thus if recent economic data indicates stronger growth in the overall economy than is desired, then a slight rise in interest rates might be used to try and keep that in check.

The corollary that follows would be that since the price of housing is included in the economic data that determines the growth rate (isn't it ?), then if we have a period of very strong house price growth, this would have an impact on the economic data that the reserve bank looks at when determining the prudent options with interest rates.

Thus an increase in interest rates used to keep control over inflation, as a result of (amongst other things), growth in the price of housing, has the effect of increasing the cost of finance, which would have an effect on the affordability of housing, and thus the number of people looking to buy new property, thus having a negative impact on economic growth data, thus causing the reserve bank to consider lowering rates, thus decreasing the cost of housing, etc etc etc

... in other words, although there are a LOT more variables in the equation that can affect the economic performance, at a very crude level, there is a closed feedback loop in operation (we hope !).

I know it's a very simplistic view of economic management - but am I fundamentally wrong ?

 

[MarkB]

Originally posted by Sim
Hangon - I'm no economist, but I thought that while interest rates were used to control the cost of finance, one of the primary intentions in adjusting them was to keep control over the rate of inflation.

Thus if recent economic data indicates stronger growth in the overall economy than is desired, then a slight rise in interest rates might be used to try and keep that in check.

The corollary that follows would be that since the price of housing is included in the economic data that determines the growth rate (isn't it ?), then if we have a period of very strong house price growth, this would have an impact on the economic data that the reserve bank looks at when determining the prudent options with interest rates.

Thus an increase in interest rates used to keep control over inflation, as a result of (amongst other things), growth in the price of housing, has the effect of increasing the cost of finance, which would have an effect on the affordability of housing, and thus the number of people looking to buy new property, thus having a negative impact on economic growth data, thus causing the reserve bank to consider lowering rates, thus decreasing the cost of housing, etc etc etc

... in other words, although there are a LOT more variables in the equation that can affect the economic performance, at a very crude level, there is a closed feedback loop in operation (we hope !).

I know it's a very simplistic view of economic management - but am I fundamentally wrong ?

Are you fundamentally wrong?

No.

But remember that Garry's response was in response to this:

Originally posted by L Bernham
In reality, there is a serious nationwide bubble that the Reserve bank governor has been warning us to watch for a while and since his warnings have gone unheeded he is now left with no choice but to do something about it.
It suggests to me that the huge capital growth is over because Mr Macfarlane is going to keep raising interest rates to prevent prices rising more.

For me, the suggestion from that post is quite clear.

Unless I am mistaken LB is saying that the RBA has raised rates specifically for the purpose of addressing the "bubble" - the actual existence of which has itself been hotly debated.

If this is what LB is saying then, IMHO, he/she is wrong.

GarryK was right to say that interest rates have a far greater purpose.

And you were right to note that property prices are part of the overall economic landscape in which the RBA operates.

MB

 

[Sim]

True, I wasn't replying in the context of the original post, I was replying purely to the quote by Garry K

 

[OPM-addict]

You mean when the RBA meet in that room. They actually do work.

I always thought they turned up 11 times a year to have a very nice lunch.

As for our Asian neighbours. I dont not give a hoot about them.
Usually most major real estate developments is done by a monopoly of a few developers. Some of these developers are also associated with government officials for what ever rea$$on.

These developers definetely overprice these developments.
So there is no or little Capitial growth. But people still are willing to buy them so they may live somewhere.

During the Asian economic crisis there were many developments happening. Unfortunately, not may people could afford these overpriced developments. Halfway through the bank called in their loans to secure the cash the had lent. Because they hadn't finished the development or sold previous developments and the banks were not getting any money back.
Problem was the developers had already taken the money and "lost" it owing both the banks and the contractors alot of money.

The banks then (I can only presume) devalued the development, took the loss against their other earnings and continued on banking. (Again this is how I presume they do business)
By devauling the development they set a precidient. They tared all such developments with this same brush, thus devauling all other similiar properties. Again more losses against profits = less tax.
They still collected the mortgages from people who brought into these developments. They banks are happy, they were getting money.
They continued on banking.

I would not call this situation a bubble. I would call this corruption and mismanagement at a very high level.

LB, try not to look at most of our asian neighbours for this so called bubbled theory.

I dont believe the banks in Australia lend money the same way they used to in Asia. ( Again I can only presume)
They usually want collateral.

So, if people buy these developments in Australia and they get devalued by the banks or whoever then it was a bad investment by them. Hopefully they will learn a lesson and not do it again.

In closing, to all wise investors a happy passive income day.

Respect, Peace, Out.

OPM- addict

P.S. - To futher my education can anyone recommend any writings on just how bank and major developers do business in real estate developments.

 

[always_learning]

In Japan anyway many mum-n-dad investors were burnt by buying investment properties including existing housing at extreamly high prices. Many people purchased apartments at high prices, but the real bubble in Japan was on LAND...you know the stuff that they stopped making and always increases in price.

Banks supported this insantity by providing huge loans based on little of the mum-n-dad capital, all based on the theory of ...dont look at the returns, just look at the captial gains, you can sell in a few years and make a killing. Even city councils where purchasing private property for investments, after the bust I remember reading that the council office staff comment about the billion dollar book loss said "We would have been in a excellent position if property prices kept increasing". Any graph of the price rise in all property classes in Japan post WWII until the early 90's would have shown excellent capital gains, just a few minor blips (such as the 73 oil shock) over a long 40 year period!

 

[OPM-addict]

Hi Always learning,

A lot of the Japaneese banks also bankrolled many of the kaput developments in Indonesia.
Looking at the Jakarta skyline and seeing the half constructed executive apartments building I would say there was a lot of banking executives commiting hari-kari over it.
I was told that the many Japaneese banks went into recievership or were brought out by larger banks so they could write off there non-conforming debt. (I presume they do that over there as well).

At present in Japan what is the sentiment like among the Japaneese about their economy?


Respect, Peace, Out.

OPM-addict

 

[always_learning]

I dont think the executive bankers in Japan take it seriously, they feel they have done the hard yards to rise to the top and they are going to enjoy it. The executive bankers in Japan are doing anythng to avoid government control as they feel there may be some rationalization of there benefit packages ( golf clubs, holiday homes, black limo's, huge retirement benefits etc).


BTW I think the best way forward for the banks is to basic split there shares. Take Mizuho-bank which is the bank I used in Japan, split it into two and reassign the assets along the following lines, "The performing assets", "The junk non-performing assets" into two new companyies lets say "Good Mizuho bank" and "Evil Mizuho bank" for each existing Mizuho share issue two shares in its place, one share in the Good and one share in the Evil.

Existing share holders still hold the same assets, however but distributed into two types of holdings good and bad. When the good and the bad shares trade on the stock market what should we expect? Well if shares are worth $10 each today, after the split then the Good shares would be expected to trade at $9.99 and the evil shares at 0.01cents (or sold to the government?). As we all know investors don't like to see bad assets even when mixed with good assets. So once the bad assets are taken out, it would be expected to boost investor confidence, maybe the $10 good shares will rise to $15 allow the bank to issue more shares to paydown debts.

BTW, Tip of the week Property hit rock bottom this year in Japan...in the last 2 month values seem to are starting to rise for the first time in 12 years. I guess that 100% gains could be possible in the next few years as land values in Tokyo move pass Sydney and towards London values ( I would expect all things being equal that Tokyo should have prices higher the London and lower than Manhattan)

 

[brains]

Intersting tip AL, Are you buying a few properties?
What are the laws like for foreign ownership of property?
And yields?

 

[always_learning]

I am planning to purchase if possible.

Yeilds are excellent 6~15%, interest low 2%, no direct laws preventing foriegn ownership. You can buy if you have the money. Buying costs are about the same as Australia, around the 6% (3% tax, 2% to the REA, and 1% in other costs)

Problem is FINANCE, I am now a permanent resident so I can get a loan as a owner occupier, however investment loans to non-residents would be the big problem. So one of my plans for next year is to buy the biggest house I can finance (in central tokyo, this means a small "single fronted" style house on 100m2 of land) .

 

[L Bernham]

LB, try not to look at most of our asian neighbours for this so called bubbled theory.

OPM
You said that we cant be in a bubble because property always rises 9% per annum.

My reference to our Asian neighbours showed that it doesnt always rise as you inferred, and that property bubbles do occur.

If you don't think there is a bubble now, do you think its possible that Australia could ever have a bubble in property prices, or would you say that whatever the prices are it will always be fair value because the general population making up the market is so much smarter in Australia and so we would never allow prices to get to bubble stage?

 

[OPM-addict]

LB,

If you don't think there is a bubble now?

NO... I there is no bubble just some (not all) overpriced real estate at this moment in time.

Do you think its possible that Australia could ever have a bubble in property prices?

Anything is possible. IMHO...... NO . But some yo-yo will always but the fast-food real estate ( for explaination refer previous post).

Or would you say that whatever the prices are it will always be fair value because the general population making up the market is so much smarter in Australia?

Real estate purchace prices are where willing buyer meets willing seller. Plain, simple and easy to understand.
As for Australia population being smart, dumb, ignorant or otherwise. That a different discussion.

So we would never allow prices to get to bubble stage?

The future a mystery. Today is the present. So open it.


LB, we are not in a property bubble. But we are in a boom cycle.
It is coming to an end is some area and is still strong in other areas.
The amount of good deals still available out there are amazing.
I can't wait to find another and get more OPM.

Respect, Peace, Out.

OPM-addict

 

[Aceyducey]

Let's see:

Unemployment: 5.6% stable (lowest in 22 years)
Youth unemployment: 19.3% falling (lowest in 13 years)

Inflation: 2.6% stable (under control)

Interest rates: 7% ish slightly bullish (2% under long-term ave)

Share market: Recovered more than 30% this year (moving sideways with upward tendency - essentially pre-boom phase)

Property market: Tightening, but not collapsing

Economic Growth forecast at: 4% this year 3.7% next year (one of highest in OECD)

World situation: Recovering...US now states risk of deflation is same as inflation, Japanese property market showing signs of recovery, Europe strengthening, Asia strengthening, with China booming.....

Who sez we're in a bubble?
Where are the factors likely to cause a property bust?

This is one of the BEST of times - and it's likely to get better!

Of course the doomsayers are sure to say - 'things are so good, it can only get worse!!!'

Cheers,

Aceyducey

 

[L Bernham]

Acey Ducey

Ever heard of the term "priced to perfection"?

Sums its up correctly if you ask me.

 

[Garry K]

Originally posted by L Bernham
Acey Ducey

Ever heard of the term "priced to perfection"?

Sums its up correctly if you ask me.

Hi LB

I have heard the term, but unsure what you are linking it to in Aceys post.

As Pauline would say ..."Please explain....."

GarryK

 

[Aceyducey]

Yeah LB's comment makes no sense to me whatsoever either.

i can only assume that LB has not had time to think of a counter-argument...

Cheers,

Aceyducey

 

[OPM-addict]

Acdc,

First let LB "please explain" (thru numbers) that this "bubble" where/when/how/why/ ... will burst and lastly who it will effect?

Personally, I cant see it. This cycle is still going through. In some areas it has gone full revolution and others is still going strong.

Respect, Peace, Out.

OPM-addict

 

[Peter 14.7]

http://www.smh.com.au/articles/2003/12/11/1071125595006.html

Above is an article from todays SMH titled Jobs Galore. All about how good it is. The article is not much BUT my eye was caught by the graph ( unfotunatley not in internet site) showing each time jobs where this level in the last twenty years (82 and 91 I think) the corresponding next two years or so we had a recession?

Is it when unemployment gets this low it triggers it by wages blow out, lack of workers?
Can anyone comment on this aspect as recessions cause busts?

One for the economists among us.

Peter 147