Why it really is 'different here'
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If you extrapolate current trends forward but now argue they can't go on indefinitely, aren't you simply saying the trends aren't sustainanable but don't know when they will cease?
Unless of course you have a basis for formulating a time for the end of the "cycle" (a phrase I consider a pretty lame get-out-of-jail-free-card).
Doesn't it follow that next year is as likely as any other year in the future?
Only people who are buying homes have anything to do with demand in the home buying market. What have your grandparents to do with it? Are they potential homebuyers?
They’re not planning on moving. But if they did, they would have over $1M to go shopping with from the sale of their home. Nothing to do with income or credit supply for them.
Uh... no. Only if there was a buyer who had enough income to afford to buy their home for $1 million.
I doubt that a FHB will be able to come up with the cash.
Maybe the couple who just sold their old PPOR for $650k.
Or maybe the developer who plans build two townhouses.
I guess you could call it a supply and demand thing.
Maybe the couple who just sold their old PPOR for $650k.
Or maybe the developer who plans build two townhouses.
I guess you could call it a supply and demand thing.
Max,as we both know during the good times"greed overtakes fear"and this is understanable in so many different ways, soap box speakers tell anyone can be a billionaire,just pay them 10k and jump in line with all the other punters with stars and $$$$ signs in their eyes,there is no such thing as money for nothing everything comes with a price tag,would you trust any F-P that tells you they can beat Mr Market no one ever has and don't be so sure about the silent money factor that is out there i know several older investors that are just sitting and waiting,they have their own simple plans that work in past times as they will work again,just a matter of time no one has ever gone broke by making a profit,you can have all the doom and gloom in the world but each day some makes money-it just might not be you ..willair..Uh... no. Only if there was a buyer who had enough income to afford to buy their home for $1 million.
Okay, and who did they sell their old home to? And who did those people sell their old home to? And they? At the end of the 'chain' sits a FHB or an investor, and the amount of money they can bring is wholly a function of income.
The amount of money that FHBs can bring to the market is absolutely important to the whole system. The entire value of the entire housing stock rests solely upon the amount of new money coming into the system, from FHBs, Investors and Mover-Uppers. If this amount is diminished, the value imputed to every other home diminishes also.
I had thought this was a fairly elementary concept, but if it isn't, I can try to dig up some articles that might help you understand?
I have. Consistently for the last decade.
Buffet and Munger have done pretty well over the long term too haven't they?
Phew! It's a good thing there are cheap properties in every capital city in Australia then, doesn't really matter what the median figure says, cheap properties exist! That'll still be the case for a long time to come as well, whether it be cheap houses in the outskirts, units etc. There were cheap houses on outskirts 50yrs ago and there will be cheap houses/units on outskirts 50yrs from now.
Income as well as other new money from savings, credit, new migrants, government grants, etc.
BTW, I was not aware that income was decreasing across this booming population.
no - your argument is flawed. do you like apples?
someone on a median income with a TON of equity can have a median mortgage in a very expensive suburb - they might have a $1mil home and brought $700k to the table because they bought 20 years ago in an average area when they were still on an average income and market forces have driven the prices up in those areas as people brought existing equity into the area from other homes.
EVERYONE brings some form of equity to the table. if they don't, it's a 105% loan and if everyone does this, it causes specualtive bubbles.
so the price paid for that $1mil home ISN'T relevant to income - and this scenario isn't theoretical.
it's called "cashing in your chips", "downsizing" and all those other lovely terms used for when BBs buy a smaller, better appointed house in a better area on a govt wage bringing a ton of equity to the table.
how do you like them apples?
Good for you ,so lets go back ten years too this time in 1998 just when property was starting to run skywards,the dot com bust up did not worry you or you were just too smart and could see the stop signs, not many did Max but you seem to be a foward thinker,so you saw all this subprime mess on the cards?,the worldwide money markets can't defy gravityI have. Consistently for the last decade.
forever and depending on what area you invest in,im half way through
a book called the "Black Swan"and it will change the way i invest from now on,i'm just trying to pick which area the next B-S will come out of nowhere from,as for Munger-Buffett you want to read the books again
because they also lose money at times,and time gives it back to them.
and for a simple stand alone investor like myself,it's my way or the highway,will you buy when the all ords hits 3499?,i will.imho..
willair..
See my previous post. You too suffer from a misunderstanding of how markets work. That's cool, I'll try to explain a few of the basics for you. My assumption would have been that people here were well aware of these, but I've now been corrected.
Let's start with this:
1) Money out = Money in
a) Think of the housing market like a big bucket with water in it. The amount that can be taken out over any period of time without diminishing the amount remaining in the bucket is equal to the amount that is added to the bucket over the same period. Therefore:
i) When more water is added than removed, the overall level rises
ii) When more water is being removed than added, the overall level falls
b) Some of the water being taken out may be being redirected in order that it is going back into the bucket. It is essentially replenishing itself.ii) When more water is being removed than added, the overall level falls
- If we were to measure the flow-rate of water coming out of the bucket, that is the analogue of home sales.
- If we were to measure the flow-rate of water going into the bucket, that is the analogue to home purchases.
- The circulating water is existing home-owners who sell and re-buy.
- The water exiting is existing home-owners who sell and do not re-buy (think nursing home or funeral home).
- The new water being added is FHBs.
- Cut off the flow of new water and the overall bucket level falls.
Now add in the most remarkable part of all (and this is well off the point I am making here) - investors. They too add to the inflow. But they take not from the out-flow! They don't really take water out, but merely pretend to, and then add this to the inflow. And by the miracle of a market with low annual turnover, every time they do so, the amount in the bucket rises 20-fold their contribution!
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Hi TC
I agree it will pull up at "some point". However, i can paint a "possible" scenario (I never said it was probable by the way):
Median house price $1.5m
Two working people per household on $50k
Combined Income of $100k = $90k post tax after dealing with all the middle class welfare to come.
They need $20k to live on per annum, leaving them much better off than today's pensioners.
The rest is spent on rent = $60k /annum circa $1150/week.
This leaves yields for investors around 4%, which is pretty much where they are now in a lot of areas. We can all argue about the "sustainability" of the situation but it is "possible", admittedly extremely improbable.
Note what happens though. There is now no chance for Mr and Mrs Median to ever buy a house because they are severely "rental stressed" and haven't got a hope of saving a deposit. 20% of the population (the investors who can stump up the necessary to get the finance) end up with 80% of the houses.
Again highly improbable to get that far but noting the factors in my previous post I can definitely see a trend in that direction...
Max, your bucket analogy is OK but why to you contend that money only flows in from income and no other sources?
Bit hard to respond here sorry Willair. Yes, I saw the dotcom bust coming. I bought property instead of shares. Yes, I've been writing about the problems in the US (and here) for years. I sold all my shares in December 2006 and only recently began buying again. I've had luck along the way for sure, but I reckon it's incredibly easy to spot a speculative mania in progress. From that point, it's hardly a gamble to conclude that it will collapse at some point in the future. The trick is simply moving early. So I'm not disappointed that I sold my shares and funds when the index was at 6350, only to see it hit 6850 at the peak. I wasn't trying to time the market perfectly.
You may say it's impossible to beat the market, but I disagree, especially when 'the market' for your investing includes property, shares, bonds, cash, precious metal and collectibles. A simple metric for over or under-valuation such as 1 standard deviations from the long-run price trend (or better, price to income trend) = over valuation, 2 standard deviations = spectacular bubble would do the trick just fine!
I too have read Taleb's book. I didn't like it much - in fact I was rather disappointed. His earlier work, Fooled By Randomness on the other hand is a much more entertaining and focussed read. One of my favourites from the last few years for sure.
but isn't this happening now?
and i'm not even going to start on the bucket analogy. yes, it makes sense. yes, it's theoretically correct. but it doesn't apply in the real world.
**edit and i know that i shoudl explain that better but i have a meeting now -later**
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What's the other source? Capital gain?
All capital gains are either a short term illusion or paid for by future buyers.
Let me repeat that, it is a very important point (because I'm going to relate stocks of wealth to flows of income later).
All capital gains are either a short term illusion or paid for by future buyers.
We currently have around $1.5 trillion dollars of housing wealth added by the recent boom that is yet to be paid for. It will either be paid for by future buyers (my maths says they can't afford it), or it will disappear.
savings, credit, new migrants, government grants, funds recently divested from the ASX, etc.
Savings comes from income. Credit available is a function of income. New migrants are equal to FHBs - the money they bring comes from income. Government grants come from income.
Money from the ASX is an interesting point. Because the sharemarket is just another big bucket, precisely like the housing market. It doesn't matter how inflated the contents of the bucket get, the amount of money that can be drawn out over any one period is precisely limited to the amount of new money going in. To that extent, funds recently divested from the ASX may be considered income too.
