World Bank's crisis warning
- Thread starter redwing
- Start date
A few words from the "Homer the Vigilante" episode seem appropriate 
Kent: Hordes of panicky people seem to be evacuating the town for
some unknown reason. Professor, without knowing precisely
what the danger is, would you say it's time for our viewers
to crack each other's heads open and feast on the goo inside?
Professor: Mmm, yes I would, Kent.
Kent: Hordes of panicky people seem to be evacuating the town for
some unknown reason. Professor, without knowing precisely
what the danger is, would you say it's time for our viewers
to crack each other's heads open and feast on the goo inside?
Professor: Mmm, yes I would, Kent.
Well GFC V1 saw a mini house price boom in Sydney as interest rates fell thru the floor and rents continued to climb.
In the face of GFC V2, interest rates are on their way down again and we are seeing a lot (read LOT) of investors coming into the market. Rental vacancy rates in Sydney are very tight and rents are still on an upward trajectory.
If employment holds up I see good things for the property market.
Credit may tighten and cost of funds increase irrespective of what the RBA does. If the fan disseminates the brown stuff, demand for purchases as a result of increased cost of funds will wane. Prices will then soften some more in the short/medium term.
I am speaking in a generic sense for all of Australia understanding that there is no one property market in isolation, however tighter and more expensive lending will influence values and demand to the downside.
Sydney may still bubble along Prop, however only because it is the only tight market in Australia. My rents are rising there and, vacancies are low. The undersupply myths that the datasphere publishes and broadcasts are cr@p especially when applied outside of metro Sydney and probably some mining regionals. BHP (Buy, Hope, Pray) won't work going forward in a passive sense. Only manufactured profits will glean equity increases by subdivisions, increased dwellings/bedrooms and the like
Eurogeddon is the skeleton in the closet and unemployment is starting to threaten us here. I am not an alarmist, but am not pollyanna either. Now is not the time to be over-leveraged or planning to have high portfolio LVR's IMO. Folding stuff and offsets at the ready may see better buying soon.
Always good advice for any part of the cycle.
Cheers Michael.
As a very long term BHP investor of several props, I want to put the blinkers on and believe in what Westpac's Bill Evans states in that the europe is now more or less neuted in the medium term with armegeddon fears a little bit overblown.
Remember that the RBA has the most scope of all the central banks in the world in which to cut interest rates significantly if required. Yes retail bank funding will probably increase but these increases will effectively be cancelled out by RBA decreases leaving interest rates around the 6 to 7% mark; still at a level attractive enough to a hoard of newbie prop investors and first home buyers, and a bunch of others burnt by the stockmarket.
An earlier comment re; there is no single market, I agree with and believe that generally if you are invested in props valued $600K and under things should be OK. Of course, props priced at $1mill to $2 mill+ before any market turbulence naturally experience great drops of 30 to 50% in times of strife given their larger scope for variations in price and the fact these props are owned or mortgaged by high flyer types usually bankers who are currently getting laid off en masse. People who buy props under $600K (investors or owner occupiers) are not in a hurry to move or sell so therefore a price floor can be found. Even if they dropped by approx 20% they are still at the $500K mark (not too large a drop in actual $'s).
May of course be totally wrong and we could all be blown to smithereens
Australia probably escaped the GFC is because its economy is tied more into the Asian region than the Atlantic (Europe and the Americas), and it also indirectly benefited from the massive Chinese stimulus programme.
As such I think that a hard landing in China is more likely to have an impact than a slow-down in Europe.
The real risk is (IMO) that the international credit markets freeze up again. Australia is hugely dependent on inflows of foreign capital, and I've got a feeling that roughly two thirds of borrowing is funded by funds that the banks have raised overseas.
If there was a sudden drop in credit because of this, then I'd expect several things to happen:
It's possible that rents could rise, as few would be buying, but prices could fall sharply. A lot would depend on the RBA's actions, and a 0.5% base rate could support the market.
Macrobusiness published an article last year that makes my points in a more economically literate fashion.
I'm not sure if Eurogeddon has been overdone.
The right wing press in the UK (i.e. most of the daily papers) continually have stories describing how it's going badly wrong, but they're always written from a xenophobic point of view so I don't generally believe them.
However Soros thinks the game is up, so perhaps I'm being a bit too sanguine.
As such I think that a hard landing in China is more likely to have an impact than a slow-down in Europe.
The real risk is (IMO) that the international credit markets freeze up again. Australia is hugely dependent on inflows of foreign capital, and I've got a feeling that roughly two thirds of borrowing is funded by funds that the banks have raised overseas.
If there was a sudden drop in credit because of this, then I'd expect several things to happen:
- Getting a mortgage would become much more difficult.
- Interest rates on loans would shoot up.
- The property market would grind to a halt. Look at the UK where activity is around half of what it was four or five years ago.
It's possible that rents could rise, as few would be buying, but prices could fall sharply. A lot would depend on the RBA's actions, and a 0.5% base rate could support the market.
Macrobusiness published an article last year that makes my points in a more economically literate fashion.
I'm not sure if Eurogeddon has been overdone.
The right wing press in the UK (i.e. most of the daily papers) continually have stories describing how it's going badly wrong, but they're always written from a xenophobic point of view so I don't generally believe them.
However Soros thinks the game is up, so perhaps I'm being a bit too sanguine.
Australia probably escaped the GFC is because its economy is tied more into the Asian region than the Atlantic (Europe and the Americas), and it also indirectly benefited from the massive Chinese stimulus programme.
As such I think that a hard landing in China is more likely to have an impact than a slow-down in Europe.
The real risk is (IMO) that the international credit markets freeze up again. Australia is hugely dependent on inflows of foreign capital, and I've got a feeling that roughly two thirds of borrowing is funded by funds that the banks have raised overseas.
If there was a sudden drop in credit because of this, then I'd expect several things to happen:
None of these would be good for the property market.
- Getting a mortgage would become much more difficult.
- Interest rates on loans would shoot up.
- The property market would grind to a halt. Look at the UK where activity is around half of what it was four or five years ago.
It's possible that rents could rise, as few would be buying, but prices could fall sharply. A lot would depend on the RBA's actions, and a 0.5% base rate could support the market.
Macrobusiness published an article last year that makes my points in a more economically literate fashion.
I'm not sure if Eurogeddon has been overdone.
The right wing press in the UK (i.e. most of the daily papers) continually have stories describing how it's going badly wrong, but they're always written from a xenophobic point of view so I don't generally believe them.
However Soros thinks the game is up, so perhaps I'm being a bit too sanguine.[/QUOTE
well put. we may well be entitled to be on the edge of our seats, but let's face it, the great dilemma these days is where to invest your money. in the current scenario, cash is king and many many folks have stashed their kanga into term deposits, treasuries, bonds, mortgage offset accounts, etc. People in the sharemarket are mostly getting ripped apart if not with wild share price swings, then with brokerage fees. What's left you may ask; well IMO, discounting art, gold, and other collectibles, then property is left standing yet again by itself.
If people are going to invest then property is a safe-ish bet, particularly in the residential space where 70% of the market are owner occupiers which provides some sort of stability and price support. These people generally hang onto the bitter end before selling and potentially taking a loss.
Quite a good point re; the UK press but then what investment credentials, or even investments, would most of these ignorant (mostly junior) journos have, who in the midst of meeting yet another deadline, print any crap as long as it bleeds all over the place with an armegeddon or eurogeddon flavour. Have you ever seen a positive, glowing article on the merits of real estate investing; I'ver not seen one and I've been doing this for 15 years. This is notwithstanding the fact that total real estate total returns (cap growth and rent) always ticks along annually over 10% / year. Property is after all a long term game.
I think that a positively geared property or a development site is probably not a bad place to park your money. In fact, my uncle bought a couple of building plots in the Scottish Borders in 2007 or 2008, and whilst they're probably down a bit, he said at the time that he preferred having them than an account with Icesave.
I did a calculation a while back, and owning a property comes out ahead over a fifteen year period even under a doom and gloom scenario. (Prices fall by 40%; rent and capital gains increase in line with wage growth of around 3%.)
However, I suspect that a negatively geared property with a 3% yield that requires capital gains in excess of inflation or wage growth to show a profit is not going to look clever for some years if things do turn sour...
My other belief is that you should traditional avoid safe havens at this stage. Gold, US Treasuries (10 year yield below 2%), prime London property (rental yield around 3%) have all been bid up as the rich seek to preserve their capital, and I think that there's a distinct risk their prices could fall sharply as a consequence.
I'm not sure what offers good investment potential right now. Some of the distressed markets (such as Ireland) are still expensive, but might start showing bargains in the near future. Stock markets are down, and an index tracker offers a diversified portfolio without much effort if the provider survives.
I did a calculation a while back, and owning a property comes out ahead over a fifteen year period even under a doom and gloom scenario. (Prices fall by 40%; rent and capital gains increase in line with wage growth of around 3%.)
However, I suspect that a negatively geared property with a 3% yield that requires capital gains in excess of inflation or wage growth to show a profit is not going to look clever for some years if things do turn sour...
My other belief is that you should traditional avoid safe havens at this stage. Gold, US Treasuries (10 year yield below 2%), prime London property (rental yield around 3%) have all been bid up as the rich seek to preserve their capital, and I think that there's a distinct risk their prices could fall sharply as a consequence.
I'm not sure what offers good investment potential right now. Some of the distressed markets (such as Ireland) are still expensive, but might start showing bargains in the near future. Stock markets are down, and an index tracker offers a diversified portfolio without much effort if the provider survives.
the first gfc here were were reasonably insulated, despite those like non recourse etc saying it was the end of days.
this one, i dont know. i really dont. the AUD has been unofficially declared a safe haven by larger hedge funds,which means assets priced in AUD may fare quite well. on the other hand, the aud is more open to pumpndump or dumpnpump plays because we are less liquid, whcih could wreak havoc with our stability.
on the other hand, we all know what a high AUD does to the economy.
i think itll be more of the same? a whole lotta sideways amongst bad or scaremongering headlines.
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The simplest answer is usually the most likely.
While there is a vast range of possible future outcomes, and it pays to be aware of these, I would also guess we are up for more of the same.
I wonder how much is the "warning" from the world bank an indirect plea to get more funding for the world bank and the IMF.
100% of it, the bankers of the world just keep screwing people, the only place they got trimmed was in the UK when the Govt saved the RBS but only if they took ownership.
All this free money should not be loans, it should be an equity raising, the bank stock should be suspended and refinanced with a capital raising by the Govt taking a position in the bank.
The shares are diluted, the stock owners take a hit, the board of directors and managers all miss out on their obscene bonuses, the general public who are underwriting the whole thing through taxes become the owners of an asset, sounds good to me
100% of it, the bankers of the world just keep screwing people, the only place they got trimmed was in the UK when the Govt saved the RBS but only if they took ownership.
All this free money should not be loans, it should be an equity raising, the bank stock should be suspended and refinanced with a capital raising by the Govt taking a position in the bank.
The shares are diluted, the stock owners take a hit, the board of directors and managers all miss out on their obscene bonuses, the general public who are underwriting the whole thing through taxes become the owners of an asset, sounds good to me
this nationalisation of banks points to a nationalisation of private money and, by default, the debts they hold.
i see a current nationalisation of the money supply and underlying land with mortgages.
we will see a commodities boom now (like the housing boom) followed by a spectacular bust. this will leave govts "no choice" but to "relieve" hedge funds that are "too big to fail" from their "toxic assets", resulting in resource nationalism.
the next crunch will end "private wealth" as we know it today.
Hi Aaron,
Not suggesting that all banks should be nationalised but they seem to want the debts to be nationalised and the profits to go to the managers and shareholders.
We need a balance, if they need Govt money to survive then they are insolvent, they must be recapitalised, lets do it to avoid chaos but the populace must be rewarded for taking on the risk and the bankers punished for being greedy, profilgate a** holes
Not suggesting that all banks should be nationalised but they seem to want the debts to be nationalised and the profits to go to the managers and shareholders.
We need a balance, if they need Govt money to survive then they are insolvent, they must be recapitalised, lets do it to avoid chaos but the populace must be rewarded for taking on the risk and the bankers punished for being greedy, profilgate a** holes
If Eurogeddon strkes it's likely China will take a big hit and almost certainly credit markets will be severely impacted. Meanwhile neither US or the EU is in a position to afford big stimulus packages in response. Even the Australian Government's response as far as stimulus goes would be constrained by politics and the need to back stop the banks. Maybe they'll bail out the property market again with first home grants etc. but I doubt it.
100% of it, the bankers of the world just keep screwing people, the only place they got trimmed was in the UK when the Govt saved the RBS but only if they took ownership.
All this free money should not be loans, it should be an equity raising, the bank stock should be suspended and refinanced with a capital raising by the Govt taking a position in the bank.
The shares are diluted, the stock owners take a hit, the board of directors and managers all miss out on their obscene bonuses, the general public who are underwriting the whole thing through taxes become the owners of an asset, sounds good to me
hey Mac thats some dangerous thinking... i like it
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