Forum Replies Created
- Originally posted by foundation:
Howdy Peter,
Ignore the sarcastic knockers here. You’re kind of right. It is unfair on some people at the moment. And $300,000 being affordable? Christ, you’re on $40k (which is only very slightly below the national average of $43k) – on that wage/salary you shouldn’t be borrowing more than $120-$150k!
But here’s the secret – this boom is based entirely on debt. When all is said and done, we, collectively (on the national scale) will have not made a single damn cent out of it. Sure there will be winners, but each will be matched by a loser. Or at least every dollar gained will be matched by another dollar in debt. It will not last, and it will prove to have been nothing but an illusion.
Here’s one of my old posts from the cracker.com.au housing forum. Read it, then let me know if you feel less angry or more angry (others may skip over my rant if it is familiar ground):
Bubble? What bubble? The Foundation theory of monetary stupidity.Summary
Only a small proportion of houses are bought and sold each year. This small number, generally around 5%, set the new price levels accepted by banks, valuers and ultimately owners and borrowers for the entire stock of housing. This is an illusion and a folly.
Bubble? What bubble?
If we turn the clock back a few years to when the total value of all housing stock was $1 trillion dollars in the mid-1990s, total housing debt stood at $250 billion.
In 1997, the rate House Price Inflation (HPI) hit 10% for the year. Although only 5% of houses turned over, the banks told everybody their houses were worth 10% more, implying $100 billion in extra wealth/equity. But all that had really happened was $50b of houses had sold for $55b. Magically, $5b spent became a $100b gain in wealth, but worse still, much of this extra $5b was debt-funded.
In a rational lending system, the banks would say “Hey, house prices are 10% higher, so instead of lending against $50b of houses this year, we’ll lend against $55b of houses.†Or, if they believed house prices were in a sustained 10% pa up-trend, perhaps an EXTRA 10%, ie $60.5b. But no, they revalued not 5% of the houses per annum at the new price, but 100% and the public largely fell for it. They withdrew a large chunk of their newfound ‘equity’, spent a little and invested the rest… in houses.
This added to demand and drove up prices even further, year after year. By 2000, we’d gained around $650b in additional housing wealth for an outlay of just $120b in extra debt. It’s no wonder the ‘borrow your way to wealth’ / ‘Other People’s Money ™’ seminars were doing so well – clearly it worked!
2003, total housing value passed $2.5 trillion and total housing debt was a miserly $540b. We’d turned $290b into $1,500b.
Now certain Cracker Housing contributors, the government, banks, REIs, and recently (shock and shame) the RBA themselves have all told us this is good, fine and dandy: “the sharp run up in household debt has not been a source of concern, as household’s overall balance sheets have remained sound.†ANZ Economics told us. A senior politician who should know better said “While it’s true that Australian families now have more debt than ever before, compared to asset values they are very low geared†or something very like it. And did you ever see those rubbish surveys that came out and said “the average Australian is now worth $270,000, 30% more than just 2 years ago� Gack.
It sounds good, but it is in fact lunacy.
Why? Because for values to remain inflated, turnover must continue at reasonable levels at current prices. Current prices are only met with increased debt (witness household debt continuing to rise by an additional $240b in 3 years of relatively flat prices, increasing LVRs on new loans, booming LMIs…). At 5% turnover per annum, it takes 20 years for a change in price to fully feed through to a new debt-load. We’re 4-6 years into our new level of house prices, with 14 – 16 to go.
So today with the average national price at around $300k, 420-450k houses must be sold each year. With the average new loan at $235k, that’s $100b in turnover, and around $80 billion new debt each year __just to maintain current house valuations__.
Where we had $250b in debt secured against $1,000b of houses a decade ago, we now have $800b in debt secured against $2,800b of houses, BUT an implied / required future debt load of $2,000b secured against that same $2,8000. The net national gain is exactly ZERO! It staggers me that most people can’t see this. If you don’t put anything in, you can’t take anything out.
Now if we take gross national wages at $435b today, and compound them 3% pa until 2022 (no recession or aging population here then, huh?!), they’ll be around $700b pa, growing by $22b that year. Instead of housing debt at 184% of wages as it is today, it will be 286%. Instead of housing wealth at 644% of income, it will be just 386%. Assuming 8% interest rates, debt servicing will take 29% of gross income, rather than 15% today! In 30 short years we will have quadrupled the (relative) amount we spend on INTEREST PAYMENTS ALONE from 7% to all most 30%! And all for what? NO NET NATIONAL GAIN!!!
Meanwhile the Schmucks who buy (sorry Ff, Cobran
) those average $300k houses today with a $235k mortgage will fall into two groups:
– Those whose loan is IO will have spent $300k in interest and still owe $235k on a house STILL worth $300k– Those whose loan is PI will have spent $340k on repayments and still owe $170k on a house STILL worth $300k.
All best-case scenario, pie in the sky kind of wishful thinking, because earlier I lied when I said “NO NET NATIONAL GAIN!!!†In econo-speak there will be a national gain, it will just be a NEGATIVE one! Imagine if the current 15% DSR rose to 30% tomorrow. Many people would cope, although most highly leveraged investors would be shirtless, or at least wearing brown pants. But if this happened over a decade or two, people would adapt. What wouldn’t adapt is the economy. The extra interest costs will take the equivalent of 65 billion dollars in today’s money OUT of consumption and investment EVERY YEAR! Enough to cripple the economy and bring on the mother of all depressions. I think.
So, best case scenario, we’re screwed. Worst case scenario, house prices collapse. Or should that be the other way around? House prices need to fall to a point where housing debt is growing at less than wage growth. As I’ve said before, that will require a massive (50%++) average drop in house prices coupled with a massive drop in turnover.
The third scenario, and final remaining option for us collectively, is to fund another house price boom, thus delaying the inevitable and magnifying the consequences when the correction does eventually arrive. In fact I think we’ve been doing this for the last 20 years anyway…
So buck up son. We’ve got a tsunami coming – Don’t cry for a lost sandcastle, get building a fortress!!! (And by fortress, I mean a secure financial future, not an actual fortress!!! In fact, by late 07/early 08 you should be able to pick yourself up a nice fortress for easy 30-40% Below Market Value (BMV) in real terms…)
Cheerio, F. [cowboy2]
Foundation,
I am with you buddy. This is a housing ‘bubble’ (based on debt), there has been no production of ‘real’ wealth created. If you bought a house in 1994 and sold in 2004 the ‘price’ may have risen 300% but the ‘value’ is still the same. You will have to pay around the same price to get back in. If you are flipping houses, sure after tax you might make some profit, but soon building costs and prices will continue. Meanwhile your competition is building, everybody is a developer or renovator.
We had three IP’s for that period. Rents dropped. We renovated one and sold all three. We made $800K and now earn 6.24% on our money, no fuss. We were earning $600 a week in rent less expenses, now we clear $960 a week. I will make more on our capital by staying out of the market.
Peter,
If you want to protect your savings and buy assets start looking at precious metals (seek advice). You can buy silver and gold bullion from a bullion exchange in your CBD. Put it in a safety deposit box and watch as the house prices drop and you retain your wealth. Granted bullion does not pay income or fixed return, but it beats the risk of a wobbly property market at the top of the greatest hyper-inflated prices of all time and PAYING for the privledge by negative gearing.Next bonds may collapse so you could consider fixed returns ( as the price of bonds drop yield goes up)as you pick up houses cheap!!!!!!! WARNING: This is a 2-5 year plan.
The tipping point is when banks start to stop grabbing market share and focus back on profit margins (just NAB announced). Watch as the market contracts and the amount of sales drops. Volume always leads because to be a buyer a large portion of the market needs first to be sellers. That means the amount of houses advertised for sale will drop. Watch the trend of the page numbers in your largest newspapers (already droppping).
The second part is that banks will want the market to drop more than the house is worth so that the mortagee is in negative equity. Now they have them cornered, the only way they can sell will be to go bankrupt (less sellers again) or REFINANCE TO A 50 YEAR LOAN….(less sellers for the next generation).
Two more interest rate hikes should do it…or Crude Oil – Ouch!!!
Remember it is never a good time in the market, if you think so, and is always the right time, if you think so. Money is only an idea, it is created from nothing…watch for value…price is an illusion for the poor…money is an IOU debt discuised as value.
Invest for cashflow, but that means you need to buy value. Get your surfboard ready. I can see Foundation has the board waxed.
see you on shore,
Aaron[goatee]
) those average $300k houses today with a $235k mortgage will fall into two groups:
