I have a question in about property price (particularly in Australia) in the event of depression. After my personal research I believe we are heading towards another great depression, and I am wondering what will happen with property price in Australia.
Here's the points of arguments, dollars will lose its value during depression (hyper inflation), because Australia is doing what the American is doing, the chance what's happening with them will eventually happen to us as well, but in a much smaller scale.
The depression itself will drive the price down because people can't afford repayment and their properties will be back in the market because banks want their money back, but then because the value of our dollar goes down, won't it increase the price of the property in particular (other goods in general as well). Is this a valid argument ?
The second point, during hyper inflation, when the value of fiat currency is falling, isn't having debt a good thing ? because the actual debt we have will then reduce in value ? or in other word, it'll be cheaper for us to service that debt ? Also because debt of $500K will stay $500K, but the real value of $500K will probably much less during hyper inflation ?
Am I making any sense at all ? or I am getting my economy facts wrong here ?
First, I think you should present your arguments / research that led you to believe we’re heading towards a great depression, so we have an opportunity to discount them. If you are following arguments similar to Dr Steven Keen or Mr Harry Dent Jr., there are good news and bad news. But you can enlighten us with your research later.
When you say “Australia is doing what American is doing” – what do you mean?
The make up of our economy is somewhat different from that of the rest of the world – this is one of the reason why Australia has managed to escape a technical recession. Some differences are: the integrity of our banking system, the net immigration and population, level of export for our industrial resources, etc.
But for argument sake- lets say we are in a depression:
1, Yes – dollar will lose value domestically
2, When you say “depression will drive the price down” – I am assuming you are talking about Australian Residential property
Yes – property price will go down. Not only will there be mortgage default, there will be less demand and higher supply of properties. Given Australian properties are typically overpriced (when compared to household disposable income, and rental return), this means a correction will be substantial.
3, Your idea of debt maybe flawed.
So you are saying, if 1 banana costs $10 bucks, debt of $1000 is really equivalent to 100 bananas
if in a depression, 1 banana costs $100 bucks, debt of $1000 is only 10 bananas, hence cheaps to finance?
During a depression, people lose their jobs, and if they are lucky enough to have a job – income goes down, a lot of the essential commodities will be expensive, they do not have the money to repay debt.
I don’t know if it is going to be “cheaper” to “service” debt. In relativity, that maybe true, but in reality, probably not. You still have the same amount of debt to finance, just because the same $ value cannot get you the same basket of food, does not make it cheaper?
And you will need to take into account of the interest rate at that point to determine servicibility.
All and all, Economics is a social science, no one can accurately predict the future to 100% certainty. There are too many interacting variables and economic theories cannot deal with that.
My personal research is really based on analysts' comments, historical data presented by some youtube users, which probably half of those are rubbish, and also some discussion with few people who actually experienced recessions in other countries. I've taken into account that some analysts' comment are very extreme and very US centric, which can be very true in some ways for US but not so much for Australia (hence I believe the depression will not be as bad as in US, but it will happen).
The world economy is inter-connected, Australia prosper mainly because of the raw materials we sell to China which is still growing because she manufactures goods for the world consumption, but when the economy is bad, the demand is slowing down, manufacturing is slowing down and the need for raw materials is also slowing down, then it'll impact Australia.
Current property price in Australia is un-realistic (over-inflated) based on the income ratio and, property investors are getting too complaisant believing the good days in property investing will never end. Share market volatility drives people to park their money in properties. Media does not help either, where a lot of articles are biased to encourage people to throw their money into properties.
Most likely those articles are written by property selling agencies, or anyone who benefits from increasing property price and transaction volume (which includes GOVT as well, from stamp duty and possible other taxes). GOVT will be forced to release more lands because of shortage of dwellings, in return they’ll be making money from stamp duties, taxes and land cost itself. GOVT, will might have to sell the land cheap to developer because the demand is slowing down as people are losing jobs and less capacity to purchase. They also might be forced to release more land to stimulate the economy, getting people employed particularly in property building industry.
Anyway, maybe we should not argue whether the recession will or will not happen, because every individual has their own view and interpretation of available information. What I need assistance for is to understand is the concept of relation between dollar value, property price and mortgage.
During hyper-inflation, dollar will lose its value, hence everything will go up in price significantly and property is no exception, BUT because people are defaulting on their mortgage, the bank will want to claim their money back hence those properties will be back to the market at possibly much lower price just enough to cover the remaining mortgage balance, on top of that because not many people will have the capacity to buy properties during recession/depression then the demand will be low, driving the price down.
Kenny mentioned while in relativity it is true having an existing loan will be cheaper during hyper-inflation, because while the debt of $500K is still $500K on paper, but in reality that $500K could only worth $100K in value, hence if we can maintain our loan servicing power (if we can keep our jobs, or maybe leveraging our buying power through gold and silver), that means having that $500K debt in the first place is not a bad idea at all. Am I correct to think that way ?
So, based on my thought above, there’ll be some correction in property prices but I don’t think it would be as extreme as what Prof Steve Keen says of 40%, because the drop in dollar value will push the price up. My thought is the 2 opposite direction factors will drive the correction around 20-30% from current median pricing. Would you be agree with my numbers ? If not, what sort of property price drop you reckon we will experience in the next 2 years or so ? or you just don’t think the property price will drop at all ?
When talking recession / correction / depression and similar thoughts in real estate, the one thing to keep in mind is the following: Is the person doing the talking going to gain or lose from promoting this alleged scenario?
And the reality is that there are as many people hoping for a crash as there are people praying for it not to happen. And clearly those who desire a crash are out there with somber sembiance pretending to carefor the other half whilst getting loan approval to buy their property as soon as it hits rock bottom. Of course the naive that believes the hipe or the doom is just as guilty. Yet the market is made purely out of this intangible "belief" and nothing else.
What do you do? The answer is usualy made simple by the doom and the hipe merchants. Buy when everyone is selling and sell when everyone is buying…and don't tell anyone. Concerned face or happy face according to popular mood helps but remember to act the opposit way.
All this talk about the new great depression and the biggest financial crisis ever is a big con anyway. The only thing people ought to be concerned is the new tax thought up by Al Gore and Company to tax the whole world and pretend to care for the environment. The Emission Trading Scheme is the largest con on earth and those who believe human activity is changing the climate and furthermore (what arrogance) that humans can change the climat back are as deluded as the believers in the tooth fairy. If the planet is warming up this can only be good news for humans. Warmer is better, we may be able to have crops in Antarctica and Canada, Whohoo food crisis solved, not to mention more water front properties with deep water acces.
I think a lot of the bears in the property market have something to be concerned about. There is a high level of national debt in Australian and housing affordibility is sliding with artificially inflated price by government grants, which brought forward a lot of first home buyer’s decision to get into the market. Their research are valid and economically sound – depending on who you listen to. You have to educate yourself to distinguish it from sensationalised media as Marc mention.
The reason I ask is, your topic mentioned a depression. Depression is defined as recession for extended period of time usually more than 3 years. I sincerely doubt Australia will be in that stage anytime soon.
Regardless, lets assume we are in a depression.
I agree with your assessment regarding property prices.
I disagree with the debt of $500k on paper is worth $100K and furthermore I am not sure what you mean by “leveraging our buying power through gold and silver”
A debt of $500K to the bank will always be a debt of $500K to the bank regardless what money is worth. You are only obliged to repay $500K at the end of the day, regardless if the Dollar can purchase more or less or the same basket of goods. Now, you maybe right in that the security asset for the bank (ie your house) is now worth $100K. But your debt is still $500K and you are still required to make repayment on $500K. Typically in a depression or a recession scenario, the sentiment is to reduce the level debt and reduce investment. Because the amount of money will not be able to get you the same basket of food. A typical household with the same earning income before recession/depression will have less money overall due to the higher prices of other necessities. It will be difficult for them to finance their properties, and hence the increase in defaults. So I would say that debt will not be a great thing at that point, even if you can sustain it. (esp is you are a Prof Keen follower)
I suspect during a depression, property price will be significantly reduce. The demand will not make a substantial difference with the reduced property price at that stage. It’s only when the economy goes back into recovery that you will see property price starts to pick up.
My assessment and it is only my personal opinion, is that the property price will increase by between 5-10% in the next 12 months in line with normal demand.
As long as interest rate stays relatively low (~>4% rba cash rate), unemployment stays relatively low (~>6.5%) and there is no over supply of housing, and the net immigration and population growth will probably sustain the demand in the cities in the east coast. Resource productivity will probably sustain the west coast.
Note my position. I’m a active property investor (not speculator). I have properties and I buy properties. So property price going up both benefits me and harms me. But i guess my biasness is still towards bullish.