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  • Profile photo of DWolfeDWolfe
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    So.

    If there is a bubble it makes me wonder how many people will jump on the bubble wagon. "I said 10 years ago there was a bubble" that sort of thing :)

    Investors and property owners alike need to ask the question. If, then?

    If there is going to be a crash then…… what is the likelihood of this happening to X, Y, Z of my properties? What effect will this have on me personally? If there is a crash, then I will do x. That sort of thing.

    I think a few people are discounting really how much people have stopped spending in retail and started shoveling money into their mortgage. People are discounting how much equity people have in their properties. Many comments speak as though most people bought houses yesterday. This is not the case.

    I saw the comment made (cheers Steve) that people access equity like an ATM. I'm intrigued by this as I don't personally know anyone who does this. Sure people use equity to buy more property but after that point in the purchase the next property is a good or bad investment based on what the investor buys. They still can only have 80% in a lot of cases against any property.

    I haven't yet met anyone who has drawn against the equity in their house an bought a plasma tv or gone to Maccas. I think I would be very afraid if I did.

    I'm not discounting the bubble theory. But like Evolution it remains just a theory and any attempt to pass it off as hard truth at this point in time is incorrect.

    I would prefer to wait and see. Sure I'll hedge my bets, I'm not stupid, but I won't be frightened by the mass media, false message mongers and people who don't own any property.

    My 3 cents.

    D

    DWolfe | www.homestagers.com.au
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    Profile photo of toetoe
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    white_goodman wrote:
    toe wrote:
    if there's a crash it will be due to wider economic conditions. A China bust maybe, or the world loses confidence the world currency (US dollar), given the amount of money they've "printed" recently.

    look at the source of funds for our major banks in financing residential property, our banks arent as immune as you think, when the banks costs go up (interest they pay from getting foreign money), and they are, interest rates will go up

    You're arguing against yourself here. All I'm saying is that the market won't implode on it's own as many people seem to think. My quote says "if there's a crash it will be due to wider economic conditions". You said I'm wrong and that bank funding from overseas could cause a crash. That would be the wider economic condiditions I'm talking about! And even that won't happen on it's own, we'd need an event to cause overseas funding to be tighter than now.

    Profile photo of toetoe
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    pharvie wrote:
    You can argue these points until you are blue in the face, but at the end of the day unless you are just living somewhere and for some reason don't care what happens to your house price, it is an investment decision.

    The botttom line is most people will not have an exit strategy except to do what everyone else will do and rush for the exit en-masse if something goes wrong as per the Moran Stanley article.

    Very few investment properties in recent times have any cash flow value past a hope for capital gains in the future and negative gearing in the present because everyone knows that property just goes up without fail. I even read an article in the Fin Review on the weekend where John McGrath indicated cash flow positive to be 'old school'. That pretty much says it all.

    It usually takes time to accumulate capital and the prime rule in investing is to protect that capital so you can reinvest and keep increasing it. If you have lost it all it is hard to make more.

    Those in the community who are experienced investors will likely take some money off the table at an appropriate time and not mind if they inadvertently leave a bit for the next person. 

    I can hazzard a guess that very few will; I am sure there a more than a couple of US citizens suffering from that so often heard 'If only' lament.

    pharvie, I'm not really arguing any points, I'll leave that to people who are saying there'll be a crash regardless of what happens.

    I can't even get the four members of my family to agree on which movie to watch at night. How do you expect to get 40% of investors selling at the same time? That's what I'm saying. I'm not convinced that 1.4million investors will all decide their investments are duds in the same month, without some major influence from the wider economy. That's what a crash is you realise, everyone running for the exit at the same time.

    What if it happens over a longer period, say two years? That's what happened from 2003 onward? Property market stagnation.

    I'm not convinced that the market can crash under it's own weight people. Not without influence from the wider economy!
    But I'm open if you want to, convince me otherwise!

    Profile photo of ummesterummester
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    toe wrote:
    I'm not convinced that 1.4million investors will all decide their investments are duds in the same month, without some major influence from the wider economy. That's what a crash is you realise, everyone running for the exit at the same time.

    1.4 mil in the same month seems unlikely, doesn't it? 1.4 mil over a year or 2 seems more possible. The same number over a year or 2 when stock is moving very little – that can cause either a crash or severe correction also.

    The thing with Australian property owners (as I'm sure was the same with American's, Irish, greeks and the like before their markets turned) is that not only do they think the country is different, or special, but that they think their suburb, street and even house are more special than others in the country. Strangely, they think there is nothing special about the house when they are bidding for it, it just becomes special once they own it. Patriotic personal financial delusion.

    This mindset works well when a bubble is forming, because everyone thinks they have something special when they own it, which makes them want to own more. It also works well when a bubble is either deflating or popping because the specialness of their property means it will sell even when the market is flooded with thousands that won't. It's gotta be worth what the bank loaned, doesn't it?

    Profile photo of reasonsreasons
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    toe wrote:
    pharvie wrote:
    You can argue these points until you are blue in the face, but at the end of the day unless you are just living somewhere and for some reason don't care what happens to your house price, it is an investment decision.

    The botttom line is most people will not have an exit strategy except to do what everyone else will do and rush for the exit en-masse if something goes wrong as per the Moran Stanley article.

    Very few investment properties in recent times have any cash flow value past a hope for capital gains in the future and negative gearing in the present because everyone knows that property just goes up without fail. I even read an article in the Fin Review on the weekend where John McGrath indicated cash flow positive to be 'old school'. That pretty much says it all.

    It usually takes time to accumulate capital and the prime rule in investing is to protect that capital so you can reinvest and keep increasing it. If you have lost it all it is hard to make more.

    Those in the community who are experienced investors will likely take some money off the table at an appropriate time and not mind if they inadvertently leave a bit for the next person. 

    I can hazzard a guess that very few will; I am sure there a more than a couple of US citizens suffering from that so often heard 'If only' lament.

    pharvie, I'm not really arguing any points, I'll leave that to people who are saying there'll be a crash regardless of what happens.

    I can't even get the four members of my family to agree on which movie to watch at night. How do you expect to get 40% of investors selling at the same time? That's what I'm saying. I'm not convinced that 1.4million investors will all decide their investments are duds in the same month, without some major influence from the wider economy. That's what a crash is you realise, everyone running for the exit at the same time.

    What if it happens over a longer period, say two years? That's what happened from 2003 onward? Property market stagnation.

    I'm not convinced that the market can crash under it's own weight people. Not without influence from the wider economy!
    But I'm open if you want to, convince me otherwise!

    Hi Toe

    An interesting article in the Australian today might help crystalize the conversation:

    http://www.theaustralian.com.au/business/wealth/sharing-the-spoils-more-australians-are-looking-to-access-the-equity-in-their-homes/story-e6frgac6-1226008336351?referrer=email&source=AusBus_Morn_email_nl&emcmp=AusBusMorn&emchn=Newsletter&emlist=Member

    This article quotes that 72% of the total wealth of those
    aged 60 and above is in their home compared to Super and the article canvasses
    the home equity loan issues surrounding the fact most people have few assets
    outside of their home. The oldest Boomers are now 65; the youngest around 50.

    As the saying goes, people don't plan to fail, they just
    generally fail to plan. If something does not normally happen, such as a
    significant housing market correction for example, then why really bother about
    all the associated risks? In fact most people wouldn’t bother even if they were
    check-listed for them.

    If the 72% figure quoted is accurate, that puts stable house
    pricing high up on the list to enable people to retire successfully, ignoring
    any IPs some may have.

    I like evaluating risk when timing into an investment.

    If one takes the 72% figure and thinks about it, it means
    that most people are speculators by default, not investors, because they have little
    diversification in their portfolio. Should something go wrong with the property
    market, most will be holding a highly illiquid asset that is dropping in value,
    possibly at an alarming rate.

    If we now think about the average IP owner, their idea of
    diversification these days is to negatively gear in different suburbs. If you own
    cash flow negative IPs only, you either have the cash on the side doing
    something different that you can use to fix any possible bank loan calls, or
    you are an at-risk speculator similar to those 72% of home owners, not an
    investor.

    It usually takes some economic reason to trigger a significant
    financial event and considering how many people have much of their wealth tied
    up in housing, our government is going to try and move heaven and earth to stop
    property falling. Did not help the Yanks, but ours will most surely try, just because
    it is not their money.

    But if we consider that Australian consumers are amongst the
    most highly geared in the world, appear to have a propensity to speculate
    instead of investing and are now heading in large numbers to retirement, it may
    not take too much at some point to change that wealth equation.

    I think that like the USA, most people sitting on good
    capital gains at present will at some point be sighing, ‘If only’. Active investors
    will have taken prior action and use their capital to take advantage of
    whatever the new situation offers.

    Profile photo of toetoe
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    pharvie wrote:
     It usually takes some economic reason to trigger a significant
    financial event

    Thanks pharvie, you have crystalised my point in that sentence.

    Profile photo of Steve McKnightSteve McKnight
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    Hi team,

    It looks like this has been a very beneficial forum topic with lots of robust discussion.

    In regards to sustainable / affordable housing, it may actually be a little too late for that. I can't see the situation changing while the taxation laws encourage investors to make a loss by investing in expensive housing.

    Personally, I would like to see the tax laws changed so that tax offsets from -ve cashflow are capped to the income (to create a cashflow neutral position), and thereafter the excess losses need to be pooled and carried fwd to be offset against the capital gain on eventual sale.

    Part of the problem causing price growth is the lack of supply, so this policy would take away the incentive of holding indefinitely, since the losses could only be accessed on sale. Furthermore, I think the idea of refinancing capital gains 'tax free' needs to be potentially reconsidered. That's a much bigger issue, but there are no easy answers.

    I doubt either of these options would be politically attractive.

    In summary, the government has a choice… affordable housing, or increased household wealth and happy voters. I'm not sure you can have both.

    Cheers,

    – Steve

    Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
    https://www.propertyinvesting.com

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    Profile photo of fWordfWord
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    toe wrote:
    My quote says "if there's a crash it will be due to wider economic conditions".

    Agreed with this. There is an impression by some that the property market simply has to crash because the growth in property prices has so far outstripped inflation and the growth in wages, and that property buyers are simply speculating and using property as a tool simply to save on tax.

    Indeed as you say, a crash has to be due to more significant negative events or sentiment in the economy, and that's logical enough. Either that, or Australia as a whole has to become so unpopular and unlivable that everybody wants to leave, migration ceases, and somebody remarks, 'Last one to leave, please switch off the lights!'

    Profile photo of DWolfeDWolfe
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    Hi all,

    Those are great comments Steve.

    Something will have to give eventually, whether it is government policy will remain to be seen. I think the current crowd pleaser policies will remain until a party/government presents itself (for election) that will perform a real and considered change to the tax system. Many people would appreciate a real goverment who makes decisions.

    So far we are stuck with lame duck politicians who are up for election time and time again. No one wants to present any policies that will challenge the status quo or get them the boot. Fresh blood into the political scene is stifled and and the ole boys (and a few gals) club will keep free thinkers and general intelligence out of politics. (Don't get me started with politics we will be here all night) 

    The refinancing issue is a biggie too. How do you police this sort sort of policy? Do the banks report each financial transaction to the government, it may become a bit big brother. Sliding tax scale on percentage of refinance?

    The Australian public are becoming more intelligent (yes they are) and with this will come financial intelligence. People already understand that when they spend money interest rates go up. Bye bye retail spending.

    This next year will be a very interesting one.

    Very interesting conversation.

    D

    DWolfe | www.homestagers.com.au
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    Profile photo of fWordfWord
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    On the topic of creating affordable housing, would increased supply of government subsidised housing help the situation?

    In Singapore for example, the government owns many, many large blocks of apartments that are sold direct to the public on a 99-year leasehold period (the leasehold period applies to a large proportion of other property in Singapore).

    These apartments are perfectly livable, and vastly less expensive compared to housing on sale in the private market. The whole scheme is means-tested (ie. by income, marital status, assets) and only people who meet the strict criteria can buy such an apartment direct from the government. The high density of such developments also means that heaps of people can be housed in a single block of apartments.

    For the purposes of having a roof over their heads, would this be a viable option to aid those who simply need a place to live? What are people's opinions on this?

    Personally I think this is helpful. An investor (or anyone who owns or controls even a portion of any other property, or owns a sizable business or share portfolio) cannot buy such apartments. Prices of these apartments will hence remain stable and affordable for the long term, and so long as the government keeps up with the infrastructure and supply of these apartments, there should be no shortage of affordable housing for the people who actually need it.

    If these people subsequently become successful and want to upgrade, then they can step out into the private property market and look for something else to buy.

    On that note, we need to improve the standards of public transport in order to support such a scheme. There is little point in housing hundreds of folk in an apartment block somewhere if they have no easy means to get to work. If everyone was forced to drive, we'd face severe congestion on our roads (which is already happening).

    Profile photo of reasonsreasons
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    toe wrote:
    pharvie wrote:
     It usually takes some economic reason to trigger a significant
    financial event

    Thanks pharvie, you have crystalised my point in that sentence.

    toe

    Investing (for me) is just an emotionless game of timing, probability and risk-reward analysis.

    If you can successfully use your economics argument as an edge to stay in the market for as long as possible and increase your capital (or whatever), and then get out with that capital intact to continue investing, you are onto a winner.

    Being able to say one was right after the fact might make one feel righteous, but will not replace valuable forfeited investing capital.

    I believe that there is a higher probability of the housing market correcting sometime in the future (months or years, who knows?) than doubling in the next 7-10 years. I also believe that most non-commercial property is held by high-risk-taking capital gain speculators (many with incomes of around $80K for IP holders) and that induces high inherent risks in itself.

    Based on the further high probability (or is it a given) that no-one can ever see a bubble until afterwards (especially Central Bankers), if I extract myself out in an orderly fashion over the next ‘x’ period where I have made good gains and inadvertently leave money on the table because property still goes up, what have I lost?

    Only time will tell me that and I could be wrong (that's probability for you), but by putting the money to work in equities, fixed interest and hybrids in the meantime (I happily invest there too), I can probably do just as well whilst waiting to see what happens next.

    It is just a part of investment strategizing and most importantly, protecting my capital.

    Profile photo of thecrestthecrest
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    I would hate to see "Singapore style" high density means tested "Centrelink Towers" unit blocks, ghettos n gangs no thank you.

    OK guys, as an economist I make a great motelier, so I'm punching above my weight here, but i feel a pause or plateau in price growth is more likely than a major correction, and should achieve the same result but more slowly and with less collateral damage.

    What do you think ?

    Cheers
    thecrest

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    selling motels in NSW

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    thecrest wrote:
    OK guys, as an economist I make a great motelier, so I'm punching above my weight here, but i feel a pause or plateau in price growth is more likely than a major correction, and should achieve the same result but more slowly and with less collateral damage.

    What do you think ?

    Cheers
    thecrest

    Hi thecrest

    If when you say 'I feel a pause or plateau', etc…, does it really mean that you are in deep doo-doo financially if something else happens so are hoping for the best? If so, then it does not mater what anyone else thinks.

    What investment scenarios do you personally have firmly in place to ensure you get out financially intact should the worst case happen, not what you just hope or think might happen?

    Cheers

    Profile photo of reasonsreasons
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    SteveMcKnight wrote:
    Hi team,

    In summary, the government has a choice… affordable housing, or increased household wealth and happy voters. I'm not sure you can have both.

    Cheers,

    – Steve

    Steve

    My bet is on the latter as successive Govts. have ensured most people's wealth is in their home through grants and taxes, therefore the Govt. will have to attempt to protect that wealth at any cost if something happened to affect housing in order to stay in power (regardless of party).

    They are likely to win an initial battleor two, but I have no faith in them winning a war, as no other country has. I have been happy to make money out of property, but have always remained mindful that it is in essence a bit of a Govt. backed, bank-run, Ponzi scheme.

    Cheers

    Profile photo of AussieHousePricesAussieHousePrices
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    Hi Guys,  

    I’m not so sure there needs to be an “event” in order to pop our housing bubble. With the American housing bubble, or the ‘87 stock market crash for example, nothing specific happened that caused them to burst.  A bubble relies on a constant supply of new entrants to keep it going.  One day, you eventually run out of people willing to pay ever-increasing prices, and the whole thing comes tumbling down. 

    thecrest, I think there is absolutely no chance of a plateau after a boom. Feel free to check out my recent post on this topic if you’re interested in my reasons.
    http://aussiehouseprices.blogspot.com/2011/01/will-property-prices-plateau.html

    Cheers,
    And
    y.

    Profile photo of ummesterummester
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    re the govt supporting house prices – there is a little more at play downunder than majority voter satisfaction. The govt does not know how to support the ageing population as it is and with a population bubble around the boomers, whom are mostly invested in property, a crash would lead to some very disgruntled peers of politicians and no-way for the country to fund their retirements.

    re a plateau being impossible, i tend to agree. I like to relate the property market to a vehicle that is travelling too fast and has the speed wobbles. You can't steer the car out against the direction it wants to go, as the RBA is trying to do, without risk of a larger crash. Still, like an out of control car, there is a slim possibility that it will avoid collision and an even slimmer possibility that it will stay on the road. Every crash has the potentential to be unique but none of world's housing ones have been thus far, probably due to market confidence which Steve has mentioned.

    Profile photo of reasonsreasons
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    AussieHousePrices wrote:
    Hi Guys,  

    A bubble relies on a constant supply of new entrants to keep it going.  One day, you eventually run out of people willing to pay ever-increasing prices, and the whole thing comes tumbling down. 

    thecrest, I think there is absolutely no chance of a plateau after a boom.


    Cheers,
    And
    y.

    Hi Andy

    A good article and your comment about ever decreasing numbers of buyers made me think of an analogy in the share market. I enjoy trading in the share market as well as property (no point limiting your income streams) and shares actually do trade sideways (plateau) quite often, but not in a dead straight line as you say, but within a tight price range (up and down within a horizontal channel).

    If it happens when the price of a particular share has increased considerably, it can be what is known as distribution of shares. This distribution is when the smart money (the big instos) sell to the mums and dads etc who have just latched onto the idea that the share is going up big-time. The instos sell for a while until the price drops to a certain level and then they stop selling. The suckers then come in and drive the price up again to the top of the channel. The instos sell down again and then stop at the bottom of the channel and because there are limited numbers of shares available for sale again, surprise, surprise, the price goes up again.

    Once the instos have got rid of most of their shares at the highest price they can, all interested buyers have nearly dried up as well as this distribution process usually takes place over a 3 or more month period. Then surprise, surprise, this time the price starts dropping and usually does for some time until it reaches a low point where the smart money again believe it is a value proposition and start the whole process over again (this time called accumulation) so they can eventually drive up the price again.

    The distribution process is usually quite a calm and orderly process, the aftermath not quite so once the price drops below the bottom of the channel that the share price has so successfully and safely stayed above for months, due to the fact there are no more buyers to support a higher price. All the recent buyers have been expecting the price to go through the top of the price channel and ever upwards to greater riches, because that is what this share always does (like property always does perhaps).

    If the same analogy is applied to the property market, it is at a wonderfully high level at present and if we do see a flat market in property for a while, could it be the smart money exiting as happens with shares?

    That in share terms is one of many tactical parts of the market and where fear and greed meet. If you can read it correctly and mitigate risk, you can make money or limit your losses.

    It is possible we could see something similar in terms of property at some point; and like shares, only time will tell as the pattern develops. As you point out, nobody rings a warning bell, but like shares and how the smart money gets rid of large numbers of unwanted equities to the unsuspecting public, the signs might have clearly been there had you taken a good look.

    Cheers

    Peter

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    AussieHousePrices wrote:
    Hi Guys,  

    I’m not so sure there needs to be an “event” in order to pop our housing bubble. With the American housing bubble, or the ‘87 stock market crash for example, nothing specific happened that caused them to burst.  A bubble relies on a constant supply of new entrants to keep it going.  One day, you eventually run out of people willing to pay ever-increasing prices, and the whole thing comes tumbling down. 

    thecrest, I think there is absolutely no chance of a plateau after a boom. Feel free to check out my recent post on this topic if you’re interested in my reasons.
    http://aussiehouseprices.blogspot.com/2011/01/will-property-prices-plateau.html

    Cheers,
    And
    y.

    Sorry Andy but I have to disagree with just about everything here. First lets look at the chance of a plateau, in 2001 Ian McFarlane the RBA governor at the time warned that he would personally see to it that the house price boom of the early 2000s stopped by raising interest rates. Between late 2002 and 2005 the market plateau'd. So I dont see how you say that's impossible.

    And while house prices have increased at about the same rate they did in early 2000s, the Price to Income ratio has remained stable since 2003. Which means the likelyhood of a crash based on affordability has been the same since 2003, and it hasn't happened yet.

    The one thing I agree with you on is that the '87 stock market crashed under it's own weight, however the stock market is an entirely different beast to housing. However I can't understand what in the world would make you think there was no event external to price increases which triggered the GFC crash. My memory is different to yours. There was a smaller economic event which lead to banks tightening lending practices at the same time as hundreds of thousands of ARM mortgage resets doubled peoples mortgages simultaneously (within the space of three months anyway).  People who were planning on refinancing as their mortgage reset had no other option than to default enmass. Is this not a trigger, what am I missing?

    Profile photo of AussieHousePricesAussieHousePrices
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    Hi Pharvie – you raised some good points – and I agree that price can trade within a tight range. Would you agree however, that it’s usually due to one of two reasons – either a) there’s not much interest or trading happening so not much price movement, or b) there’s a lot of interest but it’s a battle between bulls and bears. 

    We can definitely rule the first scenario with housing which has become a national obsession.  If then it’s the second scenario, there has to be an eventual winner between bulls and bears meaning prices cannot simply plateau for long.

    Profile photo of AussieHousePricesAussieHousePrices
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    toe wrote:
    Between late 2002 and 2005 the market plateau'd. So I dont see how you say that's impossible.

    I’m still not convinced.  You’re looking at the weighted average for 8 capital cities.  Is it possible that the plateau you’re seeing is really just an average of rising markets (such as Perth) and falling ones (such as Sydney)? 

    toe wrote:
    And while house prices have increased at about the same rate they did in early 2000s, the Price to Income ratio has remained stable since 2003. Which means the likelyhood of a crash based on affordability has been the same since 2003, and it hasn't happened yet.

    Not too sure why you brought this up.  I never mentioned that a crash was related to affordability.  However, I do notice that your graph finishes at 2009.  Look at this more recent graph and you’ll notice that affordability has actually worsened since 2003.
    http://upload.wikimedia.org/wikipedia/commons/0/00/Real_Melbourne_House_Prices_1965_-_2010b.JPG  

    toe wrote:
    There was a smaller economic event which lead to banks tightening lending practices at the same time as hundreds of thousands of ARM mortgage resets doubled peoples mortgages simultaneously (within the space of three months anyway).

    OK, what was the smaller economic event that lead to tighter lending practices and ARM mortgage resets?

    Or are you saying that was the event?  If so, regarding tighter lending practices, I think you might be confusing cause and effect. I would say that falling house prices triggered tighter lending practices, not the other way round. Of course, once the cycle starts, they feed off each other.

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