House prices to keep falling for years

Wilsta · 19 August 2008

Okay guys here is my theory:

There will be a recession ... then a depression! World wide household debt as a percentage of household income has more than doubled over the last 5 years (unprecedented). Property prices have also more than doubled over the past 5 years (unprecedented again). The cheap credit and record debt has fueled consumer spending to unsustainable levels - demand for consumables will drop sharply as people pay off their loans (buy now pay later? We’re heading for the pay later part of the equation). Businesses will have to let go of staff and some will shut down - deepening the credit crunch. But the real problem is property values. If they return to their 20-year prior trend then mortgage asset backing will fall and credit rating agencies will lower credit ratings on banks and mortgage funds. Lower ratings (especially for banks) means greater cost of funds and the perception that a bank may be less safe than another - a possible run on funds may occur and the banking system will start to fall over. As the remaining banks and finance companies tighten their lending criteria the money multiplier effect of the banking system diminishes resulting in less money in the economy and the process starts over again and spirals out of control.

For those of you who follow the US markets closely (in particular Fannie Mae & Freddy Mac) - you'll notice that they are a bit ahead of the rest of the world in the property crunch. This is because their foreclosure laws are different to ours - something I'll get into later if you are interested. The storm is coming – don’t get me wrong!

theasxgorilla · 19 August 2008

Wilsta said:
For those of you who follow the US markets closely (in particular Fannie Mae & Freddy Mac) - you'll notice that they are a bit ahead of the rest of the world in the property crunch. This is because their foreclosure laws are different to ours - something I'll get into later if you are interested. The storm is coming – don’t get me wrong!

Sorry, I think this lead and follow stuff is strawberry fertilizer. The US was behind on the real estate boom in this case. They boomed later and they crashed first...who is leading whom?

The UK a sign of things to come in Australia? It may be the case, but it's not going to be the case because it happened there...it'll be the case for it's own (Australia's own!) set of reasons. Who remembers when the BoE dropped rates back in 2005? The RBA found room to wind on .25% during the same year. The economies were doing different things at different times in response to local and global happenings...the "why" is beyond this post...suffice to say it was happening then and it is happening now.

algis · 19 August 2008

I've come across some interesting data on median house prices for one of the hardest hit cities in the American credit crisis: Detroit:

http://www.housingtracker.net/old_housingtracker/location/Michigan/Detroit/

The data reveals the following:

75th percentile dropped 22% since 05
50th percentile dropped 32%
25th percentile dropped 60%

Reasons behind the staggering drop for poor:

Immoral lending practices
Financially illiterate sorts amongst the low class
The ability to send jingle mail and just up and leave your house to the bank if you can't repay your loan makes for a highly volatile market - the relatively well off don't do this sort of thing.

Given that we don't have the ability to send jingle mail in Australia, if the conditions where otherwise exactly the same here, we would not see a 60% drop.

So what conditions would we see? We are starting to see some major layoffs and an overall slowdown, which will have repercussions on a highly leveraged bunch of people in Australia. If the commodities boom is sustained (which will continue to foster immigration) and the Aussie dollar stays down, we should see further inflation and wage growth.. this would help keep housing prices where they are. Otherwise, I can only see continued softening of the overall market.

explod · 19 August 2008

algis said:
I've come across some interesting data on median house prices for one of the hardest hit cities in the American credit crisis: Detroit:

Given that we don't have the ability to send jingle mail in Australia, if the conditions where otherwise exactly the same here, we would not see a 60% drop.

.

Not being able to send the keys in makes little difference if mortgage holders default and cannot pay. The banks will still be stuck in the same way.

I know people now very successful who have been bankrupt more than once. If things get bad the degrees may be the same. Agree that we have more going for us here in Aus., but if the US system collapses it will be dire everywhere for some time.

Mofra · 19 August 2008

Wilsta said:
For those of you who follow the US markets closely (in particular Fannie Mae & Freddy Mac) - you'll notice that they are a bit ahead of the rest of the world in the property crunch. This is because their foreclosure laws are different to ours - something I'll get into later if you are interested. The storm is coming – don’t get me wrong!

Yes - there is no recourse open to a lender once a repossession has taken place. In Australia the mortagee is liable for the full debt, even after the repossession of the property (if a subsequent sales fails to realise the whole debt + costs).

Mortgage Insurers are even more scrupulous; they pay the bank the difference between realised sale & the debt (if there is a shortfall), then pursue the mortgagee for this difference + costs (effectively two sets of costs - sale costs & LMI recovery costs). They will pursue you until bankrupcy or the grave. If you take the latter option, they will take their final payout out of your estate too (heck, they'll take the flowers off your grave if they think there is value in them).

Happy thoughts.

CamKawa · 20 August 2008

Mofra said:
Yes - there is no recourse open to a lender once a repossession has taken place. In Australia the mortagee is liable for the full debt, even after the repossession of the property (if a subsequent sales fails to realise the whole debt + costs).

Do you know how long it takes on average from a lender defaulting to the bank putting the house on the market?

noirua · 20 August 2008

House price in London have been reported to have fallen 5.3% last month alone. Report came as UK house prices fell another 2.3% in August, so far.

Temjin · 20 August 2008

Another nice article from CIJ.

http://cij.inspiriting.com/?p=520

Fox’s method of solving hen’s housing affordability

Recently, we saw this article in the news media: First home buyer affordability still at 24-year low

“Affordability will only improve if all governments work together to remove the onerous tax burden and regulatory imposts on new residential construction.”

This quote was said by Housing Industry of Australia (HIA) chief economist Harley Dale. Is that a conflict of interest? This is the same problem that we mentioned before in News media contradiction regarding the Australian rental crisis?:

Rather, we believe that due to the way the human brain is wired, conflict of interests can often result in biased information, especially when the issue concerns money and wealth.

Asking the HIA for a solution to the housing affordability problem is the same as, in the words of one of our readers, asking “yet another fox to guard the hen house.” Basically, the HIA wants the housing affordability problem to be ’solved’ by:

Reduce government taxation burden on homebuilders so that there is a greater incentive to build homes.

Release more land for housing construction.

What is the underlying assumption of this ’solution?’ Well, this ’solution’ assumes that there is a housing ’shortage.’ But what if the assumption is wrong? In that case, this is what we said in Australian housing shortage myth,

When it comes to solving Australia’s housing problem, there is an entrenched superstition that makes many believe that there is a housing ’shortage’ in Australia. This superstition has resulted in many proposed solutions to the housing affordability crisis that are completely useless, wasteful and counter-productive.

As we said, in that article,

In reality, the housing ’shortage’ superstition is the result of an illusion. The illusion arises from the fact that there is a mismatch of housing demand and supply. In some parts of Sydney, there is an over-demand for housing, which gives rise to the housing ’shortage’ illusion. In other parts of Sydney, there is an over-supply of housing (some of them brand new) that are unwanted.

Let’s imagine the government decides to remove all taxation burdens on builders and release all land for house building tomorrow. This will be a builders’ paradise. But will that be a home buyer’s paradise? If the government really do that, do you think the builders will begin a house building spree and solve the housing shortage and affordability problem? Well, consider one of our reader’s protests in Australian housing shortage myth:

Mis-investment, who wants to live on Paramatta Rd, especially where this building is, it’s on Parramatta Rd and miles from the city. Would you live there?
All the empty dwellings on the outskirts of the city are just mis-investment, they are overprice houses in areas where people don’t actually want to live or they can’t afford them anyway.

The context of this comment lies in the fact that there are a lot of brand-new apartments and houses in the outer suburbs of Sydney that remain unsold. They remained unsold because these brand new homes are undesirable for various reasons (e.g. too far from city, no transport infrastructure, etc.). Obviously, these builders are losing money because of insufficient demand for these homes. That could be a contributing reason for current recession in the home building industry.

Why are these homes undesirable in the first place? There are many reasons: lack of infrastructure development (especially transport), rising fuel costs that makes car ownership expensive, lack of amenities, far away from employment centres, etc. Worse still, look at the wasteful use of land in Sydney- lack of high-rise residential apartments even in places near the CBD. In Singapore, they have a population that is as big as Sydney squeezed in a land area several times smaller. It should be clear by now who had been sleeping behind the wheel to allow the situation to become what it is today.

Next, what are the many short-term solutions proposed by governments to tackle the home affordability crisis from the demand side? All the ’solutions’ proposed so far involves boosting the ability of buyers to pay for the already exorbitant and overvalued prices of homes. Examples of such solutions include first homeowner’s grant, tax-reduced savings account and so on. These ’solutions’ can be compared to solving hangover problems by supplying more alcohol for drinkers to drink their way out of pain.

So far, no government has the guts to propose a politically unpalatable way of alleviating this problem by encouraging further deflation of house price through a change in the tax regime. In fact, there are plenty of scope for further property price deflation. As Associate Professor Steve Keen said in Brace yourselves for recession, says Steve Keen,

I think something of the orders of 40 per cent of prices are simply financed by people’s expectations that the prices will keep on rising.
Well when this expectation goes, ultimately goodbye 40 per cent of the current price of houses.

The question is, which of these two would one want to be the trigger for property price deflation?

Changes in the tax regime

OR

Rising unemployment, rising mortgage rates, further unravelling of the credit crisis, economic slowdown

In Australia, we have a tax regime of fully taxing savings and half taxing speculation- interest income are fully taxed whereas there is capital tax exemption/concession for property ‘investment,’ negative gearing, etc. Such tax regime encourages people to speculate, fall deeper into debt and discourage savings, which is the last thing the Australian economy needs right now. If the government is unwilling even to alleviate the housing affordability crisis in the short term by changing the tax regimes, then Australia have to rely on an inevitable economic crisis to do that, which is more painful and a lose-lose outcome for everybody

Like I said in the comments, the Aussie dream is just too unrealistic and uneconomical to maintain. We should learn to live like Singaporeans.

gfresh · 20 August 2008

Or UK.. lots of people packed into a small area. You'd think therefore the total supply would be quite limited. Hasn't really stopped major falls in their market though.

The article above touches on the conflict of interest going on. Developers have no interests to create too much "affordable" property, or to increase the supply of homes, and are already sitting on large areas of land, which one day, when the time is right, will be developed into housing. But there is no reason to go ahead and build on them in a short period of time, or there would soon be ample supply of homes, and eventually they'd have very little work.

Where would be the benefit in that? Heck, even via my simplistic view, if I owned large areas of land, there is no way would I be silly enough to flood the market with homes in a short period of time, thereby reducing the perceived value of each. Better to do it over years, decades even, maximising every individual estate for top dollar.

Surly · 20 August 2008

Mofra said:
Yes - there is no recourse open to a lender once a repossession has taken place. In Australia the mortagee is liable for the full debt, even after the repossession of the property (if a subsequent sales fails to realise the whole debt + costs).

Mortgage Insurers are even more scrupulous; they pay the bank the difference between realised sale & the debt (if there is a shortfall), then pursue the mortgagee for this difference + costs (effectively two sets of costs - sale costs & LMI recovery costs). They will pursue you until bankrupcy or the grave. If you take the latter option, they will take their final payout out of your estate too (heck, they'll take the flowers off your grave if they think there is value in them).

Happy thoughts.

You forgot to mention that they make the borrower pay for this

cheers
Surly

noirua · 20 August 2008

Property markets get caught out when forced sellers arrive, executor sales etc. They cut the price asked just to get the property sold. Many who have bought for investment purposes become squeezed, particularly, if they bought a new appartment that was overpriced in the first place.

Some areas have a lot of new appartment blocks which may be rented by those who "get on their bike" travel to get that good job in the city. The downturn comes, many lose their jobs, and appartments become empty, rents drop and sales begin.

As they say on the investment scene, in all sectors, "NEVER be a forced seller".

wayneL · 20 August 2008

The latest from Old Blighty:

http://www.telegraph.co.uk/money/ma...008/08/18/cnland118.xml&CMP=ILC-mostviewedbox

To think that only six months ago the talk was of small island, housing shortage, immigration, new paradigm, new two tiered society, property only ever goes up etc.... sound familiar?

Savills: Residential building land value drops 20pc

By Jonathan Russell
Last Updated: 10:23am BST 18/08/2008

Residential building land, one of the core assets of most housebuilders, plummeted in value by 20pc in the first six months of the year and could fall by up to 50pc before the current slump is over.

Research by estate agent Savills shows the value of brownfield sites, down 19.8pc, and greenfield sites, down 22.5pc, fell by roughly four times the rate of the housing market as investors deserted the sector.

With development land a key part of most housebuilders' asset bases, the valuations will be a major concern for the struggling sector.

nioka · 20 August 2008

Temjin said:
Like I said in the comments, the Aussie dream is just too unrealistic and uneconomical to maintain. We should learn to live like Singaporeans.

Why do you say that. Most australians can afford the aussie dream and have no need, or desire to live in high rise cages.

Those that can't have gone the wrong way about it. They have spent their earnings on holidays, overpriced cars, unnecessary consumer items, mobile phone bills, partying etc yet still think they deserve a McMansion on no deposit and almost interest free.

Those of us that saved for what we have and chose the life we lead are happy with the Aussie way. The only thing to be unhappy with is the way politicians have stuffed up the infrastructure to support it.

wayneL · 20 August 2008

Coming to a suburb near you, the reluctant landlord.

http://www.citywire.co.uk/personal/...spx?ID=311910&re=3534&ea=199083&ViewFull=True

Again, it's UK based, but give it another few months and you'll see this over there.

Temjin · 20 August 2008

nioka said:
Why do you say that. Most australians can afford the aussie dream and have no need, or desire to live in high rise cages.

Those that can't have gone the wrong way about it. They have spent their earnings on holidays, overpriced cars, unnecessary consumer items, mobile phone bills, partying etc yet still think they deserve a McMansion on no deposit and almost interest free.

The meaning of "afford" can be very subjective.

What do you consider to be affordable anyway? Back 15 years ago, my parents were able to "comfortably" afford an average side home, with an average size family car, take regular holidays, pay for me and my Brother education fee and still have some sort of saving while only earning an average family wage.

Now? People have to make SACRIFICE in order to do the same thing. Why does it have to come to that?

nioka said:
Those of us that saved for what we have and chose the life we lead are happy with the Aussie way. The only thing to be unhappy with is the way politicians have stuffed up the infrastructure to support it.

While politicans have their fair share of blame, I don't think we should place everything single of it on them. The reality is that there is only so much they can do. When I was saying the average Australian dream being too unrealistic and uneconomical, I meant it from the perspective of the government.

Where would you find a politician who would mandate all city councils to only release land for HEAVY RESIDENTIAL DEVELOPMENT only? That is, only allow multiple-storey residential apartments, and ban all 800m2 size land with double-storey home with a large backyard.

The fact remains that if everyone desire to live in an average Aussie dream home, it is going to cost ALOT OF MONEY to build and maintain such a vast network of infrastructure regardless of whether we have unlimited land or not. Just look at Singapore or Hong Kong, their public infrastructure are simply world class. No one is complaining about the government isn't building infrastructure fast enough so more "desireable" houses/apartments can be built. And yes, I understand they are extreme examples. And yes, they have their own share of property bust too. (and alot more extreme too)

robots · 20 August 2008

hello,

um, think you forgetting something here wayne, how the prices going here in AUs?

might like to check the ABS website, but things going extremely well considering issues

lot different to the motherland

thankyou
robots

Beej · 20 August 2008

Temjin said:
The meaning of "afford" can be very subjective.

What do you consider to be affordable anyway? Back 15 years ago, my parents were able to "comfortably" afford an average side home, with an average size family car, take regular holidays, pay for me and my Brother education fee and still have some sort of saving while only earning an average family wage.

Now? People have to make SACRIFICE in order to do the same thing. Why does it have to come to that?

Sorry but that is all a load of rubbish. People on average incomes have ALWAYS had to make sacrifices to attain a home, car, raise family etc. I've never heard of ANYONE saying it has been easy......

The problem with the "youth of today" is that they all think that it should come easy, but it never has.

Cheers,

Beej

wayneL · 20 August 2008

Beej said:
Sorry but that is all a load of rubbish. People on average incomes have ALWAYS had to make sacrifices to attain a home, car, raise family etc. I've never heard of ANYONE saying it has been easy......

The problem with the "youth of today" is that they all think that it should come easy, but it never has.

Cheers,

Beej

Riiiiiiiiiiiggt.

The favourite catch-cry of the forgetful.

Nonsense.

gfresh · 20 August 2008

waynel said:
Coming to a suburb near you, the reluctant landlord.

Well no wonder, the suburb is named "Upper Slaughter" after all

wayneL · 20 August 2008

gfresh said:
Well no wonder, the suburb is named "Upper Slaughter" after all

Well most forum software is offended by the town of S****horpe.

See /\

House prices to keep falling for years

Wilsta

theasxgorilla

Problem solved... next bubble.

algis

explod

explod

Mofra

CamKawa

noirua

Temjin

gfresh

Surly

noirua

wayneL

VIVA LA LIBERTAD, CARAJO!

nioka

wayneL

VIVA LA LIBERTAD, CARAJO!

Temjin

robots

hello

Beej

wayneL

VIVA LA LIBERTAD, CARAJO!

gfresh

wayneL

VIVA LA LIBERTAD, CARAJO!

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House prices to keep falling for years

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explod

VIVA LA LIBERTAD, CARAJO!

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hello

VIVA LA LIBERTAD, CARAJO!

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