Dundas

O2bsure

I have watched the video.

We should not forget that Robert Shiller is in the job of selling books.
He writes and talks about subjects which are popular and expected such as the crash of the US stockmarket & the US housing market.

Without trying to degrade his work, it is clear to me that anyone could have predicted the share market crash.
You could see from miles away that stocks were overvalued and the same with property prices at their peak.

In this particular video he is sending mixed messages and shows that he doesn't know the product he is trying to analyse.

For example, he is saying that properties won't go up because you can build more of them. While you can build more, these won't be in established city areas.
Does he take into consideration supply and demand?
In the US as you know they have built over 1 million speculative properties and they have them now sitting empty and vandalised.

There is no excess supply in Australia; in fact we have the opposite.
We are not building enough properties and this is not about to change anytime soon.
He does not take into consideration the increasing construction costs.
In some areas of Sydney property prices have fallen below replacement cost.
He is not mentioning rents and interest rates which are the main factors determining the value of a property.

He is also saying that properties don't usually have V shaped recoveries
I don't know where he gets his information from but they do, they are just slower moving charts than the share market charts he is used to see.

Finally, the Sydney property market has largely had its price correction.
There could be some more adjustments at the higher end but overall, the drops of interest rates which have just started will help stabilise prices.

Cheers

Hi Bill,

Well 600K Pols moved to the UK in 2007 year on top of the 400K+ who moved there in the 2 yrs prior and thats ignoring the folks who moved there from everywhere else. The Uk is of course a rather small island with supposedly limited building potential. In any case, none of this has prevented the larget monthly house price drops in their history (in fact they've now had drops 11mths straight).

Copenhagen sits on an island only arond 150km long (7000km2), population 4mill(the island not just Cph), limited land, expanding population and ...... collapsing house prices.
Want to see what a stunning trend in growing inventory on a land locked, growing population example looks like, then check this graph ...

Boliga.dk

(also note the Top 10 price reduced properties for Sept 1 ...top being -47%)
(also note the total amount of price falls for Sept 6 -437.000.000 kr compared to price rises 24.000.000 kr ...stunning stuff)

There are so many failed examples of the 'lack of space / growing population' line that its amazing to think it can still be presented as reliable.

Say what you will about Australias lack of supply, its false. We can argue that one all day long. The truth will only finally be revealed when credit is squeezed to the point where collecting houses like baseball cards becomes impossible. At that point and beyond, the supply/demand curve will change and surprise many. The collapsing AUD is going to cause significant problems for the ozzie credit lenders going forward. Easily obtained foreign funds are being withdrawn from Australia and the banks are going to have to find new sources.

Robert Shiller is one of many but the Case/Shiller index is now an accepted cornerstone in correlating and measuring real estate in the US. Fact is , the future may involve mortgage holders having to buy a hedge against home depreciation by using an index such as this. I could certainly imagine future mortgage lenders demanding a premium be paid for this sort of new style mortgage insurance. ...you want a loan , then you must insure it.

If only this concept had been made mandatory in real estate markets around the world, there would be none of these enormous problems today ...but probably also no enormous real estate speculation either.

all the best
02.

In Australia, the majority of loans are already insured for the mortgager - it's called Lenders Mortgage Insurance, and it protects the lender if they are required to sell the property at a loss when they foreclose.

The mortgagee typically pays the LMI if the LVR is above 80% (with insurance premiums rising dramatically above 90% LVR), with the lenders covering the insurance premiums at or below this level (I'm not sure whether they do or don't insure lower LVRs).

Yes, I remember having to take that when I bought a place in oz in the 80's.
But what I'm referring to is a step more draconian than that.

The lender may say, to insure that there is no loss and there is no forced inconvenience/hassle to the mortgager or mortgagee a derivative taken against an index could prevent the mortgagee from having to leave his home at all. Unlike insurance where premiums are historically based via actuarial math, the derivative against the index would be very transparent and reflect the real market.

gotta go.

Tanya,
I hope you don't mind us highjacking your thread


02bsure

I find your posts very interesting.

In relation to the UK and Danish price falls, I believe that these are largely due to increased cost of living, mainly the price of oil and food, fear of unemployment and due to the increased cost of credit.

The trigger for the turn around was IMHO the central banks's increases of interest rates. Central banks in Europe and elsewhere were trying to control inflation at a time when the price of oil and food was going up. Inflation which was largely imported so they have put unnecessary burden on their economies and on mortgage holders.

Also, something I find quite remarkable and which I think it hasn't quite been grasped yet is that money market rates have now decoupled from the official rate. In late 2007 I was amazed to see lenders raising rates independently of the reserve bank...
Since then Australian lenders increased rates by an additional 1.5%
It makes me sick even thinking about it...

Now we have the unusual situation where the RBA is cutting rates as everyone expected but the lenders are reluctant to cut theirs.
The RBA cut rates last week and lenders are taking their time to cut theirs with ST George being the worst 1 (they will cut them by 0.3% in the end of sept)

Also, it is now highly possible that a number of other lenders will keep their rates at current levels. Please note that we are talking about a 0.25% drop.
Are their margins really that small to worry about such a tiny cut?

This is not all bad news though.
The continued pressure on household budgets is definitely going to have an affect on people's spending and will force RBA to lower official rates even further.

I can't wait...

Cheers

Bill, interest rates in Europe are only slightly higher than their historical lows.

My mortgage is 3.7% fixed (took it out in 2005) today the going rate is around 5.2%. Interest rates are absolutely not the reason housing is dropping in Europe. Roughly 10% of all of Denmark is currently for sale., people went crazy speculating based on the belief that property never goes down.

Back to oz, don't expect too much kindness from the Banks now that the non-bank lenders are off the scene. The endless buckets of cheap credit are gone, those days are over.

O2

That's a very low interest rate, nominal interest rates here are around 9%.
If I was paying 3.7% all my properties would be +ve geared and I could retire tomorrow

It's interesting to hear that the reason for the price falls is not high interest rates.
I guess the EU with their open border policy made it easy for people who had access to equity and easy credit in the UK and elsewhere to buy properties in their surrounding countries and push prices up.
Now they want to sell and get out but not many people are buying so prices are discounted heavily.

The situation in Sydney is not the same but I can see some worrying similarities in other states. For example, many Sydney & Melbourne investors have been buying properties in QLD and in particular Brisbane and the Gold coast.

Now that their IP holding costs have gone up some of those people will be looking to sell. We've already had reports of significant price corrections in some places so the recent interest rate cut could not have come at a better time. Hopefully there will be more cuts soon.

In regards to Sydney though, I don't believe that we will see significant price corrections here because we've already had 4 years of no growth and/or falling prices.


O2

Thanks for the warning.
I think driving their customers to the wall is not good for business and
falling asset prices and defaulting customers won't help their credit rating either so I was actually expecting them to go easy on us. So far this hasn't been the case...

Luckily, the increased price of petrol in combination with high interest rates and increased rents and food in particular brought consumer spending to a stand still.
What a relied that was.

The recent RBA cut is a good start and the way our economy is going we will have a few more cuts. In the short term interest rates will not come down by much but even 1% to me it's a lot of money.

Cheers

Interestly enough, in the case of Denmark, only Danes or people who have lived in DK for more than 5yrs are allowed to buy real estate there.

02

I don't know how to explain this.
It could also be that interest rates were low, finance was easy to get and property prices were low so it made sense for Danes to buy their own place.
Or did they have a rental shortage?

I remember in the 90's when I worked in Stockholm it was very hard to find rental accommodation. We had to put our name on a rental list and wait for up to a year and sometimes longer for our turn.

Cheers

Things changed quite dramatically from about 1996.

I also worked in Stockholm (around 97) and rentals there like Copenhagen were difficult to get.

But then the free flowing credit (new products and lenders) came along and flooded the market with new credit. The mantra became , how-much-per-month and no longer how-much-in-total?

Then came a flood of building activity and speculation flipping. You have to remember also that taxes are very high in Scandinavia so when the ability to make sizeable TAX FREE gains from real estate speculation presented itself, it was an absolute gift. It presented the sort of profits that one would normally have to work a lifetime to achieve after paying Scandi taxes (think 68% in top level income tax in DK).

So when the train started to leave the station, everyone jumped on and as is normal with this sort of speculation , the first in were well rewarded the late comers are now burning.