Select to expand quote

evlPanda said....The Australian property market has become too big to fail.

That sounds eerily like many famous proclamations of the past. Often said by people who have the most to lose.

People said similar things in 1929.

"There is no cause to worry. The high tide of prosperity will continue."
... Sec. of Treasury, Andrew Mellon,
September 1929.

"Stock prices have reached what looks like a permanently high plateau".
... Yale Economist Irving Fisher,
October 16th 1929.

"This crash is not going to have much effect on business."
... Chairman Arthur Reynolds
Continental Illinois Bank of Chicago
October 24th 1929.

"I have no fear of another comparable decline."... Arthur W. Loasby
President Equitable Trust Co.
October 25th 1929.

The truth is, NOTHING is too big to fail. Even the entire planet could fail due to a cosmic or environmental catastrophe. The sun will supernova one day too.

To say that a piddly market is too big to fail sure is rolled gold hope.

Whilst it's certainly not in the country's interest for the real estate market to fail, I agree with Adriano, it's never going to be too big to fail. Surely the 2008 GFC kickoff with a property meltdown in the land of apple pie is best evidence of this, their market would slaughter ours for size/value, and the alarming thing at the time was their household debt in 2008 was much lower than ours is now (as a percentage of income).

As I've said earlier, I'd hate to be the RBA governor right now, he knows it's irresponsible to not raise the cash rate but he also knows that it would be irresponsible to raise it and potentially trigger a property crash. Income tax relief will give him a little room to move, but the income tax cuts also serve to lower the tax returns of those (in the reduced bracket) who have negative geared their investment property expenses. It's a double edged sword.

My calling the property market "too big to fail" is a criticism. It's a reference to the "banks are too big to fail" response of the GFC.

My point being they have become too important an economic force, and if/when they fail they bring the whole house of cards down with them,

Too much economic legislation and adjustment, and lever-pulling and such is controlled by the property market; its power a shadow over the entire economy now.

Successive governments, all of them, have allowed it to get this way. It was the Gillard government that opened the doors for foreign investors to purchase not just new or off-the-plan properties, this driving the building market, but also established dwellings, houses, thus driving the property market as a whole.

Australian property is now an overly inflated elephant filling most of the room.

(this is good for bitcoin, ha ha)

Select to expand quote

Paddles B'mere said..
Whilst it's certainly not in the country's interest for the real estate market to fail, I agree with Adriano, it's never going to be too big to fail. Surely the 2008 GFC kickoff with a property meltdown in the land of apple pie is best evidence of this, their market would slaughter ours for size/value, and the alarming thing at the time was their household debt in 2008 was much lower than ours is now (as a percentage of income).

As I've said earlier, I'd hate to be the RBA governor right now, he knows it's irresponsible to not raise the cash rate but he also knows that it would be irresponsible to raise it and potentially trigger a property crash. Income tax relief will give him a little room to move, but the income tax cuts also serve to lower the tax returns of those (in the reduced bracket) who have negative geared their investment property expenses. It's a double edged sword.

I think the RBA have no choice but to raise the OCR. Overseas investments are at a very low level especially after Trump demanded that US companies invest in America. Rising the OCR is the quickest and easiest way to attract offshore funds.

Select to expand quote

psychomub said..

Paddles B'mere said..
Whilst it's certainly not in the country's interest for the real estate market to fail, I agree with Adriano, it's never going to be too big to fail. Surely the 2008 GFC kickoff with a property meltdown in the land of apple pie is best evidence of this, their market would slaughter ours for size/value, and the alarming thing at the time was their household debt in 2008 was much lower than ours is now (as a percentage of income).

As I've said earlier, I'd hate to be the RBA governor right now, he knows it's irresponsible to not raise the cash rate but he also knows that it would be irresponsible to raise it and potentially trigger a property crash. Income tax relief will give him a little room to move, but the income tax cuts also serve to lower the tax returns of those (in the reduced bracket) who have negative geared their investment property expenses. It's a double edged sword.

I think the RBA have no choice but to raise the OCR. Overseas investments are at a very low level especially after Trump demanded that US companies invest in America. Rising the OCR is the quickest and easiest way to attract offshore funds.

I wonder if the banks would do/will do it without the RBAs lead?

Despite being guaranteed by the governments, will the banks now insist that they need to raise it so that they guarantee their shareholder returns? They might, but won't that screw them too?

If the banks really think that the housing market it ready for a huge fall, won't they lose big time too? If they let it go too far, they would lose big time as investors all over the place declare bankruptcy.

In the GFC, it sounds like it was the ability to walk away from debts that made the dodgy real estate deals such a problem. You can walk away from them here too, its just more effort, and the banks don't want that. Individually they might in a good market, but if it was a scenario of a bad market, who are they going to sell the properties to to get their money back? Sell it for too low a price then it deflates all of their property assets.

Select to expand quote

evlPanda said..My calling the property market "too big to fail" is a criticism. It's a reference to the "banks are too big to fail" response of the GFC.

I know. My response wasn't a criticism. I do agree broadly with it, despite how nuts it sounds.

I noted the irony of the reference to those schmuck bankster crooks who got bailed out by the taxpayer in the US in 2008 when they should have been allowed to completely fail.

Whether one prescribes to the validity of your statement or not, if the market is going to tank it will, and there isn't anything a government or the RBA can do to stop it.

I think that's a fair statement Adriano, the housing market and associated high levels of debt may have gone past the point of being "controlled" by either monetary or fiscal policy and it's possible that neither the central bank nor government (either the reds or the blues) have any plan that can work. It could be just like you say and will tank all by itself without anyone being able to do anything just like it did in the US in 2008.

Hey FN, I don't think the banks will do anything without being controlled by their overnight cash rate, they've got enough bad press on their plate as it is and don't want to cause a collapse because quite simply it will give them bad debt and hurt their bottom line.

Select to expand quote

Paddles B'mere said..
I think that's a fair statement Adriano, the housing market and associated high levels of debt may have gone past the point of being "controlled" by either monetary or fiscal policy and it's possible that neither the central bank nor government (either the reds or the blues) have any plan that can work. It could be just like you say and will tank all by itself without anyone being able to do anything just like it did in the US in 2008.

Hey FN, I don't think the banks will do anything without being controlled by their overnight cash rate, they've got enough bad press on their plate as it is and don't want to cause a collapse because quite simply it will give them bad debt and hurt their bottom line.

Yet the liberals sat & watched this happen ... poor governance...& opposed the RC into Banks which have caused this potential economic mess .

Bazz, I reckon both the red and blue team have allowed it to happen as it's been going on for a few different governments as things like this take a number of years. It's a delicate balancing act, you want people to spend/consume but not go into too much debt. The main aim of the central bank is to maintain a low rate of inflation by manipulating their overnight cash rate and they've done that pretty well but spending has gone wild with the nice low rates.

An interesting article on the US/ World housing bubble.

I think we are just starting Stage 3 in Sydney..

www.peakprosperity.com/trouble-ahead-for-the-housing-market/

Many argue that high property prices are caused by immigration putting strain on housing stock. Too many people / not enough houses..

This article puts that theory to rest..

www.news.com.au/finance/economy/australian-economy/economy-slowing-sydneysiders-moving-and-towers-shooting-up/news-story/ef7b985027421b12edc8512ebfd6ceda

"Sydney has just recorded its highest vacancy rate in at least 13 years - as SQM Research figures now show 2.8 per cent of the city's units and houses are sitting unoccupied. And they say it's only going to get worse in the coming months.That adds up to 19,572 residential rental dwellings estimated to be sitting vacant and available for rent, and experts say it could signal a dramatic slowdown in the city's economy."

^ Doesn't that prove the theory?

The last 13 years have had the vacancy rate at very low rates, pushing up prices, because record immigration.

Here's how I remember viewing rentals in Sydney five years ago:


Add 10% to the asking price and you might get it.

Select to expand quote

evlPanda said..
^ Doesn't that prove the theory?

The last 13 years have had the vacancy rate at very low rates, pushing up prices, because record immigration.

Here's how I remember viewing rentals in Sydney five years ago:


Add 10% to the asking price and you might get it.

I think there is always a lag in the system. Developers do their sums, acquire land, start building, and a few years later you have apartments available for housing people.

I worked around Ryde for a couple of years and you could see all these developments pop up and you could see that once they all came online that there would be a huge boost to the number of apartments available. I think that time has arrived. There seemed to be a lag of about 3 years.

In the south of Sydney, there is an apartment development that is due to become available in the next year or so. I think that alone is 2000 apartments. Despite rumours of a lot of foreign ownership, at least a reasonable number of them will become rentals, and another 1000 apartments will be looking for new tenants.

I am sure there are similar developments all around Sydney. If you take a tour of areas around Alexandria you will see a tonne of apartments that are available. I think Meriton announced a while back that they will retain a lot as rentals. I think that this is their way of not flooding their own market with new apartments for sale.

The unfortunate thing about all this is that people seem to close their eyes and ears to this happening around them until it becomes an issue of over-supply. I think you will still have some people believing there is a shortage, based on what was happening five years ago.

Select to expand quote

evlPanda said..
^ Doesn't that prove the theory?

The last 13 years have had the vacancy rate at very low rates, pushing up prices, because record immigration.

Here's how I remember viewing rentals in Sydney five years ago:


Add 10% to the asking price and you might get it.

Yup, so what happened?

Investors piled into the rental market, buying everything they could...and getting good returns for it. Then they leveraged, refinanced, borrowed more and more to buy new properties to rent out due to lax lending rules and low interest rates. What could possibly go wrong?

This naturally drove up property prices.

The papers regularly ran stories on 30 year olds who had built multimillion dollar property empires in a few years from a single $20k deposit. seminars on property investing were held etc, etc.

The problem with frantic bubbles like this is they run off their own momentum to such an extent that the party is over long before there are noticeable market signals and before anyone realises it.

I was watching House Hunters International yesterday - a couple from Los Angels were looking at three two bedroom apartments / houses in a small city - Tarija Boliva,

They ended up choosing a small but nice terraced house for 300 per month!

People who have large mortgages - were the market to drop like 70 percent - would you walk away or continue to pay the bank?

That's a great question Peter, you'd certainly have to do the numbers to find out if bankruptcy works for you. ie you can earn in the mid 80's and pay rent instead of a mortgage payment and own next to no assets till the smoke clears.

Select to expand quote

Paddles B'mere said..
That's a great question Peter, you'd certainly have to do the numbers to find out if bankruptcy works for you. ie you can earn in the mid 80's and pay rent instead of a mortgage payment and own next to no assets till the smoke clears.

www.news.com.au/finance/business/banking/aussie-families-default-on-mortgage-repayments-after-banks-underestimate-their-spend/news-story/1b90666436df05235f420466a19f7320

AUSTRALIA'S banks have been caught fudging their numbers, using a dodgy financial tool to vastly underestimate borrowers' expenditure in order to write loans people will never be able to repay.


It's called the Household Expenditure Measure (HEM), an estimate of the bare minimum for essential living costs, along with limited discretionary spending - and borrowers are finally realising their banks got their figures wrong by using it.

Now Aussies across the country have been left with investment properties they can't afford or are being forced to sell their family homes and enter the rental market as they struggle to stay afloat and default on their mortgage repayments.

Experts have slammed the banks' use of the tool, with the person who invented it saying it was "alarming" they weren't using it as it was intended.

Were these really infomercials?

www.dailytelegraph.com.au/nocookies?a=A.flavipes

Problem: Falling prices and rental income spell disaster.

www.domain.com.au/news/the-25yearold-with-eight-investment-properties-20151020-gk9kbj/

Select to expand quote

petermac33 said..
I was watching House Hunters International yesterday - a couple from Los Angels were looking at three two bedroom apartments / houses in a small city - Tarija Boliva,

They ended up choosing a small but nice terraced house for 300 per month!

People who have large mortgages - were the market to drop like 70 percent - would you walk away or continue to pay the bank?

I think I would walk away if I could. A drop of that magnitude is going to be a huge problem for me, but only if the bank asks for more equity... which it would. They would be screwing themselves though and would be better off to pretend it was all good, otherwise the whole thing would collapse, which at a 70% drop, it already has.

That said, I would be happy to move to Bolivia or Guatemala for a few years if I had no job or prospects. Ya puedo hablar un poco.

I always wonder about these people from the USA that move somewhere cheap in latin america. Its good if you adjust your living expectations, but not so if you assume it is as good as in the US. I have met a few retirees in Panama that think its a great place to move because its (relatively) cheap, but then realise its a 3rd world country in some ways, and difficult in many ways if you don't know the language.

But, 70% is major damage for everyone and no one would be immune. You couldn't have a 70% drop without it resulting in huge job losses and very high rates of unemployment.

It would create a huge contraction in the economy. Even those with no property assets at all would have problems.

Select to expand quote

psychomub said..
Were these really infomercials?

www.dailytelegraph.com.au/nocookies?a=A.flavipes

Problem: Falling prices and rental income spell disaster.

www.domain.com.au/news/the-25yearold-with-eight-investment-properties-20151020-gk9kbj/

I don't know. I have read a few of these stories over the past few years, always with a bit of scepticism. I thought that most of these people seemed to have some exceptional luck or something or someone backing them up.

But, if they invested in the right way, they might weather the storm better than most. If they have selected the right properties in the right areas, where rents are covering the payments, they are going to be as well off as anyone else.

Then again, if all their properties have rental drops, then it would probably be a disaster for them. If vacancy rates increase, and rents fall, this may well happen. I would be happy for these sort of people to fail, just through jealousy, but I know that if they do, I will be stuffed as well.

Interesting mainstream press article.

www.brisbanetimes.com.au/money/borrowing/it-s-our-version-of-the-gfc-warning-on-looming-interest-only-crisis-20180720-p4zsrs.html

Select to expand quote

Paddles B'mere said..
Interesting mainstream press article.

www.brisbanetimes.com.au/money/borrowing/it-s-our-version-of-the-gfc-warning-on-looming-interest-only-crisis-20180720-p4zsrs.html

Good article, but a wee bit sugar coated.

If house prices continue to drop - even by small amounts, many less of the holders of these interest only mortgages will be able to refinance the original purchase price of their properties.

Select to expand quote

petermac33 said..

People who have large mortgages - were the market to drop like 70 percent - would you walk away or continue to pay the bank?

A drop of 70% would represent armageddon. That would make what happened in the US and Europe during the GFC look like a picnic. Unemployment will probably be over 15%. The banks will be bust and the government will have nationalised or part-nationalised them to keep them running. They will probably consolidate the "big four" into the "big 3" or "big 2". They will do whatever they can to keep the banks alive, and it will be at a very big cost.

I think a crash is a possibility, but I sincerely hope we never see anything like a 70% drop - the social cost will be devastating.

www.moneymorning.com.au/20180720/australias-property-boom-is-well-and-truly-over.html

Yet another source..

'Generally the wider market [in Sydney]has cooled with transaction numbers falling, selling periods extending and prices declining.''Melbourne has eclipsed Sydney as the nation's worst-performing capital with prices falling by about 5 per cent in recent months, according to recent analysis by investment bank Morgan Stanley.'

The trouble is, with so much debt in the system, it could be difficult to correct or even slow down the housing bubble without triggering a full-on crash. One that could have disastrous effects for the wider economy.Controversial - but often prophetic - economist, Harry Dent, believes that Australia is currently in the mother of all bubbles. He says:'Australia is now, by far, the most overvalued country in the developed world.'Sydney is now 42% more overvalued at median price to median income than San Francisco.'

www.smh.com.au/politics/federal/visa-queues-swell-as-peter-dutton-s-migration-cuts-bite-20180720-p4zsp6.html

I agree psychomub, with this much debt coupled with assets that are so overvalued it wouldn't take much for it all to collapse quickly. Hence why I have always said I'd hate to be in the shoes of the RBA governor.

Debt slaves:

www.news.com.au/news/aussie-homeowners-trapped-in-mortgage-prison/news-story/5467fbbdc933cbe18ab9019e81381885

...the bankster's wet dream...

..just found this in my bookmarks - from 2 years ago..

wolfstreet.com/2016/10/07/liar-loans-surge-in-australias-red-hot-housing-bubble-ubs/

www.asgoodasgoldaus.com.au/blog/apra-airbrushes-australian-history-to-avoid-economic-armageddon/

collapse or adjustment ...
www.brisbanetimes.com.au/business/markets/it-s-not-just-sydney-the-end-of-the-global-housing-boom-20180801-p4zusx.html