Property Crash? Bah Humbug!

[Bob Kane]

NZ has never had a property crash.
Not a real crash.
Not where you lose your dough.
For good.
The worst we've had is a mild dip in values for about 18 months.
And then we regained all the loss and started making money again.
If you want to study a real crash then look to the '87 sharemarket.
It took 17 years for the market to recover to the '87 level.
And lots of investors lost their dough.
Another crash is what the finance sector is experiencing right now.
There some investors are looking at getting back 30 cents (or less) in the $.
Now that's a crash.
But property?
Crashing?
Never happened in the past.

[halfempty]

As a side note and sorry to hijack your thread but if we lost about 6 billion with all the finance companies going bust, then we gained about that from the farmers fontera payout.

Does that make us about even again?

[Mark_B]

HE

What's the connection between the small-time investors who collectively lost big-time $ in finance companies and the dairy farmers currently milking it for all it is worth?

I don't see one.

The first group were investors, the second a business owners and operators.

M

[halfempty]

I was making a global connection between money into the economy and money out and saying that as a national economy maybe we are no worse off.

But it is interesting that you word your post so that the hard working people who slog it out ever day doing a job you would probably not do your self are "milking it" while the people who put there money in a fund with a high return then expected it to still be there later are OK.

Not picking on you I just find it interesting how peoples opinion come out in there wording.

I know people who are very well educated and had every dollar they had in a finance company and lost the lot.
And that's very sad but it's also just not smart.

My mum mentioned something about Eggs and a basket?

[Mark_B]

Alot of people (down here anyway) had their money in finance companies because their adviser recommended them.

As for diary farmers - when they start paying something approaching the true cost of the good they produce (including allowances for damage done to rivers and waterways, CO2 emissions, and damage done to local roading networks), then I'll withdraw my "milking it" comment.

Until then...

M

[halfempty]

I understand your position, I just don't happen to agree with it.

and don't withdraw your comments your as entitled to your opinion as I am to mine.

[Mark_B]

I'm not sure you do understand my position - if you did then you'd realise that how hard dairy farmers work (and they work hard) is completely irrelevant to whether the profits they make are economically justifiable.

And if you re-read my post, you'll see that I'll withdraw that comment when...

Paying for damage to waterways is not even on the agenda atm (afaik).

Paying for CO2 emissions is on the agenda, but it is not very politically popular (especially with Federated Farmers having the influence they do).

Paying for the damage to roads - I know of one local council that's working towards that, but they've met all kinds of resistance (from FF and others).

I know that because I worked for them on that project for a couple of years.

M

[67910241]

Couldn't agree more Mark

but don't forget they're competing against American and Chinese farmers whom their governments still subsidise ie. pay to produce & pollute.

[totaranui]

never a property crash?

"But property?
Crashing?
Never happened in the past". says Bob Kane.


The past is not a reliable predictor - some say it's not a predictor of any sort.

There's been property crashes - defined as one that's universal and affects all property owners to the extent that the equity in their property simply disappears, as does the bank that lent them the money. Not a downturn (as current) that affects only imprudent property and financial investors.
In NZ the first property crash was in the years 1880-1890.
And the second was in the years 1932-1935. See the various Mortgage Adjustment Acts passed in the 1930s. Not there yet. But see The Mortgage Forgiveness Debt Relief Act 2007 in the US. Things are getting serious there?

It's yet to be seen if the current downturn becomes a property crash and a depression. Some say the signs are there for a depression, in that we have yet to see whether the actions of countries' central banks in injecting money into banks (mainly by swapping the bank's bad debt for good) is going to work.
For those who still think the past in a reliable indicator of the future (for investment), I recommend an excellent book "Against the Gods - the Remarkable story of Risk" by Peter Bernstein.

[Gatekeeper]

The past is not a reliable predictor - some say it's not a predictor of any sort.

Agree. Lessons learnt from the past are important but not a predictor.
The era we are entering is quite different in many respects to the Great Depression. The Great Depression was a time of plentiful resources.
Today we find ourselves with oil production plateauing/food production plateauing, and a huge lack of real capital.

People the world over has invested their future in houses, and produced nothing with that precious capital.

Great blog from London Banker at RGE Monitor this last week.
Sorry, no direct link but you can to subscribe free at http://www.rgemonitor.com.

The ultimate outcome is a lower std of living for everyone and a huge change to our financial systems. No boom for housing for decades, experiment failed, the era of low interest rates and bucks for bankers and financialists is hopefully over. Back to real Capitalism......please.....

Capital-ist Economies to Capital-less Economies
London Banker | May 23, 2008
A farmer who eats the seed corn over the winter must borrow to plant in the spring. He must repay the loan from the harvest, leaving him with even less to live on come the following winter if the crop does not yield a greater harvest. The misfortune of one bad harvest can start a cycle of decline that leads to permanent penury. Sharecropper plantation owners have exploited and impoverished sharecropper farmers on this principle for centuries.


Is it different for nations?

"It is the aim of good government to stimulate production, of bad government to encourage consumption."
- Jean Baptiste Say


In the classical conception of economics, capital is the surplus of production over consumption. Only by consuming less than is produced can a person, or a company, or a nation accumulate capital for reinvestment, growth and continued prosperity. Capital cannot be borrowed, because borrowing implies repayment from the proceeds of the endeavour at a rate which – on the whole – precludes accumulated surplus.


A gambler might get lucky and make enough to both repay the debt and hold a surplus over his consumption, but gambling erodes investment discipline and prudence, and so over time proves a poor basis for economic management in the home, the boardroom or the Treasury.


A thief or con-artist might steal or defraud enough to repay the debt and hold a surplus over his consumption, but theft and fraud erode commerical confidence and invite retribution, and so over time prove a poor basis for economic management in the home, the boardroom or the Treasury.


A defaulter can simply refuse to repay the debt, and keep any surplus for himself, but defaulting erodes investors’ confidence and leads to bankruptcy, and so over time proves a poor basis for economic management of the home, the boardroom or the Treasury.


Borrowing implies risk, for both the lender and the borrower.

Somehow neo-classical economics was able to finesse this principle to convince a generation of consumers, bankers, regulators, legislators and investors that debt should be considered capital too, and that more debt than savings could be good for economic growth and prosperity.


For a time, the neo-classical economists appeared to have found a financial perpetual motion machine. As consumers, companies and governments borrowed more, they appeared to prosper more. Leveraging the accumulated equity in their homes, the consumers got bigger houses and bigger cars. Leveraging their fixed assets and future revenues, the companies got bigger balance sheets, bigger executive remuneration and bigger shareholder dividends. Leveraging their power of taxation and monetary creation, the governments got bigger militaries, bigger bureaucracies, bigger scope for patronage projects. The bankers intermediating all this debt got bigger too, with bigger bonuses for “loan origination”, bigger fees from M&A, bigger commissions and income from securities and derivatives dealing, and bigger influence with their supervisors to loosen any inconvenient accounting, reporting, audit, scope or expansion rules that might have impaired their freedom to keep the party going.


Free Market became the rallying cry of those who believed in perpetual motion. They passionately decried regulation as impairing the market’s freedom to allocate “capital” to the best likely return. They passionately decried taxes as diminishing the “capital” held by those who would reinvest it in growth. They passionately exhorted consumers, businesses and governments to borrow as much “capital” as they could possibly bear, and to err on the side of profligacy, so that more “capital” would be working to grow their revenues and balance sheets in the “free market”.


But the problem with this perpetual motion machine was that it was all the time grinding the seed corn. The “capital” it was pumping out was not the surplus of production over consumption, but the borrowed surplus of greater fools who believed in the hawkers’ pitch of perpetual motion and laid their meagre savings and accumulated assets on the barrelhead in faith the machine would return them multiplied.


The reality of the American, UK and other heavily leveraged economies is that we have eaten our seed corn and eaten the seed corn of those who have financed our profligacy. Over the past twenty-five years there has been a quiet conspiracy among those bankers profiting from the process to promote gambling, stealing, fraud and default as solutions to disguise the implications of a failure of perpetual motion.


Financial markets have morphed over this time from mechanisms for efficient allocation of scarce investment capital to promote greater production through rewarding foresight and diligence into casinos that reward those with a system that beats the unwary and beats the house. Leverage has been used to overcome bad judgement, rewarding those willing to risk more at the expense of the prudent. Modern markets have arguably never been less transparent, with fragmentation, off-exchange dealing, derivatives, structured finance, hedge funds and other ill-transparent innovations making it all but impossible for the average Joe Investor to assess activity and prospects with any confidence.


Companies were urged to borrow for sprees of mergers and acquisitions, and then either declare bankruptcy to shed their inconvenient pension liabilities or move production offshore to reduce expenditure on labour or both, emerging from these contortions as desirable prospects for more mergers and acquisitions. Any setback resulted in the generous retirement of one incompetent executive and the more generous appointment of another that would borrow the company into future prosperity.


Consumers and consumer finance companies were urged alike to feed the machine by overstating house values, overstating incomes, understating debts, juggling credit cards, and continually recycling any proceeds from the mania’s inflation of asset prices back into more accumulated debt through regular refinancing. Workers were forced to give any surplus savings from labour to the machine as mandatory pension contributions or cajoled into it through tax breaks on 401Ks and other ruses funnelling seed corn to the machine.


Governments were urged to finance wars, social welfare spending, police state intelligence technologies, infrastructure and excess, defaulting through loose monetary policy, defrauding through massaged official statistics, and deregulating the financial sector and capital markets when credit constraint threatened to stem the tide. A government that got into trouble was urged to "privatise" by leveraging or selling government assets, the seed corn of past accumulations, or to put services out to tender in the private sector so that they could pay more to receive less through the miraculous efficiencies of free market fulfillment of social needs. Any difficulty or disruption was overcome with tax breaks, subsidies and public underwriting of yet more debt creation - with mortgage interest deductions, corporate debt interest deductions, FNMA, FHLC and other ploys all feeding more seed corn to the machine.


All of this will someday unwind. It may be this year. It may be next year. It may be several years hence if central bankers can scrape together more seed corn from ever greater fools to keep the perpetual motion machine turning over. At some point, indebted societies must revert to the discipline of consuming less than they produce to repay their debts, or these societies will suffer the even worse consequences of the social dislocation and commercial disruption that follows gambling, theft, fraud and default.


Globalisation has allowed the bankers to hawk their perpetual motion wares to a wider pool of greater fools. This is a dangerous policy. Warren Buffett has long warned that as long as the US has major foreign trade deficits, it has to "give away a little part of the country" each year. He warned America was becoming a "sharecropper economy," where Americans largely work for foreign-owned firms – or governments. The profusion of sovereign wealth funds represents the rational diversification of states with surplus production over consumption – capital – to preserve that wealth through equity investment that unlike debt will be secure from the debtor’s attempt to inflate away his obligation through the expedient of monetary laxity. Owning equity means a permanent claim on American production. Like the sharecropper, foreign equity ownership implies permanent want and decline to penury for the borrower nation.


Worryingly, globalisation has increased the likelihood that debt will lead to political instability and international conflict. The wars for resource, long a “Great Game” but now increasingly a violent and expensive gamble, are only one outcome. Food riots and inflation encourage governments to resort to intervention and oppression. Internal economic decline and dissent reinforces calls to patriotism, theocracy and militarism over reason. Lately I find myself wondering if the “beggar thy neighbour” policies of the 1930s weren’t a result of a similar dynamic, following, as they did, a similar era of massively irresponsible bank-fuelled credit growth and deflation.


When I was young and in debt, an old mentor of mine enjoined me to pay off my loans and my credit cards and to never again “borrow for consumption”. Investment that would confidently yield a good return, such as buying an education in a profession or purchasing a home for the long term, could be financed, but a new TV or a holiday must always be earned and paid for from present income.


Strange to say, but his advice shocked me. I had grown up with debt. My parents were always in debt. My earliest memory of economics is my father explaining to me that he loved inflation because his salary would get bigger and his debts would get smaller.


Nonetheless, I took my mentor’s advice and have lived within my income, whether large or modest, ever since. Perhaps I have missed out on having a grander house, or a flashier car, or the trendiest gadgets, but I have slept remarkably well for over twenty years and feel confident of withstanding the challenges and profiting from the opportunities that the future may bring.

Hat tip to Capone (the blogger formerly known as JMa) for suggesting the title in his comment on Professor Roubini's blog on 2008-05-13 14:39:49.

I've been given a regular Friday slot here on Finance & Markets Monitor. This allows us to carry on the chitter chatter over the weekend when the Professor's blog is quiet for the most part. There may be some weeks when I don't post, but the team at RGE now has enough depth that there will always be something worth reading here.

[Josko]

Interesting reading Gatekeeper...

Obviously Bob Kane it depends on how you define ‘crash’.

When you look at the share market crash and any example of a property crash the same logic can be applied to both situations you only loose money if you need to sell, both have been elastic and returned to previous levels and beyond.

Both have a cycle of crash and recovery.

The current financial turmoil with finance companies is an industry crash. Mainly brought about by the tightening of credit markets and general market sentiment towards risk.

There is hardly a cycle that can be attributed to investing in finance companies.

If you define a property crash as has been mentioned before by a drop in values of 30% or more then we are only a few percentage points away before we can say that the property market has crashed in some areas.

Will there be a recovery, I bet you gazzilion dollars there will be.

[flyernzl]

An interesting perspective I heard today: From the point of view of the overall economy, none of the finance company money has been 'lost'. It has simply been transferred from the pockets of pensioners/widow/orphans/the gullible and the unfortunate to the pockets of the sharks and the spruickers (and possibly from there to the Porsche dealers and the Dom Perigon sellers).
That money still exists, it has simply found a new home.

[Davo36]

Yes, the "Trickle Up" effect!

David

[Badger]

An interesting perspective I heard today: From the point of view of the overall economy, none of the finance company money has been 'lost'. It has simply been transferred from the pockets of pensioners/widow/orphans/the gullible and the unfortunate to the pockets of the sharks and the spruickers (and possibly from there to the Porsche dealers and the Dom Perigon sellers).
That money still exists, it has simply found a new home.

Wealth transference to the banksters. "MORAL HAZZARD"

Also in many cases there wasnt any "REAL CREDIT" to start with since many took loans out to invest.

What they loaned is invented from "THIN AIR" by central bankers and the scourge of paper is then released through discount windows to there mates for the gullible punter to loan from.

[Bob Kane]

When is the bottom of the slump?

About now.
I think we might be passing through the worst of the doom and gloom.
The mood will slowly change over the next 6 months.
If you're waiting for bargains then it might pay to start scratching around now.