Property bubble must burst

[Edinburgh]

Who can tell exactly what will happen. I wonder if Tauranga might be the model for the property market.

Here, the annual increase is just below inflation and it has been that way for a while. Houses are selling but it is a buyer's market. The market is just ticking over.

Increased rates and declining company profits (and some layoffs) might bring a soft landing and perhaps the housing market nationally will follow Tauranga's example.

Then again, there is our indebtedness and America's. I worry that the fundamental weakness in our economy could cause a recession if there is a trigger and that trigger could be the collapse of the American dollar - or something domestic. Seem to be a lot of earthquakes lately.

I trade in property, it is how I make my living, because the whole cash flow period passed me by. I would love to have an income from loads of cash flow properties and if I did I wouldn't be worrying. But when you trade, even if your turn around is 3 months, you could be stung.

I remember the 87 sharemarket crash - ouch!

But here is something to put it all into perspective. My 31 year old nephew was told on Friday that he has bowel cancer and he will lose his bowel. He has to wait 2 weeks for an MRI scan to discover if the cancer has reached vital organs and he might lose his life.

Don't suppose he's worrying about a property crash. Live life while you've got one.

[Skeptic]

If the answer is cash flow then you are ok provided your gearing is below 80% and it is putting passive income into your account every week.

Well you are OK if the rental market stay the same as now, but if there are a lot of vacant properties and house prices fall, driving down rents, then there is no guarantee that a house that is cash flow positive now will stay that way.

[Libertas]

Well you are OK if the rental market stay the same as now, but if there are a lot of vacant properties and house prices fall, driving down rents, then there is no guarantee that a house that is cash flow positive now will stay that way.

Historically the average price percentage change per year has never dropped more than 5-10% into negative growth. And you would have to have bought a really bad investment for this to happen IMHO.

I agree that the property may not be positive cash flow after this scenario has happened but I would say you have bought into a really bad market to begin with if you still can't manage the mortgage payment due low vacancy rates.

If it was positive cash flow to begin with then your risk is much lower. To achieve positive cash flow I don’t mean just buying really well, this can also be achieve by lowering the gearing ratio.

[Gatekeeper]

The Bank of Japan put up the cash rate to .5% yesterday. It has had no effect, with the Yen dropping further. Doesn't look good for our exchange rate. I read that 70% of farmers will not make a profit this year! We are surviving on credit that is going to get more expensive as our exporters take an even harder knock. Some are saying the USD/NZ will go to .80

Following on from this post, it looks like the carry trade has started to unwind!

http://www.reuters.com/article/reutersEdge/idUSN2746285420070227

Is the party over for the yen carry trade ?

NEW YORK (Reuters) - The party for yen "carry trades" may be ending sooner than expected, after a 9.0 percent slump in Chinese stocks on Tuesday prompted investors to reduce some risk in their leveraged portfolios.

The Japanese yen jumped more than 1.5 percent against the U.S. dollar, and was up about 1.0 percent against the euro on Tuesday, as investors unwound trades in which they had borrowed yen at low interest rates and used the proceeds to invest in higher-yielding assets in other currencies.

The yen had slid to a four-year low against the dollar in January, as low Japanese interest rates and low volatility in global financial markets, resulted in the "carry trade" value soar to an estimated $1 trillion.

The Bank of Japan's decision last week to raise its benchmark interest rate to a decade-high of 0.5 percent did little to restrain investors from selling the yen and buying instruments with higher yields, until now.

Tim Lee, founder and president of Pi Economics, an investment advisory firm in Stamford, Connecticut, said the end of the carry trade regime could be a "devastating financial collapse."

"We would be seeing a lot of hedge funds and investment banks which have benefited from carry trades go under. When these trades reverse, they all reverse together and the yen is a crucial part of it," he added.

"The subprime mortgage market, I think, is going to get worse and worse and there's no turning around," said Pi Economics' Lee. "The broader market seems to be ignoring it and that's a mistake. I think it's the first crack in the credit bubble."

The growth in subprime lending in the U.S. was fueled by a flood of global liquidity chasing higher returns in an environment of relatively low interest rates in the developed world, helped by sharply rising house prices in many countries.

As a result some lenders eased loan requirements on everything from houses to multibillion-dollar office buildings and introduced variable rate and deferred interest mortgages.

Analysts are concerned troubles in the subprime mortgage market could spread to other asset classes such as credit derivatives whose rapid growth have also been financed by low-yielding currencies such as the yen.

In the longer term, slowing economies in high-interest rate countries such as Britain and Australia may dim the attraction of carry trades also. Britain's interest rates are currently at 5.25 percent, while Australia's are 6.25 percent,

Stockmarkets are diving, hang on to your hats!
This is what I've been expecting for awhile.
It really had to happen.

[cube]

It should be noted that the 9% correction in China reverted the index back to its level of two weeks ago, still double over the year, so if the market is to correct fully, we should expect to see further falls.

cube

[cube]

I had to post this from the NZ Herald - Gatekeeper you should turn Pro!

The New Zealand dollar and sharemarket were being hammered today, after Chinese stock prices plummeted overnight (NZ time).

The New Zealand dollar went into decline across the board from about 7pm, falling particularly abruptly against the yen. The plunge picked up renewed momentum from about 7am today and the kiwi was still falling at 10am in hectic trading.

From 85.50 yen about 7pm yesterday it was down to 82.40 at 10am. Against the greenback the fall was from US71c to US69.85c, against the Australian dollar the kiwi dropped from around A89.35 to A88.65c, and against the euro from 0.5385 to 0.5280.

The New Zealand stock exchange followed world markets down when it opened at 10am today.

Ten minutes after opening the benchmark NZSX-50 index was down 121 points, or 2.9 per cent, to 3979. And by 10.39am it had dropped 3.23 per cent to 3971.

Overnight, the Japanese currency had exploded against Australian and Canadian dollars as well as the kiwi, all of which are popular targets of carry trades by speculators and individual investors in Japan. Against the greenback the yen rose nearly 2-1/2 per cent.

Following the 8.8 per cent plunge in China's benchmark Shanghai Composite Index, some speculators unwound their carry trades, in which they had borrowed cheap in yen to invest in higher-yielding currencies such as the NZ dollar.

[captaincrab]

GK, I am impressed. Well read.
The thing in the back of my mind is the how in Australia they are creating a device called a Property Warrant which can be used to unlock personal super to buy property.
Where is that investment money going to go? I reckon NZ.

[tricky]

Stockmarkets are diving, hang on to your hats!
This is what I've been expecting for awhile.
It really had to happen.

GK, well done, you were on the money today.
Go out on a limb - what will happen tonight/tomorrow?

[Propoholic]

Stockmarkets are diving, hang on to your hats!
This is what I've been expecting for awhile.
It really had to happen.

The following forms part of todays share market commentary from the Financial Times:-

I’ve been hanging out with my old friend Greed recently, when guess who turns up completely by surprise, my old mate Fear – haven’t seen him for ages.

Catching up with Fear was great. He explained that he has been keeping a low profile recently, due to his dislike of Greed. “Greed can be so pompous”. I agree and come to think of it I am becoming bored of Greeds ‘larger than life’ look at everything.

Fear explained that even though we haven’t bumped into each other recently, he has been around. He went on to say that since 2005, UK house prices (including London and the SE) have dropped by over 27% if compared to gold. I was amazed. Even though I have been in the same vicinity as Fear, I hadn’t even noticed him. Fear advised that I should keep my eyes open. The problem with hanging out with Greed is that more often that not, he blinds you to the obvious.

I think I’m going to see a bit more of Fear in the not so distant future – he keeps it real and is so down to earth.

[Gatekeeper]

GK, well done, you were on the money today.
Go out on a limb - what will happen tonight/tomorrow?

Hard Call, but more of the same I would say.
The carry trades are starting to unwind, and Yen is rising. This will raise fixed mortgage rates if it keeps up. Maybe Bollard won't need to raise, punters will move to floating and then he has control again.

[Libertas]

Maybe Bollard won't need to raise, punters will move to floating and then he has control again.

He might think he has control, but does he really?

[Paul34]

The carry trade is interesting from the perspective of how the world views our economy. People seem to forget that it is a measure of our strength relatively. NZ is seen as a risky volatile little produce little difficult to export economy. As a result it requires a higher IR to get people to invest cash here.

This is the crazy thing with the RBA as a means of holding inflation, they have forces counteracting. On one hand they want foreign money on another they want us to produce. At different points in the cycle the focus shifts. I would say the focus is clearly shifted to production now. Anyone looking in the mirror can see housing puling back which in an economy that makes so little is a key driving force.

If the govt was not hiring like crazy to consume our labour we would see the truth of the situation.

Our trade defecit would be telling him enough is enough. The 20 economist who think he will raise IMO have got it wrong.

The talk of the gold std is interesting as we need to have a base measure to understand worth, housing and its loss making tax incentive scheme is not the measure.

The situation can best be controlled by tighter lending policy or having the patience for the market to work. The lenders who are coming a cropper now through poor loans in the US sub prime market and our own car dealers is how a market should work.

[Libertas]

On one hand they want foreign money on another they want us to produce.

So it is their job to find a balance. Lowering the OCR appears to be the right action to take at this stage. If they raise it then we have a similar situation to the economic slump of the late 90's. Or is that what they want.... to crash the economy by hurting productivity.

Turn the tap off to the flood of credit.

[whitt]

ollard won't need to raise, punters will move to floating and then he has control again.

Have you seen the floating lately. Down to 8.5%.
As mentioned why fix.