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  1. #1
    Join Date
    Sep 2003
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    High up above and deep down under
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    Default Property bubble must burst

    Property bubble must burst
    The Dominion Post | Tuesday, 30 January 2007

    By DAVID MCEWEN
    What's the difference between investment and speculation? One of the best descriptions of the chasm that separates them comes from billionaire investor Warren Buffett.

    He says speculators tend to act like Cinderella at the ball. "They know that overstaying the festivities – that is, continuing to speculate in assets that have gigantic valuations relative to the cash they are likely to generate in the future – will eventually bring on pumpkins and mice.

    "But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: they are dancing in a room in which the clocks have no hands."

    Speculators buy with the express intention of selling, preferably in as short a time as possible, at a whopping profit. The flaw in this plan is that they require someone equally as greedy and presumably less intelligent to buy from them at the inflated price.

    Such buyers are not hard to find when a market is raging and prices are rising steadily. However, they are extremely hard to locate when the market dips.

    Many people are aware that the market has gone wild during a bubble, but most wrongly think they have got enough talent to know when a crash is coming and get out before that happens. I am concerned that the property market in this country is a bubble. Recent articles that quote research showing that New Zealand has among the most unaffordable property markets in the world underpins this view.

    Essentially, during very long periods, property price growth struggles to run away from the inflation rate. It can do so for extended periods, only to fall back below the inflation rate.

    The reason is that our salaries are tied to the inflation rate – in fact, our salaries are a big component of the inflation rate – so if property is rising much faster than inflation, eventually nobody will be able to buy property, and the property market will have to stagnate for as long as it takes for inflation linked wages to catch up.

    By adjusting the long-term rise in property prices by inflation, you get the real growth in values. Robert J Shiller, professor of economics at Yale University and a leading authority on markets, set out to do long- term research on property values adjusted for the distortion of inflation.

    Professor Shiller searched the globe to find the most reliable property statistics over the longest period on record. He found this in the central suburb of Amsterdam, the Herengracht, where reliable statistics date from 1600.

    Professor Shiller then produced what must be the longest range graph of property prices ever recorded, covering 350 years, starting at 1628.

    The prices were adjusted to remove inflation and showed an extraordinary thing – the price of a house in Herengracht, adjusted for inflation, had barely moved in 300 years.

    But the graph also showed extraordinary cycles where property outpaced inflation for up to 20 years, only to fall below inflation for the next 20.

    The notion that after a decade of booming prices in New Zealand, the property market will now settle for a steady growth rate still well above inflation, seems to me to be deeply flawed.

    David McEwen is managing director of Investment Research Group. He can be reached by email at [email protected] .

    http://www.stuff.co.nz/3945134a1865.html
    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

  2. #2

    Default

    Bit more of the same here http://money.cnn.com/2005/01/13/real...shiller1_0502/

    Hmmmmm
    "
    It is true that, for the United States as a whole, real home prices were 66 percent higher in 2004 than in 1890, according to the index my research assistants and I have put together. But all of that increase occurred in two brief periods: the time right after World War II and since 1998.
    Other than those two periods, real home prices overall have been mostly flat or declining. Moreover, the overall increase, including the booms, is not very impressive -- 0.4 percent a year."

  3. #3
    Join Date
    Jan 2005
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    1,129

    Default

    I tend to think property outperforms inflation by about 2-3%.
    I think Monid recently posted this figure and it has a realistic credibility.

  4. #4
    Join Date
    Feb 2004
    Location
    Wellington
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    2,808

    Default An investor can still make money

    It's possible to make money without ever selling. The article appears to me to focus only on one part of the puzzle and that is the sale and purchase price...... this is not the only way to make money from property.


    But i kinda agree about the whole bubble thing

    cheers
    spaceman
    Delightfully in need of some Tender Loving Care
    Blessed are those who can give without remembering and take without forgetting
    Some things are not as they seem, nor are they otherwise

  5. #5

    Default

    The problem with the whole "Bubble must burst" theory is that someone has to tell all the mum and dad investors that they have to stop buying above value as is their habit.
    Then go round all the first home buyers and get them to stop wanting a home at any cost as is their habit.

    And the habits of the crowd are hard to change.

    Steve
    Steven Goodey - CEO PropertyTutors Wellington

    www.propertytutors.com

  6. #6
    Join Date
    Feb 2004
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    Newcastle-under-Lyme
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    Default

    Quote Originally Posted by Stevegoodey View Post
    The problem with the whole "Bubble must burst" theory is that someone has to tell all the mum and dad investors that they have to stop buying above value as is their habit.
    Then go round all the first home buyers and get them to stop wanting a home at any cost as is their habit.

    And the habits of the crowd are hard to change.

    Steve
    Steve like most things financial markets operate with homeostasis.

    (And before someone makes a comment about only being a poor kid from the Bronx or some similar such nonsense, you have wikipedia: http://en.wikipedia.org/wiki/Homeostasis )

    In other words individuals can't change the habits of the crowd, but the habits of the crowd will lead the habits of the crowd to be changed.

    Look at the stockmarket crash, this was precisely the result of this, the masses behaviour caused unsustainably high stock prices, then the masses reaction to this caused a crash...

    We had better hope the bubble bursts soon, because the bigger it gets... the harder the fall.

    David

  7. #7
    Join Date
    Apr 2005
    Posts
    2,735

    Default

    Quote Originally Posted by Stevegoodey View Post
    The problem with the whole "Bubble must burst" theory is that someone has to tell all the mum and dad investors that they have to stop buying above value as is their habit.
    Then go round all the first home buyers and get them to stop wanting a home at any cost as is their habit.

    And the habits of the crowd are hard to change.

    Steve
    Yup, heard behaviour is funny alright.
    This whole house thing is a fad.
    It was stocks last time...and free love before that...
    Personally I don’t mind that the public have something to keep them occupied...it stops them from annoying me.
    But I do wish the youngsters would get over the car and base music fad more quickly... I'm sure that all the misdirected energy could be put to better use.

  8. #8

    Default

    Does anybody have any idea as to what it might take to change things? What level of interest rates if any, for example. First home buyers borrowing 200 or even 300k seems crazy to me, although I realise that these amounts will seem like pocket change one day (when a loaf of bread costs $100). How about a tightening of lending standards? You would think that it couldn't outrun peoples ability to pay but that is what seems to be happening. Makes you wonder what is in store for our children?

  9. #9
    Join Date
    Jan 2004
    Posts
    1,545

    Default

    That's the unknown I suppose, but in January 2008 Basel II comes into effect, this might change things slightly as each country sets it's own rules. At present our rules have not been decided.

    Under Basel II, which will be introduced in New Zealand in January 2008, the risk-weighting on residential mortgages falls from 50 per cent to 35 per cent.

    In other words, the capital requirement on $100 million of this loan type will fall from $4 million to $2.8 million.

    On the surface this looks as if the banks will become even more aggressive as far as residential mortgages are concerned, but Basel II is less prescriptive - it gives each country the opportunity to adjust its risk-weightings.

    The Reserve Bank of Australia has indicated that it will only apply the 35 per cent risk-weight to residential mortgages when the LVR (loan to value ratio) is 80 per cent or less and the mortgage is insured. It has also indicated that mortgages with an LVR of 100 per cent or more will be risk-weighted at 100 per cent under Basel II instead of 50 per cent at present.

    The Reserve Bank of NZ is looking at its approach to Basel II. It has made no official announcement on the issue but Basel II gives Bollard another way to fight the housing boom.

    For example, the Reserve Bank could determine that only residential mortgage loans with an LVR of 75 per cent or less, plus insurance, will be 35 per cent risk-weighted. Mortgages with an LVR of 75 per cent to 90 per cent, plus insurance, will be 50 per cent risk-weighted and all those with an LVR of 90 per cent or more will be 100 per cent risk-weighted.

    This would have a big impact on bank lending policies. It would also be a more effective way to restrain the housing boom as the OCR is extremely crude, particularly as it has huge implications for the sectors of the economy that have no involvement in housing or consumer spending.

    The OCR is also ineffective as only 15 per cent of residential mortgages, in dollar terms, have floating interest rates and any increase in the OCR takes a long time to flow through to borrowers' behaviour.
    This maybe the tool the RBNZ is waiting for.

    http://www.nzherald.co.nz/category/s...ectid=10422257
    Find The Trend Whose Premise Is False - Then Bet Against It

  10. #10
    Join Date
    Jan 2007
    Posts
    91

    Default

    i was reading somewhere (forgot where - maybe even on this forum) that inter-generational mortgages are becoming common in some parts of the world (UK or Japan I think?) - I've not heard of these in NZ so maybe we are behind and there is plenty of growth to come.
    Theres no need for the bubble to ever explode - it can just keep on expanding across generations right?


 

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