Could a US housing crisis happen here?

12 Comments

1. 

   Lyall
   April 5, 2018 at 9:45 am:

   Spot on. People always forget that the denominator is inflated during debt booms – the income/GDP part of the equation. Debt stress will eventually lead to people cutting spending, triggering a recession and job losses, and then the debt stresses & defaults will mushroom.

   It is naive and historically ill-informed when people merely assert that everything will be ok because debt levels are manageable at current levels of income/employment. It is also a long debunked argument that rising asset prices ought to relieve concerns about hight debt levels, as it is the high debt levels that have driven asset prices up in the first place. That same argument could have been (and was) used by soothsayers to argue that risks did not exist in the US in 2006, Japan in 1990, etc, before the busts came. It is bewildering to see people continuing to make that argument.

2. 

   Victor
   March 6, 2018 at 8:00 pm:

   Hi Roger,

   Thank you, as always, for your insightful high-level view on such topics.

   I was wondering what, if any, advice would you provide to first-home buyers (FHB) entering a market such as Melbourne/Sydney?

   Despite the first home often being an owner-occupied property, it is also often viewed by first home buyers (FHB) as a long-term investment, either to sell in order to get into a bigger second property for a growing family or as the first property in a portfolio of many future ones.

   Sydney appears to have come back a bit over the last 3-6 months, although from a higher base, providing some hope of a significant pull-back, it just seems that Melbourne remains quite robust with a strong local economy, population growth and a median still a fair way off Sydney’s, suggesting there may still be room to grow.

   Whilst there are always good opportunities for those who are disciplined and patient, admittedly harder to find in a booming market, generally speaking, do FHB just have to swallow their pride and try to limit the clear ‘overs’ they must pay on their property in TODAY’s market? How does one navigate the inevitable rise in interest rates other than by being ultra-conservative with their loan amount, or this just the only way?

   • 

     Roger Montgomery
     March 9, 2018 at 10:43 am:

     We cannot offer any advice however its worth remember that the more leverage you use to buy any asset, the more difficult it becomes to make rational decisions about what to do next. High debt to income and high debt to gap suggests that either rising rates or a slowing economy could spell trouble for those with highly geared properties. In the long run, strong relative population growth and reported difficulties securing development consents suggests a shortage will eventuate again and prices will stabilise but whether that leads to rising prices will depend on how the debt/interest rate/economic growth(jobs) picture plays out.

3. 

   jimbo james
   March 4, 2018 at 6:45 pm:

   Staggered that some would choose to hide behind such a fallacy. Reputations can be fickle. Make no mistake the Government will be throwing the kitchen sink at preventing carnage in this space. They will fail just like they do with every other policy. Wayne Byers has clearly been instructed by the Treasurer to wind back interest only lending caps not long after they were implemented. Funnily enough the backflip comes just as most markets are retracing

   • 

     John
     March 5, 2018 at 11:35 am:

     Martin North is presenting a very good – and specialised andnow almost daily – analysis of Aus housing situation on his youtube channel. Seems to correlate well with what Rodger is saying. This situation looks quite dynamic at the moment (multiple moving parts that seem to be lining up) so it is really useful to track it closely so that you can start to see the trend.

     https://www.youtube.com/watch?v=jm5wpO27eBQ&t=5s

4. 

   Paul Kedwell
   March 2, 2018 at 10:24 pm:

   Inevitable downturn at some point, catalyst needed.

   However I believe I will be quite deep, countries that avoided last time not so lucky this time.

   My question roger is , timing but market could run 1 maybe even 2 years , but will drop / bear market drop below this current point ?

   Certainty from my point of view so patience will prevail in this redicolously expensive asset world currently.

   • 

     Roger Montgomery
     March 5, 2018 at 8:02 am:

     That’s an excellent question Paul. One cannot know.

5. 

   Spiro
   March 2, 2018 at 1:26 pm:

   Hi Roger, thank you for your commentary, always a good read. There are some questions I would like to ask.
   1. How do you determine the fair value of property in different parts of Australia. We have long term data available, although trying to establish fair value is difficult. Would you consider a start date of the mid 70’s and increase by say an average of 4% from there?
   2. If you were to include residential or commercial property in your potfolio, what characteristics would you consider given changes to demographics and to digital/technology in the workplace.
   Would appreciate your thoughts.

   • 

     Roger Montgomery
     March 5, 2018 at 8:08 am:

     Hi Spiro,

     1) To determine the value of an asset you need to look at the present value of the future cash flows streaming from that asset. Property should not be treated any differently. The result is you won’t find a residential asset in Australia whose price is below that value. That is one of the reasons (income is another) why you don’t see residential REITS in Australia – difficult if not impossible to make a sound investment case. Yes, there are people who have made lots of money buying property but if not from renovating or extending, then it has been from momentum (someone else being willing to pay an even higher price), not from value investing.
     2) Look up our blog posts (use the SEARCH bar at the top) discussing the characteristics of industrial property, which appear to be more appealing than commercial.

6. 

   Bruce Meiers
   March 2, 2018 at 11:01 am:

   From what I have read the slide in home prices to an affordable and stable level usually takes around six years and most of the slide occurs during a recession. This seems logical owing to the rise in unemployment during a recession. Interestingly most of the unemployment usually comes from the industrial sector and Australia is sadly lacking in this sector as our economy is now heavily reliant on the service side.
   Watching first hand the slide of housing during 1990-91 I noticed the evaporation of purchasers over about a twelve month period and there was blood in the street, a great buying time. Building trades were working three days a week if they were lucky and many left the industry. Today the housing industry is booming and shortages are occurring in labour and materials; a slowing of sales and price rises may result in forced unemployment in this sector if the rate of change increases owing to purchasers withholding a decision on buying.
   Presently in Melbourne purchasers are showing no fear of prices or the large amount borrowed even though affordability is running around a ratio of ten (grossly unaffordable) but we have full employment and high incomes. Lifting the affordability ratio higher would be extremely difficult, the risk ratio, hence there is a greater chance of price declines. Many investment speculators may find their equity evaporates quite quickly in the coming periods ahead.
   Another point that I would like to raise is the so called booming economy over the last 18 months. ECRI has some very good posts on this matter and they are suggesting the world is now on the downward leg of both the industrial and world growth cycles: historically this has not been good for the economy nor the stock market.
   History tells us that even though our industrial sector is small a substantial realestate calamity can occur as it did during the early 1890’s and Philip Soos has completed some interesting work about this period of time.

7. 

   Andrew
   March 1, 2018 at 8:30 pm:

   As someone who has just moved home after 15 years in the states, I have struggled to get into the Australian housing market for just this very reason – I lived through the mess of the GFC. At least in the US you have 30 year fixed interest rates for your homes.

8. 

   Max Zan
   March 1, 2018 at 4:42 pm:

   Hi Roger

   Some interesting and valid points there . The comments on the link below although somewhat dated are also worth reading and considering.

   http://www.abc.net.au/news/2017-07-20/rba-new-neutral-midway-between-a-slowdown-and-recession/8727014