Rising House Prices Make Housing Affordable

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[Editor’s note: You are receiving this version of The Daily Reckoning Week in Review as part of your subscription to The Daily Reckoning Australia.]

  • The magic number
  • Ve haf vays of making you cut
  • Rising house prices make housing more affordable
  • Exit the Fee

The magic number

The magic number emerges. 600 billion it is, divided into 75 billion a month doses, in addition to the existing 35 billion a month. In case you’re lost, the figures are how much money the Federal Reserve will be printing. So, $100 billion a month will be flooding into the economy.

If that sounds absurd to you, you’re not alone. But that’s just what central banks do, so you shouldn’t be surprised. (Germans refer to central banks as “note-banks” – as in dollar notes – for a reason.) And if you’re worried about inflation resulting from all this money printing, you should know that it’s the stated goal of the whole effort. Peter Schiff has nicely summed up the whole shemozzle. He isn’t calling it QE2. He’s calling it the Titanic, because it’s doomed to fail. (The QE2 is also the name of a ship.)

Now all this is big news. Stocks rallied, gold went to a new high and currencies smashed the US dollar. But something may have fundamentally changed. Usually when the fed announces purchases of government bonds, the prices rise and thereby the yields fall.

This is because the purchasing of the Fed puts upward pressure on the prices. But 30 year Treasury yields rose as bond prices fell after the QE was announced. Yes, Fed purchasing, but lower prices. Why? Perhaps the purchases were less than expected. Or the vigilantes are finally moving in. With inflation signals in record high commodities and currencies against the US dollar, perhaps the vigilantes see the spectre of inflation hammering bond returns?

Currency markets are the big hint. The AUD went straight past parity. Yes, the USD’s days are numbered, all puns intended. But what will emerge afterwards? Charles Kadlec from the Wall Street Journal reckons he might have the answer. The right answer that is, not the correct forecast. Analysing the bond purchases in his piece titled Gold vs. the Fed: The Record Is Clear, Kadlec points out what everyone should know about using money printing to create inflation:

This policy is based on a false – and dangerous – premise: that manipulating the dollar’s buying power will lead to higher employment and economic growth. But the experience of the past 40 years points to the opposite conclusion: that guaranteeing a stable value for the dollar by restoring dollar-gold convertibility would be the surest way for the Federal Reserve to achieve its dual mandate of maximum employment and price stability.

The actual likelihood of returning to the gold standard is unknown. But quite a few serious people advocate it. If you would like to know about the demise of the gold standard, I highly recommend this podcast. (Basically, you can blame the French). The point of the podcast is that the gold standard is not something you can simply dismiss, even if you are sceptical.

“Ve haf vays of making you cut”

The Germans are engaging in a dangerous act of self righteousness. And it’s not making them any friends. Except the French President, with whose help the German Chancellor bullied the EU into some serious belt tightening. “Angela Merkel consigns Ireland, Portugal and Spain to their fate,” claims Ambrose Evans Pritchard in The Telegraph. Irish journalist Brendan O’Connor chimes in with a satiric “Ve haf vays of making you cut” and “While the Germans aren’t supposed to invade countries any more, it seems that like vampires, as long as you invite them in, it’s OK.”

It all makes great reading. But underneath the German vampiric military exterior lies a heart of gold. They want what’s best for Europe, so it can buy more German exports. Aside from that, German voters will only take so many bailouts and the German constitutional court might not take any.
When you consider the other option to German imposed austerity, things get really scary:

Economist Colm McCarthy has starkly warned that the International Monetary Fund will be running Ireland by February if the Budget “fails to convince the financial markets”. In what he calls a “scary scenario”, outlined in the Sunday Independent today, Mr McCarthy says “the game is up” if the Government flunks the Budget on December 7.
“The sense of impending doom is also evident in the latest Sunday Independent/Quantum Research poll, which found that a massive 64 per cent believe it to be “inevitable” that Ireland will need the help of the IMF in the new year.

Wait till the Irish learn of the IMF’s track record at helping nations. Then they will really get a sense of impending doom.

Rising house prices makes housing more affordable

Noted Austrian Economist and financial crisis predictor, Peter Schiff, came up with a thoughtful concept he called the “Paradox of Rising House Prices”. The idea was that rising house prices make housing cheaper. Sounds odd, but it makes perfect sense. In 2006 Schiff wrote an article explaining that rising house prices are factored in when buyers buy. They expect equity to be formed. That means rising house prices make buying a house more affordable, particularly when houses are easy to remortgage. Simply refinance after one year for whatever price rise your house has given you. But when prices begin to fall, or stall, that affordability gain is lost, making houses more expensive.

But there is another theory your editor has pioneered. At least as far as we know. When you buy a house, what do you pay? What are your costs? The price of the home, you might think. Nope, unless you’re paying cash. More likely is that you took out a loan, providing the deposit and making the loan repayments over time. Those are the costs, not the house price. Now, do deposits and loan repayments get larger or smaller given rising house prices? Well, if a bank perceives house prices rising as a safe bet, that reduces risk on the loan transaction very significantly. If the borrower stops paying, the bank is left with an asset that has gained value.

Given the lower risks of being in the mortgage business, the market does the rest. Loan providers will compete for business and drive costs for borrowers down. Required deposits fall and interest rates go lower as lenders out bid each other for customers. Eventually, … presto! Buying a house becomes cheaper!

From the land of bailouts, bubbles and billionaires

“Remember when Ronald Reagan was president? We had Bob Hope. We had Johnny Cash. Think about where we are today. We have got President Obama. But we have no hope and we have no cash.” – Speaker to be John Boehner during the election campaign.

Well, the election results are in. The House of Representatives goes to the Republicans, but the Senate remains out of reach. What does it mean?

Why are you asking us? It’s not like politicians’ rhetoric is something they stick by. That’s one of the main points Tea Party leaders are making after their mixed but influential performance. They are planning on keeping the Republicans honest, after G.W. Bush led them all over the place last time around.

As for the racist and homophobic elements of the Tea Party, they didn’t seem to turn out. In fact, gay and racial minority leaders did very well out of the Tea Party wave. The Tea Party darling Marco Rubio is the son of Cuban exiles and got elected as a Senator! The Democrats on the other hand have a bias against the living. They elected a deceased candidate in California.

The big question out of all this is what it means for 2012. Neither party has the mandate at this point. Who will take it when the time comes? Hopefully Europe will be pulling off austerity by then and Keynesians will return to their classrooms demoralised.

Speaking of Keynesians, check out this video on the subject. It’s about the impact Keynes made on the sanity rally held in Washington DC recently. No doubt attendees of that rally would decry the inequality, which is getting out of hand in that bastion of capitalism, the US. The rich are only getting richer, they say.

Only it seems that many of the self proclaimed billionaires are in fact not billionaires at all. Two people were so eager to pay taxes they filed multiple so called “W-2” forms, which made them multiples richer. The supposed mistake skewed the statistics dramatically for 2009. Top US earners went from income growth of 500% to a decline of 7.7% for the year. Oops. The fact that 2 people managed to muck up the report illustrates just how accurate the whole thing is.

Meanwhile, the bailouts continue, with AIG to receive a further $22 billion for restructuring. We can’t keep track anymore. Nobody needs to really, considering the money is being printed out of thin air anyway.

Exit the Fee

Regarding this exit fee shenanigans that Treasuer Wayne Swann has come up with, we have little to say. Particularly in the light of the pain, suffering and violence involved in the issue. Simply ponder this: If exit fees are abolished, where will banks recover the lost revenue?

Probably by charging mortgage holders higher rates. So, those who do not want to swap and change mortgages will take on the costs of those who do. And everyone will be paying more. Best of all, if you can easily change mortgage, why read the fine print in the first place? That in turn means banks can include more dubious clauses. Government intervention will not solve this. And you can’t increase competition with more regulations.

The Average Queenslander

Australian license plates are ridiculous. Victoria is not “the place to be” and Queensland is not “the smart state.” Going by the amount of Victorians driving around Queensland, it’s the other way around. But to the point, the Courier Mail reports on the severely struggling average Queenslander.

New figures show the average Queenslander is left with only $18 a week after basic costs, which do not include medical bills, insurance or entertainment.” And despite Queenslanders supposedly liking an underdog status, this isn’t what they had in mind.

So with the latest rate rise and Commonwealth Bank decision, it’s tough times for the maroahns. Then again, “an $18 “horse dress” bought online has upstaged Melbourne’s most stylish on the biggest fashion day of the spring racing carnival.” Yep, a fashionable north Queenslander took the honours.

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.
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Comments

  1. hehehe titanic…bailouts wont help and 90% of the hazards (leverage on no collateral) are still hidden, like icebergs. sink the ship, save the iceberg. next challenger , or going down for all to see when the O (for Obama) rings fail.

    Reply
  2. Zhang: “Simply ponder this: If exit fees are abolished, where will banks recover the lost revenue?”

    We have numerous loans with the ANZ which have no exit fees whatsoever. How does the ANZ survive? Pretty well. If a bank offers excellent service, they figure you won’t leave. :D

    We also have numerous loans with Members’ Equity. These have no exit fees after five years. How does Members’ Equity survive? Again, they’re doing well! :D

    What is significant here, in fact, is that we pay no fees on anything at all, with either bank. :D

    Your logic is flawed, James. The situation is far more complex than you describe it. There’s agreement in both L parties that exit fees are going to be the crux of a bank review. It won’t affect us at all. Nor should any ethical bank CEO harbour concerns, unless collusion really is an issue. ;)

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  3. “the average Queenslander is left with only $18 a week after basic costs” – Twaddle; I live in QLD and even the disability pensioner families who live on either side of me can still afford to smoke taylor made ciggies.

    DRA does quote some alarmist crap at times. Haven’t analysed the Courier Mail article but fully suspect that if a bloke like Kris Sayce did he’d be screaming that CM have combined some silly unrelated sets of stats to come up with an attention grapping made ya look ya silly chook type headline – You really SHOULDN’T take everything you read in the mass media at face value ya know Jimbo! ;)

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  4. “grabbing” ! :D – PS: If you but (or should that be ‘put’? :) ) text inside “” signs on this site, it seems it doesn’t appear – I’m so FULL of useless trivia! …

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  5. It is signs like these that don’t work:

    >>>>>>>>>>>>>>>>>>>>>>>>>>>> (greater than)

    and

    <<<<<<<<<<<<<<<<<<<<<<<<<<<< (less than)

    Wonder if they'll appear when en masse?

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  6. Use multiple >>> and <<< signs if one wants them to appear it seems?

    Goodo – We'll see if any financially entertaining comments come in tonight.

    Toodle pip to all! :)

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  7. For more enduring symbolism, the spacebar is our friend, Ned.

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  8. I see the space cadet is still lurking… . :D

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  9. http://www.heraldsun.com.au/money/money-matters/houses-seized-as-loan-defaults-hit-record/story-fn312ws8-1225948145480

    My understanding on this is the banks are acting quickly on defaults.. amounts in default $3000 to $5000 from what I have read…
    Reason given is banks know house prices are falling and they are moving quickly to minimise their losses..

    Any Queenslanders have a take on it?

    Stillgotshoeson
    November 7, 2010
    Reply
  10. Omigod! We’re the same as… as… as… the US!~

    (Shoes, salivating at the thought of 193 QLD families losing their homes.
    Jeez, you’re a one-off, son. Ex won ya in a raffle, did she?!~ :D )

    Reply
  11. All quiet on the Western/Northern/Eastern and as expected Southern fronts?

    Hmmm … Tick, tock, tick, tock … :D

    Reply
  12. “Any Queenslanders have a take on it?”

    Yep, we certainly seem to have been in the grips of a correction here for maybe as long as 9 months now Shoes. Although I’ve only been picking up vibes on same over the last 3 months maybe. Not being specifically in the industry.

    Anecdotal (and limited to a region I’m interested in) only, new rentals are attracting maybe 10% less than what current rentals are. A bit of an oversupply issue is my gut hunch.

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  13. Comment by Ned S on 7 November 2010:

    All quiet on the Southern fronts?

    Real Estate Institute of Victoria reported a clearance rate of only 61% for property auctions Saturday… Figure may well fall below 60% Once all weekend results are reported and issued tomorrow.

    Either way was a significant drop in demand for property here in Melbourne.
    Around 2500 houses up for Auction over the remaining Saturdays.. 27th of November is our State Election with not many houses up for Auction that day but a couple of 1000 property Auction Saturdays in there… could be interesting.

    Stillgotshoeson
    November 7, 2010
    Reply
  14. Southern front to me in terms of that throw away comment was Antarctica Shoes – Apologies! :)

    But yep, Melbourne is down I notice. Will be interesting to see what happens there and in Sydney. Because in many ways effectively Melbourne and Sydney are the Oz housing market I guess. With the RBA presumably keeping a very close eye on them (amongst other things) in relation to their interest rate moves.

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  15. Hi Shoes

    Yes prices have been dropping here in SEQ. I watched the market for ages before i bought my house in July (although I really only looked at acreage). Lots of places just sat there, a lot dropped their prices quite dramatically. I got my place for what I would think about 25% off what it would have sold for if they wanted to wait.

    My daughter works in real estate and she said people who really want to sell HAVE to drop their prices or they just won’t sell. Some rental prices have dropped as well.

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  16. My view is rising interest rates have nothing to do with people unable to pay their mortgage. When anybody in the last 3 years took out a mortgage, they fractured in probably a 4% rise. What they didnt expect is the Cost Of Living to accelerate way beyond the avg. In my situation, If I take what the extra COL have introduced into my mortgage Just this year alone. ie Council Rates up $800, Power up $1000, water up $600, gas up $500, rego up $200, (Weekly food/House items we were spending about $200, now about $300, so extra $100 p/w) which is $5200. Add all those together $8300. If you take it as a nominal inflation rate of 4%, it should be about $400. Therefore, I’m paying in my household bills an extra $8K per year even without rates rising. This is where the problem is. Every State, Local, even Fed Govt’s are to blame for what’s going on now. But for some strange reason, all the anger is pointed to the banks, But it’s not their fault. It’s the Govts at all levels.
    What they are doing is instead of cutting back expenses and funding capital improvements, they keep spending the same (Often increasing) and offset back the capital improvements to customers.
    How many times have we heard “To fund new DeSal pants water prices will rise”, “To fund new upgrade of transmission powerlines, prices will increase” . This is NOT right. People need to start standing up to Govt and help stop the current leaching of funds from our pockets, because soon we will be too late and we will all be living in tents.

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  17. Comment by Biker Pete on 7 November 2010:

    193 QLD families losing their homes.

    http://www.theage.com.au/business/property/christmas-mortgage-stress-people-already-calling-in-tears-20101103-17e3w.html

    Might well be another 2500 to 5000 more next month it seems….

    Comment by Biker Pete on 7 November 2010:

    Omigod! We’re the same as… as… as… the US!~

    Some parts of America have large default/foreclosure problems… Some parts of America are doing OK

    We may well be heading down that very same path now… many a true word is spoken in jest.

    Stillgotshoeson
    November 8, 2010
    Reply
  18. Wishing us in the same lifeboat as the US is fairly typical of your mindset, Shoes. Floundering in rough seas of your own making, others have to sink for you to rise. Not the most admirable coping strategy… . ;)

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  19. others have to sink for you to rise. Not the most admirable coping strategy….

    Biker, shoes can speak for himself, but like I have said before I am over Caring for others, it was their choice to buy houses at bubble levels, no one put a gun to their head and said buy a house at bubble prices.

    Did these same people “care” about sensible people like me and shoes who knew it would financially irresponsible to buy.
    You also have to remember these same people priced us out of the market so to speak with their stupidity so why should we care?

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  20. Hard pressed to recall any post in which you’ve expressed caring for others, Steven… . :D

    Your position has always been identical to Shoes’ stance.

    The Blame Game you play is indefensible: “…these same people priced us out of the market…” Those losing their homes in QLD are unlikely to be investors. They’re everyday families caught up in the unemployment crises currently hitting QLD. To pretend you ever cared about these folk is silly.
    Like Shoes, you feel the need to not only walk to the lifeboat on their floating remains, but crow about it while you do… .

    Fellas like you will whinge ad infinitum regardless of prices. It gives you someone to blame for your current sad circumstances. ;D

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  21. Comment by Biker Pete on 8 November 2010:

    Wishing us in the same lifeboat as the US is fairly typical of your mindset, Shoes.

    Not a case of wishing anything…

    For a few years, myself and others have been saying property prices have risen too high too fast and are now over priced.. Many, Many others like youself have said No,No No this is not the case, Australia is different, China will save us, Supply and demand etc etc….

    A year ago (roughly) I gave wild outlandish predictions of the number of rate rises this year, Banks moving rates above RBA moves and defaults rising and property values declining because of these…

    Any one remotely on the “financial stress line” has had commentators/bloggers/economists warning them to be careful and assess their situation and do some thing about it..

    Property prices have no direct effect on me at this point, indirectly they will.. the greater the correction that comes the greater the influence..

    I bought $150000 worth of shares in May that are now worth over $200000, I can not get those sorts of returns on property so why would I invest in property?
    Further down the track when I am looking for steady income from investments I may look at property.

    The banks are asking for tax relief.. 20 billion dollas profit between them and they are going cap in hand for government assistance.. All those profits and almost no increase in dividends.. Why? Banks now have a liquidity problem and they know it, Declining finance applications, lower growth prospects and billions of long term debt funded by short term funding coming up for refinance means the banks are in a precarious financial position.

    Stillgotshoeson
    November 8, 2010
    Reply
  22. “…the banks are in a precarious financial position…”

    Possibly your most amusing contribution yet. :D

    Reply
  23. Comment by Biker Pete on 8 November 2010:

    “…the banks are in a precarious financial position…”

    Possibly your most amusing contribution yet. :D

    Matthew 13:13
    Therefore I speak to them in parables: because they seeing
    see not; and hearing they hear not, neither do they understand

    Loose translation…

    None so blind as those that will not see…

    Stillgotshoeson
    November 8, 2010
    Reply
  24. After you recent online outburst, quoting Matthew 13:13 seems even more hilarious than your previous post, Shoes. :D

    But let’s ‘see’, shall we?

    http://www.news.com.au/money/interest-rates/why-australians-would-be-better-off-buying-a-house-in-london/story-e6frfmn0-1225948612619?from=news+newsletter_rss

    I ‘see’ the UK is calling you ‘home’, but it’s the graph comparing our ‘poor’ banks to the rest of the world that you need to study (in between bouts of religious fervour… . ;) )

    Check out the ‘How We Compare Globally’ graph.

    I’ve no issue with our banks raising their rates in line with RBA recommendations. We benefit when they do. Moreover we pay no exit fees, being with reputable banks. To call ‘poor’ on our banks’ situation… and wish for a US crash here isn’t just simplistic wishful thinking, Shoes. It’s a very clear snapshot of your current, very confused mindset.

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  25. You are the deluded one.. I am not “wishing” anything..

    This site is called the Daily Reckoning.. ie it implies that a “reckoning” will come.. I agree with this and have commented how/why I think things will happen…
    I have not as you say “wished” for it.. I have just posted a perspective that differs to yours.. These things that I thought would happen are happening, I do not “wish” for it to get worse, I just believe, based on the economic conditions we are seeing, that it is still to get worse..

    You have post after post of how you achieved your financial position to date… I have posted how I am using these volatile times to increase my financial position.

    What worked for you over the last 20 years will probably not work for “recent” property investors as the rapid rise in property values over the next 20 years will unlikely match the previous 20 years gains.

    My investment strategy over the last couple of years also will not work forever, however I am flexible enough to take advantage of other investment opportunities as they arise.

    Stillgotshoeson
    November 8, 2010
    Reply
  26. Just a point on the “supply and demand scam” as I like to call it.

    Auction clearance rates in the capital cities were between the low 50’s to low 60’s %.

    If there was a shortage then you would have 100% sold or at least close to it,
    If around 40% to 50 % are NOT SOLD guess what

    THERE IS NOT SHORTAGE

    You don’t have to be a mathematical genius to work that one out!!!

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  27. A few months ago, I did some research on my suburb here in Brisbane based on house sales as posted on onthehouse.com.au.
    At the time, for the 2010 year to 29/5, there was 44 sales with a median of $940,000, with 21 (47.7%) being in the million dollar plus category.
    I’ve noticed that houses seem to be on the market longer during my morning walk, so decided to see what the latest is.
    For the period to 14/9 from 30/5, there was 32 sales with a median of $940,000, with 12 (37.5%) being in the million dollar plus category.
    Year to date, the median is the same, with a drop off in million dollar sales and an increase at the lower end (up to $750K).
    I’d call that a flat, but not declining housing market.

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  28. Median remaining $940000 after 5 years Davo… Some would be a bit peeved..

    Good deposit of say $300000 leaves a balance of $640000 Mortgage..

    640000 @ 7% is nearly $45000 in interest alone.. x 5 years

    Even an investor claiming the “loss” would be feeling the pinch having to find the shortfall and seeing zero capital growth over that period…

    Stillgotshoeson
    November 8, 2010
    Reply
  29. Not the type of ‘reckoning’ these blokes desperately need, Davo.
    It’s carnage they’re after, mate. :D

    What Shoes fails to factor in is the free rent, the capital gains free windfall on sale, and the fact that most buyers in that range would have been stepping up from the last CGF sale. The $640K mortgage is a mythical bird fluttering in his deluded cranium.

    Naive to the world of property, it would be asking just a little too much for the voluntarily homeless to see The Big Picture.
    (And that’s fine with me!~ :D )

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  30. Just a point about QLD number plates. The QLD plate is ‘The Sunshine State’. Always has and will be so.

    Idiot in chief Peter Beattie thought the ‘Smart State’ plates would be a hit so introduced them. It’s an option on the registration form. I think the uptake is about 2%, about the same as the voluntary ‘carbon offset’ program. Ie, only for fools and idiots, the same ones that thinking changing the tagline on a licence plate will change the image of the state as other than a place for a nice tan.

    I can guarantee the only ‘smart state’ plates you’ll see on the road are attached to government registered vehicles, which automatically get them.

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  31. Shoes, not sure where the 5 years is coming from in your comment.
    The median house price hasn’t changed in 2010.
    It has risen from $810K for second half of 2008 to $920K for second half of 2009 to $940K for all of 2010 to date.
    I haven’t put any information in relating to any period except 2010.
    However, if it was still $940K in 5 years time in 2015, yes, I would be pissed, but I’m confident that’s not going to be the case.

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  32. “Auction clearance rates in the capital cities were between the low 50’s to low 60’s %. If there was a shortage then you would have 100% sold or at least close to it, If around 40% to 50 % are NOT SOLD guess what THERE IS NOT SHORTAGE You don’t have to be a mathematical genius to work that one out!!!”

    Using your simplistic formula, one could equally comment that if half did not sell, the ones which did must have gone for half-price(!) Your logic is impeccable, Steven. Regardless of what these homes fetched, your comments are always priceless… . ;)

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  33. yeh whatsever you say

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  34. Yeah, whatsever… . :D

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  35. Hear the latest forecast for this year is that housing in se Queensland is expected to drop by about 5% over the next 12 months. I’m afraid I’m with Shoes. I am sick to death of listening the slumb-lords twittering on, telling us, “how much money I am making, my houses, my tenants, my tax fiddle, blah blah blah………………” Sir, you mistake me for someone who cares.
    Statistics released by a university in Taiwan state that up to 80% of day traders lose money in the end. But we all know who they are, they are the FOREX/CFD, borrow your money to invest, penny sharers, ‘get rich quickers.’ Well the rental landlord market is made up of exactly the same crowd. They (in the main) have been introduced to the ‘housing never goes down market’ by the like of the Investor clubs. They are financially unsophisticated, have little or no genuine funds and are generally grade 10ers. They invest either by default or when someone comes along and leads them by the hand (in order to pick their pockets).When I came from the UK some years ago, I could not believe that the banks would lend so much money into these rip-off pyramid schemes. I worked in real estate and opened my eyes even more. One day the u-know-what will hit the fan. And I will laugh my arse off at their expense. I’m not jealous, I have a quite a few bob and a house. I just find the crap in the paper, on the tv and sometimes in some of these letters, boring and educationally derelict. US real estate went down the plug, UK real estate went down the plug (they reckon the UK is going to take another -10% hit this year) and yet the spruikers keep spruiking. Biker, your whole empire depends on the bankrupt mindless grade 10ers. Mate, I make my money in the stock market and whip it back out. It costs me $60 to make my investments liquid. You reckon I would want to tie myself in with the margin borrowers on a $14k exit fee when the shit hits the fan? – cos that’s the business you are in. Good look to ya Mr Hooker.

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  36. I guess my line is pretty much unchanged: Yes, Brisbane house prices have seemed unrealistically high since about 2005 (to me). So I’ve been expecting a correction. (Which was another one I got wrong with them having gone up even more since.) But either way, I was never expecting a correction as big as the 40% figure that was being bandied around in late 2008 in relation to Oz generally. And, barring some pretty much total meltdown of the global economy, still aren’t.

    Just to give an idea of my thinking when I made my last two purchases (both debt free):

    My $312K (?) home in March 2008 – Went, Hmmm, I wouldn’t be at all surprised to see the price of this thing drop by 10%. (It needs some renos.) Have now factored that out to about 20% post GFC. (Figure I could sell ‘quickly’ for $275K)

    A $360K house in the name of my SMSF in April 2008 – Did some back of envelope calcs considering land values and construction costs and recall coming up with $240K as a worst case scenario. And decided I could live with that. I’m just not a stocks ‘n bonds type of bloke. (Figure I could sell ‘quickly’ for $330K)

    Being effectively retired, and working in cash, it’s more about minimising risk than maximising any potential short term return on a couple of assets that I really have no intention of ever selling I guess.

    And as opposed to sitting in cash and paying high tax (or having to move more money into super every year to lower my tax rate than I really feel to – Though that option is available to me unlike it mightn’t be to a lot), I still suspect that in 10 years time both properties may well be worth 50% more than what I paid for them minimum. With nil/minimal CGT implications IF I actually did sell.

    Interesting exercise (for me) to revisit my reasoning when I bought. And realise that nothing much has really changed. Though if the properties had been bought using borrowed money, I’d probably be seeing things differently.

    Reply
  37. Comment by Davo on 8 November 2010:

    Shoes, not sure where the 5 years is coming from in your comment.

    However, if it was still $940K in 5 years time in 2015, yes, I would be pissed, but I’m confident that’s not going to be the case.

    Had to go pick the kids up from school so was a rapid response…
    The last part you have is what my post was in reference to.
    Other countries have seen large price corrections in real estate, Australia may be different and only have a period of stagnation in real estate property. (best case scenario at the moment I feel)

    Some areas I expect to still suffer declines in real estate values

    Stillgotshoeson
    November 8, 2010
    Reply
  38. Ned: “I still suspect that in 10 years time both properties may well be worth 50% more than what I paid for them minimum.”

    Our expectation is a great deal higher, but we don’t need it.
    Our areas’ growth was 4 – 6% during the last year, less than you’d expect given that building costs are rising by 6% annually… but given the risk factors and tax issues of other investments, we’re happy with this growth, particularly because our costs are so low. :)

    Reply
  39. Ned: “I still suspect that in 10 years time both properties may well be worth 50% more than what I paid for them minimum.”

    Biker: “Our expectation is a great deal higher, but we don’t need it.”

    Longer term (10 years plus), a lot of it simply comes down to whether one has inflationary or deflationary expectations I think?

    And in that regard, I must admit that I’m of the inflationary bent. Which makes my 50% (nominal figure) fairly reasonable to my way of thinking – And may help explain my use of the word ‘minimum’ in relation to it perhaps?

    Reply
  40. “…may help explain my use of the word ‘minimum’…”

    Fair call, Ned. Ten years is a l-o-n-g time. There was a spell in the mid-2000s during which we saw growth of 100% in three years. I’d accept ten years as a more realistic duration for doubling, now.

    I may have to eat my words if WA values treble in a decade. ;) We’ll probably have sold a lot of our homes when their values double. Having said that, we’re not selling houses which doubled in ’05 – ’07*. They’re our best rentals… .

    * Did sell off a few blocks… and right at the peak!~ :D

    Reply
  41. “Ten years is a l-o-n-g time” – Hardly bares thinking about does it? Shute, we’re all gunna be either extremely grumpy or extremely anaesthetised by then I hope! ;)

    I know the deflationists are still pushing their spiel. But central banks and governments (including those of Asia) are still way happier with inflation than the alternative. Is how it seems to me anyway.

    Reply
  42. If there’s one thing we can bank on, it’s inflation, Ned. Factor in wage rises, too. Those two certainties will work against the majority of our generation, but the steady growth of housing values and rents will compensate!~ :D

    (Forget those hardly bears, mate. They’ll soften up in time. Gave my old (young) mate five stars to reward his compliant acceptance of my views…
    and I see someone else did, too!)

    Reply
  43. “Factor in wage rises, too” – Yep, I’m looking forward to going back to part time work in my early 70s picking up the junkies’ syringes on the beach and hygienically disposing of same (or whatever?) for maybe $220K pa mate? But enjoying myself in a sort of quasi retirement until then maybe!? :)

    Reply
  44. “…picking up the junkies’ syringes on the beach and hygienically disposing of same (or whatever?)…”

    Oz may be recycling ’em by then, Ned. Doubt you’d bother to work for so little, mate. Guess it would buy a Mac and Fries(?) I recall the daily paper used to cost threepence, the Saturday Matinee a shilling… and the utter shock when a Coke went up to fivepence. You could buy a new house for 240 quid!

    Mine dew, most of us couldn’t afford houses. Raised in shoeboxes, most of us. Pretty cramped… .
    (Response: “You had _shoeboxes_???!!!~ Luxury! Why, when I was a kid…” etc. etc…. )

    Reply
  45. “Doubt you’d bother to work for so little” – It just sounded like a much more enticing work environment than taking out the hospital waste to the incinerator Biker? But I reckon I’ll want my $220K regardless! :)

    Reply
  46. And Gee, I’m only talking about a part time job – With me not feeling to be being stressed out by any physical or intellectual effort at such an age? Hmmm … :D

    Reply
  47. Comment by Biker on 9 November 2010:

    Gave my old (young) mate five stars to reward his compliant acceptance of my views…

    My views have never changed…
    Back in Feb I think it was I said our views were not that dissimiliar, and you went off on a tantrum post about not giving a fuck about how similiar etc blah blah blah…

    I expect Melbourne/Sydney property prices to decline around 20% from their respective median values and then suffer a protracted period of minimal or zero growth over a period of years allowing affordability to improve as wage inflation brings down the income to price ratio of housing.

    I expect the ASX to suffer a fall in the region of around 40% from current values
    Then start it’s climb back up to new record levels.

    Stillgotshoeson
    November 9, 2010
    Reply
  48. Comment by Ned S on 8 November 2010:

    Ned: “I still suspect that in 10 years time both properties may well be worth 50% more than what I paid for them minimum.”

    Biker: “Our expectation is a great deal higher, but we don’t need it.”

    Longer term (10 years plus), a lot of it simply comes down to whether one has inflationary or deflationary expectations I think?

    And in that regard, I must admit that I’m of the inflationary bent. Which makes my 50% (nominal figure) fairly reasonable to my way of thinking – And may help explain my use of the word ‘minimum’ in relation to it perhaps?

    The negative impact from this is the swathe of FHB’s that have bought in the last 2 or 3 years on 10% deposit and have $400k+ mortgages.. They are likely to see property values in the areas they have bought correct by 10% to 20% and then have a period of very low or no capital growth in home values whilst still paying these 400K mortgages at 8%,9%,10% maybe more interest rates… Paying 30K to 50K a year in interest payments for a property that might be going up 20K a year.
    Less leveraged buyers and buyers whom purchased 5 years ago are in a far better position to ride this out.

    FHB don’t have spare cash sitting around to take advantage of offsets. They do not have spare cash to invest in other investment classes. They all can not move back home or in with friends and rent out their homes to help pay for the house.. (exposing themselves to future CGT by doing this anyway)

    Million dollar + homes in Melbourne are starting to come off the boil with their prices… First Home Buyers under pressure with rising interest rates and limited spare cash flow..
    The middle range properties 500k to 700k seem to be holding up well so far.. Time will tell how much influence price pressures above and below this range have.

    Stillgotshoeson
    November 9, 2010
    Reply
  49. Different for different people is all Shoes – As I said above “if the properties had been bought using borrowed money, I’d probably be seeing things differently”.

    On a technical point, it is my understanding that a FHB could move back in with family/friends and rent their home out without exposing themselves to CGT. Though certain conditions would need to be complied with – Anyone in that situation should probably be considering having a chat to a tax accountant about it before they actually do anything.

    Reply
  50. “On a technical point, it is my understanding that a FHB could move back in with family/friends and rent their home out without exposing themselves to CGT.”

    You’re correct, Ned. FHBs who bought wisely are set for life.
    Smartest of the bunch are probably those who took the $21K and built.
    One of our young tenants who left us is doing the ‘OWAF’ Toyota leap in the air. Never see this young bloke without a huge smile!~ :D

    Reply
  51. “On a technical point, it is my understanding that a FHB could move back in with family/friends and rent their home out without exposing themselves to CGT.”

    On a technical point.. It is my understanding that if you rent out your principle place of residence and claim tax deductions for it you then are liable for capital gains tax on the sale of that house in the future.. apportioned to the length of time is was leased out to how long you lived in it as your place of residence.

    Stillgotshoeson
    November 9, 2010
    Reply
  52. Not for the first 6 years is my understanding Shoes. And then subsequent 6 year periods thereafter if one moves back into it as their home. But you aren’t allowed to say any other place was your ‘home’ as well.

    Don’t know how much truth there is in this, but I heard once that it was a concession that was introduced to keep diplomats and such like who live overseas for extended periods happy – But with it being a case of what’s good the goose is good for the gander, the plebs get the benefit of it too.

    Reply
  53. The FHB rule was ‘live in it at least six months’. The length of time permissible for absence has been increased generously. We’ve considered living overseas for several years continuously, while renting out our homestead, in fact.

    Smart FHBs are laughing. I suspect any experiencing distress have either maxed out their credit on consumer goods, including flash cars; or are affected by the downturn in some Australian industries, including construction, tourism and (overseas student) education. We have no experience of any distressed sale(s) in our key suburbs (other than those involving failed marriages). We study _every_ sale in those two areas.

    The really clued-in FHBs were those who took up shared equity programs, in addition to the $21K gift. They’re now paying far less for their homes than they were for rent. Good luck to those fortunate families!~ :D

    Reply
  54. http://www.theage.com.au/business/auction-of-luxury-homes-flops-20101109-17l0m.html

    4 million dollars of an expected (hoped for) 30 million dollars worth of sales…

    Stillgotshoeson
    November 9, 2010
    Reply
  55. Comment by Ned S on 9 November 2010:

    Not for the first 6 years is my understanding Shoes. And then subsequent 6 year periods thereafter if one moves back into it as their home. But you aren’t allowed to say any other place was your ‘home’ as well.

    My understanding of the 6 year rule is “period of absence” from your home and still be able to claim it as your permanent residence…
    If you rent it out and claim the rental against the mortgage (positive or negative geared) it then becomes subject to CGT for the period it was leased out.. You are supposed to get a valuation of the house at the time you lease it out and another valuation at the time you return to it as your residence. The CGT of that period is then taxable. If you fail to get the valuation done the ATO will assess it using a complex formula.. dart at board maybe? :) to assess the CGT requirements.

    As for FHB.. Yes they could lease it out after 6 months and keep the “Grant”
    Some in Melbourne have been caught leasing out properties from day on and have had to repay the FH Grant.
    Cash in hand off the books would be different but does carry an element of risk ;)

    Stillgotshoeson
    November 9, 2010
    Reply
  56. Yep, they only sold 2 out of 11. (Which presumably didn’t include any $10m ones?) Reckon they are negotiating on the sale of some more. But it certainly wasn’t a bonzer result – Hope they didn’t pay too much hiring out the entire Opera House to hold the auctions! :)

    Reply
  57. forgot to add.. You can however rent out up to 2 rooms with no Income Tax or CGT liability

    I did that with my first home I bought in 1994.. Nearly paid it off in 5 years.
    Bought it for $80K sold it for $132K Owed $20k on it on sale. Bought the “marital” home for $160k

    Signing it over to the Ex wife after all that hard work kind of put me off a) getting married again and b) buying property.

    That house now is probably worth 3 times that much.
    My assets 5 times as much, been around the world and bought a Landcruiser as well.. far better off with out a house and a wife ;)
    Thats 5 times as much from a much, much lower base line.
    This is why no one will ever convince me that Property is better than Shares as an investment.. Never.

    Stillgotshoeson
    November 9, 2010
    Reply
  58. “If you rent it out and claim the rental against the mortgage (positive or negative geared) it then becomes subject to CGT for the period it was leased out.” I’m 99.9999% sure you’ve been misinformed on that one Shoes.

    The ‘6 year rule’ addresses the period of time your can rent your home out for (while claiming all the usual rental property deductions) without the home becoming subject to CGT.

    I’m not sure how long a FBH is expected to live in the place to avoid any risk of being asked to repay the grant. It’s simply not one I’ve ever checked.

    Reply
  59. Residence Used for Income Producing Purposes

    Where a sole or principal place of residence, which has been acquired after 19 September, 1985 is used for income producing purposes (for example, part of the residence is used as a place of business such as a doctors surgery or dedicated to deriving rental income) then upon its sale the CGT provisions will apply. The calculation of any applicable CGT will be determined on the following bases:

    1. Where the residence is first used to produce assessable income prior to 20 August, 1996 any CGT liability is calculated with reference to, and apportioned over the length of time the residence was used for income producing purposes compared to the total period of ownership;

    2. If, on or after 20 August, 1996, a person commences to use all or part of a principal residence for income producing purposes, the capital gain is calculated by reference to the proceeds on sale, the market value at the date the income producing activity commenced and the proportion of the residence used for income producing purposes.

    As a rule of thumb the Taxation Office will consider a sole or principal place of residence from which income has been derived to fall within the CGT provisions where a person is entitled to claim income tax deductions for interest, rates, rent and insurance premiums.

    Stillgotshoeson
    November 9, 2010
    Reply
  60. “forgot to add.. You can however rent out up to 2 rooms with no Income Tax or CGT liability”

    Shoes, that is 100% WRONG!!!

    Don’t know who has been telling you about CGT but if he’s an Aussie tax accountant his arse is presumably wide open to being sued for gross incompetence or some such?

    But don’t sweat it – If you acted in good faith that long ago (1994) my understanding is the ATO would let bygones be bygones? Though fraud can be a different matter.

    Reply
  61. Comment by Ned S on 9 November 2010:

    “forgot to add.. You can however rent out up to 2 rooms with no Income Tax or CGT liability”

    Shoes, that is 100% WRONG!!!

    Don’t know who has been telling you about CGT but if he’s an Aussie tax accountant his arse is presumably wide open to being sued for gross incompetence or some such?

    But don’t sweat it – If you acted in good faith that long ago (1994) my understanding is the ATO would let bygones be bygones? Though fraud can be a different matter.

    They don’t enforce it.. They basically don’t want to know.
    If you have 6 Indian students in each room they will want to know but 1 person in each room they are not concerned with either the Income Tax aspect or the CGT aspect..

    Stillgotshoeson
    November 9, 2010
    Reply
  62. Shoes, amongst others things, the info you quote basically says that if you derive income from your home (as you would if you rented out a couple of rooms) then you are exposing yourself to CGT. Is my take on it anyway?

    But, the ‘6 year rule’ is an exemption to that normal happening. Which applies once a person vacates the home and begins to rent it out. But with no ‘double dips’ being allowed – Namely you can’t have more than one property that is CGT exempt simultaneously – EXCEPT for some ‘6 month’ provision to allow you to sell the first place as I recall.

    Not sure if they’d like you renting it out for that 6 month period though? Or how spouses stand in situations where they have houses in different names – Except to say I’m very sure there are regs on it and it would be complicated enough that the average bloke would probably be well advised to get professional advice.

    Reply
  63. “They don’t enforce it.. They basically don’t want to know.
    If you have 6 Indian students in each room they will want to know but 1 person in each room they are not concerned with either the Income Tax aspect or the CGT aspect.”

    I’d venture to suggest that if they haven’t enforced it in the past, that could well be because they haven’t had systems for tracking it. But they just paid a lot of money for a new system. So I’d been very reluctant to assume that some day down the track they mightn’t decide they really would like to know.

    Thoughts come to mind along the lines that a lot of potential boarders could well be on some sort of Centre Link assistance (including ‘rental support’ of some type or other?) with Centre Link being very keen to keep tabs on the addresses of their benefit recipients. And with that info generally being available to the ATO when and if they do choose to use it?

    Reply
  64. Shoes: “That house now is probably worth 3 times that much.”

    I can understand your dismay over your property transactions, Shoes.
    As an asset, it let you down. Losing an asset which trebled in value must have been a major blow. You’re wise to totally avoid an(y) investment so exposed to loss. You should stay with what you know: shares.

    I was utterly devastated to read Smallcap’s comments, above. I depend on bears’ positive and supportive comments; so to discover that I’ve offended a DReAder is a real blow. It’s simply not true that a single Gold Star is a matter for celebration here… and that four Thumbs Down constitutes high praise for my contribution.

    The DRA banner “Australian House Prices Are Severely and Seriously Unaffordable” has always encouraged me to offer my positive suggestions to those who are distressed by continuing price growth of property… so I’m deeply and permanently injured by those who don’t share my views… .

    Reply
  65. I can understand your dismay over your property transactions, Shoes.
    As an asset, it let you down. Losing an asset which trebled in value must have been a major blow.

    I don’t consider it a major blow at all… I have done very well outside of property.. My financial position is better for it. I did not lose $480K

    I lost $160k.. In a manner of most benefit to my children.. primary focus is and always will be my kids..

    My gains have far exceeded that initial loss..

    Stillgotshoeson
    November 9, 2010
    Reply
  66. Even the stuff about whether operating a ‘business’ from your home exposes the property to CGT (and entitles you to claim deductions re rates, mortgage, insurance etc), is a bit messy I gather – A pretty cluey tax professional I know said to me once that the room/s the business is operated from have to have been pretty much modified for quite specialist purposes that mean they really are only suitable for running a business.

    Though, to be sure, I’d probably get a private ruling from the ATO in relation to my specific case if I was thinking of going down that track. As I imagine it could still be a bit of a subjective call?

    Reply
  67. “In a manner of most benefit to my children.. primary focus is and always will be my kids.. ”

    You’re right, of course. In your situation you should stay well clear of housing… and persons of that other devious, traitorous gender…. .

    Reply
  68. “you should stay well clear of housing… and persons of that other devious, traitorous gender”

    Buy the next house for cash while renting the wife is one reasonable strategy I’ve seen used by blokes who are working very hard on recovering their financial position … Something tells me I just failed the SNAG test again? :D

    Gawd, I hope Annie’s not listening! ;)

    Reply
  69. As to “getting married again”, check out binding financial agreements Shoes – Things have changed a bit I gather. Though as you already have kids and presumably don’t know any lady who you actually like a REAL lot, then semi-unattached as an ongoing option sounds sensible.

    Reply
  70. I have added, to the extensive major threats to property (rising interest rates, earthquakes, rising sea levels, falling immigration rates, unemployment, Ralph Norris, Gail Kelly, Chinese invasion) ‘Shoe’s Ex.’

    It’s now at the top of my list, with his final one-word assessment: Never.

    I did find this little exchange enlightening, though:

    Biker: “One of our young tenants who left us is doing the ‘OWAF’ Toyota leap in the air. Never see this young bloke without a huge smile!~ :D ”

    Shoes: “…bought a Landcruiser as well.. far better off with out a house… ”

    ;)

    Reply
  71. Shoes: “…bought a Landcruiser as well.. far better off with out a house… ”

    Well, I have slept in it on more than one occasion ;) Mobile Home :)

    Stillgotshoeson
    November 9, 2010
    Reply
  72. Can see you kickin’ your heels, Shoes!~ ;)

    Do you have that MAFIA STAFF CAR sticker on the back window?

    Reply
  73. Good to see the ANZ assisting its clients, Shoes. Their figures are impressive. How’s your own offer progressing?

    Reply
  74. Comment by Biker Pete on 18 November 2010:

    How’s your own offer progressing?

    They have mulled over my offer, however they have decided to list it and see if they can get more on market for the house….

    If they get more they get more… My offer is my offer I told them.

    Stillgotshoeson
    November 18, 2010
    Reply
  75. “My offer is my offer I told them” – I’d have done the same. Cash is a handy thing to have. And there’s lots of places for sale in Melbourne from what I can see.

    Reply
  76. Both prospective buyer and intending seller did the right thing.
    We decline offers all the time… and understand the prospective buyer’s stance.

    Greatest surprise of our lives twenty years ago, was to make a (starting) offer $100K below our _real_ intention… and have it accepted. :D

    Reply

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