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  1. #1
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    Default A profound inflection point?

    For several years I have followed developments in the property market with interest, and, at times, with regret for having remained on the sidelines, as prices have spiralled ever higher and higher. Finally we are starting to witness the beginnings of a reversal in prices, but the mainstream opinion amongst property investors at this point seems to continue to be that property prices will merely "slow" and that we are in for a soft landing.

    However, the more I read and think about this, the more I wonder whether property investors have not come to grips with the profundity of what is happening globally in credit markets and the implications this holds for property prices globally. We could well be in the early stages of one of the biggest property market crashes in history with profound implications for the global economy.

    At the inflection point of a huge bull market participants often are blind to profound changes that are taking place and are too slow to change their views. Often by the time they figure it out its too late to act and catestrophic losses have been realised. This is particularly the case for market participants who have not lived and invested through multiple cycles, and the problem is that cycles can take a long time to play out. The good times for property investors have lasted so long that it has come to be perceived as normal. This has played itself out time and time again in the stock market but never before have we seen something potentially of this scale in global property markets. Investors talking about a mere 'slowdown' and even perhaps looking at picking up bargains only a few months into the downturn have, to my mind, completely missed the fact that we have passed a pivotal inflection point.

    Over the past last two to three decades, and especially during the last six years, we have had one of the biggest global property bull markets in history, with the amounts of money involved eclipsing the dot-com boom and indeed any other bubble to have ever come before it. Prices have risen by 10% a year or more (in some cases significantly more), but this is not normal! By virtually every metric property prices are unbelievably expensive, and history shows that every bubble has eventually reversed itself. This one is unlikely to be an exception.

    People have misunderstood exactly why prices have risen by this much. (I have challenged many to explain what law of the universe mandates that prices should go up at 8-10% a year and not one has been able to offer a plausible explanation). Absolutely the biggest driver of this boom has been the willingness of banks and investors (in the case of securitization) to lend more and more money to people to invest in property on loose terms and at low interest rates. When banks start offering 50 year mortgages and 100% finance and the like, it becomes clear that peoples' ability to borrow yet more amounts of money has come to an end. And all this franetic lending activity has of course been accelerated by an unprecedented level of speculative activity in property markets in recent years.

    An abundance of cheap credit and ever-loosening credit standards has driven property prices higher and higher. This is what has driven the dramatic increase in demand/money flowing into housing, as the natural economic growth cycle can only support growth in real house prices of about 1-2% at best (very long term measures have put house price growth at slightly less than 1% in real terms). Property price have gone up a long, long, way, and most property investors do not seem to appreciate that this has been driven almost entirely by debt-fueled demand and low interest rates. This is cyclical not structural!

    What is most dangerous is that this trend becomes self perpetuating (which George Soros has pointed out), as higher property prices increases the level of perceived collateral to re-lend against, so more lending ensues. All this leads to a significant underestimation of the level of systemic credit risk built into the system, and is also why the developed west has been running such dangerously large current account deficits for so long!

    Also important, rising prices also act to reinforce the perception that property prices always rise and is therefore safe to lend against aggressively. This belief is now being revealed to be erroneous and the implications are potentially huge because what we could see is a reversal of this credit-driven boom in prices. As prices fall, banks get more nervous and willing to lend less money, so prices fall further etc and the cycle can become self-perpetuating on the downside. This has already happened before in Japan where property prices have fallen for 14 consecutive years as it continues to unwind.

    It always takes a trigger to turn things around and we have now seen this. The unravelling of the US sub-prime crisis has been the trigger, and now that the debt tap has been suddenly turned off its seems to me that a collapse in prices (not just a "slowing") is now virtually inevitable. We are already seeing this.

    Furthermore, this could well be a global phenomenon not just a US phenomenon. The boom has been global and driven by globalised financial markets, and consequently the bust must therefore also be global. Already we see in the UK that prices are absolutely collapsing. Sentiment and psychology are central to booms and busts, and what we are beginning to see now is a reappraisal by banks globally about the riskiness of real estate lending which will now begin to play out for several years. Access to funds from "securitization" is now a thing of the past with the incentive problems of separating ownership and origination of loans revealed, and to top it off, the devastating credit losses in the US now mean the balance sheets of the global financial system has taken a big hit and credit rationing has begun. NZ and Australia will not be unharmed. Yes, NZ has not participated in sub-prime lending and securitization, but prices have nonetheless undergone the same debt-fueled bubble dynamics with valuation metrics absolutely off the charts. With the trigger flipped there is no going back and sentiment has turned.

    What most concerns me about this is the level of debt involved. People investing in property have become completely oblivious to the tremendous amount of risk they have undertaken. A collapse of this nature has the potential to completely undermine western consumption and threaten the stability of the entire banking system.

    Look at stock prices! Share market investors are waking up to the problem. The real risk is that with a reversal of lending and the wealth effect, consumption slows right down, slowing the economy and leading to job losses. This in turn further increases pressure on property prices etc. And to add insult to injury, inflation is now getting out of the bag. If inflation kicks up interest rates of 15% or more are not impossible (they are already 10% for floating mortgages). The fallout could be huge. I could well be being too alarmist here, but certainly for the timebeing there seems to be little justification for having any exposure at all to property given the considerable downside risks that are emerging and the still-stratospheric level of prices.

    I hope I'm wrong. I wish money-for-nothing was the way the world works and everyone could get rich just borrowing lots of money and buying property. But unfortunately that is not the way the world works, and unfortunately history shows that when everyone comes to believe the contrary that a huge collapse is usually nigh. I believe the 'get-rich-quick' pundits who have populated global property markets in recent years are going to get their comeuppance. The scene is absolutely set for a devastating crash globally.

    I'm interested in peoples opinions on this. This has really only just dawned on me and I've been slow to realise the ramifications. I'm not one to usually scaremonger but occasionally the doom and gloom merchants are right, and their case seems compelling. It may well be that they were right all along.

    Dimebag,
    Last edited by Dimebag; 15-03-2008 at 11:53 AM.

  2. #2
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    Property prices never fall? Check out the news piece below dated 13 March 2008. Prices have fallen 10-20% in California over the past 12 months. Any investor with 80% leverage would be basically wiped out.

    http://news.yahoo.com/s/ap/20080313/...ef=patrick.net



    LOS ANGELES - Median home prices plunged in many of California's most populous counties in February, with Southern California leading the slide with an overall drop of 17.9 percent compared to a year earlier, according to new housing data released Thursday.

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    The drops reflect a deepening housing crisis in the state, which saw home values soar during the housing boom then decline sharply in most areas.

    Median home prices fell this year in 15 major counties, DataQuick Information Systems said.

    The median price in a six-county area of Southern California fell to $408,000 — the lowest level since October 2004, when it was $402,500. That median is 19.2 percent below the region's peak price of $505,000 last summer, and it's 1.7 percent below January's median, the firm said.

    In the nine counties of the San Francisco Bay Area, the median price fell 11.6 percent to $548,000 compared to a year earlier and 17.6 percent from the region's peak median price of $665,000 last summer. Bay Area prices were essentially flat from January.

    Home sales volume also kept sliding last month.

    Sales fell 39 percent from a year earlier in Los Angeles, Orange, San Diego, Riverside, San Bernardino and Ventura counties. In all, 10,777 homes were sold in February in those six counties, up 8 percent from January, DataQuick said.

    Southern California's home sales volume has hit new lows every month since September.

    The nine San Francisco area counties saw a similar slowdown, as sales dropped 36.7 percent last month from February 2007.

    Some 3,989 homes were sold in San Francisco, Marin, San Mateo, Napa, Alameda, Sonoma, Contra Costa, Santa Clara and Solano counties. That was up 11.2 percent from January.

    Even as prices fall, buyers remain slow to dive into the market, with many waiting for prices to fall further.

    Others have been unable to find affordable financing because lenders stung by soaring mortgage defaults and foreclosures have cut back on the easy lending that helped propel the housing boom.

    The dynamic has worsened the prospects for many homeowners desperate to sell as falling home values drain their equity.

    Statewide figures were expected later Thursday.

  3. #3
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    More evidence of a systemic credit crunch across the entire mortgage market and the spreading to the UK.


    http://money.cnn.com/2008/03/13/news...on=patrick.net

    NEW YORK (CNNMoney.com) -- The credit crunch has finally hit the traditional mortgage market.

    Investors are now shunning mortgage-backed securities issued by government sponsored enterprises Fannie Mae and Freddie Mac, which have been critical in keeping the real estate market from completely falling apart.

    Some fear this development will make it harder for people, even those with strong credit histories, to get a home loan.

    "Even if you have good credit, you don't know if they are going to give you a loan or not," said Joseph Mason, a senior fellow at the Wharton School of the University of Pennsylvania.

    And for those who can still get a loan, the tremors in the mortgage-backed securities market has made loans more expensive for borrowers. As the prices of mortgage-backed securities have fallen, their yields have risen, leading to higher mortgage rates.

    The national average rate on a 30-year fixed-rate mortgage was 5.96% Thursday, after jumping to 6.08% earlier this week, according to Bankrate.com. Rates on a 30-year fixed mortgage were about 5.90% a week ago. A borrower looking for a 5-year adjustable-rate mortgage would pay 5.71% today, up from around 5.03% a week ago.

    "The cost of mortgage financing has increased dramatically and it couldn't come at a worse time," said Tom LaMalfa, managing director of Wholesale Access, a mortgage research firm. "We're going to see a further diminishment of available mortgage money."

    Not just a subprime problem anymore

    Rising defaults and delinquencies effectively shut down the subprime and jumbo mortgage markets last summer, but borrowers with good credit could still get conventional loans that met the agencies' criteria. That's because investors continued to buy securities - backed by Fannie (FNM) and Freddie (FRE, Fortune 500) - seen as safe since they carry an implicit federal government guarantee.

    But the landscape changed in late February. Investors were spooked after Fannie and Freddie reported a combined $6 billion in losses for the fourth quarter as defaults rose.

    A new round of fear washed over Wall Street last week when financial fund Carlyle Capital announced its lenders wanted more money to make up for the depressed value of the agency mortgage-backed securities Carlyle had put up as collateral for loans. An announcement by the Mortgage Bankers Association last Thursday that defaults had reached record levels didn't help soothe concerns.

    This bad news comes as Congress, in an effort to stimulate lending in higher-cost areas, temporarily raised the size of the mortgages Fannie and Freddie can guarantee to as much as $729,750.

    The situation has grown so worrisome that the Federal Reserve took several steps this week to inject liquidity into the agency mortgage-backed security market by allowing banks to trade these securities in as collateral for loans.

    On top of that, to shore up their finances and regain investors' trust, Fannie and Freddie have been instituting new fees and stricter underwriting guidelines, making it costlier and harder to qualify for traditional mortgages.

    In an investor conference Wednesday, Freddie officials sought to calm jitters by saying the agency has "significantly" increased prices, introducing new fees based on risk levels.

    Prepare to pay more for a mortgage

    Wholesale Access has estimated that all these changes mean 30% to 40% of borrowers who could have qualified for a conventional mortgage a year ago can no longer do so.

    Fannie and Freddie are demanding higher credit scores and charging higher rates for those who don't have them. Until recently, a borrower with a 620 score might pay the same as one with a 680 score, said Victoria Bingham, chief executive with Pacific Rim Mortgage in Tigard, Ore.

    But now that person might have to pay a half percentage point more. With today's rates, that translates into 6.75% for a 30-year fixed-rate mortgage instead of 6.25%, or $74 more a month on a $225,000 loan, typical for her client base.

    Borrowers must also put more money down, especially if they don't have stellar credit. For instance, those with down payments of less than 5% need a credit score of at least 680, said Steven Plaisance, executive vice president of Arvest Mortgage Co. in Tulsa, Ok. Previously, he could make loans to people without big down payments if they had other strong points, such as stable employment.

    Experts said they don't think traditional mortgages will disappear. But if they are harder to get, it will take longer for the housing market to recover as a glut of unsold houses could lead to even more declines in real estate values.

    "Fewer buyers who can come into the market mean more homes on the market," LaMalfa said. "The absence of an increase in demand will put further pressure on prices."




    http://www.guardian.co.uk/money/2008....interestrates


    House prices across the UK tumbled in December at the fastest pace in more than 15 years as tighter mortgage lending and higher interest rates pushed the property market closer to the biggest crash since the early 1990s, the Royal Institution of Chartered Surveyors says today.

    Surveyors are urging the Bank of England to cut interest rates without delay to attract buyers and help stabilise the market. The latest monthly snapshot of the housing market by the RICS compares the proportion of surveyors reporting a drop in prices with those who saw the market climb. The study shows 49.1% more surveyors reported a fall than a rise. November's level was 40.6%.

    The survey offers the bleakest picture since November 1992, when the UK last saw a severe slump in the housing market as properties shed almost 30% in value against a backdrop of soaring interest rates.

    Price falls were seen across the country, with East Anglia and the West Midlands showing the heaviest decreases. Only surveyors in Scotland reported some subdued price rises.

    "The Christmas slowdown started much earlier this year and hit harder," said Jeffrey Hazel, of Geoffrey Collings and Co in King's Lynn, Norfolk.

    Even in London, which has been at the forefront of Britain's housing boom, surveyors said the outlook for 2008 was not promising. "We need one or two very urgent mortgage interest rate decreases," said Arwel Griffith of Lexicon Surveying Services in Walthamstow. "Even that might not assist very substantially in the currently gloomy market."

    Ian Perry, a spokesman for the RICS, said: "The housing market is clearly feeling the pinch from the credit crunch and the round of interest rate hikes in 2007."

    The Bank of England raised interest rates five times between August 2006 and August last year to 5.75% to cool the rampant expansion of the UK economy, double-digit house price growth and decade-high levels of inflation.

    Last summer's credit crunch, sparked by the sub-prime mortgage crisis in the US, has gripped the world economy, making lenders more cautious. This has made it difficult for many buyers to get on to the property ladder, dampening demand.

    Meanwhile, supply to the market is edging up. The balance of surveyors reporting a rise in new properties to sell turned positive for the first time since May. The RICS said the looser supply was partly due to the extension last month of home information packs to cover all properties as homeowners brought forward sales of their homes to avoid extra costs.

    But Perry said the underlying economic conditions were vastly different from the early 1990s. "Supply would have to loosen considerably before prices experience a significant dip," he said. "The coming months will be of great importance to the market. The Bank of England may have to cut rates further if the market is to remain in a stable condition."

    The Bank's quarter-point interest rate cut last month did little to bring Christmas cheer for buyers, the RICS said, with the survey showing that 25% more surveyors reported a fall than a rise in buyer inquiries. But this has eased from 31% in October as first-time buyers wait on the sidelines in the hope that interest rates will fall.

    Policymakers decided to hold interest rates at 5.5% last week as they juggled a potential economic slowdown with fears of inflation ticking higher after oil prices flirted with $100 a barrel this month and as food prices creep higher. But analysts forecast that borrowing costs would start to fall next month by a quarter point, possibly ending the year as low as 4%.

    Fallout
    · London and the south-east, where million-pound homes became common and properties were snapped up in days, can no longer withstand the slowdown. Demand from the City is falling as bonuses and jobs suffer the effects of the credit crunch.

    · The RICS says Scotland is the only region which saw price rises, albeit at the slowest pace since April 2005.

    · While the RICS says the West Midlands is bearing the brunt of recent falls, Nationwide has said this was the most stable region last year.

    · Northern Ireland, which is not covered by the RICS survey, was another red-hot market for housing, making it vulnerable to sharp corrections in prices.

    · Northern Ireland and Yorkshire & Humberside were among the first areas to see price falls during the last quarter of 2007.
    Last edited by Dimebag; 15-03-2008 at 11:35 AM.

  4. #4
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    I can't find a better source for this chart showing significant house price declines, so check out "figure 2" on this RBNZ May 07 Financial Stability Report.

    Also, an interesting report by the authors of the chart is found here:

    Girouard et al (2006)

  5. #5
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    Thanks for that Lizard,

    Have been watching some of Peter Schiff's commentary on You Tube - the link below is well worth a watch (as is any of his other commentary that is available), where he talks about (in 2006) the unsustainable nature of the US economy and how it will all come undone when the property market inevitably collapses.

    http://www.youtube.com/watch?v=sDh3F...eature=related

    Schiff is very impressive - not least because he predicted the current crisis almost exactly to a tee years before it all unfolded. The arguments he makes about the very bleak outlook for the US economy and property prices are extremely compelling, and how it is virtually inevitable that the US goes into a severe, severe recession. He has suggested property prices will fall 50-70% from peak levels in some hotspots. Before listening to his arguments I would have thought this was foolishly alarmist, but if you hear him out you'll see that this is actually a reasonable projection.

    Prices have risen two to three fold while the fundamental underpinnings of the economy have gone backwards, and in a severe recession it is difficult to see how property would not revert to levels pre boom. A 50-70% decline over the next 3 years seems quite possible - prices are already down 20% in some regions and delinquencies are job loses are only just beginning. Falls of this nature will bankrupt the US financial system and plunge the economy into a deep recession. The USD will also collapse as inflation takes off. Interestingly though, he makes a compelling argument as to why this won't necessarily spell doom for the rest of the world, and in actual fact it may benefit.

    His website is also well worth a browse.

    http://www.europac.net/#

    Interesting times,
    Dimebag
    Last edited by Dimebag; 15-03-2008 at 03:58 PM.

  6. #6
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    Look at this arrogant w**ker Mike Norman try and laugh Schiff off the air for suggesting in late 2006 house price will fall in 2007! Everything he said began to immediately come true as this clip demonstrates (with subsequent news headlines etc inserted after the fact).

    http://www.youtube.com/watch?v=yoZV5...eature=related

  7. #7
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    Not out of any economic textbook but heck one version of how the US economy works )I did post an another thread somewhere) I have keep in my journal now all seems too true



    The biggest organised racket in the US rests upon the dream of owning one's home.

    Hundreds of legally sanctioned scams operate under this ruse.

    The US economy depends on continous expansion of housing construction and financing of all types. The Fed tries to orchestrate the triangle of the US, OPEC and China. OPEC supplies oil, which allows the US to build houses, which increases the money supply, which allows the US to buy ever cheaper junk from China and more oil from OPEC.The profits from this are then dumped back into the US, where they become more crackerbox-on-steroids McHousing at lower mortgage rates, enabling the cycle to start again

    Break part of that cycle and its all over. It was nearly broke years ago but the likes of Bear Stearns became ever more creative with their 'legally sanctioned ruses'

  8. #8
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    Quote Originally Posted by Dimebag View Post
    Thanks for that Lizard,

    Have been watching some of Peter Schiff's .........

    His website is also well worth a browse.

    http://www.europac.net/#

    Interesting times,
    Dimebag
    Likes of Snoopy and Ratkin will be impressed that this guy selects PGW as a stock to hold in these times ....... OMG ... a yank doing this

    Good stuff

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    Dimebag..... I to have also had a keen interest in the property market for many years. IMHO one of the greatest inflences in property price is the shortage of land, and therefore all up cost. I'm talking mainly in areas of say the North Shore. If you can find a site, price has been $300k++, then to build a 200m2 house @ $2000m2 making $700k+.
    So I'm sure we are about to see property companies start to drop like flys, or just like the finance companies......

  10. #10
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    Quote Originally Posted by ari View Post
    So I'm sure we are about to see property companies start to drop like flys, or just like the finance companies......
    At least then it might be possible to get a chippie or sparkie to do some jobs on the place without having to wait for 6 weeks and take out a mortgage to pay for it.... :mad:

    YOTT
    \"Better to remain silent and thought a fool than to speak out and remove all doubt\"

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