Housing Crash!

Will it hurt?

So, over on that other fringe economic news site there has been a lot of housing crash fear porn pumped out due to imminent rise in interest rates beyond everyone’s wild imagination. Sydney houses are in free-fall already, dropping at 2.5% year-to-date, with Melbourne not too far behind with an equally horrid slide of 1.7%! Thankfully, the economy of the state that 113% of WA population has entrusted me to lead during the last state election, Perth is sitting at a healthy 4% gain YTD, with a number of suburbs sliding into a million-dollar club just hit 56, according to the CoreLogic recent data.

But let’s examine what does a house price crash really look like. Being an astute political leader, I will present you with one specific anecdote, and you can extrapolate, or annualize it to reach your own sordid conclusions as to where we are headed, and decide whether you need to reach for a comfort blankie. The story below is what has led to events so well presented in the Big Short and Margin Call.

I give you the house. Quarter-acre block, backing onto a golf course, a live stream in the back corner of the property, brand new build, top of the line finishes and the largest model available from that particular builder in a brand new development in heavenly retirement oasis of southwest Florida, a couple of miles away from the waters of the Gulf of Mexico.

The house was built in 2006, and listed by the developer for sale at $675K USD. The buyer, being astute in the ways of the local economy, an avid reader of ZeroHedge, USAGold and other fringe economic websites that existed in their unadulterated form back in the day, had an inkling that the economy was tanking and there was room to negotiate. So, the buyer offered $500K, and, as the sales manager later told the buyer, the message from the head office was: “don’t let the buyer leave!”. The deal went through, the builder got a sale, the buyer got a 25% discount off the listed price and they all lived happily ever after. That was in July 2006.

Come October 2006, an exact same house, but on a smaller block, 4 doors down, sold for $380K. The buyer started to get nervous, as the mortgage cost, even when allowing for a tax-deductible interest, was way over the house value at a current market price.

Fast forward to 2008. The buyer secured a new job away from the heaven of SW Florida, in metropolitan Atlanta, Georgia. The craziness of house price speculation did not hit that area nearly as hard, and houses, while going up, did not reach nosebleed levels, as Atlanta was not an attractive migration point, as it lacked “livability” due to being a manufacturing hub, no ocean front and higher taxes (Georgia has state tax, Florida does not). And it snows in Atlanta once every 4 years or so.

Having paid the mortgage and rent for another year, the buyer decided to walk away, Florida being a non-recourse state, and mailed the house keys to the bank. Partly the decision was informed by a $800B bailout that was given to the banks by George W. So the bank put the house on the market and it finally sold for $117,500 in June 2012. That, my friends, is an 82% haircut from the original listed price over 6 years.

The house since has been upgraded, with a swimming pool addition, but is still valued at ~$700K, full 16 years after the original build. Given the cost of internal upgrades and the addition of the swimming pool, it is still priced below the original listed sales price on a nominal bases and forgetting the inflation.

And now you know, on the solid data point of one example, what the housing crash look like. Until Sydney and Melbourne have median house values on par with Perth, there is no crash, free-fall, slide or implosion. Just a “negative sideways movement leading to the next super-boom” (c), quoting MB’s favourite hedonist.

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Gouda

https://www.abc.net.au/news/2022-06-30/commonwealth-bank-lifts-rates-by-1-4-per-cent/101197136

The Commonwealth Bank of Australia (CBA) has increased its fixed mortgage rates by a huge 1.4 per cent, just days before the next Reserve Bank board meeting.

Fixed mortgage rates for owner-occupiers and investors, for one- to five-year loans, have all been pushed higher.

However, the bank has cut its lowest variable home loan rate by 0.15 percentage points, down to 2.79 per cent, for new customers with a 30 per cent deposit.

Coming

Yeah it’s all a scam

they’re hoping panicked people will listen to the media and rba and lock it in

on this one I’m with MB – overnight rate is not going to hit 3%+

its all jaw boning and pantomime by the central banks

the 2yr (which historically predicts overnight rate) is now down to 2.6% , from 3.3% a couple weeks ago

Freddy

CBA knows house prices are going to fall hard. Anyone with a 30% deposit is welcomed. Everyone else can GAGF.

Gouda

The message I’m getting is that the 30% deposit means they’re trying to reduce their risk profile by deterring those on lower LVRs.

FHB applicants with 5% deposit/government supplying the difference scheme would probably have to stump up another 10% to qualify, so the might look elsewhere. Also read somewhere that overseas funding to second and third tier lenders has dried up – if there are more closures like Volt, people may not have much choice.

On some of the medical investment groups, I am reading a few threads about people worried about their fixed interest loans starting with 2 jumping up when they expire, as well landlords concerned about paying a few hundred dollars for gas and electricity checks. I think if that’s enough to cause concern one shouldn’t be investing in the first place, but if it’s happening at this income level, it’s going to be fairly widespread.

I’m keeping an eye on my own variable rate loan – it’s increased from 2.5 to 3.25 since the two rate rises. With that in mind, I expect CBA’s 2.79 variable rate to rise to over 3 if there is another 50 basis point rise. 

Peachy

On some of the medical investment groups, I am reading a few threads about people worried about their fixed interest loans starting with 2 jumping up when they expire, as well landlords concerned about paying a few hundred dollars for gas and electricity checks

mate, that sounds like an absolute goldmine of material. Doctors are notoriously poor with money, as a rule. Almost as bad as lawyers!

You should be mining that resources and putting up awesome articles every week!

Aussie Soy Boy

No bigger mugs than doctors.

Gouda

It’s not usually all that interesting.

Apart from having a higher than average income and slightly better book smarts, I don’t think the medical practitioner group is that different from any other demographic.

On the investment side there are crypto bros, property double every 7 year believers and everything in between – plenty of younger ones trying to work out what to do with their money while property has boomed, and older ones who think they did it tough at 17% rates and those complaining should lower their expectations. Tell me you haven’t heard that before!

Like any group the standard wanker types exist – a friend told me about a travel group for medicos full of people taking photos of their flight tickets and expensive watches, and there are plenty of judgemental holier-than-thou types who believe all doctors should work for free or immigration should be dialled up to 1000 and “we can save the world” DocDemography type BS.

There are certainly mugs, with plenty getting stuck with lifestyle creep as their income grows. However, the advantages is a high earning and more straightforward career path which is quite hard to fuck up, which gives one the ability to more easily recover from financial mistakes.

Freddy

FHB applicants with 5% deposit/government supplying the difference scheme would probably have to stump up another 10% to qualify

Maybe that is the intervention that we have overlooked. When house prices fall EZFKA government will intervene and guarantee the entire loan so that the banks continue lending.

A fly in your ointment

Heil GrüpenFührer!

I think you misunderstood the other fringe site as what they implied is that 2.5% tanking is actually 10% loss (you forgot the EZFKA entitlement to a minimum 7-8% increase per year PLUS allowances for more if property is improved, you know, like wild overgrown grass cutting, fresh patch of cheap paint over mold and replacing the mailbox).
That means that RE have lost 10% of chicken that did not hatch from eggs and they would – if it was not for Pootin or IR increase.

Maliciously, some people have suggested that 180° flip over at that fringe site is due to their heavy investment relying on RE perpetual increase in spite the decades of telling people that what goes up will imminently come down in the next 18 months

Last edited 4 months ago by A fly in your ointment
Aussie Soy Boy

Great post. The only economies that make sense are the resource states.

Counterfiat

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DictatorDavid

My take is moderate falls will continue as rates rise. Some people who are leveraged to the eyeballs will be shaken out and other will hold on. People will start to pressure the government who will intervene with but it will be heavy handed think housing stimulus, access to super, buying 40% of peoples homes. Inflation will fall off quickly and the RBA/fed will start to cut rates again to get people buying again. In 12-18m we will have seen the bottom around 15%-20% fall before prices move back up again and hardly the market crash some are expecting.

Peachy

I also think that RBA will be happy to blow the top 15%-20% worth of froth off. It’s basically the pandemic rises, which even the RBA can see were a pretty fucking silly thing to engineer.

that said, they can only arrest falls if they act in time. There is a risk that they leave it running too long and the faith is lost, in which case 20% won’t be the bottom.

Ramjet

I don’t see inflation falling unless the war ends in Ukraine. The war has already caused price pressures for essential items for living ie food and energy. It is whether central banks have a plan for stagflation that doesn’t cause inflation to increase or a recession.

Reus's Large MEMBER

Inflation is only just getting started, given the crop failures around the world and the lack of yield from those that have not failed, due to lack of fertiliser, we are going to see food becoming very expensive and in short supply especially for the lower income bracket.

Peachy

Bleeding heart lefties will be rapt, as the entire western world is levelled with Africa and Asia!

Stewie

That is part of the idea – expect emergency immigration and mass evacuations to the west in order to deal with the great hunger.

Ramjet

Food more expensive at the same time as Bill Gates invests heavily in US farmland 🤔

DictatorDavid

We will have to wait and see what things looks like in 12 months time. If inflation is only just getting started then I predict RBA will be chasing it’s tail to catch up and falls will be >20%

https://twitter.com/michaeljburry/status/1541419336677462016

canuckdownunder

Here’s your US money supply and thus your inflation, this shit ain’t transitory. Central banks aren’t going to be able to start slashing rates with raging inflation.

With all the poop hitting the fan there’s nothing available for a bailout.

Sydney units down 40%, houses 60% by the time this bottoms.

Capture+_2022-06-26-10-22-52~2.png
Peachy

With all the poop hitting the fan there’s nothing available for a bailout.

Sydney units down 40%, houses 60% by the time this bottoms.

what has the real potential of root EZFKA house prices is yield pressure.

houses have been trading on yields of 2%-3%. Now, that’s something that might look sensible when rates are low and falling.

but when bank deposits begin to pay, say, 4% and this state of affairs persists for a hwile (especially if consumer goods prices are zooming too) it could so happen that expected (ie demanded) yields on houses will reset closer to 4-5%.

rents being already pegged to the roof, this implies very heavy haircuts of the top.

canuckdownunder

Just checked some 5 year term deposits, Judobank @ 4.15% and AMP @ 4.25%

Coming

What is this even a graph of

Peachy

Global warming – hockey stick

Last edited 4 months ago by Peachy
Coming

Another fake panic

canuckdownunder

M1 money supply, official Fed stats

Coming

This graph shows “M1” going up more than 5x in the last year

do you know anybody who makes 5x more than they did before ?
do you know anybody who has 5x more MONEY than they did before ?

I don’t

not even bezos and musk increased their wealth by that much (paper wealth let alone actual deposits)

so who has all this supposed 400% extra money ?

do you think, perhaps M1 is a worthless measure ?

the federal reserve stopped relying on it in the 80s apparently

maybe it’s not measuring the actual largest amounts of “money”, which are offshore dollars and repo

https://www.fxstreet.com/amp/analysis/its-all-lies-part-2b-the-money-supply-metrics-have-become-obsolete-202107161320

https://alhambrapartners.com/2021/11/15/is-m2-the-money-behind-inflation-if-not-what-is-or-isnt/

if there’s 400% extra money, why would house prices fall 60% ?
your position isn’t even internally consistent – the MB disease

Last edited 4 months ago by Coming
A fly in your ointment

if not mistaken, this is the US debt which includes every single $ they owe. In fact only recently there was an article on ZH which laid out total US worth lock, stick and barrel and it was mu h less (cannot remember, I think they were short by $8-10T).

Coming

US debt has quintupled in 12 months ?

come on son

canuckdownunder

Why would everyone have 400% more wealth just because money supply has gone up 400%? M2 hasn’t gone as crazy but growth rates were hitting 50%.

The CBs are scared shitless that velocity will pick up and we end up in a severe inflationary spiral. They have to keep jacking rates to cool the economy and rates will keep going up. That’s why we’re going to massive price falls in RE. My calls of a 60% may be high in nominal terms but against gold falls will be even greater.

Coming

I didn’t say everyone would have it

but SOMEONE should

Who has it ? Where did it go

Peachy

The thing about the house that was advertised for $650k, sold for $500k, then was on sold for $117k…. The thing about it is that while it is dramatic, I suspect it is unrepresentative.

I know dick about Florida geography, but presumably Fort Meyers is a bit of a backwater, or a resort town – so economically equivalent to one of the EZFKA mining towns, in terms of susceptibility to booms and busts.

my guess is that by and large the bottom might have been found for many houses in more prosaic locations closer to $300k, rather than $100k.

still, it certainly demonstrate what CAN happen, and how powerful a force the availability and cost of credit exerts. this is the force currently being unleashed in EZFKA, at it can certainly bite hard.

let’s not forget that event at 50% off peak prices, EZFKA housing wouldn’t be cheap.

Agent 47

Fort Myers is a tourist town but there are a lot of wealthy people with estates down there. South West Florida is really nice and the best part of the state.

robert2013

Good call. You can find similar volatility in Karratha or South Hedland.

Peachy

The post wasn’t meant to be an example of what might happen, but as an snapshot of what the property crash might look like, and 2.5% “crash” in Sydney ain’t it.

oh, you’re 1,000% right there.

people who call a 2.5% easing off all time highs a crash/slide/freefall are just dickheads. No grasp on reality.

Reus's Large MEMBER

Actually they have the best EZFKA grasp on reality, because if they call it a crash then the EZFKA money dispenser will be turned on in order to avoid the “crash” sooner rather than later and their home ATM will start working again so they can have that boat / overseas holiday etc.

canuckdownunder

Interesting medical factoid: players at Wimbledon don’t have to test for Covid, and even if they do test positive they don’t have to withdraw.

Second factoid: some 32 year old comedian just randomly died, the news stories don’t give any mental health links which rules out suicide, what could possibly be cause of death?

Peachy

Second factoid: some 32 year old comedian just randomly died, the news stories don’t give any mental health links which rules out suicide, what could possibly be cause of death?

Maybe he died of laughter? Because he made up a joke SO AWESOME that he couldn’t stop laughing long enough to breathe.

or of shame? Due to not doing enough to check his own privilege and combat climate change…

canuckdownunder

Some Canadian guy, I had never heard of him but I would bet another NPC woke drone spewing lefty talking points as comedy. I heard there are videos of him after getting the jab and mocking anti-vaxxers.

Last edited 4 months ago by canuckdownunder
Aussie Soy Boy

I heard there are videos of him after getting the jab and mocking anti-vaxxers.

Glad he’s dead if true. Good riddance.

A fly in your ointment

Maybe he died of laughter?

https://m.youtube.com/watch?v=Qklvh5Cp_Bs

it is not unheard of…
above is a link to the 5min documentary on the similar case from approx 80yrs ago which changed the path of the history

Last edited 4 months ago by A fly in your ointment
Peachy

Interesting medical factoid: players at Wimbledon don’t have to test for Covid, and even if they do test positive they don’t have to withdraw.

yeah, I think that the UK has dropped all that bullshit. I don’t quite know if it was spurred by something as banal as Partygate or if there is something more…

players at Wimbledon don’t have to test for Covid, and even if they do test positive they don’t have to withdraw.

some dude just dropped out from the gayest pom event due to being infected despite the waxing

Aussie Soy Boy

The US has a high vacancy rate compared to Australia. If you don’t buy your own place you’re renting which sucks. Waste of money, lack of stability, invasion of privacy.

I imagine in the US you have the option of moving somewhere like Ohio if you can’t afford California, but no such option really exists in Australia even regional towns you might be paying $400 per week minimum

House prices reflect interest rates. High inflation seems baked in at this point. If there’s no ceasefire and Russia doesn’t bend their knee to the west we get a real energy crisis 4 months from now. The west is sleep walking into but they will get what they deserve.

Peachy

imagine in the US you have the option of moving somewhere like Ohio if you can’t afford California, but no such option really exists in Australia even regional towns you might be paying $400 per week minimum

yessum.

But perhaps there is a point, somewhere, at which the few big cities “burst” and new places to live are developed in earnest?

Aussie Soy Boy

Even if they give away the land for free in the regions the cost of materials and labour is crazy. Even more so in country areas.

I read some ABC articles today about people paying $250 per week I think it was for a camp site to pitch a tent and these are people with little children. They’re simpletons for the most part who had too many children or didn’t put any money aside but it shouldn’t be this hard. If you work 5 days per week you should have enough money for a place in the cheapest part of town without much trouble. This is how refugees running from war zones live. They at least don’t pay for their tent and get free food.

Maybe we have a work for the dole on building sites.

stagmal

you are correct about regionals, my rent in dubbo is rock bottom low (150pw) and that is extremely unusual and partially reflects how horrible my apartment is. you can only find rents that low by going far out west to places like mount isa or broken hill etc, you will be living in concrete cinder block constructed shitdumps and there’s maybe only a dozen left nationwide for rent below $170PW.

available apartments are thin on the ground, when they are on market they’re about as shit as the one i live in but the asking price is typically double mine or more. ive walked into open inspections then walked the fuck out right away, so many are barely fit for human habitation but no one cares, realtors don’t care either they dont even show interior photos of rentals (which never happens in america). the turnover in my building is insane too, no one stays long and people skip town often before their contract is up

the average ezfka unit living either intetionally or for no choice at the bottom of the pile outright lvies an existence worse than a lot of third worlders imo, average factory shop worker in some tier III chinese city in shaanxi has higher QoL, and way better amenities / ease of getting around.

thats another thing the few rare cheap apartments in towns like this are on the fringe of town, youre not riding a bike (if you even have a place to store one – leave it outside and abo kids will steal it in 2 days) or walking in summer so prepare to pay out the nose on transport costs.

Last edited 4 months ago by stagmal
stagmal

lol speak of the devil imagine living in this fkn hole

https://www.realestate.com.au/property-unit-qld-mount+isa-434533335

Ramjet

For regional areas, my rule of thumb is that they are expensive if they are on the coast or within 2 hours driving to the capital city (excluding mining towns). Given housing is the main game in town, housing drives the economies of Brisbane, Melbourne and Sydney and as such these cities act as though they have clout. So I am expecting a housing rescue package of some sort.

Peachy

So I am expecting a housing rescue package of some sort.

there should definitely be an expectation of a rescue package. BUT, if yields on cash have gone to 4%+, the size of package required to keep ALL property trading at a yield of 2.5% indefinitely is implausibly large.

I mean government would have to take 40% equity in EVERY house.

If this happens, then we basically have a MASSIVe permanent home seller grant. Eg house sells for $1m, but really buyer pays $600k, gov pays $400k to seller.

house sells for $2m, buyer oays $1.2, gov adds $0.8m. Arithmetically perhaps it could work. but sure does seem pretty absurd… somehow rhymes with my two-tier money ideas, too… maybe something to discuss as part of Dry July.

Ramjet

Look at rental increases and how the federal, NSW and VIC government want more immigration. Stagmal will be paying $250 per week rent soon. That should help put a floor under prices.

Peachy

Rents can rise, for sure.

but not that much. Not with the cost of everything else galloping.

and it’s one thing to have new arrivals stacked 4-to-a-room and quite another to squeeze the existing population so hard that they must resort to this kind of living.

politically, rising rents just don’t have the same charm as rising prices… quite the opposite

Coming

It’s pretty clear then , that this isn’t monetary inflation

its supply and energy chain problems

people DONT have extra money in their pockets

they have the same amount , but they are chasing fewer goods

Peachy

people DONT have extra money in their pockets 

they have the same amount , but they are chasing fewer goods

but those people are going to ask for pay rises, to get back even, right?
so the prescription is the same – smash demand with interest rates.

….now, I don’t necessarily actually believe the whole wage-price spiral stuff… but it is enough that others (including central bankers?) do, or claim to…

it might well be that the prescription is the same in other models of inflation too, eg

  • monetary – too much money chasing too few goods, caused by too much money
  • supply shock – too much money chasing too few goods, caused by shortage of goods

..if you destroy enough demand (or money) with higher interest rates, pressure on prices eases…

Coming

but those people are going to ask for pay rises, to get back even, right?

This is the propadee investor school of economics

if interest rates rise, I’ll ask for more rent

like they were forgoing profits purely out of the goodness of their heart

similarly workers were working for less than they could have got, but now that prices are rising they can’t be as generous to their bosses

yeah it’s retarded

Anyway, my point is – can we all agree that it isn’t “money printing” that has caused inflation

Peachy

yeah it’s retarded 

Anyway, my point is – can we all agree that it isn’t “money printing” that has caused inflation

but that is a non sequitur. I would not exclude the possibility that money printing is contributory here.

still, I do understand what you’re saying about supply shock. And I do acknowledge that it too is contributing.

Reus's Large MEMBER

However if it is food and fuel then the demand does not go away like it does for TV’s etc. So you still have rampant inflation in things that you need.

Peachy

However if it is food and fuel then the demand does not go away like it does for TV’s etc. So you still have rampant inflation in things that you need.

yes – if it’s in food and fuel, demand doesn’t go away. Food and fuel will still be bought.

what will happen is that less money will be left over for other things (including propadee punting adventures)

Hoody

What happens if the trend goes the other way for 37yrs?

mortgage-rate6-22a.png
Peachy

Yes, that’s the thing, isn’t it?

its what I mean when I talk about yield pressure. It’s the opposite to the previous chase for any yield …

Ramjet

So we are almost in recession
https://www.news.com.au/finance/business/retail/bizarre-trend-proves-australia-is-in-trouble-as-lipstick-effect-takes-hold/news-story/9061dbde22e2b503baf4e992a2f51d3f

I have seen some commentators say that the US is already in recession (usually ones sceptical of the White House rhetoric and don’t have anything to sell).

Peachy

Oh noes, too late for Revlon!

Freddy

Albo abolishing tariffs and FBT on EVs. The perfect gift for wealthy tax dodgers.

It must be time for me to go contracting again so I can buy a Tesla Model S Plaid on a reduced company tax rate, and claim all expenses and depreciation.

Last edited 4 months ago by Freddy
Peachy

Albo abolishing tariffs and FBT on EVs. The perfect gift for wealthy tax dodgers.

id be there in a heartbeat. Have posted about this previously.