Following Joe's comments, I went off to obtain an itemised quote for a 200 sq. m (double garage and patios bring it to 260 sq.m) in Schonenberg Estate, near Somerset Mall. Reputable builders (not masterbuilders or exotic European firms) who would build the house with double layer solid claybrick cavity walls and chromadeck tin roof in Cape Vernacular style. Superwood cupboards and granite top kitchen & bathrooms (all in all quite modest, but decent) for R1.9m all inclusive.
The stand is 750sq.m. that I can get for R800k. So, grand total, lets say R2.7m
I could (with some negotiation) get similar houses there (so, not asking prices, but actual deals) for R2.6 - R3.2m. No risk and move in immediately.
We will probably buy in the S.suburbs when and if we decide that it makes sense to buy, but the above scenario shows that property is quit well priced. That the bubble has indeed burst. That building has once again become more expensive than buying.
Peter, a great Freudian typo in your last paragraph: "property is quit well priced". Listen to what your subconscious is screaming at you! Quit while you're ahead! Don't flush hundreds of thousands down the drain!
And in other news: News24, aka Naspers, aka vast amounts of Broederbond money ploughed into property, published a glorious article on Thursday called "How SA market will benefit from '10" (http://www.property24.com/property24/news/FullArticle.aspx?articleid=9697)
It's a very well researched article, and quotes no fewer than ten - TEN - sources, all telling us why 2010 is going to resurrect the property market.
Oh, one other thing: all ten are employees of Pamela Golding.
I know I shouldn't be surprised by our media publishing propaganda as news, but sometimes these peoples' chutzpah amazes even an old cynic like me...
I agree, what a poor little attempt to stir enthusiasm for property. And for Pete's sake! Where is the run-up hype to the 2010 event that they are bargaining for? The suspiciously absence of the 2010 hype adds to the perfect storm for 2010 to do nothing for property or the economy. And post 2010?
So allow me to join your sarcasm and say, oooh, they are all propery experts, they should know (yeah, about as much as the garage-owner or petroljocky knows about global oil dynamics).
And I agree, the audacity of their remarks, considering the blatant conflict of interest, is amazing!
I'm not saying that prices will increase substantially - I am saying that I cannot build for the same price as buying and that, if I were in the market, I could get a good buy now.
Still working on the long term (10 - 15 yrs) calculations for renting vs. buying (see my last post on last Saturday's Open Thread).
I have inside information from the government's economic sector that the rand's currently inflated value will be dropping significantly in the last quarter of '09.
Sent: 04 May 2009 09:26 AM To: Property24 Editor; Property24 News Subject: How SA market will benefit from '10 - 30 Apr 09
How about an article with comments by home-sellers (owners) and prospective buyers? Do you expect readers to believe what PGP staff are saying about the property market?
i sent this to the editors of property24, and here is the response for those who might be interested:
Thank you for your email. The whole idea behind the article is to inform home sellers and prospective buyers. These are some of the experts in their areas and they analyse trends according to the World Cup's impact to the best of their ability and they have the data and experience to back up their comments, which Joe Public doesn't. The comments in the article are realistic and in line with what other experts and analysts are saying, while being more specific. Just finding agents who will comment on trends in specific areas is already difficult, and getting prospective buyers and sellers to comment is a hopeless task. They often also don't have enough knowledge to comment authoritatively and are very cautious because of the risk of jeopordising their bargaining positions with prospective sellers and buyers.
Peter, some commitment on your part to be getting quotes on build costs of new home. But I urge you to rather look at how people are valuing property - which can't be measured quantitatively. i.e. Have people's needs, wants, time preferences changed which would change consumption patterns, such as shifts from property purchases to rentals.
Your stance, for one, points to more future consumption of property - thus lower demand today, which will place downward pressure on the property market (and upward rentals). There is no cut and dry here, and it doesn't matter what builders charge. If people don't want to build a home at that price it won't be built. Bubbles can last a lot longer than any rational person would expect. Think of the US treasury market for a current example.
Listen to Peter Schiff on the US housing bubble at a speech made for some mortgage bankers association in 2006 for some good reasons as to why their market was due for a correction. He wasn’t invited back the following year, although it would have served them well to listen. Of course the US’ financial system is different to ours, in that home loans were securitised and risk passed along the chain – but the economics is the same.
Would love to hear what you guys think. www.youtube.com/watch?v=6G3Qefbt0n4
There are 8 clips to watch - set some time aside. It's wortwhile listening to it
This is the first time I've been to the site, it makes interesting reading. I must admit that I am not as clued up as some of the bloggers, so pardon any naivety on my part.
I have a question related to my situation. I bought the house I live in mid 2007 (not a good time) for R1 050 000. Fortunately I had a hefty deposit to put down from selling my previous property. However, I still owe R600 000 on the property.
Would you sell now, rent a better house for less and invest the money in e.g. Satrix etc. Or hang on and try and pay off the property as quickly as possible (realistically 5 years if everything goes well).
PS: The house is in Somerset West in a reasonable area - worst case I feel I could get R950 000 providing I could find a buyer of course.
It bugs me sometimes when the discussion about "bubble or no bubble" seems to boil down to homeowners or prospective homeowners getting a good deal or not, or if now is a good time to rent investment properties or flog them. Property bubbles are highly damaging to the wider economy. If there is a huge property bubble on the verge of popping the repercussions are not just going to hit BTL investors and families with a mortgage. Everyone is going to suffer. Look at what's happening in the UK, US and Ireland right now. It started with a property bubble but the detonation is fucking everything from employment to the envioronment. Even before they burst those bubbles are sucking capital out of the real economy where instaed they could have been invested in real industries, factories, decent jobs etc. I think it's kind of sick that high house prices can be such a source of cheer to some. For every other essential in life, like food, water, healthcare, those in our society tasked with providing them brag if they manage to provide the commodity at ever lower process. With housing it's just the opposite. A "healthy" market is one where the cost per unit keeps on rising, where the chance of finding decent shelter keeps on rising further beyond reach of the majority. I'd love to know if anyone has any hard numbers on what proportion of our economic "booming", "miracle" 6% growth rate that Trevor and the Boys were crowing about the last year or two was simply capital appreciation on overpriced mcmansions.
What you need to do is work out how much you will spend each year for the next 5 years on bond, rates and maintenance.
If house prices are say 20% lower in 5 years time, then you have a fully paid off house worth 760,000.
Now assume that you sell the house for 950,000. Pay off your bond and you have 350,000 in savings. that alone, if invested at 10% interest, will become 560,000.
Now how much will it cost to rent a house just like yours. Deduct this rent from the money you were going to spend on the rates, bond, and maintenance. Take what you have left and stick that in your savings account and gain 10% a year for the next 4 years.
Do the same the next year but assume your rent will cost 10% more. Once again tuck away the savings and gain interest on it.
If you have more than 820,000 in 5 years time in your savings you can afford to rebuy a similar house in cash plus the buying costs.
Anything left over is what you have gained from your gamble.
Of course the big questions are what will be the value of your house in 5 years time, how much is the rent, what savings / investment rate can you get (I believe we haven't seen the end of the equities crash yet), can you find a buyer in this market for 950,000 - you then have to decide if the extra cash you gain at the end is worth the effort.
Lets say your land drops to 600,000 in the crash. Let's say the identical house is 2.9m. Your build plus land is now 2.5m.
Now who says houses can't sell for less than build cost. Not I because it was like that for many years in the past. So lets say it is eventually 10% cheaper to buy that to build. Your 2.9m house can now fall to 2.25m to fit that criteria.
So that is a potential 22% fall. And of course, when it is cheaper to buy than to build, the builders are going to get less work, so they will be desperate for business, so their prices fall, and so there's a few more potential percentage to add to the drop.
Thanks CJ, you have given me some homework to do, your reasoning makes reasonable sense to me.
From what you say, the unknowns are what will my house be worth in 5 years, and how much I could reasonably make through savings / investments. I am reasonably confident I could sell for R950 000. I appreciate the advice.
if all you rich idiots think that your property will only slip 10% to the levels of 2006, think again fucktards! Properties have been WAY overpriced since about 2004. Not sure what the figures are but between late 03 and late 05 there was the greatest spike in home prices since 00. The fact that you white people had so much to lay down on down payments and you had big enough paychecks to warrant loans for these overpriced McMansions is the root of inequality in S AFRICA. Now you wealthy fools will lose much of your unfair monetary advantage. The black professionals (and the Chinese!) will now be able to invade your neighborhoods and impregnate your daughters!
This blog is for the rich elite upper crust who are the handcuffs of AFRICA. No better than a pack of miserly JEWS discussing how to best keep their assets and power over this matzoball of a blog.
Enjoy the last few moments of your suffocating reign, yuppies.
All value in our current economic paradigm is based on scarcity.....or sometimes perceived scarcity and fantastic marketing or scaremongering.
When you start to look philosophically at a system that places value on scarcity and abhors abundance, then you begin to realise how the game is rigged and there will not be houses for all.
I have seen anger on this blog by people trying to beat the game but lost..hope by others that they haven't been beaten by the game...and others who are still trying to beat it.
I quote from a US economist who "gets it"
"While there's some genius behind creating a poverty system, it's just a tool used to control humans who otherwise might bite the ruling hand should large enough numbers wake up to the ideal that we're all working a lot harder than we really need to and that the fruits of these additional labors are ending up in the hands of bankers, who without making anything productive (i.e. making interest & usury isn't really productive in a wider sense) they nevertheless end up in control and ownership of the whole planet.
To be sure, rabid capitalism has had an upside; plenty of technology and what have you. But its dark side, often brushed over by the parrot press/MainStreamMedia is that we have stripped out much of the planet's resources and they're not coming back anytime soon, and did I mention to you that and the odds grow daily that we're either at (or sadly, past) a point of no return?
All of which gets me around to asking a rather pertinent question here: "If the government was being totally honest with the furthest extension of the Western Capitalism business model, they'd probably admit that everything ends up owned by either a ruling power elite, or its proxy paid-for by special interests, government at one level or another. The rest of us would serve at the pleasure of this power structure - as we most assuredly do now anyway, and that would be that.
As the second leg down of the Second Depression kicks in over the coming Fall and through fall of 2010, it may be time to start thinking of the larger question of work: "What can I do of value to my fellow humans that I can start up with as little capital as possible, and which will have a huge resiliency to economic turmoil. I like to call it "insulated entrepreneurship" - insulated, as much as you can, for the control of formal government that presently rules."
Ben, the reason why increased value of property 'brings such cheer to some, is because, although a house serves a basic purpose, it is also often purchased as an investment. Big difference. Your point on value-for-money items makes good sense for the rest, but is not relevant to property. Just as CEOs don't boast about their company's 'cheaper than the next one'-shares.
“Not sure what the figures are but between late 03 and late 05 there was the greatest spike in home prices since 00.” Humorous. Thanks Anonymous. I beg to differ on the equality issue. The root of the difference is laziness.
Ben: on the size of the bubble in SA: a house is valued on it’s prospective rental income (even if buying to live) over a certain horizon (20/30/perpetuity years depending on time preference), discounted to its present value. Think of the dividend discount model for equity valuation. Why should you pay (much) more for a home than what you could rent it for, unless you have a certain value attached to owning a home, i.e. family with kids, pets, veggie garden, convenience, status, whatever is important to you. On the economic growth rate of 6%: different angle to think of it: growth was driven by debt and leverage – so we brought forward (to present) future consumption, which led to higher growth rates. When you take on debt you bring future consumption forward to consume today, at the expense of future consumption, and that growth is accounted for in the GDP figures for the present year. So should credit markets not get flowing again (which I hope doesn’t out of sound and sustainable economic principles), growth will be subdued purely as a result of delevering as debt is repaid. Real estate will turn down as it’s suffered from over-investment in the past cycle.
Newboy: I assume you bought the house as a speculative investment (you’re wanting to sell because value’s come down some 10% to date and you’ve only had it for two years). If this is the case, it needs to be evaluated in your portfolio of investments. Stocks, bonds, commodities you own could be up depending on when you bought. Evaluate your entire financial situation and chat to a financial/investment advisor about it. I believe in 5 years time the nominal price of your home will be around today’s levels, unless the central bank goes out guns blazing to create inflation (so watch what they get up to), but either way the cost of living will be substantially higher than today. The real value of your home (priced in commodities ,soft or precious) will be lower in 5 years time.
Ad: you talk of all value in our economic paradigm being based on scarcity, and a system that’s flawed when this is the case: I don’t think capitalism is a poverty system – it’s a wealth system. It seeks to maximise wealth. You only create wealth by producing/providing something that’s of value and utility to others. People value things with scarcity more than things found in abundance (ignoring paradox of value for now – we’re not all on a hot desert and need to choose between diamonds and water). This is praxeological not psychological. If you take away capitalism, no entrepreneur in his rightful mind will go out and do business for profit, after all we work for ourselves and families first. If we don’t make profits (i.e. you can’t put resources to use in such a way that people value and will pay a premium for), we won’t be creating any resources/goods to give to the larger population, or create jobs for that matter. Furthermore we won’t have market prices as we won’t know what people value most.
I do, however, agree that the fascism currently sweeping the West is not good for the man on the street. Profits have been privatised and losses nationalised, which taxpayers will need to pay off in years to come. Entrepreneurs should be left to do business, and not be rent-seeking and lobbying with government for special interests.
Good points CJ. So what reference does replacement cost serve when property value is (as rightly pointed out by becks) subjective.
And with regard to last Saturday's posts; you misunderstood. The friends, family and business example was used to illustrate that 'being tied down, tax and maintenance' - some of the favourite reasons (excuses) posed for not buying property - are lame. I did not say that there are good reasons not to buy, and I did not say that you cannot have these if you rent.
On your calculations - this is what I needed, and it's appreciated! Unfortunately, this, together with Wolf's comments last week, means its back to the drawing board for me. But it's a rent vs. buy thing.
Don't forget that property has one huge advantage - leverage and over a very long time, which means that the pain (interest paid) soon (relative to the mortgage period) becomes negligible. A million now is nothing 10 years - even five - down the line.
Peter? I can't figure what your your angle is and I think more than a couple of us suspect you're an agent provocateur with a finger in the Pammy Pie as some of your comments are wragtag weird! Or else you're the incarnation of the ultimate consumer and I should really be buying more MTN and Shoprite shares because 31# cellphone downloads and popcorn sales are set to double!
You want subtle bub? Go spout your 'fair price' views to the poor sod who bought last year at Mz Agent's 8k/sqm and is now thoroughly stuck in negative equity and tell me about sublte after he tears you a new one!
Buy-to-let? Leverage? Interest? pain, negligible, 1 bar to nothing... hohum. Hey Homer? where were you the past decade? I'm so grateful that I 'deviate' to the Austrian School of thought. Von Mises is dead, Long Live Von Mises!
If you say that the value of a flat will be the (net) rental income over 20 years, then it means that on a R1.4m flat with R7000 rent/m (with 10% rental increase), then, with no downpayment, there will be positive cash flow after 7 years and R2.8m received in rental (rent - mortgage repayments = R2.8m) after 20 yrs.
So R1.4m, albeit a lot of money, is good value for the flat. Even if the house index falls by another 10%, it's merely theoretical.
Joe, not sure that I appreciate your insults. Didn't know that you were averse to property in any form. Perhaps you are throwing the baby out as well...
Anyway, R8k/sq.m. being overpriced or a bargain depends on many things. Saw a magnificent house over the weekend with material alone worth double that - so that 'poor sod who bought last year, perhaps should not have gone for rose marble and the golden faucets. Blame the buyer, not the quality and durability of the house.
Ok, that does it, I'm convinced, the bloke definitely is an accountant.
Pete? It's a bargain LOL! Buy it and rent it out for 7k. (everyone else? Please don't take me seriously?)
CTPB? Please would you be so kind as to post a yield curve for a 1.4 bar (10% down) 7k per month rental property so 'ole Pete can see (or maybe not see) for himself? Bugger me, you can only postulate this bloody argument in so many ways. Enuogh already!
Scientific auditor & accountant, Joe. I ensure that data generated by pharmaceutical companies' R&D are not fudged ... so don't give me bull for figures and expect them to go unchallenged, mate.
So, the merits of renting aside. Are you really going to take me up on my views of what a fair price for property is? What if I tell you that I, unlike you, don't have a crystal ball. But I can see that in the PAST price of property exceeded other goods (as shown in CJs calculations of coke & diesel ...), but that it has come down significantly and remained stagnant to such an extent that it again now lags again or is on par at least.
Jis Pete, this last post of yours set me off in hysterics boet, I'm still wiping snot spikkels off my pc screen! Bean Counter, someone, please help! Aaaaaugh, breathe Joe, breathe! I'm having Far Side visions here.
(No wonder SAfrica is the 'pharmaceutical' capital of the world LOL.)
Pete? You're so far out on the fringe I am totally unable to keep up with you. I concede defeat. You win! You're right, current CPT property prices are all fair value for money. Now seriously, tell me about some of the bargains you see out there? Seriously, tell me?
Beancounter, my subconscious mind is not something that I will risk 10 years of careful savings on. Same goes for listening to everybody shouting out how property ownership creates security... I have to understand it before I throw (or keep) that kind of money towards (or from) it.
And I know what you are saying, busy doing the maths. I study the articles (mostly European, except for two by Erwin Rode, and three by Wits Business School - only ones I could find for SA, barring the hundreds written by estate agencies and banks) and it shows that renting is financially a better deal, especially on a two-to-five year projection.
It is the inflationary and compounding results that keep me (and everyone that I have spoken to since I came across this site) from a clear financial principle.
I will have to, without assuming that we know the economic future, pose a calculated scenario.
completely agree with you but you miss the point...there is no such thing as a free lunch.
an economy cannot exist by people flipping houses, charging interest or renting out; someone somewhere has to produce goods and add value. money is at its simplest a claim on future work, if no work is done or value created but money is still issued you get inflation i.e too much money chasing too few goods.
At its simplest level there are far too many people in this country living off the efforts of others...hence the very high cost of living we have after a few short years
Becks, the UK doesn't manufacture anything significant. All they have are financial services and real estate. Abstract products can make an economy. Singapore, Hong Kong, New Zealand etc. All provide services for a niche, yet they flourish.
SAs inflation is created by the government, not the scarcity of products. That is why property will become massively expensive. We have a next generation of consumers, big spenders brought up in a disposable world - they will not be satisfied with downscaling. And there is an incredible amount of money to be made in providing credit to them. And the government will (whether it is for good or bad) ensure that its available.
Ad: of course an economy can’t exist only “by people flipping houses, charging interest or renting out.” Agree with you. Disagree with you on topic of money in its simplest form. Money at its ‘simplest’ form is a means of exchange. It’s not a claim on future work. If people don’t want money in exchange for a service/product, it won’t be accepted, and hence loses its monetary quality as a means of exchange and any claim you think it has on anything (Zimbabwean dollar). Whether or not we produce is insignificant in the gov’s inflationary process, even if we produce and create value, the central bank/treasury can still inflate through deficit spending, interest rates below free market rate, monetisation of debt. Not sure if I get your point though, to be honest. This blogging thing stretches the process out a bit.
Peter: I know the UK doesn’t manufacture anything significant. Let me ask you: how is their banking/financial sector faring? Any bankruptcies lately? Real estate sector? Down 20% y-o-y in April? Any effects on the real economy? Will you be going long on the pound anytime soon? London was the centre of the industrialised world in the 19th century under the mercantilist system. But the big wheel turns and you should read up more about the Austrian theory on international trade and business cycle to find out why. The property market will remain linked to rentals whether you like it or not. And banks are not going to risk lending to big spenders who can’t afford to pay them back. The government will do its best to get the banks to lend – is the US gov getting the US banks to lend yet? Because non-performing loans and defaults are still rising, and the commercial property market (which lags residential market) hasn’t even popped yet – which will dwarf the subprime.
I do not think that you can use any economy at the moment and evaluate how it fared based on the produce or services. Italy has a very big manufacturing sector, yet they suffer just like the UK, if not more.
The UK banks and property sector is frying because of sub-prime mortgages, overleveraged bank equity (up to 15:1!)and complex abstract financial products from the US. Credit was removed overnight - that's why the UK and other is going to the loo. Not because their traditional industrialized format or factories no longer exist.
I give you Spain - a balanced country in terms of manufacture, services, global outsourcing and what have you. They are on the brink of collapse, like Ireland.
Botswana has only diamonds - yet the flourished for decades.
Mortgage backed securities - made up of such a complex mix of mortgages, futures and derivatives that most of the supervisors didnt understand what they were buying (or selling to the east).
so if we can't analyse any countries at the moment we should stop while we're ahead? and next you'll throw portugal and greece at me? are you aware these 4 are known as the PIGS? nothing sound about these economies at all. but because it's a crisis we shouldn't analyse them? please man http://www.wikinvest.com/wiki/Portugal%2C_Italy%2C_Greece_and_Spain_-_PIGS
they're the laughing stock of the EMU. countries right across the Med morocco, tunisia, egypt are still going to be showing positive growth this year...any thoughts on them? their biggest trade partner is the EU. they okay to analyse?
pete an asset backed security is not complex, they become complex once they're turned into mortgage pass-through securities and next step collateralised debt obligations that can be made-up as synthetic CDO which involves not even owning the underlying assets but credit default swaps based on them. but you're on the right track
Pete? You're either a genius or a very subtle comedian... I just can't seem to figure out which?
Now that we've covered the whole gamut of "complex abstract financial products strutting around in the guise of MBS, futures and derivitaves, could you please enlighten me on where CDO and CDS fit in the picture? Strange? I probably don't unnerstand this whole thingie too well. I thought that SPV's structured CDO's in tranches as a type of ABS to describe the broader concept of a complex financial instrument? And why blame the supervisor? Wouldn't it be more prudent to blame the rating agency who gave the CDO derived from a CDO a 'AAA' rating rather than the trader who sold it to a moron investor?
In the meantime, can someone please pass me the oxygen? I swallowed the pen cap I was chewing on...
Yes, but even ordinary asset-backed securities are abstract when they are extremely leveraged or the assets are paper or the assets are not identified. Thanks for the clear explanation, though.
re. Countries and Economies - do not misunderstand me. I said that a country can be economically sound without physical produce like steel, oil or agriculture. I was not batting for specific countries. And I definately do want to enter into a moral discussion of 'good countries' or what the EMU stand for, because then issues as slavery and human rights fall away so long as there's 'growth'.
No, I did not say that you cannot analyze. But you know that you cannot draw correllations or clearly name causes between a country's industry and it's current economic climate.
Dont get your question, Joe. You saying that investors who bought these products were not careful enough? Hmmm? Or you reckon there was a way to know what was coming?
Point remains: Banks and Property are not down because of a country's industry, but because of credit shortages and lack of trust that originated from the US subprime and abstract financial products.
Beck's? I'm not disputing the concept of 'abstract' at all. You and Pete are quite right with that. Anything that's a tier 3, off-ballance-sheet, scammed-to-market 'asset' is an abstract in my opinion. Quite analogous to Jackson Pollock painting his breakfast nuh?
One thing I would like to debate though... you cannot blame the PIGS alone for the ills in the EMU. Yes, their credit behaviour and their current balances contributed. But if you want the real culprits who crumbled the cookie then go look at the countries whose banks leveraged at 35:1 and even 50:1 (and not 15:1). The French, Austrian, UK and German banks (though the German's not as bad) are really deep in the doo-doo. Think Kreditanstalt and Polish mortgages in CHF as an example!!!! We're talking a collective $1.7 trillion in highly leveraged products with a $400bn debt servicing rollover due in 2009 alone. Wait till this 'bubble' pops and pop it will with the Zloty devalued by more than 40% and Poles unable to service their bonds.
And Spain? Come on, they're not the laughing stock of EMU (maybe Greece) but not Spain and Portugal. When more than 17% of your workforce under the age of 20 are unemployed you should get very worried viz a viz Spanish Civil War. I'm not laughing at them, and I really hope they can hold it together and extricate themselves from the clutches of the feudalistic EU Parliament. Did you know that the EMU constitution does not allow the PIGS to devalue their base currencies? That this has been a primary cause of the destruction of their ability to compete in export markets?
Seriously, don't laugh at these guys. That's like the pot calling the kettle black. Worry about our own little farce of an economy before you criticize these guys.
Beck's, I assume you are familiar with asset back securities? If you want clearer explanations I'm happy to provide some links as I don't think this blog is aimed at that kind of thing, the reason I'm not posting reams of 'MBA talk' here.
Pete? "You saying that investors who bought these products were not careful enough? Hmmm? Or you reckon there was a way to know what was coming?"aah...yup, that's more or less exactly what I'm saying. Let me rephrase for you... "You saying that investors who bought these products were greedy?" (sic). Pete, like Bernie Madoff proved, there are no free lunches and any derived instrument, by definition, is a high risk play and if you get involved in them, you better be prepared to take the losses with the wins and you BETTER understand the mechanics of them. And above all you better understand the margins and have the collateral to back them. And there's the rub nuh? Investors, or should we call them speculators, were offered these products where for a small sum down, they COULD make a leveraged fortune while they took all the risk and the third party who sold the product took none. Too good to be trua ain't it? The truly funny thing about the whole ponzi scheme is that all these third parties were selling on the collateralized risk to each other while rating agencies were spewing out AAA ratings like there was no tomorrow. Real herd behaviour. Then I suppose the real blame should be with the SEC who were warned in 1997 that this was a ponzi scheme.
Pete? The warnings were there from the late 1990's and those who understood these products either had itchy trigger fingers or stayed well clear of them. You don't put your money into something you don't control directly or don't understand. That lesson is as old as time. Anyway, have a look at this article from 2006 as it's a very good analysis of FWMD's and certainly precedes the meltdown. WMD or "What are Derivatives?" The warnings were there, they were clear, and only the greedy ignored them. I do feel sorry for investors whose money was tied up via funds in these instruments. But then, why would anyone give his money to a third party to invest and then sit back in the TV couch and assume it will always be safe and will just grow? Why would you invest your money and not know how it's invested? That's like telling your dog to guard your biltong stash.
Pete? I won't comment on your last para as I'm still trying to decipher it. Here's something to ponder. Go look for Governor Cuomo's questions around the BofA-Merill-Lynch merger in Dec 2008. Watergate was a pajama party compared to what's brewing here.
Can we now please get back to a discussion about property?
Allow me then to ask a question? Why do we use the CPI when property inflation is calculated/compared. Surely we must use the interest rate (lets say prime). The make-up of the property market is generally based on credit, which is extended at prime. This is therefore what property is costing us and this is at which rate property should appreciate.
and to add to Cuomo comment NY Fed chair SFriedman resigned with immediate effect last night -- on questions about purchases of Goldman Sachs stock in January -- he's a retired chairman of GS....mmmm.
i know you're not disputing concept of abstract - was just pointing out to pete that ABS' aren't abstract and that it's financial engineering that makes them abstract. I am quite familiar with the basics of CDOs, CMOs, CDSs, etc. but always find links interesting thanks. actually had a good lag at the pass the oxygen and swallowed pen cap comment yesterday.
Don't get me wrong, I'm not blaming PIGS for problems in EMU. said it for lack of better word at time should have used 'basket case' or something similar. pete pointed out that the "UK doesn't manufacture anything significant. All they have are financial services and real estate." implying a country can survive on this. Then he whipped out Spain and Italy as having sound manufacturing sectors but that they're also feeling the pinch. But they're not sound - they're the IS from PIGS. feudalistic parliament and constraints on currency revaluations is another discussion entirely, although I'm well aware of it. But taking the EMU as one economy, have the real estate and financial services been a net-positive or net-negative?
Which is my point: these products and leverage that drove growth in UK is now causing a blow-up in PIGS (especially Spain real estate - leaving Austrian et al exposure to CEE out for now). so to say an economy can grow based on real estate and finance is just false. the products that helped a nation like UK 'grow' are even more of a negative as they eventually drag everyone down with them.
pete just to make sure i understand you: so if prime climbs to say 25% the property market will inflate by a corresponding 25%, and vice versa. If prime goes to 50%, property inflates by 50%? so if as you say the make-up of property market is based on credit, tighter credit conditions lead to inflation in property prices?
Peter? I'm seriously going to give you the most honest answer I can because your question is good and has merit.
Here's the thing: If you estimate property value purely off the inflation rate of property prices then over time you have absolutely no benchmark to measure it against and subsequently you have no clue as to whether property is expensive, cheap of fairly priced. Above all, you don't know whether it's affordable.
Enter the CPI. The nearest possible measure (albeit fudged a bit) we have for affordability is the CPI. Employment and salaries generally trend in line with the CPI. Though since the 80's, working stiffs have generally trended backwards and are today much poorer than they were a decade ago.
The interest rate is merely an indication of the cost of your financing, or the loss of purchase power of your ZAR.
Pete. Take a property price as a benchmark at a point in time, say 2000. Appreciate at against the CPI and against a House Price Index up to 2009 and the difference will show you whether property prices are leading or lagging people's incomes.
Lotsa pundits don't like this approach, but it's what I use and it's served me well. lat 2004 it started warning me that property was getting way ahead of inflation adjusted incomes and I got out of property and stayed out, and will stay out for some time to come, and Lew Geffen is welcome to snap up all the bargains out there.
Pete? You and the missus will get your pad in time and for a reasonable price. Just don't value your purchase off a mark-to-market principle as that's what got most people in trouble in the first place. Just because a developer has a hidden 500% markup on 'general items' or uses breezeblocks when he told you fired brick, doesn't mean you should pay 8k/sqm.
Look at what demographics are earning, what they can afford, and then decide whether prices are fair or not. Pricing property on the greed and fear of a boom frenzy is the surest way to get yourself locked in to negative equity unless you're a professional flipper.
Does it not, in a lagged fashion? I can see that near term high interest rates will make mortgage repayments harder and put pressure on property prices. But think beyond, and think back.
Why compare to CPI and not rather to repo (forget about your 50% example - too theoretical and irrelevant, like world peace, cute and possible, but naah, don't think so).
Reason for my question: Some remarkable tight correlations between property prices and prime over the last 15 years, be they slightly out of phase.
hey Beck's, thanks for that snippet on Friedman, I didn't know. Though don't you reckon that's just smoke and mirrors to distract from the real scandal of the BofA saga? Friedman is smallfry compared to what Hank and Ben will have to explain if some prosecutor decides to push the issue?
And you're right, I did digress a bit. your comments re the EU are quite on the button. Though us guppies down here better hope they don't implode coz since the EU is our major trading partner, any significant downturn (dare we call it depression?) will leave us "kaalgat in die reen, ons twee staan kaalgat en alleen" down here in the southern lattitudes. OMO
46 comments:
Following Joe's comments, I went off to obtain an itemised quote for a 200 sq. m (double garage and patios bring it to 260 sq.m) in Schonenberg Estate, near Somerset Mall. Reputable builders (not masterbuilders or exotic European firms) who would build the house with double layer solid claybrick cavity walls and chromadeck tin roof in Cape Vernacular style. Superwood cupboards and granite top kitchen & bathrooms (all in all quite modest, but decent) for R1.9m all inclusive.
The stand is 750sq.m. that I can get for R800k. So, grand total, lets say R2.7m
I could (with some negotiation) get similar houses there (so, not asking prices, but actual deals) for R2.6 - R3.2m. No risk and move in immediately.
We will probably buy in the S.suburbs when and if we decide that it makes sense to buy, but the above scenario shows that property is quit well priced. That the bubble has indeed burst. That building has once again become more expensive than buying.
Peter, a great Freudian typo in your last paragraph: "property is quit well priced". Listen to what your subconscious is screaming at you! Quit while you're ahead! Don't flush hundreds of thousands down the drain!
And in other news: News24, aka Naspers, aka vast amounts of Broederbond money ploughed into property, published a glorious article on Thursday called "How SA market will benefit from '10" (http://www.property24.com/property24/news/FullArticle.aspx?articleid=9697)
It's a very well researched article, and quotes no fewer than ten - TEN - sources, all telling us why 2010 is going to resurrect the property market.
Oh, one other thing: all ten are employees of Pamela Golding.
I know I shouldn't be surprised by our media publishing propaganda as news, but sometimes these peoples' chutzpah amazes even an old cynic like me...
I agree, what a poor little attempt to stir enthusiasm for property. And for Pete's sake! Where is the run-up hype to the 2010 event that they are bargaining for? The suspiciously absence of the 2010 hype adds to the perfect storm for 2010 to do nothing for property or the economy. And post 2010?
So allow me to join your sarcasm and say, oooh, they are all propery experts, they should know (yeah, about as much as the garage-owner or petroljocky knows about global oil dynamics).
And I agree, the audacity of their remarks, considering the blatant conflict of interest, is amazing!
I'm not saying that prices will increase substantially - I am saying that I cannot build for the same price as buying and that, if I were in the market, I could get a good buy now.
Still working on the long term (10 - 15 yrs) calculations for renting vs. buying (see my last post on last Saturday's Open Thread).
I have inside information from the government's economic sector that the rand's currently inflated value will be dropping significantly in the last quarter of '09.
Sincerely,
Jacob Zuma
Sent: 04 May 2009 09:26 AM
To: Property24 Editor; Property24 News
Subject: How SA market will benefit from '10 - 30 Apr 09
How about an article with comments by home-sellers (owners) and prospective buyers? Do you expect readers to believe what PGP staff are saying about the property market?
Regards,
i sent this to the editors of property24, and here is the response for those who might be interested:
Thank you for your email. The whole idea behind the article is to inform home sellers and prospective buyers. These are some of the experts in their areas and they analyse trends according to the World Cup's impact to the best of their ability and they have the data and experience to back up their comments, which Joe Public doesn't. The comments in the article are realistic and in line with what other experts and analysts are saying, while being more specific. Just finding agents who will comment on trends in specific areas is already difficult, and getting prospective buyers and sellers to comment is a hopeless task. They often also don't have enough knowledge to comment authoritatively and are very cautious because of the risk of jeopordising their bargaining positions with prospective sellers and buyers.
Kind regards
Sub-editor
Greetings fellow CTPB users.
Peter, some commitment on your part to be getting quotes on build costs of new home. But I urge you to rather look at how people are valuing property - which can't be measured quantitatively. i.e. Have people's needs, wants, time preferences changed which would change consumption patterns, such as shifts from property purchases to rentals.
Your stance, for one, points to more future consumption of property - thus lower demand today, which will place downward pressure on the property market (and upward rentals). There is no cut and dry here, and it doesn't matter what builders charge. If people don't want to build a home at that price it won't be built. Bubbles can last a lot longer than any rational person would expect. Think of the US treasury market for a current example.
Listen to Peter Schiff on the US housing bubble at a speech made for some mortgage bankers association in 2006 for some good reasons as to why their market was due for a correction. He wasn’t invited back the following year, although it would have served them well to listen. Of course the US’ financial system is different to ours, in that home loans were securitised and risk passed along the chain – but the economics is the same.
Would love to hear what you guys think. www.youtube.com/watch?v=6G3Qefbt0n4
There are 8 clips to watch - set some time aside. It's wortwhile listening to it
This is the first time I've been to the site, it makes interesting reading. I must admit that I am not as clued up as some of the bloggers, so pardon any naivety on my part.
I have a question related to my situation. I bought the house I live in mid 2007 (not a good time) for R1 050 000. Fortunately I had a hefty deposit to put down from selling my previous property. However, I still owe R600 000 on the property.
Would you sell now, rent a better house for less and invest the money in e.g. Satrix etc. Or hang on and try and pay off the property as quickly as possible (realistically 5 years if everything goes well).
PS: The house is in Somerset West in a reasonable area - worst case I feel I could get R950 000 providing I could find a buyer of course.
What your thoughts?
It bugs me sometimes when the discussion about "bubble or no bubble" seems to boil down to homeowners or prospective homeowners getting a good deal or not, or if now is a good time to rent investment properties or flog them.
Property bubbles are highly damaging to the wider economy. If there is a huge property bubble on the verge of popping the repercussions are not just going to hit BTL investors and families with a mortgage. Everyone is going to suffer. Look at what's happening in the UK, US and Ireland right now. It started with a property bubble but the detonation is fucking everything from employment to the envioronment. Even before they burst those bubbles are sucking capital out of the real economy where instaed they could have been invested in real industries, factories, decent jobs etc.
I think it's kind of sick that high house prices can be such a source of cheer to some. For every other essential in life, like food, water, healthcare, those in our society tasked with providing them brag if they manage to provide the commodity at ever lower process.
With housing it's just the opposite. A "healthy" market is one where the cost per unit keeps on rising, where the chance of finding decent shelter keeps on rising further beyond reach of the majority.
I'd love to know if anyone has any hard numbers on what proportion of our economic "booming", "miracle" 6% growth rate that Trevor and the Boys were crowing about the last year or two was simply capital appreciation on overpriced mcmansions.
For Newboy -
What you need to do is work out how much you will spend each year for the next 5 years on bond, rates and maintenance.
If house prices are say 20% lower in 5 years time, then you have a fully paid off house worth 760,000.
Now assume that you sell the house for 950,000. Pay off your bond and you have 350,000 in savings. that alone, if invested at 10% interest, will become 560,000.
Now how much will it cost to rent a house just like yours. Deduct this rent from the money you were going to spend on the rates, bond, and maintenance. Take what you have left and stick that in your savings account and gain 10% a year for the next 4 years.
Do the same the next year but assume your rent will cost 10% more. Once again tuck away the savings and gain interest on it.
If you have more than 820,000 in 5 years time in your savings you can afford to rebuy a similar house in cash plus the buying costs.
Anything left over is what you have gained from your gamble.
Of course the big questions are what will be the value of your house in 5 years time, how much is the rent, what savings / investment rate can you get (I believe we haven't seen the end of the equities crash yet), can you find a buyer in this market for 950,000 - you then have to decide if the extra cash you gain at the end is worth the effort.
For Peter
Lets say your land drops to 600,000 in the crash. Let's say the identical house is 2.9m. Your build plus land is now 2.5m.
Now who says houses can't sell for less than build cost. Not I because it was like that for many years in the past. So lets say it is eventually 10% cheaper to buy that to build. Your 2.9m house can now fall to 2.25m to fit that criteria.
So that is a potential 22% fall. And of course, when it is cheaper to buy than to build, the builders are going to get less work, so they will be desperate for business, so their prices fall, and so there's a few more potential percentage to add to the drop.
So don't be too sure the bottom is here.
Thanks CJ, you have given me some homework to do, your reasoning makes reasonable sense to me.
From what you say, the unknowns are what will my house be worth in 5 years, and how much I could reasonably make through savings / investments. I am reasonably confident I could sell for R950 000. I appreciate the advice.
if all you rich idiots think that your property will only slip 10% to the levels of 2006, think again fucktards! Properties have been WAY overpriced since about 2004. Not sure what the figures are but between late 03 and late 05 there was the greatest spike in home prices since 00. The fact that you white people had so much to lay down on down payments and you had big enough paychecks to warrant loans for these overpriced McMansions is the root of inequality in S AFRICA. Now you wealthy fools will lose much of your unfair monetary advantage. The black professionals (and the Chinese!) will now be able to invade your neighborhoods and impregnate your daughters!
This blog is for the rich elite upper crust who are the handcuffs of AFRICA. No better than a pack of miserly JEWS discussing how to best keep their assets and power over this matzoball of a blog.
Enjoy the last few moments of your suffocating reign, yuppies.
Ben, great post.
All value in our current economic paradigm is based on scarcity.....or sometimes perceived scarcity and fantastic marketing or scaremongering.
When you start to look philosophically at a system that places value on scarcity and abhors abundance, then you begin to realise how the game is rigged and there will not be houses for all.
I have seen anger on this blog by people trying to beat the game but lost..hope by others that they haven't been beaten by the game...and others who are still trying to beat it.
I quote from a US economist who "gets it"
"While there's some genius behind creating a poverty system, it's just a tool used to control humans who otherwise might bite the ruling hand should large enough numbers wake up to the ideal that we're all working a lot harder than we really need to and that the fruits of these additional labors are ending up in the hands of bankers, who without making anything productive (i.e. making interest & usury isn't really productive in a wider sense) they nevertheless end up in control and ownership of the whole planet.
To be sure, rabid capitalism has had an upside; plenty of technology and what have you. But its dark side, often brushed over by the parrot press/MainStreamMedia is that we have stripped out much of the planet's resources and they're not coming back anytime soon, and did I mention to you that and the odds grow daily that we're either at (or sadly, past) a point of no return?
All of which gets me around to asking a rather pertinent question here: "If the government was being totally honest with the furthest extension of the Western Capitalism business model, they'd probably admit that everything ends up owned by either a ruling power elite, or its proxy paid-for by special interests, government at one level or another. The rest of us would serve at the pleasure of this power structure - as we most assuredly do now anyway, and that would be that.
As the second leg down of the Second Depression kicks in over the coming Fall and through fall of 2010, it may be time to start thinking of the larger question of work: "What can I do of value to my fellow humans that I can start up with as little capital as possible, and which will have a huge resiliency to economic turmoil. I like to call it "insulated entrepreneurship" - insulated, as much as you can, for the control of formal government that presently rules."
Peoplenomics by George Ure
Ben, the reason why increased value of property 'brings such cheer to some, is because, although a house serves a basic purpose, it is also often purchased as an investment. Big difference. Your point on value-for-money items makes good sense for the rest, but is not relevant to property. Just as CEOs don't boast about their company's 'cheaper than the next one'-shares.
“Not sure what the figures are but between late 03 and late 05 there was the greatest spike in home prices since 00.”
Humorous. Thanks Anonymous.
I beg to differ on the equality issue. The root of the difference is laziness.
Ben: on the size of the bubble in SA: a house is valued on it’s prospective rental income (even if buying to live) over a certain horizon (20/30/perpetuity years depending on time preference), discounted to its present value. Think of the dividend discount model for equity valuation. Why should you pay (much) more for a home than what you could rent it for, unless you have a certain value attached to owning a home, i.e. family with kids, pets, veggie garden, convenience, status, whatever is important to you.
On the economic growth rate of 6%: different angle to think of it: growth was driven by debt and leverage – so we brought forward (to present) future consumption, which led to higher growth rates. When you take on debt you bring future consumption forward to consume today, at the expense of future consumption, and that growth is accounted for in the GDP figures for the present year. So should credit markets not get flowing again (which I hope doesn’t out of sound and sustainable economic principles), growth will be subdued purely as a result of delevering as debt is repaid. Real estate will turn down as it’s suffered from over-investment in the past cycle.
Newboy: I assume you bought the house as a speculative investment (you’re wanting to sell because value’s come down some 10% to date and you’ve only had it for two years). If this is the case, it needs to be evaluated in your portfolio of investments. Stocks, bonds, commodities you own could be up depending on when you bought. Evaluate your entire financial situation and chat to a financial/investment advisor about it.
I believe in 5 years time the nominal price of your home will be around today’s levels, unless the central bank goes out guns blazing to create inflation (so watch what they get up to), but either way the cost of living will be substantially higher than today. The real value of your home (priced in commodities ,soft or precious) will be lower in 5 years time.
Ad: you talk of all value in our economic paradigm being based on scarcity, and a system that’s flawed when this is the case: I don’t think capitalism is a poverty system – it’s a wealth system. It seeks to maximise wealth. You only create wealth by producing/providing something that’s of value and utility to others. People value things with scarcity more than things found in abundance (ignoring paradox of value for now – we’re not all on a hot desert and need to choose between diamonds and water). This is praxeological not psychological. If you take away capitalism, no entrepreneur in his rightful mind will go out and do business for profit, after all we work for ourselves and families first. If we don’t make profits (i.e. you can’t put resources to use in such a way that people value and will pay a premium for), we won’t be creating any resources/goods to give to the larger population, or create jobs for that matter. Furthermore we won’t have market prices as we won’t know what people value most.
I do, however, agree that the fascism currently sweeping the West is not good for the man on the street. Profits have been privatised and losses nationalised, which taxpayers will need to pay off in years to come. Entrepreneurs should be left to do business, and not be rent-seeking and lobbying with government for special interests.
Good points CJ. So what reference does replacement cost serve when property value is (as rightly pointed out by becks) subjective.
And with regard to last Saturday's posts; you misunderstood. The friends, family and business example was used to illustrate that 'being tied down, tax and maintenance' - some of the favourite reasons (excuses) posed for not buying property - are lame. I did not say that there are good reasons not to buy, and I did not say that you cannot have these if you rent.
On your calculations - this is what I needed, and it's appreciated! Unfortunately, this, together with Wolf's comments last week, means its back to the drawing board for me. But it's a rent vs. buy thing.
The value of CT property is another altogether.
Joe, thank you for the final post last week. All good points that makes me understand better this thing called property.
And thank you for busting my bubble regarding brick and mortar - you could've been more subtle about how to evaluate the price of a house.
What about owning rental property?
Don't forget that property has one huge advantage - leverage and over a very long time, which means that the pain (interest paid) soon (relative to the mortgage period) becomes negligible. A million now is nothing 10 years - even five - down the line.
Peter? I can't figure what your your angle is and I think more than a couple of us suspect you're an agent provocateur with a finger in the Pammy Pie as some of your comments are wragtag weird! Or else you're the incarnation of the ultimate consumer and I should really be buying more MTN and Shoprite shares because 31# cellphone downloads and popcorn sales are set to double!
You want subtle bub? Go spout your 'fair price' views to the poor sod who bought last year at Mz Agent's 8k/sqm and is now thoroughly stuck in negative equity and tell me about sublte after he tears you a new one!
Buy-to-let? Leverage? Interest? pain, negligible, 1 bar to nothing... hohum. Hey Homer? where were you the past decade? I'm so grateful that I 'deviate' to the Austrian School of thought. Von Mises is dead, Long Live Von Mises!
If you say that the value of a flat will be the (net) rental income over 20 years, then it means that on a R1.4m flat with R7000 rent/m (with 10% rental increase), then, with no downpayment, there will be positive cash flow after 7 years and R2.8m received in rental (rent - mortgage repayments = R2.8m) after 20 yrs.
So R1.4m, albeit a lot of money, is good value for the flat. Even if the house index falls by another 10%, it's merely theoretical.
Joe, not sure that I appreciate your insults. Didn't know that you were averse to property in any form. Perhaps you are throwing the baby out as well...
Anyway, R8k/sq.m. being overpriced or a bargain depends on many things. Saw a magnificent house over the weekend with material alone worth double that - so that 'poor sod who bought last year, perhaps should not have gone for rose marble and the golden faucets. Blame the buyer, not the quality and durability of the house.
Ok, that does it, I'm convinced, the bloke definitely is an accountant.
Pete? It's a bargain LOL! Buy it and rent it out for 7k. (everyone else? Please don't take me seriously?)
CTPB? Please would you be so kind as to post a yield curve for a 1.4 bar (10% down) 7k per month rental property so 'ole Pete can see (or maybe not see) for himself? Bugger me, you can only postulate this bloody argument in so many ways. Enuogh already!
Pete? Not sure that I care... Now toddle along you Wombat, you... please? can we now progress to a meaningful subject?
Scientific auditor & accountant, Joe. I ensure that data generated by pharmaceutical companies' R&D are not fudged ... so don't give me bull for figures and expect them to go unchallenged, mate.
So, the merits of renting aside. Are you really going to take me up on my views of what a fair price for property is? What if I tell you that I, unlike you, don't have a crystal ball. But I can see that in the PAST price of property exceeded other goods (as shown in CJs calculations of coke & diesel ...), but that it has come down significantly and remained stagnant to such an extent that it again now lags again or is on par at least.
Jis Pete, this last post of yours set me off in hysterics boet, I'm still wiping snot spikkels off my pc screen! Bean Counter, someone, please help! Aaaaaugh, breathe Joe, breathe! I'm having Far Side visions here.
(No wonder SAfrica is the 'pharmaceutical' capital of the world LOL.)
Pete? You're so far out on the fringe I am totally unable to keep up with you. I concede defeat. You win! You're right, current CPT property prices are all fair value for money. Now seriously, tell me about some of the bargains you see out there? Seriously, tell me?
Beancounter, my subconscious mind is not something that I will risk 10 years of careful savings on. Same goes for listening to everybody shouting out how property ownership creates security... I have to understand it before I throw (or keep) that kind of money towards (or from) it.
And I know what you are saying, busy doing the maths. I study the articles (mostly European, except for two by Erwin Rode, and three by Wits Business School - only ones I could find for SA, barring the hundreds written by estate agencies and banks) and it shows that renting is financially a better deal, especially on a two-to-five year projection.
It is the inflationary and compounding results that keep me (and everyone that I have spoken to since I came across this site) from a clear financial principle.
I will have to, without assuming that we know the economic future, pose a calculated scenario.
becks,
completely agree with you but you miss the point...there is no such thing as a free lunch.
an economy cannot exist by people flipping houses, charging interest or renting out; someone somewhere has to produce goods and add value. money is at its simplest a claim on future work, if no work is done or value created but money is still issued you get inflation i.e too much money chasing too few goods.
At its simplest level there are far too many people in this country living off the efforts of others...hence the very high cost of living we have after a few short years
Becks, the UK doesn't manufacture anything significant. All they have are financial services and real estate. Abstract products can make an economy. Singapore, Hong Kong, New Zealand etc. All provide services for a niche, yet they flourish.
SAs inflation is created by the government, not the scarcity of products. That is why property will become massively expensive. We have a next generation of consumers, big spenders brought up in a disposable world - they will not be satisfied with downscaling. And there is an incredible amount of money to be made in providing credit to them. And the government will (whether it is for good or bad) ensure that its available.
Ad: of course an economy can’t exist only “by people flipping houses, charging interest or renting out.” Agree with you. Disagree with you on topic of money in its simplest form. Money at its ‘simplest’ form is a means of exchange. It’s not a claim on future work. If people don’t want money in exchange for a service/product, it won’t be accepted, and hence loses its monetary quality as a means of exchange and any claim you think it has on anything (Zimbabwean dollar). Whether or not we produce is insignificant in the gov’s inflationary process, even if we produce and create value, the central bank/treasury can still inflate through deficit spending, interest rates below free market rate, monetisation of debt. Not sure if I get your point though, to be honest. This blogging thing stretches the process out a bit.
Peter: I know the UK doesn’t manufacture anything significant. Let me ask you: how is their banking/financial sector faring? Any bankruptcies lately? Real estate sector? Down 20% y-o-y in April? Any effects on the real economy? Will you be going long on the pound anytime soon? London was the centre of the industrialised world in the 19th century under the mercantilist system. But the big wheel turns and you should read up more about the Austrian theory on international trade and business cycle to find out why. The property market will remain linked to rentals whether you like it or not. And banks are not going to risk lending to big spenders who can’t afford to pay them back. The government will do its best to get the banks to lend – is the US gov getting the US banks to lend yet? Because non-performing loans and defaults are still rising, and the commercial property market (which lags residential market) hasn’t even popped yet – which will dwarf the subprime.
becks,
I do not think that you can use any economy at the moment and evaluate how it fared based on the produce or services. Italy has a very big manufacturing sector, yet they suffer just like the UK, if not more.
The UK banks and property sector is frying because of sub-prime mortgages, overleveraged bank equity (up to 15:1!)and complex abstract financial products from the US. Credit was removed overnight - that's why the UK and other is going to the loo. Not because their traditional industrialized format or factories no longer exist.
I give you Spain - a balanced country in terms of manufacture, services, global outsourcing and what have you. They are on the brink of collapse, like Ireland.
Botswana has only diamonds - yet the flourished for decades.
Hey Pete? What is a "complex abstract financial product"? I'm not sure I understand?
Mortgage backed securities - made up of such a complex mix of mortgages, futures and derivatives that most of the supervisors didnt understand what they were buying (or selling to the east).
so if we can't analyse any countries at the moment we should stop while we're ahead? and next you'll throw portugal and greece at me? are you aware these 4 are known as the PIGS? nothing sound about these economies at all. but because it's a crisis we shouldn't analyse them? please man
http://www.wikinvest.com/wiki/Portugal%2C_Italy%2C_Greece_and_Spain_-_PIGS
they're the laughing stock of the EMU. countries right across the Med morocco, tunisia, egypt are still going to be showing positive growth this year...any thoughts on them? their biggest trade partner is the EU. they okay to analyse?
pete an asset backed security is not complex, they become complex once they're turned into mortgage pass-through securities and next step collateralised debt obligations that can be made-up as synthetic CDO which involves not even owning the underlying assets but credit default swaps based on them. but you're on the right track
Pete? You're either a genius or a very subtle comedian... I just can't seem to figure out which?
Now that we've covered the whole gamut of "complex abstract financial products strutting around in the guise of MBS, futures and derivitaves, could you please enlighten me on where CDO and CDS fit in the picture? Strange? I probably don't unnerstand this whole thingie too well. I thought that SPV's structured CDO's in tranches as a type of ABS to describe the broader concept of a complex financial instrument? And why blame the supervisor? Wouldn't it be more prudent to blame the rating agency who gave the CDO derived from a CDO a 'AAA' rating rather than the trader who sold it to a moron investor?
In the meantime, can someone please pass me the oxygen? I swallowed the pen cap I was chewing on...
becks,
Yes, but even ordinary asset-backed securities are abstract when they are extremely leveraged or the assets are paper or the assets are not identified. Thanks for the clear explanation, though.
re. Countries and Economies - do not misunderstand me. I said that a country can be economically sound without physical produce like steel, oil or agriculture. I was not batting for specific countries. And I definately do want to enter into a moral discussion of 'good countries' or what the EMU stand for, because then issues as slavery and human rights fall away so long as there's 'growth'.
No, I did not say that you cannot analyze. But you know that you cannot draw correllations or clearly name causes between a country's industry and it's current economic climate.
Dont get your question, Joe. You saying that investors who bought these products were not careful enough? Hmmm? Or you reckon there was a way to know what was coming?
Point remains: Banks and Property are not down because of a country's industry, but because of credit shortages and lack of trust that originated from the US subprime and abstract financial products.
Beck's? I'm not disputing the concept of 'abstract' at all. You and Pete are quite right with that. Anything that's a tier 3, off-ballance-sheet, scammed-to-market 'asset' is an abstract in my opinion. Quite analogous to Jackson Pollock painting his breakfast nuh?
One thing I would like to debate though... you cannot blame the PIGS alone for the ills in the EMU. Yes, their credit behaviour and their current balances contributed. But if you want the real culprits who crumbled the cookie then go look at the countries whose banks leveraged at 35:1 and even 50:1 (and not 15:1). The French, Austrian, UK and German banks (though the German's not as bad) are really deep in the doo-doo. Think Kreditanstalt and Polish mortgages in CHF as an example!!!! We're talking a collective $1.7 trillion in highly leveraged products with a $400bn debt servicing rollover due in 2009 alone. Wait till this 'bubble' pops and pop it will with the Zloty devalued by more than 40% and Poles unable to service their bonds.
And Spain? Come on, they're not the laughing stock of EMU (maybe Greece) but not Spain and Portugal. When more than 17% of your workforce under the age of 20 are unemployed you should get very worried viz a viz Spanish Civil War. I'm not laughing at them, and I really hope they can hold it together and extricate themselves from the clutches of the feudalistic EU Parliament. Did you know that the EMU constitution does not allow the PIGS to devalue their base currencies? That this has been a primary cause of the destruction of their ability to compete in export markets?
Seriously, don't laugh at these guys. That's like the pot calling the kettle black. Worry about our own little farce of an economy before you criticize these guys.
Beck's, I assume you are familiar with asset back securities? If you want clearer explanations I'm happy to provide some links as I don't think this blog is aimed at that kind of thing, the reason I'm not posting reams of 'MBA talk' here.
Pete? "You saying that investors who bought these products were not careful enough? Hmmm? Or you reckon there was a way to know what was coming?"aah...yup, that's more or less exactly what I'm saying. Let me rephrase for you... "You saying that investors who bought these products were greedy?" (sic). Pete, like Bernie Madoff proved, there are no free lunches and any derived instrument, by definition, is a high risk play and if you get involved in them, you better be prepared to take the losses with the wins and you BETTER understand the mechanics of them. And above all you better understand the margins and have the collateral to back them. And there's the rub nuh? Investors, or should we call them speculators, were offered these products where for a small sum down, they COULD make a leveraged fortune while they took all the risk and the third party who sold the product took none. Too good to be trua ain't it? The truly funny thing about the whole ponzi scheme is that all these third parties were selling on the collateralized risk to each other while rating agencies were spewing out AAA ratings like there was no tomorrow. Real herd behaviour. Then I suppose the real blame should be with the SEC who were warned in 1997 that this was a ponzi scheme.
Pete? The warnings were there from the late 1990's and those who understood these products either had itchy trigger fingers or stayed well clear of them. You don't put your money into something you don't control directly or don't understand. That lesson is as old as time. Anyway, have a look at this article from 2006 as it's a very good analysis of FWMD's and certainly precedes the meltdown. WMD or "What are Derivatives?" The warnings were there, they were clear, and only the greedy ignored them. I do feel sorry for investors whose money was tied up via funds in these instruments. But then, why would anyone give his money to a third party to invest and then sit back in the TV couch and assume it will always be safe and will just grow? Why would you invest your money and not know how it's invested? That's like telling your dog to guard your biltong stash.
Pete? I won't comment on your last para as I'm still trying to decipher it. Here's something to ponder. Go look for Governor Cuomo's questions around the BofA-Merill-Lynch merger in Dec 2008. Watergate was a pajama party compared to what's brewing here.
Can we now please get back to a discussion about property?
Allow me then to ask a question? Why do we use the CPI when property inflation is calculated/compared. Surely we must use the interest rate (lets say prime). The make-up of the property market is generally based on credit, which is extended at prime. This is therefore what property is costing us and this is at which rate property should appreciate.
and to add to Cuomo comment NY Fed chair SFriedman resigned with immediate effect last night -- on questions about purchases of Goldman Sachs stock in January -- he's a retired chairman of GS....mmmm.
i know you're not disputing concept of abstract - was just pointing out to pete that ABS' aren't abstract and that it's financial engineering that makes them abstract. I am quite familiar with the basics of CDOs, CMOs, CDSs, etc. but always find links interesting thanks. actually had a good lag at the pass the oxygen and swallowed pen cap comment yesterday.
Don't get me wrong, I'm not blaming PIGS for problems in EMU. said it for lack of better word at time should have used 'basket case' or something similar. pete pointed out that the "UK doesn't manufacture anything significant. All they have are financial services and real estate." implying a country can survive on this. Then he whipped out Spain and Italy as having sound manufacturing sectors but that they're also feeling the pinch. But they're not sound - they're the IS from PIGS. feudalistic parliament and constraints on currency revaluations is another discussion entirely, although I'm well aware of it. But taking the EMU as one economy, have the real estate and financial services been a net-positive or net-negative?
Which is my point: these products and leverage that drove growth in UK is now causing a blow-up in PIGS (especially Spain real estate - leaving Austrian et al exposure to CEE out for now). so to say an economy can grow based on real estate and finance is just false. the products that helped a nation like UK 'grow' are even more of a negative as they eventually drag everyone down with them.
pete just to make sure i understand you: so if prime climbs to say 25% the property market will inflate by a corresponding 25%, and vice versa. If prime goes to 50%, property inflates by 50%? so if as you say the make-up of property market is based on credit, tighter credit conditions lead to inflation in property prices?
Peter? I'm seriously going to give you the most honest answer I can because your question is good and has merit.
Here's the thing: If you estimate property value purely off the inflation rate of property prices then over time you have absolutely no benchmark to measure it against and subsequently you have no clue as to whether property is expensive, cheap of fairly priced. Above all, you don't know whether it's affordable.
Enter the CPI. The nearest possible measure (albeit fudged a bit) we have for affordability is the CPI. Employment and salaries generally trend in line with the CPI. Though since the 80's, working stiffs have generally trended backwards and are today much poorer than they were a decade ago.
The interest rate is merely an indication of the cost of your financing, or the loss of purchase power of your ZAR.
Pete. Take a property price as a benchmark at a point in time, say 2000. Appreciate at against the CPI and against a House Price Index up to 2009 and the difference will show you whether property prices are leading or lagging people's incomes.
Lotsa pundits don't like this approach, but it's what I use and it's served me well. lat 2004 it started warning me that property was getting way ahead of inflation adjusted incomes and I got out of property and stayed out, and will stay out for some time to come, and Lew Geffen is welcome to snap up all the bargains out there.
Pete? You and the missus will get your pad in time and for a reasonable price. Just don't value your purchase off a mark-to-market principle as that's what got most people in trouble in the first place. Just because a developer has a hidden 500% markup on 'general items' or uses breezeblocks when he told you fired brick, doesn't mean you should pay 8k/sqm.
Look at what demographics are earning, what they can afford, and then decide whether prices are fair or not. Pricing property on the greed and fear of a boom frenzy is the surest way to get yourself locked in to negative equity unless you're a professional flipper.
This is good. We're back to property discussions
Does it not, in a lagged fashion? I can see that near term high interest rates will make mortgage repayments harder and put pressure on property prices. But think beyond, and think back.
Why compare to CPI and not rather to repo (forget about your 50% example - too theoretical and irrelevant, like world peace, cute and possible, but naah, don't think so).
Reason for my question: Some remarkable tight correlations between property prices and prime over the last 15 years, be they slightly out of phase.
Thanks Joe - my turn to digest.
hey Beck's, thanks for that snippet on Friedman, I didn't know. Though don't you reckon that's just smoke and mirrors to distract from the real scandal of the BofA saga? Friedman is smallfry compared to what Hank and Ben will have to explain if some prosecutor decides to push the issue?
And you're right, I did digress a bit. your comments re the EU are quite on the button. Though us guppies down here better hope they don't implode coz since the EU is our major trading partner, any significant downturn (dare we call it depression?) will leave us "kaalgat in die reen, ons twee staan kaalgat en alleen" down here in the southern lattitudes. OMO
Post a Comment