Well, it's been informative, but this blog seems to have descended into a Saturday evening leg cream oke debate. I'll check back from time to time, but I think you're coming off my Chrome start pages list. Enjoy the impending crash.
The leg cream is/was an attempt to liven this place up.
Clearly, it has failed.
Probably because it is visited by a bunch of humourless accountants and/or scientists, all of whom could do nothing more than get upset and none of whom have the insight to spot this.
So no more leg cream stories, back to endless monologues about, well, nothing really.
A word of advice, as you move on to inflict your sense of humour on another blog: brevity is the source of wit. Leg cream jokes? Funny the first time. Raise a smirk the next two times. By the fourth time it's saying a lot more about your sense of humour than ours.
Oh, and another thing: the genuinely witty and insightful among us know that if you've failed to raise a laugh, blaming your audience for not having a sense of humour is the last resort of the crashing bore.
God speed, and good luck with the whole humour thing. With a lot of work you may become adequate.
Right, anyone for house prices? The Economist has updated its tracker of the various bubbles and busts.
I am not the "leg cream" guy - the post above is not me - probably someone who got upset by the graph I posted at the end of last weeks posts - I agree with Bean, the cream guy just didn't know when to let it go ... incidentally, Bean's summary of Cream's lack of talent as a comedian raised more chuckles from me than Cream's pitiful attempts ever did ...
I can't find the Economist link Bean - got a tinyurl for it by any chance ?
I have been looking at the very interesting graphs over at housepriceafrica again - I have nothing to do with the site, I just think the guy has done a wonderful job graphing all the pertinent information - it really helps one see what is going on -
http://tinyurl.com/3mpuboa
If anyone is interested, open the page in another window and I will take you through some of my thoughts on them ...
I have already pointed out the top real price graph that shows houses are double what they should be compared to salaries ( i.e. in real terms ) - it clearly shows they need to half in price in real terms.
Graph 6 shows the real price over 45 years and this confirms that house prices are way too over priced according to long term norms.
Graph 10 shows that interest rates have never been this low since 1980.
Graph 13 shows that despite low interest rates, debt to household income has never been so high - in fact it is double what it was back in 1980 when interest rates where also at this level - so debt levels need to fall - I would suggest that for this to happen, house prices need to fall also.
Graph 12 is interesting and confirms that house prices are way ahead of disposable income. If we assume that the disposable income graph continues on it's pretty smooth trend, then nominal house prices will need to fall 21% to rejoin it,which is where it traditionally likes to be.
Graph 15 compares SA real prices to the classic bubble graph and shows that the "fear" plunge stage is imminent.
Graph 16 shows that new house prices and old house prices are traditionally the same, but presently new homes are actually 50% higher than old houses - this suggests that new home prices need to plummet to get back to norms.
Finally, the bottom graph is kind of interesting - house prices in gold ounces. If we update it to the present price of gold, it shows that when priced in gold, house prices are at an all time LOW !!!! They have only been this low one other year in the last 30 years, and that was in 1980.
As we have seen in the other charts, house prices need to fall, so I would suggest that perhaps this is telling us that gold has peaked. If it hasn't, then house prices in gold terms are going to go into record low territory where they have never ventured ever before.
If we say that nominal house prices in rands will fall 21% over the next year, and the gold house price returns to the norm of 130 ounces like it did after 1980, then gold will return back to $800. That looks like it could be a fit to me. If the Rand weakens then the gold price will be lower, if the rand strengthens then the gold price will be higher.
So there we have it - I would say therefore in conclusion, over the next 3 or so years we could see real house price falls of 50%, nominal house price falls of 21% with new homes falling by 40% which probably means land will fall in price to facilitate this, inflation climbing up to 10%, interest rates getting higher, and gold halving.
@ CJ, give this a whirl: http://tinyurl.com/35ae5so
As for your long-term reasoning, all looks fundamentally solid. I hope you're wrong (remember, I caved in and bought early this year - don't want my crap investment to get crapper) but you've called it mostly right so far.
Having said that, I think we really are reaching a "this time it's different" stage in Western history - whether it's the disintegration of the Eurozone or the fracturing of the US into multi-state economic blocs, I suspect long-term predictions are going to become increasingly futile. And if you believe the gold bugs, the world is going to rush back to the shiny stuff as its default currency.
Wouldn't it be one of the greatest ironies if a housing bubble broke the global economy, and after ten or twenty years of economic chaos, the world decided that the last remaining safe place for money was a house? Sigh.
@ Anon: secure, talented people call it self-confidence. Insecure, untalented people looking at secure, talented people call it vanity. A small point, but then you seem to trade in small points, so let's leave it at that.
I see Ireland's real price almost boomed as high as SA but has since crashed 40% real, compared to SA's 11% - they are showing us the way.
The US peaked 2 years before SA and has since almost crashed 40% in real terms, almost back to where it started.
Japan never boomed at all and has decreased 40% real over the full 14 years - so much for houses always going up.
Singapore property actually got cheaper over the same period and is now back to where it started - ie it's houses do what they should and just keep track with inflation.
Australia finally turning down - looks like they are the last to leave the party.
Switzerland has a very stable line, with house prices going up annually about 1.5% higher than inflation, over the last 14 years.
Britain's bull trap has entered the fear stage - SA lagging behind and is heading to that point soon.
SA still the most overvalued property market amongst the 21 major countries listed. According to their graph SA real prices need to drop 60% real rather than my 50% calculations ... and that is not factoring in any over correction that usually happens in crashes ... 70% real price drops anyone ...
Any Estate agents who still wonder why people are reluctant to buy in SA presently can hopefully understand why this would be having seen these graphs and the ones in my previous post. People are in serious debt and houses are double what they should be. People just don't have the money. It's that simple.
Where I live I can pick up a small freestanding for about 1 bar. If CJ is correct and we will see a 70% drop most people will buy 2 or 3 :) CBD prices are still crazy though, or are they?
I'm still not sure the above calculations have factored in the true value of property before the boom and now. Nor can any of those graphs include intangible data. Now those are graphs I would love to see. I would also love to see the graph comparing house prices to political stability. Or wait beter yet, where's the graph that shows the comparison between house prices and that average human's fear levels / per country / per fear source. House prices vs job security? I need to see the graph that compares house prices to changes in administration, or manipulations in political or financial policies. Show me the graph comparing the average homeowner's equity levels vs debt on their homes, compared to other "crash" countries.
SA is a different platform on which a market can exist. Comparing the sales of farm equipment in South Africa to that in Zim is kind of like comparing the price of rice in Egypt to Indonesia.
Although if you are correct, and there are millions of South Africans sitting on property barely making payments each month, then God help us all, and you can say "I told you so".
Houseprice SA is an amazing website. A lot of effort goes into it. Also the monthly changes in real and nominal prices are being updated regularly. Definitely a website to stop by every now and then.
The "true" price you want is the "real" price, ie the price after inflation has been factored out - most of the graphs I talked about were indeed "real" graphs.
The 50% -70% drop is a real drop - SA has inflation so that will take care of a fair bit of that real drop needed, so the nominal (actual) falls won't be so much.
Indeed, debt is double what it was back in 1980. The low interest rates are protecting people from the pain - which is why they are not being forced to sell at a lower price. However, if interest rates increase to match the increasing inflation, then the pain starts, people will be forced to sell, buyers will only buy at lower prices, and when people see that prices are falling there will be a rush for the exits, so prices fall more ... welcome to the "fear" stage of the crash.
The points I make are interpretations of graphs based on the fact that cycles repeat and graphs always revert to historical norms.
I would be happy to hear your own interpretation of the graphs if you believe they show something different.
---
I forgot to mention Graph 7 on the housepricesouthafrica website - this has real house price growth and nominal house price growth on the same graph. If we assume that real prices should follow inflation, but that there are cycles around this norm, then the real price area above the zero line should be pretty much the same as the area below the zero line. Notice from 1997 to 2007, there is a huge area ABOVE the zero line - then a relatively small area from 2008 to 2010 below the line - this area is nowhere near large enough to match the huge area above that preceded it ... we need much more. So that line has to nose dive down again.
And when it does, notice how the nominal line always tracks it ... so that gives us another clue that nominal prices are going to fall.
“The continual demand and the extraordinary consumption made the price of commodities become exorbitant. The value of house prices rose by a third, as no limit was placed on expenditure and only pleasure, luxury and comfort were studied, without any thought that days of trial might succeed to these days of prosperity.
Everyone spent with both hands, and every facility was given to people to obtain what their frivolous needs demanded. Unlimited credit was the order of the day, and everyone could obtain large sums quite out of proportion to their standing or to their income …
The abundant source of the fortunes ran dry the moment more economical rulers came to the head of affairs; credit suddenly ceased, and poverty became more evident from day to day.
The methods which were introduced and the careful expenditure prevented money, which had always kept the wheels going, from circulating as rapidly as before, and people were pulled up in their headlong career of apparent happiness and pleasure.”
Dutch bureaucrat, Baron Andries van Pallandt, Cape Town 1803-1806
Its not that this time is different BC, its just that everything including human and economic folly is cyclical, this includes the rise and fall of nations on longer timelines.
CJ, take a look at these charts especially the bottom one, the 36 year gold/zar chart. Can you see a decade’s long trend? If you print it out and flip it over it shows you the value of the rand and where it is ultimately going; zero. It is SARB and Government policy to send it there by debasing it between 3% to 6% a year but its running in excess of 10% by my calcs.
Now If you look at the real house price graph and overlay that on the house/gold chart ['79 to present] you will see a correlation. What the gold and house prices are adjusting for is debasement and inflation of dollar and rand. If one understands the dollar reserve system then you will see that this is the correct conclusion to be making here.
So what we are comparing in the house price/gold graph is houses and gold; two stores of value, not the paper rand. This gives one a very different picture and one which initially perplexes. Is it gold that’s overvalued? Are houses good value? Everything seems so normal in that chart doesn’t it?
The problem is the rand not the price of gold or houses. These stores of value have adjusted for the rands debasement as I have been saying for a long time. House prices are not overvalued, they are actually good value presently. This brings with it a problem. If houses are good value presently then why are they unaffordable? Purely because in many sectors wages have not adjusted upward enough to compensate for monetary debasement. For those not holding stores of value like property or gold sans debt the wealth is fast flowing away from them. This has been masked by the extension of credit but that game itself is up. This is all part of the transfer of wealth that has been happening for some time.
Now although the graph shows houses as good value there is a caveat.
Gold is not needed in the world, it has no major industrial utility. However because of its relative scarcity [160 000 tons of above ground gold or about 3/4 oz per person on the planet] divisibility, fungibility, portability, beauty and non tarnishable properties it has been the single best store of value for thousands of years. One does not need to afford gold and you can do without it. It is for those with savings or wealth who wish to carry that wealth through time.
Houses on the other hand are needed. They also need to be affordable. This is the single biggest difference between these two stores of value [and houses lack all the others inherent in gold, except perhaps beauty but that depends on the architect]. This issue of utility and affordability is why the price on houses are capped but the price of gold isnt.
This is why I do not agree with BC's assertion that houses will be the surviving long term store of value while gold will be the speculative dud. Speculation is inherent to both as well as anything traded in a market. I’m not saying houses will stop being a store of value; it’s just that the value it can store is capped through the economy and affordability.
Because of the historic monetary chaos in the world [of our first worldwide all paper monetary experiment], and the knowledge that physical gold has already been chosen as the ultimate store of value as well as its properties of absorbing almost infinite value without distorting economies, i hesitate to say that we will see a return to the mean described by the chart.
As a physical gold advocate and not a gold bug, I believe we will not see a return to the gold standard of old. Actually all gold bugs really want is a balanced budget, not a gold standard. However i do see the end of currency being both means of exchange and store of value. Paper currency will retain the means of exchange role which it performs excellently and physical gold will retain the store of value role. [Paper gold or contract gold suffers from the same fractional reserve debasement as currency which will come to an end on sufficient demand for physical settlement i.e Venezuela etc]
Goldilocks - your real price graph ends at 2005 so it is deceiving - an updated one shows that the last boom in 1980 had average prices of $1800 in todays money (it peaked at $2200 in todays dollars). In other words we are now pretty much matching the biggest ever previous peak.
Obviously, the question is, are we going even higher. Are we going to go where we have never been before - gold at record prices and houses in gold terms cheaper than they have ever been.
Remember, if Gold does shoot up, then houses valued in Gold become even cheaper - in other words they are falling in price ... which is interesting.
The one thing that could be screwing up all the graphs is that governments have manipulated the way inflation figures are calculated to such an extent that maybe they no longer represent reality, which, if it is the case, would totally mess up real price charts.
A real price gold chart using what Shadow Stats perceive to be the correct inflation figures, rather than the manipulated government ones, show that Gold actually needs to hit $6500 to match the 1980 peak.
Notice that there seems to be quite a few similarities with the 1980s - same interest rates, same gold price, same house prices in gold - they also were at the peak in the housing market cycle ... what happened next was the prime rate soared to an all time high, real and nominal house prices plunged, gold collapsed, and the gold price of homes soared.
Debt also soared (it was half what it is today), and inflation also went higher after dipping a little - it was higher than it is today, but, if we measured inflation in the same way it was measured back then, maybe we would also be seeing a similar inflation figure as they had then)
The US shiller housing graph in gold is also an interesting one - in 2005 an average house was 140 ounces of gold - since then Gold has soared and housing has crashed 40% in nominal dollar terms so houses now cost only 30 ounces. An all time low ... yet there is no indication that the market wants to bottom yet. There is certainly a case over there to watch out for that bottom because that could be a good time to sell your Gold and buy houses. Not because houses will necessarily soar, but they will at least have become stable whilst Gold collapses.
Certainly interesting times and there are many pieces to the puzzle ... it is just a matter of trying to piece together enough of the pieces to see the overall picture.
Did you know CJ that the notional value of contracts on worldwide markets is over 1 quadrillion dollars [1000 trillion]? A quarter century of world GDP. All the gold in the world ever pulled from the ground is valued at around 10 trillion. What is in a bubble?
I have been hearing gold bubble and gold crash talk since around $500 so forgive my scepticism. I will have to repeat what I am saying in a different way since you are holding on to seeing the world through paper eyes.
Here are 10 charts to complicate matters further. There are a million metrics to use but they all miss the single most important point I am trying to make.
What is physical gold or property really worth today? We only know it in paper terms don’t we, using currency as numeraire. When you start to look at the world of real things only instead of paper abstractions you begin to see what value and wealth is. Paper currency is not wealth or value; it is a claim on value, claims which run in parallel to the world of real things. However this paper world has ballooned to such fantastic proportions since the 80’s it has long left parity with the physical world. These debt claims we have saved cannot be traded back into the physical world at anywhere remotely near to todays prices. Doing so would entail massive distortion of economies and ultimately bloodshed. Reread my comments on gold and house utility in my previous post to see where these claims could flow to without restriction and why.
Yes one day I will trade the gold for other stores of value such as property, but that day has not arrived and a chart will probably not give us a timely indication either.
@Goldilocks - The nice thing about cycles and charts are that the reasons are actually not that relevant - the tide goes in and out - the science of gravitational pulls are not that important because the cycles will keep on doing what they do. There are always reasons why a bubble is not a bubble because it is 'different this time'.
The point is, according to official stats, we are at the edge of the limits of where we have ever been before in terms of real Gold price.
Obviously that line is not impenetrable and it is indeed possible that we will go into unknown new territory, (as indeed property did when their bubble didn't collapse at the previous real peak and went on to become a super-bubble that had never happened ever before and that ended up almost destroying the world's financial system).
The point is, we are in a place presently where there is reason for gold charts to offer resistance.
Interestingly, Gold had a mini meltdown today ... is this it ?
Of course, if you argue that official inflation figures are nonsense, as Shadow Stats indicates, then all graphs are giving us the wrong feedback and all bets are off ... and pretty much anything could happen.
Gold tanking - Margin hike on contracts, Bernanke address tomorrow, time for profit taking and a correction, shorts come in hard. All part of the big game and flushing out the weak hands. Nothing goes up in a straight line; cycles as you say.
The big question for the strong hands is: Are the reasons why gold has become the “new” safe haven resolved?
Over The Counter or OTC derivatives is what crashed the global economy, property was just the underlying vehicle from which they derived their “value”.
Here’s a thought experiment. We call it the fractional reserve housing game. Imagine one has a house. Now you can create 20 or 30 or more titles to the house because you are a licensed financial services provider and sell them at par as investments. The titles to the house are called unallocated but everyone believes they can go live in the house if need to. The titles are traded on the housing market and everyone buys them because that’s how one invests and can earn a return or not depending on the market at the time. No one wants to really live in the house because then they would have to pay for upkeep etc so they are happy that they just have the deed; its a lot simpler. They can cash in on the possible capital appreciation of the house without having the hassles of physical ownership.
This is very similar to what a Mortgage backed security is but not quite. Now a few questions are in order here.
Does the abundance of titles on the market increase the value of the houses or depress them? Does it make the housing market more volatile? Is there a difference in value between the real house and the paper titles? What happens if it all goes pear shaped and everyone wants to live in the house?
This is present day bullion banking and if a few more Chavez’s of the world demand to live in the house we will soon discover more than hypothetical answers to those questions.
There are cycles yes, but some of them are so long your grandkids will be long gone before they end. It is this type of transition I believe we are in; the reworking of the worlds monetary system.
Martin Armstrong is a great source on those long cycles btw
Apparently in many major US cities it is now cheaper to buy a 2 bedroomed house than to rent it - certainly, in the US where the housing crash has been allowed to play out, the housing bottom is getting near.
Martin Armstrong's cycles apparently predict that US housing will bounce up for 3 years then plunge to even lower lows.
The following is also interesting - since August 2010 these price increases have happened -
Unleaded gas prices are up 45%. Heating oil prices are up 46%. Corn prices are up 71%. Soybean prices are up 26%. Rice prices are up 13%. Pork prices are up 31%. Beef prices are up 25%. Coffee prices are up 38%. Sugar prices are up 48%. Cotton prices are up 13%. Gold prices are up 42%. Silver prices are up 115%. Copper prices are up 23%.
Yet official inflation is less than 5% in most places ... Huh.
Shadow stats says that in the US, inflation as it used to be calculated is actually above 10%. The new calculations reason that if steak becomes too expensive then it is removed from the inflation basket and substituted with hamburgers because that is what people can afford ... and that is why inflation is so low, and why bond rates are so low, and why people who save are being screwed by low bank interest, and people relying on social security or salaries are getting inflation based increases that are actually below the real cost of living increases ... and that explains why in 4 years, the number of people in the US on Food Aid has doubled.
If the US housing bottoms next year, then SA will bottom in about 4 years as historically we lag about 3 years in housing bottoms.
The big dilemma is do we play along with the charade and use the inflation data that the governments are presenting to us ... or do we stick with the traditional ways of calculating data, in which case nearly every chart has to be redrawn. And of course, if inflation really is 12% and not the official 6%, but your bond is only 10%, then banks are actually paying you to borrow money ... and suddenly the whole thing becomes a total mess.
So if Gold does indeed go to 6000, then that is because the official inflation figures have been discredited. In which case we can't complain when Unions demand 18% increases. And banks are going to have to increase bond rates. So houses will fall in price nominally as borrowers come under pressure ... and with higher inflation the real price will also accelerate down ... and voila, we could well end up with that 70% real price collapse after all.
So in conclusion ... if we go along with the charade of the official inflation figures then I stand by my predictions ... if the charade crumbles then we enter a whole new ball game and everything changes.
I hope you got the bullion banking/house analogy. I expect the paper price of gold to tank to around $200/oz but try get any physical for that price; the premiums will be so massive it will dwarf that $200.
The whole reason we need money to seperate functions i.e currency as medium of exchange and gold as store of value is that it resolves the conflict between the debtors and the savers. Who cares what interest rates are or inflation is when you are saving in gold which adjusts automatically? China then doesnt have to worry about what its T-bills are worth.
CJ have you done your own personal inflation basket on the things you consume? This is going to give you the most accurate information tailored to you and relevant to your situation.
BC, a friend of mine who is trying to convince his family members to ditch their property inheritance in lieu of gold and select stocks has calculated costs of maintaining property including rates etc at 16% inflation p.a. Food inflation has been at 12.5% average for the last 40 years. Petrol is running at just over 10%.
Gold has been at around 17% p.a for 40 years and that includes a 25 year bear market. This year has been good for me in gold and silver; 50% return after costs.
Oh and a handy way to calculate compounding is to divide 70 by the rate of inflation; this will give you the amount of years it takes for prices to double. i.e If inflation is at 16% it will take 4.375 years to double.
For those who grew up in the paper century and considered it the norm.
The main thing we miss today is universal money. Gold fulfilled this role from the time of Augustus to 1914. The absence of gold as an intrinsic part of our monetary system makes our century, the one that has just past, unique in several thousand years… I firmly believe gold will be a part of the international monetary system sometime in the twenty first century.
Robert Mundell, Nobel Laureate in Economics, Acceptance Speech — Dec 1999
It seems to me that inflation is certainly higher than the recorded figure. The Saturday Argus used to graph a weekly basket of goods at various supermarkets - when I highlighted in Realestateweb that the basket was rocketing, the basket, which had appeared for 4 years, mysteriously vanished and was not seen again.
Of course Gold is not part of the basket. The point is, if we stick with official inflation figures then my scenario is a credible way forward and Gold has probably peaked.
If we acknowledge that we can't use the official inflation figures then we need to redo all the graphs with what we believe the correct inflation figures are ... and the first thing to do then would be to increase bond rates by 5% to reflect these correct figures ... which of course would put huge stress on the housing market.
So, what to do ... continue the lie ... in which case the scenario I have painted could happen ... or correct the lie and take the pain as all hell lets loose, but in the knowledge that the sooner the pain happens the sooner it will all be over.
A bit more on the houses priced in gold chart. If you either invested in gold or housing and nothing else then selling housing in 2005 for Gold would have been a good idea and soon selling gold for housing would be good.
However, that doesn't mean that housing will go up - it might just be that gold falls faster than housing. A 20% fall in housing and a 50% fall in gold would mean that houses in gold terms increases significantly in price, even though in Rand terms they would have fallen. It is important to bear this in mind.
@ Goldilocks, is your link correct? I clicked through and all I found was a haven for paranoid racist crackers feeling hard-done-by because blacks have the audacity to suggest that apartheid wasn't a boon.
@ Eugene "Goldilocks" Terrorblanche. Stop wasting your time on white supremist websites. No wonder, you like gold so much, you protecting yourself from the "evil natives". Haha
I have invested in krugerands for the past 7 years and i can tell you that i doubled my money should i decide to sell my coins now. However my house i bought has depreciated by 20%. So i am still buying krugerands as gold will continue its rise and i buy when there is a dip
41 comments:
I know an oke who sells ladies leg cream to high end salons and makes R100k per month.
He was at the PE match where the Bokke whiped the All Blacks
He says most people have no sense of humour and are as dumb as a bag of hammers, like the last guy posted on previous thread.
He also says we have entered the "Amageddon" wave in the markets, and there there is no limit to the downside except zero
Dear Bag,
Is "Amageddon" the Xhosa plural of just a single geddon? Or are you perhaps referring to Armageddon?
Yours,
Hammers.
Well, it's been informative, but this blog seems to have descended into a Saturday evening leg cream oke debate. I'll check back from time to time, but I think you're coming off my Chrome start pages list. Enjoy the impending crash.
Of which R 40 000 goes to the fiscus, unless it's cash in hand transactions.
The leg cream is/was an attempt to liven this place up.
Clearly, it has failed.
Probably because it is visited by a bunch of humourless accountants and/or scientists, all of whom could do nothing more than get upset and none of whom have the insight to spot this.
So no more leg cream stories, back to endless monologues about, well, nothing really.
Y-A-W-N
Yours sincerely
"Leg Cream"
I know a person who dies it. I believe he makes a good living out of it.
I am the leg cream guy.
Why don't you guys have a sense of humour?
So long, Leg Cream.
A word of advice, as you move on to inflict your sense of humour on another blog: brevity is the source of wit. Leg cream jokes? Funny the first time. Raise a smirk the next two times. By the fourth time it's saying a lot more about your sense of humour than ours.
Oh, and another thing: the genuinely witty and insightful among us know that if you've failed to raise a laugh, blaming your audience for not having a sense of humour is the last resort of the crashing bore.
God speed, and good luck with the whole humour thing. With a lot of work you may become adequate.
Right, anyone for house prices? The Economist has updated its tracker of the various bubbles and busts.
http://www.economist.com/blogs/freeexchange/2010/10/global_house_prices
They've also added a few toys like princes in real terms, relative to incomes, etc.
I am not the "leg cream" guy - the post above is not me - probably someone who got upset by the graph I posted at the end of last weeks posts - I agree with Bean, the cream guy just didn't know when to let it go ... incidentally, Bean's summary of Cream's lack of talent as a comedian raised more chuckles from me than Cream's pitiful attempts ever did ...
I can't find the Economist link Bean - got a tinyurl for it by any chance ?
Dear Bean Counter
"the genuinely witty and insightful among us know ..."
You said it, boet! Vanity not one of your strong points
I have been looking at the very interesting graphs over at housepriceafrica again - I have nothing to do with the site, I just think the guy has done a wonderful job graphing all the pertinent information - it really helps one see what is going on -
http://tinyurl.com/3mpuboa
If anyone is interested, open the page in another window and I will take you through some of my thoughts on them ...
I have already pointed out the top real price graph that shows houses are double what they should be compared to salaries ( i.e. in real terms ) - it clearly shows they need to half in price in real terms.
Graph 6 shows the real price over 45 years and this confirms that house prices are way too over priced according to long term norms.
Graph 10 shows that interest rates have never been this low since 1980.
Graph 13 shows that despite low interest rates, debt to household income has never been so high - in fact it is double what it was back in 1980 when interest rates where also at this level - so debt levels need to fall - I would suggest that for this to happen, house prices need to fall also.
Graph 12 is interesting and confirms that house prices are way ahead of disposable income. If we assume that the disposable income graph continues on it's pretty smooth trend, then nominal house prices will need to fall 21% to rejoin it,which is where it traditionally likes to be.
Graph 15 compares SA real prices to the classic bubble graph and shows that the "fear" plunge stage is imminent.
Graph 16 shows that new house prices and old house prices are traditionally the same, but presently new homes are actually 50% higher than old houses - this suggests that new home prices need to plummet to get back to norms.
Finally, the bottom graph is kind of interesting - house prices in gold ounces. If we update it to the present price of gold, it shows that when priced in gold, house prices are at an all time LOW !!!! They have only been this low one other year in the last 30 years, and that was in 1980.
As we have seen in the other charts, house prices need to fall, so I would suggest that perhaps this is telling us that gold has peaked. If it hasn't, then house prices in gold terms are going to go into record low territory where they have never ventured ever before.
If we say that nominal house prices in rands will fall 21% over the next year, and the gold house price returns to the norm of 130 ounces like it did after 1980, then gold will return back to $800. That looks like it could be a fit to me. If the Rand weakens then the gold price will be lower, if the rand strengthens then the gold price will be higher.
So there we have it - I would say therefore in conclusion, over the next 3 or so years we could see real house price falls of 50%, nominal house price falls of 21% with new homes falling by 40% which probably means land will fall in price to facilitate this, inflation climbing up to 10%, interest rates getting higher, and gold halving.
Discuss ....
@ CJ, give this a whirl: http://tinyurl.com/35ae5so
As for your long-term reasoning, all looks fundamentally solid. I hope you're wrong (remember, I caved in and bought early this year - don't want my crap investment to get crapper) but you've called it mostly right so far.
Having said that, I think we really are reaching a "this time it's different" stage in Western history - whether it's the disintegration of the Eurozone or the fracturing of the US into multi-state economic blocs, I suspect long-term predictions are going to become increasingly futile. And if you believe the gold bugs, the world is going to rush back to the shiny stuff as its default currency.
Wouldn't it be one of the greatest ironies if a housing bubble broke the global economy, and after ten or twenty years of economic chaos, the world decided that the last remaining safe place for money was a house? Sigh.
@ Anon: secure, talented people call it self-confidence. Insecure, untalented people looking at secure, talented people call it vanity. A small point, but then you seem to trade in small points, so let's leave it at that.
Thanks Bean - nice
I see Ireland's real price almost boomed as high as SA but has since crashed 40% real, compared to SA's 11% - they are showing us the way.
The US peaked 2 years before SA and has since almost crashed 40% in real terms, almost back to where it started.
Japan never boomed at all and has decreased 40% real over the full 14 years - so much for houses always going up.
Singapore property actually got cheaper over the same period and is now back to where it started - ie it's houses do what they should and just keep track with inflation.
Australia finally turning down - looks like they are the last to leave the party.
Switzerland has a very stable line, with house prices going up annually about 1.5% higher than inflation, over the last 14 years.
Britain's bull trap has entered the fear stage - SA lagging behind and is heading to that point soon.
SA still the most overvalued property market amongst the 21 major countries listed. According to their graph SA real prices need to drop 60% real rather than my 50% calculations ... and that is not factoring in any over correction that usually happens in crashes ... 70% real price drops anyone ...
Any Estate agents who still wonder why people are reluctant to buy in SA presently can hopefully understand why this would be having seen these graphs and the ones in my previous post. People are in serious debt and houses are double what they should be. People just don't have the money. It's that simple.
Where I live I can pick up a small freestanding for about 1 bar. If CJ is correct and we will see a 70% drop most people will buy 2 or 3 :) CBD prices are still crazy though, or are they?
I'm still not sure the above calculations have factored in the true value of property before the boom and now. Nor can any of those graphs include intangible data. Now those are graphs I would love to see. I would also love to see the graph comparing house prices to political stability. Or wait beter yet, where's the graph that shows the comparison between house prices and that average human's fear levels / per country / per fear source. House prices vs job security? I need to see the graph that compares house prices to changes in administration, or manipulations in political or financial policies. Show me the graph comparing the average homeowner's equity levels vs debt on their homes, compared to other "crash" countries.
SA is a different platform on which a market can exist. Comparing the sales of farm equipment in South Africa to that in Zim is kind of like comparing the price of rice in Egypt to Indonesia.
Although if you are correct, and there are millions of South Africans sitting on property barely making payments each month, then God help us all, and you can say "I told you so".
Houseprice SA is an amazing website. A lot of effort goes into it. Also the monthly changes in real and nominal prices are being updated regularly. Definitely a website to stop by every now and then.
@ anonymous
The "true" price you want is the "real" price, ie the price after inflation has been factored out - most of the graphs I talked about were indeed "real" graphs.
The 50% -70% drop is a real drop - SA has inflation so that will take care of a fair bit of that real drop needed, so the nominal (actual) falls won't be so much.
Indeed, debt is double what it was back in 1980. The low interest rates are protecting people from the pain - which is why they are not being forced to sell at a lower price. However, if interest rates increase to match the increasing inflation, then the pain starts, people will be forced to sell, buyers will only buy at lower prices, and when people see that prices are falling there will be a rush for the exits, so prices fall more ... welcome to the "fear" stage of the crash.
The points I make are interpretations of graphs based on the fact that cycles repeat and graphs always revert to historical norms.
I would be happy to hear your own interpretation of the graphs if you believe they show something different.
---
I forgot to mention Graph 7 on the housepricesouthafrica website - this has real house price growth and nominal house price growth on the same graph. If we assume that real prices should follow inflation, but that there are cycles around this norm, then the real price area above the zero line should be pretty much the same as the area below the zero line. Notice from 1997 to 2007, there is a huge area ABOVE the zero line - then a relatively small area from 2008 to 2010 below the line - this area is nowhere near large enough to match the huge area above that preceded it ... we need much more. So that line has to nose dive down again.
And when it does, notice how the nominal line always tracks it ... so that gives us another clue that nominal prices are going to fall.
“The continual demand and the extraordinary consumption made the price of commodities become exorbitant. The value of house prices rose by a third, as no limit was placed on expenditure and only pleasure, luxury and comfort were studied, without any thought that days of trial might succeed to these days of prosperity.
Everyone spent with both hands, and every facility was given to people to obtain what their frivolous needs demanded. Unlimited credit was the order of the day, and everyone could obtain large sums quite out of proportion to their standing or to their income …
The abundant source of the fortunes ran dry the moment more economical rulers came to the head of affairs; credit suddenly ceased, and poverty became more evident from day to day.
The methods which were introduced and the careful expenditure prevented money, which had always kept the wheels going, from circulating as rapidly as before, and people were pulled up in their headlong career of apparent happiness and pleasure.”
Dutch bureaucrat, Baron Andries van Pallandt, Cape Town 1803-1806
Its not that this time is different BC, its just that everything including human and economic folly is cyclical, this includes the rise and fall of nations on longer timelines.
I found an inflation adjusted dollar gold price chart for you just out of interest. Does gold look like a bubble to you and CJ or could that be the dollar instead?
CJ, take a look at these charts especially the bottom one, the 36 year gold/zar chart. Can you see a decade’s long trend? If you print it out and flip it over it shows you the value of the rand and where it is ultimately going; zero. It is SARB and Government policy to send it there by debasing it between 3% to 6% a year but its running in excess of 10% by my calcs.
Now If you look at the real house price graph and overlay that on the house/gold chart ['79 to present] you will see a correlation. What the gold and house prices are adjusting for is debasement and inflation of dollar and rand. If one understands the dollar reserve system then you will see that this is the correct conclusion to be making here.
So what we are comparing in the house price/gold graph is houses and gold; two stores of value, not the paper rand. This gives one a very different picture and one which initially perplexes. Is it gold that’s overvalued? Are houses good value? Everything seems so normal in that chart doesn’t it?
The problem is the rand not the price of gold or houses. These stores of value have adjusted for the rands debasement as I have been saying for a long time. House prices are not overvalued, they are actually good value presently. This brings with it a problem. If houses are good value presently then why are they unaffordable? Purely because in many sectors wages have not adjusted upward enough to compensate for monetary debasement. For those not holding stores of value like property or gold sans debt the wealth is fast flowing away from them. This has been masked by the extension of credit but that game itself is up. This is all part of the transfer of wealth that has been happening for some time.
Now although the graph shows houses as good value there is a caveat.
Gold is not needed in the world, it has no major industrial utility. However because of its relative scarcity [160 000 tons of above ground gold or about 3/4 oz per person on the planet] divisibility, fungibility, portability, beauty and non tarnishable properties it has been the single best store of value for thousands of years. One does not need to afford gold and you can do without it. It is for those with savings or wealth who wish to carry that wealth through time.
Houses on the other hand are needed. They also need to be affordable. This is the single biggest difference between these two stores of value [and houses lack all the others inherent in gold, except perhaps beauty but that depends on the architect]. This issue of utility and affordability is why the price on houses are capped but the price of gold isnt.
This is why I do not agree with BC's assertion that houses will be the surviving long term store of value while gold will be the speculative dud. Speculation is inherent to both as well as anything traded in a market. I’m not saying houses will stop being a store of value; it’s just that the value it can store is capped through the economy and affordability.
Because of the historic monetary chaos in the world [of our first worldwide all paper monetary experiment], and the knowledge that physical gold has already been chosen as the ultimate store of value as well as its properties of absorbing almost infinite value without distorting economies, i hesitate to say that we will see a return to the mean described by the chart.
As a physical gold advocate and not a gold bug, I believe we will not see a return to the gold standard of old. Actually all gold bugs really want is a balanced budget, not a gold standard. However i do see the end of currency being both means of exchange and store of value. Paper currency will retain the means of exchange role which it performs excellently and physical gold will retain the store of value role. [Paper gold or contract gold suffers from the same fractional reserve debasement as currency which will come to an end on sufficient demand for physical settlement i.e Venezuela etc]
Goldilocks - your real price graph ends at 2005 so it is deceiving - an updated one shows that the last boom in 1980 had average prices of $1800 in todays money (it peaked at $2200 in todays dollars). In other words we are now pretty much matching the biggest ever previous peak.
Obviously, the question is, are we going even higher. Are we going to go where we have never been before - gold at record prices and houses in gold terms cheaper than they have ever been.
Remember, if Gold does shoot up, then houses valued in Gold become even cheaper - in other words they are falling in price ... which is interesting.
The one thing that could be screwing up all the graphs is that governments have manipulated the way inflation figures are calculated to such an extent that maybe they no longer represent reality, which, if it is the case, would totally mess up real price charts.
A real price gold chart using what Shadow Stats perceive to be the correct inflation figures, rather than the manipulated government ones, show that Gold actually needs to hit $6500 to match the 1980 peak.
Notice that there seems to be quite a few similarities with the 1980s - same interest rates, same gold price, same house prices in gold - they also were at the peak in the housing market cycle ... what happened next was the prime rate soared to an all time high, real and nominal house prices plunged, gold collapsed, and the gold price of homes soared.
Debt also soared (it was half what it is today), and inflation also went higher after dipping a little - it was higher than it is today, but, if we measured inflation in the same way it was measured back then, maybe we would also be seeing a similar inflation figure as they had then)
The US shiller housing graph in gold is also an interesting one - in 2005 an average house was 140 ounces of gold - since then Gold has soared and housing has crashed 40% in nominal dollar terms so houses now cost only 30 ounces. An all time low ... yet there is no indication that the market wants to bottom yet. There is certainly a case over there to watch out for that bottom because that could be a good time to sell your Gold and buy houses. Not because houses will necessarily soar, but they will at least have become stable whilst Gold collapses.
Certainly interesting times and there are many pieces to the puzzle ... it is just a matter of trying to piece together enough of the pieces to see the overall picture.
Did you know CJ that the notional value of contracts on worldwide markets is over 1 quadrillion dollars [1000 trillion]? A quarter century of world GDP. All the gold in the world ever pulled from the ground is valued at around 10 trillion. What is in a bubble?
I have been hearing gold bubble and gold crash talk since around $500 so forgive my scepticism. I will have to repeat what I am saying in a different way since you are holding on to seeing the world through paper eyes.
Here are 10 charts to complicate matters further. There are a million metrics to use but they all miss the single most important point I am trying to make.
What is physical gold or property really worth today? We only know it in paper terms don’t we, using currency as numeraire. When you start to look at the world of real things only instead of paper abstractions you begin to see what value and wealth is. Paper currency is not wealth or value; it is a claim on value, claims which run in parallel to the world of real things. However this paper world has ballooned to such fantastic proportions since the 80’s it has long left parity with the physical world. These debt claims we have saved cannot be traded back into the physical world at anywhere remotely near to todays prices. Doing so would entail massive distortion of economies and ultimately bloodshed. Reread my comments on gold and house utility in my previous post to see where these claims could flow to without restriction and why.
Yes one day I will trade the gold for other stores of value such as property, but that day has not arrived and a chart will probably not give us a timely indication either.
@Goldilocks - The nice thing about cycles and charts are that the reasons are actually not that relevant - the tide goes in and out - the science of gravitational pulls are not that important because the cycles will keep on doing what they do. There are always reasons why a bubble is not a bubble because it is 'different this time'.
The point is, according to official stats, we are at the edge of the limits of where we have ever been before in terms of real Gold price.
Obviously that line is not impenetrable and it is indeed possible that we will go into unknown new territory, (as indeed property did when their bubble didn't collapse at the previous real peak and went on to become a super-bubble that had never happened ever before and that ended up almost destroying the world's financial system).
The point is, we are in a place presently where there is reason for gold charts to offer resistance.
Interestingly, Gold had a mini meltdown today ... is this it ?
Of course, if you argue that official inflation figures are nonsense, as Shadow Stats indicates, then all graphs are giving us the wrong feedback and all bets are off ... and pretty much anything could happen.
Gold tanking - Margin hike on contracts, Bernanke address tomorrow, time for profit taking and a correction, shorts come in hard. All part of the big game and flushing out the weak hands. Nothing goes up in a straight line; cycles as you say.
The big question for the strong hands is: Are the reasons why gold has become the “new” safe haven resolved?
Over The Counter or OTC derivatives is what crashed the global economy, property was just the underlying vehicle from which they derived their “value”.
Here’s a thought experiment. We call it the fractional reserve housing game. Imagine one has a house. Now you can create 20 or 30 or more titles to the house because you are a licensed financial services provider and sell them at par as investments. The titles to the house are called unallocated but everyone believes they can go live in the house if need to. The titles are traded on the housing market and everyone buys them because that’s how one invests and can earn a return or not depending on the market at the time. No one wants to really live in the house because then they would have to pay for upkeep etc so they are happy that they just have the deed; its a lot simpler. They can cash in on the possible capital appreciation of the house without having the hassles of physical ownership.
This is very similar to what a Mortgage backed security is but not quite. Now a few questions are in order here.
Does the abundance of titles on the market increase the value of the houses or depress them?
Does it make the housing market more volatile?
Is there a difference in value between the real house and the paper titles?
What happens if it all goes pear shaped and everyone wants to live in the house?
This is present day bullion banking and if a few more Chavez’s of the world demand to live in the house we will soon discover more than hypothetical answers to those questions.
There are cycles yes, but some of them are so long your grandkids will be long gone before they end. It is this type of transition I believe we are in; the reworking of the worlds monetary system.
Martin Armstrong is a great source on those long cycles btw
Oops I forgot to ask the most important questions.
The market value of the houses is based on the paper titles trading.
When everyone demands to live in the house and they realize they cannot, where does the paper title value go to? Up or down?
What is the value of the physical house?
Now that portion of the cycle is gonna require a strong pair of hands!
Apparently in many major US cities it is now cheaper to buy a 2 bedroomed house than to rent it - certainly, in the US where the housing crash has been allowed to play out, the housing bottom is getting near.
Martin Armstrong's cycles apparently predict that US housing will bounce up for 3 years then plunge to even lower lows.
The following is also interesting - since August 2010 these price increases have happened -
Unleaded gas prices are up 45%.
Heating oil prices are up 46%.
Corn prices are up 71%.
Soybean prices are up 26%.
Rice prices are up 13%.
Pork prices are up 31%.
Beef prices are up 25%.
Coffee prices are up 38%.
Sugar prices are up 48%.
Cotton prices are up 13%.
Gold prices are up 42%.
Silver prices are up 115%.
Copper prices are up 23%.
Yet official inflation is less than 5% in most places ... Huh.
Shadow stats says that in the US, inflation as it used to be calculated is actually above 10%. The new calculations reason that if steak becomes too expensive then it is removed from the inflation basket and substituted with hamburgers because that is what people can afford ... and that is why inflation is so low, and why bond rates are so low, and why people who save are being screwed by low bank interest, and people relying on social security or salaries are getting inflation based increases that are actually below the real cost of living increases ... and that explains why in 4 years, the number of people in the US on Food Aid has doubled.
If the US housing bottoms next year, then SA will bottom in about 4 years as historically we lag about 3 years in housing bottoms.
The big dilemma is do we play along with the charade and use the inflation data that the governments are presenting to us ... or do we stick with the traditional ways of calculating data, in which case nearly every chart has to be redrawn. And of course, if inflation really is 12% and not the official 6%, but your bond is only 10%, then banks are actually paying you to borrow money ... and suddenly the whole thing becomes a total mess.
So if Gold does indeed go to 6000, then that is because the official inflation figures have been discredited. In which case we can't complain when Unions demand 18% increases. And banks are going to have to increase bond rates. So houses will fall in price nominally as borrowers come under pressure ... and with higher inflation the real price will also accelerate down ... and voila, we could well end up with that 70% real price collapse after all.
So in conclusion ... if we go along with the charade of the official inflation figures then I stand by my predictions ... if the charade crumbles then we enter a whole new ball game and everything changes.
Hats off for the "leg cream" guy - perversely, it looks like his strategy worked?
CJ, gold does not form part of any CPI basket, FYI
Anyone want to estimate what SA's true inflation rate over the last five years has been?
The official numbers are:
2007: 7%
2008: 11.5%
2009: 7%
2010: 4.25%
2011 (so far): 4.4%
CJ? Anyone?
True inflation number
Currently at 23%
I am correct!
CJ,
I hope you got the bullion banking/house analogy. I expect the paper price of gold to tank to around $200/oz but try get any physical for that price; the premiums will be so massive it will dwarf that $200.
The whole reason we need money to seperate functions i.e currency as medium of exchange and gold as store of value is that it resolves the conflict between the debtors and the savers. Who cares what interest rates are or inflation is when you are saving in gold which adjusts automatically? China then doesnt have to worry about what its T-bills are worth.
CJ have you done your own personal inflation basket on the things you consume? This is going to give you the most accurate information tailored to you and relevant to your situation.
BC, a friend of mine who is trying to convince his family members to ditch their property inheritance in lieu of gold and select stocks has calculated costs of maintaining property including rates etc at 16% inflation p.a. Food inflation has been at 12.5% average for the last 40 years. Petrol is running at just over 10%.
Gold has been at around 17% p.a for 40 years and that includes a 25 year bear market. This year has been good for me in gold and silver; 50% return after costs.
Oh and a handy way to calculate compounding is to divide 70 by the rate of inflation; this will give you the amount of years it takes for prices to double. i.e If inflation is at 16% it will take 4.375 years to double.
For those who grew up in the paper century and considered it the norm.
The main thing we miss today is universal money. Gold fulfilled this role from the time of Augustus to 1914. The absence of gold as an intrinsic part of our monetary system makes our century, the one that has just past, unique in several thousand years… I firmly believe gold will be a part of the international monetary system sometime in the twenty first century.
Robert Mundell, Nobel Laureate in Economics, Acceptance Speech — Dec 1999
It seems to me that inflation is certainly higher than the recorded figure. The Saturday Argus used to graph a weekly basket of goods at various supermarkets - when I highlighted in Realestateweb that the basket was rocketing, the basket, which had appeared for 4 years, mysteriously vanished and was not seen again.
Of course Gold is not part of the basket. The point is, if we stick with official inflation figures then my scenario is a credible way forward and Gold has probably peaked.
If we acknowledge that we can't use the official inflation figures then we need to redo all the graphs with what we believe the correct inflation figures are ... and the first thing to do then would be to increase bond rates by 5% to reflect these correct figures ... which of course would put huge stress on the housing market.
So, what to do ... continue the lie ... in which case the scenario I have painted could happen ... or correct the lie and take the pain as all hell lets loose, but in the knowledge that the sooner the pain happens the sooner it will all be over.
A bit more on the houses priced in gold chart. If you either invested in gold or housing and nothing else then selling housing in 2005 for Gold would have been a good idea and soon selling gold for housing would be good.
However, that doesn't mean that housing will go up - it might just be that gold falls faster than housing. A 20% fall in housing and a 50% fall in gold would mean that houses in gold terms increases significantly in price, even though in Rand terms they would have fallen. It is important to bear this in mind.
hey where's the leg cream guy?
these okes are boring - self-important
I know an oke who sells ladies leg cream to high end salons and earns over R100k a month.
He doesn't have the time to read through all this drivel posted above so could somebody please summarise in 50 words or less?
Its common for people to shoot the messenger when they know they have been duped.
Completely off topic but here is the original article recently plagiarized by the Cape Times
I love hard data like this, cuts through all the BS.
@ Goldilocks, is your link correct? I clicked through and all I found was a haven for paranoid racist crackers feeling hard-done-by because blacks have the audacity to suggest that apartheid wasn't a boon.
@ Eugene "Goldilocks" Terrorblanche. Stop wasting your time on white supremist websites. No wonder, you like gold so much, you protecting yourself from the "evil natives". Haha
Lol lmao..
Recently I was asked on this blog why gold isnt moving considering the markets were tanking. Gold made its biggest gains at this time since '99.
If a raving lunatic nutcase does some good analysis and backs it up with figures I dont chuck it out; why would I?
I have been called a nutcase for believing in gold and because I could see what was coming down the road.
Every single naysayer is eating their words. People should wake up from their confirmation bias and grow up.
@Goldilocks
Are you rich? And I mean rich as in have lots of rands.
I love the white warrior women in those golden bikinis!!
Great debate guys, decent reading.
I have invested in krugerands for the past 7 years and i can tell you that i doubled my money should i decide to sell my coins now. However my house i bought has depreciated by 20%. So i am still buying krugerands as gold will continue its rise and i buy when there is a dip
Post a Comment