by frog
In the US housing market, prices are falling faster than during the Great Depression. Goodness, I pray that doesn’t happen here! In an article last week, the Economist reported that:
Unfortunately, new figures this week reveal that house prices have already fallen by more over the past 12 months than in any year during the Great Depression. The S&P/Case-Shiller national index fell by 14.1% in the year to the first quarter. This shows that the latest fall in nominal prices is already much bigger than the 10.5% drop in 1932, at the worst point of the Depression.
Today inflation is running at a brisk pace, so property prices have fallen by a staggering 18% in real terms over the past year. In nominal terms, the average home is now worth 16% less than at the peak in 2006, and the large overhang of unsold houses suggests that prices have further to fall. If so, this housing bust could well see a bigger cumulative fall in prices than the 26% real drop over the five years to 1933. Most people would call that a pretty destabilising contraction.
I hope it’s not infectious! Hat tip: bjchip
Published in Economy, Work, & Welfare by frog on Mon, June 9th, 2008
Tags: depression, economist, great, housing, inflation, prices
on the trolls and those who are unable to keep on topic
This must be the socialists’ fault, right? Somehow? Can any kiwiblog commentators shed any light?
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Lol roger nome. Actually, it’s the Anglo Disease, but more on that in another post.
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not exactly a subject to be ‘smart-ar*e about..eh..?..frog..?
lots of people are going to hurt..lots..
how about some gravitas from you..frog..?
you don’t do humour that well..eh..?
phil(whoar.co.nz)
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phil u – a bit tough I think. One needs to keep a sense of humour about these things after all.
The sub-prime crisis is just example of speculative capital doing its thing in a context of fiat currency and low interest rates (the Fed in the US has kept them down at about 3% historically, whilst inflation is controlled by demand for the USD in a rigged international monetary system).
It’s banks that screw us. We need a new monetary system based on a gold standard to keep the value of money tied to reality.
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This creates an opportunity for people well in ahead in “property” to go on a buying spree.
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Problem is frog,
Those people who bought 10 years ago are still sitting pretty. Over that 10 years the house pricing went up over 100%
So a correction back by 20%, still leaves a 80% gain (is my maths correct?)
As long as one did not over leverage that property it does not matter what propery values drop down to.
Like most people I wont be selling until the market turns, and if I do want to sell (if the market does not correct) the value of the house I’m buying has the same value ratio in it’s price correction as mine has.
So no real worries for the long term investor.
It is those who boorowed 100% who are now in trouble. Percentage wise this is what, 5% of the market?
Correct me if that percentage is wrong.
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Why is it a *problem* that housing prices are falling? Right now, houses are unaffordable to most people who don’t already own one.
The cost of buying a house on a mortgage is currently about twice the rent. Rationally, it should be much the same (in a lot of places, a lot of the time, it is) to buy as rent.
If I make $100 working, I pay 39% marginal tax on it. If I make $100 through house price inflation, I pay *no* tax. That is neither fair or good for the economy.
It’s a bad thing for people if prices rocket and then slump, granted. What we should have is a policy on house price inflation (just as the reserve bank has targets for general inflation) and a range of control factors to manage this (capital gains tax, GST on mortgage interest, minimum interest rates, removal of negative gearing).
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“It is also interesting to probe how the sources of concentrated wealth have changed over the last decade. Media, retail industry and the development of shopping centers also feature increasingly prominently among the wealth sources of the top ten. Property stands out as the most important single source of wealth. 48 “property barons” had a combined wealth of $16.7 billion last year, well ahead of services and manufacturing industries as sources of wealth.
What underpins these trends?
Broadly speaking, two forces have shaped the concentration of wealth in Australian society. One is asset price inflation. The decade of the 1990’s in particular was remarkably buoyant for share prices. The growth in real estate values, only recently coming to a temporary halt at the end of a prolonged and dramatic property price boom, has widened the gulf between existing land and property owners and those aspiring to join this group. The dominant effect of asset price inflation is to intensify the advantaged position of those holding the greatest initial wealth.”
http://www.onlineopinion.com.au/view.asp?article=2259
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This is what happens when a country holds the minimum wage at $5 an hour for 10 years or otherwise lose good paying industiral production jobs for service sector jobs (they downsize their housng as soon as they can).
People can only buy houses on sub-prime loans – thus only only the honmes for a few years before mortgagee sales.
Here we had the post 9/11 migration of expats and other skilled worker immigrants as we realised job led growth (these people could buy the better houses – forcing others in more areas pushing up housing across the board). Given the favourable tax treatment of rentals, the lack of capital gains tax and the then low interest rates (worldwide post 9/11) those with the means borrowed money to buy into the rising market – this their windfall profits.
Housing is now as unrelated to wages as it was in 1976 – then only 5 years of inflation (while house prices stayed static) brought the two back into relationship. Muldoons wage price freeze then took down interest rates and people started buying homes they could pay for.
Bollard and National should bite the inflation correction bullet this time too. Bollard should cut rates to 7.75 in September (but will still need to hold them at or above the Oz level – which is currently 7.25 and likely to hold up there through 2009). The new government should increase GST to 20% and use the revenue to cut tax on interest income and of course tax rates (we need to discourage cosumption and at the same time allow people the opportunity to save and invest).
That and minimum wages by $1 pa over the next three years and generous in wage settlements with teachers, military and medical staff etc should be about right.
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PS
I am a fan of a lower GST rate on food and power (as we move to carbon charging) – perhaps a compromise with those who love GST on all things at 10%.
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It’s happening here too.
Actually our houses are way overvalued in my view. Section prices could easily drop by 50% and still be out of reach of many people. Environmentalists must take much of the blame for this bubble – the constant squeeze on growth of cities and use of land for housing has created a severe shortage.
This shortage has been, to be frank, a pretty sickening and cynically engineered scam. And it would have continued also, if there weren’t quite so many people leaving the country at the moment.
My bet is that the councils will keep squeezing land, and eventually people will stop leaving in such huge numbers, and prices will stabilise or even rise. This would be a shame, as they are completely unaffordable for young people.
In the USA, you might note that Houston, which has basically no environmentalist-induced squeezing (i.e. housing sprawls out in all directions), has suffered less than other centres from the bursting of the bubble (i.e. it’s bubble wasn’t inflated quite so much).
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The cost of a home for first time buyers is a problem, but its a problem entirely created by the parents of those first time buyers. As the parents are using property as a money making venture, they are depriving their kids of the opportunity to buy their own home.
However, that simple truth is unpalatable, so everyone looks around for someone else to blame…
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Perhaps you could cite some supporting evidence?
Most parents only own their own home. Their only involvement in the “money making venture” was buying a home to raise a family in.
As for those involved in rental property, they come from all generations.
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Funny Gristmill staff see those opposed to immigration (or questioning who benefit$ and who looses) as having a racist agenda. Doesn’t that sound familiar?
http://gristmill.grist.org/story/2008/6/8/161659/9999
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The Rent Trap
For the housing market’s winners, the gains have been spectacular.
Infometrics director Gareth Morgan calculates that between 1989 and 2005, the residential property market has provided investors – and owners – with a tax-free 319% gain.
http://www.catalyst2.co.nz/blog/news/the-rent-trap/
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Property researcher Hugh Pavletich has good reason to feel pleased with his lobbying of political and industry players about housing affordability.
Only four years after his first annual Demographia survey many of the basic premises have now become an accepted part of the lexicon used by political leaders, property players and researchers.
http://www.nbr.co.nz/home/column_article.asp?id=20225&cid=16&cname=Property
Smart Growth’s Role In The Housing Crisis: Wendel Cox +Comments.
http://www.planetizen.com/node/31002
Commentary: Houston, we have a problem
http://www.newurbannews.com/AprMay08Commentary.html
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How is that an accusation of racism jh??
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Houston sounds crap-tastic!
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Zero population growth, capital gains taxed at the same rate as any other form of income.
Low (and stable) house prices are a good thing for everyone except those that bought high.
That coming from someone who owns 4 rental properties, who’d have thunk!
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Yes Houston is great in terms of quality of life – plenty of space, nice houses and easy to get around, for the most part. A good clue to what things can be like without state / council interference.
It isn’t the private sector that created unaffordable, cramped, ugly houses. It’s the state.
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What if fuel prices keep rising?
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# StephenR Says:
June 10th, 2008 at 8:39 am
The solution to our energy and traffic problems isn’t improved mass transit, better city planning, or changed behavior. It’s keeping out those pesky immigrants.
How is that an accusation of racism jh??
—————————————
What they’re saying (I think) is that population numbers through immigration are a red herring and that this advert is just a guise for those who don’t like immigrants/ outsiders. While “improved mass transit, better city planning, or changed behavior” is part of the solution why not (also) numbers of people and why isn’t it considered intelligent and reasonable to express concerns about numbers of people. The numbers of humans today are unprecedented. My point is that environmentalists are avoiding hard issues (wanting to be always the good-guys). If we were worried about the numbers of another species we would simply have a “cull” without a second thought.
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Maybe they are, maybe they aren’t. I wouldn’t accuse them of making accusations of racism.
Do a search under ‘population’ at Grist, see if there are any posts…
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Houston : Cheap houses but Household Income “goes down the gas tank” Can’t cycle or walk neither:
Houston has low housing prices, but its transportation costs are high and rising. Working-class families — those with incomes ranging from $20,000 to $50,000 annually — spend 31 percent of household earnings on transportation in Houston, according to a 2006 report from the Center for Housing Policy. That’s far above the national average, and above what such households spend for housing in Houston (24 percent of their income).
Given the lack of transportation choices, moderate-income families in Houston have little alternative to pouring nearly a third of their pay into automotive expenses. Unlike housing, which can build household equity, transportation dollars go down the gas tank. With rising oil prices during the last eight years, this problem is getting steadily worse.
http://www.newurbannews.com/AprMay08Commentary.html
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Not sure Optimist saw the ‘crap’ next to ‘-tastic’…
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Hi jh
> Houston : Cheap houses but Household Income “goes down the gas tank? Can’t cycle or walk neither:
Filling up costs about $1.30 a litre in Texas.
> Working-class families … spend 31 percent of household earnings on transportation in Houston
At an income of $50k that’s about 200 tanks of petrol, or 4 a week. Which is around 342km a day by by maths. That means the average family drives for 5 hours a day? Seems a little high…you might be thinking of Southeast England, but even then I doubt it.
I’ve spent a small amount of time in Houston and it’s a very liveable city. There aren’t many environmentalists there, which is nice because you don’t get all the doom and gloom.
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Wrong.
Contrary to propaganda, Americans pay tax – roughly 20% at that income level, so 50k comes down to 40k.
31% of that is $12,400.
Cars cost money to register, buy, service and insure as well as run (particularly in the US without ACC), totalling maybe 40c a mile for a basic vehicle. So that $12,400 buys 31,000 miles – 16500 each for a 2 person household (or about 28000km). Not unreasonable for a car commuter.
Once gas prices treble, that money’ll be unaffordable and the outer suburbs of cities like Houston will become “edge slums” where the inhabitants can no longer afford to travel to work. This has already happened in many outer Sydney suburbs.
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No doom and gloom in the heart of red state country? You haven’t visited the Houston that I know of. What they need are the environmentalists to regain their voices in the State legislature – they used to be heard – and to stop slapping their own backs for building the suburban sprawl that is fast becoming the suburban ghetto – all across America, including Houston.
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America’s Most Expensive Commute Cities
By Matt Woolsey, Forbes.com
August 8, 2007 [before current oil spike]
“It’s often said that the trip to work can kill you. But if you live in Houston, what really takes a beating is your wallet. There, the average commuter spends 20.9% of his annual household costs on getting to work. He’s not alone. Cleveland, Detroit, Tampa, Fla., Kansas City, Mo., and Cincinnati also landed on our list of the country’s biggest cities where transportation eats up a fifth or more of household costs, according to a study by the Surface Transportation Policy Partnership (STPP), a nonprofit research firm, which draws on 2003 Bureau of Labor Statistics data, the most recent available. The study looked at annual transit costs such as gas and tolls, and public transit fare, as well as money spent on car payments and maintenance.”
http://promo.realestate.yahoo.com/americas_most_expensive_commute_cities.html
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I think there is some cynical spin coming from certain quarters endorsed by non other than Dr Donald Brash: ignores immigration (25% increase in population 1990 to 2004); ignores the credit bubble; wants a free ride on straining infrastructure. In NZ the property industry is a $20 Billion, bulldozer.
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Sprawling places like Houston are also ghastly places to be a teenager – you have to go miles to get to anywhere you would want to hang out, and you’ve basically got to get there by car.
Here in New Zealand, you’ll notice that South Auckland and North Shore both have high rates of juvenile delinquency, because of a feeling that there’s nothing else to do. Demographically they are completely different places, the only thing they’ve got in common that accounts for the similarly high levels of delinquency is sprawl.
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The consequence of urban isolation in outer suburbs is the same as 1980′s era no go areas of some inner cities. Thus the LA gang scene ala the old East coast ghetto areas.
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A cull, now we are talking.
I’d start with the Christians, Jews and Muslims. That should solve a bunch of problems all in one hit.
They’d all have gone to a better place anyway….
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The sooner Americans who believe in a Second Coming get raptured out of here, the better it would be. Unfortunately we will have to wait for their God to fulfill the prophect of mere men (and any real God would punish them for their blasphemy by leaving them here until they died).
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samiam – go easy there mate. I’m assuming that your comment was tongue in cheek, but it may not be construed that way by many and would thus be very much in breach of the rules of etiquette around here. It’s not that funny in either case…
***You’ve been warned***
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Send out the cane toads
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> Once gas prices treble
I think I can safely hold my breath for that one! Even at current prices we can make oil from gas or oils sand…wishful thinking for petrol to triple in price from its already high level I think. I could probably make oil out of lawn clippings at that price. Sad to think that you might wish for that. You don’t do you?
> Contrary to propaganda, Americans pay tax – roughly 20% at that income level, so 50k comes down to 40k.
I think tax would be $6,698 and only on taxable income which would be much less than $50k as they have a lot of deductions. Their rates are a lot lower than ours. Even before Bush’s tax cuts, you would have had to earn about US$120k (before mortgage interest deduction, etc.) in Texas to attract 20% tax.
> No doom and gloom in the heart of red state country? You haven’t visited the Houston that I know of. What they need are the environmentalists to regain their voices in the State legislature – they used to be heard – and to stop slapping their own backs for building the suburban sprawl that is fast becoming the suburban ghetto – all across America, including Houston.
Houston is the opposite of ghettos – you will be thinking of crammed apartment buildings like in New York. Houston has lots of spacious subdivisions with plenty of greenery. It is the lack of space and green that creates slums and it is ironic that environmentalists are so against trees and space where people live.
> …according to a study by the Surface Transportation Policy Partnership (STPP), a nonprofit research firm,
A “US activist website includes current news and topical analyses about a variety of transportation planning topics.”
So environmentalists think that people spend too much on transport. Want to force them out of their cars to save them money. Give me a break…
> Sprawling places like Houston are also ghastly places to be a teenager – you have to go miles to get to anywhere you would want to hang out, and you’ve basically got to get there by car.
That’s terrible…do you mean I might have to get my license and drive? Ban it quick…
OK I’m sorry for the sarcasm but you guys are falling into the trap of telling people, who are perfectly happy and have in fact chosen the way they live, that they are in fact not happy and would be much happier if you could force them to live a different way.
What was that about living in a free country?
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House prices fall 15% the year after they rose 15%. House prices rose by 10% the year after they fell by 10.5%. The same happened with the third biggest fall on that graph. Seems that not is it true that what goes up too fast must come down just as fast but what comes down too fast must go up just as fast.
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Interesting follow up angle to this story from TreeHugger – Market Conditions Do What Whining Can’t: Houses Getting Smaller:
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Join Richmastery:
“Jones and Hows are two liars from New Zealand pocketing stacks of cash from their seminars in Australia. They teach methods that are predatory, deceptive and unethical. Such as how to prey on drought-stricken farmers. Last year, Jones and Hows had a charge of misleading and deceptive advertising upheld against them by New Zealand’s Advertising Standards Authority. Following a number of disturbing reports, Australian consumer advocates now have Jones and Hows in their sights……”
http://www.jenman.com.au/news_item.php?id=98
[where's that picture of Phil Jone's and Dr Donald Brash?]
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How to profit in a falling market
“Lets face it people are falling over themselves today to give you their equity. properties are selling at bargain prices and even a blind man can see its easy to grab large dollop’s of equity almost anywhere in the current market.
Now imagine if you could go out and take other peoples equity and turn it into hard folding cash that you could use to pay down debt on your existing property portfolio, go on an overseas trip, upgrade the car, pay your homes Mortgage off so your debt free or leave your job.
Unlocking others Equity and Transforming it into your cashflow opens up a whole new lot of investing possibilities in a tough market and next Saturday I’ll be teaching a range of different strategies to achieve exactly that.
http://www.richmastery.com/blog/post.aspx?beid=2255&id=9114
Elsewhere he pours scorn on real estate agents who won’t present (ridiculous) offers of the “you wanna eat don’t you?” variety. emoticom > :scum:
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I have a friend that bought a new home. How he qualified for a loan I never understood. The developer and seller put him in a new home for $1000.00 down and payments of $840.00 a month. With his interest rate increasing every year. He wasn’t bringing home but $1500.00 a month. Now how in the world was he going to be able to meet his payments, pay insurance, pay for a car, clothes, food, etc.
Just qualifying people for home loans to sell them homes has finally caught up and has hand a lot to do with people losing their homes. Younger people are use to living off credit cards and having things instantly and are sometimes buying when they actually cannot afford to.
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