Don't Buy Property in 2020

+ 1 I cant find the answer to this yet either..?

 

I can’t use the grant for my kit home build - for 3 reasons. They are:

1 - total build, inc electrical and plumbing, is less than 150k
2 - It is not a ppor
3 - my plan is to provide a cheaper rentAl to a lower demographic (and this government doesn’t seem too concerned with social housing).

so for me - the answer is no - this grant can’t help me. I am in the wrong class of people.

 

Repayments increase if inflation increases (variable rates) , but not if fixed. If fixed, debt burden reduces in a compound fashion proportional to inflation (inflated away) as future dollars have a greater purchasing power than dollars at the time of borrowing. Eg a dollar today, in 10 years of CAGR at 5 % is effectively worth 60 cents. The principal inflates away but the interest component does not (assuming rate is variable).

If the land is owned, then it’s value is tied to inflation.Land will inflate at a rate proportional to inflation in that asset class. Inflation in that asset class is dependent on credit availability and capital flow (eg land banking).

If land is owned and one wishes to sell, the sale price is (somewhat) tied to credit availability at that time (buyer exchanges debt with seller for asset). Capital gains on land owned outright are thus dependent on the business and credit cycle, and probably approximate at worst case CPI (over a long run).

If a deflationary environment persists, then I don’t know what land would do. If capital inflow is high it’s probably hedged. If capital seeks haven in another asset class (unlikely) then it may actually fall in real and nominal terms. I’m sure this has happened before. But, I would suspect if in doubt, capital would flow into land if things were bad enough every time over many other assets.With the exception of QE version infinity in which capital would just follow the Fed.

Land has one clear benefit, it has a production potential, cannot be replicated etc. Unlike the Feds alphabet soup QE rubbish that destroys productivity (see appalling FRED M2 velocity) it’s actually useful to do something with.

My understanding anyway.

 

You sound like a person after my own heart. I look at QE as the source of the problem, not the solution.

So, what do you see as the direction of property prices over the next 5 years? Let's just keep it to Sydney for now.

Personally, I am in the inflation camp for the reasons you give above. Any deflation will be very brief.

 

The only thing I can say is whatever I predict it will probably be wrong.

You only need to look at the swing in both lending flow and prices post July 2019 to March 2020 to see how irrational things become. If this pandemic didn’t occur, I think we’d be at 20 % YoY in Sydney already.

The credit flow data shows investors have retraced big time, owner occupiers don’t care, they are absolutely bullish and then FHBs are even more absurdly fervent.

The direction of prices will be almost solely decided by lending. Whatever the banks do will drive it. I suspect the bottom will be 10 % off current prices around June next year. After this I see CPI type growth like the 90s for 5 years then expect hyper inflation driven by MMT. What I am interested though in is the boomers. A lot of them held out in 2009 , they can’t do that this time around, they will need to withdraw capital which needs to be back filed with debt. We are entering secular rebirth (as per Chris Coles definition), it’s going to get interesting.

This probably puts (next year) things back at mid 2017 , which means in real terms property has done nothing in 3-4 years despite massive swings up and down. In my view, secular decline began in 2008, the system actually reset in 2008 but due to QE the markets never priced it in. We’re in secular stagnation, if QE was to stop, we would see a complete collapse in global markets and price discovery would emerge. It’s not tolerable though as pension funds will default.

What’s more concerning though is persistent unemployment in the face of the RBA propping up the RMBS. The US Fed did this in 2008 , they bought 4 trillion in RMBS, they still hold it. It absolutely destroys price discovery.

I actually expect to see very little foreclosure. The banks will offer IO terms, and debt restructuring if needed... and the RBA will step in if needed. It’s not in a banks interest to foreclose, especially all at once.

I think the current demand side stimulus will do almost nothing.

 

Great answer.

My only reply would be simply that - QE won't stop. It can't stop.

The reason I got into real estate and tangible assets in general, is because once I understood how our monetary system worked, I realised that the RBA (and all central banks around the world) could be counted on to do the wrong thing every time. And when Covid19 hit, they didn't disappoint.

They will always be too loose and will always mismanage our currencies. The role that real estate plays in the banking system means that real estate prices have to rise to keep the banks solvent, like a revolving ponzi scheme of debt.

So I disagree that the stimulus will do almost nothing. I can really see some explosive growth in Sydney real estate prices over the next 5 years.

I actually think that we are getting towards the end game of a huge and destructive monetary experiment that started in 1971. That story is for another time.

 

How do I say this... I disagree with you, but I think you’re right lol. But, let’s not forget the 90s , where property did nothing until Howard lit the fuse.Propety is now a sport in this county so the sentiment will always be there, for now.

QE is kind of like the saying “it will work until it doesn’t” . QE might be about liquidity but I think it’s actually to do with confidence. If people perceive things will improve in the future they will borrow. Equity markets are not the economy, the property market is not the economy, yet both are used as a proxy for the economy and to underpin confidence.QE drives both of these things. The mistake made in the 1930s was not to increase money supply, we can thank Bernanke now for where we are... money is everywhere prices are up and no one understands the value of anything.

When I said stimulus will do nothing, I was referring to the demand side government incentives, more so.

There may be some upside coming, but there are some significant credit headwinds if people can’t borrow (unemployment) . I reckon there’s at least 12-24 months of mixed results coming. If the US Fed are backed into a corner and hit the negative rates button, that will be next level madness.