Dr Doom

Hi all,

Strong employment markets are a great way to prevent a major housing crash, but there are a few concerning signals popping up now:
- US yield curve now inverted, pointing to a recession,
- Aus bond yields tanking to record lows, suggesting we are looking at one too. Housing, China etc I guess.

If these prove correct, that strong employment buffer wouldn’t hold up. With valuations still certainly not low on most standard metrics for housing in Aus overall, even after the correction to date, this does seem a bit of a concern.

Don’t mean to sound like dr doom, but the recent market movements are worth a look. I appreciate there may be relative value in certain places, but a recession would be a major challenge.

Full disclosure: just to put my cards on the table, I am not currently in the housing market, view it as still expensive, and am hoping for a more attractive entry point.

Don’t think that is tainting my view though on the above. Just noting that bond markets, which have historically been ahead of share markets in forecasting these things, are kinda suggesting a severe economic slowdown now.

Any thoughts?

 

10 years ago, the us did have a recession. What did the bond market say for australia then? The aussie sharemarket tanked remember. Would you have gotten the same result if you had bought a house in perth, hobart, sydney, melbourne, brisbane?

 

Fair, but...

Aussie bond yields never got anywhere like this low, we didn’t have as over- heated housing market already in correction mode,China was growing at 10% not 6%, and we still had something like 700bps of interest rates to cut.

There’s still the capacity for the aid to drop, but all these other shock absorbers are mostly used up.

 

Int rates usually drop to stave off recession.

That should/will happen, even if its the banks themselves and not RBA, or combo of both.

I agree there is a gut feeling going around that something big bad is about to happen.
Alex Straker has also predicted a massive sell of on markets here:

 

Rates can move a bit, but not a whole lot given we are starting this downturn at 1.5% not 7.25%.

Currency could kick in as it normally does. I’m amazed the aud hasn’t already tanked with 10 year bond yield down 100bps in 4 months.

 

USD weakness is propping up AUD.

 

I think your view and the market sentiment would point to it currently being a pretty good entry point. This means you can be picky and take your time for the right asset. BUT you won’t know where the bottom is until you’re looking back at it in a rising market.

 

Not always. Often it is unemployment that rises following a housing crash.

 

Potentially, although jpyaud has also been fairly stable. Bond and currency markets seem to be on different pages at the moment.

 

From SMH markets live website this morning:
https://www.smh.com.au/business/markets/wesfarmers-bidding-15b-for-lynas-20190326-h1csn1.html

 

All very true and good points, so what I am trying to do is just focus on current pricing and whether it stacks up.

I did have a bit of a giggle though about an article in yesterday’s AFR in the “how it sold” section about a property sold in paddington last week. The buyer wanted $2.7m, but agent ended up getting it away for $2.55m. the story was all about how weak a market it is at the moment.

While it is a weak market, what caught my eye was how the terrace still sold for exactly 3x what it traded for in 2007. So still an average 10% p.a. Growth.

So QldKoolies you could well be right. I made this mistake early the last decade although I wasn’t really ready to buy them anyway.

But I can’t help feeling things are still very overpriced with risks skewed to the downside. And if I’m wrong, the sustainable returns that can be reasonably assumed from long term (say20yr) passive property investment still don’t make me want to dive in anyway.

 

wait for the sideways movement in property, it increases your buying power for you so long as you keep your cash at or above inflation.

 

Question is your opinion set?

If so maybe hard.

The market isdefinitely in the so called last inning.

How long will it last.

There is people on here who have called the demise since 2015.

Who knows.

 

Agreed.

Those calling the demise from 2015 are now about evens and moving into the money though.

Agree that key is to focus on current pricing and returns on offer. But if they don’t stack up, as most don’t for me at least, and there are signs of excess abound with a number of potential negative catalysts on the horizon, I think it’s worth taking a lot of care.

That said, one (of likely many points) where I could certainly be wrong (and the market takes off before hitting my price) is if we get some major positive surprises in the upcoming budget. New fhb grants etc.

But to my original point, it doesn’t really help my 20yr expected return.

 

He has predicted heaps of things to happen..everytime they don't happen the dates change...

Yawn...waste of time even reading it.

More entertaining watching paint dry.

 

Its risk with positive and negative impacts. Areas ‘have their day’ so to speak. You can aim for that through some analysis and predictions so that within the 20 year outlook your property will have its day in that time or go for a strong history of demand and it’s likely already had its day but would be ‘blue chip’.

I think above all else it is about the property, its value or its potential, more so than the economic outlook or the market. I don’t know the terrace you speak of but was it the kind of property that ticks all the boxes. That property is likely to always do well and historically will look expensive. You are probably not going to land a property like that dirt cheap in a struggling market but you will have less competition. If you want a bargain property you’ll end up exposing yourself to the negative impacts you’re worried about such as a down turn.

I pulled the trigger on a blue chip location late last year and got a discount but still had to pay through the nose. On your timeline of 20 years, no dramas! Afterall its the leverage that works for you over time. Very few will grab at the bottom of a market just before it has its day and get big rewards quickly without improvements or adding value.

 

All these doomsayers do this! Drives me nuts.
Goal posts move for 10 years until eventually something happens and they say “Seeeeee I told you so”.
Forget the fact if you listened 10 years ago you wouldn’t have tripled your asset base in the booming markets.

 

Send me $1M and I will call you when the property market has hit rock bottom and about to head upwards .

 

If you're talking about @Alex Straker , you couldn't be further from the truth. He's posting his technical analysis graphs, trying to predict the future BOTH Up and Down. Posting a graph predicting downtrend movement because the market sentiment changed doesn't make him a doomsayer. Next time it can easily be an uptrend.

 

So firstly I agree that just trying to time the market is a mugs game. Just because an asset is mid-priced today in someone’s opinion, it doesn’t mean that mis-pricing will correct tomorrow, or over any specific period. (The odds of it correcting long term though are actually quite good). Identifying catalysts may help inform a guess on the timing of any adjustment a very little bit, but there are always plenty of other factors that can offset a catalyst short term. Eg in 2009 some (including me) felt the market was fairly fully priced, but didn’t foresee massive rate cuts and market fiscal stimulus, China coming back online in a big way, and banks losing their heads in terms of lending discipline (eg 50% IO loans -whatever your views on the appropriateness of IO loans for a sophisticated investor, there is now way its appropriate for 50% of the mortgage market, a view shared by basically every regulator around the world).

So those sprukers etc calling a crash over a specific period are usually kidding themselves.

However, there is a difference between trying to time the market and calling it over-valued and therefore not currently offering a decent expected return. So if it goes up tomorrow for some unexpected reason, that doesn’t necessarily make the investment decision wrong as one-off or unsustainable factors (overly generous govt grants, aggressive bank lending, further rate cuts from a 1.5% starting point) generally aren’t sustained over a 20 year period.

The catalysts can also help with the conviction of the decision to hold off, if that’s your call. And current economic signals are showing plenty of red flags, even if we ignore already falling house prices.