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Dumb question regarding property values

Discussion in 'General Property Chat' started by moyjos, 20th Feb, 2016.

  1. moyjos

    moyjos Well-Known Member

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    Ok playing the dumb blonde card here :cool:

    There are always lots of posts about "the bubble bursting" and "Property values dropping by 30-40%" etc etc. so now the dumb question...... Why does it matter????

    I get that if you are looking to revalue to extract equity for the next buy, it is an issue... but for the regular Mum and Dad who just live in their family home and pay the mortgage on time every month, does the paper value of their house have any actual affect on their life? Sure if they want to sell, their $1m Sydney 3x2x1 might now only be worth $700K, but surely that means the (previously)$1.2M 4x2x2 that they want to upgrade to is now only $800K.

    or even the property owner who holds an IP previously worth $500K now worth $400K, but the rent still comes in each week, life goes on regardless of the paper value of the house.

    Why would the bank care what the value is as long as the mortgage is being paid? Has anybody ever had a random valuation from the bank, who then says, "Oh BTW your value is $x down from $y...you need to pay us $50k"

    What am I missing??
     
  2. Bran

    Bran Well-Known Member

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    My simple understanding of a complex problem is that if the end result of this whole oil market share over supply drive leads to a 'crash' of one of the major suppliers, then the local banks underwriting of 9 TRILLION of loans in the resource sector is written down. If this occurs, then similarly to the GFC, they will recall high risk loans (e.g. developers). If they consider high risk loans to include high LVR residential loans (like mine), then many of us, and the system, are screwed.

    As long as the property were to go back up, and as long as you can hold, then it's only mentally stressful. A 30% drop would wipe out all my equity, and then some.
     
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  3. Hodor

    Hodor Well-Known Member

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    It isn't a problem, until it's a (big) problem.

    I don't think the big crash will happen like some people say, a few 10% drops and prices falling relative to inflation as prices stagnate seems the most likely outcome in some markets IMO.
     
  4. marty998

    marty998 Well-Known Member

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    Agree with the principles of your point Bran, but not the details. There is not $9 trillion of loans in the entire Australian banking system, let alone the oil and gas industry.

    Ian Narev at the CBA results briefing said that loans to oil and gas sector businesses make up 2% of CBA loans (2% of $900 billion = $18 billion).

    Of this, only 1.8% are considered impaired ($360 million).

    $360 million is hardly much more than a rounding error... but that is just oil and gas.

    You can only wonder what would happen if BHP takes the stupid decision to continue their progressive dividend policy instead of paying back debt.

    With regard to the original question, life will go on for people who own or almost own their home outright. People with mortgages will feel some psychological trauma. People with investment debt will need a shoulder to cry on.

    Others with the capacity to take on investment debt will likely swoop in and make a killing.
     
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  5. Bran

    Bran Well-Known Member

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    In any scenario, I'm happy to hold on. It will likely be a hiccup in the grand scheme of things.
     
  6. bob shovel

    bob shovel Well-Known Member

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    I had to google...



    What is a 'Bubble'
    A bubble is an economic cycle characterized by rapid expansion followed by a contraction.

    2. A surge in equity prices, often more than warranted by the fundamentals and usually in a particular sector, followed by a drastic drop in prices as a massive selloff occurs.

    3. A theory that security prices rise above their true value and will continue to do so until prices go into freefall and the bubble bursts
    .

    But the media over uses the word to spruik doom and gloom. Plus Joe Muppet uses the word to show adverse jealousy that they own no property.

    I prefer "band wagon" every one is jumping on board, usually after the action starts then the wagon is over loaded and wheels falls off, punters lose interest and go elsewhere
     
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  7. bob shovel

    bob shovel Well-Known Member

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    To quote this clown... Does property have a "massive sell off" or is it just less buyers/buying which reduces prices
     
  8. WattleIdo

    WattleIdo renovating Premium Member

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    Looks like the definition has changed recently to embrace envious Joe Muppet's garden-variety usage. In the definition above it pretty much refers to a market peak.
    Not so long ago a bubble was a much more dangerous delusional unfounded form of mass insanity.

    'Bubbles in housing markets are more critical than stock market bubbles. Historically, equity price busts occur on average every 13 years, lasts for 2.5 years, and result in about 4 percent loss in GDP. Housing price busts are less frequent, but last nearly twice as long and lead to output losses that are twice as large (IMF World Economic Outlook, 2003). A recent laboratory experimental study also shows that, compared to financial markets, real estate markets involve longer boom and bust periods.' Wiki: Real estate bubble
     
    Last edited: 20th Feb, 2016
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  9. York

    York Finance Broker Business Member

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    The issue can be if one is wanting/needing to refinance during the 'slump' period and they are highly leveraged. To refinance, a valuation will show a reduction in value (assuming the price has dropped) So if the property was at say 80% LVR before the slump and now say it becomes 90% or higher this represents a problem. You may need to pay the difference to get you back to 80% or pay LMI. This is IF you can service and satisfy other criteria also.
     
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  10. Marg4000

    Marg4000 Well-Known Member

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    Falling values are usually the result of other factors, not the cause.

    One danger is rising interest rates. The ones at risk are those who have bought recently at a high lvr. So long as they can keep paying, there is usually not a problem. But if interest rates go up and they cannot afford the repayments, then a forced sale can result. Because of the higher interest rates, fewer people can afford to buy, so values fall.

    Similarly with the present problems in mining towns. Dropping rents have drastically raised the cost of holding, so forced sales and fewer buyers lead to falling values.

    In both scenarios banks become cautious leading to more difficulties with finance, again limiting borrowers.

    Some benefit. Rents can fall, at present in mining towns. Lower values across the board mean a perfect time to upgrade.

    Main losers are those who have to sell with no chance of buying again in the depressed market or, even worse, still owe money after the sale.

    Most people are relatively unaffected.
    Marg
     
  11. Angel

    Angel Well-Known Member

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    Those who are excited about the potential for valuations to drop following the removal of NG so you can buy more properties at lower prices, just remember that your current portfolio will also drop in value and you wont have the same amount of equity with which to service.
     
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  12. Tyler Durden

    Tyler Durden Well-Known Member

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    That's when you get a good job that pays good money, just like the FHB'ers. ;)

     
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  13. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    And it can be completely devastating if your loans are x-coll.

    This is where it becomes a real problem, simply because if you plans involve using any cash (via equity release or via sale of a property) you simply will not see the funds. The bank will take as much as they want then give you the change.

    This loss of options can vary between 'a bit annoying' to 'completely earth-shattering'.
     
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  14. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    This is why it's so important to access any and all equity while you can. Don't wait until you need it!
     
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  15. Omnidragon

    Omnidragon Well-Known Member

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    No it actually doesn't matter if they can continue to pay their mortgage.

    Although they may lose their jobs if it gets ugly enough, as recession hits the whole country, and then have their house foreclosed.

    That's why, anyone who's relying on their job to pay a mortgage, is taking on some serious risk.