The "wealth effect" refers to the tendency of people to adjust their spending as their wealth -- concentrated heavily in housing and shares -- changes. When wealth rises, spending strengthens; when wealth falls, spending weakens. ... But now the wealth effect is reversing So now in Australia we have the Reverse Wealth Effect??? Housing Bust Reverse Wealth Effect Australia - DollarCollapse.com Interesting times, seen it all before..... what it comes down to is how you have covered your bases. After boom always comes bust, cycles, been like this for decades, just may be a different reason as to what started the boom/bust cycle. Today the bust cycle is the CREDIT SQUEEZE. Its not all doom and gloom of course, if you got it wrong then its about unravelling the mess and getting out sooner than later, managing the risk so you don't lose your shirt, stop the bleeding. The bleeding is not enough CASH FLOW. If you got it right, happy days, sit back, watch and wait there is absolutely no rush.... in fact this is where some investors will rush in the belief they are buying bargains.... nope they are buying at the start of the downturn... mistake. This is another sure way to lose capital you made. Fancy strategies like developing... well good luck, your feaso at the beginning of the project may be way off as prices continue to fall, high risk. Lesson I have learn.... No one is a genius cos you got it right, don't forget this one.... as if we let ego can get in the way we may find ourselves back to square 1. MTR
Thanks MTR From near the end of the article "As home prices fall, so therefore does “discretionary” spending. Australians will continue to eat and to air condition their bedrooms, but they’ll cut way back on vacations, new cars, etc. And the debt-based part of the economy will suffer. This will cause stock prices to fall, knocking another leg out from under the average citizen’s net worth and making them even less likely to splurge. And so on." This is why the RBA are worried, the word RECESSION will start appearing more often in media publications ........
What I observed during GFC period..... it hurts everyone......fire sales.....holiday homes go, luxury cars etc Not saying this will be a repeat... no idea???
Yes, the flow on effect........ It isn't just the fire sales or diminishing spending by the population The further flow on effect is no wages growth (not that we have had much in years) Followed by job losses and lack of business spending/investment
On a side note. If property cost less All things being equal wages and so on. Disposable income increases for a large portion of the population. Lack of discretionary spending has been a drag on the economy. Lower rents due to lower property prices and smaller mortgages due to cheaper buy price mean more money in the bank
Problem is the lag. Most people already have the home loan. And the recession means less can take them out.
The trouble is disposable income didn't increase (by very much) It is the illusion that the property "asset(s)" increased, so I can afford to spend more (than I actually earned, in many cases) = disposable income increase. So anyone who bought in Melb/Syd in the last 3+ years (prior to the last 4 months) who payed a premium are still paying that mortgage "premium" (or more) for fear of the lender calling in the loan due to drop in value, how much disposable funds do they in reality have ? I bet they are still SPENDING more than they can afford due to the consumer mentality (with little regard for planning..... A very small % of our population actually plan for and play the longer game). The result in the near future is further drops in property prices due to repossession sales (at which point @euro73 steps in all cashed up) Or, we go into recession/zero growth for several years (#Perth market the last 5-6 years). (*Sure, its an open forum and anyone can post their opinion, I hope my guestimate of the Aus future is wrong.)
Perth market experienced boom in 2013-14, however higher end blue chip houses crashed in 2007 and not fully recovered
True but in the same token. The proportion of buyer who bought in the last 3 years and are also levereged beyond their mean is a small portion of the pool I would say tiny portion of overall property pool. It would be awesome if this data was easily available to see if I'm actually right or dreaming.
Lots of people often use the small proportion argument on here. Yes it’s often true. Only a small proportion will have P and I issues. Only a small proportion will have bought in the last 3 years. Only a small proportion are investors who are apra impacted. Just to be clear. To have a major impact on the market, you don’t have to impact the majority. Impacting a small subset is enough. I made this argument on here for the last 18 months and people ignored it. In the last 6 months with the drop kicking in, we can see it’s true. A 10% change in demand is significant. If the reserve bank thought household spending would drop even 5% which is a small proportion- they would be very worried. 18 months ago I went to a housing inspection for a 1mil house and 25 people where there. Saturday I went to 4 where I was the only person. At this point however, I would say we still only have a small proportion of people impacted by apra and overleverage. Yet the whole market feels it.
Only a small % of the total housing will be on the market, and only a small % of those will be motivated enough to sell at a "lower than market" price. But those sale prices will become the new normal. You can make a comparison to the stock market. The value of a share is the last traded value, and all other shares are deemed to be worth the same amount, regardless of how many shares are actually on the order books for sale and at what limit price is set on the sell orders. A house in a street near me is for sale and is priced at a 20% discount for what it would have sold for at peak, and it's got exactly zero interest. I know the street and most houses would be considered pretty similar stock. None of the other houses on the street are for sale, but the moment that one vendor sells the rest of the houses on the street are pretty much going to be valued at the same price by prospective buyers. It only takes a few motivated sellers in an area to tank the market.
This is very true. I can't stop saying the same, and people ignore Even in one isolated large building, when the number of listings is increased suddenly, the sales are poor with huge discounts. Many agencies advise to stay in queue in order to have a good price if similar appartments are already advertised. Stock market was a good example when low volume fire sales push the price down. Another example - oil production. Just a minor surplus or shortage moves the oil price significantly
People in Perth are still spending though, even though their houses have declined in value by 10%. Many do believe Perth is back on the recovery path. (Although by looking at number of listings available on the market, you wouldn't believe it)
