Comments on: The Scam of the Century http://www.whocrashedtheeconomy.com/blog/?p=329 Tue, 07 Sep 2010 16:40:15 +0000 http://wordpress.org/?v=2.7.1 hourly 1 By: Diana B http://www.whocrashedtheeconomy.com/blog/?p=329&cpage=1#comment-3635 Diana B Thu, 22 Jan 2009 12:03:58 +0000 http://www.whocrashedtheeconomy.com/?p=329#comment-3635 I found the partial answer to my Q. but not the big picture? This paper examines the depth and duration of the slump that invariably follows severe financial crises, which tend to be protracted affairs. We find that asset market collapses are deep and prolonged. On a peak-to-trough basis, real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years. Not surprisingly, banking crises are associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls an average of over 9 percent, although the duration of the downturn is considerably shorter than for unemployment. The real value of government debt tends to explode, rising an average of 86 percent in the major post-World War II episodes. The main cause of debt explosions is usually not the widely cited costs of bailing out and recapitalizing the banking system. The collapse in tax revenues in the wake of deep and prolonged economic contractions is a critical factor in explaining the large budget deficits and increases in debt that follow the crisis. Our estimates of the rise in government debt are likely to be conservative, as these do not include increases in government guarantees, which also expand briskly during these episodes. http://papers.nber.org/papers/w14656 I found the partial answer to my Q. but not the big picture?
This paper examines the depth and duration of the slump that invariably follows severe financial crises, which tend to be protracted affairs. We find that asset market collapses are deep and prolonged. On a peak-to-trough basis, real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years. Not surprisingly, banking crises are associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls an average of over 9 percent, although the duration of the downturn is considerably shorter than for unemployment. The real value of government debt tends to explode, rising an average of 86 percent in the major post-World War II episodes. The main cause of debt explosions is usually not the widely cited costs of bailing out and recapitalizing the banking system. The collapse in tax revenues in the wake of deep and prolonged economic contractions is a critical factor in explaining the large budget deficits and increases in debt that follow the crisis. Our estimates of the rise in government debt are likely to be conservative, as these do not include increases in government guarantees, which also expand briskly during these episodes.
http://papers.nber.org/papers/w14656

]]> By: Diana B http://www.whocrashedtheeconomy.com/blog/?p=329&cpage=1#comment-3633 Diana B Thu, 22 Jan 2009 10:49:05 +0000 http://www.whocrashedtheeconomy.com/?p=329#comment-3633 I would like to see an article on Post-Housing Bubble Bust-Australia? - I cannot seem to get my head around the flow-on effect of a major correction in House prices in AU? - It's not just the price of the dwelling on the land; but also the revaluation of the land > by the relevent State Gov Dept's - that flow on to the Local Gov Rating (Taxing) agencies? In my shire rates are calculated on the Qld Gov Valurer Generals estimate on the land area, which supposedly fund infrastructure, amenities etc?...has anyone zoomed out for the big picture? Given that my parents (postwar, I am a "baby boomer" I despise that term, however) paid 350.00 Auspounds for their first house 1949-50>I +(husband) paid $9000.00 for our first hse (outskirts of Brisbane)1972> but my daughter will have to pay in excess of $350,000.00 for her first house? (which she is not going to do)- If her generation forgo homeownership for a life of rental properties how is this going to effect the dynamics of all other interconnected business> every RE office works hand in hand with Legal Officers; having worked in Qld Title office back in '94 it is their bread and butter... etc etc...? Can some one attempt this task albiet hypothetical, and post it maybe on this site? I would like to see an article on Post-Housing Bubble Bust-Australia? - I cannot seem to get my head around the flow-on effect of a major correction in House prices in AU? - It’s not just the price of the dwelling on the land; but also the revaluation of the land > by the relevent State Gov Dept’s - that flow on to the Local Gov Rating (Taxing) agencies? In my shire rates are calculated on the Qld Gov Valurer Generals estimate on the land area, which supposedly fund infrastructure, amenities etc?…has anyone zoomed out for the big picture?
Given that my parents (postwar, I am a “baby boomer” I despise that term, however) paid 350.00 Auspounds for their first house 1949-50>I +(husband) paid $9000.00 for our first hse (outskirts of Brisbane)1972> but my daughter will have to pay in excess of $350,000.00 for her first house? (which she is not going to do)- If her generation forgo homeownership for a life of rental properties how is this going to effect the dynamics of all other interconnected business> every RE office works hand in hand with Legal Officers; having worked in Qld Title office back in ‘94 it is their bread and butter… etc etc…? Can some one attempt this task albiet hypothetical, and post it maybe on this site?

]]> By: David http://www.whocrashedtheeconomy.com/blog/?p=329&cpage=1#comment-3577 David Mon, 12 Jan 2009 04:38:59 +0000 http://www.whocrashedtheeconomy.com/?p=329#comment-3577 Grant I would like to point out with your ever expanding ring of value theory, that cities cuch as Phoneix, Salt Lake City, Las Vegas are growing much faster than any city in Australia. (Las Vegas population increased almost one million 1995 to 2005) yet property prices there have collapsed more than any other US city. This price decrease has nothing to do with fundamentals (like population increase, like wages, like shortages) and everything to do with speculation exactly like the stock markets. With the entire world economy slowing dramatically there will be job losses or under employment on a huge scale and if this occurs it does not matter whether you want to hold on or not you may have no option but to go bankrupt, infact it will be worse for Australia than America because we can't just hand in the keys and transfer the loss to the bank. The borrowing spree that we used to buy everything (I am just as guilty as everyone else) will come to a screaming halt, because the banks won't lend to us anymore. I would also keep an eye on the Australian banks as the full impact of this has not yet hit them, however I can tell you as a banker there is not much lending happening and management is starting to panic. Grant I would like to point out with your ever expanding ring of value theory, that cities cuch as Phoneix, Salt Lake City, Las Vegas are growing much faster than any city in Australia. (Las Vegas population increased almost one million 1995 to 2005) yet property prices there have collapsed more than any other US city. This price decrease has nothing to do with fundamentals (like population increase, like wages, like shortages) and everything to do with speculation exactly like the stock markets. With the entire world economy slowing dramatically there will be job losses or under employment on a huge scale and if this occurs it does not matter whether you want to hold on or not you may have no option but to go bankrupt, infact it will be worse for Australia than America because we can’t just hand in the keys and transfer the loss to the bank. The borrowing spree that we used to buy everything (I am just as guilty as everyone else) will come to a screaming halt, because the banks won’t lend to us anymore. I would also keep an eye on the Australian banks as the full impact of this has not yet hit them, however I can tell you as a banker there is not much lending happening and management is starting to panic.

]]> By: Grant http://www.whocrashedtheeconomy.com/blog/?p=329&cpage=1#comment-3564 Grant Sun, 11 Jan 2009 00:39:06 +0000 http://www.whocrashedtheeconomy.com/?p=329#comment-3564 @Pete - I'm not so sure. Do you really think Japan is enough like Australia that we can safely assume what happened in that country will be mirrored in Australia - we are very different culturally, ecconomically and geographically. I appreciate your point regarding their culture re "saving face", but so many other aspects are so drastically different. For example, Japan was going through a cultural change (young people breaking mould and doing whatever they wanted - like our young already do here) and another is the geographic differences ie the large amounts of developable land (in Australia) vs the mostly appartment living (in Japan) - is the value in cookie-cutter 1 bed appartments the same as a 5 bed 600m2 block in a nice leafy suburb? The desire for someone to "poney up" large cash for an item is based on demand for something of value. If there is no demand (due to unemployment) or there is no value (cause its a cookie cutter appartment and there are 100 of them for sale) then the price MUST go down. Inner city appartments in Australia are set for a price adjustment (downwards) and this is mainly due to a oversupply and lack of value. There is no logical reason for under supplied good quality land in the city suburb-belts to crash - there is strong demand (due to location and value) and lack of supply (due to mainly home owners and minimal developers). The model in Japan was very, very different - in fact I think its highly unintelligent to just assume that everything is the same, and therefore we should base our thinking purely on history. @Pete - I’m not so sure. Do you really think Japan is enough like Australia that we can safely assume what happened in that country will be mirrored in Australia - we are very different culturally, ecconomically and geographically. I appreciate your point regarding their culture re “saving face”, but so many other aspects are so drastically different.

For example, Japan was going through a cultural change (young people breaking mould and doing whatever they wanted - like our young already do here) and another is the geographic differences ie the large amounts of developable land (in Australia) vs the mostly appartment living (in Japan) - is the value in cookie-cutter 1 bed appartments the same as a 5 bed 600m2 block in a nice leafy suburb?

The desire for someone to “poney up” large cash for an item is based on demand for something of value.

If there is no demand (due to unemployment) or there is no value (cause its a cookie cutter appartment and there are 100 of them for sale) then the price MUST go down.

Inner city appartments in Australia are set for a price adjustment (downwards) and this is mainly due to a oversupply and lack of value. There is no logical reason for under supplied good quality land in the city suburb-belts to crash - there is strong demand (due to location and value) and lack of supply (due to mainly home owners and minimal developers).

The model in Japan was very, very different - in fact I think its highly unintelligent to just assume that everything is the same, and therefore we should base our thinking purely on history.

]]> By: Grant http://www.whocrashedtheeconomy.com/blog/?p=329&cpage=1#comment-3561 Grant Sat, 10 Jan 2009 14:08:58 +0000 http://www.whocrashedtheeconomy.com/?p=329#comment-3561 @Juiced - The bank will still require full loan repayment, and if selling your house at 30% less means I still owe $120,000 and I still have repayments to make, and after all that - I still need to find a place to live - OMG! ...and the funniest part is that I guess that's going to be renting. Continuing this crazed scenario, renting demand will most likely rise, increasing the price of renting - so it could even be possible that the net outcome is very similar in terms of the weekly pay check impact - a more realistic outcome is that few people will feel that it is worthwhile selling up, and most will curb their spending on Plasma TVs and new cars... and start to just pay off the debt instead. More to the point... every personal situation will be different of course, but I think it would be safe to assume only a minority would be in a scenario whereby selling up significantly below your debt would be the best move to make. @Juiced - The bank will still require full loan repayment, and if selling your house at 30% less means I still owe $120,000 and I still have repayments to make, and after all that - I still need to find a place to live - OMG! …and the funniest part is that I guess that’s going to be renting. Continuing this crazed scenario, renting demand will most likely rise, increasing the price of renting - so it could even be possible that the net outcome is very similar in terms of the weekly pay check impact - a more realistic outcome is that few people will feel that it is worthwhile selling up, and most will curb their spending on Plasma TVs and new cars… and start to just pay off the debt instead.

More to the point… every personal situation will be different of course, but I think it would be safe to assume only a minority would be in a scenario whereby selling up significantly below your debt would be the best move to make.

]]> By: Pete http://www.whocrashedtheeconomy.com/blog/?p=329&cpage=1#comment-3560 Pete Sat, 10 Jan 2009 11:19:24 +0000 http://www.whocrashedtheeconomy.com/?p=329#comment-3560 Grant, in Japan a lot of people did hang onto their houses. Japanese people don't like declaring bankruptcy, and Japanese banks don't like to force their customers to lose face. Can you imagine Australian banks going easy on customers, just because they didn't want to be impolite? Tokyo still fell 70%. I will certainly agree that their is an "expanding ring of value". Good places can be bought in bad suburbs that are in an otherwise good location. Uni students will replace the unemployed renters, crime rates will drop, then young professionals will start to move in. However the bubble bursting will sink a lot of property - even the ones that will increase in value compared to other suburbs. Grant, in Japan a lot of people did hang onto their houses. Japanese people don’t like declaring bankruptcy, and Japanese banks don’t like to force their customers to lose face. Can you imagine Australian banks going easy on customers, just because they didn’t want to be impolite? Tokyo still fell 70%.

I will certainly agree that their is an “expanding ring of value”. Good places can be bought in bad suburbs that are in an otherwise good location. Uni students will replace the unemployed renters, crime rates will drop, then young professionals will start to move in. However the bubble bursting will sink a lot of property - even the ones that will increase in value compared to other suburbs.

]]> By: Juiced http://www.whocrashedtheeconomy.com/blog/?p=329&cpage=1#comment-3559 Juiced Sat, 10 Jan 2009 10:09:28 +0000 http://www.whocrashedtheeconomy.com/?p=329#comment-3559 Great article, I enjoyed reading it. As for Grant's comment above about mortgagees in Australia "more likely (to)... stick it out, and pay off the loan rather than declare bankruptcy". Sure, this will happen but only if they <i>can</i> stick it out. If people are reliant on two incomes and they suddenly have only one, I don't think they can 'stick it out'. Great article, I enjoyed reading it.
As for Grant’s comment above about mortgagees in Australia “more likely (to)… stick it out, and pay off the loan rather than declare bankruptcy”. Sure, this will happen but only if they can stick it out. If people are reliant on two incomes and they suddenly have only one, I don’t think they can ’stick it out’.

]]> By: Grant http://www.whocrashedtheeconomy.com/blog/?p=329&cpage=1#comment-3558 Grant Sat, 10 Jan 2009 08:44:24 +0000 http://www.whocrashedtheeconomy.com/?p=329#comment-3558 One aspect not considered in this article is the continuous expansion of cities in Australia. Compared to the US and UK we are 1) a very young country with a small population and 2) have very small cities with large amounts of land available to be utilised. These conditions help raise land prices for a variety of reasons - mainly due to the ever increasing value of older suburbs becoming the next better suburbs (and the suburbs before them becoming even more valuable etc). This expanding ring of value can continue to happen in Australia (whilst there is demand to expand and grow). Now this won't impact the "avg" real house price, as long as new cheap housing comes online at the edges, to fuel the desire to keep affordable housing available. The real risk (outlined in the article) is when no further housing is available, and then the forces of maxium affordablity for housing will start to take effect - things like better transport and better communication (100 years ago there would be no possible way to live on the Gold Coast and still work in Brisbane) have allowed housing to continue to expand. I'm guessing in another 100 years, I could live 300 klms west and still have some of the benefits (medical, education and entertainment) that I enjoy close to the CBD (but cleary it would be more expensive to live inside the 100Klm radius - why, cause its recognised as being the better location to live - just like the better suburbs near all cities are). As such, I think some of the "sky is falling" claims made are not as likely as described - eg in Australia we don't have the same walk-away home loans that allow USA residents to just walk from their debt when they default, thus allowing prices to crash badly... so in Australia, it is more likely that I'll stick it out, and pay off the loan rather than declare bankruptcy. As such, I'm less likely to sell and carry the debt for ever... I'll keep the price up (by not selling) and continue to hold onto the home instead. This creates a different outcome that this article isn't addressing at all. My advice to readers - don't believe everything you read on the Internet. One aspect not considered in this article is the continuous expansion of cities in Australia. Compared to the US and UK we are 1) a very young country with a small population and 2) have very small cities with large amounts of land available to be utilised.

These conditions help raise land prices for a variety of reasons - mainly due to the ever increasing value of older suburbs becoming the next better suburbs (and the suburbs before them becoming even more valuable etc). This expanding ring of value can continue to happen in Australia (whilst there is demand to expand and grow).

Now this won’t impact the “avg” real house price, as long as new cheap housing comes online at the edges, to fuel the desire to keep affordable housing available. The real risk (outlined in the article) is when no further housing is available, and then the forces of maxium affordablity for housing will start to take effect - things like better transport and better communication (100 years ago there would be no possible way to live on the Gold Coast and still work in Brisbane) have allowed housing to continue to expand. I’m guessing in another 100 years, I could live 300 klms west and still have some of the benefits (medical, education and entertainment) that I enjoy close to the CBD (but cleary it would be more expensive to live inside the 100Klm radius - why, cause its recognised as being the better location to live - just like the better suburbs near all cities are).

As such, I think some of the “sky is falling” claims made are not as likely as described - eg in Australia we don’t have the same walk-away home loans that allow USA residents to just walk from their debt when they default, thus allowing prices to crash badly… so in Australia, it is more likely that I’ll stick it out, and pay off the loan rather than declare bankruptcy. As such, I’m less likely to sell and carry the debt for ever… I’ll keep the price up (by not selling) and continue to hold onto the home instead. This creates a different outcome that this article isn’t addressing at all.

My advice to readers - don’t believe everything you read on the Internet.

]]> By: ch http://www.whocrashedtheeconomy.com/blog/?p=329&cpage=1#comment-3555 ch Fri, 09 Jan 2009 23:05:03 +0000 http://www.whocrashedtheeconomy.com/?p=329#comment-3555 great read, well done. great read, well done.

]]> By: George http://www.whocrashedtheeconomy.com/blog/?p=329&cpage=1#comment-3554 George Fri, 09 Jan 2009 21:56:26 +0000 http://www.whocrashedtheeconomy.com/?p=329#comment-3554 What would your advice be for first home buyers? Keep renting? What would your advice be for first home buyers? Keep renting?

]]>