Thursday, April 7, 2016

The great matrimonial housing short-squeeze

It's a fairly consistent view around our office that house prices are absurd in Sydney - and winning a Sydney property auction is not a route to security, rather a route to becoming an indentured servant to a bank.

Alas we have one staff member married a few years with an 18 month old son.

I caught him looking at He told me his wife was looking.

His tart comment: short-squeezes come in many forms.



Sulieman Ravell said...

No problem

Just buy the property and hedge with long term puts on the banks.

If he complains that its unaffordable to do that, then he clearly can't afford to buy a house

Anonymous said...

So Mistake No. 2 will be buying a house? Or is that Mistake No. 3?

Anonymous said...

The formula for valuing a perpetuity is c/r where c is the coupon and r is the interest rate (suppose both in real terms). When r goes down, the value goes up. Real interest rates around the World have been in long term decline, are at historic lows, and are expected by most in the market to remain very low. House prices in urban areas will of course be very high by historical standards in such an environment. granted, houses are not a perpetuity, but the essence of the matter remains the real interest rate. Unless you are a contrarian who bets that interest rates will revert to some historical norm (which one?), there is nothing to explain in high current house prices, except insofar as they are imperfect substitutes for those rotting boxes, aka apartments, that can be reproduced ad nauseam at more or less constant cost.

Anonymous said...

As a young person, i can't see why more people aren't marching in the streets. Unless you have a silver spoon it takes years for us to save a deposit, whether it is 10% (and then you have to pay mortgage insurance, something which protects the bank not you) or a 20% deposit.

How much does the average accounting graduate get paid these days in Sydney? 60k/yr? Thats $1,150/wk. From that, their expenses per week are:

Tax/Medicare: $235
Rent: $200 (lets say they are sharing with a few people)
Food: $140 ($20 a day)
Utilities: $50 (electricity/phone/water)
HECS/HELP repayment: $45
Transport: $40 (lets assume they don't have a car as well, they live close to public transport)
Clothing and Laundry: $20 (got to buy shirts, shoes, suit, ties for work)
Health Insurance: $20

There are probably other 'essentials' i'm missing from this budget, but this already takes me to $750/wk, so one saves $400/wk or around $20k/yr. After two years, there you have it you will have saved enough for a 10% deposit on a small 2 bedroom apartment in Penrith, 60km from the CBD and a 75min trip by train. The bad news is, you still don't have a car so you still have to rely on public transport ($60/wk now) and your mortgage interest payments are 360k * 4.2%/52 = $290/wk. ie your expenses have increased by $110/wk not including mortgage insurance.

Saving and living such a frugal lifestyle can't be good for retail sales figures - and then if you do end up with a ridiculous mortgage, you will be too busy trying to pay down your mortgage - again not good for retail sales. Retail sales can only be propped up by tourists buying Blackomres vitamins for so long...

It is little wonder a lot of my cohort have had enough and are moving to London/Singapore/HK/NY to work. Get the life experience. If you have to pay for expensive housing, you might as well do it in a world city. Oh, this 'brain drain' isn't good for the tax payer either. as for your uni debt, if you disappear permanently overseas the government doesn't chase you down for it either.

Pereg25 said...

Easy Fix:
Announce raises for all staff looking to buy into the market. This will allow them to service a bigger loan. Wait for them to buy into the inflated market. Increase short exposure to banks/mortgage brokers/insurers/real-estate businesses. Sack all those who have bought into the market. Encourage other shorters to do likewise.

Surely it cannot be illegal to destroy one's future by allowing them to borrow more? After all you have helped the poor people get onto the property ladder; without your generosity (and the bank's/mortgage broker's greed)they would never have been able to own their little piece of (mouldy) paradise.

Anonymous said...

what will prick the bubble?

Anonymous said...

Do people generally rent, or...?

dearieme said...

"as for your uni debt, if you disappear permanently overseas the government doesn't chase you down for it either": I can see a future of young Aussies moving to London and young Brits to Oz, all to escape their uni debts. Waltzing Matilda.

dearieme said...

"as for your uni debt, if you disappear permanently overseas the government doesn't chase you down for it either": I can see a future of young Aussies moving to London and young Brits to Oz, all to escape their uni debts. Waltzing Matilda.

Anonymous said...

It's true... getting married and having kids is certainly the most expensive decision I've ever made. I calculated the other day that my household expenses went up 6-8x pre and post marriage/kids.

My housing went from $800 in rent, to $5000 mortgage + insurance + taxes + maintenance!

Anonymous said...

As for young Aussies -- just wait for the Chinese bubble to blow up. Pick up the pieces in Sydney from distressed Chinese sellers!

Anonymous said...

All the above comments are depressing. For all young professionals, if you have an attitude of saving about 20-25% of your take home income for the rest of your working life then you will probably be OK even if you don't buy a home. If you give up because housing is out of your reach and just spend, then you will be a slave. So take your pick, indentured servant, slave or OK!!!

Anonymous said...

Settling down, getting married, owning a home, having kids, living as long as medically possible... so lame. -Generation YOLO

Unknown said...

Re:Anon April 08.
My daughter and husband have moved to a "world" city, London. They say the work is more interesting and they manage to save more than in Sydney. and they get to see Europe.

The really depressing thing is, on a recent visit to see my "new" grandson their house was full of friends, all ex-pat Australian professionals, all around 30yr old and all saying they had no plans to come "home".

dearieme said...

"It's true... getting married and having kids is certainly the most expensive decision I've ever made."

My father used to say, of anyone getting married, "Soon his penny bun will cost fivepence."

Anonymous said...

Housing prices go most crazy where new development is constrained by geography and zoning - see Vancouver Canada and San Francisco.

If there is geographic and political room for development then the market should take care of itself.

A Chinese collapse may not help in the short term since it may increase the capital seeking to flee China.

I live close enough to Vancouver to have family there and far enough away to not personally benefit from the rising prices. There is a sense that Vancouver is reaching some sort of a breaking point on the prices for detached homes. Your employee should study what happens when reluctant buyers capitulate to a rising market - it usually signals a top.

mspacey4415 said...

One of the smartest person I know - this guy was working at the mortgage desk at GS pre-crisis - knew it was a housing bubble and had held out for years -- ended up buying a house at the peak in 2006. because his wife was coming out with a kid. Short squeeze indeed.

Peter Rickwood said...

I've thought bubble since about 2003, but it just doesn't pop, so I've given up saying so and am just bemused by the whole situation. Shorting this (by selling banks or what-not) is not appealing -- one of those cases where market can stay irrational longer than you can stay solvent.

Martin Barry said...

You can no longer move overseas and expect to not pay your uni debt. New law comes into effect next year that you have to register and keep repaying. It seems they will use data received from all countries with tax treaties to track you down. Not sure how they intend to enforce it but I'm not waiting to find out, going to pay my debt off before the next indexation. :-(

Unknown said...

Hmm.. Housing ..How about the education bubble ?

Anonymous said...

Unfortunately housing is one of those emotionally driven milestones in life - i.e., going to kindergarten, graduating high school, completing Uni, first job, marriage, baby... Get your first house, etc etc... My baby needs a place to safely learn to walk without the worry of ciggy-butts, broken glass, cars, and weirdos.

As much as it pains someone as bearish as I am, at this juncture in my life my wife has made it abundantly clear that going long housing is going long on our marriage. Full stop.

That's a bet I'll always have to take as a matter of principal and long term happiness... So, hedging my bets on my first house via shorting the REITs/banks is probably on the books.

Had a thought of how great it would be to obtain my financing from a lender who's willing to gaurantee my original home value for up to 5 years of the purchase cost/date - I'd be willing to sign over a portion of any capital gains (should that occur) at that point in time on the sell date of the same property. If I don't sell after 5 years and there are capital gains, the lender must agree to settle on their portion of the capital gains at that point in time which shall be paid out in installments at a specified interest rate, or lump sum at a discount to market (assuming there is a market for this financial product I have just invented by that time). What I'm gauranteed as the purchaser of this hedged loan is the value of the property purchase price for up to 5 years. After which, the loan simply rolls into a standard mortgage and we settle the capital gains deal separately, with the option to roll-up my capital gains obligation into fully refinanced loan... Happy to entice any takers with an establishment fee. Break costs are standard and have no impact on the 5-year hedge...

So as the lender you get:
1) a fee
2) regular P&I mortgage repayments
3) A claim to any capital gains on year 5 with a few payout options - one being a discounted lump sum.
4) Still receive regular mortgage repayments beyond year five should the loan still be active

I get:
1) A loan at standard/reasonable market terms, etc.
2) 5-year year home value protection against market volatility.
3) 100% claim to any capital gains on the asset beyond year 5

Open to offers....

To digress......

Glong on investment properties in SYD/MEL is for the irrationally exuberant fools whom will soon be slaughtered.

Anonymous said...

One more thing - I'm a champion of the daring man on your staff... Once again, GEN Y completely screwed by our Baby-Booming-Parents... Thanks for MTV and a bleek economic future.

Unknown said...

Love this short post! True to the point.

Anonymous said...

Just came across this interesting blog post.

I too have been bearish on property for too long and see the market (irrationally?) continue to outpace wages growth and feed off the low interest rate environment.

However, the key ingredient I see that may prevent any sort of bubble being pricked is the role of the government/RBA. For political reasons, I find it hard to believe that these bodies will stand on the sidelines if house prices make any sort of material decline. Its a bit like the banks, the government jumped in and guaranteed their existence during the GFC. Given that mortgage holders are voters, I anticipate that either the RBA or the government would step in with measures to backstop falls in the market. This could be through:
- further reductions in interest rates (limited)
- macroeconomic boosts (further adding to the deficit)
- restricting supply
- introducing measures that allow additional foreign investment (perhaps coupled with steep declines in the dollar).

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