Real Estate and Banks - emailed to subscribers - Mon, 20 Feb 2006

I found this paper of great use. Worth a read. Ignore the maths early on perhaps, just concentrate on the linkages and findings.

Substitute the word China each time you read Thailand, and you have an idea of what could repeat, never exactly, but something like it is possible.

Worth considering too, in the context of this weekend's front page headlines where the Age reports the RBA is warning banks on lending standards, the Australian reports the RBA as suggesting tax cuts are affordable. Any tax cuts will of course capitalize straight into land price, which, as you can read in the report, flows through to more loans from banks, then lower lending standards on the less and less affordable higher land prices.

If you know your economics as I have taught you, then you know this activity tells you point blank that land prices are becoming unaffordable:

The up move in real estate does not continue forever. One cannot help but feel that this is moving us right on que into the last years of this real estate cycle. History very much repeating as the underlying business structure has not changed one bit. Of course the industry players don't see it that way, they are simply taking entirely reasonable tactics to raise the profitability of their industries by coming up with schemes to sell more mortgage loans to more customers. What I do in class is to teach you to see through this activity and help you forecast better. Note too, it is most likely a new crop of loan managers in the industry making the loans; few if any of them will have a memory of the last real estate cycle, certainly for anyone under 35 this will be the case. And remember, the vested interests in this industry, and the politicians on whom re-election depends upon a growing economy, will do absolutely everything possible to ensure land price stays up for as long as humanly possible:

  • longer term mortgages
  • govt loan assistance packages
  • infrastructure spending (note what the Vic liberals are now proposing to get elected - massive infrastructure projects)
  • tax cuts
  • the spending of government surpluses
  • increased military spending, even further war

The real estate cycle stands every chance of running the full 18 years in my view, it all depends on interest rates and how this effects the banks. We are getting to the serious end of the cycle now, so to speak.

the figures in the report are not contained in this pdf file - if anyone can find the same report with figures included, i would appreciate a copy.

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