no boggle eyed spittle spraying please, page-70

Bleasby,

The margin lending analogy was not missed but I get confused with the message you are sending. You talk about how property "margin lending" is at 95% for lenders as opposed to 40-75% for a share margin loan and yet you "accept you won't get a margin call with property".

I'm sorry that I don't understand, but if you won't get a margin call then isn't the analogy flawed? Other people have raised this analogy but I just don't see it as a good one.

You asked the question "but what if vacancy rates or interest rates rise?" because you are concerned what would happen if mortgage payments are not met.

My answer is many fold. Number one, vacancy rates and interest rates WILL rise ... eventually. In between now and then there will be a lot of water under the bridge. The question on this thread was why should a 40% drop in property occur in the face of very low vacancy rates? I posed that question because the low vacancy rates are happening now and, maybe I wasn’t clear, but I was focussed on the near term (next few years).

Sometime in the future, when supply rises to meet demand, we will see vacancy rates over 3%, maybe 4% and we will see that interest rates will be forced to rise thanks to the overheated buying which will have created the higher vacancies (and will have driven up prices).

At that time I will have a different view of those areas of the country where vacancies are high and I may turn my attention to other cities, towns or even countries (that last is unlikely but you never know). More likely, I will see that the share market offers better opportunities in the near term and will focus my attention there. I am not alone in this, most investors will move between asset classes as outlooks change.

Anyway, later on you spoke about the risk and whilst I acknowledge that "property has its own set of problems" I would have to say (a) Which investment does not? (b) I think raising investors' awareness of the risks is a good thing but you may be underestimating people's ability to grasp what they are doing. Sure there are many seat-of-the-pants people investing in property but not too many would be totally ignorant. Perhaps you are attributing a greater risk-factor to the exact same risks?

You know how to do a risk analysis I am sure. Identify the risk, attribute a rating to the likelihood, attribute a rating to the impact, calculate the overall risk rating and then describe mitigation of the risk.

I think most long time investors perform this same risk analysis but not formally, they do it on the fly, in their heads. Even if they did it formally, the ratings of the risk’s likelihood and impact are subjective. Your risk rating seems to be more severe than I would attribute to the exact same risks.

As to the rest of your post where you discuss wealth destruction and getting out in time, it is a good risk management technique to look at all those possibilities and have strategies in place but as far as my question (at the start of this thread) is concerned, the question remains why would this happen in the face of very low vacancy rates? No one has answered that question even after we have reams of words after the original question was posed.

One thing I will add and that is that you did show how the situation worsens once the ball is rolling but you have not explained how the ball starts rolling in the first place. What will cause these events to start? I myself have listed some possibilities, more people per square metre of floor space, decentralisation, declining populations, etc. All of these will be obvious when they start, giving plenty of time for the cognoscenti to head for the hills and sell up. I don’t see signs of them just yet.

To your credit, you have acknowledged that the scenario you have painted is unlikely (given the stage we are in the price cycle) so I think you have provided a discussion piece here which is great and may be relevant further down the line.

I have enjoyed our discussions but I still await someone to explain how the 40% drops will occur over the next few years. I note that the very people who were making those predictions have not come up with the goods in terms of reasoned arguments.

Sort of shows that they had no basis to their claims to start with and they aren’t worth listening to.