I thought I was clear. My original post acknowledged that there is nothing (repeat nothing) that could get you to a -40% property decline based on information we have available right now. The -40% call has been made too early.
My second post arose from a concern that you did not understand what I meant in the original. It also let you know how I think you will get to -40% when and if that happens. My comments were general in nature given I had already conceded via the first post.
I cautioned you that I am very fearful of the current subprime crisis. It is the only thing I can see on the horizon that might cause a -40% decline in property in Australia, but it would require things to deteriorate further than they have so far. You would be incorrect to assume they could not.
Re “…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.” Two responses:
One: If this is true then by default you have a circular question re the -40%. We will never (as in never ever) get to -40% because the vast majority are so bright that there will be very few distressed sales. The selling pressure will always be moderate and thus in your world you cant ever get to -40%. After all, to get to -40% you do surely agree that we require a significant number of distressed sales.
Two: I am expressly stating that the investors will be ignorant. They will invest (based upon price expectations, devised from past experience that prices never go negative) when in fact they should be divesting. The potential for that to happen in property is greater than in shares because share investors have frequent bouts of negative price growth and are a bit more cautious about investing into a decline. When did property last fall 10% across the board, followed by a further 20% to teach you to adjust your price expectations? At least with shares the rebound is typically within a year. Thus stretched share investors are exposed for much less than will occur in housing. Like I said, you cant assume investors will always be able to ride out 5-10 years of stagnant prices. Danger usually comes in double doses (ie subprime and bank fraud, subprime and inadequate ASX regulation re shorting/margin lending practices).
Do property investors have some intelligence level that share investors do not? Why were people still increasing their share exposures leading into the Aug 07 sub-prime crisis? Why did they stay invested after this massive hint that things were not right? Refer 2 above for the answer. Their price expectations were wrong and they thought the good times would just keep on rolling on.
Property investors will do the same. A big difference is that most share portfolios are not geared (its all equity). Most property portfolio’s are geared (and some/most quite heavily). Hence my analogy. Share investors primarily use margin loans to gear, whereas property investors use bank debt. They both use negative gearing to grow wealth and both face the prospect that the gearing will destroy wealth. Note: Property prices only need to stay flat for 8 years (not untypical) for wealth to be destroyed if you account for opportunity cost. Distressed sales following serious declines make the cost real and not just paper. The same with a margin loan. Meet the margin call with cash and its a paper loss, whereas distressed sales of shares realises the loss.
Your comment: "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."
This indicates you still do not fully comprehend what I have said. If its "obvious" as you say then you dont get to -40%. It is the unknown or unanticipated that is more likely to get you to -40%. This outcome is more likely when price expectations are very much wrong, not when price expectations have had 10 years to adjust to slowly changing housing patterns. Thus -40% is more likely to need a shock. Some people are saying to you they think the shock is subprime on the back of some very bullish house price and debt growth. I have already given you my opinion. They could be right, but arent just yet.
I could keep on going and respond to other points you have made, but I think the main ones are above. I do not really have anything further to add to your discussion as I'm not a property investor and I couldn’t care less who wins the debate. Just thought I would add a perspective. If others have already discussed the margin lending analogy then at least you are aware. Remember what I said in my last post, “it’s the awareness I am seeking.” Im not concerned with who is right or wrong in your current debate. Equally, I couldnt care less if my mate sells or holds his property, as long as he does so with awareness. Good luck.
