the real estate bandwagon..everyone's joining in, page-39

I think the prudent course of action is to minimise the debt from rental properties by selling one to lower the debt on the others to a more managable position should the market turn. After all, it doesn't really matter what happens to the housing market if you own the property outright but if your over-extended and not getting the rents the pressure is enormous - been there, done that.
It seems to me that the housing market has a 7 to 10 year cycle and I plan to take advantage of that by cashing up and waiting. At the moment I see a mania that will eventually wane as other economic influences come to the fore. The warning signs are a continuing increase in disposable income required to service the debt and a steady rise in vacancy rates - I dont see wages increasing to match the increasing committment.

The problem with all this is the lack of control that one has when you are tied to the bank ie should the market turn the first thing to go is your equity - you still owe the bank the debt. You also have the chance of the bank calling you to increase your equity margin or if the situation really deteriorates they can call in the debt completely - just ask a over-extended farmer what its like.

The examples of this from an international perpective are numerous. Japan property prices have fallen 60% since 1990, Hong Kong have fallen 40% in 2 years.
A friend of mine in Cathay Pacific has recently walked out of his apartment in Hong Kong because he owes the bank much more than the property is worth.

To say this wont happen here is folly. I apologise for the negative tone but I believe care needs to be taken.
By all means enjoy the fruits of your labour but make sure you have a safe fall back position - this boom will not last forever and remember -: "the patient make money out of the impatient"

The following article appeared in MSN Money

Wall Street great says the market is broken


Investing pioneer John Templeton believes there is still huge downside risk to the stock market - and he's almost as bearish on house prices.

By Bill Fleckenstein

Wall Street has its statesmen and its noisemakers. Into the former camp fall the likes of Warren Buffett, the late Leon Levy and John Templeton, the founder of the Templeton funds group. Their wisdom is there for the taking, but when it's deemed to be "pessimistic," folks turn away.

That's where the noisemakers come in, ready to rev up any story that gets people buying stocks. Some technology chieftains have demonstrated remarkable skill in that arena. After all, the performance of their stock options depends on folks' willingness to believe. Imagine, then, the scene behind closed doors when Microsoft (MSFT, news, msgs) announced its decision to show options the door.

Templeton's take: The stock market is broken

Last week, a friend was kind enough to e-mail a copy of an interview that Sir John Templeton gave recently to Robert J. Flaherty of Equities magazine. I, in turn, would like to share its wisdom with readers of the Contrarian Chronicles.

During previous interviews with the publication in 1999 and 2000, Sir John said investors should expect a 1929-style crash in stocks. Flaherty notes that those earlier interviews prompted two very different responses. Some folks expressed gratitude for the money they'd saved by reading Sir John's comments (both at the time and later), while others opined that Sir John was "old and out of touch," and what did he know about today's market, anyway?

In his current interview, Sir John, who is now 90, devotes most of his thoughts to the housing market. What he tells Flaherty comes as surprise to the downside, since the writer had been expecting to hear more encouraging words: "Because I was hoping for good news," Flaherty writes, "I was personally taken aback and depressed by Sir John's short-term pessimism."

In that vein, Sir John offers this observation about Wall Street at large: "The stock market is broken, and it will take some time, maybe years, to repair it. Mass media, especially TV (read: Bubblevision) today is so short-term that few in its audience grasp the lasting damage and corrective impact which will continue to linger from the greatest financial crash in world history."

He continues: "It would be unlikely that the bear market is over when the American stock market is only down about 30%, when in the biggest boom ever, it had been up 10 times over where it had been years earlier. . . . Following such a large increase, a 30% decrease is small." (I am assuming that here, he was obviously not talking about the Nasdaq ($COMPX).)

I guess I like that passage because it's a refrain that I've often pounded away at in my daily column.

Bear markets and housing markets

Moving on to housing prices, Sir John comments: "Every previous major bear market has been accompanied by a bear market in home prices. . . . This time, home prices have gone up 20%, and this represents a very dangerous situation. When home prices do start down, they will fall remarkably far. In Japan, home prices are down to less than half what they were at the stock market peak." Sir John adds, "A home price decline of as little as 20% would put a lot of people in bankruptcy."

Sir John also had a few words about debt -- a four-letter word that folks seem not to care about: "Emphasize in your magazine how big the debt is. . . . The total debt of America is now $31 trillion. That is three times the GNP of the U.S. That is unprecedented in a major nation. No nation has ever had such a big debt as America has, and it's bigger than it was at the peak of the stock market boom. Think of the dangers involved. Almost everyone has a home mortgage, and some are 89% of the value of the home (and yes, some are more). If home prices start down, there will be bankruptcies, and in bankruptcy, houses are sold at lower prices, pushing home prices down further." On that note, he has a word of advice:
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"After home prices go down to one-tenth of the highest price homeowners paid, then buy."