will there be a drop in housing prices?

[GuyInTaiwan]

HH: The short answer to your question is "yes". I'm no expert on this, but here's my understanding of it. A sovereign credit crisis would mean that a nation's bonds would be viewed as risky. As such, they would have to increase the yield on them in order to attract investors. However, that in turn would suck money away from people keeping it in interest bearing cash because they could then get higher yields. So, interest rates would have to increase as a result in order to attract depositors at banks. To account for this, borrowing costs for home owners would also have to increase (so banks could still make a profit on the money they had effectively borrowed from those depositing to lend to those borrowing from them). I think that's the gist of it. It seems like sovereign debt leads to inflation one way or another.

[headhonchoII]

The way I was thinking about it was a global sovereign credit crunch i.e. countries compete for investors in their bonds. With so many countries with large deficits they need to fund. Therefore they need to up the amount that their 'treasury bills/bonds' pay in interest. This has the side effect of creating higher interest rates for private banks due to central bank increases.

If they can't fund their deficits by finding creditors willing to loan money (i.e. purchase their treasury bills/bonds), they need to inflate their way out of their deficits or default. So far the US has not experienced any problem in finding purchasers for their treasuries, maybe it will be forced to increase rates by inflation first.

Here's a good article about inflation and the Fed in the US.
http://thedailynewsegypt.com/global-vie ... -fisk.html

[GuyInTaiwan]

Well, that first paragraph amounts to the same thing, though. Countries compete for investors based upon how those investors perceive them with regard to risk and return. Those countries then set central bank rates, as you wrote. The other banks in effect have to compete against the central bank to attract investors (people making deposits), so to be able to meet those obligations, the banks have to increase interest rates on loans such that they're above what they pay out in interest to those making deposits. It's all basically the same thing. The reason the U.S. and some other countries can maintain low interest rates for those with home loans is because people still perceive such countries as a safe bet, so they're willing to accept low returns.

You're correct about the second paragraph. The other way out is by turning on the printing presses. Since the U.S. is still perceived as a very low risk investment in terms of its bonds, this would be the more likely option. It's also preferable in a way since it's more stealthy.

[Omniloquacious]

Omni: Have you read Freakonomics? The bit about selling your house is interesting.

I hadn’t read it, but I’ve had a look at some excerpts from and summaries of that chapter. There’s not really anything there that surprises me. I already have a pretty good idea of what to expect and what not to expect from estate agents.

Actually, I’ve had quite a mixed experience in buying and selling here.

When I bought my first place in Taiwan, and hadn’t any idea what to expect, I went to a couple of estate agents and had them take me to look at a few places, but didn’t see anything that suited me. Then I saw an ad for a newly built highrise that looked very promising, so I went to have a look, got shown around by one of the on-site sales people, found a flat that fitted my requirements very nicely, liked the price that she named, so immediately said that I’d take it. I meant that I’d take it for the asking price, since it didn’t occur to me that there’d be any room for negotiation. The sales girl gave me a funny look, hesitated a moment, and then suggested that I should offer a substantial bit less than the price she had named, and she was sure the construction company would accept it. I was pleasantly surprised, agreed with alacrity, and she duly got confirmation of sale at that price. I thought it was extremely decent of her, since I assume her commission was linked to how much she could sell for, and she had absolutely no need to help me get the price down like that when I’d already made it clear that I’d buy at the price she’d initially named.

Last year, when I sold my flat in Xindian, I had a taste of the sharp practice of estate agents. I was too busy to deal with it, so I entrusted it to my sister-in-law, who’s a novice estate agent here in Linkou. She found an estate agent in Xindian who had sold units in the same building, was confident that she could make a quick sale at my target price, and was willing to do it for a flat fee of just NT$100,000 (less than 2% of the asking price). I would pay the sister-in-law another NT$70,000 for her help (I was willing to pay more, but the wife said that would be enough). The Xindian agent quickly found a buyer at my asking price, and set up a meeting for the contract signing. When we arrived at her office, and before we met the buyer, she came out with some spiel about the NT$100,000 being a small commission, and that though she was sure the buyer was good for my asking price, she thought there was still room for getting a little bit more, so if it was okay with me, could she have a last round of negotiation with them and keep any extra she could squeeze out of them, to augment her slim commission. I immediately cottoned on to what she was doing, and understood that she’d already got their agreement to a price above my target, but since I was satisfied with getting my target price, I was happy enough to let her have a little bit more. The wife and sister-in-law, who were with me in that meeting, didn’t actually understand what she had proposed until I explained it to them, otherwise they might have objected or insisted that we split the difference (which is what I really should have done). Anyway, she soon came back to us to confirm that the buyer had agreed to pay NT$70,000 above my target price, meaning that she would get a commission of NT$170,000. Thus, I ended up paying total commission of NT$240,000 on a sale of just over NT$5.6 million, which was on the high side (more than the standard 4% commission), but I was still happy enough to get my whole target price in my pocket so quickly and easily.

Now the latest spin is that buying houses is the best way to deal with inflation. That is true only if interest rates stay low and asset prices stay high i.e. you can inflate the debt away over a period of time. If interest rates increase that is not true. Of course the journalists in Taiwan just repeat what spokesmen say, the profession of journalism is hardly a profession at all these days.

Major understatement, major alarm bells. Back in the early eighties, interest rates in Australia were something like 17%. Could you imagine if interest rates went up to just 5% here?! The streets would run red with rivers of blood.

Yes, even a moderate rise in interest rates is going to hurt a lot of people very badly. Governments and central banks are going to have to keep interest rates at or just above zero for as long as they possibly can, despite the many negative consequences that result from the effective loss of this key instrument of monetary policy.

Two decades ago, when I was getting 7% on my money in the bank, I assumed that such a situation would never change. I thought I'd be able to go on piling up money in the bank, and once it hit a certain amount, would be able to retire and live comfortably on part of the interest. Now, my money in the bank is earning next to nothing and effectively losing value with each passing month, but I don't see anywhere else to park it safely and profitably. If I sell my house for NT$15 million and put that money into the bank, it'll steadily diminish in value, so I'll be wanting to use at least a substantial part of it to buy another house as a relatively safe store of value. The big question is whether I rent first and wait for a sharp drop in housing prices so that I can buy something much better with my modest store of money, or buy something with half or more of that money now with a view to upgrading to something better if and when the crash comes, or put the whole of it back into another house that suits me better than the one I have now. I'm having a very hard time making a decision on this.

[GuyInTaiwan]

Omni: Interesting. I've sent you a PM.

[Incubus]

The big question is whether I rent first and wait for a sharp drop in housing prices so that I can buy something much better with my modest store of money, or buy something with half or more of that money now with a view to upgrading to something better if and when the crash comes, or put the whole of it back into another house that suits me better than the one I have now. I'm having a very hard time making a decision on this.

Not sure if I understand option two. Do you mean to get a cheap, old place and renovate it?

Between options one and three, I'd go with the first option. Even if there's no crash, you'll have all the time in the world to shop around, and mind you, you don't have to have a crash to get a good deal. There're always cash-strapped, desperate homeowners who are willing to sell their property for cheap. The obvious drawback is that you'll likely live out of boxes and have to move twice.

[Icon]

I believe the crash will be slow to come. The bubble is mostly fueled by Chinese and Taiwanese investors, and those guys have very deep pockets. They have proved impervious to global economy -aside from moving their money from the West to the East, and have every incentive to keep on pouring more gas to the flame. The small potatoes just get caught in the crossfire.

Told you about my friend who bought her 9 ping place and made 2 million earning? Well, she bought herself a bigger place. I wonder how much you can stretch 15 million. Places like my humble abode go for that in Xindian, maybe one can stretch that for a newer place but further from the MRT in our area. One wonders how the correlation between cost/land is done, after seeing nw, small places fluctuate from the laughably expensive to ridiculosuly overpriced. If it wasn't hard to sell, it is even harder to buy. Dunno how the situation is in Linkou or any newly developed areas.

[Omniloquacious]

The big question is whether I rent first and wait for a sharp drop in housing prices so that I can buy something much better with my modest store of money, or buy something with half or more of that money now with a view to upgrading to something better if and when the crash comes, or put the whole of it back into another house that suits me better than the one I have now. I'm having a very hard time making a decision on this.

Not sure if I understand option two. Do you mean to get a cheap, old place and renovate it?

I mean buy something either much smaller or in a much cheaper part of Taiwan, live in it until the market tumbles, then sell it for whatever I can get and use the proceeds plus the balance of the proceeds from my present abode to buy something much better than I have now. The latter is actually what I'd most like to do: buy quite a decent place in southern or eastern Taiwan for NT$7~10 million, and put the balance into my savings. I'd really love to move away from northern Taiwan, and I can live wherever I please since I do more than 95% of my work from home. But the fly in the ointment there is that the wife is highly averse to moving any distance away from Taipei. I'm working on that, but daren't hold out any high hopes of success.

Between options one and three, I'd go with the first option. Even if there's no crash, you'll have all the time in the world to shop around, and mind you, you don't have to have a crash to get a good deal. There're always cash-strapped, desperate homeowners who are willing to sell their property for cheap. The obvious drawback is that you'll likely live out of boxes and have to move twice.

This is most likely what we'll do. We're already actively looking at rental possibilities. But I absolutely hate moving, and recoil at the thought of having to do it twice. I moved often when I was younger, and hardly minded it at all. But now that I have a family and all the household clutter that goes with it, it's a totally different proposition, and one that fills me with dread.

[GuyInTaiwan]

Omni: There's a bit of idiocy with land speculation here in the Southeast, but there is still some great, cheap land. You could end up building your own place if you had to. You could probably have something resembling a French chateau for 10 million NTD down here. It depends upon just how remote you would want to go, but there are some absolutely stunning places. A couple of months ago, we went to Yushan National Park from the Hualian side and the valley leading up to that is absolutely stunning.

The only other thing you would have to think about though is the locals. Some are okay, a few are great, but I think the majority really are absolute hicks. This is changing, but there's still a lot of provincialism even in the kids I teach. For instance, the driving over here is ten times worse than Taipei, it's just that the population density is probably one hundred times lower, so it doesn't seem as bad. Environmental standards? What environmental standards?

[Incubus]

The big question is whether I rent first and wait for a sharp drop in housing prices so that I can buy something much better with my modest store of money, or buy something with half or more of that money now with a view to upgrading to something better if and when the crash comes, or put the whole of it back into another house that suits me better than the one I have now. I'm having a very hard time making a decision on this.

Not sure if I understand option two. Do you mean to get a cheap, old place and renovate it?

I mean buy something either much smaller or in a much cheaper part of Taiwan, live in it until the market tumbles, then sell it for whatever I can get and use the proceeds plus the balance of the proceeds from my present abode to buy something much better than I have now.

This may sound good in theory but I highly doubt it'll work out this way. When the market tumbles, lots of people will try to unload. It'll be hard to sell anything, even at a reduced price, as it'll become a buyers market.

This is most likely what we'll do. We're already actively looking at rental possibilities. But I absolutely hate moving, and recoil at the thought of having to do it twice. I moved often when I was younger, and hardly minded it at all. But now that I have a family and all the household clutter that goes with it, it's a totally different proposition, and one that fills me with dread.

One way to get around this is to make an arrangement with the new owner. If they're not in a hurry to move in, you can ask them if they can give you 6 months or even a year before you vacate the property. Of course, you'll be paying rent in the interim, during which time you can hopefully score a new home. Even if you can't make such an arrangement, you can try to drag out the transaction period to two months (ask your realtor about such strategies), and that'll buy you some time to look for a place.