Your House and Enron

Enron was a sham, they were the only non-financial sector company in the US to use 'Mark to Market' reporting, that is they could report expected earnings as actual earnings that would knock on to the share price. Once they started accelerating their income, they had to keep accelerating in order to live up to the expectations they were creating.

Can you put a price on a home? Absolutely, and there's two ways, just like Enron had two kinds of profits.

Will start with the exotic, technical and rational way nobody actually does put a price on a house. That is you look at its earnings, its earnings to put it simply are rent. What rent can a house recieve? Even if you live in it, the income would become the savings of renting your next best housing option.

Rent = Income, Income = Rent. So once you know how much a home earns you can determine 'Net Present Value' which we could complicate by adding a 'required rate of return' but for simplicities sake you would just divide the rent by the interest rate. (since your minimum 'Rate of Return' would be to repay the cost of borrowing money to pay for it). Which is about 8% (for any long term projection) so you would earn $20k in rent, divide it by 8% you got a Net Present Value of $250k. So if you were borrowing at 8% for a house that earns $20k you would be rational in your investment if the price tag was $250,000 or less.

A simpler way is to just take a small period like 1 months rental yeild minus 1 months mortgage costs (revenue - cost of ownership) so you make $1,550 repayment per month you need to earn at least $1,550 rent per month to be an investor (because investments earn money).

Actually you wouldn't be an investor, you would be an idiot, because you could put the same money in a government bond and earn at least 3-4% so you need to earn at least 5-7% in rent above your mortgage repayments. That is investment, that is the only way property can be an investment.

Now for the second method, the one people use. To put it simply the price of a house is however much a bank is willing to lend you. Not you specifically but people in general. If the banks are tight with the loans, then housing prices will be tight. If they are all loose then house prices will rise. Why? I don't know, because people are morons or something.

People generally speaking don't look at the rents, they just need for some reason to own a house whether it mkes fiscal sense or not. You will also note that in the aforementioned section on the rational way to determine prices, I didn't mention 'Capital Appreciation' once.

Because unless you are Enron, there is no reason for the price to increase unless the rents increase correspondingly, which would require a wage increase also. So it stands to reason that Capital Appreciation is irrelevant.

If a house can earn as much money as it did last year then it has the same value, why would somebody pay more for the same value, it's just going to eat into the slender profit margins rent already has.

Unlss, you are of course Enron, then you may forecast future earnings. You may anticipate some flimsy reason for rents to go up (which would be just plain crazy right now) such as 'population increase' (The ABS shows that for every new person in Australia between 2001-2006 there was a new dwelling built for every 1.6 new people. In a country that has an average occupancy of 2.4 people per dwelling. Vis-a-vis population growth isn't sustaining housing prices and almost never does). or 'supply shortage' (15.6% increase in the number of unoccupied dwellings between 2001-2006) whatever the bullshit reason, you anticipate some increased future worth of the property then simply 'accelerate' it Enron style into todays prices.

For example a 2 bedroom house in Brunswick (where one can rent a room for $120 per week still) is priceat $450,000 almost double its Net Present Value, the only explanation being that the banks are willing to lend at low interest rates 95% of the value of the home to just about any douchewad still.

The douchewad is buying simply because they anticipate some price increase. They don't know why, just that it always does. In this case the person would be paying about $3g in mortgage repayments per month whilst making (even with the expensive rent of $200 per room per week) would be making only $1700 a month.

In other words the banks get all the actual income from the house, and then they get some of your wages as well. What do you get? You get the capital appreciation.

If I sold you my consulting business and informed you it lost $1300 a month, would you buy it for $450k? Yes, absolutely yes! you would say because if you pay $450k for it today, imagine what it will be worth when it starts making money.

Just admit it motherfucker, you can't explain why house prices go up. You just know they do. House prices went up when they announced the extention and expansion of the federal 'First Home Buyers Grant' money home buyers never see a cent of, as it goes straight to the home seller and is absorbed instantly in the price. Not just that but prices increased more than the amount of the grant resulting in a net loss for the buyer due to its stimulus effect on demand.

Its a clear example of the principle 'A house is worth as much as the banks are willing to lend' because any amount of money made available to purchase houses just gets absorbed in higher prices.

And then you have to stand back and look at the 'real' economy. Think of it as you will as looking at Enrons real earnings. Whilst houses are appreciating in price at ever increasing velocity, jobs aren't getting any better, in Australia they are getting worse, no money is leant for production or capital investment. Companies have to do this themselves from retained earnings or share offers, the economy is increasingly concentrated on the resources sector, manufacturing is dissappearing (a value adding activity) there is no investment in R&D, the best graduates are persuing job opportunities overseas. House prices are increasing faster than rent (just like Enrons share prices increased faster than its actual earnings) and rent is increasing faster than wages, and taxation will increase on wages at some point to pay for the debt driven economy (like stimulus packages), so why, oh why the fuck do house prices keep increasing when there is almost no hope that they will increase in actual value rendered to the real economy.

The banks earn all the rental income, and set the asset prices. So basically you are fucked. Even if you sell your house for a profit, you will have to live somewhere again. And when you buy in to the market at this astronomic high (most housing is 'unaffordable' by the definition of mortgage repayments costing no more than 30% of household take home income).

You are buying anticipating an unsubstantiated future gain. You are buying Enron when you buy a house in this country.