As our Swarm Trading French technical analyst Gabriel Andre might say, “Sacre bleu!”
NineMSN Money yesterday quoted statistics from RP Data (commissioned for the Commonwealth Bank) which shows there are 74 suburbs in Australia where it is cheaper to buy a house with a mortgage rather than renting.
NineMSN Money claims that “With conditions favouring buyers, now could be the time to get into the market.”
Pardon us for being contrarian, but our initial reaction is – only 74 suburbs!
Rather than this indicating that now is the time to be buying property, it is probably telling us that now IS NOT the time to buy property. How so?
Before I get into the nuts and bolts, let’s not forget who commissioned and who undertook the research.
It is without doubt in the interest of the Commonwealth Bank to get more people buying houses. Because don’t forget, if the property market completely slumps then they are left with a massive book of bad loans.
As for RP Data, you may remember us mentioning them several months ago in Money Morning. They were pushing for the ASX to establish a house price derivative that could be traded on the ASX. The idea would be so people could ‘hedge’ the value of their house against the price falling.
In other words, both of these firms have a vested interest in keeping the property market propped up.
Anyway, now you’ve got the background, here’s the nitty-gritty. Based on the gist of the story, it is telling us that you can now save up a deposit and buy a house that will have monthly mortgage repayments less than paying rent.
By extension it is also saying that you could save, buy and then rent out the house to a tenant and have an income stream that is greater than the mortgage costs.
The fact that this is being trumpeted as a perfect time to buy rather than rent tells us a couple of things.
First let’s look at it from the home occupier’s perspective. People that are renting rather than buying, do so because of two reasons. One reason is because they choose to rent rather than buy, therefore the stats from CBA and RP Data will have little impact on them.
The other reason is because they cannot afford to buy. Maybe they haven’t saved enough deposit, or their income isn’t high enough, or property prices are just too high. Does this ring any bells?
It wasn’t so long ago that you couldn’t turn on the radio or TV without seeing an ad from Leigh Matthews and Devine Homes telling you that you didn’t need a deposit because of the first homebuyers grant, or that they would pay your rent while you saved the deposit – of course the rent payment was just added to the loan for the house.
It seems as though no sooner is the current housing slump only half over than the banks are getting up to their old tricks by getting as many people to buy houses and take out mortgages as possible. Only this time of course, they’ve got the government guarantee underwriting it.
Secondly, there’s the landlord’s perspective. Should it really be such a shock that a mortgage should cost less than renting? Shouldn’t rent naturally be higher than home loan repayments? It makes sense to us for a few reasons.
First of all, when you buy a house you take on a whole bunch of responsibilities – rates, bills, maintenance, etc. This costs money. When you rent a house, you have none – or only a portion – of these responsibilities. If there’s a plumbing fault, you call the landlord, and they pay to fix it.
Therefore, a landlord should at the minimum be charging the tenant for the cost of the mortgage and then charge an additional premium to take into account maintenance costs. Finally, the landlord should charge an additional amount in order to achieve a profit.
Anything less than this and the landlord is losing out.
However, in recent years, the opposite has been the case. Landlords have been charging tenants significantly less rent than the cost of servicing the mortgage. Why? Because of the mantra that “property prices always go up.”
Therefore landlords were happy to cover say, 70%, 80% or 90% of their mortgage cost from the rent in the firm belief that the property value would rise. Then they could sell it, or more likely withdraw equity in order to buy another rental property.
So in reality, the fact that only 74 suburbs in Australia have mortgage costs lower than rental costs doesn’t signify that now is the time to buy at all. It signifies that the price/value of houses in other suburbs have the potential to fall much further, and the prices in the 74 suburbs could fall even further than they already have.
Yesterday we wrote about the almost fanatical devotion to economic growth. The property market is no different with the belief – still – that property prices will always rise.
As we have written before, the protagonists in this – government, banks, industry and pressure groups – have learnt nothing from the over-extension of credit and the asset bubbles. The signs are clear that previous mistakes are already being repeated.
Other Stuff on the Markets
Gold continues to fall after touching USD$1,000 last week. The theory is that momentum traders were piling in helping to push it to that level. Consequently other traders took the opportunity to sell out.
Gold is again starting to look good value. Especially prior to stats being released on higher inflation which can only be a matter of months away.
Macquarie shares soared yesterday. Dead cat bounce? See below what Gabriel has to say…
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