Your editor isn’t immune from making the odd error. Yesterday we made a corker. We’d like to blame it on the editor. So we will. But that means we have to blame our self.
As several on-the-ball Money Morning readers pointed out via the Money Morning mailbag (moneymorning@moneymorning.com.au), yesterday we tried to explain that a big wad of cash thrown at the private sector didn’t necessarily equal a big pay-day for private sector companies.
And it also didn’t mean a sustainable boost to the share price either. Your editor drew on the example of CSR, which had risen by 10% immediately following the announcement of the $42 billion government stimulus package in February. However, since then the share price had fallen by nearly 50% before a modest recovery.
It is still trading significantly below the before-stimulus (BS) price.
However, your editor’s error was to type ‘CSL’ instead of ‘CSR.’ Not once, not twice, but three times. As one Money Morning reader pointed out:
“I can see very little relevance between housing insulation and a medical company.”
Neither can we. We made a typo.
If we could be so bold to say – it was a clear case of not knowing our Rs from our L-bows. Lesson learned, we won’t do it again.
In true Orwellian fashion we’ll soon erase all evidence of our mistake from the online version.
The Property Crash Yet to Come
But to other matters. Namely the subject on everyone’s mind – property. For many it is a passionate subject. No one likes to think that the very home they live in is worth less than it was twelve months ago. Or even perhaps, less than the price they paid for it.
The reality is, for many owner-occupiers or borrower-occupiers, whether the value of their home rises or falls in price shouldn’t matter. Providing they can continue to make the mortgage repayments, and they don’t plan on moving home then it shouldn’t make a difference.
The problem is that according to the stats provided by property spruikers, RPData, about 2% of Australia’s housing stock is on the market to be sold at any one time. That may not seem like much, but the important aspect is that it means only a small increase in the numbers of houses on the market could have a proportionally much larger impact on the prices buyers are willing to pay.
You see, it isn’t just the number of sellers. It is the type of seller as well. And what we are likely to see over the next twelve months is an increase in the number of distressed sellers.
Especially if as even mainstream economists and the government are predicting, the unemployment rate rises to over 7%.
But guess what. There’s even a scenario where prices could fall even if there is a drop in housing supply. We constantly hear from property spruikers that Australia has a “chronic housing shortage,” therefore house prices can never fall.
For a start that’s not true. Houses do not have a special immunity from declining prices. While supply and demand is always important, it shouldn’t be forgotten that supply and demand are also impacted by the price a buyer is prepared to pay and a seller is prepared to receive.
But, let’s play the property spruikers game and assume that the supply of housing on the market remains at a “chronically short” level.
So, how could the scenario of falling supply work out? The obvious starting point is that demand will fall as well. That will have an effect of at least not pushing house prices higher.
But the second effect is that distressed sellers are less likely to be immediate buyers for another property. That is especially the case if they have taken out little or no equity from the property they are selling. And if they had qualified for the first home buyers grant last time, well, they obviously won’t this time.
Secondly, those home owners who do feel secure in their jobs and believe they can continue to meet mortgage repayments, are less likely to put their houses on the market. That’s because they may feel less confident in getting the price they believe they deserve, and secondly with fewer properties on the market it would create less choice.
In that scenario, even though the supply has remained constant, or even fallen, the type of seller has changed. The number of distressed sellers as a percentage of all sellers has increased and therefore the price they are prepared to accept will fall.
But that all seems a bit too orderly. A bit too clinical. Crashes, slumps and bumps are usually much harder than that. That’s why before we get to the ‘orderly’ phase described above we are likely to see something much worse.
And if we take note of the research from Australian Property Monitors, the signs are that the property slump has already started.
There has been anecdotal evidence around for some time that a price crash has already occurred in the high end property sector. Again, the property spruikers claimed this couldn’t possibly flow through to the mid and lower levels.
So far, we’d say they are probably right. For now at least. But there is only reason why the slump hasn’t filtered through. It’s entirely due to the increased first home buyer subsidy. Once this artificial aid to demand is removed from the market, house prices will fall by up to $30,000.
On a $300,000 house that’s a big chunk. And if you add on the other costs such as stamp duty, a first homebuyer could be out of pocket by over $40,000 before they’ve even moved in.
But it could get even worse than that, because following the sudden drop in demand, plus an increase in distressed sellers, it will have a further negative effect on prices.
So what does the research from Australian Property Monitors tell you? Simply this, that Sydney house prices at auction fell from $786,682 in the first quarter of 2008, to $616,237 in the first quarter of 2009.
That’s a fall of over 21%. More importantly it’s a much bigger fall than the 3% drop many mainstream analysts have predicted.
It wasn’t much better elsewhere. In Melbourne prices fell from an average of $513,304 last year to just $476,677 this year. That’s a drop of over 7%.
“But” you ask “doesn’t that mean the crash has already happened? Surely it’s time to pick up a bargain.”
No. Far from it. In fact it’s more likely to be evidence supporting the claim of a slump in the high-end housing market. Prices have been slashed or properties are withdrawn from sale.
At the mid and low levels – where most of the volume is – prices are still being artificially supported. And the ones that will feel the greatest pain are the first home buyers that are being conned into buying property now.
Other Stuff on the Markets
The Dow Jones Industrial Average gave back 2% overnight. The market was apparently ‘surprised’ by lower retail spending numbers. We can only think that the ‘market’ has no concept of what impact a recession and job losses has on people’s ability to spend money.
The BrisConnections debacle threw up (probably an appropriate phrase) more headlines yesterday as troublemaking investor Nicholas Bolton sold his votes to Leighton Holdings subsidiary Thiess-John Holland for $4.5 million.
Comments on this entry are closed.