Today your editor planned on tackling superannuation, but two things have happened to delay our coverage until tomorrow. First is the release of the HIA/Commonwealth Bank Housing Affordability index, which I’ll get to in a moment…
And second is due to the number of emails we’ve received on the subject of super over the last couple of days.
When we cover super tomorrow, we’ll draw in other tax-efficient investments. Most of the emails we’ve received from financial planners and accountants have lauded the wonderful tax efficiency of superannuation – which is true. However, it did bring back memories of the first thing your editor ever learned about investing…
More on that tomorrow.
Whenever we think we’ve missed something, or are getting confused, we down tools and go back to basics. It’s not necessarily that we think we’re wrong, it’s just that sometimes when we read the mainstream press and commentators we can hardly believe what they are saying and writing.
When I write that I “go back to basics” it usually means paying a visit to the section in the economics text books marked “Supply & Demand.”
We find that usually settles things once and for all.
It was the following headline yesterday that caused us to down tools:
House prices down to 2002 levels
The opening line from the article states, “It’s the best time in seven years for first home buyers to get into the property market.”
The article continues with, “A combination of static house prices and low interest rates have improved housing prices, according to the Housing Industry Association-Commonwealth Bank housing affordability index. The index for first home buyers rose 22.3 index points in the March quarter to 175.8 points.”
This is being labeled as a positive sign. Today’s Australian Financial Review (AFR) follows suit with, “Home affordability the best in years.”
However, in their excitement to proclaim a new bull market for housing they’ve clearly glossed over an important aspect of the survey results…
Housing hasn’t become more affordable because house prices have dropped, it has become more affordable because prices are still being artificially inflated – low interest rates and the first home buyers bribe.
The claim that “it’s the best time in seven years for first home buyers to get into the property market” is completely wrong. It’s the worst time.
What this survey clearly shows is something that we’ve argued all along. That if it wasn’t for dangerously low interest rates and government bribes, the housing market would already have collapsed. The fact that it hasn’t yet, merely means the pain is being delayed.
And as more and more people are induced into getting into the market while prices are still at or near the peak, the end result will be worse.
As the AFR article notes, “Housing minister Tanya Plibersek announced… the total number of first-home buyers around Australia was up more than 30 per cent between February and March, increasing from 12,664 to 17,265.”
Even the HIA’s own comments point towards a crash in the housing market – although of course, they think they’re being bullish.
HIA chief executive Chris Lamont had this to say, “In the foreseeable future this is about as good as it’s going to get with the incentives and the low interest rates… with demand being the way it is together with the housing shortage, we’re forecasting an upward trend in interest rates and downward trend in affordability in 2010.”
So what the HIA is trying to tell you is that once interest rates rise and the incentives stop, house prices will rise.
We could be wrong, but surely the opposite is the case – no bribe and a higher cost of money will lead to lower prices and more “affordable” housing. Only houses will be more affordable based on the price rather than the cost of money.
Then there’s the old chestnut about the housing shortage. It’s the one constant in all the arguments put forward by the housing bulls – the “chronic” housing shortage means house prices can never fall.
Of course, this argument is complete nonsense, as it only factors in one element out of supply, demand and price. It’s also an unsustainable argument because it suggests that regardless of the price of housing, the “chronic” housing shortage will mean there will always be enough potential buyers who are prepared to buy – whatever the price.
If we take that argument to the extreme, every home owner and real estate agent could put their heads together and agree to not sell homes for less than $5 million? If we accept the logic of the HIA and others, the “chronic” housing shortage would mean there is still demand for housing at this price.
If the HIA agree that’s a ridiculous concept then they must agree that price and demand are equally important when determining a price.
And as for demand, the HIA are severely underestimating the impact of the first home-buyers bribe. Especially the misguided belief that things will return to “normal” when the bribe is removed.
So while we’re drawing on examples, perhaps the following illustration best explains the huge impact of the bribe, and how it cannot possibly be argued that it hasn’t had an influence on prices…
Imagine a housing auction where two couples (A and B) are bidding for the same property. Unknown to each other, couple A is able to bid until the price reaches $300,000 and couple B is able to bid until the price reaches $301,000.
As the auction progresses, bids are raised until couple B places the bid of $301,000. Couple B should be the winner of the auction.
However, at that point couple A is approached by a mystery benefactor offering to give them a voucher for $14,000. However, this voucher can only be used against the purchase of a house and cannot be exchanged for cash.
Suddenly, couple A is given a lifeline, they can now bid $302,000 for the house and win the auction.
Little does couple A realize, but the mystery benefactor now approaches couple B and makes them the same offer. They too have been given a lifeline and can bid higher…
What happens next?
Naturally, couple A is able to bid to a maximum of $314,000, while couple B is able to outbid them at $315,000.
Can there be any argument to suggest that the first home buyers bribe hasn’t had an influence on the price the bidders can bid to and therefore on the price paid? No.
If we extend the example further to early 2010, when the bribe is no longer available to buyers. And if we assume that couple B is now a distressed seller due to the rising interest rates predicted by the HIA…
Couple A returns to bid against new couple C, but because there is no mystery benefactor handing out vouchers, the maximum they can bid is $300,000 and $301,000 respectively.
Couple B is forced to sell at a loss.
We’ve stated before that we’re happy to be proved wrong on the emerging property bubble. But every argument put forward by the property bulls does not stand up to scrutiny.
The examples used above may be extreme, but it merely highlights the distorting effect of low interest rates, government subsidies, and the fallacy of a housing shortage that will supposedly assure ever higher house prices.
Other Stuff on the Markets
The S&P/ASX200 closed down 1% yesterday but should head higher today following a 3% rise in US markets. Overnight the Dow Jones Industrial Average added 235 points and the FTSE100 gained 2.3%.
The price of gold in Australian dollars eased back to $1,200, while in US Dollars it has slipped to USD$918.
The Aussie dollar this morning trades at USD$0.7650 and JPY73.69.
Crude oil traded to close in New York at USD$59.04.
For the biggest movers on the market yesterday click here…
And today on the economic calendar we have the release of the Reserve Bank of Australia board minutes, while in the US more housing data is released.
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