One of our favourite subjects is taking centre stage again. It is, the property bubble.
And it all kicked off yesterday with the release of a report from the self proclaimed “leading provider of industry research, analysis and forecasting services.”
The “leading provider” is BIS Shrapnel. They claim their forecasting is “reliable and clearly explained.”
So, we decided to take a look. And then we had a coronary! $935 for the 120 page-plus report. No thanks. But we’ve sent an email asking for a free copy – you never know, we may strike it lucky.
But as a teaser for what is inside the full “Residential Property Prospects 2009-2012″ report, BIS does offer a brief extract for free. So we looked at that instead.
Even if we were inclined to throw $935 at BIS Shrapnel we’d ask for our money back after reading the one paragraph introduction. It runs as follows:
“Residential property constitutes the major investment for most Australians, and is the largest sector of the property market. With an estimated total value of almost $3,000 billion and comprising around 8.3 million dwellings, it is a market which offers enormous opportunity for both capital appreciation and income generation. While residential property markets are complex, to the informed participant, they are understandable. These markets are affected by many factors, some short-run and some more fundamental.”
I’ve underlined the giveaway line. Is there any chance this report could provide an unbiased view of the property market while talking up the “enormous opportunity” for capital appreciation and income?
But you see, this is exactly where the problem is with the housing market. And it is exactly why this massive $3 trillion market is yet to burst. It seems to your editor that the property spruikers have forgotten one key thing about the residential property market…
A house is for living in. I know it’s a controversial view. And it may ruffle a few feathers. But the number one purpose for a house is that it’s a dwelling. It’s a roof over your head.
It is not to be viewed as an investment where the price always rises. In fact, when you factor in inflation is there even any really evidence that housing provides an investment for retirement? We’ll raise our had here to say we don’t know yet because we haven’t researched it.
But just as a quick digression, there is the idea that you pay off your big house, live in it for twenty or thirty years, sell it for a packet and then downsize to something much cheaper and ‘voila!’ you get to live the life of riley on the rest of the cash.
Does it really work that way? Maybe if you’ve just done that you can send an email to the Money Morning Mailbag – moneymorning@moneymorning.com.au. Only, our initial thought (that we’ve just thought in the last two minutes of typing this) is that by the time your ‘old’ house has depreciated it is now worth not much more than the land or redevelopment value, yet typically even if you downsize you will be moving into a much newer home that is fully valued.
How much of a premium is there for an older 4 bedroom house compared to say, a brand new 2 bedroom townhouse?
Anyway, it’s just a thought. Absent any replies to the Money Morning mailbag we’ll do some digging around to see what we can come up with. Who knows, we may be wrong. But we’ll make a guess that there will be cash left over but probably not as much as the property spruikers would have you believe.
Back to the BIS Residential Property report. According to the press release which is headlined “BIS Shrapnel forecasts a sustained recovery in residential property markets – First-home buyers leading the way.”
Before I go into more detail, you may like to read the full press release here. I’m convinced that even if you didn’t believe there was a property bubble, after reading the press release you’ll at least start to have some doubts.
The statement claims:
“After years of rising interest rates from 2003 to 2008, first-home buyers are now in a good position to enter the property market. Those young adults who have been living at home and accumulating the savings now required by lenders are particularly well positioned.”
We are sure those that lived at home and saved are well positioned. But we have to seriously question how reliable it is to make that assumption. We are sure there are many, many more that have been renting and who are fed up of “paying someone else’s mortgage” and so decided to grab the first home buyers grant and get stuck into the housing market.
The recent figures from the Australian Bureau of Statistics do indeed show “First-home buyers leading the way,” which the FHBs taking out an average loan of $283,400 compared to the average for all housing buyers of $264,700.
That’s almost exactly the amount of the FHB bribe. But don’t forget that figure for all housing would be even lower if it didn’t include the inflated FHBs, which now account for a staggering 27% of all monthly loans.
We can’t believe there can still be people around that deny the FHB bribe hasn’t distorted the housing market. It’s as plain as day.
Amazingly, BIS Shrapnel, “expects the current heat in demand for property in the most affordable suburbs will generate green shoots of recovery in residential property prices during 2009/10.”
They argue – and they are the leading experts – the current roaring market from first home buyers is actually a good thing. It’s not a bubble at all. Prices may have only fallen by 3% or so over the past year, but that it seems is as low as it’s going to go.
They say “NOW is the time to buy a house.” It sounds just like all the brokers who were still tipping their clients’ money into the stockmarket just before the dot-com bubble burst.
How can there be ‘green shoots’ of recovery in the housing market when it hasn’t fallen yet?
But that’s not all. Yes, there is more…
Yesterday’s The Age reminded us of the upcoming perfect storm for FHBs. It came from a quote by the Housing Industry Association’s Victoria Executive Director Gil King when he said:
“HIA believes that the number of first home buyers purchasing new homes will continue to soar to record levels between July 1 and September 30, where the combined federal and state grant increases to an unprecedented $32,000 for a new home in metropolitan Melbourne and $36,500 for a new home in regional Victoria.”
Got that? In regional Victoria you’re friendly neighbourhood government will give you $36,500 to buy a home. Of course we’ll be told officially that buyers will still need to show proof of savings. Really? Do you reckon any bank is going to turn down the opportunity to stuff their loan book with new debt? Banks live by it. They are in too deep to abandon the housing market now.
They know that as soon as they pull the pin on the housing market it will crash down around their ankles. But don’t forget, all they can do is postpone it. They can’t stop the crash from happening.
As for all special interest groups, the HIA shows it’s true colours with this statement from Mr. King:
“The increased grants have been crucial for the survival of our industry, for aspiring first home owners and for boosting much-needed housing supply,”
Yep, there you have it. What does the HIA care about creating a housing bubble and encouraging first home buyers to leap in with hundreds of thousands of dollars of debt just at the time the market is peaking.
We’ll have more on this and the dire consequences it will have for regional Victoria over the next few days.
Kris Sayce
for Money Morning Australia
{ 1 comment… read it below or add one }
Dear Kris, what to do, what to do!!
We are a family of five that are stuck in the crappy rental system because we missed the original property boom whilst we were living in the UK. When we tried to get on to the property market, we realised that we would be overextending ourselves financially for a ‘home’ that, at the bottom of the property market, would actually be a two bedroom flat or something similarly inappropriate for a young family. This was back in 2004.
So, with the ever tempting $36,500 (Victorian) government grant we are considering making some compromises (live rurally) in order to create stability (a family home). Due to circumstances, our little family has moved on average every 6.5 months over the past 3.5 years. So stability is something we desperately want.
**
And here is the dilemma. Can you please explain to a ‘’currently full time mother aka bog standard housewife’’ why holding off on buying would be a good idea if you say there is a chance of inflation? Wouldn’t this mean higher interest rates leading to higher rental prices and a bigger demand for rentals (increased foreclosures from rate increases, plus increased unemployment)? With inflation and higher interest rates, surely we would not be able to afford entering on to the property market, even with housing prices adjusted via a property bubble bursting?
Or do we take a risk, get a 5 year fixed mortgage, ask for $36,500 from the government and live rurally (because at least then we are paying as much in mortgage as we would be renting cheaply in the city). I admit there are downsides to this idea. Living rurally could mean our children end up with 2 heads instead of one (forgive me, but I’m a city girl and am a little hesitant about this aspect of rural living). Also, we would not have a husband/father for three nights a week – so to reduce the commute to Melbourne as much as possible. But we would have our own home…and we are not so sure given the current economic climate that we’ll be in the market for our own home for another 3-4 years, even with the bubble bursting….
We’d appreciate your thoughts.
Kind regards, Mother McDade.