‘Conventional wisdom’ is perhaps one of the biggest threats to, well, anything.
It’s the lazy-man’s or lazy-woman’s argument.
“Everyone knows house prices always go up.”
“Gold is a hedge against inflation.”
“There’s a housing shortage.”
“The money from Super funds will ensure share prices always go up.”
Or even the best one we’ve heard and laughed at lately is, “Housing is a hedge against inflation.”
Some of the above may have a hint of truth, some may have no truth at all. Some of them may even be understatements, such as the gold/inflation point.
Is gold really a hedge against inflation? Actually, over the last forty years it’s performed better than a hedge.
In the old days, hedging meant that you created a neutral position in the market. You would neither gain nor lose. Then hedge funds appeared and all of a sudden ‘hedging’ came to mean taking high risks in anything you like.
And as for gold, if you owned a few ounces forty years ago then you’ve done much better than if you had just held cash in the bank. Does that mean gold is trading ‘above the mean’ and could be set for a correction?
We’ll look at that in more detail another time.
But today we wanted to look at something else. On the subject of conventional wisdom we’ve already kicked one goal from 60 metres right on the siren, by showing that the ‘housing shortage’ claim is a sham.
Actually, I think I called it a ‘lie.’
Which it is.
Anyway, we’ve probably all had quite enough of that debate for now. Although looking at the Money Morning website it seems as though the arguments have continued on and on.
One of the claims made against your editor is that if we say something often enough it will happen eventually. Maybe in 10, 20 or 300 years house prices could fall and then we can rise from the grave and say, “I told you so” and only then rest in peace.
We’ve also received a number of emails asking us what we believe the catalyst will be for the housing collapse that we are so confident of. Just as it’s difficult to predict the exact timing, it’s almost as difficult to predict what will cause it.
But we can look at one possible scenario…
Late yesterday evening after the rest of the Sayce family was tucked up in bed, your editor discretely shuffled off to the home office to crank up the computer.
Ensuring that no-one was looking and the door was locked we starting typing out the address of a website we know we shouldn’t be caught looking at.
The website was…
If you recall, that’s our favourite Department of Families, Housing, Community Services and Indigenous Affairs website. They’re the mugs responsible for the National Housing Supply Council State of Supply Report.
Now before you let out a groan about Sayce banging on about the housing market again, we’ll just say this. We won’t even tackle the subject of a price crash or supply shortage or increased demand.
Or I’ll try not to anyway!
Because that’s not what I’m looking at today. Instead I’m looking at other information in the report which like the ‘homeless people’ stats, seems to have been missed by the mainstream press and everyone else.
Of course I could be wrong on that score. Maybe it’s just me that’s never seen these numbers quoted anywhere.
So if you are familiar with these details already you’re more than welcome to call me out on it by posting a message to the website later on today.
One of the first things to strike your editor as we scanned through the report again was the following chart…
From 1973 to 1988 house prices barely moved according to the Australian Bureau of Statistics (ABS) data.
That, reader is a period of fifteen years with no growth.
Then prices had a little spurt, but again for the following ten years no growth at all.
So if we look at this chart and take the period from 1973 (which is the baseline for the index) to 1998, the gain is about 30% over twenty-five years.
That’s an average return of around 0.73% per annum.
But then 1998 comes round and boom! The market goes berserk. In two years the housing index rises more than it has done in the previous twenty-five years.
But it doesn’t stop there. By 2003 the housing index is almost double the level of five years previously, and by 2008 the housing index has increased by 150% from the level of 1973.
What changed in 1998? Why should house prices have taken off so quickly after being stagnant for nearly three decades?
As you’ll probably be aware, your editor does not have a PhD in property and being a ‘shares man’ we clearly don’t understand the machinations of the property market. Therefore we just have to rely on common sense and those that do understand it.
For that – not the common sense part – we turn back to the National Housing Supply Council State of Supply Report. They, reader, are the experts.
Anyway, to your humble and non-PhD qualified editor, another chart and a table caught our eye in the report. I’ll reproduce both of them below for you.
The first is titled, “Tenure and landlord type of occupied private dwellings.” It breaks down all occupied dwellings into ‘Fully Owned’ and ‘Being Purchased.’ Plus it has a separate segment for types of rental accommodation:
The numbers are small, so you can click here to go to the online version.
And while we’re at it, here’s the other chart I mentioned:
This one shows the “Median first home price” as the blue line against the right hand scale.
As you can see from the line, the median home price for first home buyers was around $150,000 in 1996, yet it had climbed to over $400,000 by 2008.
That’s more than double and is roughly in line with the housing index shown above.
But let’s just go back to the table above. This was the most interesting statistic I found. As I mentioned, this could be something you’re already familiar with so forgive me for being a slowcoach if it is.
Just to make it more readable I’ve done a quick cut and paste job on the table. But you can click on the link above for the full version.
The statistic that interested us the most was the “Fully owned” and “Being purchased” percentage figure…
As you’ll notice, within the space of ten years, the number of fully owned homes has fallen from 42.5% in 1996 to 35.1% in 2006. Consequently, the number of “Being purchased” homes has risen from 26.5% to 34.7% during the same time.
The real drop in “Fully owned” homes occurred between 2001 and 2006.
But what can explain the sudden surge? Is it a massive increase in immigration and a shortage of housing as claimed by the property spruikers?
Well, coincidentally, the period between 2001 and 2006 was a time of low interest rates and cheap money. And the period just prior to that could – and we could be wrong – be classified as the beginning of the property spruiking bubble.
Does the name Henry Kaye spring to mind?
And what about all the upgraders? After thirty years of your house value standing still, suddenly the price has nearly doubled. Here’s the chance to get out of the home that you raised the kids in, increase the mortgage and buy something bigger.
So what if it’s taken you thirty years to pay off the mortgage, if housing prices double again, in just five years you’ll have paid off this new mortgage in one-sixth of the time and you can upgrade to an even bigger house.
It’s money for old rope.
If you managed to get in at the right time, then as with all leverage, you’ve compounded your return nicely. Keep doing it and you’ll be a millionaire before you know it.
Gee whizz, if only it was as easy as that.
Looking at the table again, it makes something of a mockery of the claim that most Australians don’t have a mortgage. If we trust the stats from the ABS then half of owner-occupiers have a mortgage of some sort.
Does that necessarily make them potential panic sellers? No, of course not. But it does mean that the number of people indebted on their home is greater than conventional wisdom tells us.
But there’s also the other third of housing. That which is for investment. The arguments from the spruikers here is contradictory. On the one hand they tell us they don’t care about capital gains, on the other they tell us the income doesn’t matter, it’s the gains that count.
Well, we don’t know what to believe, so we’ll just go on the tax effective basis that means negatively gearing a property is advantageous from a tax basis. It means you can run the property at a loss and get a tax offset.
Of course that means you need capital growth otherwise there’s no point in the investment.
A report in The Age earlier this week suggested Australian property investors claimed a total of $5.6 billion in losses on property.
Look, I’m no PhD student, but making a loss on an investment doesn’t make sense to a ‘shares man.’ Obviously property is ‘different.’ Losses are good in property investment and profits are bad. Is that how it works?
Anyway, we’re just asking the questions here. I’m sure, based on all the comments we’ve received on the Money Morning website, the spruikers can easily explain how it all works.
And we’re sure they’ll explain that the recent splurging of cheap money and free money onto first home buyers is a benefit to the Australian housing market.
We aren’t so sure. With half of all owner-occupier homes “Being purchased” and doubtless the majority of investment properties also “Being purchased”, it will only take a small increase in the number of properties going on the market for it to have an impact on median house prices.
And we’re also not convinced by the property bulls who claim they hope prices will fall so they can pick up a bargain. What are they going to use to buy the cheap houses with? Cash? We doubt it.
Most property investors are leveraged up to the eyeballs. Their only source of ‘cash’ is the paper ‘equity’ in their existing properties. Equity that will soon vanish as prices slump. Even the credit crazy banks will be reluctant to lend more money going into a falling market.
And upgraders won’t have much luck either. If they fancy upgrading to a new cheaper bigger house, who’s going to buy their existing house? That’s going to have to fall in value to reflect the fall in price of the bigger houses.
But what do we know? We’re just a ‘shares man.’
Your comments are welcome.
Other Stuff on the Markets
The S&P/ASX200 slipped 1.41% yesterday, while overnight on Wall Street the Dow Jones Industrial Average added 21 points. In Europe the FTSE100 gained 0.15% and the CAC40 dropped 0.11%.
The price of gold in Australian dollars is trading at $1,161.60, while in US Dollars it is trading at $1,000.48. And the price of silver in Aussie dollars is $19.23 and in US Dollars it is $16.57.
The Aussie dollar remained steady versus the US dollar and Japanese Yen, trading at USD$0.8616, and JPY78.30.
Crude oil closed overnight at USD$68.69.
For the biggest movers on the market yesterday click here…
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There is a point where the ponzied nature of Australia’s property industry becomes clear for everyone to see…when we start scrambling for people’s Super, then we have we would reached that point and alarm bells will be ringing.
A politician that precedes over falling house prices is in for some trouble at the poll, but a politician that precedes over falling house prices and collapsing Super for all those soon-to-be-retirees is in for some minor civil unrest…even the biggest property bull wouldnt want to have all their eggs i one basket.
I also think thatrelying on internationally financed new fools to enter the housing ponzi scheme is optimistic. These guys arent willing to throw their money at an investment class that has seen massive gaines over such a long period of time…they realise they missed the boat and they dont want to be getting onto that boat when it is sitting still or sinking fast.
As Mick so clearly pointed out, the price of houses in Oz has been caused by an increase of $’s that have been spent on Australian houses in the past two decades. Unless there are 100′s of billions of dollars ready to be invested in over-priced houses, then the Australian property industry is out of luck and the most-overdue correction in the history of asset bubbles is just around the corner
It could be PuntPal, it could be. Banksters have certainly tightened their lending and only want to lend to people, it seems, who don’t really need to borrow. Many are called and very very few are chosen. I know this from current experience. So, this one certainly would point in that direction.
As for the other question, of whether they will lend with happy abandon to SMSFs, the jury is still out on it. There is some lending going on, but probably not at a rate that yet that would make much difference. But if they are willing, there will have takers, I would expect. After all, if you look for decent returns at manageable risk, property will appeal to many SMSFs where the boomer generation will be dominant. The assumption here is that many of these people ARE in cash, and will be looking to invest so as to generate a better return than they will be getting on Cash Deposits.
As for the carry trade finding its way into property here, again, this will be dependent on whether lenders will be willing to channel cheap money into property. This is not easy to tell, given the rotten state of mind they adopted for now, but that there will be willing borrowers, I would think so, given just what I have seen on tonight’s 4 Corners program on the ABC. According to that program, and I would not think that the ABC’s 4 Corners would shill and sensationalise for property spruikers, decent rental housing is in incredible short supply, and a lot of families with kids, are forced to live in temporary motel accommodation for moths on end, with no end in sight.
It was very distressing even to watch, but the program seems to be once a confirmation that not enough suitable housing is being built, and with finance having been so difficult to get over the past couple of years, things could get much worse before they start getting better.
And finally, even if I am wrong on all those points about new money flowing into property, and even if you are right that people will not be dumb enough to borrow, it still does not follow that we will have a price crash. As I have argued in more detail before, we are more likely to see volume drying up. Unless current owners are forced to sell, through massive job losses, or big jumps in interest rates, or both, then current owners will simply hang on and stay put. Why would anyone sell their property at a loss, if they were not absolutely forced out and thrown out, especially at a time when rental supply is already tight? It just won’t happen that easily.
And even if there is great suffering from job losses and high rates, and all that, guess who will be likely to ride to the rescue? You guessed it, the Ruddfather will be in the front lines, especially coming up for election, and chances are that his banker buddies will oblige with payment amnesties and what have you, to help people stay in their homes. The moving parts are just way too many, PuntPal, for me to feel confident in either direction.
To be sure, the road ahead will not be easy for most of us. Volatility and uncertainty will take their toll, not to mention an overall reduction in the purchasing power of our labour and incomes, which will continue relentlessly with our factories and production lines increasingly being manned by a workforce that costs a fraction of our wages. So, the picture going forward is not pretty, but whether crashing property prices will be part of it in the near term or not, I don’t think we can reliably tell at this point. But I don’t think you will be persuaded by these arguments, somehow, which is fine. Someone has to keep the fires going on the other side, too.
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