‘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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Well it’s a shame that it’s come to this. I thought both cb and N have provided excellent arguments (and poetry) to this blog. You are both obviously very intelligent people.
I have to admit that I happened upon this site whilst in a bearish mode with regard to property (spent far too much time on Keen’s blog) but after reading a lot of cb’s arguments I’m no longer here no there. Anything could happen, and I think that is essentially the thrust of cb’s argument. I just don’t think that anyone can know for sure.
One mustn’t overlook the fact that our current government is riding the wave of very high approval ratings. They propped up the market once so what’s to stop them doing it again? How much more can they get away with before losing favour with the general public? I would guess a lot more.
I have to say again though that it really is great to be able to find intelligent discussions such as yours. It really is difficult trying to “stay awake” with all the crap out there in the MSM. Where on earth do you guys go to learn and expand your knowledge in such matters??? Can you recommend any decent resources or other blogs etc?
abc – Try the other side of this argument, Chris Joyes blog at http://www.businessspectator.com.au/bs.nsf/fmISBlogHome?OpenForm&is=Property&blog=Concrete%20Detail
or the Australian Property Forum at http://tinyurl.com/oz-property
You could also look at GHPC but they are a very negative lot there and you have to pay a membership. It’s a bit ugly there really.
Best of Luck
Mod – You cannot be serious.
latest update on 3aw bout 1.30 pm……
all the cashed up chinese are buying the aust property up
quicker than u can cook microwave prawn crackers
lol etch
spot on, atomitron. the fact is that the parasite class lives off the back of the people who actually produce things, grow food, build road and buildings, cars, fridges, washing machines, and what have you.
Another is that, in spite of this, the privileged would through any of us under the bus quicker than you could ask “What have I done?”, if and when it so suited them. A semblance of democracy that we still have left, our votes, even as they are manipulated through mass media, keeps them somewhat in check through the political process, and to an extent that their interests are aligned with ours. All the same, we forget at our peril that a parasite is not going to give up on its host, until it finds a better one. Geezzzzzz, what a morbid view that is. I am getting myself depressed.
abc, thank you so kindly for your benevolent and soothing comments. Understandably, perhaps, the topic of property prices is an emotive one, and there is nothing wrong with that. Emotion is one of the essential elements that make us fully human. Alas, in the heat of the debate, we occasionally slip up and let go of good manners, which itself is very human, as none of us are perfect, or at least that is what conventional wisdom says.
And may I especially compliment you for spelling out my overall position on the question of property prices? It was slowly driving me to distraction that in spite of continuous protestations I was being cast as being a property bull, who believes that prices can only go up, or worse, that I was trying to sell something, or that somehow I was only talking my own book. In response to these allegations I decided to self-disclose a few things about myself, but that proved even more counterproductive, as it only gave more fodder for name calling and snide comments. Anyhow, …. thanks again for taking care to actually read and think about the points I tried to bring to this audience’s attention.
On the subject of Steven Keen, I had been an avid follower of his blog myself, and still respect his work. The fact that he made the wrong call on short term property price movements is merely a salutary testimony that the market is indeed too unpredictable for even the very brightest and best, to call it right all of the time. This post is too long already, so I might say something about Keen’s arguments in a separate post, later. Take care.
abc, One of my favourite sites is Max Keiser’s. The guy and his co-producer are both bright as sparks. And he is a straight shooter to boot. He is an ex-Wall Streeter, and knows the game inside out, and he is giving them hell. He is also hillarious sometimes, and good entertainment, even though in his audios he can somtime be silly and ramble. But the gems are there for picking up, and well worth the listen. You might also check out his video archive, and in fact you might want to start with those, as he is not wasting much time on those in getting to the point. Here: http://maxkeiser.com/
Enjoy.
cb – the only thing unpredictable is the politics of it all, the economics is clear for everyone to see. Those graphs are scare (I have seen them before) bit they still scare me. Surely anyone can see what has happened over the past 15 years…we are at the apex of a housing bubble and that bubble cannot be inflated any further. If you made money during the formation of this bubble, then well done…but dont expect things to continue as they have.
As I have said before, people simply cannot afford houses prices to go any further…
Peter Fraser – I know your Joye’s biggest fan, but why dont you actually address some of Kris’s points? At least cb puts up a good fight, you just run for cover
Surely the fact that house prices have increased in parallel with provate houshold debt since mid-90′s is evidence that this bubble is fueled by credit and credit alone…not some mystical housing shortage that clearly doesnt exist.
Hello PuntPal, it is nice to see you contributing again.
Hmmmmm, I agree with you that easy credit that was showered on us like rain is perhaps the chief culprit. (Mind you, as a little aside, the same thing is virtually synonymous with money printing, or inflation, because that is what every loan is, freshly conjured money out of thin nothing by the lending bank – which is why I have been saying that most of the property price rises have been due to inflation, which is pretty much the same thing where ‘inflation’ =df ‘money printed in excess of GDP or goods and value produced’ .)
Moreover, I also agree with you that credit has become tight, and that banks have stopped lending (the bastards!).
However, consider this: These two facts, call them premises, do not by themselves the conclusion that therefore this is the apex for property prices, that from here we are facing an inevitable crash.
Why? Because there could be other sources of fresh money starting to flow into property. If so, if this money flow outstrips housing supply, prices could simply resume their upward climb. There are in fact signs that this might be happening, even though I am not that sure.
Now, you may ask, what on earth could these fresh sources of money be? One answer could be what I have already described about superannuation savings being increasingly channelled into property investment, as this is a massive amount of saved money, SAVED and UNLEVERAGED, that will increasingly look for a decent return at a reasonable risk. And, moreover, this money can now be leveraged against, virtually doubling or trippling the amount that can go into property through SMSFs. There are signs that this is already happening and most of the large lenders are already loaning into the property market this way.
But to top off the cake, here is another possibility, right out of left field: The new carry trade. It is more of a rumour at the moment, but it sounds plausible, that the new carry trade is the US$/AU$. What that means is that large, international borrowers will borrow in the US at dirt cheap rates and will invest that money here in Australia where they are going to get a better interest and return on their borrowing than they pay in the US for taking out the loan, and they pocket the difference. This could mean billions and billions of hot money, flooding into this country, which will inevitably lift asset prices across the board while the trade lasts. That would mean, in short, blowing any bubbles we have at the moment MASSIVELY BIGGER.
For our own sakes, I hope this is not going to be the case. We need higher asset prices like we do a hole in our heads, and when the hot money rushes out of the country we will be left absolutely devastated. It has happened to so many countries, but hey, nobody will say NO to a party while the champagne is flowing and the band is in full swing.
Anyhow, can you see the point I am trying to make? Can you see why we cannot be so sure that this indeed is the apex, and that prices may, and may not, have a massive crash from here? Can you see how we could in fact go higher before having an even worse crash than we would now?
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