One day on and still nothing from the property spruikers on the claimed relationship between population growth and house prices.
Not a sausage.
We expected to receive at least one piece of evidence to support their case. Instead we’ve received more information from Money Morning readers that supports the argument that population increases and house prices are not necessarily correlated.
As always, we’re happy to be proved wrong.
But onto something different for today. And it’s just a brief Money Morning as we’re on a tight schedule to complete a couple of reports for our paid subscribers.
We were amused to see the report of comments from the ASX chairman David Gonski who claimed that the government should not allow a competing exchange to operate in Australia.
Obviously it’s only right that he should try and look after the interests of his shareholders. But it’s still amusing to hear him claim that introducing exchange competition would be bad for investors.
He said, “Internationally, including in some of the markets that are much bigger than ours, increasing discussion by commentators and regulators alike is taking place about whether multiple market operators produce beneficial results for retail and traditional long-only investors, or whether in fact the opposite occurs, to the benefit, for example, of statistical arbitrageurs.”
What he fails to acknowledge is that even if “statistical arbitrageurs” did benefit, it would be because of this that other investors would also benefit.
You see, in simple terms, what an arbitrageur does is take advantage of small price discrepancies between the same instrument trading in different markets.
If differences do appear, the arbitrageurs fancy computer systems recognize this and move in to take advantage of the difference. This very action causes the difference in prices to disappear.
Theoretically, and practically, these differences should only appear in the market for a short term before the arbitrageurs move in.
As soon as they do, all investors benefit.
So in fact, what you’re likely to see is an improvement in the spreads between the buy and the sell price on securities, if competition is introduced to exchanges.
As exchanges will be keen to attract traders to their exchange each exchange (including the ASX) will make every effort to ensure that prices quoted on its exchange are as competitive as possible.
Is it really possible that an exchange would encourage wide spreads between the buy and the sell price? We wouldn’t have thought so. If that happens brokers wouldn’t direct trade to that exchange.
No, it’s typical for an monopoly company to try and frighten investors with the fear of worse prices under a competitive environment. All monopolies try the same trick. The ASX is no different.
With any luck ASIC and the government will see through the ASXs ruse and ensure new exchanges are allowed to open for business on the Aussie market.
As in every industry and every market, increased competition produces only benefits for the consumer, and does not worsen it as the ASX is falsely trying to claim.
Other Stuff on the Markets
The S&P/ASX200 eased off 0.20% yesterday, while overnight on Wall Street the Dow Jones Industrial Average slipped 29 points. In Europe the FTSE100 dropped 0.50% and the CAC40 fell 0.49%.
The price of gold in Australian dollars is trading at $1,143.16, while in US Dollars it is trading at $1,009.71. And the price of silver in Aussie dollars is $18.96 and in US Dollars it is $16.74.
The Aussie dollar remained steady versus the US dollar and Japanese Yen, trading at USD$0.8835, and JPY79.27.
Crude oil closed overnight at USD$70.34.
For the biggest movers on the market yesterday click here…
{ 27 comments… read them below or add one }
Kris – of course your right, there is no correlation between population changes and demand for housing. In fact you would probably argue that if everyone on the planet suddenly died, demand would stay the same, so therefore the same rule will apply if population increases, demand would again be constant and supply would not play a part in the market dynamics.
Your logic is shameless in it’s stupidity. Stick to flogging gas.
lol, PF. Isn’t that precisely what Sayce is doing?
Thanks cb, I tried to stay away. It was a very short lived moratorium.
I probably should have also pushed the point of demand affecting prices, but they can’t see that on this site anyway. Clearly if you take away demand prices fall, and if you increase demand prices increase.
Their argument is that we may want a Ferrari, but if we can’t afford it we won’t buy it, so demand is not a factor, and that is true to an extent, but it assumes that 100% of those who would like a Ferrari can’t afford one, but they are out on the streets, so demand and ability to purchase exists.
So there is a correlation between demand and prices, although not a 100% correlation. In any market not everyone who desires something can afford it, but to assume that no-one can afford or will purchase it is just at odds with basic fundamentals.
lol @ PF ;p
I sympathise with your frustration …
I dont think Sayce was saying that increasing population does not increase demand for housing – of course it does.
IF there were zero houses built for a year, and the population increased in that year by x amount, then it is a no-brainer that demand would have increased, and this would definately push the prices up!
However, there is no reliable way of knowing that the 150 000 houses that were built (say) over the past year was not enough to satisfy the “underlying demand”…. (underlying demand being defined as the number of people WANTING to buy a house at the going prices)
As an extreme example, let’s assume there were 150 000 new houses built. Furthermore, let’s assume that the population increased by 500 000 in that same year. To further simplify the illustration, let’s assume that this entire population increase of half a million was due to overseas students! ;p (there was abstinance for an entire year
If the average occupation per house in Australia was say 3 people, then one could argue that 500 000 extra people would require more than 150 000 houses at this rate. However, in this case, clearly students would not be in a position to live “average” as 3 people per house, and would therefore occupy far fewer homes. In fact, the purchase of 50 000 extra homes may for example be enough to satisfy the extra half a million students, as they may only be able to afford to live on average TEN per house.
This is just an illustration of course, far removed from reality, but it does serve to illustrate that there is no way of knowing whether the 150 000 (or however many exactly) houses that are being built per year are indeed too few for the population growth of a given year …
As Sayce points out – the dynamics relating all these variables are infinitely more complicated than is fathomable by those setting up these various reports which calculate the actual shortage to the nearest ten thousand! I think those reports are ridiculous in the assumptions that they make, and their results of how many dwellings we “fall behind” by each year are indeed laughable.
Thanks Sandra, as you point out it is difficult to establish what extra demand a population increase will have, and precisely how much that will influence price, but it is not correct to argue that it will in all cases have absolutely no effect, which is the Sayce argument. I knwo we are arguing degrees here, but an extra 400,000 or so annually must alter demand for either homes for sale or homes for rent.
Yes of course we will squash more people into homes during tough times, but again that is difficult to measure and you cannot argue that in every case demand and prices will fall.
Our best gauge is to look at the market and see how many homes are being offered for sale, are prices changing and in which direction, and what is rental demand strength.
Anything else is just conjecture at best.
I wonder if gas shares will tumble when demand increases?
Yes, the callibration of variables for calculating demand and supply is far from being an exact science, but given reasonable assumptions about household density and the nature of population growth composition, we still have a useful tool for supply – demand projections. If your half a million immigrants were all cashed up business people with families, instead of students, then you would make the appropriate adjustments and still get a reasonable projection of future demand. But such considerations would seem to be too complex to think through, let alone appreciate, for a busy man like Sayce.
lol, PF, they could. It is a possibility, clearly, especially when lower prices start influencing the price, hahaa.
Hey, Sandra, JohnMcCall responded to one of your earlier posts. If you have not seen it before, you might want to go back and check.
CB – your being naughty again aren’t you. In fact there really is a direct correlation between price and price. We should start graphing it now. It will be the new “must have” index for property analysts.
lol, PF. Time for an index revolution. Sayce should patent it, me reckons. Then he would not have to spruik small caps, or hot gas.
CB – i’m a bit clumsy with navigation on this site…
I dont know which subject that was on which JohnMcCall commented on something i said.
Can you help with a link?
Sandra go back to the home page and then to the very bottom.
Click on “older entries”
Yes, that’s right, and then click on the comments for getting to the comments section of each article. When you have finished with any comment, you can click the BACK button on your browser, which will take you back to the abreviated view of articles.
You can keep going back the same way, page after page.
Found it?
cb – I know that N won’t be reading this, but this is a comment from Rory Robertson of Macquarie Bank re our discussion from the p[ast few days – “With house prices and housing credit trending higher, it’s now clear to all that our housing and mortgage markets are nothing like those in the US. Nor are they anything like those in Japan, if anyone still is in any doubt. Australia’s problem remains building enough houses to absorb our rapid population growth, not – as in Japan – finding enough people to live in existing houses as the population declines by 25 per cent over the next four decades.”
Supply and demand will of course play through pricing so if Sayce was suggesting that absolutely no correlation exists then I reckon he’s mistaken. But the point I think he was trying to make with the Ferrari scenario was a good one and cannot be answered flippantly by suggesting that because you very occasionally see them on the road then they actually represent a high demand, affordable investment for everyone and AFFORDABILITY is the big issue here. Most independent measures (including the recent RBA rant) speak of the risk of house prices in Australia as being on the unaffordable side of the ledger. House prices have to be capped by the ability of people to obtain and service the loan they take to make the purchase. Speak to the few remaining generation of Australians who grew up in the first half of the twentieth century. People used to save to buy a home – almost literally. They saved and mostly used their own money. They saved up and bought a block of land. They saved up and built a garage which they then lived in whilst over the course of several years they built a ten square (or 100 square metre) fibro cottage. Now days the smallest project builder wouldn’t think of anything less than 350 to 400 square metre floor plans for their spec homes. And of course the new home owner wants to fill it up with the extra goodies – right here right now! This has been facilitated entirely by the availability of massive credit. These dramatic changes to the path of home ownership did evolve over time but have accelerated from around 1995. The news from previous posts is of the suggestion that lenders of loans for both owner occupied and residential investment and development are tightening up and getting harder to come by. Frankly, I don’t see this from the advertising of loans, government incentives and Gerry Harvey’s ceaseless natter about ‘NO REPAYMENTS TILL 2013′ Every thing the Reserve is saying points to interest rates in an upward direction. If credit is strangled and the cost of servicing loans becomes higher how will this not impact on prices despite the strength of any demand issues? Summarising, you may desperately want to pay a million bucks for that property but if no one is lending or you cannot service the loan debt, then the FOR SALE sign will stay put until the price drops to the point when someone can afford it. I want a Ferrari too but I reckon my chances of convincing my bank manager for a $250,000 loan for a car will actually prevent me from getting one – as it should – I simply cannot realistically afford it. This doesn’t mean Ferrari will drop it’s prices because it is a ‘niche’ market and if I was honest with myself I would have realised my potential to own one never really was anything more than a ‘want’ rather than a ‘need’. In other words, I was never really in the market for a Ferrari. I think after a decade or more of leveraging credit with an unprecedented rapid escalation in property price topped off with this last bout of artificial stimulation there will be many, many new and upgraded property owners who, if they really assessed their situation carefully probably shouldn’t have ventured into that particular market either.
BB I will surprise you and agree with most of your comments above, not all though.
You made a very good point about what previous generations had to do to get their own home, but since the end of the second world war, and particularly since we imported banking ideas from the USA credit has become easier here, and of course availability of credit has impacted on ability to buy, which alters demand. Lets not keep travelling over that point.
You also make a good point about peoples expectations of the Grand Design house, which has to push up costs, so it is almost a fruitless exercise to compare an average home built in 1944 to an average home built in 2004 as they are vastly different.
However we can’t turn back the clock, and although credit has tightened, I expect 90% LVR loans to continue for the forseeable future, and I can’t see you being able to sell a lesser standard of housing to the current housewifes who are really the buyers of homes, husbands just get to pay them off. Women now work full time so they don’t expect to work all day and then sweep out a house with lino floors and chop firewood for the stove when they get home. That ain’t gonna happen, ask your wife if you don’t believe me, she will clarify that. Our demographic has altered forever.
My earlier point about the Ferrari’s was really just to point out that any increase in population may not increase demand, but in all probability some of the new comers at least will wish to rent or buy. I don’t see any tent villages or shanty towns popping up, do you. Yes some will stay with friends or relatives, but with levels of around 400,000 annually sooner or later that avenue will close up.
But of course Sayce doesn’t actually say that an increase in population will NOT lead to increased demand which in turn will lead to increased prices. He said “that population increases and house prices are not necessarily correlated” which simply implies that an increase in population will not necessarily lead to an increase in price.
If housing were a discretionery spend I would probably agree with him, but it is a necessity not a discretionery item. We all need to live somewhere. Living rough is not an option for most families.
I’m sure you will make up your own mind on that, but instead of Saye waiting for others to prove his assertion wrong, why don’t we take another tack and ask him how can he prove that absolutely no newcomers to our lands will require housing, and if some added demand therefore exists, how will that added demand not affect prices.
sorry, I have been busy today, PF. Well, isn’t that telling?! Unfortunately, RR seems to be regarded as just another spruiker, instead of being paid the attention his views would seem to deserve. As I pointed out before, at the end of the day, it is not RR who is going to get the benefit of the long walk from Canberra.
And, should I add, when it comes to predictions as important as this, there should be no excuses being marshalled in defence of anyone. It is a well known fact that politicians and banksters have have huge stakes in the economy and that they will take every opportunity to meddle. And if so, this must be taken into consideration, something that RR did, and SK failed to do. If meddling is what made the difference, then so be it. The bottom line is that RR has shown himself to be on top of his game.
cb – Yes anyone who works for an organisation who is perceived to have a vested interest suffers from that “spruiking” name calling. However these guys make calls on the economy very publically and of course sometimes they are wrong. But if they are not right most of the time their credibility suffers, and they are then unemployable in that role.
I think that they have a vested in interest in being right to maintain their employment, but suffer from being only human. Even Keen who was so wrong on his call, I do not think that he made that call for any other reason other than he thought he was right, so I don’t think less of his ethics beacuse of that. Everyone (yes even me) is wrong sometimes.
BB, you said:
“If credit is strangled and the cost of servicing loans becomes higher how will this not impact on prices despite the strength of any demand issues?”
This is a good conditional argument, but by its very nature, its consequent obtaining depends on the truth of its antecedents, and any other conditions that might be built into the argument. There are three of these to be considered:
1. Credit is being strangled. Credit, unfortunately has been quite seriously tightened, and I have been personally despairing over the fact. But perhaps it would be an exaggeration to say that credit has been strangled. Well rated borrowers can still obtain credit. Also, it is not known whether, and for how long, tightened up conditions are going to last, so we have a potential element of uncertainty here with regard to one of the antecedents that should weaken confidence in the materialisation of the consequent.
2. The cost of servicing loans is going to become higher. Again, this is what the RB jawboning will have you believe, not to mention the obligatory mantra of any opposition that “the sky is falling in.” You need to take this with a grain of salt, I would say, for although we will at some point see higher interest rates, we will not see sharp rises, unless the economy picks up serious steam. I do not see this happening for a while. If anything, we will be facing ongoing headwinds from the global downturn, and recovery will be subdued.
Now, this could change here in Australia, if we entered an insane housing boom like they did in the US following 9/11. This is not very likely, nor would it be desirable, as it would, almost for sure, end in a spectacular bust, just like it did overseas.
3. If demand from population growth increases, it can still overwhelm the dampening effects on prices from tighter credit and higher servicing costs. It just depends which one works out to be the stronger. It is impossible to tell this in the abstract, but we cannot assume that dampening effects will overwhelm that demand. They may, and may not. With increased population growth, there might just work out to be more people eligible for loans than tightening conditions disqualify. It is a possibility, and hence, it is a third condition on account of which the consequent of the argument might not obtain.
spot on, PF. RR’s job does not depend on keeping any particular boom or bubble alive, but on the overall accuracy of his calls and the soundness of the justificantions he brings in support of them. His motivational structure is quite different from a real estats and politicians with whom he is being lumped together by Sayce and Co.
darn these typos, ‘real estate agents’, I meant to say, of course.
Kris Sayce, discussing the main theme of this article, I’m not against creating competition for the asx, but remember we had a number of state stockmarkets that amalgamated because each one was not really viable as an efficient organisation on its own.
If you look at recent history when Keating let in foreign banks, we did have about twenty at one point, and now we are back to the same big four with a few minor players.
Telecommunications ia another area where we tried to instil competition, and after the fall of One Tel and co we really only have two, and one of them can’t supply decent coverage.
Therefore before we just create another exchange, do we have any research or due diligence that lends support to two viable healthy exchanges. If one is just a poor cousin struggling to survive, it will not be competition but just be a distraction in the market, and will impede growth for companies that list with it.
If the US can only support two real alternatives, can we?
I’m not against the idea, but do you have any real argument to support this idea other than a general warm feeling about creating competition?
Ohooh, PF, won’t such practicalities once again spoil an otherwise good yarn?
Yes your spot on with ASX playing the game trying to protect their monopoly, it was the same deal with the NYSE specialists when they owned the market. In 1996 the average spread of a listed stock was 0.28 then came decimalization, de-regulation and a fair level playing field for other exchanges to compete, now the high frequency traders make markets and as a result the average spread on listed stocks has gone down to 0.016 purely as a result from arbitrage, so the ASX is speaking pure bullshit and I say bring on a competing exchange, I will definitely be providing liquidity on it, and we should all get lower commissions plus tighter spreads and more accurate asset pricing.
Well said Jared
(finally a real mann …
Interestingly, the futures exchange was absorbed by the ASX not that long ago. But, hey, the failure of Ansett did not preclude the subsequent success of Virgin in this country, did it? So, let there be competition, I say, and let those spoiling for a fight, have it.
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