Kris is putting the final touches to the November issue of Australian Small Cap Investigator, so I’m filling in today.
But so you don’t get too many withdrawal symptons, I’ve got a subject you’ll be familiar with…
Property!
You and me, we’re constantly bombarded by the media about the housing shortage. If that message isn’t in your morning paper, chances are you have a flyer in your letter box from a real estate agent, telling you, that there is a shortage of homes in your area. Followed by the question, “Would you like our company to come and value your home?”
Of course you would. To quote Darryl Kerrigan “It’d be nice to know what we’re sittin’ on, darl.”
Imagine how rich you would feel, with a bit of paper and six numbers telling you how much your address is worth.
People love to hear what their house is ‘worth’. But, the problem is, it’s not actually ‘worth’ that.
Whenever this subject comes up, and it pretty much always does, I use my little street I live in as an example of over inflated property values.
Nine years ago, the average price paid for a block of land was $80,000. Most of the houses built were fairly normal sized family homes. The average cost to build back then was about $160,000.
On those numbers you can assume that the average cost was $240,000. But these figures are pretty rough, as I’m not allowing for any deposits or other costs.
In December 2005, my neighbour put their house on the market. My friends in my area were blown away when we found out the new couple paid $495,000.
Mr. Smith and I smirked to ourselves, “Hmmm, doubling the original cost of building in five years? That’s odd.”
A few more years have gone by, and for whatever reasons, five houses have gone on the market this year.
Now, in a street of only 12 houses that is a lot. What was even more interesting is that the lowest price paid for one of those houses was $730,000. And the highest? $863,000.
Supposedly the first price of $730k was when the market took a breather and property prices were dropping back to ‘normal’ levels.
Even at the lower end of the scale, $730,000 is three times the initial cost to build. Three times the value in nine years?
That can’t be right, can it? The figures above means that in five years, the property had doubled in value. It had gained just over 106%.
Or how about if we look at it this way. The most recent price, when there was a supposed ‘dip’ in housing prices, means that in nine years the house was now worth 204% more.
204% more! No wonder everyone tells you that property is where to ‘stick your money’. With figures like that you would be mad not to invest in property.
But you see, that is the problem.
Thanks to the tax laws being changed in favour of investments properties, and add in easy lending and that has been responsible for driving prices up as well. And, you know how much the banks love lending against property.
A tale of mine that I bash around at BBQ’s is my own application for a mortgage.
When I applied, I was $10,000 short of what I needed for my house. But my ‘broker’ came to the rescue. He told me that all I had to do, was tell the bank it was an ‘investment property’ and the bank would lend me another $20k.
Guess what? I told the bank it was an investment property, and didn’t use the last bit of the draw down, leaving me ‘in credit’ before I had even made my first payment.
Stupid banks.
But, how did we get to this point? Why is housing so over inflated?
The price of houses simply can’t continue this rocket-like rise. You’d think the Australian government holds a Buzz Lightyear attitude to house prices – “To infinity and beyond” – because they keep bragging about how well our economy is holding up as a result of our strong housing market.
Newsflash Messrs Rudd and Swan. It’s not holding up. You’re keeping it there.
Don’t you remember why the first homeowner’s grant was introduced? At the beginning, it was to offset the cost of the newly introduced GST. However, that $7,000 did little to encourage buyers. So PM Howard decided to boost it up to $14,000.
At the time, some suggested the first home owners grant would add to inflation.
Have a look at the chart below. In the year 2000, you can see the start of year property prices started to sky rocket.
Before I move on from the chart, have a look at the period from 1990 – 1996. Property prices remain pretty stable through this period.
But then, just before the end of last century, our credit restrictions started to change. Do you remember hearing stories of dogs receiving ‘pre approved’ credit cards? Well, that was the beginning the loose lending.
At no other point in history have properties been so overvalued. Add to that over lending – like we have now – and you have yourself one over inflated property market.
This is a major part of the problem. There is too much easy money around to buy a home. Australia has been flooded with money from the banks and the government to buy a house.
That’s a funny thing about supply and demand though. The more there is of something, the less its worth. And the less there is of a product, well, then it’s worth more.
The amount of houses up for sale didn’t change. But the number of buyers did.
Buyers were able to flood the market. They had ‘pre approved’ bank loans and for some, the first home buyers grant.
And not much longer after the grant, came the 105% finance. This type of finance meant you didn’t need a deposit, or even the cash to pay stamp duty and legal fees. You could finance the ‘value’ of the house and the other fees that go along with buying a house.
After all, why wouldn’t you? Your house is only going to go ‘up’ in value.
I continue to read articles that Australia has resisted the recession, and our strong banking system will save us. That our economy has been spared, and our property prices will continue to soar at unprecedented rates.
(Cough cough) Excuse me, I’m choking…
We can’t hold these property prices up forever.
But, the government wants you to think that they can.
In fact, as of August this year, the mortgage market was worth about $763 BILLION dollars to only the four major banks. Just so we’re clear, that’s $763,000,000,000.
Can you imagine the chaos should our mortgage market fall over? The major banks would collapse and our economy would look as strong as a box of wet tissues.
The prices have been pushed so high, not by a property shortage, but from the fearless leaders in Canberra.
All the government has achieved by pumping money into the housing market – which has been done via home owner grants and easy tax laws for investment properties – has encouraged people to borrow more than they can afford.
Oh, I forgot, the bank said they can afford those repayments.
That means it must be ok.
But at least once a week I see an article in the mainstream press talking about the property bubble. Not only that, but the Money Morning mailbag is constantly full of reader feedback wanting to know when the property bubble will end.
Of course, I don’t know when the property bubble is going to burst. No one does.
But most importantly, if you take a serious look at what has driven the property market in the last ten years, you will understand that what goes up, must sometimes come crashing down.
Regards,
Shae Smith
Assistant Editor, Money Morning
60-Second Market Round Up
by Shae Smith
The S&P/ASX200 dropped 2.90% on Friday, closing at 4,572.10. You can expect a quiet market today as traders and investors sit back and wait for the RBA decision’s on raising interest rates tomorrow. However, it’s expected that the RBA will raise rates 25 basis to 3.75%.
The Dow Jones Industrial Average closed at 10,309.92, down 154 points. Trader’s alarm of America’s exposure to the Dubai Debt saw a panic sell-off, but some money managers feel that this was an overreaction.
Despite the doom and gloom on markets around the world, in the UK, the FTSE100 finished up 51 points, to 5,245.73. The banking sector in the UK rebounded on Friday as traders showed little concern for the Dubai Debt crisis.
The Nikkei was driven deeply into the red on Friday, closing down 3.22% to 9,081.51.
The price of spot gold in Australian dollars is trading at $1,298.80, while in US Dollars it is trading at $1,177.67. The price of silver in Aussie dollars is $20.18 and in US Dollars it is $18.30.
The Aussie dollar versus the US dollar is trading at USD$0.9132, and against the Japanese Yen JPY79.14
Crude oil closed at USD$76.05
For the biggest movers on the market yesterday click here…
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Etch – What’s the problem with your punctuation? Your comments might be taken more seriously if they were written more clearly. I smell a troll!
Anyway, my take on this is that having moved to Melbourne a couple of years from the UK, myself and my partner are currently renting. For us it’s amazing that we have a joint income of $100k+ but obtaining a mortgage for a ‘reasonable’ property would be beyond us if we didn’t have savings. And, we’re both in our mid-forties. That to us, seems ridiculous.
And by reasonable, I’m not talking about a massive 5-bed 4-bath house. Yes, we could move to one of the ‘new’ outer suburbs/developments, but then we’d have a very long (and expensive) daily commute via car.
The UK and the US both thought they were immune to this ‘bubble’ bursting too, until it happened. It’s common sense that tells that if house prices keep rising the way they are currently, it won’t take long before the ‘average’ house is too expensive for the majority of people.
To us, Aussies seem ‘obsessed’ with investment properties and ‘making’ lots of money quickly with little or no effort. That’s going to ‘bite’ back very soon we think.
The answer, PuntPal, is YES, and also NO. It depends on how you specify the question.
1. If your question is whether multiple home ownership might be responsible for not enough homes being on the market at affordable prices for people looking to become owner occupiers, then the answer is clearly YES.
2. If your question is whether multiple home ownership might be responsible for there being a shortage of decent housing, the the answer is most probably NO, as this question is simply a function of whether there is enough housing stock for buying and renting relative to the housing needs of the nation.
Having said that, the example you bring up is an illustration of how further polarisation between the landed few and the landless poor can continue, while house prices are kept being pushed ever higher by the few, whose wealth and influence are sufficiently large to keep capturing the bulk of fresh housing supply coming onto the market.
It is unfair and deeply unjust, but it illustrates quite clearly why the average house price to average income ratio is no reliable indicator for future property price movements in either direction.
As an aspiring property investor (not speculator) I am constantly on the lookout for a cash flow positive investment but sadly I am yet to find one that I believe is worth the money people believe it is worth.
Don’t talk to me about negative gearing, what you expect me to believe that the way to Financial Freedom is to lose money on an investment????
I view all housing as a separate stand alone business I don’t care what its worth when I sell it (but I do when I buy it) I care if it makes a profit. That means when all expenses are paid it puts money in my pocket.
Show me how Shae’s home can be considered a sound investment when priced at such a ridiculous value???
Ademac
Puntpal – your mate has not caused a shortage, those two homes are still there and no doubt rented out to families who need a house.
The shortage occurs when a generation suddenly decide that now is the time to move out of their parents home and into their own home, either with mates, or as couples.
I have no idea why but it seems to come in waves every few years or so. Young people will reside with their parents for so long, but secretly they would prefer their own digs where they can behave in the manner that they would like to, and not in the manner that their parents would prefer. It is just part of growing up.
Something like a GFC can make a lot of those people move back into the family home and cause an oversupply, but now that they can see that unemployment is not going to be a concern, home prices are rising, stability and confidence have returned, then the mass movement and migration of people from the suburban homes will/have started.
As for the rich kids, well we’ve always had them. Their parents give them some advantages, but the guy who wins is someone who gets ahead. Whether that is a rich kid doing even better than his parents, or some guy who started with nothing going from rags to riches is irrelevant, winners are made not born.
Take care.
cb comment
‘while house prices are kept being pushed ever higher by the few’
PF comment
‘but now that they can see that unemployment is not going to be a concern’
LOL, you guys are priceless!!! a few people are snapping all the new housing (cb) because we are back to boom times (pf)
So that means the we have a very small percentage of the population owning the majority of the homes. so it would only take a very small percentage of people to lose their jobs to see a huge number of homes foreclosed
talk about walking on thin ice!!!
PF – I guess, some of the frustration for people like PuntPal, which I must say is more than legitimate, is that there is always something that keeps home ownership either completely out of their reach, or offers them that option only on condition of decades long debt slavery. It should not be like this. It is not equitable, and weakens our democracy. It is not good for this country to continue down this route to a divided society of the haves and the have nots.
What is the solution? I do not have the full picture, but some legislative changes that start favouring owner occupier ownership against multiple home ownership by investors would be a good start.
GB – I am not so sure that I follow everything you are saying, but PF and I are each highlighting a different aspect of the market, and our views are not necessarily in contradiction with each other’s. I simply made a comment that the examples brought up by PuntPal are an illustration of how home ownership gets more and more concentrated in the hands of those with more means. I have no figures to refer you to, but my overall impression is that, along with the trend of wealth being concentrated in fewer hands, there is a parallell, and probably overlapping trend of this being manifested in property ownership being similarly concentrated in fewer hands.
Now, these are only trends, and they probably are decades, if not centuries, away from peaking, and therefore PF’s explanation for increasing demand for housing, where young people seek to move away from home is perfectly compatible with what I have been talking about. Did you see a contradiction between our positions, as I could not tell?
As for the fragility of the system for collapse as a result of increased concentrations of properties in fewer hands, I would say this: The system will become more robust to the degree that there is increasing demand for housing relative to new housing supply, and will become more fragile to the degree that there is an oversupply of housing relative to demand.
Concentration itself does not increase the risk, as such, I don’t think, although it could probably be argued that it increases the “systemic” component of the total risk pie. Such an argument would be credible, because if a single property owner goes bust and the house goes up for auction, then there is one up for sale, but if a multiple property owner goes bust, then there will be multiple properties up for sale. Clearly, multiple property ownership increases the chances of a flood of supply if the dam is to break.
I will answer my own questions to make sure my points are clear.
How can someome do this without the help of their parents?
They cant – the only young people that are buying places now are the ones that have boomer parents that are willing to use the equity in their homes to allow more leverage to keep this bubble going. This bubble has reached new a new era of ponziness.
Is it a good thing that rich kids are able to make these ‘investments’?
NO – clearly its not something we want happening. As cb has finally said, this is not equitable and its not fair. I dont have a problem with families passing on wealth, but when they do it using property that has been partly purchased with my taxes, then I HAVE A MASSIVE PROBLEM WITH IT!!!!
Is is possible that this kind of a purchase is the cause of 0ur housing shortage?
I wasnt saying we have a housing shortage, I was being sarcastic. I was pointing out the stupidity of spruikers still claiming that we have a shortage. Would a 27 year old who is not super wealthy (nor are his parents) be able to buy 3 houses if we had such a shortage????
COME ON FELLAS… it is so obvious that the house price rises in Oz are caused by people like my mate, competiting against other idiots who have all bought the line that house prices much rise. They are using credit, shared equity finance, parents guarantor – anything to buy a house without having actually saved any more for it.
Thanks, PuntPal. You are quite right, and I agree with you on what is happening. The only thing on which, for me, the jury is out, is whether we do in fact have a housing shortage relative to demand, and that is because I am perhaps slower at accepting at face value the official reports about the same. If rents are indeed on the increase, however, then that would provide independent confirmation that supply is being outstripped by demand. Renters, as far as I know, do not make a passtime out of paying higher rents, if they have a choice in the matter.
Anyhow, PuntPal, you are right to be angry. Alas, you are also very resilient in your convictions, which seem to be such that, on the currently available evidence, on balance, the system will continue to use your savings and tax dollars for a long time yet in order to subsidise your mates and peers in their debt – based wealth creation through property ownership.
PuntPal, the bottom line is this:
1. The system is not fair. It is rigged.
2. The system is first and foremost rigged in favour of bankers and their political allies who will ensure that the system will continue to be rigged.
3. The rigged system is such that savers (and generally those on fixed incomes) are systematically screwed, first by the bankers, and then by the government’s taxman. And they are being screwed systematically and mercilessly, year in, year out. This is what you have to understand, and until you do, well, you will just have to take it, even though, in a perverse sort of way, most of the time you will not be aware of, and you will not believe, what in fact is being done to you.
4. The rigged system (at least the way it has been up to this far) is such that debtors are the means by which savers are being screwed, and the payoff for the debtors is to share with the bankers and the politicians the ill-gotten gains from the poor savers.
5. Thus, you have all sorts of deductions and negative gearing to reward the debtors for taking on the risks of the rigged system. For, when the occasional browns stuff hits the fan, the debtors are the first ones in line for holding the can.
6. The primary vehicle through which the wealth transfer occurs is inflation, real inflation, which is being masked by doctored statistics.
So, the line up is this: On the one side we have savers and those on fixed income. On the other side we have the bankers, the politicians and their armies of statisticians and the tax man, using and systematically rewarding debtors in the sharing of the spoils for carrying the lion’s share of the risks of the rigged system.
If that is correct, then you as an individual must take stock and determine the extend to which you have your affairs aligned with either side of the great scam divide. Your choice, financially speaking, is to align with the losing side in fully justified moral indignation, or become complicit in the scam. Neither choice is particularly attractive, but the third alternative of trying to sit on the fence will probably entail some risk of splitting your a!se.
Good luck, whatever you choose.
THERE YOU GO GUYS
WHO SAID THE’RES A SHORTAGE OF HOUSES???????????????
YA MATE JUST BOUGHT 2-3 OF EM ………………………..
PLENTY
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