Housing Under the Pump

We picked up our complimentary copy of Malaysia’s New Sunday Times as we checked out of the Concorde Hotel in Kuala Lumpur early yesterday morning.

We didn’t bother reading any of it until the mini-van (we only travel in style you know!) had dropped us off at the shiny and spotlessly clean Kuala Lumpur International Airport.

And only then once we’d settled down for an iced chocolate at the Harrods coffee shop inside the main terminal.

Although I will point out that we chose Harrods because of the comfy looking white leather-look seats rather than a desire to be seen drinking iced chocolate at a branch of the world’s most expensive souvenir shop.

Anyway, somewhere deep inside the paper – past the news about the shenanigans following the subsidy cut for the sugar industry – was the news that Australia’s first unelected female PM, Julia Gillard had called an election.

“There’s going to be an election… In Australia… In August”, we announced to a disinterested Mrs. Sayce. “Oh”, she replied.

To be honest, we’re not sure why we mentioned it. We don’t care. We don’t care if it’s Rudd or Gillard or Abbott or… what’s-his-name… Ah, Turnbull, that’s right.

If the Labor party wins it’ll continue to take money from people it doesn’t like and dish it out to those it does like. If the Liberal party get in it’ll revisit its plan of taking money from people it doesn’t like and giving it to those it does like.

To be fair though, they don’t even have to dislike someone to take their tax dollars. They just have to be people in the worst position to do anything about it – namely folk like you.

And the people they give the money to aren’t necessarily the people they like either. Just those that are most easily manipulated.

So, we’ll try not to prattle on about the forthcoming federal election, because the reality is whoever wins they’ll claim a mandate for some grand plan, and whether you like it or not you’ll be the one footing the bill…

Anyway, when you’ve been away, the immediate urge is to tell everyone about it. That’s fine when talking to family and friends.

But I’m sure the last thing you’re interested in is a Sayce Travelogue of England, Scotland, Paris and Kuala Lumpur. So we’ll spare you the trouble of reading it by not printing it.

However, there are a number of press clippings we’ve collected along the way. At the time of snipping them out of the paper they seemed interesting and useful. But perhaps two to three weeks after the event they may not be so interesting or useful.

A headline from tabloid The Sun such as “Belt up, Mayor – Council fatty’s trousers fall down during speech”, while amusing, doesn’t do much to help you figure out whether you should buy or sell shares, or buy or sell the Australian housing market.

So we’ll stew on those cuttings – and there are plenty of them – over the next few days and figure out what’s worth mentioning and, erm, what isn’t.

But one thing is worth mentioning today.

And that is the attitude towards the property market in the UK. Yep, if you expected us to come back from our trip whistling a different tune then you’re going to be sorely disappointed.

During the two-and-a-half weeks we were there, as we caught up with family, old friends, and even strangers, house prices were mentioned… once.

The conversation went something like this – “How have house prices done in Australia? Here they’ve fallen a lot but they’re starting to level off a bit now…”

And then the conversation moved on. The person we were talking to didn’t even seem to be looking for an answer.

Of course it’s always dangerous to generalise the attitude of an entire population based on a non-conversation with one person. But the fact that no-one else we spoke to even bothered to touch the subject speaks a thousand words.

Try speaking to more than three Australians without house prices getting mentioned in general conversation – even if you’re not talking about anything to do with house prices, odds are the subject will soon crop up.

I mean, after three weeks away with barely one half-baked chat about housing it was appropriate that almost exactly at the point that we crossed into Australian airspace on the flight home yesterday that we overheard another passenger boring some other passenger with tales of the Australian property market.

It was the usual stuff that we won’t bother repeating. In fact, to be truthful after about two minutes of mind numbing boredom we quickly reached for the headphones to drown out the prattle by watching the remake of Clash of the Titans instead.

What that conversation goes some way to telling you is that people in Australia are still super keen to talk about the housing market. And not only talk about it, but talk it up.

They must see it as being like a hot-air balloon, the more hot air blown in the higher it’ll go. Stop blowing in the hot air and the balloon soon falls to the ground.

So while Aussie property bulls continue to blow hot air, in the UK they’ve given up.

Because there house prices have already taken a battering.

Although even that didn’t stop The Independent newspaper asked on 30th June, “How long can the housing market avoid a crash?”

Do you see how quickly the sentiment can change? Here the bubble blowers see rising house prices and think about how much higher they will go.

In the UK people see fallen house prices and think about how much lower they will go.

Even the UK ‘renovate or detonate’ shows were talking down the returns and talking up the dangers of property development and investment.

In other words, the UK has been there and done that with property investment. And even more importantly, property investors have learned the one lesson that Australian property investors refuse to learn…

And that is that house prices don’t rise for ever.

Look, I’m not saying that UK investors now believe that property prices will fall forever. That would be irrational. No-one would think that an asset price will terminally fall – without good reason.

But when you think about it, why should it be such a crazy argument? I mean, if it’s illogical to conclude that UK house prices will fall forever then on the flipside it has to be equally illogical to argue that Australian house prices will rise forever.

However, as we’ve seen from some of our favourite property spruiking blogs in the few hours that we’ve been back, the hot air continues to blow.

Anyway, while in the UK we tuned into one of the daytime property renovation shows. It was called “Homes Under the Hammer”. A more suitable title would be, “Housing Under the Pump”.

It was the usual deal, hyperventilating male and female co-hosts following the story of a couple of property investors.

But aside from the presenters’ lack of Ventolin, something was different. The outcome of the show was different to what you would have seen a few years ago. Long gone are the days when mug punters could buy any crappy old terraced house in Morecombe or inner city Bradford and then see the price double despite the terrible renovations carried out by the hapless investors.

Now property investors look as though they’re lucky to get back more than the risk-free rate of return. So much so that the flipping houses approach has to give way to the buy-to-let approach – in other words, buying a house for income rather than capital gain.

That’s the point when the voices of the budding developers involuntarily rise an octave or two as they try to hide the disappointment of only making a 5% gain on the months of effort, “Oh, yes [up an octave], we’ve thought about renting it out [voice breaks], it’s something [rises another octave] we’ll definitely consider [cough]! Won’t we Sebastian? [nervous laughter]“

Seriously, for the amount of time and effort these people were putting in to one property development, working 100 hours plus per week on renovations, only to make a 15 thousand pound profit after eight months, they’d be better off working in a call centre or selling “I Love London” t-shirts on Oxford Street.

The fact is, UK property is in a slump. There’s no getting around it. And what’s more, just as UK investors now recognise that share prices can fall as well as rise, they now realise that property prices can fall too.

They realise there’s no secret formula to property investing. There’s no magic spell that ensures the never ending upward spiral in prices.

They’ve heard the claims that rising population will prop up prices. That’s why they bought so much property. That’s why they paid over the odds. In the belief that population growth means higher prices.

What they’ve now learned is that there’s no verifiable, iron-clad relationship between actual population growth and rising house prices.

Sure, there may be some correlation, but that doesn’t mean that prices can’t get ahead of themselves. That’s where the property spruikers are blind to the impending disaster they’re helping to create.

The UK now is where Australia is shortly to be.

You see, it’s not the increase in population that pushes prices higher, it’s the belief that that an increased population will push prices higher. And that has the effect of, you guessed it, pushing prices higher.

That belief causes more investors to pile in.

Share market investors would know of it as trading psychology. Top traders such as Murray Dawes recognise the peaks and troughs in the share market and can use it for profit.

So make no mistake, the peaks and troughs of the share market are no different to the peaks and troughs of the property market. Whatever the property spruikers will tell you about housing being different.

It isn’t.

Like any Ponzi scheme, those that get in early and get out before the bust will make a packet. Trouble is, those returns have been and gone, long ago. Those that are continuing to pile in based on the mainstream misinformation about population growth are paying the same too-high prices that UK property investors paid three years ago.

But even more worrying than that is what happens when that light bulb is turned on above the property investors’ head.

That light bulb shines the light on the foolishness of the Ponzi scheme. The madness of the bubble. At that point investors realise there is no magic spell or formula, just a great big hoax.

At that point buyers understand that there isn’t a housing shortage. They realise population growth doesn’t necessarily mean house prices always rise. And they also realise that ultimately a house is something to live in and not a get-rich-quick money-making scheme.

That housing is a cost not an investment.

That’s when the bubble pops. UK property investors have learnt the hard way, and it seems they’ve got the message loud and clear.

Australian property investors on the other hand continue to be spoon fed the same old guff about Australia being different – Rory Robertson has another crack at it in The Australian.

All we can say is don’t believe the spin. It may be galling for any Aussie to take a leaf from the Poms, but when it comes to the housing market it makes sense to learn from those that have actually experienced a housing crash rather from the chumps who continue to claim it can never happen here.

Cheers,
Kris Sayce
For Money Morning Australia

Tagged as: election, house, housing, invest, Julia Gillard, price, property, rudd