5 Myths That Won’t Stop a House Price Crash
“First and foremost, house prices are falling. We’re going to use the dreaded ‘f’ word here on television. House prices are falling”
Those are the most startling words on the Australian housing market we’ve ever heard on mainstream television.
They were spoken by Louis Christopher. He’s the managing director of SQM Research.
Money Morning reader, Brett sent us the video of Channel Seven’s Sunrise program. You can click here to watch it.
In the same program, Mr. Christopher notes, “The rate of decline is actually accelerating.”
To which host, David Koch replies “So we’re at the start of a freefall”!
Hats off to Kochie.
There aren’t many in the mainstream who will talk the truth about Aussie house prices.
Most prefer to ignore it.
Others insist on calling people like your editor a “nutter”. Just for daring to say house prices will fall.
But you know things are bad when even the mainstream talks about a 5–10% fall in capital cities. And a 15–20% drop in regional areas.
The fact is housing is an awful investment. Or it is until prices drop 30–40% below current values.
We agree with Kochie. There is a house price freefall.
Mortgage arrears getting worse
Today’s The Age notes, “Low-doc mortgage arrears top GFC peak”.
The article states:
“Arrears on prime residential mortgage-backed securities (RMBS) of 30 days or more hit a record high of 1.79 per cent in the first quarter, from 1.37 in the final quarter of 2010.”
But those are prime loans. The kind of loan your Federal Government told the Australian Office of Financial Management (AOFM) to invest in.
The article continues:
“The increase in arrears for the most fragile band of mortgage borrowers, low-doc loans, with payment delays of 30 days or more hit 6.74 per cent in the first quarter, up from 5.7 per cent in the final quarter of 2010, a higher level than December 2008 quarter, when the financial crisis hit…”
Those numbers are interesting.
Especially when you refer to the March 2007, Financial Stability Review from the Reserve Bank of Australia (RBA). It states the following about US subprime arrears:
“According to First American LoanPerformance, the proportion of these loans that are 90 or more days in arrears or in foreclosure has increased from around 6 ½ per cent in mid 2005 to nearly 13 per cent in January .”
Now, we’ll agree we’re not comparing like with like.
The point is this: these events start as a slow-burn. Then, before you know it, borrowers get their fingers burnt, then their wrists, elbows and shoulders too.
In the same report, the RBA stated:
“The closest equivalent to sub-prime loans in Australia are non-conforming housing loans, which are provided by a few specialist non-deposit taking lenders and account for an estimated 1 per cent of all outstanding mortgages, well below the 15 per cent sub-prime share in the United States.”
While the RBA may be right in terms of the formal classification, we’ll treat that stat with caution.
Plenty of unsuitable borrowers were suckered in by low interest rates in Australia as there were in the US.
Australian borrowers are not officially labelled sub-prime. But that owes more to wordplay than the Aussie banks’ conservative lending.
And that’s why the more we see, the more we’re convinced the worst is ahead for the Aussie housing market.
Debating the spruikers
At the moment we’re preparing for The Great Property Debate in Sydney on Tuesday 7 June.
You can purchase tickets to the event by clicking here.
Just note there has been a change to the line-ups. I listed the original participants in this issue of Money Morning.
The line-ups are now…
On the house prices won’t crash side: Harley Dale, chief economist, Housing Industry Association; Shane Oliver, chief economist, AMP Capital Markets; Amanda Lynch, CEO, Real Estate Institute of Australia; and Dr. Tony Hayek, CEO, Blue Wealth Property Research Group.
They’ve brought out the big guns. Makes you think they’re worried!
On the other side is… your editor; Professor Steve Keen, University of Western Sydney; and David Collyer, managing director, Prosper.
The working title for our presentation is, “5 Myths That Won’t Stop a House Price Crash”.
The five areas we’ll cover are:
- Housing supply
- Price-to-income ratios
- External shocks
- Quality v Quantity
- Structural change to interest rates
As we’ve dug around, we’ve come across more evidence to support our argument. I’ll reveal all at the debate.
The most important thing is after over two years of abuse and insults from the spruikers and property bulls, we’ve been proved right – house prices have fallen.
Of course, the spruikers claim we’re just like a broken clock. That is, if we stick to it long enough we’ll eventually get it right. But the reality is, the best time to act was two years ago – when we first warned of the coming crash.
And when the mainstream denied house prices would fall.
Those who took the risk, believed us and didn’t buy a house are sitting pretty now. Those who laughed at us and believed house prices always go up are suffering as interest rates rise and house prices slump.
But we don’t blame those who didn’t believe us. They are simply victims of the outrageous antics by the spruikers.
We’ll say it again: house prices won’t be considered a bargain until they have fallen by 30–40% from current levels.
We look forward to seeing you at the debate if you can make it.
Money Morning Australia