5 Myths That Won’t Stop a House Price Crash

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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.”

Ouch!

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 [2007].”

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.

Cheers.

Kris Sayce
Money Morning Australia

Kris Sayce

Kris Sayce

Publisher and Investment Director at Money Morning Australia

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.
Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.

Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has more than fifteen years’ experience in analysing small-cap stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.

After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

Initially he began writing for the Daily Reckoning Australia — but eventually, took over Money Morning. It’s now read by over 50,000 subscribers each day.

Kris will take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money!

Whether you agree with him or not, you’ll find his common-sense, thought-provoking arguments well worth a read.

To have his investment insights delivered straight to your inbox each day, take out a free subscription to Money Morning here.

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(You can find a list of recent investment articles written by Kris at the bottom of this page.)

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38 Responses to “5 Myths That Won’t Stop a House Price Crash”

  1. Not paying for boomer retirements

    Down, down, prices are down!

    Not before time. Bring it on!! Maybe I don’t need to move overseas after all.

  2. J.C.

    Roger@29,
    You’re talking about the “property cycle” whereby the same phenomenon plays like a tape loop and the average schmuck gets rich by leveraging up on residential houses and sitting back and quietly accumulates wealth. That’s it, right? It happened before so it’s gotta happen again doesn’t it? That’s “the cycle” I’m talking about.

  3. Peter Fraser

    But JC it will happen again, it just won’t happen for some years, and it will be more modest next time.

  4. Lee

    We cannot predict what will happen in the future, but we can learnt from the past and make our own conclusion.

  5. Carrie

    Hi , I think real estate is over valued in Auckland New Zealand as well. Do you thinnk this coulod be the case as well ? Carrie

  6. irsurfer

    in the words of that famous spy “oh yeh baby”

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