- Money Morning Australia

5 Myths That Won’t Stop a House Price Crash

Written on 26 May 2011 by Kris Sayce

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 [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.


Kris Sayce
Money Morning Australia

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38 Comments For This Post

  1. Greg Says:

    I agree with the 30% – 40% bit. House prices must fall by at least this much before the next generation will be able to afford them in the same way that their parents did. I hear a lot of people say “they will never fall that much”, and when I ask why not, their only answer is “they just won’t”. Wishful head-in-the-sand thinking I say. Based upon every single measure other than “using the proceeds from the sale of a similarly inflated Ponzi asset”, house prices are grotesquely out of whack, and they must correct. Period.

  2. SG Says:


  3. GGG Says:

    I think we should all move on from the “house prices will fall x%” talk. We all know they are falling, but no-one knows how far they will go. Rather, we should be trying to estimate what the government will try to do in its inevitable attempt to stop the fall. FHOG won’t work as well next time, as people see what happens when it expires, and there’ll be less suckers available to take it up next time.

    My guess is they will use the tax system, by making negative gearing even more attractive. They will present it as a way to build the housing stock of the country, relying on the myth that there’s a housing shortage. Conveniently, they will forget to limit it to newly built homes only. Voila, problem solved.

  4. gutfeeling Says:

    The was I see it the only ones that benefit from high house prices are:
    real estate agents
    government (what the NSW Labor gov’t did with the 10-year once-in-a-lifetime NSW housing bonanza cash flow I will never know!!)

  5. bb Says:

    Surprising to see that one Mr C. Joye has apparently decided to abort the debate on behalf of the spruikers. Is it possible he has joined the ‘darkside’ or is he just getting splinters in his bum?

  6. michael francis Says:

    I’m sticking with 70% falls plus.

  7. mel Says:

    qoute: “But the reality is, the best time to act was two years ago – when we first warned of the coming crash.”

    The two areas I have closely monitored in melbourne (melton and sunshine. Yes, bogan suburbs) have risen well above 40% since your warning of a crash two years ago.

    and quote: “We’ll say it again: house prices won’t be considered a bargain until they have fallen by 30–40% from current levels.

    Given the insane upswing in prices since 2008, what level of correction today would have made you correct 2 years ago?

    Kris, I have all the respect for you in the world, but lets call a spade a spade.

  8. arthur Says:

    How can anybody on earth put a figure on a market absolutely glutted to the eyeballs with unsold stock, and a lot more to come ? in fact, a lot of apartments on the Gold Coast and other “coasts” had been sitting there, literally, for 2 to 3 years with “ANY OFFER CONSIDERED” and still no takers… check out; http://WWW.REFINDHOUSEPRICES.COM

  9. Ben Says:

    Any chance of this debate making it to the internet so others can watch on ?

  10. michael francis Says:

    How come the opposing propery bulls team have 5 on its panel and
    the housing bears only have 3.

    They must have used the hedonic formulae to work that one out.

  11. michael francis Says:

    Whoops, can’t count. Make it 4, not 5.

  12. Gavin R. Putland (Prosper Australia) Says:

    Thank you, Kris.

    Nothing personal, but just for the record: David Collyer is our campaign manager (also sometimes called the campaign director or campaign developer). We don’t have a “managing director” – although we do have a president, an office manager, a project coordinator, and a research officer (that’s me).

  13. Adrian Burchall Says:

    A good insight GGG (no.3). I too have been thinking a lot about how both the federal and state governments will react.
    State governments will have little choice but to curtail spending and raise taxes in other areas to make up the shortfall from the lost windfall of ever-rising stamp duties. One policy tool they do have is to completely shut down all new house building and only allow renovations in the hope of creating a real shortage of stock and thus putting a floor under prices.
    The feds have a lot more ammo in the locker. Of course there will be a lot more meddling because they don’t want large prices falls on their watch. They’ll do anything to stave off a day of reckoning because Australian home owners have come to accept as a right ever rising prices. Price rises of 7% pa are factored into their spending and financial decison-making. Any Fed govt. that stops delivering on this score will be crushed come election time.
    My guess is the Feds will:
    – Yes, increase negative gearing
    – Increase the First home vendors grant
    – Increase immigration to at least 500,000 per annum
    – Purchase loads more Residential Mortgage Backed Securities – my guess is $40bn in 2012 and perhaps $200bn in 2013 – in an effort to save the banks
    – Increase taxes on superannuation and savings to pay for their meddling
    – Introduce a new tax on those who do not have a mortgage, much like the medicare surcharge, again to finance their meddling, help prop up the banks, and provide financial assistance to those underwater with their mortgages – and call it a ‘mateship tax’ – helping your fellow Australians. This will be designed also to compel young and some not so young Australians to enter the market.
    Having said all this I’m still sceptical there will be a major crash. It’s more likely that there will be a gradual decline of perhaps up to 20%. People’s perception will be that the Feds will do all they can to prevent a crash and this belief, of itself, will probably keep some kind of floor under prices – so long as the China and India booms continue. Remember even a 20% decline only reverses the rises of the last year or two.

  14. Drew Says:

    Kris, it might just be me, but I think your working title “5 Myths That Won’t Stop a House Price Crash” needs more work. Because if you’re saying that those 5 points that won’t stop a house price crash are myths, it sounds to me like you think they WILL stop a house price crash.

  15. Tom Says:

    Adrian @ 11
    “One policy tool they do have is to completely shut down all new house building”
    That’s pretty much what happened in the UK. The incoming government abandoned mandatory home building targets for local authorities, which effectively gave the NIMBYs a green light to block all new developments.

    “Introduce a new tax on those who do not have a mortgage”
    They might do that, but in a more subtle way. e.g. raise income tax but make home mortgage payments tax deductible.

    My belief is that they may be able to kick the can down the road for a while, but ultimately it will be futile. The governments in the US, UK and Ireland did their absolute best to prevent a house price crash, in the case of Ireland bankrupting themselves in the process.
    Admittedly Australia is starting off from a much better position in terms of it’s national debt that any of those countries, but even so the scale of this bubble is such that it will not be possible for them to prevent it popping.

  16. The Wolf Says:


    Ain’t that the problem with hedonics… the more times you stare it is equal to the number of times you calculate a different result…until you find one that sells ;-)

  17. Peter Fraser Says:

    You are overlooking a point that Louis Christopher also made, countries with a trade surplus have not had a housing price crash. Look at Canada, Brazil, and the other main ore producers and manufacturing countries with a surplus.

    It just hasn’t happened.

    40% is a big big call and it’s a long way to the summit from St Kilda.

  18. John Elkin Says:

    Barangaroo at $6bn investment looks like a good by!

  19. John Elkin Says:

    Peter Fraser, when you talk of trade surplus, are you talking recent surpluses (mining boom) or our cumulative deficit (Australias actual position)?

    Our deficit, despite the recent impressive gains from the mining boom still places us right down there with Portugal, Spain, Greece the US etc.

    What is your point?

  20. Peter Fraser Says:

    John Elkin – the current account deficit in Australia is currently 1.2% of GDP whilst Portugals is about 10% of GDP.

    Our public debt is 3.6% of GDP whilst Portugals is 93% of GDP.

    Our private debt is close to 147% of GDP and Portugals is 260% of GDP.

    John could you explain your position please?

  21. drood Says:

    House prices in Canada are stagnating , and a penthouse in Brazil ( new tiger economy ) with sea views will set you back $200K so i dont see the relevance.

  22. Peter Fraser Says:

    drood – Canadian house prices may not be rising, but they didn’t crash in the GFC. House prices in Brazil have increased substantially. the fact that they seem cheap to us is not the issue, it’s whether they are cheap to the locals.

    Read this article “Brazil’s speculation fever shows no sign of easing”


    I have long said that I expect house prices to fall here, and they are, but expecting nationwide falls of 40% in median house values seems to be a very courageous call.

  23. Leo Says:

    30% increase followed by a 30% decrease results in a 9% overall decrease.
    eg: old price 100K + 30% = 130K
    now 130K – 30% = 91K
    considering your 40% increase only 28% decrease would return the property to its 2008 price (and you also have to consider the amount of money you have already put in the home loan)
    just do the math….

  24. Jay Says:

    mel, the 30-40% drop isnt referring to a few specific suburbs in melbourne, it is australia wide. While im sure there are other similar cases where suburbs have also risen considerably in the low end of the market, overall property in australia when observed like any investment, be it a rally in silver/gold or increase in the price of luxury cars, is seen as overvalued even when taking into the well drummed fundamentals. The low end property market tends to be the last to gain at the height of a bubbble due to affordability. Also generally housing investment can be considered longterm for those looking to retire or purchase their first homes, unless youre flipping and selling to expect a profit within a year or so. If someone said the ASX was expected to fall x% over the next 6 months it doesnt mean that some Gold shares for example wouldnt do well. Acknowledge advice but always do your own research.

  25. Loving Propoerty Says:

    Interesting that in the last 2 years prices have actually increased.

    March 2009-March 2010: -0.2%
    March 2010-March 2011: +20%

    So if we were to follow your advise we’d have lost out on a hefty gain. But you know, don’t let the truth get in the way of a good storey hey.

  26. Loving Propoerty Says:

    Sorry, wrong way round.

    March 2009-March 2010: +20%
    March 2010-March 2011: -0.2%

  27. Peter Fraser Says:

    Hmmm – good storey – was that meant to be a pun?

  28. Beauner Says:

    Chris Joye is an A-Grade Wanker.

  29. Roger Guillemet Says:

    There is no single housing market.Prices will allways be different, state to state, postcode to postcode, suburb to suburb.The postcode in which I reside has risen 26 % in the last year and the neighbouring postcode has gone down by 3% and that is on the Sunshine Coast that is supposed to be allready in “freefall” if you believe the commentators.
    The other often overlooked factor is not all households have a mortgage. Again in the postcode in which I live 36% of homes are owned outright.
    Another statistic of note is that 51% of borrowers are paying their loans on time 46% are actually ahead of their payments and only 3% are in arrears.
    Valuers in this neck of the woods seem to be using 2007 values as a guide to current prices i.e. any gains over2008/2009 have been lost, all fine and dandy IF you bought in 2007 or earlier not so shiny if you bought in later which unfortunately includes many First Home Buyers sucked in by the FHOG.
    If or when the RBA raises rates again you can expect the aforementioned 3% arrears to start to climb and prices to respond accordingly.
    Personally I still don`t think 40% plunge likely, more plausible is 5-10%.But then what? bump along for a year or so then away they will go again. It`s called “the property cycle”

  30. Beauner Says:

    I hope house prices go up by another 60% in the next 4 years….no reason, just coz I want it to!

  31. Not paying for boomer retirements Says:

    Down, down, prices are down!

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

  32. J.C. Says:

    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.

  33. brett Says:

    here’s the SQM followup on Sunrise:


  34. Peter Fraser Says:

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

  35. Lee Says:

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

  36. Carrie Says:

    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

  37. irsurfer Says:

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

  38. Marek Kozlowski Says:

    compare the prices above to the rents below

    net, inflation adjusted return over 4%

    Do your valuation and show me a bubble !!

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