- Money Morning Australia

Why Housing Will Fall as Hard as Silver But Take Longer to Recover


Written on 27 May 2011 by Kris Sayce

Why Housing Will Fall as Hard as Silver But Take Longer to Recover

“The rise in house prices is driven by the fact that households were able, due to financial deregulation, to access almost unlimited amounts of credit if they wanted to and, probably even more importantly, the fact that interest rates came down to much lower levels through the 1990s than they had been in the ‘70s and the ‘80s, and that just gave households much more borrowing capacity.”

That’s something your editor could have written.

But we didn’t.

Instead, it was spoken by Reserve Bank of Australia (RBA) deputy governor, Ric Battellino.

He was speaking at the annual stockbrokers bash.  This year it was held at the Hilton Hotel in Sydney.

All we can say is this: it’s nice of the RBA to admit rising house prices were the result of a credit-fuelled boom.

Perhaps he’d like to send his colleague, Dr. Luci Ellis a copy of his presentation.  Last year she told a property conference – no surprise there – that Australia does “not have a credit-fuelled speculative boom…”

But despite his admission that easy credit fuelled growth, the deputy guv refuses to accept an Aussie housing bubble.

In another answer, the depooty said:

“But, people have been forecasting a decline in Australian house prices for a long time, mainly on the back of the fact that house prices have fallen in most other countries around the world, but I think that sort of forecast doesn’t really take into account the factors that are at work here in Australia, particularly the population growth and the fact that incomes are still rising.  So house prices are adjusting relative to income here, not because house prices are falling, but because incomes are rising.”

Deny, deny, deny…

But let’s be even-handed here.

It’s not just housing where your editor fears a bubble.  We’ve got our bubble alert turned to high in the commodities sector too.

Commodity prices haven’t peaked

But depooty Ric doesn’t.  He sees no bubble:

“From all the work we’ve done, most of what we see in commodity prices today is driven by fundamental demand/supply factors.  There’s no doubt there’s a bit of speculative activity as well, but, fundamentally, it’s very strong demand that’s driving this… I mean, most people have been forecasting for the past year at least that commodity prices are going to come down; they keep going up.  It’s not clear they’ve even peaked yet.”

Hmmm… we’re not so convinced.

In our weekly update to Australian Small-Cap Investigator subscribers, we printed two charts.  This one:

And this one:

Source: ABARE

The first is the RBA’s Index of Commodity Prices.  As you can see, the price has spiked sharply since early 2009.

The index is now about 20% higher than before the economic meltdown in 2008.

The second chart is from the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARE).  It shows the value of forecasted new capital expenditure for the resources industry.

Interestingly, the two charts are almost identical.

That much isn’t surprising.

You’d expect higher capital expenditure in the resources sector as commodity prices rise.  Simply because higher prices make more projects viable.

And it also makes existing projects more profitable.  Encouraging mining companies to increase investment in capital.

Twin Aussie bubbles

In our view, both housing and the resources sector are in bubble territory.

Although in fairness, they’re in different phases of the bubble – with the housing market slightly more advanced.

They both attracted huge amounts of capital… in the belief prices will continue to climb… and the higher they climb, the greater the belief that others will pay higher prices.

This is when you get the kind of talk you hear from depooty Battellino.  He believes the price rise is fundamentally driven and so prices could go higher.

But what about the gold and silver price, you may ask?

We’ll cop that one.  It shows even your editor is human.  We got caught up in the short-term ridiculous silver price rally.

That’s what price bubbles do.  They draw in even the sane.

But we’re happy holding gold and silver.  And we’re happy adding to our position on a regular basis.  Simply because we’re not leveraged to it.  Because we’re not leveraged, we can’t lose more than we’ve invested.

If we’d borrowed for our silver investments, we’d be in big trouble.  But we didn’t, so we’re not.

That’s not the case for leveraged home buyers, resources companies and silver buyers.  They’ve all taken a big punt on prices going higher.

That’s why leverage is important.  Without it, buyers or holders can survive short-term volatility – that’s the same for housing, resources shares and silver.

But those using leverage are more affected by rapid price moves and interest rate moves.

Bubbles follow same pattern

You see, bubbles are the same in any asset class.  The only difference is the time taken for the bubble to burst.  In stock and commodity markets the reaction is quick.

For example, you’ve seen the silver price soar.  Then it collapsed.  And now it’s recovered.  Although it’s still below the peak.

In the housing market the action is much slower due to low liquidity.  But it’ll follow the same pattern.

Don’t forget, the U.S. housing bubble burst in 2006.  Five years later, prices are still falling.  And there’s no near-term chance of recovery.  But one day… someday… it will recover.

That’s worth remembering when you read in the mainstream press about it being a buyers’ market for housing.

It’s not.  It’s still a sellers’ market.  Because if a seller can con you into buying now, they’ll be laughing twelve months from now as prices fall further.

Like an unexploded bomb, we’d suggest house buyers continue to keep their distance.

Cheers.

Kris Sayce
Money Morning Australia

P.S. Although we’re cautious about the outlook for the stock market, it doesn’t mean you should avoid it.  While we suggest holding precious metals, cash and dividend paying stocks in your portfolio, you do need to take risks to increase your returns – to combat inflationary central bank money-printing.  One of the best ways to increase returns is using small-cap stocks.  To read more on how you can place small stakes to make big returns, click here…


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26 Comments For This Post

  1. bb Says:

    They (the msn) were hard at it on last night nine news (Sydney) – a so-called ‘news’ item on why it’s a great time to buy a house. They acknowledged house prices as falling but with the classic ‘better get in now cuase they will be going up again by Christmas’ routine. Who were these experts you ask? Well one just happend to be a large real estate franchise operator – no doubt trying to clear out some of his mounting (and still overpriced) listings within specific areas. I hope they charged this bloke for an ‘advertorial’

  2. HL Says:

    I’ve been following you guys on the housing bubble for quite a while now, and was excited when you announed that the bubble had burst! But unfortunately lookinf at the house prices in the suburbs of the inner west of Sydney the prices seems like they are still going up! Example houses in the suburb of Strathfield is >$1M!!! But I’m holding out and hope they do come down. But to start at >$1M and come dowm 30-40% is still >$600000!!: (

  3. drood Says:

    A company director will always tell his staff they are doing a great job.
    Targets are always reached.
    Hardly anyone fails a training course.
    People get qualifications just for attending.
    Students are taught literacy at university.
    Exam pass marks are routinely downgraded.
    Politicians do as the media tells them.
    Planning permission depends on who you know.
    Justice is decided on how much money you have.
    Estate agents will tell you any lie you would like to hear.
    Every restaurant has an “award for best restaurant” on the wall.
    All freedom fighters are terrorists.
    All protestors are left wing commies, (unless its against a mining tax).
    All investment newsletter writers will tell you they have a foolproof system, (so why do they need to tell us about it?).
    We just sit at our computers and talk about it.

  4. David Hindin Says:

    Kris, you say “We got caught up in the short-term ridiculous silver price rally” Well, dont feel bad. That wasnt a rally, and it wanst ridiculous. You aint seen nothing yet.
    So, who was COMEX working for when they made 5 successive margin calls (4 after the price had already started to fall!). It was a deliberate take down of the market. However, the fundamentals are still there, insufficient supply, excess demand, low inventory levels. This tells me that there is pressure on prices and will remain so until either inventory levels are back up or demand falls.
    So, I expect at even $100/oz that this wont reduce the demand enough becuase industry wont find alternatives quickly, if they bother at all, but it may start the producers producing, opening new mines etc. This isnt an instant fix, so I think we are looking at $100 plus as the new normal for silver for years to come.
    David

  5. arthur Says:

    With every house purchase you should qualify for a complementery frontal lobotomy ! It would be the equivalent to backing a three legged horse in the Melbourne Cup.

  6. GGG Says:

    “Because we’re not leveraged, we can’t lose more than we’ve invested.”

    That’s just another way of saying you can lose all that you’ve invested.

  7. gutfeeling Says:

    “So house prices are adjusting relative to income here, not because house prices are falling, but because incomes are rising.”

    - OMG is he serious? Incomes aren’t going anywhere, unless you’re in the mining or finance industries. In fact I’d hazard a guess they are going backwards compared to the real inflation rate.

  8. Huskies Says:

    Alan Greenspan for years declined to talk about the property bubble fuelled by easy credit in the US. Until it was too late and the bubble implode. I think I see similarity between the US Feds and the RBA.

  9. Ben Clifton Says:

    The silver story still has a long way to play out !
    I brought in at $8 per ounce and think $100 per ounce in 2012 is a possibility. However $250 an ounce for silver in 2011 – You got to be joking Daily Reckoning team….You need to stop this google adwords advert.

  10. andy dufresne Says:

    HL#2,

    Talk of a bursting bubble is IMO premature where the primary markets are concerned.

    It’s a similar story in Melbourne’s west and rural periphery. Asking prices are still climbing, but movement is slow due to the buyer/seller stalemate. Time will tell whether the increase in listings will lead to meaningful reductions – I’m seeing a 50% increase in the areas I watch, yet despite the bid side drying up, the ask has continued to increase over 6 months. The catalyst is not yet evident.

    Vested interests have turned their efforts towards minimising any further cash rate increases. I reckon where Melbourne and Sydney are concerned the picture being painted is gloomier than the reality.

  11. Beauner Says:

    @ 2.

    Ive never understood Strathfield having a median house price over $1 million.

    The place, like most of Western Sydney, is a shitehole.

  12. Small Australia Says:

    I remember Strathfield – thats where the mc donalds is and where all those wankers hang out with their cars and intimidate people. They’re the people we had to have immigrate to continue “consumption” and “growth”.

    For one million dollars I could live like a king in any other country.

  13. Silver Tulip Says:

    Same coital embrace (commod’s & housing) as up here in Canada, eh. Coitus interruptus coming soon.

    http://i53.tinypic.com/4si1og.jpg

    Source:
    http://www.nowandfutures.com/images/crb_1900on.png

  14. Silver Tulip Says:

    Vancouver vs commodities, eh.

    http://i51.tinypic.com/2r551r5.jpg

  15. Ty Tower Says:

    Only a coupleof weeks back it was “Get into Silver” and your offsider was convinced it would boom further . Its important for your credibility Chris to admit the error openly . It is slightly glossed over here. I don’t care ,I didn’t buy silver. I made the mistake of buying a property at auction last week . I agree on the downward movement on RE but it stops when prices fall and wages rise enough. So I’m getting back in now .
    I fear you are right though and it will be more than a year , more like two or three before it hits bottom . Oh well ,gotta have something to do until then ! Its a repair and rent job.

  16. Gary Says:

    Australia didn’t have the subprime crisis ,ie .people who couldn’t afford the houses they bought. I would like to hear views of people regarding the changes to Self funded superanuants. In 2008 diy super managers were allowed to borrow for property.This wasn’t allowed previously. This meant cheap money and tax deductions must have helped to keep property prices high. No coincidence this was the same time as first home buyers were going gang busters.
    Now I read that financial planners are allowed to take commisions from property developers for advising clients to buy flats and apartments. No other financial products. Both these ideas are good if property keeps rising.
    What happens if PROERTY FALLS 15%? We have our own subprime I’m guessing. Any thoughts? Gary

  17. Arnold Judiths Says:

    Where are all your articles promoting silver now? You beat the silver drum hard for months prior to the silver crash and post-crash have the gaul to call yourselves ‘sane’. What a huge mistake was your insane silver promotion and no doubt it adversely affected many .

  18. Sukh Sagar Says:

    Slowly time is coming when people who could not afford previously
    should start looking for houses to live in. Even if the prices goes down they will surely go up again and the buyers would definitely save on rent and pay towards the house.
    Suppose it goes down from $400,000 to $250000 when it goes up next time it will go up to over $600000. Extremely high development costs pushes the price of land too much in Australia.
    Local councils and urban land development bodies are failing us.
    Sam.
    Sam.

  19. Lee Says:

    If that was the case, why the US housing is going down despite the interest is so low. It is normal that when interest rate is going up the affortability is going down and therefore house price goes down. But at the same time the rent will go up. Don’t the supply and demand and consummer confident influence on the price.

  20. Lee Says:

    Just want to add. my comment is refer to the comment quote in begining of the article.

    Lee

  21. Vic del Vecchio Says:

    Hi Krys,

    I have been reading your stuff for around six months now. Having been in banking and finance for 40 odd years I have seen the peaks and troughs of both the stock market and the property market. The one consistent factor is affordability. What the finance Industry has tried to do over the years is to cloud the affordability issue into borrowing capability. See an inflationary economy on the horizon and leverage up against it to generate more funding then get government involved in “Every Australian deserves their patch of dirt” and you have a toxic mix sugar coated as affordability. Short term profit expectations are then driven by shareholders (which are all corporate investors by the way) and Boards and CEO. Then to feed the frenzy more cash is found to give to the unsuspecting masses- who begin to believe that they can Afford it, otherwise why would they lend it to me.
    Well, the banks are then pressed by the GFC and pull in their horns- again driven by shareholder interests, and no one of the masses can now AFFORD to buy let alone to service what they have bought. Sad isn’t it, that we are only at the tip of the iceberg and the slope is downwards, slippery and into frozen water.

  22. john Says:

    I was looking to buy as first home buyerin sydney west, but the price is so high now. i prefer to rent. even retail business is almost dead now, i see most businesses having hard time.
    do any one think the house pricess can crash?. it is told that the pricess start to falling, but i don’t see any kind of price crash. i don’t see hardly a house for sell, and houses can sell in few days.

  23. Booty Says:

    I bought silver using leverage but I used a couple of credit cards that offered 0% interest over 1 year. Silver will recover…

    I am also renting out my 2 br unit that I have a mortgage on for more than the rent I am paying for a 4 br house, 10 mins away from my unit…

  24. GORDY BEATTIE Says:

    Mr. Vic Del Veccio’s comments, statements of ‘pure fact’ actually, are music to my ears. His offerings on this subject are truely profound and as such should be passed our to the current Generation.
    A Generation whom many would conclude have neither, experienced the hardships that most of we ‘Baby Boomers’ were forced to endure, or , have lived off the backs of ‘Wealthy Parents’ ( & no doubt, still are ).
    Financial education to the young MUST start at home, the life knowledge of ‘Elders’ is sometimes the only butress to guard against their downward slippery into that ‘FROZEN WATER’. . . . my thanks to you Mr. Del Veccio for your clear & precice appraisal of the situation.

  25. Brian Says:

    Houses are to live in. They do not produce any thing. Wealth is created by production. If house prices could long term beat inflation nobody could afford to buy or to rent. Investment property is a cottage industry. One trillion $’s of mortgages are held by Australian banks & housing wise Australia is living beyond its means.

  26. Colin.J.Oldham Says:

    I read all your comments regularly and I’m quite impressed with the knowledge gained.
    Keep up the good work.

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