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


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.


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…

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 editor of Tactical Wealth, and Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. 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 close to twenty years’ experience in analysing 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 55,000 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.

Kris is also the editor of Tactical Wealth and Microcap Trader where he reveals the best opportunities he’s discovered in the markets that you could profit from. If you’d like to learn about the latest opportunity Kris has uncovered, take a 30-day trial of Tactical Wealth here or Microcap Trader here.

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26 Responses to “Why Housing Will Fall as Hard as Silver But Take Longer to Recover”

  1. Vic del Vecchio

    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.

  2. john

    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.

  3. Booty

    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…


    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.

  5. Brian

    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.

  6. Colin.J.Oldham

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

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Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@moneymorning.com.au