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:
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.
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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Written by Kris Sayce
Kris Sayce is Editor in Chief of Australia’s biggest circulation daily financial email — Money Morning. (You can subscribe to Money Morning for free here).
Kris is also editor of Australian Small-Cap Investigator, his small-cap stock research service, where he provides detailed analysis on some the brightest, smallest listed companies on the ASX.
If you’re already a subscriber to these publications, or want to follow his financial world view more closely, then we recommend you join Kris on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.