Your ‘Great Property Debate’ Digest
What can we say… the Great Property Debate went pretty much as we expected.
The housing bulls would drag out their usual excuses, and we’d counter them point for point.
Of course, the format wasn’t really a debate. Rather it was seven individuals giving a presentation one after the other.
The event kicked off with Tony Hayek. As we understand it, Mr. Hayek owns a property investment business. The following three quotes will give you a good idea of his 15-minute presentation:
“The property market has grown forever.”
“The property doomsayers have been wrong forever.”
“The GFC was the best financial period of my life: interest rates went down… rents went up… and capital values went up.”
[Ed note: The last quote is paraphrased; we were a bit slow jotting down his full comment.]
Lousy assets
Next up was housing bear, David Collyer from Prosper. Prosper is the group that organised the home-buyers’ strike. You may recall we’re rather indifferent about the buyers’ strike.
The market is maxed out on credit and is unable to grow at a fast enough rate to prevent the credit and housing market from popping.
Still, Mr. Collyer gave a few nice quotes. Some of them we’d agree with, such as:
“Residential housing is a lousy asset class.”
“This is the most predictable disaster in Australia’s history.”
He also had a good line about compulsory superannuation. Something Ross Gittins at The Age may wish to consider before he writes another “Stop whingeing, you’ve never had it so good article.”
Mr. Collyer said something along the lines of: not only do the current generation of people in their 20s, 30s and 40s have to fund their own retirement through compulsory superannuation, but they’ve also got to fund the retirement of the baby-boomers who are starting to retire.
We couldn’t agree more. Those in their 50s and 60s who bang on about the selfish “me” generations would do well to remember baby-boomers aren’t the financial geniuses they think they are.
They’ve just copped a lucky break…
Lucky to have bought a house in the 1970s and 1980s at the beginning of the credit-fuelled housing boom.
For 20 or 30 years they’ve convinced themselves of their financial prowess – “Buy and hold property and you can’t go wrong son/daughter.”
Years of brainwashing has resulted in their kids taking out bigger and bigger mortgages, all thanks to the financial advice of parents who said, “You can’t go wrong with property.”
In fact, most of the letters we’ve received have been from folks in their 20s or 30s who say their parents have pressured them for years into taking out a mortgage.
And that they thank us for giving them the confidence not to make a huge mistake.
Who benefits from recourse loans?
Next up was Amanda Lynch from the Real Estate Institute of Australia (REIA). As we say, we heard exactly what we expected:
“Housing is the engine room.”
“The fundamentals are entirely different in the Australian housing market.”
“The highest income earners are the one’s carrying most of the debt.”
“[Australian] lenders have full recourse loans.”
That last one always amuses us.
The bulls always say it as though full recourse loans are good for the borrower. Yeah, great. If you’re conned into taking out a stupidly big home loan on the promise that house prices always go up, what can you do when you wise up to the fact you’ve been lied to?
If the value has gone down and if Fitch Ratings is right and first-home buyers are set to default in swathes, there’s not much you can do. Because if you skip town, the bank or the mortgage insurer will chase you down until they’ve wrung every last cent from you and your family…
Three cheers for full recourse loans – if you’re a banker that is.
Next, Professor Steve Keen.
The prof started off saying the conventional wisdom is population growth and sluggish dwelling constructions are reasons for high house prices.
Prof. Keen said the relationship between population growth and house prices is actually quite low… the correlation coefficient is only 0.21. In other words, it only has a marginal impact.
The prof. provided a few good quotes:
“You need accelerating debt for rising house prices.”
“Accelerating debt makes house prices rise.”
“Decelerating debt makes house prices fall.”
“The government has been complicit in driving the asset bubble.”
“Australian households now more indebted than Americans.”
“Australian banks financed a bigger bubble than America.”
“A bigger bubble with further to fall.”
“Our banks more exposed than U.S.”
Following Prof. Keen was AMP Capital chief economist, Dr. Shane Oliver…
Housing prices are high, but no crash
“I don’t see a property crash around the corner, but house prices are Australia’s Achilles heel.”
“I do think it’s overvalued… We haven’t been building enough… We have a 200,000 dwelling shortfall in Australia.”
Then there was also a comment about “The Soviet system of not having price bubbles.” To be honest, we were so taken off-guard by its suddenness, we didn’t copy down the full statement.
That aside, Dr. Oliver had a good slide showing the comparison of house prices between Sydney and Los Angeles; Perth and Austin, Texas; and Melbourne and Chicago.
He chose those cities because of their similar characteristics – for example, Austin, like Perth is a resources city – and because they have similar wage levels. Here’s our re-working of Dr. Oliver’s presentation slide using the same data from Demographia:
| Sydney – $634,300 (9.6x income) | Los Angeles – $328,000 (5.9x income) |
| Perth – $480,000 (6.3x income) | Austin, Texas – $180,000 (3.3x income) |
| Melbourne – $565,000 (9.0x income) | Chicago – $200,000 (3.6x income) |
Note: All amounts are converted to Aussie dollars
But don’t worry, because Dr. Oliver noted, “It is not a speculative mania.” That’s alright then…
Your editor was next – we gave you the summary yesterday – and finally it was Dr. Harley Dale from the Housing Industry Association (HIA).
We’ll be frank. After we’d finished our stint, we started to lose a bit of interest – not that it’s all about me of course! So our pen took a bit of a break.
The only gems we picked up from Dr. Dale were:
“Half the local associations have a surplus of dwellings.”
“We have not built sufficient homes in Australia.”
…and so on. At least there was an admission that there isn’t a widespread housing shortage.
Even so, the debate pretty much finished as it started.
So, did we get much from it?
Mainstream continues to hide the facts from the people
We didn’t learn anything new. But then, we didn’t expect to. We had hoped the housing bulls would surprise us by pulling a proverbial rabbit out of a hat and saying, “Here’s proof, you’re wrong Sayce.”
But despite the lack of rabbits, it was good to see them shift a little uncomfortably in their seats as we spoke.
The thing is, we figure the reason the TV stations wouldn’t interview us is they don’t want another bearish voice getting into the mainstream.
They’d rather use Prof. Keen because they know most viewers will remember him for losing the bet on the housing crash – “Oh, not Steve Keen again! Didn’t he get it wrong last time?”
The more voices on TV talking about the housing crash, the more people will start to understand it. That’s why the mainstream would prefer to keep the inevitability of the crash under wraps.
But we will raise a glass to Prof. Keen for sticking to his guns.
Unlike your editor, Prof. Keen is fairly well known in Australia. For the past two years or more, the bloke has been ridiculed from pillar to post for his views on Australia’s chronically overpriced housing market.
But through it all he’s kept his head up and continued to warn Aussies about the inevitable collapse of the Australian housing market.
From what we know and from the evidence given by Prof. Keen we have no doubt he (and we) will be proved right… no doubt at all.
Cheers.
Kris Sayce
Money Morning Australia
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All the pro-property arguments are very marginally relevant with only one that really counts; hundreds of sellers for one buyer, if any…. it’s called GRAVITY !
Not conviced? Google up archives of U.S., Irish, U.K., Dubai, Icelandic, Spanish newspapers back before their crashes and you’ll see the same arguments trotted out.
“You must have either found a very good deal or had a very large deposit? If the latter, you need to take into account the opportunity cost of lost investment/saving income.”
Hi Drew.
Yeah the deal was pretty good, under $500K for a 2 bedroom apartment in Double bay.
10% deposit.
Repayments of about $2800.
Strata and other fees about $300 per month.
If I pay interest only it is actually less than that.
I pay $2750 now in rent for a very similar property.
So not a big difference really.
(And rents still seem to be creeping up in the east as its very hard to find anything)
Double Bay is definitely one of the most expensive suburbs in Australia to Rent or buy. Mind you I got a pretty good deal but i think i did get that deal due to less competition nowadays.
As I mentioned above, I dont think property is good as an investment in the short terms in Australia. Possibly even a really bad one. But renting very hard and stressful as well.
And if its to live and if you are in for the long haul…
Abby @ 6 – conclude anything you like.
I think that a very large portion of the boomers will get a reduced or nil benefit, however I do accept your argument that X and Y will have to support them to an extent.
I don’t think that will change much for gen X and Y either, although hopefully as each generation progresses the burden on state benefits will be reduced.
SG – yes the boomer generation has a larger population, but it is over a longer period as well. On a year on year basis, there isn’t much difference.
Google it…
This “collapse of the Australian housing market” statement being repeated over and over trying to drive it home reminds me of a boat cruise I took up the Mallacca Straights. The boat was the “Superstar Gemini” and when ever they got on the speakers ,2 of which were over your bed .every third word was ” Superstar Gemini”. This was at any hour whenever they felt like it and you could not turn them off.
I used a penknife to gently separate one wire from the paper cone in each speaker. That was the only way I could get time to think for myself. It was on your luggage , on every paper, on all the furniture and even on the toilet seat!
Sounds like the ‘Great Property Debate’ was a bit of a fizzer. Everyone setting out their respective positions without any debate.
The property market is in its death throws and things are looking very bad. The irresponsible GFC stimulus simply kicked the can down the road and now the crash will be twice as bad. I expect to see prices down 30-40% within a couple of years. Auction results across Sydney and Melbourne have collapsed (see http://australianpropertyforum.com/topic/8694847 for details) and stock is building up on the market at a rapid rate. Unless vendors drop prices to meet the market, their homes won’t sell. Simple as that. For the real estate speculators, the party is well and truly over.
Peter Jenkins
Does it all really matter? The same market cycles repeat over history and the general sway of opinion will never change. You will always have the debtors and extortionists promoting their view and you’ll always have the savers and bears opposing them. The same catch phrases of rhetoric are thrown around and the same cycles repeat but again, does it all really matter at the end of the day? The question should never have been ‘who’s going to be wrong or right’ because ultimately, the market cycles will continue as they always have. The real questions that should be asked pertain to why this situation should have ever come about in the first place. Australian society is a trainwreck of self interest who (as always) manipulate and gouge the system unfairly and without real risk, only to pass on all the losses to the tax payer. Our system is a nanny state in ideals and in process, driven by the small minority who control the network, but have cleverly (but with insidious intent) been able to co-opt a portion of the sheeple to act as a scape goat for their endeavours. Just because people are ‘right’ doesn’t alter the fact that this situation shouldn’t have ever happened in the first place. Anyone with half a brain will see our rigged market capitalist ideals have rout untold damage to this country both financially and socially, but without the appropriate flowcharts to pinpoint culprits and antagonists, it’s created the perfect smoke bomb for the perpetrators to escape under and claim innocence. The most recent property boom will be looked back upon in later generations as a dark period in our history and it’s only through the lens of impersonal, historic study that the real questions (and following surmations) will be realised.
How’s your shares going lately boys?????????????
Seems that both sides have something to sell. The property Bulls would like to see property continue to rise and on the other hand the doomsayers would like you to invest in other things that they can make money out of. Logic would say do your own research believe only what you conclude and go with that. It seems that the people that right this article are starting to preach their version of doom and Gloom the same as their American parent company. Then again since the company is owned by the yanks its almost a prerequisite to be extremist in their views. Sayce this Australia not America and no we do NOT have to follow the same path that the yanks have gone down
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