I’m probably the last person you want to get stuck sitting next to at a dinner party.
At least that’s what I reckon the people sitting next to me on Saturday night were thinking.
To be fair, my social skills weren’t at their sharpest. My wife has just had a beautiful baby girl. After two weeks of sleepless nights, this was my first outing into the world. So I was a bit rusty.
Of course, as an immensely proud father, I was beaming about the latest addition to the clan. I have a ’10-photo rule’ in this situation. I probably have 2000 photos of my kids on my iPhone. Apart from my family – and that includes our two year old who navigates the iPhone better than me – no one wants to see them. So … after 10 photos, that phone goes back in my pocket. And that’s ‘the 10-photo rule’.
So after a selection of cute pictures, in my exhausted state my conversation fell back to default mode – resources and mining.
Note to self: Most sensible people don’t want to hear about how tight the short-term fundamentals of the copper market are. At least not on a Saturday night!
When the people sitting around me gave me that ‘I don’t give a rodent’s rectum about Chinese copper inventory levels’ look, I thought hmmm … maybe it’s time to switch to a more inclusive topic: Aussie property.
Turns out, everyone at the dinner party had a view on the Australian property market. And they were fighting to be heard. I was happy to have a chance to catch my breath and sip on my first beer in a fortnight. But after listening to five minutes of an ‘Australian property will go up forever’ chorus, I bludgeoned my way into the conversation…
Maybe I should have stuck to the baby photos!
Why the Property Market is Running Out of Gas
It seems almost no Australian property owner wants to hear anything negative about the property market – even if it is the truth.
So when I started throwing about a few iffy statistics I’d had my eye on, I felt about as welcome as a fart in a spacesuit.
Do you think they wanted to hear that annual housing credit growth is at a 35-year low?
Not particularly.
But it is.
Housing credit is the ‘gas’ that inflated the property bubble. As investors and home buyers take out more loans, it facilitates property demand, which leads to higher prices. A month ago, annual housing credit had fallen to a record low of 5.4% year on year. Last week, this fell again to set a new 35-year low of 5.3% year-on-year growth.
The result? At best – housing holds its ground. At worst, gravity finally catches up with the Australian property market in earnest, and we see it fall significantly as it has in every other Western property market.
Housing credit is the lifeblood of rising property prices. Housing credit growth levels spent most of the last 20 years in the double digits. With levels of only 5.3% year-on-year growth today, it is impossible to see property prices staying at their ‘laws-of-physics-defying’ high levels.
We have also just got news that new homes sales in Australia crashed by a record monthly fall of 7.3% in January. The monthly fall in new sales was not a one off, and is part of a trend. Multi-unit sales have been smashed 25.1% if you compare sales over the last three months to the same period in 2011.
So where do we stand now?
The chart from the Reserve Bank of Australia gives us an idea.
Australian Property Prices Are Clearly Trending Down
Australian property prices did actually pick up 0.8% in February, and these charts don’t show this. I’m not reading too much into this. One month’s figures are meaningless on their own, and this is likely to be just a blip. The trend is still clearly down, which suggests prices have further to fall just yet.
The Aussie economy has just had more bad news. Data released yesterday on the Aussie retail sector, painted a bleak picture for the economy.
The Australian services index contracted in a big way last month. Anything under 50 means the sector is shrinking – and in February it was at 46.7, plummeting down from a barely expansionary 51.9 in January. The ‘employment measure’ figure dropped from 51.2 to 47.5. Sales and new orders also fell by a similar amount.
This matters to Australian property owners because the retail industry directly employs around 15% of the Australian workforce, and indirectly employs far more. When such a large chunk of the Aussie workforce is starting to do it tough, you should expect a slowdown in the Australian economy and a further fall in property prices.
Betting on Australian Property Prices Falling
Many large hedge funds overseas are betting on Australian property prices to crack sometime this year. They don’t tend to reveal how they are doing this, but I expect they are shorting property funds, the Aussie dollar, or possibly interest rate futures.
The easiest way for most everyday investors to do the same is to sell their homes. However, RP Data-Rismark are now launching an index that allows investors to trade Australian property prices on a daily basis. It is not up and running yet, and it’s not clear yet whether it is possible to short sell the index to profit from falling prices.
If it is possible to short sell this index, it may have started just at the right time for property bears.
It looks increasingly like Australian property could face the same dose of salts that has affected nearly every other property market in the world in the last few years.
But … do you think the other dinner guests wanted to hear all that?
After retreating to some banal small talk about how nice the food was, I politely moved seats to sit next to the birthday girl who wanted to see those baby photos.
She’d just bought an apartment as well.
So … I tactfully broke my 10-photo rule, and kept those cute baby pictures coming.
Dr. Alex Cowie
Editor, Diggers & Drillers
Related Articles
The Conference of the Year for Australian Investors
Why the Australian Economy is Much Weaker than the RBA Thinks
Sydney – Hero or Villain of the Aussie Housing Market?
March 6th, 2012 at 5:23 pm
Congrats on your new born!
March 6th, 2012 at 5:36 pm
I can hardly wait until I toss a one-ounce silver bar down to buy a HOME to LIVE in. That is all.
March 6th, 2012 at 7:21 pm
Agreed this is a very hot topic. Guess we can blame all those real estate and bank employed ‘economists’ who the media give so much air time too. No surprise there, they are one of their major advertising revenue streams.
Sadly so many in Australia have bought all the spruiking lies, and lived in denial about what is really coming. Only the vested interests, naive, and fools would continue to try and talk property up.
Anyone with half a brain and no bias can see where this is all heading. POP goes the property bubble.
March 6th, 2012 at 10:02 pm
I have been buying silver I hope I can buy house with it, if the dollar crashes.
March 6th, 2012 at 10:32 pm
I live in Germany and the 2 financial advisors I have spoken with since being here have both said to sell any Aus property I have (I dont have any so nothing to worry about there). But while on the topic of crashes, this is a bit more relevent (and scary) for me. http://www.spiegel.de/international/europe/0,1518,818966,00.html
As they say in the artical though, perhaps a little too complicated for most mainstream media to take up.
March 7th, 2012 at 10:37 am
Ben @ 5.
Seems financial advisors the world over are the same – get out of any product that I can’t earn anything from and buy this wonderful investment here (my commission is only 10% but you’ll make that up in no time – honest!).
Don’t trust financial advisors – they are no better than real estate agents, mortgage brokers, politicians or central bankers – they just have a different qualification.
March 7th, 2012 at 11:45 am
Exactly – what a truly strange experience it is trying to have a rational conversation with any Australian who is leveraged up on property.
Mention the words bubble, or over-valued and without a moments hesitation the listener immmediately sticks their fingers in the ears and starts uttering la, la, la, laaaa, la, laaa !
This would be genuinely funny if it were not so true.
March 7th, 2012 at 5:51 pm
MSSolar – i did post but they canned it. Can you believe after some of the most vile posts have been allowed unmoderated here, they ban one of my posts.
Anyway as I said before, one ounce of silver will buy you a very nice doornob from Bunnings – so that’s a start.
March 8th, 2012 at 8:25 am
Haha – great article. At least you still get invited to dinner parties!
March 19th, 2012 at 5:45 pm
“Do you think they wanted to hear that annual housing credit growth is at a 35-year low?’
Alex, prices are exactly where ‘they’ want them to be.
What would happen if we had 10 consecutive months of rate cuts combined with a bunch of tv shows on getting rich with property?
Prices would escalate into unheard of territory, all thanks to cheap money (which can be unleashed at any time) and our local (we are not the usa) government subsidized housing scheme.
I believe you are correct in many respects. If we continue on our current path we will end up screwed eventually just like many others. However your timing is way, way off. Do you not remember what your mates were saying in 2008?
For enlightened thinkers on so many issues your obsession with the whole housing thing is baffling.
Its all about bullets and the rba has a truckload up their sleeve.
If rates go to near zero (and they just may), it will be time to get out entirely.
Sincere congratulations on the newborn mate
March 21st, 2012 at 7:06 pm
please keep pointing out the truth about property, with its negative gearing and equity. You should all sell you homes to me cheap and I might approve your rental application ……wait no you’d need a secure job and I am getting sooooo many applications for every vacant property you may not qualify!
THE big problem with this crash theory is my beloved redhead in Canberra who will stop borrowing or printing money….hmmm so has property in the past gone up so much or has the real value of the dollar gone down?? I remember earning $3.65 p h which was the award rate and was happy with it in 1977.