Housing Market Crumbling at Both Ends

Housing Market Crumbling at Both Ends

“The quality stuff we’ve got is still selling well but the B and C-class properties have been hit harder.”

That’s according to John Bongiorno, director of Melbourne real estate agency Marshall White, quoted in today’s Australian Financial Review (AFR).

But the following part was the best bit, as written by AFR journo Ben Hurley:

“The reason for the discrepancy is likely to be that Mr Christopher’s numbers pick up all the second-rate or overpriced properties that don’t sell, and then fade into the background.”

Come again? Anyway, I’ll get back to that in a moment. Earlier this week I mentioned how US fund manager Jeremy Grantham had been challenged to a $100 million bet on the Aussie housing market.

That Grantham was being invited to take the short side and therefore profit if prices fell, while the other side to the bet would be long and profit if prices climbed.

So far we’re unaware if Grantham has bothered to tear himself away from managing a firm with $104 billion under assets in order to take the bait on the bet.

After all, such a bet, where his maximum gain is just $100 million if Aussie property prices fall to zero, would work out to add just 0.1% to the value of Grantham’s assets under management.

I don’t know about you, but I wouldn’t even bother getting out of bed for just a 0.1% return. And that would be the maximum assuming house prices fell to zero and you couldn’t give them away.

In reality his maximum upside would be a 0.04% return if – as he predicts – Aussie house prices fell by 40%.

So, we doubt Grantham would even bother messing around with such trivialities.

But, if Grantham doesn’t take the bet, then let’s see what we can do – just to make things interesting. In fact, your editor is in discussions right now to facilitate the $100 million transaction.

In a Money Morning exclusive we can reveal who our potential mysterious backer is:

There’s no guarantee that anything will come of this, I’m just waiting on a few character references on him – apparently he’s a doctor, so that shouldn’t be hard – before I proceed any further!

I’ll keep you updated on how our negotiations go.

Until then, back to our opening thoughts…

Apparently, according to the AFR headline, “House glut hits lower-end stock”. The article claims:

“Evidence is mounting of a glut of house listings on the market this spring without the demand to meet it.

“But real estate agents struggling to offload lesser-quality stock insist the best properties are selling well.”

By best properties they must mean the ones that were up for auction at the Ray White property extravaganza at the Sydney Opera House on Monday night.

Just last week the Wall Street Journal previewed the auction writing:

“Investors from around the world, but especially China, are expected to flock to the auction and snap up the residences.”

Maybe they did flock, but as The Age reported yesterday, they didn’t feed when they got there:

“An auction of luxury homes held at the Sydney Opera House last night raised just $4.1 million, much less than the $30 million vendors were hoping for, less than a week after borrowing costs increased.

“Only two out of the 11 homes were sold.”

Oh dear – Pffffffffffffffffffffffttt! We’re not much good at maths [Reader’s voice: or English!], but a quick check on the calculator reveals that’s an auction clearance rate of just 18.2%.

Much, much less than the 54.6% overall auction clearance rate recorded for Sydney the previous weekend.

The only reason we can think of by way of an explanation is that despite the fancy setting, Ray White must have been trying to flog B and C-class properties. Because everyone knows that the real good stuff is selling like hot cakes.

The Age quotes Brian White from Ray White Real Estate:

“We’ve been a little bit crash-tackled by the interest rate increase last week. The Reserve Bank seemed to give the indication that they were keen to keep the lid on prices, and that’s not what buyers want to hear. That’s a very bearish sentiment.”

Hmm, why an Australian interest rate rise should worry all the buyers from China that are supposed to be flocking here is anyone’s guess. We thought the story was that Chinese buyers were cashed-up and read to buy, pricing local Aussie battlers out of the market.

Surely a 0.25% rise in the official interest rate would be neither here nor there for them.

And again, we thought the story that the high grade properties were still selling well.

Ah well, maybe it’s not so. Maybe another piece of the spruikers’ armoury has fallen off.

But we have to get back to the comment from John Bongiorno. We seem to have very quickly gone from a housing shortage crisis where there’s nothing available, to one where there’s a “glut” of stock, particularly for houses which are overpriced and well, not very good.

However, these properties don’t really count because they just “fade into the background”! You should only count properties that are good… so there.

We’ve definitely heard it all now.

But there’s other evidence that the “quality stuff” isn’t selling. SQM Research, the firm run by the same Mr. Christopher quoted in The Age – you know the guy, he’s the one whose analysis picks up “all the second-rate or overpriced properties that don’t sell, and then fade into the background” – keeps a track of asking prices on properties and how much the price has been discounted from the initial asking price.

Here’s a copy of the details we received yesterday for Western Australia:

a copy of the details we received yesterday for Western Australia
Click here to enlarge
Source: SQM Research

We looked at the second home listed, in Maylands. We’ve got no idea what the Maylands area of Perth is like, but it seems to be a commutable distance to the CBD.

It’s got five bedrooms, four bathrooms and enough room for four cars – everything a family of four could ask for. They could all use the bathroom at the same time without waiting – that’s gotta be worth $2.39 million doesn’t it?

Apparently not. According to SQM Research the house has been on the market for… [ahem] 578 days… a quick check on the fingers works that out to be over one-and-a-half years.

And seeing as Realestate.com.au reports the recent median house price for Maylands as $531,000 these sellers are clearly looking at attracting buyers in the top end of the market.

Of course, that should be fine because top end properties are selling well… except for these top end properties in Perth that is… and the ones in Sydney. Which appear to be doing terribly.

But maybe the lower end of the market is still doing well.

Which reminded your editor of a comment in that daft Westpac housing bubble myth report:

“[B]orrowing and lending decisions appear to have remained sound, and most of the new wave of first home buyers either have a significant equity buffer (particularly in NSW, Victoria and South Australia) or face low risk of job loss due to exposure to the mining boom (Western Australia and Queensland).”

For a start, I’d like to hear from you if you’re in the mining sector to see if Westpac is right about the risk of job loss being low. Having done the odd bit of research on mining stocks for our Australian Small-Cap Investigator newsletter, we can hardly think of a higher risk industry in terms of job security than the resources sector…

But anyway, with higher interest rates and a much lower first home buyers’ bribe, you wonder how much equity WA buyers really have. We don’t know for sure, all we can do is rely on stories we hear. Such as this sent to us by a Money Morning reader last week:

“I am in the process of selling my O/O home. The Purchase price for this 3 bed ‘cottage block’ in 2007 was $449,000. I cannot find a real estate agent willing to list the property for more than $420,000. How do the pundits determine that house prices have increased? Every real estate agent you speak to tells you how bad the market is (being a buyer’s market).”

Don’t forget, even our pals at RP Data admit it’s a buyer’s market. Remember their Facebook comment:

Facebook comment
Source: Facebook 

“What is most puzzling is that the number of properties advertised for sale continues to increase at a time when conditions are not particularly strong for sellers.”

Listen to most of the spruikers and they’ll tell you everything is tickety-boo. It is, but only in the properties they can sell. But the ones they can’t? Those of course just “fade into the background.”

But that hasn’t stopped the banks from singing their same old tune. First the Commonwealth Bank [ASX: CBA] trotted off around the world with an investor tour, spruiking fibs about the health of the Aussie housing market.

Then the desperate boys and girls at Westpac [ASX: WBC] released their bubble myth report.

Now we’ve got the ANZ Bank [ASX: ANZ] heading off to the US and UK in an attempt to hoodwink overseas investors to buy some of the bank’s lovely debt – but they forget, they’ve seen and heard the same old stories before.

Not surprisingly, the presentation includes a section on the robustness of the Aussie housing market.

A few slides in particular made us chortle. The first is an old favourite. It’s this one:

Housing shortage has reached unprecedented levels
Source: ANZ Bank

 

We love it for the simple impression it leaves the gullible viewer with. The idea that the housing shortage will continue to increase forever. The addition of the arrow above the rising bars is a nice little touch.

When we first saw an example of this methodology of calculating the housing shortage a few months ago we were able to respond fairly easily.

Back in March we wrote an article titled, “Housing Shortage Set to Hit 35 Million by 2050”.

It was a crazy headline, but it was based on crazy numbers from the Housing Industry Association (HIA). The HIA claimed in a press release:

“The report finds that if current building trends persist, then Australia’s cumulated housing shortage would reach 466,000 dwellings by 2020…”

Blimey, if we look at the ANZ chart it has the housing shortage at over 400,000 by 2015… that’s about five years earlier than the HIAs dire warnings.

But before you decide to start subletting rooms in your house for all those desperadoes in search of a home, you may want to consider this… in that same article we wrote:

“You see, if we take the HIA’s 15.6% annual growth rate – remember, we’re using their numbers – and extrapolate the number further, then by 2025 there will be a housing shortage of 958,946.

“But why stop there. If we go out to 2030, the housing shortage rises to 1,979,626. And best of all, if we follow their growth rate all the way out to 2050 we find out the housing shortage will reach 35,953,391…”

We then put all those numbers in a chart to show the ridiculous nature of the ever-increasing shortage nonsense:

Housing shortage Chart 1

That’s right, the housing shortage will be exactly equal to the forecast total Australian population!

And, as we pointed out, just five years later, the housing shortage would be twice the predicted Australian population!

Housing shortage Chart 2

A shortage of 75 million homes for a population of just 35 million people. How does that work?

But look, read the full back issue for yourself by clicking here. In our opinion it’s one of our better ones.

As far as we can figure out, the ANZ hasn’t disclosed what annual growth rate they’ve used. All we can see is the arrow pointing towards infinity and beyond

But it turns out the ANZ numbers aren’t too far different from the HIAs.

Based on the growth rate from 2009 to 2015, ANZ is banking on an average 13% gain… give or take a fraction. The result by 2050? This:

ANZ Chart

A thirty million housing shortage… just five million short of the HIAs prediction. Even by 2025, just fifteen years from now, the shortage at this rate will reach 1.4 million.

I mean, this must be what the ANZ is predicting because they’ve made no attempt to explain at which point the housing shortage growth rate will stop. They’ve just included a nice little arrow pointing upwards.

But these following slides tickled our fancy as well:

Household Debt and Owner-Occupier Debt
Click here to enlarge
Source: ANZ Bank

 

By the way, you can see the entire presentation for yourself. The ANZ has lodged the presentation with the ASX.

What the ANZ and indeed the Reserve Bank of Australia claims, is that because household debt is mostly held by higher income households then that’s fine and there’s no problem.

But what the bank fails to mention is that more people than ever before are borrowing against their homes to purchase personal items.

So that while the Housing figure has gone ballistic since the early 1990s, while Personal debt has remained lower, it doesn’t mean that personal debt levels have dropped.

The idea, as the bank claims that “Debt largely used to acquire assets” is absolute rubbish. Depreciating assets such as a car maybe. But what else? New TVs, furniture… hardly what you would call growth assets. Or what about the holiday overseas? All paid for with equity from the home.

All that’s happened is that consumption spending has been capitalised into housing debt. The bank knows this is the case yet it insists on claiming that the debt position is fine because Aussies are buying “assets”.

The fact is, not only are Aussies buying overpriced housing on the back of the perpetual lie about a housing shortage, but they’re consuming against the so-called equity in those same overpriced houses.

Finally there’s this chart:

Indebted Households
Source: ANZ Bank

 

ANZ explains:

“Households in the top two quintiles account for 75% of all outstanding debt.”

In other words, the few hold the most.

Well anyone could tell you that, it’s the old 80-20 rule. Or in this case the 75-25 rule. But it means nothing. The size of the household income is of no relevance when it comes to the ability to service debt.

You’ve just got bigger debt.

A $500,000 a year earner who has borrowed six-times their income is in proportionately the same amount of debt as a $70,000 a year earner who has borrowed six-times their income.

Is there no stopping the amount of twaddle the banks are prepared to put out in their pathetic and desperate attempt to prevent the inevitable? It appears not.

If the last few weeks have proven nothing else it’s that the Aussie banks have been forced to go to extraordinary lengths to keep facts about the housing bubble from coming out.

Unfortunately for them they haven’t realised that the Australian general public is more informed on the formation and destruction of asset prices and asset bubbles than they have ever been.

No longer can the banks spin a few lies to the mainstream press and expect that message to filter through to everyone. Today an increasing number of people rely on more than the pap served up in the mainstream press and can see the facts for themselves.

Hopefully we can get the financing for this $100 million bet from our new doctor pal… because there’s gonna be plenty of money to be made from shorting this massive housing bubble.

In absence of that, we’d say to keep on shorting the bank with the biggest mortgage exposure – Commonwealth Bank [ASX: CBA].

Cheers.

Kris Sayce
For Money Morning Australia

Kris Sayce
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 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. Official websites and financial e-letters Kris writes for:

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31 Comments on "Housing Market Crumbling at Both Ends"

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Tim
Guest
Good to see the MM emails going straight to WordPress. Kris, I like the counterpoint to the whole housing schemozzle that you provide, but here’s an anecdote. My gf and I have no debt, and have circa 80k in the bank. Combined income sub 200k. Plenty of free cash flow every month beyond me spending a bit on web development on my online businesses. Our spending limit on a place is 550k (for a variety of reasons including minimising leverage, we want to have lives and travel loads, we refuse to spend more due to Victoria’s robber baron stamp duty… Read more »
Sandra
Guest

CB – you’ve got mail!

J.C.
Guest

Tim,
I’d imagine that your experience probably holds for quite a number of people. By the look of those supply extrapolations, things are going to get a lot tougher for those ruled by fear.

PQ
Guest

Kris you’ll be interested to know that the property spruikers have stopped spruiking for buy/hold rental properties. I get various newsletters and they are all now spruiking either Property Development in Australia or USA Property Investment.

BB
Guest

I don’t have fancy charts or a PhD in economics but based on insider, grass roots knowledge of the skillful blokes equipped with one ton pickups, sledgehammer and battery drill who knock a few star pickets in the front lawn and fix the “For Sale” signs to them there are a helluva lot more signs being put up than taken down. I’m confidently calling the start of the great Aussie deflating housing bubble as November 2010.

Peter Fraser
Guest

Yep the market in Perth slowed down early in 2010 and turned negative, followed by Brisbane.

It is worse on the Gold Coast and the Sunshine Coast.

Really is this news???

I think the bubble deflated and went fizzzz some time ago, although Sydney and Melbourne are still quite strong, though slowing.

Again is this news, surely everyone here knows that????

masalai
Guest

I bought a PhD from USA just for ‘giggles and s88ts’ – , I feel that I must agree with BB…

Thanks for your essay Kris

Lies = politics/politicians…
Witchcraft = Economists

Peter Fraser
Guest

Tim the housing market in Melbourne will rationalise in about 6 months.

I can’t help you with the stamp duty costs, they are appalling in Victoria. By contrast sub $500K in NSW and Qld it is NIL for a FTB.

oysterboy
Guest

Re Sydney Housing Loans – Aussie John was on 2GB (Sydney AM Radio) money last night saying that last month was the slowest his business has had in the last 3 years.

PuntPal
Guest

I agree BB…For Sale signs everywhere in my neck of the woods

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