Real Estate Industry Forecasts Major Price Falls

Real Estate Industry Forecasts Major Price Falls

Your editor is still on Australian Small-Cap Investigator duties this morning.  Click here to get the latest issue when it’s released.

“We anticipate a reduction in the median price from $601,500 in December last year to somewhere between 3-5% below that in March.” – Enzo Raimondo, CEO, Real Estate Institute of Victoria.

It seems it’s not just the so-called lunatic fringe saying the housing bubble has burst.

Yep, your editor has been called worse than a lunatic for saying house prices are over-valued.  It’s a good job we’re thick-skinned and can handle it.

After all, we’re not afraid to point fingers at others.  So it’s only fair we cop it on the chin when others attack us.  And we’re happy to cop it because ultimately, we know we’re right.

Make no mistake, a 3-5% drop in the median house price is big.  Especially if you’re mortgaged to the eyeballs.  For some, when you take into account the fees associated with buying and selling, it can mean the difference between walking away break-even or walking away with a big loss.

And I mean big.

A 5% drop from $601,500 is a fall of $30,075.

That’s a lot of money to lose when you’ve been told house prices always go up.

But as I’ve written before, the median house price number is misleading.  Because it only shows the value of houses that have sold.  It doesn’t include all those poor souls who are unable to offload the burden of an oversized mortgage on an overpriced house.

Throughout Australia there are thousands of people who just can’t afford to sell.

Thanks to the spruikers and government handouts, these people have locked themselves into a lifetime of servitude to the banks.

Why?

Too scared to take a loss

Well, imagine you bought a house for almost no money down at the peak of the market in 2009.  You put in a few grand of your own money, but most of the deposit came from the first home-buyer’s bribe.

Now you realise it was a mistake because you can’t afford the increase in interest costs, and you want to get out.  Only you can’t.  Because selling now means taking a loss on the property.

How can you lose when you didn’t put anything in?  That’s not fair.  But that’s what happens when you’re suckered in by bankers and spruikers.

Not only that, but because you’re in negative equity once you sell you’ll still owe the bank cash for the shortfall.  Not forgetting the agent’s fees and removalists and coming up with a deposit for a rental property.

What are the alternatives?  I mean, there certainly aren’t any savings to draw from because the mortgage is such a burden there isn’t any spare cash to save.

All the home owner can do is either resign themselves to living in debt-ridden poverty – in a big house – or try and get a personal loan from the bank to cover all the expenses.  To be honest, that’s probably the best option.

But few will take it.  They’ll prefer to wait until the value of housing has fallen even further and the negative equity is even larger.  At that time, with higher interest rates, they’ll have no choice but to bail out.

Not a day goes by without tales of personal housing disasters hitting the Money Morning mailbag.  Most of them I can’t reprint here for fear of identifying the writer.

But here’s a classic example:

“My brother is looking at buying his first house this year.

“He has his eyes on a place in Coburg / Preston that is being sold via private sale.

“The owners tried to sell it last year at auction with a reserve of $795K but it didn’t sell.

“The owners now want $680-700K for it.

“My brother got an independent valuer in on the weekend who valued it at around $630-650K.”

This is a key point.  Houses like this have been massively overvalued.  We’re sure in this case the vendors saw a similar house in the street selling and thought, “Ours is better than that”, or “If they got that for theirs, we’ll get this for ours.”

Twelve months later, realisation is setting in that house prices were stupidly high.

Even if they get the top-end of their asking price, it’s still more than a 10% reduction.  But if they’re not careful, they’ll be lucky to even get the valuer’s price by the time the market crash has finished.

Then there was this letter:

“In regards to the falling house prices, you are spot on the mark. My wife and I are just about to put our house on the market and we will be lucky to get what we paid for it 12 months ago after putting an extra 20K into it.

“We live in ______ on the coast just east of ________ in Qld. Both places next door to us are for sale and there are ~70 houses for sale in ______ between 400 – 450K (hopefully our price bracket).”

So much for “marvellous water views”

Or this one, also from Queensland:

“As of Saturday 5.30 pm, Buderim, I have direct personal experience to support your contention that Aus. house prices have collapsed.

“A beautiful, tasteful, 4 bed, 2 bath house with a view to die for, magnificent landscape garden, recent kitchen and bathrooms, terraces, etc, on a 2,500 sq mtr lot, in a highly sought after area of Buderim was auctioned by NEXT.  Only one real bid of A$750K, passed in!  I believe sold post auction for no more than 850K.  Point is this house has been for sale since last September, when it was marketed at over 1.5 Mil.”

Ah, a “view to die for”. That would be the equivalent of Jessica Irvine’s “marvellous water views”. Well, it hasn’t done much for this home.  Almost a 50% drop in the asking price.

It shows you even places with a view can become overpriced.  And that places with a view can suffer catastrophic price falls.

But why would someone take such a huge cut?

We can only guess.  Our guess is you’ve got a whole bunch of people who bought in thinking prices would always go up.  They thought there would be a greater fool who would pay an even higher price.

They probably even used equity against another property as the deposit.

But the greater fool investment strategy will always end messily.

As I say, there are many more stories coming through each day.  But that’s not the only thing.

Where are the cashed-up investors now?

There’s a remarkable silence by the property investors.  As recently as twelve months ago, we’d receive letters from property investors saying, “I’m looking forward to house prices falling because then I can buy even more properties, so bring it on sucker.”

But now, not a single word from them.  They’ve obviously just realised their so-called wealth isn’t wealth at all.  It’s just equity in property.  And equity in property isn’t wealth.

Equity in property is just a pre-approved loan from the bank.  Because as soon as you withdraw equity it becomes debt… how can that be wealth?  It isn’t.  Besides, as you know, even pre-approved loans are subject to approval.

And right now, we’ll guess banks won’t lend against existing properties because they’re worried about falling prices.  This lack of credit growth is what’s helping push prices lower.

But that’s what happens with Ponzi finance.  It becomes self-fulfilling as the banks see the writing on the wall and don’t want to be the one left holding the baby [Ed note: apologies for the mixed metaphor!]

Think about it, how do banks decide on the valuation of a property?  That’s right.  They require a valuation.  And as our reader noted above, the valuers are pricing down valuations.

Lies, damned lies and statistical lies

But that hasn’t stopped the spruikers from keeping on keeping on.  In a recent article for Switzer.com.au, Comsec economist Craig James writes:

“There is an old adage in economics – there are lies, damned lies and statistics.  And when it comes to the issue of housing valuations and affordability, there is a lot of data that can be categorised in the two former terms and much less in the latter.”

So what does Mr. James do?  That’s right, he quotes the following statistic:

“However Glenn Stevens did say something else: ‘The other thing I’ll say is that it’s quite often quoted very high ratios of price to income for Australia, but if you get the broadest measures, a country-wide price and a country-wide measure of income, the ratio is about 4.5 and it hasn’t moved much either way for 10 years. And that is higher than it used to be, but it’s actually not exceptional by a global standard as far as I can see.’

“What he was quoting here was the analysis by Rismark International and RP Data on housing affordability. To measure home affordability you need to compare all incomes across Australia with all home prices across Australia – city and regional. Unfortunately, a raft of industry bodies don’t do that and it produces spurious outcomes.”

It seems Mr. James has rather missed the point of the adage about “lies, damned lies and statistics.”

The adage is ironic, it’s not literal.  It’s not a statement to say that statistics are truthful compared to lies and damned lies.  The meaning of the statement is that statistics are worse than lies and damned lies.

That you can trust a statistic less than any lie.  To make it easier to understand, perhaps we could make the statement more literal: There are lies, damned lies and statistical lies.

There.

Because you can take a statistic and do anything with it to support your argument.  Hence it’s worse than lies and damned lies.

So for Mr. James to rely on a statistic from companies that provide data to the housing industry misses the point by a wide margin.

Mr. James winds up with:

“The bottom-line is that Australian home prices aren’t so extraordinary after all. Once foreign investors start focusing on the facts rather than fiction then perhaps a few more dollars will start flowing Down Under. Because it is a concern abroad, and it’s not being helped by misinformation.”

Really?  Perhaps Mr. James should look at some of the other statistics he’s so fond of.  For instance, the median house price in the United States is… $202,000.

That’s less than half the median house price in Australia.  About a third of the Melbourne median house price.

But, then again, that’s just a statistic too.  So do with it what you will.

But we don’t need statistics to know that Australian house prices are overpriced.  However much the spruikers and bankers try to talk it up, the slowing and contracting of credit in Australia will be the ultimate reason for the continuing house price crash.

It’s getting worse by the day.  And we’re getting more letters by the day to prove it.

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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63 Comments on "Real Estate Industry Forecasts Major Price Falls"

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Drew
Guest

Nice article Kris. I definitely sense a change in sentiment happening in Melbourne.

For my 2c worth on the topic, feel free to check out:
http://aussiehouseprices.blogspot.com/2011/03/definition-of-bubble-part-1.html

Kirsten
Guest

By now you’ve probably heard about the first home buyers’ strike:

http://suggest.getup.org.au/forums/60819-campaign-ideas/suggestions/1595687-first-home-buyers-property-buyers-strike?ref=title

It’s gaining a LOT of momentum.

Hello
Guest
A coupel of experiences, 1. Couple of months ago, we liked a house in a suburt in Brisbane, which was advertised as “offers above 569K”. We talked to the real estate agent and offered 570K. However the agent/seller was insiting the house is worth more than 620K and the seller is looking for more than 620K as as the identical neighbouring house was sold in 600K three years ago. Before signing in contract, I asked one of my friends (who is very experience in real estate market) and he suggested it is not worth more than 520K. Ignoring his suggestion,… Read more »
Miguel
Guest
Hi, I am from overseas and living in Australia for a few years now, first day I came in I straight away realized the obscenely overprice of Australian properties. When my mates asked why I wasnt buying I simply said “I can’t afford it” eventhough I would get a few calls asking if I would be interested on a 100% loan. My mates would not believe me when I explained that where I am from you can buy a property with a few years of savings and even some people can afford to buy their properties outright. Now please pay… Read more »
Peter Fraser
Guest

Drew – but it’s not 40% is it?

LiquidCool
Guest
Sentiment is definitely changing exponentially. And i’ve actually seen price cuts for many houses in my area in the last 6 months – and it’s an inner city Melbourne suburb! Mainstream media used to be very bullish, now the articles are very bearish. The media write what the majority want to read so the media are really just reporting on sentiment that’s been building over time. Question is will govt interference once again delay the mega-pop once more like in 2008. Probably not FHOG, but covered bonds making lending cheaper? I really hope the RBA/Govt don’t do the same as… Read more »
mel
Guest
we all know they will attempt ANYTHING for prices not to crash.. Ultimately it will fall hard, but unlikely to happen in the near future. The rba has a ton potential to lower rates in the short to medium term. Imagine 16 rate cuts and a bunch of ‘property investment’ shows on mainstream tv? Truth be known it is possible we have a repeat of 2008/09 when they panicked, lowered rates too far, increased incentives too much and prices have damn near doubled since then. The 50% plus crash IS going to happen and it will be spectacular when it… Read more »
Drew
Guest

PF @ 6 – I don’t follow?

MD
Guest

I was looking for a unit to buy in Sydney a few months ago.

One of the units I saw was a one bedder in Bellevue Hill.
Quite average to be honest, in an old crappy block on Birriga Road.
It was facing the street. 50 square metres, no parking and in need of a renovation.
The agent wanted 450K.
I told him Ill give him 420. He just laughed at me.

Got an email from him today, begging me to buy it for 395K!

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