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“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.
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.
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.
For Money Morning Australia