Should You Buy, Sell or Rent?

Should You Buy, Sell or Rent?

It’s not surprising with everything we’ve written about house prices in recent weeks, your editor has gotten plenty of emails asking for personal advice.

Unfortunately, I can’t give individual personal advice.

But what I can do is repeat what I’ve written here several times before.

If your finances aren’t stretched – and you believe you’ll keep your job – then unless you want to lock in a profit on your home, you may be better off not selling… even if it means seeing the value of your home fall.

On the other hand, if you’re paying out a high proportion of your income on mortgage repayments and you’re concerned about servicing the loan, then you should seriously consider selling up and getting out.

That could mean renting somewhere.  Or if you think prices will fall, but you’re not entirely convinced, then you should at least think about moving to a smaller or cheaper home.

At least that way you’re reducing your debt level and you still get to stay in the property market – even though the value will fall.

Is it worth it?

If you’re an investor, there’s no getting around it.  You’ve got to do the numbers.

Are you really making as much on that investment property as you think you are?  Is it really worth financing a property for another ten years with an interest-only loan?

Look at the numbers.  For most property investors it means sacrificing income now in favour of capital gains in the future.

If there aren’t any future capital gains then why are you sacrificing current income?

Not only that, but you also need to work out the comparative returns on other investments.

As I wrote on Monday, it’s amazing to even say it, but right now there’s a greater chance of losing money on a property investment than there is on small-cap mining stocks!

It shouldn’t be that way.  But it is.

And there’s even a chance you’ll be better off sticking cash in the bank rather than going through the hassle of owning and maintaining an investment property.

I won’t go through all the numbers again, but you should read Monday’s Money Morning to give you some idea of the capital gains needed to make housing investment profitable.

And remember, the actual return on housing is worse because we didn’t include all the fees for buying and maintaining the property.

But at least it’ll give you a starting point.

Finally, as an investor you need to figure out future returns.  It’s all very well to say, “In the long run property always goes up”. But who says?

For the most part property investors are looking at a short timeframe of ten or twenty years and assuming that’s representative of the long term.

Yes, share prices can fall

We could do the same thing by showing you a chart of the US S&P500 stock index between 1988 and 2000:

Source: Google Finance

If that was all the data we gave you, and you knew nothing else about the stock market, I’m sure I could convince you that share prices always go up.

But you’re not dumb.  And I’m not a crook.  Because now I’ll show you the S&P500 from 1988 until today:

Source: Google Finance

Now you can see the stock market doesn’t just go up.  It goes down as well.

But if all anyone told you was that share prices only go up, and if the only period they’d shown you was a period when prices were rising, then you’d probably believe them.  Right?

Let me put it this way: the next twenty years for house prices will look like the right-hand side of the above chart rather than the left-hand side – that is prices rising and falling, not just rising.

Look, the spruiking from the property guys is no different to the spruiking from the stockbrokers and fund managers of a few years ago.

Between 2003 and 2007 brokers told clients stock prices couldn’t fall due to the weight of money argument.  It was the idea that with all the money pouring into super funds every day, month and year, it would provide a permanent floor under stock prices.

In other words, there would always be buyers of stock, regardless of what the economy was doing.

Not surprisingly, it turned out to be complete nonsense.  Yet the weight of money argument isn’t so different from the population growth argument made by property spruikers.

They claim that with all the new people coming to Australia, it provides a floor under house prices.

What both arguments ignore is the human element.  The mainstream and spruikers always view the market and market behaviour as though it’s a uniform reaction.  But it’s not.  The market – any market – is a collection of individuals acting in their own self-interest.

In the case of the stockmarket it’s individuals managing their own portfolio of shares… some are beginners taking a $500 punt here or there, others are investment “whales” punting $1 million a time…

And then there’s a whole bunch in between.

In addition you’ve got the fund managers.  They’re investing for two reasons.  One is to try and make money – or not lose money – for their clients.  But they have another motive too: that’s to make their own money by charging fees or commissions.

If they make bad investment decisions, there’s a chance they won’t earn as much.

That means, you can have as much money coming into the market as you like, but it doesn’t negate individual actions.  It’s those individual actions that cause prices to change.

I’ve used the example before, if no-one sells a share the price won’t go down.  But there’s no cartel of share owners on the market.  That means if owners believe others will sell then they’ll try to get out first.  That can force the price down.

It’s the same on the buy side.  If prospective buyers think other buyers will pay more for a share, then a buyer will be keen to get in quickly… that can force the price up.

Sellers bring out more sellers

Property investing is no different.  I’ll repeat that… property investing is no different. For the past twenty to thirty years, prospective buyers and current owners have rightly predicted that people will pay more for property and so prices keep going up.

The more they’ve risen, the more owners and buyers believe prices will rise further.

But now the market has turned.  Buyers don’t believe prices will always go up.  That means sellers are starting to bail out.  The proof of that is in the huge increase in houses up for sale.

The knock-on effect will be especially hard for investors who rely solely on price appreciation.  They’ll now have to figure out if they can finance a property that’s returning a negative income yield and zero (at best) price growth.

Odds are they can’t.

And if owner-occupier buyers see the market flattening and then falling, what’s the rush for them to buy?  There isn’t.  Not until they figure that prices have fallen to a level where it’s worth buying.

But what about the shortage of homes and land?  That’s simply not true.  Falling prices will increase supply as developers fall over each other to sell their land at a cheaper price to other developers.

And sellers will decrease their asking price as they fall over each other to sell before prices fall further.

Just like in any other market.

The disappearing shortage

That’s when the lies about a housing shortage are revealed.  Funnily enough, spruikers in California thought there was a housing shortage too.  Over a year ago we printed an excerpt from an online community newspaper from 2006.

Here’s the quote:

“The Californian Building Industry Association (CBIA) continues to express alarm over what it calls an ongoing housing crisis in Southern California. Alan Nevin, the association’s chief economist, projected in a 2006 CBIA Housing Forecast that only 185,000 to 205,000 building permits will be granted this year, far short of the 240,000 new homes needed each year.”

“Southern California has been experiencing a massive population boom in recent years and it’s believed that 6 million new residents will be living in the region by 2020. The population increase, coupled with the housing shortage, has the CBIA worried that it will be increasingly difficult for first-time homebuyers to find a moderately priced unit.”

The supply picture in California today?  Well, according to a recent report in the Christian Science Monitor:

“By the CoreLogic analysis, the states with the largest ‘supply’ of distressed properties (measured in months it would take to sell them) are New Jersey, Illinois, Maryland, Florida, Delawere, Georgia, Connecticut, Alabama, California, Washington, and Michigan.”

Oh dear.  So much for a housing shortage.  Just as houses “appeared” from nowhere to flood the market in California, houses will “appear” from nowhere in Melbourne, Sydney, Brisbane, Adelaide and Perth too.

Anyway, back to the point.  As an owner-occupier, the really important thing – before you do anything – is to rethink how you view your home.  You need to forget about it as an investment.  You need to just think about it as a place to live.

Once you’ve done that, you’ll soon figure out whether it’s worth paying a few thousand dollars a month in mortgage repayments for a house that may not increase in value.

Then you can decide whether to switch to a smaller home with smaller repayments or rent… either one will be dead money.  The only important thing is how much it’s going to cost you.

Or to put it another way – just as an example – do you pay $3,000 a month on mortgage repayments on a big house; $2,000 a month on mortgage repayments on a smaller house; or $1,500 a month on rent.

If after doing the numbers, you figure out renting is the cheapest option then that’s the point you work from.  You then need to decide if paying an extra $500 a month to have a mortgage is worth it.

If not, then don’t buy.

Treat your house like a car!

Your editor takes the same view with cars.  I know it’s different, but you’ll get the point when I explain it…

Each day we drive about 40km from home in Frankston to the office in St Kilda.  We then drive home each evening.

And that’s it.

So, all your editor needs is a car that can make that trip each day.  That’s why we bought the cheapest thing we could find.

Now, of course we’d like to drive a fancy car.  Who wouldn’t?  But the point is, any car more expensive than our current car would be a luxury.  The Hyundai Getz cost us about twelve grand, but it does the job.

If we upgraded to a car that cost thirty grand, it would mean we’re spending $18,000 more than the minimum cost of driving between Frankston and St Kilda.

So, we need to figure out if that’s a cost we’re prepared to pay.  For the moment it’s not.  We don’t need to impress anyone by turning up in a fancy car.  And we’re yet to be convinced that the extra comfort of a more expensive car is worth the extra cost.

The same goes for housing.  Do you really need the four bedroom home when a three bedroom home is cheaper?

Do you really need four “living” areas, when two or three would be fine?

If you answer yes to the above, that’s fine.  And if you’re prepared to pay a higher price and higher mortgage repayments, that’s fine too.

But remember that anything above basic shelter is a consumption or luxury item.  So it comes down to how much house you want to “consume”.  And like with anything you consume, you shouldn’t expect to profit from it.

Does that make sense?

The Aussie housing market is going down the gurgler right now.  And we’re seeing more evidence of it by the day.  Housing is going back to what it’s supposed to be – being a home and not a money-making investment.

Trouble is, it’s going to make a whole bunch of people poor along the way.


Kris Sayce
For Money Morning Australia

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

86 responses to “Should You Buy, Sell or Rent?

  1. I saved this comment made by someone on another blog recently, as it was well said:

    “My partner and I live in a very nice inner-city apartment that recently sold for $1.1m. We pay $4000 per month rent. So it effectively costs us 4.36% pa to live here ($48,000pa rent / $1.1m).

    If we were to buy the apartment we would have to firstly pay $10,000 pa in strata fees and levies, or 0.9% pa of the property’s value. We would then have to either:

    1) pay 6.8% pa in ‘dead interest’ for the privilege of a mortgage, making the total cost of ‘borrowing to buy’ 7.7%pa (6.8% interest + 0.9% in strata fees), or

    2) we could pay cash which currently earns 6.51% pa before tax in the bank (at call), or 4.56% pa after tax based on our marginal tax rate of 30%. The total cost of buying with cash is therefore 5.6% (foregone interest of 4.56% + 0.9% in strata fees).

    So both buying options are substantially more expensive than the cost of renting (4.36%).

    So why would we, or anyone else for that matter, currently buy?

    To earn a capital gain?
    That will only happen if:
    1. A buyer is willing to pay more than the last buyer and thereby realise an even worse return (the ‘greater fool’)
    2. Rents rise faster than property prices, which should be happening if this ‘housing shortage’ is as pronounced as the property proponents would have us believe
    3. Interest rates fall substantially and are sustained at lower levels for years.

    Matt. | Surry Hill – March 23, 2011, 8:01AM

  2. And as I have said before. ..
    If I had a $500K cash deposit, I could get a loan of approx $1M and BUY where I currently live. There’d be
    * the mortgage/interest payments on $1M ~ about $7,000pcm @7%, over 25 years
    * the fees ~ thousands
    * the stamp duty ~ many tens of thousands
    * the rates and taxes ~ a couple of thousand per annum
    * the insurance ~ some hundreds per annum
    * the maintenance and upkeep of the property ~ a couple of thousand every so often
    * the maintenance and upkeep of the appliances ~ hundreds
    And then the hope of a big capital gain and tax breaks to offset the above, down the track.
    I could rent for $3,000pcm, and use the $2,500pcm from the interest on my $500K deposit to help me along.

    And yet, most people I speak to still reckon I’m “mad” to rent.

    Do the maths.


  4. Digger@1 You ask “So why would we, or anyone else for that matter, currently buy?” Aside from the buyer simply being mad or stupid, there is another plausible reason. The Ponzi scheme answer. The fact that the buyer is also the recent seller of a similarly inflated Ponzi asset. Asset flipping between holders of these assets, as the prices spiral upwards, and the vortex created by this spiral drags prices at the lower end up with it. But down there lurk the newcomers, the first home buyers, those who must pay not with the proceeds of a Ponzi flip, but with cash or debt. These guys are the ones who are really playing with fire, the ones who should REALLY run the ruler over the numbers, and ask if buying’s worth it. The other group teetering on the brink of a hiding to nothing are the older ones who bought when houses were affordable, are now smugly sitting on a fortune, and counting on this fortune to fund their retirements.

  5. Isn’t the problem simply that rents are too low, which is probably because property is overpriced. If $500k house/unit gets $3,000 pcm in rent thats 7.2% and barely covers the interest not to mention other costs. If the rent is set by what people are prepared to pay then the value of the property should be based on what somebody is prepared to invest on the basis of what return they want on their capital. Property values are distorted because of the tax concessions given, ie negative gearing, which is basically over taxing us in the first place and then refunding it only if we make a bad investment.

  6. Something else I frequently encounter is that the argument over whether to buy or rent seems to be based upon the assumption that buying is “slightly more expensive” but preferable because of the security, freedom, peace of mind etc. that comes with it.

    This may well have been the case 20 or 30 years ago, but these days, in most cases, buying is SO MUCH more expensive than renting that the comparisons are almost ridiculous.

    I often find myself saying – to the utter dismay of those on the other side of the argument – that house prices would have to HALVE to making buying even a prospect! And I’m not joking!

    The two examples provided so far in this thread (digger@1 and greg@2) bear this out.

    Funny thing is, most people I know who OWN their houses (as opposed to huge debts to the bank) bought them when they WERE half as expensive, and every single one of these people would not be seen dead paying what their house is now “worth” to own their house.

    Once house prices stop spiralling up, who knows how low they can go. Because if one suddenly has to “justify” a purchase without a guaranteed doubling in price every 7 years, on what basis will this be made? Comparing with the cost to rent, perhaps?

  7. Hey tel@5 …. that’s not a $500k house/unit getting $3,000 pcm in rent. It’s a $1.5M house!

  8. What a fantastically simple and accurate statement. “Housing is going back to what it’s supposed to be – being a home and not a money-making investment.” It should never have been allowed to be otherwise. If you want to develop a vibrant, technologically advanced society and economy you don’t create incentives and policy structures that ride the back of residential property development. Imagine what might have been had the billions of dollars that were ploughed into pissy blue board, faux tuscan rendered ‘dream homes’ been directed at emerging technologies, renewable energy, food production, water management, high speed rail, hydrogen powered vehicles etc. etc. God God we have been cravenly greedy,stupid short sighted Australians. We deserve a very hard kick in our collective arses.

  9. Hold that thought bb@8. We deserve a very hard kick in our collective arses for another reason. The obsession with buying overpriced property has an additional side effect in that it glues people to where they live. I know plenty of people who have outgrown their house for so many reasons – not just because it’s too small – and they simply cannot move. They cannot move because the only “option” they see is to sell and buy where they’d rather be, but they can’t afford to. One consequence of a debt fuelled property boom is that someone who bought a semi-detached in Clifton Hill 20 years ago for $80,000 now has kids, but is stuck in the tiny house because even moving to the replica semi-detached next door would cost them over $100,000 in stamp duty alone! More than they paid for their house! A much healthier approach – imho – is to be more flexible. Acknowledge that your needs may change over 20 or 30 years, and make it so you’re not wedded to your house! Property prices back at 3x income would be a big move in the right direction.

  10. Greg@6
    I agree with your comments.
    I’m not quite holding out for 50%, 35% is my bottom line.
    By my calculations that would bring Sydney back into line with other major cities in the developed world.
    One thing to remember is that once prices have crashed, it would then be safe to factor in capital growth; though only in line with earnings growth (5%?) rather than the current 10% expectation.
    However prices do tend to overshoot on the downside, so a 50% fall is a real posibility.

  11. I hope that property will descend to 3 x annual income in the coming years. In the meantime i’ll continue to boycott buying!

  12. Tom@11. I’m not “holding out” for anything in particular. All I’m saying is that when I have to pay $800pw rent for a $800,000 house, we have a contest, and I’ll consider buying. Until then, I’ll keep renting, and keep saving the difference. For the place I’m currently living in to become “competitive” relative to its rental cost, its price needs to drop to about $700K. That’s a long way from the last sale price, 4 years ago, at over $1.3M. Coincidentally, I remember that back in the 1980s and early 1990s, that the rule of thumb was always 1000 x weekly rent = buy price.

  13. It’s great to see some critical mass developing around the opinion that house prices are headed for a significant correction. I think the price corrections will be more severe in the outlying suburbs than in the inner suburbs simply because of the demographics involved, but nonetheless some sanity will prevail everywhere.
    Steve Keen has written a great article which aligns with what Kris has been saying, see:
    The really interesting thing will to watch the Federal Govts. policy response to a significant correction in prices. Will they significantly increase the FHOG? Tax deductions for mortgage interest on non-investment properties? Cut interest rates?
    Maybe the Feds are already making preparations. It suprises me that there has been little comment in the mainstream press concerning The Treasurer’s decision not to renew the terms of two Reserve Bank board members – Donald McGauchie and Warwick McGibbin makes one wonder that his decision was based on finding compliant replacements who will be amenable to the Fed’s desire to cut rates by whatever it takes to hold up property prices.
    Interesting times ahead I think.

  14. Well done bb.

    Very concise and well reasoned argument on how distorted our society has become….

  15. Sounds like a bunch of losers who can’t afford to buy property waiting for a crash that won’t happen. And even if a crash did happen you probably wouldn’t be able to afford a house because most of you would be out of a job. Remember the only way property prices are going to fall by about 35-50% is if unemployment doubles.

  16. Greg @ 10 – Where do you get your numbers from? Floating around in your head? Ahh theres one – that will do. You certainly are not getting them from facts.

    Only $80k for a house in Clifton Hill 20 years ago – okay examples please………………….. What – you can’t find one? Not even one?

    To pay $1ook stamp duty in Victoria would require a sale of $1.819 million. Again examples please of a semi-detached house in Clifton Hill for that price.

    A quick search on produced – umm not one listing for ANY residential property in Clifton Hill over $1.25 million.

    In fact the highest price is $1 – $1.1 million.

    Stick to facts Greg not emotional ramblings and numbers plucked from thin air or you will be shot down.

    BTW – You are just as wrong on what a sub-prime mortgage is – Drew, PF & Abby are correct.

  17. Not that its a rule or anything but does anyone else see the spread of shops in malls skew way towards those prone to emotional purchase decisions based on peer pressure and “fashion” over practicality.

    It seems to me the suburbs displaying the greatest cyclic price (not value) swings attract also this very type of buyer. Those sales staff with the location (x 3) mantra and dressing up the boxes with landscaping and rented furniture differ little from the perfume pushers at Myers in my view. What self respecting fashionista could resist?……….

    Bless ’em, thats where your bubble comes from…………

  18. BB – well said.

    I think the biggest question to ask is why Steve Keen was the lone academic willing to go out on a limb and call the bubble for what it is…are there any other academics that agreed with Keen publically (econonmic academics)…

    What about the journos…they have done a complete hatchet job on the bubble case, by playing down negative news and boasting about past house price increases. Their role has been nothing short of illegal. I couldnt find any news on property on SMH today and then they snuck out the appaling finance figures for the month! This is the biggest sign of collapse yet!! And the consequences of a collapse are massive, but the SMH think its not a big deal???!! Please!! – they are hiding the news to suit their own financial interests.

    The lesson I hope Australian’s learn from this is to think for themselves…herd mentality and intellectual complacency have been major drivers for this bubble.

    Kris – for most new home buyers who have borrowed anywhere near 80% (i,e, were lured in with grants and low rates) makes sense to GET OUT NOW!! If the falls are going to be significant and you have borrowed significantly, then cutting losses, incurring transaction costs and renting is the way to play it.

    If you get out now then you can start saving and enjoy the financial ease of renting within your means.

    The people in the US who sold out in 2006 and started renting are going ok (provided they have a job!). But its the people that tried to ‘ride out the storm’ that got creamed the most! They are stuck underwater and drowing in debt!

    This ^ realisation will take grip at the same time as we see landlords realising their rental returns are rubbish and deciding its time to capitlise on their paper gains…

  19. md@15. OK, it seems I must confess. Not semi-detached. Free standing. Still tiny. Same size, but not not semi-detached. In any event, sticking to “semi-detached”, your search digs up “… the highest price is $1 – $1.1 million.” $1-$1.1 million for a semi detached in Clifton Hill!!!!!!!!!!! These were poor people’s cottages not long ago. Janitors bought these things! Now you must have a deposit of $500K PLUS a mortgage of $4K per month!!! I rest my case.

  20. Great article
    Would be great to see an article on the effects of governrment stimulus on housing market.
    I think Steve Keen did an article on this a few years ago. From memory it was clear the ‘roller coaster’ effect it had on sales and prices
    Would be interesting to see now. From the amount of properties on the market and slow down in sales I suspect the flip side of the stimulus will be much greater this time around!

  21. Greg @ 18- The search was for ALL properties – not just semi-detached.

    But yeah – who would buy a property at todays prices – it doesn’t add up.

    May I suggest revising your “buy price trigger” of 1000 x weekly rent. You can get that now in some areas (mainly country).

    While acceptable for the last 20 or so years, it is, historically, still too high.

    At 750 times I would become interested; at 600 times – getting excited and at 500 times in like Flynn! Providing interest rates are not above 10%.

    I wouldn’t be investing for capital gains – but for cashflow i.e. positively geared.

  22. On a side note $100k stamp duty on a $1.82 million house – WTF.

    Plus a transfer fee of $1352 – no wonder the scumbags in government prop up house prices with buyer grants etc.

    Maybe thats why the government wants a carbon tax – to replace revenue from lower stamp duty due to falling house prices!

    I know it’s federal (carbon) v state (stamp duty) – but its our money Ralph!

  23. md@20, Greg@18
    I remember reading a US book on property investing that said to buy properties with more than 6% rental yield and get out if the rental yield went under 5%. This was obviously a long time ago, as those sorts of yields have not been available for many years (I’m not sure what the current rental yields are in the US; anyone know?)

    That corresponds to buying properties at less than 833 time weekly rent and selling at over 1060 times.

    So if the property market goes back to the pre-bubble ‘normal’, houses that rent for $450 pw will be selling for $375,000.

  24. I hear you Tom @ 26.

    But if rental is 6% and interest rate is 6% you are relying on capital growth and tax deductions to exceed the costs of vacancy periods, maintenance, insurances, rates, agency fees etc to make a profit.

    Otherwise you are negatively geared – which is okay if you have the cashflow AND experience capital growth – if not then you are, well screwed!

    In a steady market 750-833 (as you mentioned) times weekly rental would be about right; I would still be looking for around 500 x for the bottom of the market as corrections, due to human nature, always overshoot – both to the upside and downside.

    This should also coincide with house prices being around 4 times average household income.

  25. md @ 24,
    You’re not necessarily screwed at 6% interest, 6% rent and no capital growth. Because remember, that is only year 1. If rents rise in line with inflation, and interest payments fall (as you pay of the mortgage), you’d become positively geared after a while.

    But I agree you’ll be able to do better than that as the bubble bursts and the market overcorrects.

  26. Greg @ 8
    That reinforces the point, either the house is too expensive or the rent is too low, which is the main point I was trying to make. Whoever owns this property should sell NOW, take anything above say $900k and put the cash in the bank, wouldn’t they be way ahead?Also @ 8 agree with the 3 x income, that was the basis on which I purchased my first home – problem is it will take one hell of a pop to get property to these levels, considering that land costs alone are around 3 x average income.

  27. I think to a large extent the rise and rise of house prices has conspired to hide a very simple truth: $300K – $500K is, for the vast majority, a helluva big debt. Escalating prices allow this debt to seem manageable, small even. It doesn’t seem so bad when you’re feeling “richer” each day, when you can always “refinance” on the back of a higher valuation. But as soon as the house price is no longer rising, let alone falling, that debt takes on a different hue. At this point in the “cycle”, taking on a great big debt so that you can “own” a house seems fraught with risk.

  28. The medicine that is needed is a US style splash down…20% should do it… that would eliminate a raft of speculators, re-align prices with incomes, re-align rents with prices, bring some normality to the market.

  29. in our case $360 a week rent for a house he is trying to sell for $560g is worth renting…had a conversation with the landlord this morning about how i dont want to buy it for all the real non mainstream reasons. he actually has 5 investment properties so obviously he isnt believing a sharp drop will occur…however later on in the conversation of truying to convince me it is a good time to buy he mentions his real estate agent was saying the same thing i was about the state of the housing market……supposedly the reason he is selling the place is so he can buy one in perth….

  30. Wow. The newspapers this morning full of reports of declining mortgage approvals and first time buyers abandoning the market.

    This gives me a flash back to a few years ago in the UK.

    Yes I know Australia is different but this is like watching Die Hard 2 having already watched Die Hard; I have a pretty good idea how this is going to end!

  31. Puntpal @ 19.

    Keen was the most prominent, but no means the only economist in Australia calling a fall in prices.

    I didn’t read the SMH, but I know that the finance figures the the ABS use are showing a very negative picture.

    Graph here –

    What it doesn’t show though is the uptick finance has taken in February and March, because the ABS doesn’t have that data yet.

    If you want more data you should also check out the rentals on market and stock on market. I’ll give you those links in another post or they won’t show this post for a couple of days.

  32. PuntPal part IV

    If you want to see what is happening in finance for housing, then the AFG figures (after the intro remarks) show a definite uptick from a disasterous January.

    link –

    If you analyse all of that data, then you will have a clearer picture of what is happening. It si still quite negative, but perhaps the picture will be more realistic for you.

  33. SQM alerts its subscribers on the state of the market

    The Managing Director of SQM Research – Louis Christopher’s comments on today’s housing finance approval figures:

    “Today’s housing finance approval numbers, released from the Australian Bureau of Statistics suggest that demand for housing has completely stalled in the new year. Indeed, demand for housing is now weaker than back in the second half of 2008; a point where house prices fell by five per cent as an average for the eight capital cities around the country.

    We believe this has occurred due to the November 2010 interest rate rise and less so the Queensland flooding.

    This is a general alert that we are putting out to our newsletter subscribers that the market is falling and is likely to fall at least 5% this year as an average for the capital cities. As many of our readers know, we are most bearish on the Gold Coast and Sunshine Coast markets. Brisbane, Darwin and Perth also appear to be in significant downturn.

    You will note as well that we have updated our Stock on Market for the month of March. National advertised residential properties rose by 13,100 or 3.8% for the month of March. There are now a total of 356,600 residential properties being advertised online. This time last year there was 241,700. That represents a 47.5% increase over 12 months.

    At this stage it is difficult to determine when the market will bottom. Most likely it will occur shortly after any announced interest rate cut or significant federal government stimulus in the market place, similar to the First Home Buyer’s grant boost released in late 2008. There is an outside possibility that the market could bottom without an interest rate cut or government stimulus if there is a large acceleration in inflation. At this point in time, consensus estimates suggest only a modest to moderate rise in inflation.

    It is important to note that in our opinion it is unlikely this downturn will materialise into a nationwide housing crash for the capital cities; rather a moderate fall in house prices is expected at this stage.”

  34. bps – I think that is fair advice from Louis, although secretely I believe he is a little more pessimistic than that release.

    I think that outside the capital cities (unless there is strong demand due to local conditions IE mining) prices will be very fragile. At least in cities there is constant demand at the lower end of the market.

  35. PF@40,
    Crikey, you’re pulling out all the ammo to support the team. Does all this fancy data dispel Sayce’s latest opinion piece? Or is this just an insight into the mortgage brokering mindset? Any chance you can wrap this into a quick summary for a meaningful summary?

  36. JC – just laying out the data for everyone to see, so they can make their own analysis. the data is real, not fanciful, and much of it is very negative. I think I’ve been very open with it.

    Most people of course just want to hear what the want to hear, but hopefully many here will actuall look at the data and form their own opinion.

    I would appreciate your opinion, and then we could discuss that in an open manner. Other opinions are welcome of course as well. It could become a bun fight, or a sensible discussion.

    Your choice…

  37. PF@42,
    Well I’m just an skeptic with a jaundiced eye so my opinion is rather meaningless. You’re the professional with a finger on the pulse of the property nation so you’re the one who should be leading from the front. Of course I want to hear the compelling summary that flies in the face of what the naysayers keep pumping out. If it’s just the same limpid stuff dished out daily by the other pros, please excuse me for not taking any notice. Concrete please. I don’t care if you’re eventually proved to be right or wrong.

  38. Seems very premature for Louis Christopher to be predicting the bottom. And he thinks it could take just one interest rate cut to turn the market around! Very strange after all the negative information he’s been releasing of late.

  39. Did you guys know this? I didn’t.

    ‘Under federal laws, homeowners can apply to APRA for access to super funds provided they can prove a lender is about to foreclose on the family home.”

    Do you think this is a good thing? I wonder if this will potentially prolong any crash as it keeps people in houses they cannot afford for longer?

  40. Drew – yes some state governments will also lend small amounts on very generous terms to help homeowners cope in times of stress. But it has been available for many years.

    JC – I’m up for it but I see you’re once again unwilling to make any analysis or take any risks. It’s just sooo much easier to sit back and criticise isn’t it? Will you ever sprout some testicles?

  41. pf. I don’t see an uptick in housing finance as a positive. Blind Freddy knows that the problem is too much debt. More debt is not going to help. I reckon anybody punting on an interest rate fall is mad. Take a look around you. The whole Western world (and much of the rest) has interest rates at record lows. Many close to zero. AND they’re printing money out of thin air as fast as they can to boot. Lower rates? I very much doubt it. Every single economic indicator ever invented by the capitalist system is saying one thing: we need to save, and reduce debt. Every single capitalist government is encouraging – via monetary policy – the EXACT opposite by desperately holding rates down in order to inflate bubbles. Rates have only got one way to go. And it ain’t down. AFTER the crash, maybe.

  42. JC – further to my earlier post, yes you are a skeptic with a jaundiced view, which makes you every bit as much unbelieveable as the most jaundiced real estate spruiker, although diametrically opposed.

    Still a jaundiced view is a jaundiced view, regardless of the angle.

    I think the above article by Sayce has been one of his best. I agree that most owners should not sell, the cost of selling and repurchasing later is just too much.

    If I was buying now I would probably wait, unless I found a bargain. Waiting may not get me a better bargain, but it is unlikely to get me a worse one either, so no rush as far as I’m concerned.

    I still expect those 5% to 10% falls nationally, with the Gold Coast and other tourist areas being the worst hit, and Sydney probably faring the best, although outer areas not performing that well.

    Fire away whimps ….

  43. Greg – it really doesn’t matter what your philosophical position is, what is happening is what is happening.

    I expect we will deleverage by about 20%, but we will NOT go back to 1965 levels, at least not in our working lifetime.

    I inferred that the uptick for finance numbers was a positive for house prices, in a sea of negative data, it wasn’t a moral position.

  44. Drew @45 – This has been around for years. Back in 2007 banks and building societies were apparently handing out the applications to send to APRA when people started to get close to the edge.
    Bad news on this you get exactly 3 months worth of repayments + 12 months interest. no more. plus taxed at a fairly hefty rate ( at least 21.5%) compared to the 0% for retirees. Depending on how much is in a persons super this can decimate the account, removing the option to do this again in the future.
    And the level of foreclosure required means that a couple of days of inactivity by APRA or the fund- whoops. No more house
    APRA will also do early release for unpaid council fees and various other compassionate reasons. Lap band surgery is a popular option.
    Based on previous experience this will do very little to prop up the market, due to amount of work and persistence required.

    Super funds can also release money on “financial hardship fgrounds” but that involves Centrelink, and can only be done once every 12 months.

  45. pf@49. Curious as to how your 20% deleverage and 5-10% price falls is anything other than conjecture.
    On what basis do you see deleveraging? On every measure, debt levels are getting worse. In fact, Australians have more leverage now than they did pre-GFC. Don’t forget that deleveraging by 20% takes on a different (bigger) hue when the value of the leveraged asset is falling!
    As for the 5-10% house price falls. First house prices here were going to keep going up, then up but slower, then plateau, then moderate, and now fall but only a little. This in spite of the fact that they’ve fallen 20+% everywhere else, and are still going down.
    If what is happening is what is happening, then I’d say the fallout is going to be a LOT worse than your description.

  46. Well Kris hats off,really try to help people today.
    So right keeping debt levels low and buying cars that are cheap and good fuel economy is good start to building real wealth most people forget depreciation on expensive cars.
    Extra cash saved can earn interest in a bank.
    Jims Mowing the owner drives old Volvo car worth bugger all and Jims a multi millionaire,people ask him why he does not buy a new car Jims reply was expensives cars cost more money.
    Nobody going to steal a crap car and put a scratch down the side.
    Sometimes a simple life is better Mr Universe traders can have the big expensive cars to feel important.

  47. PF,
    OK, my opinion is that I don’t know. My opinion is also that it is very foolish for people to take risks on record high asset prices with record high debt. I also believe that the experts’ models cannot accurately estimate the risk because the underlying model assumptions are too simplistic for the phenomenon they are trying to measure.
    My opinion isn’t an opinion. It’s a basic truth. But like I said, I’m a skeptic not a professional. And we know who the punters listen to. A decision to buy a property is gambling on the financial foibles of the masses. Sorry sunshine, at these levels of debt, most people are way out of their league.

  48. Greg@51,
    You’ve got it. These people are always very free with the numbers but without stating their assumptions, they are nothing but bald faced liars and hucksters.

  49. Exactly the answer that I expected JC.

    Your response to everything is like a clockwork mechanism.

    Well done. No wonder you like contrarians, they do all of the thinking for you. You never have to defend any position, and you can snipe at everything.

  50. Its the DATA. Its the DATA. No its not. Residential property prices aren’t about economic fundamentals. Its all about SENTIMENT remember? Fresh flowers, the aroma of baking bread, and fresh coffee. Some new pot plants and a lick of paint to hide the dry rot. Who could resist snapping up that charming $1m BARGAIN on a sunny Saturday auction, the real estate spivs grinning like cheshire cats as they climb into the leased Lexus after five minutes ‘work’. Don’t worry about the price. Those friendly lenders will be only too willing to stump up the funds and remember it will be worth twice as much in a few years time – right? And the sentiment is/was? “DON’T WORRY MATE – ITS DIFFERENT HERE”. And that was all she wrote.

  51. Greg – you’re right, this is my best guess. I haven’t been saying that “First house prices here were going to keep going up, then up but slower, then plateau, then moderate, and now fall but only a little.”

    Check with the others, I have consistently stated that prices will fall 5% to 10% for quite some time. I accept that I may have to moderate that view, because it won’t be perfect, but it will be close.

    I base my view on what I am seeing, and upon my experience, something I know many don’t have.

    My reduction in debt levels is on a % to GDP basis – I’m talking individuals, not corporate or government debt. You will have to give that a decade at least to play out.

    Even in the USA not much has changed in the debt levels, only a modest change. A house price crash doesn’t achieve that, it only affects debt levels for new entrants.

  52. pf@57. A house price crash reduces the value of the asset against which the debt is leveraged. The problem is that the debt DOES “stay the same”, but all of a sudden it becomes a big problem, because the asset is gone. Net debt skyrockets! And you go from solvent to insolvent in a flash. Australians have close to $1trillion in debt sitting behind their inflated property. Even a small price correction could tip a lot of that debt into the “insolvent” basket.

  53. Greg – I agree absolutely. A fall in asset values doesn’t throw people into the street though, it’s interest ratse that do that.

    Our RBA have been increasing rates much faster than most countries, partly to achieve what we are now seeing.

    Must do some work now.

  54. We all know that the investors will be the first sellers. But has anyone considered just how low things could go if owner-occupiers also try to sell en masse?

  55. WTF!? you bought a Getz NEW!?!?!?

    are you mad!!???

    ok, ok, I get that you probably have no interest in driving at all, thats fine… but surely! buying a second hand car! if only a couple of years old!!! SURELY that’s a better idea?

    buying a brand new car is just as much a luxury as buying a fancy car…

  56. PF@57,
    You’re a scream. Perhaps we got get the combined “experience and gut feeling” of the nation’s mortgage brokers; aggregate them; and then get a “core understanding” of the future. Imagine that.
    But as you allude to earlier, making predictions is all about the amount of chest hair you have in your world. Admitting the truth is like letting down your guard. It’s all about putting on appearances and acting like you know. Plenty of suckers to sweet talk. It’s not the life I would like to live but dealing with the same attitudes is part and parcel of life in Australia.

  57. md @ 26
    houses at 4 x annual income are still too high.
    It needs to come down to 3x to be anywhere normal

  58. tel @ 30
    The “land costs” alone at 3 x annual income is only that way because GOVERNMENT has turned land sales into its pet milkcow!
    I say we turf the barstads out of office and you will see land prices come down to sane levels….
    I’m all for revolution!

  59. Drew @45
    I wasn’t aware of that. I would say that it is a very bad idea to dip into the one asset that the banks can’t get their hands on if you do end up going bankrupt. But I can see how it would be tempting if you are in that position.
    However based on what k@50 said concerning the amounts, I wouldn’t see it having much impact in a real downturn.

  60. The truth hurts does it Abby. The only way idiots like those wishing for a crash in property are going to get a crash in property is if the unemployment rate goes up to the 10% range.

    So most likely those thinking they can then buy a property at 1/2 price will be out of a job and not be able to buy anything. So keep wishing guys for 100s of thousands of Australians to lose their jobs.

    Be careful what you wish for, you might just get it !

  61. You guys can all sell and start renting, once prices drop 10% I’ll buy up all your property and rent it out back to you at top rent.

    What a bunch of losers !

  62. Incorrect Tim, a rise in interest rates will put more pressure on prices. Conversely if rates drop it will take pressure of home prices.

    If your a bull on property, you should wait and watch the market, I think timing will be the key for buyers now, and that’s not easy to do. Watch for an increase in first time buyers, that will signal a change in the market.

  63. abby @65
    I’ m with you on the revolution, all levels and sides of government are all of the same useless ilk. How do we turf them and not get another bunch of DH’s with the same lack of brainpower?

  64. Tim @ 67 & 68,

    How many properties will you be able to buy up without running out of cashflow to fund their losses?

    Will you be getting a rental return that’s lower than what you could get in the safety of the bank?

    Do you not see any risk in buying into one of the most inflated markets in the world at the start of a correction?

    And will you be able to command “top rent” as opposed to market rent, without your properties sitting vacant?

    I guess we’ll find out who the losers are in due course.

    Personally, I’m not wishing for a property crash, but I believe it’s going to happen. And I’d prefer it happens sooner rather than later because the bigger the bubble gets pumped up, the bigger the inevitable, and painful, burst will be.

  65. Tim@67. Why does unemployment have to go to 10%? Why not 8%, or 12%? In the US, unemployment went up AFTER the bubble burst, not before. Oh, I get it. It’s the Australia is different defence. What the property bulls seem unable to grasp is that home prices are going to go down because housing IS TOO EXPENSIVE. Simple. Nobody without a Ponzi asset to flip can afford it anymore. Why is that so hard to understand?

  66. I have no problem with property investors. I’ve invested in properties myself, and intend to do it again.

    I have to admit I’ll be a little bit happy when I see people like Tim @ 67 lose a lot of money. The blatant denial of even a possibility, the sheer arrogance and belief that they are superior to all others.

    I always love a good reckoning.

  67. I hear you Greg.
    Everyone seems to think that the GFC caused house prices to crash in the US and UK, but this didn’t happen in Australia because of the great economy.
    The fact is that contracting credit caused falling house prices which caused the recession.
    The recent news on declining mortgage approvals shows that credit here is now starting to contract. It doesn’t take a genius to figure out what happens next.
    People are obsessed with the auction clearance rates, I would recommend keeping a keen eye on mortgage approvals instead over the next few months. If they keep declining, then it’s game on for the long overdue property crash!

  68. tel @ 70
    It should not matter who is in government if government is curtailed to that which it ought to be there for – the enforcement/protection of the common law rights of its citizens.

    Unfortunately government has grown so large and powerful that it is now the biggest individual threat to the rights of its citizens.

  69. Greg @ 74,

    In the USA the sub-prime mortgage crises was the ignition for the start of the recession. It caused property prices to start falling as people who took up the sub-prime loans, those that could least afford to buy houses in normal circumstances, could not afford to pay their mortages once the interest on their loans started to clime at the end of the honeymoon period. Now the funny thing with the USA is that if you have a mortgage and cannot make repayments anymore, you can just get up and leave, and then the lender has responsibility over your asset. Once you had this happening widespread over the USA, you suddenly had an oversupply of vacant properties that no one wanted to buy. This cause the lenders and other businesses to go belly up thus causing a flow on affect and mass unemployment, thus further putting pressure on property prices to fall.

    The Australian market goes through cycles, as interest rates increase demand on property decreases, thus property prices flatten or go down say upto 10-15%. Once this slow down in property occurs interest rates will start to fall and demand for property starts to increase putting upward pressure on prices again. This happened in 2008 when interest reates were between 9-10% and no one was buying and prices had fallen about 10%. As soon as interest rates started falling people started attending auctions again and suddenly there was buying activity again resulting in the mini-boom we experienced in 2009 & 2010.

    The other thing that happens when prices fall by say 10-15% is that rental yeilds become more attractive, thus brining more investor, who were sitting on the sidelines, back into the market.

    Now all factors being equal, what makes you think things will be different this time. We will have a bit of a slow down and once interest rates start their downward moves again prices will once again be on the increase. And unless there is something that is different, like massive unemployment or changes to legislation, then it will be no different.

    You say “HOUSING IS TOO EXPENSIVE”, but what is expensive? Something may be expensive to you but is not to someone else, it is relative to who you are, what your circumstances are, and what you are comparing it with. Most people who are looking to buy property may think it is expensive, but if prices drop 10-15% as I have been saying, then suddenly the prices seem like a bargin. These people looking to buy will buy because they do not want to miss out like they did previously. In 20 to 30 years time, people who didn’t end up buying will be saying, gee I should have bought back in 2011/12, just like people today say about wishing they had bought back in the 1980s or 1990s.

    As I said unless there is some external factors like large unemployment increases or drastic legislation changes then things will be no different than the previous cycles, but they will be very different from the situation in the USA.

  70. Why is that Matt @ 75 ?

    You are just like all the others, so selfish. Wanting others to suffer so you can be able to afford property. Well like I said in my previous post if property prices do crash, it won’t just be the investors that may lose out, but also alot of struggling families as people lose there jobs.

  71. Drew @ 73,

    I am currently getting 7-9% rental returns on my current properties, which we keep the rent at the lower end of the “market rent”. By top rent I meant the upper end of “market rent”, as you cannot rent something for a price way above market if there is no demand for it.

    Now if prices drop and I buy more properties, then the yield will be even higher, so I am doing much better than having money in the bank. All my properties are positivley geared so I wouldn’t buy unless I can increase my cashflow.

    I also have no intention of buying properties at the start of a correction. Interest rates are too low for me to start buying any more properties. Once interest rates are over 9%, and prices have fallen 10-15% that is when I intend to start buying. If I can afford to buy property when interest rates are 9-10%, then I should be able to afford it when rates drop to 5-6%. Don’t forget when interest rates are going up, property prices usually start falling but rents usually start rising. So I would be buying an asset at a reduced price with increasing yeilds, with the likely next move in interest rates on the down side.

  72. “As I wrote on Monday, it’s amazing to even say it, but right now there’s a greater chance of losing money on a property investment than there is on small-cap mining stocks!

    It shouldn’t be that way. But it is.”

    Really? Why? If the housing market is overheated your statement is clearly false and in the current market it is borne out.

    Your bias toward property is showing though unlike a lot of other property speculators you’re reasonable enough to tell people to think about getting out.

  73. Hi, love the website, esp, forthright comments on property. Call it as it is I say. I have been lonely on this for years. Unfortunately the property cycle can be well longer than a generation…..
    Agree with all except if you get wiped out in a Getz you’ll be sauce, probably only reason for getting a more robust care for that long twice daily trip. Car accidents arent infrequent in Oz. A thirsty car isnt good, have to be prepared for high oil prices, although a decent worldwide recession could knock them back a bit.
    One of our friends said, get the cheapest car your ego can cope with.
    I’d suggest a compromise, Hyundai i30 , diesel automatic I think is about 22++ K new, and nice car, and little more protection for you than the Getz. 2 y.o. with 45K about 18,000.

  74. Hi, do not agree with you about housing.Question:” would a piece of wood cost more or less tomorrow?”.It is obvious that prices would keep going up, especially in Melbourne.
    What about wages?
    Will it cost more or less to build a house tomorrow?
    Of course it will cost more and therefore house prices will always increase and our beautiful state keeps on attracting more and more people to live.
    Talk about share market what a disaster!
    I have never touched shares and to more its the same as gambling with your money.
    If it did make you money you would not be writing and holding share courses on how to invest!
    And please do not tell me you want other people to prosper also. This is hogwosh!

  75. Fantastic article! & Kris-funny world we live in! I just read the whole article & almost choked on my cup of t-when I realized u r kris-my cousins hubby! Lol! Great advice-I think we’ll b selling & renting 4 a little while! Best wishes & hi 2 all the family! Sheya xo

  76. I know its not fashionable in these pages, but I’m a try-hard Marxist. To me, this current recession/depression is a normal business cycle accentuated by debt, which had inflated the ability of consumers and put off the reckoning, as it were. And yes, this is against a long-term asset inflation generated by debt.

    My 90 year-old mom said recently, in her day, houses were a burden. Cost money to repair, maintain, and never went up in value. They WERE like a car – they depreciated.

    Personally, I’d like to see capital gains tax on houses – like the Yanks. Most of Australia’s wealth is buried in brick and mortar, which is utterly non-performing. But sadly … I recall when Keating tried removing negative gearing … rent went up & up, as the investors fled.

    I’m gonna move out of the house, rent it, and then rent somewhere else smaller. Then I get the best of all possibles. Yes, the prices might plummet, but on the margins. They’ll be pumped again – bet on it – with low interest rates. Stand back and watch. Then I’ll sell.

  77. I’d like to tell you my strategy, which I never hear anybody else use. I like freedom and spend a lot of my time travelling, both in and out of Australia. So, owning a house doesn’t make much sense. Instead I have several managed apartments. They bring in a regular income (and outlays, such as body corp and mortgage interest, are claimed against tax) when I’m not there, and I can use them whenever I’m “home”. To me this is the best of both worlds, and it really doesn’t matter whether the price goes up or down – I’m not selling. It’s the property equivalent of a dividend-paying blue-chip. I wonder why nobody else does this and what Kris thinks about my strategy?

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