Why Housing Will Fall as Hard as Silver But Take Longer to Recover

Why Housing Will Fall as Hard as Silver But Take Longer to Recover

“The rise in house prices is driven by the fact that households were able, due to financial deregulation, to access almost unlimited amounts of credit if they wanted to and, probably even more importantly, the fact that interest rates came down to much lower levels through the 1990s than they had been in the ‘70s and the ‘80s, and that just gave households much more borrowing capacity.”

That’s something your editor could have written.

But we didn’t.

Instead, it was spoken by Reserve Bank of Australia (RBA) deputy governor, Ric Battellino.

He was speaking at the annual stockbrokers bash.  This year it was held at the Hilton Hotel in Sydney.

All we can say is this: it’s nice of the RBA to admit rising house prices were the result of a credit-fuelled boom.

Perhaps he’d like to send his colleague, Dr. Luci Ellis a copy of his presentation.  Last year she told a property conference – no surprise there – that Australia does “not have a credit-fuelled speculative boom…”

But despite his admission that easy credit fuelled growth, the deputy guv refuses to accept an Aussie housing bubble.

In another answer, the depooty said:

“But, people have been forecasting a decline in Australian house prices for a long time, mainly on the back of the fact that house prices have fallen in most other countries around the world, but I think that sort of forecast doesn’t really take into account the factors that are at work here in Australia, particularly the population growth and the fact that incomes are still rising.  So house prices are adjusting relative to income here, not because house prices are falling, but because incomes are rising.”

Deny, deny, deny…

But let’s be even-handed here.

It’s not just housing where your editor fears a bubble.  We’ve got our bubble alert turned to high in the commodities sector too.

Commodity prices haven’t peaked

But depooty Ric doesn’t.  He sees no bubble:

“From all the work we’ve done, most of what we see in commodity prices today is driven by fundamental demand/supply factors.  There’s no doubt there’s a bit of speculative activity as well, but, fundamentally, it’s very strong demand that’s driving this… I mean, most people have been forecasting for the past year at least that commodity prices are going to come down; they keep going up.  It’s not clear they’ve even peaked yet.”

Hmmm… we’re not so convinced.

In our weekly update to Australian Small-Cap Investigator subscribers, we printed two charts.  This one:

And this one:

Source: ABARE

The first is the RBA’s Index of Commodity Prices.  As you can see, the price has spiked sharply since early 2009.

The index is now about 20% higher than before the economic meltdown in 2008.

The second chart is from the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARE).  It shows the value of forecasted new capital expenditure for the resources industry.

Interestingly, the two charts are almost identical.

That much isn’t surprising.

You’d expect higher capital expenditure in the resources sector as commodity prices rise.  Simply because higher prices make more projects viable.

And it also makes existing projects more profitable.  Encouraging mining companies to increase investment in capital.

Twin Aussie bubbles

In our view, both housing and the resources sector are in bubble territory.

Although in fairness, they’re in different phases of the bubble – with the housing market slightly more advanced.

They both attracted huge amounts of capital… in the belief prices will continue to climb… and the higher they climb, the greater the belief that others will pay higher prices.

This is when you get the kind of talk you hear from depooty Battellino.  He believes the price rise is fundamentally driven and so prices could go higher.

But what about the gold and silver price, you may ask?

We’ll cop that one.  It shows even your editor is human.  We got caught up in the short-term ridiculous silver price rally.

That’s what price bubbles do.  They draw in even the sane.

But we’re happy holding gold and silver.  And we’re happy adding to our position on a regular basis.  Simply because we’re not leveraged to it.  Because we’re not leveraged, we can’t lose more than we’ve invested.

If we’d borrowed for our silver investments, we’d be in big trouble.  But we didn’t, so we’re not.

That’s not the case for leveraged home buyers, resources companies and silver buyers.  They’ve all taken a big punt on prices going higher.

That’s why leverage is important.  Without it, buyers or holders can survive short-term volatility – that’s the same for housing, resources shares and silver.

But those using leverage are more affected by rapid price moves and interest rate moves.

Bubbles follow same pattern

You see, bubbles are the same in any asset class.  The only difference is the time taken for the bubble to burst.  In stock and commodity markets the reaction is quick.

For example, you’ve seen the silver price soar.  Then it collapsed.  And now it’s recovered.  Although it’s still below the peak.

In the housing market the action is much slower due to low liquidity.  But it’ll follow the same pattern.

Don’t forget, the U.S. housing bubble burst in 2006.  Five years later, prices are still falling.  And there’s no near-term chance of recovery.  But one day… someday… it will recover.

That’s worth remembering when you read in the mainstream press about it being a buyers’ market for housing.

It’s not.  It’s still a sellers’ market.  Because if a seller can con you into buying now, they’ll be laughing twelve months from now as prices fall further.

Like an unexploded bomb, we’d suggest house buyers continue to keep their distance.


Kris Sayce
Money Morning Australia

P.S. Although we’re cautious about the outlook for the stock market, it doesn’t mean you should avoid it.  While we suggest holding precious metals, cash and dividend paying stocks in your portfolio, you do need to take risks to increase your returns – to combat inflationary central bank money-printing.  One of the best ways to increase returns is using small-cap stocks.  To read more on how you can place small stakes to make big returns, click here…

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.

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26 Comments on "Why Housing Will Fall as Hard as Silver But Take Longer to Recover"

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They (the msn) were hard at it on last night nine news (Sydney) – a so-called ‘news’ item on why it’s a great time to buy a house. They acknowledged house prices as falling but with the classic ‘better get in now cuase they will be going up again by Christmas’ routine. Who were these experts you ask? Well one just happend to be a large real estate franchise operator – no doubt trying to clear out some of his mounting (and still overpriced) listings within specific areas. I hope they charged this bloke for an ‘advertorial’


I’ve been following you guys on the housing bubble for quite a while now, and was excited when you announed that the bubble had burst! But unfortunately lookinf at the house prices in the suburbs of the inner west of Sydney the prices seems like they are still going up! Example houses in the suburb of Strathfield is >$1M!!! But I’m holding out and hope they do come down. But to start at >$1M and come dowm 30-40% is still >$600000!!: (

A company director will always tell his staff they are doing a great job. Targets are always reached. Hardly anyone fails a training course. People get qualifications just for attending. Students are taught literacy at university. Exam pass marks are routinely downgraded. Politicians do as the media tells them. Planning permission depends on who you know. Justice is decided on how much money you have. Estate agents will tell you any lie you would like to hear. Every restaurant has an “award for best restaurant” on the wall. All freedom fighters are terrorists. All protestors are left wing commies, (unless… Read more »
David Hindin
Kris, you say “We got caught up in the short-term ridiculous silver price rally” Well, dont feel bad. That wasnt a rally, and it wanst ridiculous. You aint seen nothing yet. So, who was COMEX working for when they made 5 successive margin calls (4 after the price had already started to fall!). It was a deliberate take down of the market. However, the fundamentals are still there, insufficient supply, excess demand, low inventory levels. This tells me that there is pressure on prices and will remain so until either inventory levels are back up or demand falls. So, I… Read more »

With every house purchase you should qualify for a complementery frontal lobotomy ! It would be the equivalent to backing a three legged horse in the Melbourne Cup.


“Because we’re not leveraged, we can’t lose more than we’ve invested.”

That’s just another way of saying you can lose all that you’ve invested.


“So house prices are adjusting relative to income here, not because house prices are falling, but because incomes are rising.”

– OMG is he serious? Incomes aren’t going anywhere, unless you’re in the mining or finance industries. In fact I’d hazard a guess they are going backwards compared to the real inflation rate.


Alan Greenspan for years declined to talk about the property bubble fuelled by easy credit in the US. Until it was too late and the bubble implode. I think I see similarity between the US Feds and the RBA.

Ben Clifton

The silver story still has a long way to play out !
I brought in at $8 per ounce and think $100 per ounce in 2012 is a possibility. However $250 an ounce for silver in 2011 – You got to be joking Daily Reckoning team….You need to stop this google adwords advert.

andy dufresne
HL#2, Talk of a bursting bubble is IMO premature where the primary markets are concerned. It’s a similar story in Melbourne’s west and rural periphery. Asking prices are still climbing, but movement is slow due to the buyer/seller stalemate. Time will tell whether the increase in listings will lead to meaningful reductions – I’m seeing a 50% increase in the areas I watch, yet despite the bid side drying up, the ask has continued to increase over 6 months. The catalyst is not yet evident. Vested interests have turned their efforts towards minimising any further cash rate increases. I reckon… Read more »