aussie house prices-2010

8/7/2019 aussie house prices-2010

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Revealed: The truth about Aussiehouse prices – and how the property

industry’s covered it upBy Kris Sayce

Money Morning Australia

I you’re thinking o buying an investment property in Australia in the next 24 months – or even i youown property – you need to read this report now.

Because it could be the only honest in o you get on Aussie real estate this year.

Basically, there are two schools o thought when it comes to investing in Aussie property.

On one side, you’ve got a very vocal group o property spruikers – they believe things are pretty much and house prices are supported by population growth, low interest rates and a so-called chronic housingshortage.

On the other is a smaller group o housing sceptics – they think Aussie property is in a bubble that’s beuelled by easy credit and stimulus (low interest rates and rst-home buyers’ incentives) – and as the st

gets wound back the bubble will burst, sending property prices tumbling.

I tip my hat to the spruikers. They produce great spin. Take a look at these chestnuts rom the OHL Gro2010/2011 Property Investment Report.

• ‘Massive population growth and a shrinking land supply are combining to create record price growand auction clearance rates’

• ‘Australia’s population growth continues to surge ahead, creating unprecedented demand orAustralian housing’

• ‘A recent government decision just massively reduced the amount o land available or residentidevelopment in the designated growth corridors’

• ‘The best strategy in a rising market is to buy at a xed price o the plan. You are e ectively bproperty at today’s price, but not having to pay or it until it has already had signi cant growth’

I you eel a bit sceptical about those acts, you’ve good reason to!

But i you read that in the OHL report – and didn’t know any better – you could easily be tempted to ruout and buy a rental property right now. And why not? The thought o getting something ‘rare’ or ‘chtoday and selling it to a oreigner or a tidy pro t tomorrow is very appealing.

I’d do it. (That is, i I didn’t already know property is a riskier investment than shares right now!)You see, there are people out there – unscrupulous salesmen and women – with a vested interest in sellin

you property.

Special Report


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Money Morning Australia Special Report

They’re money lenders, property developers and real-estate agents who make a living fogging you loansand houses...

And they’ll say anything to convince you to buy...• ‘Retire knowing you’ll have a steady stream o rental income to rely on – because people will alw

need a house to live in...’• ‘I you own an investment property port olio it’ll show your riends and amily you’re a real su• Or this, a quote rom David Airey, president o the Real Estate Institute o Australia, in TheAustralian

on 29 July 2010 –‘Australians value property so highly as a means o security and haven or theiamilies…’

And then they say things to help rationalise your decision to buy. Some o their avourite choruses incl‘property doubles in value every 7–10 years’ and ‘housing prices won’t tumble because they’re proppedby population growth’.

But it’s a bunch of lies – as I’ll show you in a second.

Here’s an example o the property spruiker’s logic in action... take a look at these news articles...

House prices set to soar

An undersupply in the Australian property market will orce residential property prices up by 30%according to a BIS Shrapnel chie economist

International Business Times 27 July 2010

Housing Shortage Makes Australian Home Prices Almost Twice U.S.

... a shortage o 200,000 dwellings... is helping uel Australian home prices, which are 82 percenhigher than in the U.S.

Bloomberg Business Week 5 July 2010

Would you believe this data is based on statistics that include HOMELESS gures and immigration num(Which don’t account or whether people are moving to Australia to live with their amilies or buying own homes?) Well they are. It’s madness.

But in the property spruikers’ minds, a population increase means more demand or houses which meanhigher house prices, which means,‘Buy be ore it’s too late!’

These catchcries are parroted by real-estate ‘experts’ across Australia. And most o us readily accept th

That’s why I’m writing today. To show you – using plain old common sense – Australia is in the midst ohousing bubble. Then I’ll show you why the property experts believe Australia is di erent – and showwhy they’re wrong. Finally I’ll show you where to go to get the best contrarian advice anywhere in Aus

Right, rst things rst...

Are Aussie house prices in a bubble?

According to the NSW government’s Centre or A ordable Housing –

‘Housing is a ordable when households that are renting or purchasing are able to pay their hous

costs and still have su fcient income to meet other basic needs such as ood, clothing, transport,medical care and education... housing is a ordable i it costs no more than 30% o a householdgross income.’



As you can see, property in Melbourne Victoria hasn’t been anywhere near that level since 1997.

According to this chart, a median-priced property will set you back 7.8 times the average Aussie salary.or to put it another way, i you’re earning the average $68K wageover 85% of it will be spent on yourmortgage!

But it’s not only Melbournians who su er.

According to the ‘2010 International Housing A ordability Survey: Rating or Metropolitan Markets’Australia is home to22 of the top 58most una ordable metro housing markets in the world.I’ve underlined them in red.




The most a ordable Australian metro area to buy in on the list will still set you back 5.4 times the averannual salary!

And that’s be ore you take into account some o the hidden costs o housing.

‘I you buy an investment property, you’re paying maybe 4 per cent stamp duty on the actual totaprice, not just your investment. Say you’re buying a $500,000 house, so you’re paying $20,000 in

stamp duty. I you’ve only got a $50,000 deposit, you’re paying $20,000 transaction cost on the $50,000 that you have invested... You also have your interest and maintenance costs along the waywhich can also be very substantial.’

Ron Bewley, Woodhall Investment Research – TheAustralian, 28 July 2010

So what is a housing bubble?

The word ‘bubble’ gets bandied about so much that it’s almost lost all meaning. Here’s a quick de nitio

A housing bubble is what happens to house prices in a residential market when valuations increase tounsustainable levels – quickly. Like say, 7.8 times the average annual salary!

Take a look at the chart below or a clear picture o what I mean. It’s a comparison o US, Japanese anAustralian residential house prices rom 1980 to 2010.

Once prices peak, a correction ollows – bringing house values into line with average incomes.

You can see how it happened in Japan in the 1990s and the US around 2007. Look at the sharp drop othe US decline, compared to the long, drawn-out Japanese one...

It tells me one thing. The higher prices climb, the urther – and aster – they all.

And Aussie house prices have a long way to fall!

And i you believe what you read in the news, it could reach its tipping point any day. Take a look at thstories rom 30 July 2010...

House prices post largest fall since April 2008

In the three months to June, all capital cities experienced virtually no growth or a all in values, w



the exception o Adelaide, the RP Data-Rismark Hedonic Home Value Index has ound.

www.news.com.au

Home prices drop after 17 months of gains

National city home prices ell or the frst time in 18 months in June, as rising interest rates sent aclearance rates lower.

www.news.com.au

O course the property spruikers aren’t worried. They predict house prices will level o . You know... economy sorts itsel out. And then prices will start soaring again.

It’s as i they don’t understand why prices are as high as they are. They talk about population growthand land shortages as i that explains everything. But that’s not what’s driven the median house price inMelbourne up by 243% since 1996...

How the government increased your mortgage by 109.9%

Here’s the skinny.Government stimulus is the central driver o the over-heated property market.

It started in the year 2000. The rst-home buyer’s grant arti cially stimulated demand or properties bypressuring rst-home buyers to jump into the real-estate market be ore they were ready. Because they hclaim the handout be ore the government decided to take it back.

So they got their ‘ ree money’ and started buying up property... and the erce competition or properti(along with the ree money) made them eel ree to overpay to seal the deal.

This buying renzy – stirred up by rst-home buyers desperate to start climbing the property ladder – phouse prices at the lower end o the scale up quickly.This prompted home owners to sell in order to cash in on their property’s infated ‘value’. They then beca part o a group o second-home buyers, looking to upsize to a bigger, better house…

And so on and so orth.

It’s the greater ool theory. Up until recently the Ponzi has been allowed to grow because o the belie someone else will overpay or the house that

you overpaid or.

And it helped push the median propertyprice in Melbourne up rom $249,800 to$524,500

Things really heated up in the monthsleading up to the highly publicised pull backo the rst-home owner’s grant (30 December2009). Interest rates were still at or near anall-time low 3% – and nobody wanted tomiss out.

Just take another look at that massive jumprom 2009–10 .

But still the property bulls re use to believeAussie house prices are overcooked.




These two headlines rom 18 June 2010 might catch your eye.

No housing bubble Australian Property Investor.

Housing bubble? Not here.RP Data – ‘Australia’s #1 Property Data Provider’

Or there was the speech given by Luci Ellis, Head o Financial Stability at the Reserve Bank o Austra(RBA) at an Australian Financial Review sponsored con erence on housing on 18 May 2010.

‘Recent data suggest that we do not have a credit- uelled speculative boom on our hands. It woulnot be desirable or the current situation to turn into one.’

So what ‘recent data’ was Ms. Ellis re erring to?

I mean, it could be the Australian Bureau o Statistics (ABS) chart she used to open her presentation:

But it has bubble written all over it... Well, our version has anyway!

And obviously she hasn’t noticed the numbers contained on the RBA website which provide an insight ithe ‘non-existence o the “credit- uelled boom”’.



560% increase in household debt

Those numbers are in millions. And residential borrowing has increased 50% in nearly three years.

But no matter what the acts are, our home-grown Aussie property pundits seem to believe one o two Either property prices will continue rising orever or all temporarily – allowing investors to snap up abe ore they soar again.

But history tells us that’s not how bubbles work...

Why the Aussie Property Boom is not ‘Different’

Jeremy Grantham – chairman o the board o Grantham Mayo Van Otterloo – had this to say on a visit Australia in June 2010...

‘Bubbles have quite a ew things in common but housing bubbles have a spectacular thing incommon, and that is every one o them is considered unique and di erent.’

‘Housing market a ‘time bomb’, says investment legend‘ The Australian 16 June 20

Be ore the Japan bubble burst back in 1990, economists arguedthat rising house prices in Japan refected the country’s rapidlygrowing wealth. They said the price growth was sustainablebecause there was a land shortage in Tokyo. Then the bubble

burst. At the peak of the bubble, the Japanese Imperial Palace in Tokyo was worth more than the entire state of California.

A terwards it was worth considerably less.

On 31 December 2006, Peter Schi , the president o Euro Paci cCapital, said this on US TV...

‘Today’s home prices are completely unsustainable. They were built up to these artifcial heights by a combination

o temporarily low adjustable rate mortgage [(ARM)] payments, by a complete absence o any lending standards and by speculative buying.

And what’s going to happen in 2007 is that a lot o these artifcially low ARM payments are goingbe re-set upwards.




You’re going to start to see both the governments and the lenders re-imposing lending standards atightening up on credit. And you’re going to see a lot o the speculative buyers turn into sellers. Athese sky-high real estate prices are going to crash back down to Earth.’

People argued that ‘land shortages’ in US states where the property market was booming would sustainhouse-price growth... then the sub-prime mortgage implosion popped the US housing bubble... and that to the major downturn o 2007...

In Q3 2007 the median price of a home in Long Beach California was $602 900 – in Q3 2008 it was$391 400

Schi was right. There was amajorcorrection in the house price. And the US real-estate market still hasn’recovered. (You can still buy property in Detroit or less than US$5 000!)

But his argument – that only the ‘paper’ value o real estate had increased and it would crash when raterose and easy credit was wound back – was ridiculed by other ‘experts’.

In much the same way that housing sceptics are shouted down by property spruikers in Australia.

Ultimately, Schi was right. Just as the sceptics here will be proved right. Easy, no-doc loans and lowmortgage rates combined to entice a lot o people into buying property. Some buyers borrowed 95+ percent loan-to-value ratio – and these people were orced to sell when interest rates inevitably rose.Take a look at these two charts.




Pro . Steve Keen pointed out in an article orBusiness Spectator that i population growth running aster thannew dwelling growth leads to rising house prices, why didn’t house prices all between 1955 and 2004when dwelling growth exceeded population growth?

The simple answer is that the real driver o house prices is easy credit. Plain and simple.

How cheap money creates credit bubbles

Just in case you missed it, Australians were enjoying historically low interest rates over 2008–09 – andproperty developers and advertisers used this as a key point to sell rst-home buyers and investors onhousing.

Take note o the low o 1997 – at that point, interest rates were the lowest they’d been since the 1970s.played a part in helping uel the boom that pushed Australian housing to new levels o una ordability

And when that stops – which it hasn’t yet, remember... POP!

But the ANZ Bank’s head o property and nancial system research in 2010, Paul Braddick, has anothetheory… house prices have risen mainly because interest rates are lower. So because o that, there is nobubble and houses aren’t over-priced.

‘International comparisons o house price to income ratios have been widely used to suggesthat Australian house prices are signifcantly overvalued. These analyses are not only dangerously simplistic but explicitly ignore a key component o the housing a ordability equation – interest rates.’

He continues:

‘In Australia, the house price to income ratio rose rom an average o around 3 in the 1980s to an average around 5 since late 2003. That is, the median house price in recent years represents 5 times the average household’s annual disposable income compared to 3 times in the 1980s.’

Then he ollows it up with this chart:



There’s the proo . Interest rates averaged about 14% in the 1980s, and only about 7% in the 2000s.

But what strikes you about the chart? No rush, take your time.

Well, I’ll tell you what strikes me. I the chart is supposed to be the justi cation or high house prices, rather that house prices aren’t high, that they’re just normal, how come house prices in the US and the U

ell?

The ght against the misin ormation spread by the mainstream press is an ongoing battle. Particularly wseems to be alling over itsel to perpetuate the myths dreamt up by the property spruikers.

On the one hand, oreign parties are telling you that the Aussie property market is a bubble about to bursending house prices alling – because it’s happened in other countries… their countries.

On the other, you have local experts claiming that Australia is a ‘special case’ and that there are uniquestrengths underpinning the housing price.

What happened to the housing shortage? You know the one I’m talking about. The ‘chronic’ housingshortage. The one where Australia is short by 135,000... sorry, 200,000 homes.

The housing shortage which will reach – what is it – 400,000 homes by 2020?

According to a report by Stuart Fagg on ninemsn... ‘Australia must build an additional 500,000 houses b2020 or ace a crippling rise in house prices that will make home ownership out o reach or many.’

But suddenly no one is talking about it. I’ll tell you why. It’s gone up in a pu o smoke.

We’ve nal proo that it never existed. And as ar as we can tell, barring a man-made or naturalcatastrophe, there won’t ever be a housing shortage.

I don’t think I’ve laughed so much in a long time as when I read this headline inThe Age recently:‘Flood o property listings to hit Melbourne market.’

‘Flood’. That implies a lot. It’s the opposite o a ‘drought’. According to the Microso t Word dictionaryis a synonym to deluge, torrent and overfow. On the other hand, a ‘drought’ is nothing. Hope you’ve got




that.

According to the story,‘The Real Estate Institute o Victoria is predicting 1210 auction listings over the ntwo weeks...’

But here’s the bit that had us rolling on the foor in laughter,‘A 50 per cent increase o new home listingsexpected over the next three weekends comes as auction clearance rates begin to alter on pricier home

loans and weaker buyer confdence.’ In other words, despite the so-called housing shortage o 200,000 homes, the property spruikers andmainstream press have had the crap rightened out o them by an extra 400 houses hitting the market othe next two weeks.

Or to put it even more simply, i we average those numbers out, an extra 200 houses hitting the market one weekend is considered a ‘food’. And it’s causing panic because it’s seen as a ‘food’ o supply.

Are these people insane?

One week they’re saying with a straight pen that there’s a 200,000 housing shortage and the next week

they’re worried the whole market could topple over due to an extra 400 homes being o ered or sale.Does that make sense to you?

By our calculations, 400 homes equals around 0.2% o the number o homes needed to address the so-called housing shortage.

We’d have thought the spruikers would be cheering that the supply has increased. A ter all, with a shoro 200,000 homes, surely an increase o just 400 properties isn’t going to burst the bubble.

This is the capacity increase they’ve been waiting or. Isn’t it?

O course it isn’t. The housing shortage has been the biggest myth, urphy... and dare we say it, lie so the twenty- rst century.

It has never had any actual basis to it. All they had to do was say it enough times and people wouldbelieve it.

Now they’re panicking.

They’re panicking because they’ve known all along that the housing shortage claim was just a massivehoax. And now it’s been exposed.

Spread by every vested interest going around – the real estate industry, the property spruikers, the over-leveraged property investors, the over-leveraged banks, those allied to the property industry. You name tthey’ve all had their nose in the housing shortage trough. Conning buyers into paying top-dollar or a surisky asset.

But as owners realise their mistake they’ll start to sell. That’s when you get the real food o sellers, not piddly 400 extra ones. Sellers who are eager to get out be ore everyone else have the same idea.

You see this kind o price action on the stock market all the time as sellers leap rog to get out o a posThey do the same to get into a position. That’s how the bubble orms. The rush to get out pushes the prieven lower until the price is oversold.

The only – and it is the only – di erence is that because housing is less liquid than share trading it takelonger or this e ect to occur. It doesn’t happen on a second-by-second or minute-by-minute basis likestock market. It happens over the course o many months.

And perhaps, just perhaps, the rst stage o the food is beginning. You can see the impact that just 400extra house sales is having on the psyche o property spruikers, just wait until that trickle becomes a rea



food.

But still the excuses come.

That’s all they are, excuses. Nothing the spruikers or bankers come up with has any basis in act or logiIt’s a constant stream o excuses. They know that each one only has a limited shel li e and so they havquickly think up another.’

What happens when the excuses run out?Well, the mail is in. Since the rst-home owner’s boost was brought to an end and the RBA raised intererates rom 3% late last year to the current level o 4.5%... the proportion o rst-home buyers amongpurchasers has allen rom around 28% to about 16%.

According to Veda Advantage’s Consumer Credit Demand report,

‘The frst home owner loan market has cooled considerably in the frst hal o 2010, withmortgage applications down 20% compared to the same April to June period in 2009. This ollows on rom 15% all in the January to March quarter o 2010 year-on-year.’

A 15% all in the March 2010 quarter. A 20% all in June. This could be the pin that nally pricks theproperty bubble.

So what should you invest in now?

Well, that’s the $64,000 question.

I’m not saying that property is always a bad investment. What I am saying is that it’s a bad investment now.

But I’ll be blunt, I’m not going to go into speci cs here. Besides, do you really want to ollow the naadvice o a bloke you’ve only just met? I know I wouldn’t.

So, rather than that I thought it would be much better i you got to know me rst, and then you can decon whether what I’ve got to say makes sense... or not!

Look, I’ve been in this game a long time, starting out working as a broker in the City o London 15 yeaago. Boy, was that a wake-up call to someone resh out o university!

But – even though I do say so mysel – I wasn’t your average broker. Over the years I gured out thatmost brokers were in the game or one reason – themselves. They loved telling everyone that they’re a‘Stockbroker’, as i it really meant something.

They loved founcing around in their sharp, pinstriped Zegna suits and crisp Thomas Pink’s shirts... doubcu ed with cu finks o course.

But I also realised something else, most stockbrokers just parrot everything their research analysts tell tthe analyst says a stock is a buy then that’s what the broker tells his or her client.

The trouble is, the broker – and most importantly, the client – doesn’t know what kind o relationship thanalyst has with the company. You don’t know i the analyst is really doing a proper analysis or wheththeir opinion is clouded by investment banking deals the broking rm may get rom the company, or rthe analyst may receive.

Fortunately, the readers o my newsletter know that the rm I work or is completely independent. Oucustomers are people like you. People who either receive our ree newsletters or who pay or our inveand trading services...

And it’s as a subscriber to those services that you’ll read about the kind o investing ideas you won’t reanywhere else. While mainstream brokers and nancial planners are loading up their clients’ port olio




with bank shares, property trusts and in rastructure unds, we’re telling our readers to stay well clear oinvestments.

Instead, we’ll show you how to make long-term gains rom the resources sector, small-cap stocks, and gPlus, or short-term traders we show how to not only make quick pro ts, but also how to minimise loss

It’s all part o the service we provide to readers o our subscription based services:• Australian Small-Cap Investigator• Diggers & Drillers• Australian Wealth Gameplan• Slipstream Trader• Swarm Trader

But look, I’ve already given you a lot o in ormation. Perhaps too much.

Anyway, I don’t want you to eel overwhelmed by it all so over the next ew days, in addition to your dissue o Money MorningI’ll also send you more in ormation on who we are and what we do. Then youcan make up your own mind about whether what we do is something that interests you.

I it is, great. I it isn’t, well no hard eelings.

So, watch out or your rst issue o Money Morning in your inbox in the next ew days.

Regards,

Kris Sayce

Editor, Money Morning

© Port Phillip Publishing Pty Ltd 2010. The past is not a guide to uture per ormance. The value o any investment, and theincome derived rom it, can go down as well as up. Investments in smaller companies involve risk and may not be suitable or investors. For any investment, never invest more than you can a ord to lose, and keep in mind the ultimate risk is that you canwhatever you’ve invested. I in doubt o the suitability o an investment please seek independent nancial advice.

Money Morning Australia is published by Port Phillip Publishing Pty Ltd.Registered O ce: Port Phillip Publishing Ltd Pty, Level 1, 10 Fritzroy Street, St. Kilda, VIC 3182

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