Chris Joye comments in his release of the recent RP Data-Rismark index that the news of a 0.7% fall in one month will be “manna from heaven for the housing market bears”. Far be it from me to disappoint him, so thanks for the manna. But what adds spice to the manna is the way that Chris has attempted to rationalize the outcome:
It’s sobering to remember here that we have had 17 consecutive monthly increases in Australian capital city home values. If the sharemarket rose for 17 months straight and then tapered, people would not think twice about. It might be wise to apply the same logic to our housing market.
That comment evinced the following comment on Chris Zdatappone’s report in the Fairfax Press from the reader “Dave”:
If the share market had risen for 17 consecutive months, people would be screaming BUBBLE. Somehow this logic seems to defy Chris Joye … Oh dear.
Oh dear indeed. In a speculative market like the stock market, much of the buying is driven by the belief that prices will continue to rise; as soon as that belief evaporates, buyers become sellers and the price doesn’t “taper”, but plunge. A certain Irving Fisher once commented that “stock prices have reached a permanently high plateau”, only to see them (and his reputation and wealth) evaporate in the ensuing 3 years.
So the hope for Chris Joye is not that house prices will behave like stock market prices, but precisely the opposite. Bears like myself argue that the housing market has indeed become just like the stock market—a place where leveraged speculation in the belief that house prices always rise does far more to explain house price movements than any appeals to “fundamentals”—and this is the main reason that house prices have risen so much in the last two decades.
There is however one important way in which house prices do differ from shares: the first sign of trouble is not a sudden drop in prices, but a fall in the number of sales and an increase in the length of time it takes for properties to sell. That sign was evident in the data from the last year or so, which is why I argued that a fall in house prices was imminent in a previous article on Business Spectator. Now that the data are unequivocal, the following processes are likely.
Firstly, with an increased stock of unsold houses on the market, buyers are likely to take yet more time to make a decision—which will add further to the backlog. If prices are falling, why hurry? The urgency will leave the buy side.
Secondly, so-called investors—whom I prefer to call speculators, since 90% of them have bought existing properties rather than built new ones—will start to consider whether they should swap from the buy side to the sell side. After all, no-one in their right mind buys an investment property in Australia for the rental returns: it’s capital gains or nothing DownUnder. Do you capitalize on gains to date, or hang on hoping that the upward trend will re-assert itself once more?
Given the skewing of our market away from owner-occupiers and towards speculators in the last two decades, this second effect could cause a sudden increase in the number of properties on the market—at just the same time that buyers have become more relaxed about closing a sale. It’s this sort of process in an asset market that is why asset prices don’t “taper”—or “plateau”, to use a word from an earlier time.
I expect these two processes to lead to an accelerating rate of decline in house prices now, as they did in the USA when “Flip That House” ceased being a winning trade.
bb @ 64
The point is you are leveraged like never before at a time when the world is deleveraging and likely to experience a deflation. Good luck paying your debt back. And even worse is that Australia does not control it’s own destiny. In the 80s everyone wanted to learn Japanese, now you all want to learn Chinese. You’d be better off learning how to cook chinese than speak it!
You moan about property bears sounding silly, but it’s blind bulls like yourself that look stupid failing to acknowledge that there might – just might – be a chance house prices are too high. I guess you think the demographica annual survey is rubbish.
All mania’s end the same way.
bb Captain
It would seem you agree with me on the following points…
#92 with regard to wages/GDP linked assets a low yield compared with risk free alternatives generally indicates a poor future capital growth on the asset.
You state you agree
#94 If asset price growth is zero or very weak then the asset will be cheaper in the future (in present dollars)
You state you agree
The future growth in housing asset rent/yields is an estimate and has some uncertainty
The present housing asset yield is 2.5%
The present debt cost is a certain 7.25%
The present risk free yield 36 – 60 months is a certain 7%
My main point is… An investor will get a certain 7.25% return investing in debt repayments whereas they will get 2.5% yield with some uncertain but estimatable yield growth and probably zero or poor capital growth investing in housing over the next 5 – 10 years.
Your estimate is that yields will grow 7% for 5 years followed by 4.5% That would make yields 1.744 times higher at roughly ~4.36% in 10 years however the capital price may be exactly the same in 10 years as they are today.
When the majority of investors work out that repaying debt gives them a higher return with certainty, the market price of the asset will reflect the actions of the majority… Mr Market in action.
Just a supporting quote for Peter W from NIne MSN
“Recently released data reveal that new home sales fell for a second straight month in June to a 17-month low. This was followed by news that new home approvals fell by 3.3 percent in June, the third successive monthly drop.
How can this be? We are constantly told that Australia has a chronic housing shortage, yet we are not building anywhere near enough new homes to satisfy this supposed demand.
Shouldn’t high prices be sending a message that more housing is required? It should, but the fact that it isn’t goes to show the completely dysfunctional state of housing in this country.
Here’s the way I look at it. House prices are high not because rents are high and the income returns are healthy. They are high because the vast majority of new credit creation in our economy goes to people buying existing homes. Australian people and its banks are participating in a giant ponzi scheme and they don’t even know it.
High house prices and low rental yields (the reality for most capital city property) are not a signal for investors to come in and construct new homes. It is a deterrent. Who wants to risk building a new house and renting it out for less than the cost of finance, when the capital value is at risk from the ponzi scheme ending?
if house prices began to fall substantially, yields would increase and so would the incentive to build new houses. For centuries property has been an income-based investment. Only relatively recently has it become the focus for capital gains. Increase the yield to healthy levels and you increase the supply of housing, it’s as simple as that”.
The other aspect to deleveraging is the effect on the cost of credit, by paying back debt does it reduce the amount of M3 ? thereby increasing the interest rates, although the central bank would decrease its cash rate.
Just a footnote to the last post.
A mate of mine is a real estate agent in Mackay.
New developments need 40% deposit – banks are not lending for new developments.
Why not if there is a shortage, particulary in areas like Mackay that are booming due to Coal exports or Karratha where the house prices are now $900,000 for a ordinary house in the Desert.
Thanks all for replying
ak,
First..good post, but I have two short replies.
1. My link to debt/GDP was not my view. Please re read my post so you may understand the context as to why i posted it (ie: it was research from a bank which was deemded on this forum as useless because it was from a ‘bankster’. Yet noah Cross is more than happy to post research from banks if it supports his case)
2. The only thing I am trying to achive is to help people understand why the so called ‘bubble’ has not burst. It must be very confusing for many bears who have been waiting year after year. I am just trying to help them understand some very basic property fundamentals.
btw..You keep saying houses have increased in size and therefore there is excess supply, yet you need to understand land usage has collapsed too. A house use to site on 1 qtr acre (1,300 sqm). On new sites it is now closer to 400m. So people have given up large backyards for another bedroom. So there has been give and take.
—————-
macro2 @ 100
oh dear…not another one.
Like sj you clearly have not read my link. I will write the following in CAPITALS so once and for all you can understand…..
THE STANDARD ERROR OF 25-50% WHICH SHOULD BE USED WITH CAUTION REFERS TO ONE DATA POINT WHICH IN NO WAY RELATED TO MY POST. THE DATA TO WHICH I REFERRED HAS NO STANDARD ERRROR PROBABLY BECAUSE THE SAMPLE SET WAS VERY LARGE. THIS IS MADE VERY CLEAR IN TH LINK IF YOU EVER CARED TO READ IT.
The fact that I have now made this point FOUR times suggests to me many bears only read what they want to read….which will lead them to very poor and ill informed decisions.
the big question is….who will be the next person to write “….but bb, there is a standard error in the data which suggests you should use with caution..blah blah”
——–
macro2 @ 100
“For an average weekly housing cost of $384 to represent 18% of gross household weekly income, the latter has to be some $2,130. I’ll invite the readers to consider how many people they know that get an income of that order of magnitude”
Thats because most of the debt sits in the hands of high income households. That is the point of the data. That is what the RBA has been saying for six months. That is what Macquarie Bank research is saying. And that is why simple debt/GDP charts used in the wrong context can be very misleading.
——
huggy_london @ 102
“You moan about property bears sounding silly”
No, I think i said its is amusing that bears will congratulate SK on his research (data sourced from the ABS), but data from the same insitution which does not support the bear case is routinly dismissed.
Would you not agree that would be a silly position to take?
—————-
Peter_W
“I cannot see the price of a Bentley falling below the cost of production either and Bentley demand is extremely high (every one I know wants one).”
I can. Bentley’s are not needed for human survival.
—————
Peter_W @ 103
“My main point is… An investor will get a certain 7.25% return investing in debt repayments whereas they will get 2.5% yield with some uncertain but estimatable yield growth and probably zero or poor capital growth investing in housing over the next 5 – 10 years.”
You keep talking about this in the context of investment. I agree. Investing in resi is not that compelling (although my return expectations may be slightly higher than yours). Either way, I am not an investor.
But think about it in the context of a renter seeking to be an OO. You may get a certain 7.25% in the bank. After tax? Say 4.5%. You pay your rent of 2.5% and that leave you 2.0%
So if property grows by +2% per annum you are behind. Remember, you have to buy your property with after tax dollars.
Bears may be will to bet their families futures on the movement of the housing market, but I think if you can afford what you like, you should eliminate your risk and buy a home.
That last statement is sure to get me into trouble.
Keep up the good work bb
You seem to be the only one capable of understanding the supply/demand argument.
People just dont get it !
bb #106
You seem to agree with me when you say…
“You keep talking about this in the context of investment. I agree. Investing in resi is not that compelling (although my return expectations may be slightly higher than yours). Either way, I am not an investor.”
I also agree. Investing in resi is not that compelling. Infact I believ investing in exising debt is a certain 7.25%
The problem will be when all the investors also agree with both of us.
When the exising investors agree with us, it will subtract ~30% of all buyers each weekend from the buy side.
Clearance rates will fall below 50%
Prices will fall
Yields will rise as a result
Bentley’s are not needed for human survival.
Last time I checked I was still human and I simply could not live without my Bentley.
if you want to see how vital Bentleys are for human survival watch the movie ’2012′
@PP (#106) SJ (#65)
So, although uninvited, PP decided to enter our conversation. Welcome. I hope not to disappoint.
I could gather from the two messages addressed at me, these are P’s main observations (I am sure I’ll be corrected if I’m mistaken):
“The standard error of 25-50% which should be used with caution refers to one data point which in no way related to my post.”
“That’s because most of the debt sits in the hands of high income households. That is the point of the data. That is what the RBA has been saying for six months. That is what Macquarie Bank research is saying.”
As I am a convoluted sort of guy, let me start from the end, so that the point does not go unnoticed this time.
In my first post I clearly indicated that Table 10.9 showed a considerable number of households (31.6%) employing over 25% of their weekly gross income to service their loans. Strangely, P did not mention this. But I am sure this wasn’t deliberate, just a mistake, connected to the obviously distressed tone of the messages.
But as the discussion requires it, I will go a bit further this time and state that, according to ABS data, 22.1% of all households with a mortgage are paying over 30% of their weekly gross income, which qualifies them as being in a state of “housing stress” (more on this below).
Of which, the “7.8% of owners with a mortgage, [for which] $384 represent more than 50% gross household income” are extreme cases.
It’s a pity that between 1 in 5 and 1 in 4 households did not read RBA or Macquarie Bank research. But I’m sure these people defaulting will have no impact whatsoever.
Now, let’s go to P’s first objection.
Oopsie daisy! You caught me with my pants down. You’re a clever little devil, P. How come I did not notice that in Table 10.9 there was only one asterisk (“star”, if you prefer) and it was attached to 4.3? Aw mah gawd, this lack of relevance is killing me.
Except that I did my homework, P. I checked Table 5 from “4130.0 – Housing Occupancy and Costs, 2007-08″, containing the breakdown of the information presented in Table 10.9. Did you check it? Come on, be frank, we’re all friends here.
To make things easier for you, here is the link you need to follow.
http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/4130.02007-08?OpenDocument
Once you download the file, go to Table 5.
Now, being an expert, you might describe that table in many ways. To me, though, it looks like it has chicken pox.
But don’t worry, whatever it has, it’s not transmissible to humans. In fact, not even the other worksheets in that workbook seem nearly as affected. Go on. Open any one you like at random. Open all!
Now, funny thing, that’s a peculiar table. Aren’t you lucky? Like more spotty?
And to show you how much of a nice bloke I am, this time I took the trouble of counting a few things you should find interesting.
The basic data is contained in the C10:H59 range; 264 cells within that range contain a numerical value. Out of this latter set of cells, 57 contain a comment (the red triangles): one out of every six cells is “commented”.
42 of these cells contain either the comment “estimate has a relative standard error greater than 50% and is considered too unreliable for general use” or the more moderate comment “estimate has a relative standard error of 25% to 50% and should be used with caution”.
Yes, clever little devil, the red triangles are the “stars” in this sky.
And there are stars all over this firmament: in every one of the columns of data. Isn’t it pretty?
Before you go all “gotcha!”, as I am sure you are about to go just about now, let me say it: true, only two stars adorn the sky in the “Owner with a mortgage” constellation.
Now, that a survey can be credible in toto, when 16% of the information it’s meant to convey is unreliable, it’s beyond me.
By the way, in the lower half of that worksheet you’ll find the RSE. Have a look at them. Go on. If I am not mistaken, you’ll find the even better distributed… distribution of values:
Min Max Count
10.0 19.9 43
20.0 29.9 10
30.0 39.9 13
40.0 49.9 6
50.0 + 17
Total: 89
As you are an expert in these issues, you don’t need me to explain why large RSE are not a good thing. But, let’s be nice, for the sake of anyone who might be less well informed than P: have a look at “What is a Standard Error and Relative Standard Error?” This is the link:
http://www.abs.gov.au/websitedbs/d3310114.nsf/Home/What+is+a+Standard+Error+and+Relative+Standard+Error,+Reliability+of+estimates+for+Labour+Force+data
But I am sure you, P, are not just a clever little devil, but also a creative individual and will come up with a good reason why the data point you like in that table is reliable (only 18%, piece o cake!), while the data points (plural) you don’t like are obviously, embarrassingly not.
What’s more, as I have plenty faith in you, I bet you can even argue that the survey is reliable, although the source of the data says clearly it ain’t. And as I am such a nice guy, I’ll give you a clue: try something similar to “the FHBB was not a subsidy, it was a tax concession; therefore, it did not have any effect in housing demand”. You know: that kind of logic.
Before I forget, here is how I found that 22.1% of households are paying more than 30% of their weekly gross income: 22.1% = 14.3% + 7.8% (cells D24 and D25). That means they are conventionally considered to be in “housing stress”.
I was going to stop here, but, WTF, I’m starting to enjoy this. So, let’s go on:
We can also assess the reliability of that data on the basis of the methodological notes ABS deemed fit to include. Here I am including a quick extract I am sure you have carefully assessed, dismissed for excellent reasons, but somewhat forgot to mention (needless to say, I look forward to hearing about your reasons):
From
EXPLANATORY NOTES
http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/4130.0Explanatory%20Notes12007-08?OpenDocument
“16. There are a number of limitations to the housing costs information obtained in the SIH, due to practical data collection considerations. (…) [my comment: you don't say! really?]
“A fuller measure of housing costs would include a range of outlays not collected in the SIH, but which are necessary to ensure that the dwelling can continue to provide an appropriate level of housing services. These include repairs, maintenance, and dwelling insurance, and are costs that tend to be incurred by owner occupier households but not by renting households. Previous HES data shows that if these costs were added to SIH housing costs estimates, the estimates of average housing costs would be more than doubled for owners without a mortgage [my comment: did I really read that?] and WOULD INCREASE BY ABOUT 15% FOR OWNERS WITH A MORTGAGE.
(…)
“22 Some households report extremely low income in the survey, which places them well below the safety net of income support by social security pensions and allowances. As explained in paragraphs 42 to 45 below, the incomes of these people are not always an appropriate indicator of the economic resources available to them. THESE HOUSEHOLDS ARE LIKELY TO HAVE HIGH HOUSING COSTS/INCOME RATIOS. [my comment: this has always sounded to me like "not include these people because they're lying"; but that's me]
“Housing stress
“23 Households with relatively low income, and housing costs greater than a certain proportion of income, often 30%, are sometimes said to be in ‘housing stress.’ This publication has not included such measures because of the lack of comparability of the housing affordability ratios across tenure and landlord types, the lack of general acceptance of such a threshold as an indicator of ‘stress’, when it often reflects investment and consumption preferences, and the difficulties of comparing across different household sizes, as described in the previous paragraphs. However, Table 5 does provide information separately for lower income households. LOWER INCOME HOUSEHOLDS ARE DEFINED HERE AS THOSE CONTAINING THE 30% OF PEOPLE WITH EQUIVALISED DISPOSABLE HOUSEHOLD INCOME BETWEEN THE 10TH AND 40TH PERCENTILES.”
My comment: Thus, all other tables exclude BOTH maintenance costs by owner occupier AND extremely low incomes (except Table 5 and… Table 10.9, that at least include lower incomes!). Or, to put it in simple terms anyone can understand: “discount” housing costs and, on top, exclude those who can’t pay them. You beauty!
Conclusion: those remaining can comfortably pay their costs! Who would have guessed!?
Now, let me conclude this with a friendly advice: do your homework. Tantrums and epileptic fits might work wonders with mum, with those working for you, or, in general with people less tricky.
But I’m neither your mum, nor do I work for you.
And, truth be told, I am a tricky, twisted, cruel, unpleasant, old bastard and I do get a sadistic kick out of seeing some people (not you, never) stumbling on their own arrogance, incompetence and negligence. Call it class resentment, if you like.
Cheerio!
Though people on either side of this discussion have made some valid points, I can feel a level of interpersonal niggle rising here. I would like both sides to take a bit of a step back to stop that niggling getting out of hand.
That’s it. I’m going to borrow $2 million, buy a huge house and party like there’s no tomorrow.
I’ll never pay it back because I can’t afford it. But what the heck, it will take them 12 months to kick me out, but what a great 12 months it will be. After that I’ll crawl back from where I came.
Maybe they might forgive the debt and I’ll get to keep the house.
I can’t lose.
When the loans approved I’ll send out the invitations and put the party on credit. Remember the bigger the party, the bigger the debt, the more frequent flier points. Might score a free trip to Rio when the games up.
This article is a really good window into the issue on housing and why the pollies don’t have a clue.
http://blogs.news.com.au/heraldsun/barefootinvestor/index.php/heraldsun/comments/julia_tony_tell_us_about_your_first_home/
“JULIA’S house is typical Altona, the suburb in Melbourne where she’s lived since 1998 – ‘70s, brick veneer, two-and-a-half bedrooms. She bought it for $140,000 and her office tells me she still has a mortgage.”
Can anyone explain how on a politicians salary how she is unable to pay off a meagre $140k. In 1998 she was 37, and is the year she won her seat. Assuming an MPs salary was $50k in 1998 (can anyone enlighten me?) she bought at a price/income multiple of less than 3.
I give up!
@sj (#65)
For the record: you were in the right track all along.
But you do need to dig deeper in the information. Good luck.
i would love to see a chart comparing the price earning ratios of australian residential property and the asx 200 over the last 20 years.
BB
you do a great service to this forum of bears, as seen by Marco2′s very entertaining and thorough rebuttal. Such good work only seems to come about when the passions are stirred though and I think the red mist had truly descended when Marco2 wrote those last couple of paragraphs.
I am continually impressed with the standard of discourse that is well maintained on this forum by the Prof.
Keep it up everyone!
Meanwhile have a look at some monkeys
Laurie Santos: A monkey economy as irrational as ours
http://www.ted.com/talks/laurie_santos.html
I note that CJ is once again talking about synthetic instruments allowing investors/speculators to take a position on Australian residential housing prices without physically owning property, based upon their hedonic indices, and traded on an exchange.
The valid point is made that it allows for property investors to hedge their positions and allows the growing numbers of international hedge funds interested in taking a bearish position on our bubble.
It would also be a good hedging strategy for a company heavily tied to buoyancy in residential property
– good business smarts, but not exactly confidence swelling for those “less bearish” who make the point that these guys have first access to some of the best data going round.
But this is not the first time these intruments have been mentioned by CJ – I found mentions as early as 2006 (from memory) and last year they came very close to trading.
As I included in a report from early last year, I had decided at the time to take a bearish position on these instruments. I contacted the ASX and was placed on an email notification list. I was notified that the instruments – which were to be CFDs – were to become operational in August (2009). And in June/July the indices were even uploaded and were functional – i.e. they were updated daily.
Then nothing….. and I could find no trace of the indices on the ASX website.
Perhaps there were some technical reasons why it did not go ahead at that time.
But I find the timing particularly curious. With the winding down of the first home vendor’s boost in late 2009, for the bubble to be perpetuated there was a major need for any cash that wanted to take a bullish position on housing to actually go into physcial assets rather than synthetic ones.
Still the spruikers are clinging to the “investor argument”, so it will be interesting to see what happens on this occasion…..
Personally I now think a better trade would be to take out USD put options on Aussie banks, one in particular – anybody know if that is possible for an Australian retail investor????
Hey homes4aussies,
I don’t see how it is possible with puts, I think you would need an OTC deal which is not really possible for retail. I’d like to know if you do find a way to do this as a retail investor though.
I understand that climbing Mt Kosciuszko is not a problem for Tony but what about that poor chap who predicted that they will not fall?
“the housing recovery that we’ve seen over the last 18 months has come to an end”
http://www.news.com.au/money/property/home-loans-fall-to-nine-year-lows/story-e6frfmd0-1225903009431#ixzz0w5MX3gku
I like reasoning of the economists at Westpac:
Westpac economists said the figures “surprised on the low side” as the investor upswing “took a breather”.
A decline in housing finance in June was expected, but not one of that magnitude, they said……
“This points to finance demand stabilising and most likely moving higher during the second half of 2010.”
OK, they do say in between that the RBA will hold on further interest rate rises, but how that “points” to finance demand increasing beats me. More like “that’s what we’re hoping for, anyway”
Do we have a shortage of housing or do we have a deleveraging economy.
http://smh.domain.com.au/real-estate-news/supply-outstrips-demand-as-market-slows-new-research-20100809-11t6i.html
homes4aussies good to hear from you again!
You want to short ???
Perhaps consider a less frontal approach
If the banks make losses – they will spread the pain into other areas of thier lending book…
It shouldn’t be too hard ( but some work like all worthwile things ) too identify short targets that ‘will not’ be politically protected…
The current Ideology appears to be – Industry protection is bad unless your (of course) talking about banking industry!
Thanks TWEA
I understand your point. But I figure that if you can combine the currency trade with a position against the banks you can maximise your return
Say the share price of the bank falls by 50% and at the same time the AUD/USD cross falls 50% (close to it’s all time low). If you take each trade separately you get basically the same percentage return for your dollar. But, because the USD price of the share falls 75%, the potential returns are much higher if you can combine the trade…. (I realise that I am no doubt telling you nothing you don’t already know….)
Yes, I’d expect the government to come to the rescue of the banks. But my understanding of what happenned in the US is that even when banks were saved the equity holders were wiped out and the stock trade massively down.
While I also understand that the Government will likely implement policies aimed at preventing the bubble from popping – within the political confines of most people now wanting a more austere and tighter run economy – my analysis and understanding of bubbles is that there will come a point where buyers will leave the market and will remain unreceptive no matter what carrots and sticks are thrown at them. (In fact, the 20% increase in prices last year just confirms the instability and irrationality of bubbles, and we are likely to see that phenomenon reverse at some point – I think there is a good chance it is actually occurring right now)
Personally I think there are few better trades in the world at present.
As I said on Bubblepedia, I’m pretty risk averse, so it would be a bit of a step for me to take some of my cash sitting in TDs and tip into this trade – so it’s more from interest that I am asking whether it is possible for an Australian retail investor – but gee it would be enticing if there was a way…..