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.