Aussie House Prices Hit the Tipping Point

Aussie House Prices Hit
the Tipping Point
Tuesday, 25th January 2011
Melbourne, Australia
By Kris Sayce

• Aussie House Prices Hit the Tipping Point

Reading The Age reporting on the housing market over the last couple of weeks has been like watching the Comedy Channel.
At any point we expect Jon Stewart or Stephen Colbert to fly out of the page to tweak our nose and give us a cheeky wink.
First we had, “Land sales plummet, adding to price squeeze”.
Fairfax reporter Chris Zappone wrote:
“Land sales have dropped to decade lows, further eroding the nation’s housing affordability as prices continue to rise, according to RPData and the Housing Industry Association…
“Even as the pace of sales slows, Australia faces a roughly 200,000-unit housing shortage, HIA estimates, driven by complicated planning processes, a tax policy that encourages buyers to hold multiple homes, and the slow release of suitable land by real estate developers and governments.”
So what we have is falling demand equalling a housing shortage.
How does that work then?
Surely, if the bulls were right and there is a housing shortage, buyers would be ripping the arms off real estate developers to get land at any price.
Yet as The Age reports:
“Land sales in the city [Melbourne] staged an even bigger retreat, falling 74.2 per cent in the year to September, to about 1500, the lowest since the March quarter of 1991.”
Cameron Kusher from RPData is quoted saying:
“Undoubtedly something needs to be done to address affordability constraints and governments at all levels need to realise that it is a serious problem.”
Turn the numbers around and what you’ve got are buyers saying they won’t pay stupid prices.  Prices are too high.  And they need to fall.  But the mainstream doesn’t look at it like that.
As far as the mainstream is concerned, a lack of demand equals a lack of supply.  Therefore prices are bound to go higher… because there’s a housing shortage.
Of course, as you should know, the so-called housing shortage doesn’t exist.  What you’ve got in most cases is over-the-top expectations of sellers.
I can give you a good example… about two years ago, a house in the Sayce family’s street sold for around $750,000.  That was roughly 60% more than houses in the same street were going for three years earlier.
Today, two homes in the same street are on the market in the mid to high $600,000s.  One of these homes has been on the market for over a year.  By our estimate, they’re dreaming if they reckon they’ll get anything close to what they’re after.
If they knock 10—20% off the price they might be in with a chance… More likely they’ll have to lop 30% off the reduced price to have a chance of selling.
And based on letters we’ve received from Money Morning readers, it’s a similar story elsewhere in suburbia.  Prices on decent, relatively modern homes are 30% lower than similar homes were two years ago.
Trouble is, they’re still overpriced!
Yet so far, this familiar story has failed to show up in the dodgy housing index numbers.  We doubt that will be the case for long.  In fact, based on the comical analysis of the housing market by ANZ Bank [ASX: ANZ], we’ll bet the numbers will start showing up before this year is out.
According to reporting of the ANZ report – which we haven’t got our hands on yet:
“The bank estimates that house prices will plateau this year, at a little more than $550,000, on average.”
Well, that’s something.  At least it’s better than the ‘house prices will double’ rubbish we’re used to reading.
Even so, the banks still can’t admit it.  They haven’t got the balls to say house prices have and will fall.  They’ve always got to put a spin on it.  In their world house prices either go up, plateau or become more affordable… but they never go down.
Of course, the simple reason for that is the banks don’t live in the real world.  They live in the crazy banking world where house prices must go up.
You and I know why the banks have to push house prices higher – because the banks’ balance sheets are so leveraged to the housing market.
It’s similar to if you have a margin loan on a share portfolio.  While share prices go up you’re laughing.  You’re getting a lovely return on your capital.  But as soon as prices fall, unless you’ve reduced your exposure, you’re going to be in a bunch of trouble.
And that’s exactly what the banks are exposed to… falling house prices.
But as we say, even with price expectations falling by 30%, Aussie homes are still way overpriced.  Yesterday the 7th Annual Demographia International Housing Affordability Survey was released.
It shows that housing in every Australian town and city surveyed is either ‘Seriously Unaffordable’ or ‘Severely Unaffordable’.
For example, in Sydney the median house price is 9.6-times the median household income.
In Melbourne the median house price is 9-times the median household income.
And on the Sunshine Coast the median house price is 8.4-times the median household income.
But we thought it would be fun to see how the ratios had changed since the Commonwealth Bank of Australia [ASX: CBA] published its misleading figures a few months ago.
You’ll recall the bank printed the following slide in a presentation it gave to international investors:

The bank was trying to show that Aussie house prices weren’t overpriced compared to cities overseas.  And a quick glance at that chart would make you think the bank was right.
But, we could smell a great big stinking juicy rat…
We were the first to point out at the time that the CBA had pulled a fast one.  Not that the dumbos in the mainstream press noticed.  They simply parroted what the bank told them.
The bank’s crime?  It used numbers from Demographia to highlight the high ratios in overseas markets.  But it used lower numbers (using a different methodology) from UBS for the Australian cities.
If it had used Demographia data for all cities the table would have looked like this:

Just a slight difference!  Using the Demographia numbers would have shown the house-price-to-income ratios to be 50% higher than the bank claimed.
Needless to say the CBA shifted the blame and claimed it wasn’t trying to mislead at all.  Of course that didn’t stop the bank from keeping the slide in the presentation and embarking on a world tour to hoodwink investors into buying the bank’s bonds.
So, how do the numbers stack up now?  Take a look at this:

Yep, house prices in Sydney and Melbourne are considerably more expensive than other major cities.  And, whereas prices-to-income ratios in other major cities have largely stabilised, in Sydney and Melbourne the ratios have gotten much worse.
But how does that gel when we claim house prices have already started to fall?
It’s simple.  Right now, many sellers falsely believe house prices will recover.  So they’re holding on… for dear life.  They’re still in a dreamland thinking they’ll get the same price that sellers were getting two or three years ago.
But soon enough they’ll start to sell, and those figures will filter through to the dodgy house price indices.  And eventually the numbers will even start to show in the Demographia survey.
That’s when sellers will figure out the glory days have gone.  And that’s when you’ll get the rush to the exit.  Especially when the fabled baby-boomers start flooding the market with their un-mortgaged properties.
What do they care whether they sell for $600,000 or $500,000 when they bought the house for $50,000 thirty years ago?  OK, they will care, because it’ll be a big chunk out of their retirement savings.  But the point is, once they get it that house prices don’t always go up, they’ll sell as soon as you can blink.
But, The Age article did get one thing right:
“Australian house prices are expected to finish this year flat, amid signs that a slowdown in price gains could become ‘entrenched’, according to ANZ.”
The bit they got right is the ‘entrenched’ part… not the house prices finishing flat this year.  House prices will finish the year lower.  There’s no doubt about that.
What will become entrenched is the realisation that house prices don’t always go up.  Investors and buyers have already started to figure that one out.  And the longer prices stay where they are, the more convinced buyers will be that there’s no rush to tuck into the market.
That’s happened in the UK and US where property buyers no longer see housing as a get-rich-quick money-making goldmine.
“But what about the chronic housing shortage?” you may ask.  It doesn’t exist.
Remember the daft numbers from the National Housing Supply Council?  That’s the government body responsible for spreading the myth about the shortage.  The NaHSC is where the banks and property spruikers have gotten their ammo to support the shortage myth.
Before you swallow the myth check out how the NaHSC came to its conclusion.  Here’s the table from the 2008 report:

Source: NaHSC

We remember seeing it for the first time and laughing heartily.  We picked these numbers apart over a year ago.  Yet still the mainstream peddles the myth.
The numbers to support the housing shortage are based on 9,000 homeless people sleeping rough, 35,000 families who live with friends and relatives, 13,000 families who live in caravan parks, and 26,000 people who… well, this one is really ridiculous.
These 26,000 people are imaginary.  They no more exist than the Loch Ness monster…
What it’s saying is that because the rental vacancy rate is, say 2%, another 26,000 homes are needed in order to get the vacancy rate up to 3%.  In other words, there isn’t a shortage of rental properties at all.  It’s just that the vacancy rate is lower than the long-term average.
What it’s saying is that to solve the so-called housing shortage the market needs more empty houses!
We liken it to a shop claiming there’s a milk shortage when they’ve got ten bottles of milk left over at the end of the day when they used to have fifteen left over.
It’s not a shortage.  It’s a surplus you clowns.
But even better than that, the NaHSC wasn’t happy to just add all the dodgy numbers together.  It had to round the number up to the nearest 5,000.  So even if we accepted their dodgy numbers – which we don’t – the number has been exaggerated by 2,000 dwellings that are merely the result of rounding-up!
What a joke.  But that’s the government for you.
Yet these are the numbers the banks and spruikers base their statistics on when they carp on about a housing shortage.
Make no mistake, all the evidence is pointing towards a massive drop in the price of Australian housing.  For many the drop has already happened.  Just look at the houses on the market in your area and you’ll see the asking price is well below the levels of two years ago – and still they aren’t selling.
The UK and US housing bubble made a loud pop when it burst.  It seems in contrast the Aussie market is suffering from a slow deflation as the air comes out of it.
Either way, it’s bad news for sellers right now.  But a year from now it’ll be great news for buyers.  As I wrote a couple of weeks ago, keep your eye on the housing market… but don’t buy yet… your time will come.
Cheers,

Kris Sayce
For Money Morning Australia