More on the Housing Bubble

by Kris Sayce

According to Money Morning reader, Bill the word used in knitting isn’t “pearl”, but rather it’s “purl”.  No wonder we were so bad at it if we couldn’t even get the basics right!

Apologies to knitters everywhere.

Get in now, before it’s too late!  This morning, Eric Johnston at The Age writes:

“Prospective borrowers have been urged to get a home loan while they can.”

Although, after reading the article, we’re still trying to figure out who’s doing the urging.

It can’t possibly be Matthew Davison of Merrill Lynch.  He’s quoted by Mr. Johnston saying:

“We believe the strain on the household budget is too big to ignore, and banks don’t accurately measure household costs.”

That’s hardly a ringing endorsement to encourage someone to take out a $400,000 loan.

Perhaps it was something else Mr. Davison said:

“These pressures could possibly prompt the banks to update household budget models, thus tightening mortgage lending standards.”

Again, it’s not what you’d call urging someone to load up on debt.

But we’re not going to pin the blame on Mr. Johnston.  We’re not 100% sure how things work in newspaperland.  But we believe the journalist writes the story and the sub-editor comes up with the headline.

In this case, the sub-editor has come up with a headline that directly contradicts the story.  But that doesn’t surprise us.  Given the huge amount of advertising revenue the papers get each month, the mainstream press has a vested interest in holding off the property bust as long as possible.

And if that means encouraging more people to take out huge loans now, just as the market has turned down, then so be it.  After all, they were happy to cajole punters into the market at the peak, so why not when property is just a little bit cheaper!

Trouble is, it’s gonna get a whole lot cheaper.

Half-priced millionaires’ row

Before we crack on, two other gems sent in by readers.  First this sent by Money Morning reader, Greg, “Hedges still millionaires row despite drop”.

The article notes:

“Four years ago, before the global financial crisis hit, 199 Hedges Avenue fetched $17.5 million.  This month the four-bedroom, six bathroom, beachfront home [Ed note: marvellous water views?] in Mermaid Beach reportedly sold for almost $8 million.”

A quick bash of the Canon LS-100TS calculator tells us that’s a price drop of – [gulp] – 54%!

Amusingly, the articles states, “Mr Newlands [chairman of the Real Estate Institute of Queensland, Gold Coast] said property on Hedges Avenue would always remain popular and at the high end of the market.”

Obviously not popular enough for the seller who has taken a 54% bath.  That’s where the spruikers have made their fatal error: assuming higher prices are sustainable because an area is popular.

Then Money Morning reader Natalie dropped us this email saying:

“Did I hear David Airey from Real Estate Institute of Australia wrong?  The ABC read his statement as saying there is ‘no housing shortage in Australia.’”

Click here for the link and decide for yourself.

Here’s a transcript of Airey’s comments:

“I don’t think there’s been a bubble, and I don’t think there’s any bubble to burst.  The indicators are that this has been a very slow softening but with the huge increase in the number of established homes for sale added to properties off the plan sales continuing to rise, we’ve just seen a lot of stock which isn’t moving.”

Property spruikers have to tread a fine line.  Using their own supply-and-demand theories for why property prices had to rise, they’ve backed themselves into a corner.

Because using the same supply-and-demand argument you would logically have to say prices will fall… Instead the spruikers have to keep running with the “there’s no bubble” argument.  Even if it means ditching the claim about a housing shortage.

That way they can claim prices didn’t really go up – even though they said they did – and therefore if prices didn’t really go up then they really can’t go down.

Even though the proof is evident in Queensland where prices have fallen by 50%, and even Melbourne where prices fell 6% in just one quarter!

For some reason, every time a spruiker talks we keep hearing circus clown music!

Idiot editor

But still, the spruikers don’t like hearing what we’ve got to say.  Ex-Money Morning reader Michael sent this note today:

“Your [sic] an idiot!!!

“Please unsubscribe me from this fools [sic] emails.

“The scribes are right, you don’t understand the housing market, and its [sic] blatantly obvious by this ridiculous tirade trying to disprove economics 101 – Demand & Supply.

“Cheers,
“Michael.”

And this from Money Morning reader Rob:

“Please tell Sayce to stop blathering[…]

“its [sic] becoming an embarrassment, he’s like a bogan amongst uni students[…]

“he is really showing how clueless he is about Economics, he’s just a trader from London, for heaven’s sake[…]

“do you have nay [sic] idea why he is so anti-property?? more people have become wealthy through property than any other medium, its [sic] slow now, but who cares, property investors are long term[…]

“his ignorance is turning him into a celeb, like that kid from Melbourne.”

Thanks for the advice guys.  But we don’t need any schooling in economics.  Any branch of economics that believes in never-ending price rises and mythical housing shortages, is something we can do without.

Besides, we’re quite happy with what we’ve picked up ourselves.

As for demand and supply, again we point out that demand and supply isn’t just about demand and supply.  It’s about quantity and price too.  Ignore that at your peril.

Not only that, but we dispute the idea that property makes people wealthy.  Sure, there’s a period from the early 1980s to the mid-2000s where many did well from the inflationary credit-fuelled bubble.

But we don’t see that it’s made people wealthy.  In fact, we argue the opposite.  We argue that most who benefited from the property boom believed it would last forever.  So what did they do?  That’s right, they took their winnings and leveraged it up again on the false dream of negative gearing.

Wealth is only real wealth if it’s tangible.  Equity in property isn’t tangible.  For most property investors, if they liquidated their portfolio today and paid out all their debts, they’d barely be any better off than when they started.

In fact, those who started within the past five years are likely to be significantly behind when all costs are taken into account… property as a wealth builder?  Do me a favour.

Your house isn’t an investment

And finally, we find we’re in the strange position of agreeing with a banker.  Bank of America [NYSE: BAC] CEO, Brian Moynihan is quoted saying:

“It’s sobering to think, but some people shouldn’t be thinking of (their home) as an asset.  They should be thinking of it as a great place to live.”

We couldn’t agree more.  We’ve said it for years.  And mostly we’ve been ridiculed for saying it.  But that won’t stop us.  Owner-occupied housing isn’t an investment.  It’s an expensive consumption item.

Once you ditch the idea that a house is an investment you’ll realise it’s just not worth paying the current ridiculous Ponzi credit-fuelled prices that houses are selling for right now.