There's Nothing Generic About Housing

By Kris Sayce

In today’s Money Morning: Words from a credible analyst… Knit one, pearl one… Fairy tales dressed as fact… Defining a market… More “marvellous water views”… It’s not in the genes... Housing debate – more soon…

Why There’s Nothing Genetic About Housing

Of all the emails we receive into the Money Morning mailbox, the most enjoyable are the patronising ones.

Not surprisingly, a big chunk of them are from property spruikers… mostly telling your editor we don’t understand the property market, so why don’t we just “shut the heck up!”

That’s right, today we’re back to smack the property spruikers round the ears…

Words from a “credible” analyst

The funniest email we’ve gotten was from a “credible property market analyst and advisor”… that’s his own words.  Extracts of the email are below:

“Just been reading your (comical) writings on the housing bubble.

“There is no bubble!  There is no “one” property market!

“The property market across most (not all) of Australia has been flat for the last 12-18 months. Sure, there are some locations which have experienced (on paper) losses of 10-15% over a short period, but many locations have experienced between 0% and 8% growth over the last year. That’s hardly catastrophic.

“Show me when the Australian property market has ever crashed by more than 10% in any given year.  Show me when the ASX has declined by greater than 10% per annum.

“Property is a long-term asset class so looking at growth rates across small periods such as 3 months or even 18 months are somewhat irrelevant (especially if the investor has followed a scientific research process and selected a quality investment property with specific fundamentals).  Yes, ‘fundamentals’ – there are such things but DIY investors wouldn’t be aware of them.  Looking at the performance of an investment property over several years is more appropriate.

“Some of the comments you’ve made in respect to housing supply and demand are wrong. I’ve read the entire publication produced by the Federal Government’s Major Cities Unit.

“I could rant for ever as to why there is no ‘housing bubble’ but I’d be wasting my time because you are clearly pro-shares and like to beat up how good the sharemarket is by being (unreasonably) critical of the property market. That’s poor form and unprofessional. Rather than bag your “opposition”, try sticking to what your area of expertise is.  If property is so bad, why don’t you live in a tent or a caravan?

“I am a credible property market analyst and advisor. I aim to help people invest wisely in property. You prefer shares, I prefer property. I don’t cr@p on about the sharemarket dropping 4% in a few days because of a tsunami, or the last stock market crash, or that I know many people whos [sic] superannuation has declined by $100,000s over the last few years. It’s just poor form. The truth is, people can make good money from shares and property but there’s a lot more to know about each asset class…

“A final word on the property bubble. Michael Matusik has produced a good article which sums it up pretty well so I’ve attached it for you.  I’ll also add this:

• Australia’s banking practices are nothing like those in US and Europe where property markets are still struggling
• Residential property is an essential commodity (we all need to live somewhere)
• Modern science is allowing us to live longer and foreigners will continue to migrate to this great country because of our employment opportunities, culture, vast open spaces, and general quality of life
• History is proof that the nation just can’t build anywhere near enough properties to keep up with population growth
• Do you think that the cost of other essential commodities such as milk, bread, and medical services are likely to increase or decrease over time?
• Do you think that the wages of builders and associated skilled labour who build and renovate properties will increase or decrease over time?
• Do you think that the cost of raw land will increase or decrease over time?
• Do you think that the timber, cement, bricks, steel and other material which we use to build will increase or decrease over time?
• Do you think that Australian’s will suddenly quit their obsession with renovating their family home?

 “Stick to your knitting!”

Our dear old departed grandmother tried to teach us knitting once.  We never got the hang of it… we couldn’t understand the jargon… what did “pearl one” mean?  So we gave it up.

But back to property.  For someone who claims to be a “credible property analyst and advisor”, there’s a certain lack of credibility in the reasons for Australia not having a property bubble.

Fairy tales without facts

It’s just the same old excuses.  Making statements as though they are true – “we all need to live somewhere” – without considering the facts.

It’s true that we all need to live somewhere.  But that doesn’t mean house prices always go up.  We all need to eat.  But that doesn’t mean we can always afford to buy the same type of food.

If bananas are $20 a kilo, most people will stop buying bananas and buy another, cheaper fruit instead.

The same with housing.  When house prices are too high, people will stop buying.  But it doesn’t mean people become homeless.  It means they make alternative arrangements.  They’ll buy a smaller unit rather than a house, or they’ll rent a unit or house, or they’ll house share – yes, people still do that.

Or any number of alternatives.

But this doesn’t mean there’s a housing shortage.

As we’ve written before, spruikers often blather on about property being all about supply and demand.  They’ll then bang on about a chronic housing shortage – by the way, there is zero, I repeat, zero evidence to support a housing shortage.

And don’t tell me that’s rubbish, because it’s true.  There’s not a single jot of evidence to support the housing-shortage theory.

We’re expecting a big response to that claim.  But let me make something clear, quoting statistics and ratios dreamed up by a banking analyst won’t qualify as evidence.

What they tend to forget is supply and demand is also influenced by quantity and price.  What they also forget is the price can change without an increase or decrease in demand or supply.  So simply saying, “it’s all about supply and demand” misses the point.

But we do like it when the spruikers try to school us in markets,“There is no one property market in Australia” is the latest cry.  “The market is made up of lots of different markets.”  “It’s wrong to talk about ‘a’ property market.”

D’uh.

We know that, but they aren’t telling us anything new.  It’s the same as the stock market.  The stock market is made up of hundreds of different markets.  They’re called companies.

Defining a market

But it’s still valid to talk about “the stock market” or “a stock market”.  Simply because the valuation of one company can have an impact on the valuation of another seemingly unconnected business.

For instance, if resources stocks look overpriced, investors will ditch those stocks and look at other sectors, such as retailing or banking.  That could force resources stocks down and retail and banking stocks up.

But it’s also possible for investors to ditch all stocks if they believe the entire market is overpriced.  That can mean even fairly priced stocks are smacked down – we know that for a fact because in late 2008 and early 2009 we tipped stocks such as Retail Food Group [ASX: RFG] and Cash Converters [ASX: CCV] which were trading lower than where we believed they should be.

Property is no different.  If prices slump in Queensland it can have an impact on house prices in Melbourne.  How so?  Because investors or even owner occupiers may consider buying in Queensland rather than Melbourne.

So, as investors and owner occupiers move to invest in Queensland, it will have an impact on prices in Melbourne – would you still pay $400,000 for an apartment in Melbourne when you may be able to pick one up for $200,000 on the Gold Coast?

Who knows?  Some would, but some wouldn’t.

So, we’ll keep talking about the property market, if our “credible” analyst friend doesn’t mind.

We also like this idea that losses are only “paper” losses.  Really?  So when a property goes down in value and the mortgage payer is paying out thousands of dollars a year on interest, that’s a “paper” loss is it?  No, we thought not.

Besides, we’re already past the period where losses were on paper, losses are actual.  Just refer to the beachside Queensland properties I highlighted a couple of weeks ago… property prices have fallen by half in some areas of Queensland.  And it’s catching.

The market that was supposed to be immune from price falls – Melbourne – has seen median prices slump 6% in the past year.  Not only that, but the mainstream press is even highlighting the losses.

According to News Ltd:

“Melbourne home property prices drop $400 a week in two-year record plunge”

Now, let me ask you.  If you’re thinking of negatively gearing a property, and you read the value of the property will fall $400 per week, will you still buy that property?

Not when the only reason for negatively gearing a property is to benefit from capital growth.  If you’re losing out on the income andthe capital, only a nutter would still buy an investment property.

More “marvellous water views”

But back to Queensland.  Today’s Australian Financial Reviewreports:

“Despite bids on 30 of the 36 units, none was sold…

“An opening bid of $65,000 for an 88 square metre one-bedroom unit was the lowest offer made.  One of two 512sq m penthouses attracted a maximum bid of $600,000 after it was listed last year for $1.58 million.”

Oh, and by the way, the article is headlined, “Resort liquidation sales goes to water”.

In other words, this bricks-and-mortar investment was so spectacularly bad, the original vendors couldn’t flog any of the units, and it turns out the liquidators have fired blanks as well.

While we’re on the subject, Money Morning reader, Shane sent us a link to a property in Rainbow Bay on the Gold Coast.  The real estate agent blurts:

“Rainbow Bay Landmark Property Slashed by $400k!”

The property is now on the market for $1.399 million.  Interestingly, the property yields gross income of $46,000 per year.  Minus rates of $7,620, you’re looking at a yield of 2.7%... deduct interest expense and other costs, and… oh boy, what a crappy return for a market that’s not likely to see price appreciation for at least ten years!

That’s a whole lot of paper and real losses.

We know investing in shares isn’t perfect, but unless you use margin lending, at least you don’t keep forking out cash every month to keep your share investment.

And if you buy a good dividend-paying stock the investment will pay you… that’s probably a weird concept for a “credible” property analyst – an investment that pays you money, rather than one where you have to pay money each month in order to keep the bank from repossessing it.

We make no bones about it: buying property today is riskier than buying small-cap stocks on the stock market.  Do the numbers for yourself.  A massive mortgage with zero growth equals thousands of dollars lost each year.

But what about other points made by the “credible” property analyst.  Let’s quickly knock each one over…

“Australia’s banking practices are nothing like those in US and Europe where property markets are still struggling” – who says?  What about the secret loans from the US Fed?  What about the increase in bad loans on Bank of Queensland’s books?  What about the fact that Australia’s banks have more than half their loan books exposed to the Aussie housing market.

American and European banks were considered safe before everyone figured out they weren’t.

“Residential property is an essential commodity (we all need to live somewhere)” – as we’ve already pointed out, this is an irrelevant argument.  People adjust their lifestyles to suit the circumstances.  Next…

“Modern science is allowing us to live longer and foreigners will continue to migrate to this great country because of our employment opportunities, culture, vast open spaces, and general quality of life” – again irrelevant.  Japan has one of the longest life expectancies of any nation, and so do the Mediterranean countries… that didn’t stop property prices falling in those countries.

Besides, all the bluff and bluster about people migrating to Australia has ground to a halt.  The latest numbers show net migration has slumped from last year’s peak.

“History is proof that the nation just can’t build anywhere near enough properties to keep up with population growth” – where’s the proof?  That’s right, there is none.  In fact, the reality is the opposite.  History shows that the nation has built plenty of properties to keep up with population growth.

As we say, people adapt.  If someone can’t afford to buy a house they’ll seek alternatives.  That’s why you see a boom in high-rise developments and the subdivision of land.

“Do you think that the cost of other essential commodities such as milk, bread, and medical services are likely to increase or decrease over time?” – They will decrease once the inflation Ponzi scheme collapses in a heap.  But clearly our “credible” analyst hasn’t seen the news about the “milk wars”.

And as for medical services, these prices only rise thanks to immoral government intervention in the health industry that causes prices to rise.  Similar to housing, but neither are guaranteed to last forever – the government can’t possibly steal enough money from taxpayers to keep these Ponzi schemes going forever.

“Do you think that the wages of builders and associated skilled labour who build and renovate properties will increase or decrease over time?” – We don’t know, but neither does our “credible” analyst.  He can only guess.  What we do know is that there’s nothing set in stone to say the price of labour always has to increase.

At the moment, rising wages are just another function of Ponzi inflation and credit growth.  Neither are guaranteed to last forever.

“Do you think that the cost of raw land will increase or decrease over time?” – The same as above.  The situation in other countries shows prices of land can fall too.  Australia isn’t immune to this.

“Do you think that the timber, cement, bricks, steel and other material which we use to build will increase or decrease over time?”– Same as above… Ponzi inflation and credit.

“Do you think that Australian’s will suddenly quit their obsession with renovating their family home?” – Yes.  Why not?  All the nonsense about Australian’s having a genetic affinity with their homes, is just that – nonsense.

It’s not in the genes

It’s often said Australians have an affinity to property due to their European heritage.  Especially those from Italian and Greek backgrounds… just remind us of how the Greek and Italian economies and housing markets have fared?

But before we do, that was just too easy.  The property spruikers really should try harder.  But then again, it’s pretty hard to keep the myth going when there aren’t any real facts to back their case.

Back to the genetics of house prices.  According to The Economist:

Source: The Economist

So much for genetics.  According to this chart, the only bubble left to pop is the Australian house price bubble.

But as we know, the bubble has already popped.  You’ll see the data flow through to the statistics soon, and then it’ll only get worse.

And the housing shortage will be revealed for what it really is – a sham.

In fact, we’re guessing the popped bubble will be clear for all to see by the time your editor takes part in a housing debate in Sydney at the end of May or early June.

We can’t give you the full details yet, but when we can we’ll let you know.  It’ll be a perfect opportunity to confront a couple of housing bulls square on.

Until then, just sit back and wait for Australian houses to take an even bigger hit.  As we wrote a few months back, the end of 2011 or 2012 could be the time for opportunistic buyers to make low-ball offers to desperate sellers.

We don’t think that time has come yet, but it’s certainly worth keeping a close eye on the property market for bargain basement sales.

Cheers.

Kris SayceFor Money Morning Australia