Housing gloom in Oz

The Inevitability of Reality
Saturday, 3 September 2011
The Daily Reckoning Weekend Edition – Melbourne, Australia
By Nick Hubble

The housing gloom virus is spreading to mainstream newspapers. And property spruikers are revising their 'property always goes up' rallying cry. Now the market is 'steadying', faces 'stabilisation', feels 'softer' and prices are 'flat'.

Editor Kris Sayce points out in our sister publication Money Morning that 'flat' means declining if you actually look at the numbers in the Age.
Perth recorded the largest fall in house prices, down by 2.7 per cent, over the quarter. It was followed by Brisbane, down 2.1 per cent; and Darwin and Adelaide, each falling 1.9 per cent. Melbourne and Sydney again proved to be the most resilient of the state capitals; Melbourne's low fall of 0.9 per cent was followed by Sydney's, down by 1.1 per cent.
But let's take a look ahead rather than back. From the Age again:
Separate building approval figures show just 7600 private sector houses were approved in July, almost unchanged from June and down 12 per cent over the year. About 2900 houses were approved in Victoria, down 10 per cent on a year earlier.

These figures add weight to our view that the housing sector is going backwards at a rapid pace," CommSec economist Savanth Sebastian said.

"Homes sales have hit 10-year lows, house prices have been tracking lower for six months and housing credit is at the weakest levels since the late 1970s," he said.
So the housing sector isn't expecting things to be pretty either. Over at the RBA, they are one-step ahead according to the Australian:
RBA deputy governor Ric Battellino said today there were concerns that buyers who bought into the market in 2009, when the federal government grant was increased, may have over-committed themselves
Yes, remember those first-home buyers who had to 'get on the property ladder'? They will soon be found at the bottom of the pile of people who fell off.

To get an idea of what might transpire over coming years, consider what happened in the US, UK and Ireland, just to name a few, when house prices stopped rising. (Here we mean the real definition of 'flat', not the property spruikers definition.)

Property investors suddenly stopped believing their houses were appreciating in value. (Something that is inherently odd to your editor, as houses don't grow.) And it became difficult to justify making a loss year after year on the expenses of owning the property.

Suddenly the true value of the investment asset emerges - it will have to fall in price dramatically before it can return a profit (rent minus the costs of owning, which include paying back the debt).

So the very tax advantage that sucked gullible property investors into the market will be their downfall. Investing in a loss-generating asset may be tax deductible, but that asset obviously isn't much of an investment.

That's what the Americans, Brits and Irish figured out. Then the real selling began, unleashing mayhem on financial markets.

When Australians figure out that a loss-making investment isn't a good one ... well ... they will lose a key part of their national psyche. Perhaps they will no longer be Australian?

Here is another odd phenomenon about housing bubbles. Gold, which is in a bubble according to many property spruikers, has had margins go up with the price. That is, as the price went up, it cost more to hold a position in gold futures. Property investments are the opposite.

The higher house prices go, the less risk banks perceive in lending. That meant they felt comfortable reducing required deposit ratios in the housing boom of the US, UK and Ireland. The initial cost of buying went down as the price went up.

This just adds fuel to the fire. And whenever things slowed, the government stepped in with all sorts of grants and tax breaks, further reducing the costs of 'getting on the property ladder'. The Sherlock Holmes of property investing, Intelligent Finance mortgage broker Justin Doobov, comments: 'I have a suspicion that the grants tend to push the price of a property up by the value of the grant.'

Well done, Justin!

This may be a particularly bad time to be over-optimistic about property.

Ratings agencies, governments and private institutions continue to forecast recoveries that are unlikely to emerge. In fact, many economists who predicted the 2008 economic woes are explaining why recession is a virtual certainty in the US. Some say it has begun already. Factor in Europe's sovereign debt woes and China's attempts to slow down and you get a dismal outlook for Australia.

The 'reputable' forecasters above (people think ratings agencies, governments and big banks are more reputable than people who are consistently correct) base their projections on recoveries that happened back in the day when more debt could be borrowed to spur 'growth'. Too much debt is the problem now. It has to be paid back, or defaulted upon, before growth can re-emerge.





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