House Prices Halve Without a Recession


You’ll never guess the lead story on Bloomberg this morning. ‘Australia Gold Coast Homes at 50% Below 2010 Lure Buyers’. A snazzy photo of the Gold Coast as seen from the Q1 Observation Deck featured.

Just reminding you it’s possible, Australia. A 50% drop in house prices without even having a recession. Imagine if a recession was thrown in for good measure.

Of course, this is the Gold Coast we’re talking about. Things work a little differently there. We can vouch for that. (You can just make out your editor’s university in the background of the photo on Bloomberg.)

What’s interesting is that the Reserve Bank’s low interest rates are encouraging speculative buyers to come back according to the article. A 50% drop wasn’t enough of a lesson. On the Gold Coast, it’s once burned, never shy. Just like our pub and club crawling uni days.

The local buyers are justifying their optimism on things like a falling Australian dollar, which will encourage tourism. Sounds like ‘hair of the dog’ to us. Any reason is good enough for some more speculation. But the Australian dollar is falling for a reason, and it’s not likely to bode well for the economy. Back to that in a moment.

If you think of low interest rates as drugs, the Gold Coast would be a great place to look for the first signs of excess. But the rest of Australia never followed the Gold Coast’s property plunge in the first place. Holiday homes in Queensland are the first to go when you’re in financial trouble, and the family home in Sydney or Melbourne is probably last.

For house prices to take a hit in Australia, there’s got to be a lasting demand shock – a sudden aversion to borrowing obscene amounts of money to buy houses in the least affordable housing markets in the world. What might cause that?

Well, over in the US, the housing market is back in a mess as interest rates surge. Not Federal Reserve interest rates, but mortgage rates, which are tied to the 10 year government bond yield. And that’s been rising fast. Bank of America’s housing affordability index is in freefall. (Given the impressive surge in car sales reported overnight, perhaps the Americans are sick of borrowing to buy houses and have turned to cars instead.)

Just as falling interest rates are a drug, so rising interest rates are the withdrawal symptom. If you pump a housing sector full of debt at low interest rates, it doesn’t like that debt becoming more expensive.

Eventually, higher interest rates will reach Australia, just as low rates have. And then all that housing debt will turn out to be rather expensive. That’s how the demand shock is likely to hit.

But for now, housing affordability in Australia is at its highest in a decade…according to a report released by Adelaide Bank and the Real Estate Institute of Australia anyway. Hmmm…

Meanwhile, Fitch, Demographia and others point out Australian housing is least affordable compared to other countries. Good old statistics.

Speaking of which, housing construction didn’t contribute to GDP growth this quarter. But it was still up 0.6% for the quarter and 2.6% for the year, hitting $1.5 trillion. As the Prime Minister pointed out, GDP rose 28.5% since he was elected in 2007. The stock market is down around 20% over the same time, which he didn’t mention.

What we’re keen to mention is that, dividends thrown in, the stock market is just 1% off its 2007 high. On the same basis, the 20 biggest companies are up 15% from their 2007 highs. It’s proof the ‘Income Trend’ is in full swing when it comes to shares – capital gains are dead. The same will eventually happen in property with rents, not prices, determining returns.

Not that we ever plan on buying a house, no matter the rental returns quoted by real estate agents. Our current rental property’s builder installed plastic stove knobs which melt when you cook. They also put in a screen door you can only lock from the outside. Replacements are sure to be expensive and the boundless incompetence of builders is probably not priced into the rental yield. We pity our landlords.

Getting back to the economy, Kevin Rudd also conveniently failed to discuss Australia’s PMI results (which indicate how well the manufacturing sector is doing). Greg Canavan sent a chart over from Twitter, posted by David Scutt:

Global Manufacturing

Click to enlarge

In other words, our manufacturing sector is shrinking faster than just about every other country. So much for the boost from a falling Australian dollar. This also explains why the Reserve Bank of Australia says it wants the dollar to keep falling.

A trade deficit, the end of a mining boom and a shrinking manufacturing sector isn’t a good combination. We’ve made a punt on a certain agricultural product picking up some of the slack – milk. And our punt is 1 cent off post-GFC highs this morning after New Zealand competitor Fonterra admitted it stuffed up on safety standards, triggering a botulism scare over its powdered milk. The scare took off in China, where these sorts of food scandals play out like soap operas. Whistleblowers have a short life expectancy.

The Chinese don’t drink much milk, but that’s changing fast, creating a huge new market at margins many times those in Australia. But if you think that’s a big opportunity, consider this: 12% of adult Chinese are diabetic. Some healthcare company is going to make a lot of money. The question is, who?


Nick Hubble+
for The Daily Reckoning Australia

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From the Archives…

Is a 50% Market Decline Possible?
30-08-2013 – Greg Canavan

Why The 30/20 Tax Rule May Rise Again
29-08-2013 – Vern Gowdie

The Investment Industry: Confusion, Conflicts and Cash
28-08-2013 – Vern Gowdie

The Federal Reserve’s Crucial Next Step
27-08-2013 – Greg Canavan

Superannuation Overtakes Bank Deposits
26-08-2013 – Greg Canavan

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.

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5 Comments on "House Prices Halve Without a Recession"

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3 years 1 month ago

Save the odd bump it is still risk on and plenty of pockets of irrational exhuberance among those debt funded “investors”.

3 years 1 month ago

Do my eyes deceive me, the UK top of the PMI list? no, it can’t be, you must have it wrong or I’m colour blind.
The only thing we are good at, is doling out money to idle sods who wont work, apparently its a ‘life style choice’ now, sponging off taxpayers. With the oil and gas running out from the north sea wells, we’ll soon be the worlds basket case; again.
Less and less I like governments, more and more I like anarchy.

3 years 1 month ago

Like problem gamblers at James Packers casinos, the throbbing masses move through to have their worth harvested, whilst the elite overseers serenely take the ‘nights earnings’ and enjoy a good nights sleep.
Enjoy living without a manufacturing base Australia, I’m sure we can endlessly see double digit returns on real estate.

David Thackrah
David Thackrah
3 years 1 month ago

If 27% of people up to 25 years are unemployed or under-employed how can house prices remain where they are. The developers are erecting larger homes that are out of any normal income range in cost. Some sales are being completed by people from overseas who do not use the home. Only Australian citizens should be allowed to be a proprietor under the Torrens Title system and regulators should step in and build smaller homes.

The Fleecer
The Fleecer
2 years 8 months ago

You’ve summed it up in one paragraph beautifully, well said.

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