Australian Property Hits a New Kind of High

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Australia’s property obsession is reaching a frenzy. There is talk of a being able to bet on a new property index, clearance rates are making news alongside gossip columns and some analysts are warning of an impending crash. One speaker at the Port Phillip Publishing’s ‘After America’ symposium pointed out that it was rude to discuss religion in polite company and so property was off the agenda.

Why the speaker thought they were in polite company remains a mystery. The symposium’s Q and A panel on Friday was thrown a few curveballs by inquisitive delegates keen to pin down speakers to predictions and opinions. They asked the panel of speakers about the prospects for inflation and/or deflation. They asked about the ideological causes behind the crisis the world can’t seem to shake off. And they asked about the survival prospects of Australia’s banks. You’ll have to get your hands on the various recordings to find out which speaker said what.

One delegate asked the panel about Australian property’s potential as an income producing investment. Being used to hearing all about negative gearing – the art of investing money into a money losing investment for tax reasons – we didn’t expect to hear property’s money making powers mentioned instead.

There might be a case that property could in fact earn a good return in regular cash flow terms. So let’s take a closer look at the world of Australian property these days…

Into the lion’s den

You might have heard of property spruikers. Now we’d like to introduce you to property preachers. Property preachers are much the same as spruikers, but with the added flair of a few desperate spiritual twists now that Australian property prices are no longer rising.

Like this one in The Age:

In an Australian-mainland first, the walls of the semi-detached homes in trendy inner-city Northcote will be made from the cannabis-based building product Hempcrete, pioneered by a Queensland company for its carbon-neutral properties.

Now that the headline for property articles can’t read ‘Housing hits a new high’, this one reads ‘Housing on a new, green high’. We’re not sure if the cannabis-linked pun was intended. But the property preachers sure are getting creative.

Australian property owners will be increasingly desperate to achieve alternative new highs over coming months if Aussie house prices continue to fall. As we wrote last week, Steve Keen pointed out that, adjusted for the timing of the peak in house prices, we’re on track with Japan’s 40% decline and not far behind the pace of America’s plunge.

What House Price Crashes Really Look Like

So here is what The Age’s property preachers have come up with, other than using hemp in your walls, to make property ownership more pleasant:

If you’re negatively geared, a good way to improve immediate cash flow is to ask your accountant to submit an income tax variation form to your payroll office.

This reduces the tax rate charged on your wages by estimating your total end-of-financial-year tax position in advance. Rather than receiving a lump sum tax refund, you receive money evenly throughout the year.

Yes, if your property ‘investment’ is losing you so much money that you’re experiencing cash-flow difficulties, you can ask the tax collector to manage your cash more efficiently.

Or you could invest in investments that make money – a novel idea, we know. How much longer will investors believe in the idea that the capital value of an asset that makes a loss will go up? If you invested in a machine that costs you $2000 a month to own and rented it for $1500 a month, why on Earth would it go up in price?

And don’t start with any housing shortage nonsense. Rents would be bid up to make houses a profitable investment if there was a shortage. Simple supply and demand. All those homeless people and caravan dwellers who were counted in the ‘housing shortage’ data are more likely to rent than buy.

One last thing before we get to the kind of investments that make money rather than lose it. It was encouraging to see the property preachers admit the following in The Age:

Paul Osborne, of the buyer’s advocate firm Secret Agent, says it’s a smart move to understand household indebtedness in specific areas to snare a bargain.

He says many households are managing to service only the interest repayments, not the principal amount, of their home loans. As a consequence, the best buying opportunities tend to be in suburbs that have high proportions of household debt.

Now calling your property preaching firm ‘Secret Agent’ is a bit of a worry to begin with. But here’s the point – if over-indebted homeowners make for home buying bargains – and suburbs with high proportions of household debt are likely to yield good buying opportunities – where does that leave Australia as a whole? According to Vanessa Tripodi at CreditCards.com, ‘Aussies lead world’ when it comes to debt.

Steve Keen chimes in with this chart from his website http://www.debtdeflation.com/blogs, comparing our level of mortgage debt to the US’s. Sure enough, we’re worse.

Mortgage Debt to GDP

Australia is the world’s over-indebted suburb. So, is Secret Agent Osborne up for a buying spree? Hopefully not, because Aussie house prices here are also world beating. This chart shows real house prices in Australia have far outpaced the US bubble.

real house price indices

Demographia released its 8th International Housing Affordability Survey and Australia’s cities once again featured as some of the most unaffordable. So what happened to Osborne’s relationship of areas with high debt having lots of bargains? Well, it’s a matter of timing is our best guess. The bargains are yet to emerge.

You see, debt bids up an asset, as well as being the factor that causes a plunge in prices. It’s a simple bubble story. Once people believe prices will rise, they are happy to go into debt to buy the asset. That adds buying fuel to the story. At some point, there is either too much debt relative to income, or the idea of buying an asset to make a loss simply begins to look too ridiculous to continue.

Then, all those over-indebted people sell in a panic and the bargains that Osborne is talking about will emerge.

But until that happens – and property does become a cracking investment – where are the safest and most profitable investments for you to put your money in? More on that tomorrow…

Regards,

Nick Hubble
for The Daily Reckoning Australia

The “After America” Archives…

Debt-onomics and the Coming Debt-ocalypse
2012-03-17 – Nick Hubble

The End of Empires
2012-03-16 – Nick Hubble

Are Investment Ideas Useful?
2012-03-15 – Nick Hubble

A Chinese Mini Communist Revolution
2012-03-14 – Nick Hubble

The Final Countdown
2012-03-13 – Nick Hubble

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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32 Comments on "Australian Property Hits a New Kind of High"

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Endless
Guest

Rents are rising in some areas, for instance in inner Brisbane, maybe not to the point that compensates for the capital decline, but this is an anomaly in Keen’s Debt analysis — according to him, rents should also be falling due to de-leveraging, increasing unemployment etc.

Garry
Guest
Ah, Steve Keen, again Two years ago — Apr 2010 The economist Steve Keen has begun a long walk — from Parliament House in Canberra to mount Kosciuszko in the Snowy Mountains. It’s the penalty for losing a bet that house prices would crash last year. Under the terms of the wager, he has to wear a t-shirt with the slogan: “I was hopelessly wrong on house prices, ask me how”. The walk was the penalty for a losing bet with Macquarie Bank economist Rory Robertson. Added to these predictions made during the GFC, Keen sold his own digs for… Read more »
Biker
Guest
Steve Keen?!~ One skeptic described Keen’s record well, recently: “It is a revealing exercise writing down some of the claims Steve Keen has made: In 2006, Keen said we may already be in a recession. We were not. In 2006, Keen said the Australian Debt/GDP ratio would exceed 160% by 2007. It did not. In 2006, Keen said Australia will be in recession long before our Debt/GDP ratio falls. We did not go into recession. In 2008, Keen said interest rates would be at 2% by 2009, and ZERO by 2010. The interest rate trough was 3%; today rates are… Read more »
Ross
Guest
Property will defy Keen until wholesale funding meets its date with the underlying risk already in the system. http://www.bloomberg.com/news/2012-03-19/greek-bonds-get-initial-value-of-21-75-in-swaps-auction-1-.html Despite collective relief over Greece, those that were on the offer side of the swaps are now supposed to settle. It is “show me the money time” but don’t expect any accounting standards that threaten extend and pretend or any let up in the reserve banker liquidity supply any time soon. They will already have put the fix in to bail out those with the smoke collateral positions using the taxpayer balance sheet. Biker’s scorecard on Keen is powered by such… Read more »
Endless
Guest

To be fair to Keen, he was one of the very few Economist to predict the GFC. His claims over 40% house prices drop was always over 10-15 years.

And his other claims about unemployment and interest rates were affected by the First home buyers grant, which boosted house prices.

That said, clearly he hasn’t always been right. But then, pick any of the big economist in Australia and none of them have a great record.

Biker
Guest

Steve Keen failed to include the most predictable factor in the equation: government intervention.

Nor did Keen ‘predict’ the GFC. He _generalised_ world events, (wrongly) to Australia. It’s pretty poor research that does not consider the simplest of the eight threats to validity in making such a well-publicised prediction.

Keen continues to misinterpret what is happening here, but serves retired Australian landlords well. ;)

Greg
Guest

Biker – Aus property continues to go up as long as most believe it will keep going up. How long will it take before most people realise that it’s no longer going up? And then what? The credit bubble has left us with 15+ years of one-way asset price growth. Expect it to take a while before people realise the game has changed. Patience. The realisation will come, because make no mistake, the game has changed.

Biker
Guest

The game _is_ changing daily. Rents are now rising more rapidly than we had expected, boosting retirement income well beyond our estimates.

‘Patience'(?) We’ve steadily invested in property for 35 years.

Your opening statement is simplistic, Greg. It ignores several very cogent reasons why property in desirable areas will rise steadily in Australia.

Don't Prop Up the Ponzi
Guest
Don't Prop Up the Ponzi
Biker, Steve Keen was looking correct – 2008 saw house prices falling rapidly, but of course he didn’t count on the Rudd government pulling out all stops to reinflate the housing bubble, like tripling the FHOG, bringing in hordes of immigrants and relaxing the laws on foreign ownership. Along with these, interest rates were slashed, and all the while, we had first home buyers competing with subsidised investors for property. Yes, we had negative gearing before, but with everyone wanting to “buy now or miss out” this frenzy would not have been half as big if it wasn’t for negative… Read more »
Greg
Guest
Biker – the core difference between my view, and that of the property “bull” involves debt. This is what Keen bangs on about. I believe that accelerating debt has been the key driver behind the rise in prices. If this is true, then it follows that decelerating debt does not bode well for future rises. Anybody who believes that mortgage credit growth in the coming decade is going to be anything like what it has been for the last decade is taking a huge punt. Same goes for anybody who believes that running losses on property are going to covered… Read more »
Biker
Guest
D Prop, Keen himself predicted the falling interest rate issue, so he did factor in that criterion. Mine dew, he said rates would fall to zero!~ :) Keen simply generalised outcomes elsewhere to an Australian context: a critical error. Remember too, that the US attempted to ‘prop up’ property. While travelling in the US we were offered US$12K, via gmail, with Obama’s photo included, to assist us with home repayments. We don’t even _own_ property in the US! :D Greg, your comment re bankers attempting to keep interest rates down is quite amusing. :D Do you really believe it? You… Read more »
Greg
Guest

Biker – Amusing? What do YOU think is going on with interest rates? ZIRP, operation TWIST, the LTRO, QEI and QEII? How is it that Greece, Italy, Spain and Portugal are still able to borrow at less that 10% interest rates? After the debt-and-credit-induced-GFC, the world’s central banks have openly embarked on an unprecedented let’s-keep-interest-rates-low-at-any-cost policy, in an attempt to keep the debt and credit binge going. What do you think would happen if the “market” were allowed to price money?

Biker
Guest
Greg, your comment, verbatim, was: “…it seems clear that every banker on the planet is desperately trying to keep interest rates down…” And now you’ve now qualified that to specify _central bankers in the northern hemisphere_. Yes, your original comment is amusing in its generalisation… just as Keen’s premises are. Our own bank CEOs are quite gleeful as they raise rates ignoring our central bank’s recommendations, knowing it means their shareholders will be happy… and their bonuses forthcoming. Yes, it’s ‘amusing’ that you extrapolate in this way. If you hang around on this site too much, this kind of confused… Read more »
Greg
Guest
Biker – the fact that “bankers” are trying to raise rates 10 or 15 bp above the “official” spread is immaterial. The “official” rate is being kept artificially low – ZIRP, LTRO, TWIST, QEI, QEII – via unprecedented central bank intervention everywhere, and this is what matters, everywhere. Our bank CEOs raise rates above a floor which would be much, much higher were it not for the simple fact that monetary policy is being totally skewed in an attempt to keep the debt-and-credit party going. From a house price perspective, you either believe that this party is going to be… Read more »
Biker
Guest
The differences between our rates and those of the NH demonstrate (again) that things really are ‘different’ here. ;) When developers were panicking a couple of years ago… and needed cash flow.. we picked up some bargains. Paid a lot of CGT on one of them last year. Will inflation “…’this party’ is going to be kept going forever…” continue? Of course: * Less residential construction; * Population rising; * Rents rising; * Wages rising; * Debt chewed up by inflation, repaid with cheaper dollars annually… Since December 2005, we’ve read predictions of property crashes, benefited when believers panicked, and… Read more »
Greg
Guest

Biker – I’m not “depending” on anything. We all speculate, from time to time, and it seems last time you did on property, you were fortunate in that the Govt stepped in and pumped up the prices of your “bargains”. Good call. Looking ahead, I’d say that sort of punt is getting more risky. For my money, I’d rather punt the other way.

Biker
Guest
We’re not speculators, Greg. Bill Bonner provided really great definitions of the essential difference between speculation and investment a while back. Strangely, the fella who enjoys ‘dropping his tights’ deleted my reference to it. It didn’t help his flimsy argument. As investors, we take the long-term-view. During booms, we make remarkable money. During flat periods we buy and build. Yes, we test-the-waters as we go along… and occasionally (as in March 2011) we make a good profit during a flat period. Punt the other way? Providing you have shelter, that’s your call. We don’t ‘punt’. We don’t have sufficient knowledge,… Read more »
Greg
Guest

Well, for a very long time now, the drover’s dog has been doing nicely levering up. 2008 was the market’s way of sorting out the wheat from the chaff, but the market was not allowed to do its work, so a lot of chaff was spared. “Long term”, I don’t expect the chaff to get off quite so easy next time. The longer “long term” gets, the bigger the shock when it comes.

Biker
Guest

For those with a long-term view… and flexibility… this property market presents wonderful opportunities. Rental increases and income exceed our expectations and the longer ‘long term’ gets, the greater our retirement income.

Yes, that too will taper off, as tenants (even patient, long-suffering bears) inevitably buy their own homes; not the mansions Keen inferred would fall into their collective ‘lapse’, but what they can really afford.

Some, of course, angered by broken promises, will remain lifelong tenants.
And the truly ‘clever’ ones have GFs with homes… . No punt at all. ;)

AnnoyingO
Guest

A long slow drop in overall house prices is likely if the world situation, including China, keeps deteriorating. The ingredients are there for a faster slide too, given our record prices and indebtedness.

Australia’s population increases at 7000 a week, surely a factor in propping up rents and house prices in recent years, along with the government grants.

But it is a ponzi – where does it stop? When there are so many people we are all miserable? Or when resources start to buckle?

Biker
Guest
AO: “Australia’s population increases at 7000 a week, surely a factor in propping up rents and house prices in recent years, along with the government grants.” Why, yes. Remember too, that a new cargo cult mentality embraces a major property collapse, delaying home purchase, deterring residential construction and pushing rents ever upwards. And some states’ populations are accelerating… Perhaps because our Aussie lifestyle is so good, our present economic situation so much better than most western nations (let alone Asia) and our population comparatively small compared to most countries, it’s not unlikely we’ll actually see an increase in those clamouring… Read more »
Keenie
Guest

Ah yes Biker – population and rents. That old chestnut. But it still cannot prevent house prices reverting to norm. The market always prevails. Sure Ruddy and Co can get involved for a while – but the prices of houses in Australia will have to fall. The market always wins. Not sure about ‘stopping the world’ but it sure is about to pause.

Biker
Guest

Keenie: “The market always prevails.”

Supply and demand prevail, Keenie.

House prices will have to fall? One might apply such wishful thinking to any commodity one covets. Keen is your hero? You’d have been wiser to have retained Santa as your benefactor… ;)

Keenie
Guest

Cheers Biker. Upon reflection my post should have read ‘House prices have already fallen and have further to go’. I appreciate the point of clarity.

Biker
Guest

We bought during that brief correction, Keenie.

Sold two years later, in a market many insisted couldn’t support the kind of capital gain we made. No agents fees, either. :D

Great opportunities exist in flat markets.

Do you imagine, even for a moment, we wouldn’t _thrive_ in the kind of bloodbath the property bears envisage? Nearly fifteen thousand Aussies own six or more homes. The scenario you fantasise is one in which you’ll need to be not only very cashed up… but incredibly quick!~ :)

Keenie
Guest
The sad part is that no one is ‘thriving’ as you put it. If you believe this to be the case you are either the exception, ill informed or most likely yet to mark you property assets to market. That is where most come unstuck. It is almost always the bank who order the mark to market as the investor knows it but doesn’t want to see it. House prices have fallen. Rents have risen. But a word of advice – if you can hang in there and don’t have to sell in the market then ride it out. Good… Read more »
Stillgotshoeson
Guest

http://www.apimagazine.com.au/api-online/news/2012/04/property-bubble-bursts-in-moranbah-but-for-how-long

BHP have decided to close the mine… will be an interesting time for the “investors” there now

With commodity prices falling more close to the edge mines could be mothballed.

The early entrants could be ok, later ones over leveraged are going to be in trouble.

Biker
Guest

Why, thank you, Keenie. Take five stars! Too often those who are successful in investing are wished misfortune by losers who rejoice in others’ loss.

Classic case is the bloke who parties when a mine closes, workers lose jobs, etc… . Easy to spot a loser!~

Stillgotshoeson
Guest
Stillgotshoeson
Guest
Still true to form Biker, Can not address the message, just shoot the messenger. No, Yes Shoes, it is a shame that the mine is being closed but it does reinforce the need for investors to be careful about their investments and keep abreast of developments and issues in the commodity that their investment is based on. No, no we have none of this we have an instantaneous attack on the messenger because we can not have messages out there showing the negatives and pitfalls that can be had in investing in these mining areas.. I mean there can not… Read more »
Biker
Guest

Happier now you’ve chucked that up, son?

mick
Guest
Keen has coped a lot of stick and in all fairness he has the same problems as do those who predict the end of the world, timing. What we all need to ask ourselves is how is the debt balck hole going to be fixed? Many of the above bogs ignore this fundamental question and without a viable answer I can only see us all at the top of the funnel waiting for the smallest of tremors to send us down the shute. Whilst conventional wisdom often ignores human behaviour we do need to realise that times are dangerous and… Read more »
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