A Date for an Aussie House Price Collapse

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Today’s Daily Reckoning will be mercifully short. Your editor is working on two projects for paid subscribers that need to be finished before we head off to South Africa on Friday. It’s okay though. There doesn’t appear to be anything to worry about in the markets at the moment.

Stocks are surfing a sigh of relief that Dubai hasn’t precipitated a global crisis. Plus, huge amounts of liquidity in the market are bound to take it higher for now. This makes valuing stocks a risky – dare we say futile – proposition. But we’ll push on.

Someone has called us out on the message board and demanded we put an exact date on our prediction for an Aussie house price collapse. This is a moronic suggestion. The claim is that if you say anything often enough, sooner or later you’re going to be right…only you’re not really right…you’re just repetitive…and lucky.

But we’ve done plenty of homework on the Aussie housing market. We’re either right or we’re wrong. Our forecast is not an option. There is no time decay. True, there may be people out there who are weighing up whether now is a good time to buy a house based on predictions about the direction of prices.

However this more or less proves our point. Buying a house is one of the most important financial decisions you make in your life. It should be based on whether you can afford it, leaving plenty of wiggle room for rising interest rates, the loss of income, and, of course valuations.

On the last subject, we couldn’t be clearer about what we think of Aussie house valuations. They are outrageous. Even if demand is being fuelled by foreign buyers, this simply makes them more unaffordable to people just getting on the property ladder. Besides, getting into the property market now with a huge mortgage at a variable interest rate because you think you can sell to a foreigner for a capital gain is not an investment. It’s a gamble.

Aussies have been gambling on houses for at least ten years now (credit to Steve Keen for that description). We don’t know when it will end. But we know that it has to end eventually. It could end if something drove up unemployment or down existing wages.

But we think the more likely shock will be an external one. There are two big looming factors out there. The first is the rising cost of capital which makes importing funding more expensive for the big banks. The government is trying to soften this blow by supporting the housing market with the AOFM’s purchase of residential mortgage backed securities.

The other big factor is China. And for the sake of argument, let’s just put this out there: China’s boom is entirely a function of the credit cycle. The expansion in Chinese fixed asset investment and productive capacity is fuelled by a trade surplus and a currency policy that are on borrowed time. China’s economy is every bit a symptom of the credit bubble as the U.S. housing market.

Obviously a pop in the China bubble is a game-changer for Australia. Specifically, national income would go down (export volumes and prices probably plunging). Australia already has a mountain of debt to service. At higher rates with lower national income, that debt gets even more burdensome.

The only realistic argument is that the government will not let house prices fall. Too many people have too much to lose. The banks, the real estate industry, the builders, the spruikers, the tax man, and Australians with mortgages. In other words, Australia’s housing market is too important to fail.

But even this argument fails. Just because the government wants it doesn’t mean it will happen. As we are learning, national governments have limited resources too in a global credit crunch. Pouring them into the housing market to support prices is one part wasteful and two parts stupid.

Besides, a nation doesn’t get wealthier buying and selling houses. The ability to purchase your own home and elevate your standard of living begins with rising incomes, and those come from productivity increases and innovation and trade.

For the Australian government to make housing the centrepiece of the national wealth strategy is every bit as disastrous as the Wall Street/Washington axis making finance the crown jewel of the American economy at the expense of manufacturing. It’s a massive selling-out of Australia’s long-term economic future for short-term political gain.

This Anglo obsession with getting rich off of houses is just that: an obsession. It’s also lazy, and perhaps a sign of civilisastional decadence/fatigue. We wrote a report in 2004 called, in subtle fashion, “The Total Destruction of the U.S. Housing Market.” Excuse the formatting there. It’s the only on-line copy we could find.

You should have a look at it – but don’t order yet, we’re working with a friend to relaunch the product shortly. And if you think our advertising copy is hyperbolic, of course it is. We’re operating at the margins of the financial publishing world, writing about the kinds of scenarios that terrify the mainstream media because they alienate advertisers. They laughed when we first made the claim, and those were just the people who weren’t calling us “un-American” and a “fear monger.”

Of course it turns out we were two years early on our call. Did that make us wrong? Well, if it was a trade, yes. Way wrong. But as a macroeconomic call about an unsustainable set of circumstances, it was right. And that’s the call we’re making here about Australia. If you want a date, check out the online personal ads.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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252 Comments on "A Date for an Aussie House Price Collapse"

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Ned S
Guest

Hey Mr Denning – If ya can’t give us a date mate, I’ll settle for a decade … This one? The coming one? Or the one after? Or do ya mean in our really futuristic dreamtime cuz?

Sambo
Guest

“If you want a date, check out the online personal ads.”
Brilliant! :D
Nostradamus? No. Analytical and logical thinking? Yes.

beyondtool
Guest

Compounded rate rises that are a historical first, coming off historical lows, 15% housing price increases in a tough year, a drop in demand, the expiration of the first home buyers grant…all sounds like a certain way to start a housing crash.

To be honest I am astounded that this didn’t all start at the end of last year. You want a date..I’d say if it doesn’t happen in the next 2 years I’ll eat my hat.

GB
Guest

The AFR has an article today about steel makers in China and there are a few key points i think are important

1. 32 new steel mills have been built since a ban on new mills was imposed in July
2. Steel capacity outside of China is down 50%
3. China now produces 50% of the worlds steel, EU and north america 7%
4. Quote: ‘there’s money everywhere in China at the moment’

That’s the mother of all mothers of a bubble

Joyce
Guest

I totally agree with what Dan said. I do not have a crystal ball, so I do not know either. For property investment in certain (most) parts of Australia, patience pays under the present circumstances.

Dan M
Guest
I’ll offer a date. Shortly after the government stops messing around with the market! Get rid of the first home “sellers” grant, stop guaranteeing private bank borrowing, and then we’ll see. If we were really in a property bull market we wouldn’t need either of these massive crutches, so stop them and put the theory to the test. Having this ratio of mortgage debt to income is like jumping off a very tall building. The outcome is inevitable. The government is digging a hole at the bottom of the building by borrowing and spending to support the housing market. This… Read more »
Peter T
Guest

Dan,

You are doing some of the best, informed writing in the industry on the impending house price crash. The mainstream media are merely parrots of vested interests, in comparison.

Keep up the good work!

GB
Guest

WOW!!!! Everyone turned insane overnight

Business Spectator commentators seemed to be suffering from brain farts

Carr reckons Australia should print money and buy gold!! ‘Why not everyone else is’ he said

Kohler reports China now has 2.3 trillion reserves of gold – i guess they have NO USD left then. That means they got out of USD and the dollar didn’t collapse or he might have got his figures wrong

Retail/main stream are now on the gold bandwagon – warning, warning!!!

I’m going to buy some more USD i think

GB
Guest
Mike Mangan reports today on commodities and states he is concerned over resource stocks. I have pasted his comments below *************************************************************************1. aluminium LME inventories are 75 per cent higher than the prior 20 year high set in May 1994. 2. Nickel inventories are only 6 per cent below the 20 year high set around the same time. 3. Zinc inventories have risen six fold since the start of the subprime crisis in September 2007. 4. Lead inventories are up five-fold over the same period. 5. copper inventories have increased for 20 consecutive weeks and are up 70 per cent since… Read more »
Jason
Guest

This investing environment is crazy. I dont’t know whether to buy stocks, sell stocks, buy gold, sell the gold I already have or just spend all my money and enjoy it before it’s devalued/taxed/stolen by governments

House prices in this country beggars belief. I mean, this is Australia. It’s not like we have a shortage of land.

Chris
Guest
Jason, I agree completely. I have a 3-5 year plan to save up a substantial enough deposit (thinking 6 figures with a 2 in front is big enough) so that I can buy a house and bring up my family. I don’t know too much about finance (hence i have recently subscribed to independent sites such as this to increase my knowledge base) but the more I read the more I realise how absurd the markets actually are. Although I am getting independent financial advise to work out what suits my current situation and where to maximise my returns, I… Read more »
Justin
Guest
Yes GB, the so called economists over at Business Spectator have quite literally gone mad. Alan Kohler is now a gold lover!? I know, he must have just been disparaging gold a couple of months ago in an attempt to ‘shake out’ weak hands & pick some up on the cheap! I wonder how Adam Carr thinks we can pay off debt by printing money & buying gold? Last time I looked money was debt & you otherwise pay off debt by selling gold, which we can’t likely do because Howard sold most of it in 1997. The RBA says… Read more »
wasabu
Guest
Roughly June 2012! * Mayan calender ends on December 20, 2012 (I think that’s the date). * Nostradamus prophesies have been nicely leaked for decades… now suddenly his ‘lost book’ turns up in Rome national library! Oh boy it was just sitting there waiting to be discovered was it? hehe Oh those cheeky freemasons. I wonder where they’re bunkering down for the big one? oh sorry.. point of the second point is that the world can’t end without a good solid housing collapse – surely. If not by market sentiment then by a 60 metre meteor and a sprinkling of… Read more »
Bertie
Guest

Looking for a date?, sometime during the Rudd govenment’s next and last term. They are a pack of Wallys.

Coffee Addict
Guest

I could take punt on the August next year. Why then? Because “quantitative easing” in the US will really start to fall by then and US interest rates will start to rise.

I may be wrong. Maybe quantitative easing will continue ….. but I don’t think the US Treasury will wear that option given that the export of the cheap money though the carry trase does not benefit business in the US.

Justin
Guest

Mr Denning, go to http://www.rba.gov.au, find the statistical bulletin and hence D01-Growth in selected financial aggregates. Graph the figures on Excel & you’ll see how close we may be.

GB
Guest
Coffee Addict thats what everyone is watching for, i.e. people seem to be watching for US rates or a sovereign debt default or China removing its stimulus. its what no one is watching that may trigger a crash prior to that What if it was something as simple as the LME refusing to accept any more shipments of aluminium etc… because their warehouses are full? Currently investors globally are selling USD, which they believe is worthless, and buying physical assets such as commodities. Now we have a situation where there is a huge surplus of commodities. A surplus of commodities… Read more »
GB
Guest
another possibility I remember not long ago commentators were saying things like ‘oil at $200’ and ‘i just cant see how oil wont keep up’ then everyone blinked and oil was at $30. Now replace the word oil for gold… gold bulls say that gold has been in a 10 year bull market and the USD has been in a 10 bear market. Its possible to assume that the USD has been going down over the last 10 years at the same time the US consumer debt levels have been increasing. So, gold up, consumer debt up and USD down.… Read more »
Jason
Guest

Chris, it seems the problem with learning how the finanial markets work is that the more you learn the less you know. At least for me, lol. Smarter people out there may fare better.

I’m just happy I bought a bunch of Gold back in 2004. I owe it to sites like these challenging the accepted wisdom and forcing me to think. Good luck with your plan and let’s hope that by the time you are ready to buy, this housing madness will have come back down to earth.

Greg Atkinson
Guest

I just follow a few simple rules when reading investment advice, they are:

Do the people telling me how to invest:

1. Actually disclose any actual trades?
2. Derive their main income from investing?
3. Ever admit they are wrong?
4. Focus on facts? (or simply attempt to grab attention with scary headlines etc?)

Unless I can see a “yes” to every question above then I treat that person’s advice with extreme caution.

Dan
Guest
You need to live in a dwelling, right? It’s cheaper (if you live in a house more than a few years) to buy than to rent, for an equivalent house – hear me out. How much would you be prepared to pay in rent? What kind of house does that get you? That’s the kind of house you can afford to (and probably should) buy, and once you do there are no more moving costs, etc. For most people, this means they have badly overbought and are in a potential (or eventual) debt trap, because they are ashamed to live… Read more »
Davo
Guest
Spoke to a friend on the weekend who has just come back from China, visiting various factories. The factory owners are told to continue production levels, not sack workers, and if necessary, store unsold/unwanted production. One asked what he should do when he runs out of storage space – the answer was “we will give you money to build another shed to store surplus stock”. Obviously, the Chinese masters are looking to placate their people, and will do whatever it takes to ride out the storm of a lack of export demand, in the hope that the situation turns around… Read more »
Antony Haines
Guest
You know the more i read your newsletters the more i am starting to disagree. In today’s email you talk about a unit in Sydney selling for 189. I think your comments dis-respect other peoples situations, this unit is near the University of Sydney, near the Botanic Gardens, near the city, near the trains and is renting for more than the loan would cost at 6%. If this was a young couple very much in love and studying at the University, then tell me this wouldn’t an option at 90,000 each? Let’s say the parents were able to afford this… Read more »
Greg Atkinson
Guest
Maybe DRA and Steve Keen can get into a huddle and come up with their next property prediction…eventually one of them will come true. By the way Dan I don’t think it is a moronic suggestion for anyone to ask you to put your property prediction into some context. Steve Keen did it..and was proved wrong, so how about you just put some rough numbers around what you reckon will happen? In any case, some of your articles have conveyed the impression that a property crash in Australia was imminent, so don’t get annoyed when one of your readers questions… Read more »
Watchful eye
Guest
Antony you are very mis-guided, leaving aside scenario’s of young couples in love living in studio apartments that are the size of their old bedroom at mum and dads but now accomodate kitchen. and bathroom you can’t be serious that you think this sitation is sustainable. $180,000 for a studio, correction, 3m x 5m concrete box with carpet and a kitchen. When ratios of median house prices Vs Median income swell to 8-10 times then this floor is about to open up and swallow people whole, starting with the niaive first home buyers who punted up big time to get… Read more »
watcher7
Guest
Unfortunately it appears that Steven Keen is not a follower of the Pittsburgh Steelers. If he had been he would not have bet on a property crash. In a post earlier this year I included this quote: “Since the first Super Bowl was contested in 1967, the average annual return for the S&P 500 index has been 25 percent in the six years the Steelers competed, regardless of whether the team won or lost, according to Capital IQ, a division of Standard & Poor’s” (Ros Krasny, Steelers in Super Bowl may bring luck to investors, reuters.com, January 30, 2009). History… Read more »
Slim Pickings
Guest

One day an article will be written and state that Australian house prices are directly proportional to Government policy (all levels). Take time and think about it.

watcher7
Guest
Just to clarify, in the comparison with 1927 I was suggesting a connection with Central Bank Intervention only, as America was on a gold standard. “Had the situation continued, most European nations would have had to leave the gold standard. Given the complexities of the reparations situation, the United States would be dragged down with them in a major financial crisis. Accordingly, Secretary of the Treasury Andrew Mellon and Benjamin Strong eagerly accepted initiations from European central bankers too a conference on the question. In 1927 Montague Norman of the Bank of England, Hjalmar Schacht of the Reichsbank, and Charles… Read more »
GB
Guest

watcher7
i think you are saying that easy credit/overcapacity caused the great depression????

Back then the US was the manufacturer and the consumer too. Now China is the manufacturer and the US the consumer

Easy credit – US: popped and repairing itself

Overcapacity – China: still getting larger

We’ve seen what happens when credit bubbles pop, i.e. the US downturn but what about when overcapacity pops?? Will it be a bigger bang or only a mild one??

I think the more China waits to reduce capacity the more severe the pop will be…

Justin
Guest

I think the heart of the Great Depression was a currency crisis. By the way, anyone notice the moves in currencies on friday? The Euro took a pasting, the Yen down the most on a single day in a decade, gold down $50.

Big moves?, the Pound Sterling lost 30% of its value in one day in 1931.

Bargeass
Guest

I sure am glad I can watch from the safety of the sidelines in my $150 per week beach house.
The other bonus is all the extra holidays, spending, fun and peaceful sleeps I can have without a huge mortgage on an overvalued property over my head.
I love property investors who subsidise my lifestyle.

Pete
Guest

And we love tenants who finance our world travels. :)

Ned S
Guest

So Bargeass loves paying rent and living well. I love collecting a little bit of rent and staying home. And “Pete” loves collecting lots of rent and travelling abroad. Seems we’re all happy little vegemites then? Heck, who’d a thunk it … Does this mean Kev Rudd really is managing to keep all of the people happy all of the time??? I might have to reasses my assessment of him! :)

Ned S
Guest

Justin – Japan deciding to extend QE might at least partially explain what happened there – The Nikkei was up over 8% for the week based on same maybe?

The traders of the world are brave chaps (unless like Goldman they have an edge) – I’m pretty sure I’ll never develop the nerve for it. But good luck them that do – Except the likes of Goldman – They’re cheating thieves. IMO.

Don
Guest

“And we love tenants who finance our world travels.” I knew that this article would bring the Biker out of his hiding place :) – or is this another property owning Peter?

Justin
Guest

Undoubtedly Ned and you know two months after the Pound was devalued in 1931 the Japanese government ‘went off gold’, that is to say devalued the Yen, or whatever it was called at the time.

The North Koreans have also devalued their currency in the last week! What the #*@*! North Korean toilet paper too strong!?

Tom Sugar
Guest
I think it was me who asked for a date of the next crash…. And I also said I think there will be a crash…. in 2030! 99% of the time you should buy a property if you are going to live in it. If you take TheDailyReckoning advice you would never buy. Here’s a reasonable scenario…. A) House costs $300,000 in 2009. You decide not to buy. B) Over the next 11 years, property increases 50% (not a huge amount). C) Then in 2020 the big crash that DailyReckoning has been predicting, finally occurs. Property drops 30%. Well guess… Read more »
Nirvan
Guest

If property has only grown by 50% when it is 2020, it has already crashed.

Dan
Guest
Doesn’t necessarily work like that, Tom. With a floating value currency (fiat currency) it is necessary to use a tangible item as an index of value. For example, the average income of a street-sweep, or of any person in your own area of work at your current level of experience, or the price of a hamburger or can of soft drink. Then you can say a house today is worth 80,000 Big Macs, or 5 gross incomes, or whatever. As Nirvan says, if your house is worth $300,000 by 2020 but your income (for someone at the stage of life… Read more »
Bargeass
Guest

Tom Sugar where is this inflationless, rate free, maintenance free, holding cost world you refer to?
Can’t say I believe it exists myself.
Cheers again to my landlord who only charges me $150 per week for a beach house which is slightly less than he pays for rates, maintenance etc.

Richo (the Second)
Guest

Therein lies the problem with the housing investment industry – too much emotion – you don’t see people saying “how dare you suggest my BHP shares will fall by 30%” but substitute the word property and its like you have insulted the Queen.

Tom Sugar
Guest
Bargeass You talk about “inflationless” information…. You seriously think rents won’t increase in the next 10 years!? It is only a matter of time before rent increases to a level above (loan repayment + holding costs). Lets convert $$$ figures into slabs of beer. $150pw is around 3.5 slabs. I will guess the Aussie dollar is almost worthless in 2025, and the cost of 3.5 slabs will be $450pw. In 15 years time when the Australian dollar is worthless, you will be renting at $450+ per week. On the other hand the home owner will have almost paid off the… Read more »
2 cents worth
Guest
Tom/Bergeass I rent because I think it is “cheaper”and easier. I pay $ 400/pw for a house I guess will cost about $1000/pw to “own”. Assume I will still not own at $1000/pw but rent from bank and carry all the risk. I do not want to own this house. It is 5 yrs old and need about $20k spend om maintanance. No damage, just wear and tear. Aussie houses are not built to last 100 yrs. I will rather make my cash work somewhere els. I actually like BHP( I have cash to buy the house if I want).… Read more »
bargeass
Guest

As long as the landlord is prepared to accept a return of less than 1% after expences I think I’ll enjoy the hospitality.

Pete
Guest

If you’re happy renting and a landlord is subsidising you, bargearse, enjoy it while you can. I doubt whether you understand how property deductions work, if you believe your landlord makes just 1%… but ignorance is bliss! Meanwhile we’ve been enjoying the Mexican riviera, Ned. Beautiful one day, even better the next. Realty seems to be booming. Our guess is that the average price here is at least eighty times average earnings… but how can that be? Interesting link here, in that gold does rate a mention:
http://www.nuwireinvestor.com/articles/puerto-vallarta-real-estate-sailing-ahead-51985.aspx

Ned S
Guest
I’ve got a long term tenant – Been there since about 2000. I gather they had a windfall maybe a year or two after moving in and could have bought their own place for cash. But they took financial advice and decided to invest the money differently. They gave a bit of thought to buying again after Kev upped the FHOG last year. But decided against it. So renting apparently suits them. And collecting the rent suits me. All good. I’m still sweating on the Tax Review recommendations Biker. Latest is a reminder that compulsory annuities for them with “modest”… Read more »
Pete
Guest
Ha, ha… good one, Ned. No pumas. Watching for hammerheads while diving, though… . All our rentals are returning a nice income, except the guest house which is permanently gratis, anyway. Can highly recommend the coastal strip between Sayulita and Quimixto. At present we’re enjoying the entire top floor of a magnificent casa overlooking a green valley by the sea, dotted with the mansions of the super-rich. The best part of it is that our current accommodation is totally free… a gift from the kind owner in Seattle. We also have a central apartment one block from the beach in… Read more »
Wally
Guest
Wow, some of the reponses on this one leave a lot to be desired. All I have to say to the bulls, go all in and up to your eyeballs in debt (if you are not already), use all that leverage you’ve built up and buy more houses, units, whatever you get your hands on. real estate never go down right. Residential real estate at some point was a good investment, but anyone that thinks in the current environment it is a good investment should get their head checked. It is impossible for the crash not to occur, its a… Read more »
Pete, Mexican riviera
Guest
Pete, Mexican riviera

Where’s Wally?

Ned S
Guest

Pickin’ cotton in da fields for da man?

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