Dysfunctional Price Signals are Distorting the Housing Market

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The price of anything, whether it is a cake of soap or a jumbo jet, is meant to convey a whole bunch of information to an investor, producer or consumer. Prices send signals up and down the supply chain and these signals determine the ultimate supply and demand of any product or service.

If prices are meant to be the signal that helps smooth the supply and demand of a product or asset, just what is going on with the Australian property market?

Recently released data reveal that new home sales fell for a second straight month in June to a 17-month low. This was followed by news that new home approvals fell by 3.3 percent in June, the third successive monthly drop.

How can this be? We are constantly told that Australia has a chronic housing shortage, yet we are not building anywhere near enough new homes to satisfy this supposed demand.

Shouldn’t high prices be sending a message that more housing is required? It should, but the fact that it isn’t goes to show the completely dysfunctional state of housing in this country.

Here’s the way I look at it. House prices are high not because rents are high and the income returns are healthy. They are high because the vast majority of new credit creation in our economy goes to people buying existing homes. Australian people and its banks are participating in a giant ponzi scheme and they don’t even know it.

High house prices and low rental yields (the reality for most capital city property) are not a signal for investors to come in and construct new homes. It is a deterrent. Who wants to risk building a new house and renting it out for less than the cost of finance, when the capital value is at risk from the ponzi scheme ending?

If yields were more attractive, Australia would solve its so-called housing shortage. But it’s not that easy. You also have layers of government involved, which add to the distortion.

Local and State governments enjoy a healthy slice of the housing pie, which adds to the final cost. The Federal Government uses taxpayer funds to give to first homebuyers whenever the market looks shaky, which ironically adds much more to the cost. The recent phasing out of the latest government handouts is probably a major factor behind the construction slowdown.

All we ever hear month after month is that Australia has a chronic housing shortage and because of this, house prices will remain high. I’m sorry, but if new homes sales are approaching 18 month lows, and construction remains in the doldrums, perhaps its time to think a little differently about the problem. Commentators and bureaucrats need to realise that it’s the huge amount of credit being funnelled into existing housing that is pushing prices up and leading to weaker construction statistics.

I’d be willing to bet a waterfront mansion (if I had one) that if house prices began to fall substantially, yields would increase and so would the incentive to build new houses. For centuries property has been an income-based investment. Only relatively recently has it become the focus for capital gains. Increase the yield to healthy levels and you increase the supply of housing, it’s as simple as that.

So it’s time for the government to get out of the market, stop propping up prices for the sake of political gain and start releasing enough land to satisfy the demand that will flow from weaker prices.

The chances of this happening are virtually zero, but we need to stop kidding ourselves that our housing shortage is keeping prices high. It’s high prices that are leading to the shortage, if indeed there is one.

Greg Canavan
for The Daily Reckoning Australia

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely 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. For more on Greg go here.
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95 Comments on "Dysfunctional Price Signals are Distorting the Housing Market"

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vp
Guest

I agree with a lot of what you say regardung the giant housing ponzi scheme, but hasn’t it been stated here (and elsewhere) that the housing shortage argument is a myth anyway? Wouldn’t additional new housing, therefore, ultimately make yields even lower due to an excess of rental property?

AnnoyingOrange
Guest

The housing “shortage” is not relevant. If the investment bubble pops many people will move back in with mumma and puppa, which means more houses on the market, prices drop further, and so on.

Immigration does help keep the bubble inflated, which is all well and good until you can’t get to your fishing spot on the weekend because the boat ramp carpark is chockers.

Biker
Guest

“The housing “shortage” is not relevant. If the investment bubble pops many people will move back in with mumma and puppa, which means more houses on the market, prices drop further, and so on.”

First part almost correct. Second part incorrect. When sales are flat, we simply pull houses off the market… and rent them.

If it keeps you happily annoyed… and extra-fruity… believe the myth.
If you believe life with mama and papa is nirvana, why even leave the nest at all? We could even create an Oz TV show about the concept: “Chockers in the Bathroom”. :)

Ned S
Guest

“the vast majority of new credit creation in our economy goes to people buying existing homes” – Sounds to me like they want houses close to work and other attractions in the city centres and are all competing for them?

“Chockers in the bathroom” – I knew a nice young lass overseas whose bed was a mattress she rolled out on the bathroom floor each night. She had a degree and a fulltime job. But you take what you can get when there is a real shortage of affordable accommodation I guess.

Ned S
Guest

“bed was a mattress she rolled out on the bathroom floor each night” – Wouldn’t suit me; But at a similar age my bed was a mattress in the loungeroom of a two bedroom flat. I got there last – And the bedrooms were both taken; As was the nice private little nook under the internal stairs – Ah, for the good old days! :)

‘Course as Aussies I doubt it ever would have crossed our minds to put some poor basket in the bathroom – Never been a shortage of affordable accommodation here in my adult lifetime?

Ned S
Guest

Brace ourselves ready for the soft landing maybe fellahs? :

http://www.watoday.com.au/wa-news/property-price-plunge-for-perth-20100805-11k1k.html

I’m cashed up ready to go if us suckers should get a half even break … :)

Stillgotshoeson
Guest
Comment by Biker on 7 August 2010: “The housing “shortage” is not relevant. If the investment bubble pops many people will move back in with mumma and puppa, which means more houses on the market, prices drop further, and so on.” First part almost correct. Second part incorrect. When sales are flat, we simply pull houses off the market… and rent them. Yes Biker.. YOU may well pull your houses of the market.. you own them almost outright. MANY however do not and WHEN they can not get tenants (not IF) they WILL have to market them, Australia is different… Read more »
bearamundi
Guest
‘I’m cashed up ready to go if us suckers should get a half even break’ That is my thinking too Ned. I’ll get a little silver so I can feel like a wannabe ‘player’ at least but the real joy will be getting a bargin of some sort. Aussie dollar won’t hyperinflate, it is a good store of value, so hold onto it. I don’t have to wait for a property crash, what is so wrong with holding down a job like everyone else and paying off the family home? I grumble about work but it’s bloody fine dumbar*e. Bargins… Read more »
Biker
Guest

Inflation running at 3.5% here… the highest in Oz.

Shoes, Keen offered most of the arguments you make, above. If you’re still making his nonsense the foundation of your planning (wait & wish) good luck, son. :)

Ned S
Guest

Keen’s got some interesting ideas alright – One I’ve just read is that if a house rents out for $26K pa (like the one he’s living in ;) ), then no-one should be allowed to borrow more than $260K to buy it!!!

“Bargins could be a boat for you, or a 4WD for the bushranger inside” – I don’t hanker after those things Bear – Although as I’ve mentioned before I do sometimes have wistful thoughts about a nice old 1950s AJS … :)

Biker
Guest

“…no-one should be allowed to borrow more than $260K to buy it!”

HaHaHaHa…!! :)

Love the ‘ifs-and-shoulds-crew’. Space cadets!~ ;)

Stillgotshoeson
Guest

Comment by bearamundi on 7 August 2010:
Aussie dollar won’t hyperinflate

I expect the aussie dollar to drop back into the 60’s in the not too distant future.

Comment by Biker on 7 August 2010:

Shoes, Keen offered most of the arguments you make, above. If you’re still making his nonsense the foundation of your planning (wait & wish) good luck, son.

Nope.. not part of my plan, just an observer watching the goldfish in their bowls
swimming around without a clue of what is about to happen.. no memory of what has happened in the past.

Ned S
Guest

Oh well, the good news is that we know the solution – It’s called WWIII – Wonder which side is going to win? And whether we’ll be on it??? :)

Biker
Guest

“…just an observer watching the goldfish in their bowls
swimming around without a clue of what is about to happen…”

Uhhh, you mean goldbugs, doncha?!- :)

Stillgotshoeson
Guest

Nope, Goldbugs know what’s going to happen ;)

Biker
Guest

You mean your post considering the possibility of gold at $5K per ounce, son?!~ ;)

bearamundi
Guest
Ned, there’s a lot of bikers around here. AJS-nice, you’re a man after my Dad’s heart. I had a BMW R60/5 which I liked but frame flexed so I got an R100RS, and had obligatory accident (had 4 or 5 other bikes, brother had Dukes, including an S2 900 after a Darmah). Isn’t an AJS a British single? With push-rod valves? Read somewhere a bike with more than one piston has one too many and I’m inclined to that view now. I’d like a KLR650, cheap reliable big single and you could get out in bush too with the boy,… Read more »
Biker
Guest

“…wife and kids following in cage…”

You mean ‘with cage’, don’t you, Bear? ;)

watcher7
Guest
WW3 is going to be, for at least the first two years, the world against the Anglo-American-Celtic peoples. The US, Britain, Australia and New Zealand are going to bear the brunt of a blitzkrieg. After war, occupation and deportation there maybe only 10 percent of these people left alive. The Anglo-American Hegemonic cycle, which maybe viewed at http://www.members.optusnet.com.au/futurewatch/id10.htm presents the historic precedent and its future projection. A map of the world with the possible height of the European and Japanese empires in WW3, after they fall out with their allies, maybe viewed at http://www.members.optusnet.com.au/futurewatch/id76.htm As Enoch Powell observed: History is… Read more »
Stillgotshoeson
Guest

DR400 is a good choice Ned. As for Biker being the idiot he is… Someone else posted the gold @5k/oz. My response was that I did not think it will get that high. I also said that I would not dismiss that possibility that it may go that high. Interesting times ahead for all the markets.

Biker
Guest

Shoes: “I also said that I would not dismiss that possibility that it may go that high.”

Shoes: “Nope, Goldbugs know what’s going to happen ;) ”

Swim, little goldfish, swim… . :)

Stillgotshoeson
Guest

Having an open mind to a possibility is not the same as agreeing

Biker
Guest

“…Biker being the idiot he is…”

Blow all the bubbles you like, son. Get as angry as you like.
You’ve been flushed from your bowl. ;)

Stillgotshoeson
Guest

I don’t get angry gramps

Biker
Guest

Hook, line and sinker. You’re sprung. ;)

Stillgotshoeson
Guest

None so blind as those who will not see

Biker
Guest

Stop blowing bubbles and you’ll have a better view of the world-outside-your-bowl, goldie!~ :)

Stillgotshoeson
Guest

Funny you should say that, as that is why I think your an IDIOT and a FOOL, you have a closed view of the world, your walking around with blinkers on. Don’t mistake my words for thinking that I am calling you stupid because that is wrong, I actually get the impression you are quite intelligent. However an idiot and a fool you are and my English is improving enough to know the difference.

Biker
Guest

Shoes: “…no memory of what has happened in the past…”

Yeah, well I appreciate you’d much rather forget your comment about the likelihood of $5K gold, Shoes… but I’ve rather enjoyed reminding you; especially since your goldfish simile was so appropriate. ;)

Funnily enough, I think gold may still have some upward movement.
Think you should bail before $5K, though.

No more time to waste on you. Get over the anger. Not good to sleep on it!

bearamundi
Guest
Yeah Biker, ‘with cage’ sounds much better, less sexist!! Got paper today, and sure enough Kathmandu had upped the anti to 70% ‘clearance’ and I scored more outdoor gear. My aim is to get the family out hiking regularily over the next decade or so, it’s what Dad did. DR400, have to google it shoes. Ned got me thinking about a bike again as commuting by bicycle is hard work after 4 yrs. Use the moto on Wednesday and w/e’s. But it has to be a bike, I had an old Honda CN250 given to me a few years ago… Read more »
Stillgotshoeson
Guest

MY call has always been $2400USD/Oz for Gold

Biker
Guest

*yawn*

Stillgotshoeson
Guest

:ignore

Biker
Guest

One…two…three… exhale the stress. ‘)

Ned S
Guest

Steve Keen’s advice to aspiring home owners – “I think it’s only going to be political change and getting those sorts of legal reforms I’m talking about, that’ll work. Don’t bother saving money for it.”

http://www.finnewsnetwork.com.au/archives/finance_news_network15376.html

Bloody government – And property speculators – Stitched him up – When he was speculating on them going down! :)

Lachlan
Guest

Gold priced in “floating abstractions”. Who can guess final highs with the skies the limit management on major economies/currencies? Print till you drop. Just remains to be seen whether gold will ever reflect this in its entirity. Like Ned says..WW111 may happen yet. In fact if you read around it looks more likely than ever…ie Iran.
I do agree with you Shoes about AUD gold just over the 2k mark in shorter term. Might be an exit point for me also. A gold bug I am but the land is my primary goal…dont want to wait forever.

Biker Pete
Guest

HaHa… censorship is alive and well, here at DRA…!~

Biker Pete
Guest

We certainly won’t post anything which examines the cost of gold production, will we?

Biker Pete
Guest

Consider that $2K / oz is almost seven times production cost. If I applied that same mark-up to homes we build, we’d be trying for nearly $3 mil each at sale time. ;)

Biker Pete
Guest

There’s always a workaround. Gold is now four times production cost. Attempting to double that is fanciful.
Inclusion of WWW3 in your financial planning is probably not a sound strategy, Lachlan. Wouldn’t bank on it.

bearamundi
Guest
With a cage sounds much better biker!! My last post got hit with a ‘waiting moderation’ moniker….? I was wondering about shoes and aussie going to 60. i think that maybe the US dollar is falling faster and the aussie will be relatively fine. In the short term (6 months to a year outside) maybe all the heat will be on the greenback. If their economy blows up which is likely I don’t know if it will affect us that badly. Sure enough, yesterday Kathmandu had 70% discounts and I was able to get heaps of bargins as my plan… Read more »
Lachlan
Guest

“We certainly won’t post anything which examines the cost of gold production, will we?”

Go for your life BP.

Ben
Guest
It’s interesting from my point of view seeing a thread on housing including or perhaps degenerating to one on gold. The mansions vs bunkers argument. I think in situations like this both sides should count non-critical praise of their chosen investment as a liability. Nimbleness is the best option. I am not familiar with the fish Im observing here, whether Biker Pete is a mouth breeder or a Clownfish; or whether his opponents are Goldfish or not. You’re all in fishbowls of your own choosing. The only thing I believe is important currently is being on the side of liquid… Read more »
89peterg
Guest

you’ll all have those assets confiscated come the revolution. one family/person, one house… one car…. one world. 2 tonnes of CO2 each, reducing 10% pa. that’s it in a nutshell, recipe for a sustainable madhouse, that or the end of the world.

Biker
Guest
“It’s interesting from my point of view seeing a thread on housing including or perhaps degenerating to one on gold.” See if you can locate the crack that brought it on, Ben. :) Yes, I agree a revolution or a war might boost gold’s chances of doubling. Having been formed in the forties, I’ve survived the threat of nuclear obliteration, the Yellow Peril and the Red Revolution… and all the indoctrination of imminent Armageddon. Great movie themes, but it might be a very long shot hardwiring them into your financial plan. Ben, who has never heard of offset accounts, figures… Read more »
Ned S
Guest

“you’ll all have those assets confiscated come the revolution” – It’s been tried before Peter – And doesn’t ‘work’ (pardon the poor pun! :) )

Not to say it won’t be tried again – But if it is, the best plans will involve emigration. Possibly to a country that has tried it reasonably recently. Where they still recall that it doesn’t work.

Ned S
Guest

“Also looking for a little land Lachlan. In Europe that is what everybody tries to do. City and country lifestyle” – Strikes me that is sort of what we have in much of Oz with our urban sprawls Bear – The best of both world combined with a little bit of country and a little bit of city having both being afforded by our 600 and 800 m2 blocks. We’ll probably have to adjust. And some certainly won’t like it.

Ned S
Guest

Wonder what some Affordable Home Ownership versions of this cartoon might look like? :) :

http://www.theaustralian.com.au/news/opinion/gallery-e6frg6zx-1111120349509?page=9

Biker
Guest
Well Ned, if the guru advised: 1.) Take the 21.25% (after tax!) saving offer; 2.) Save 20%; 3.) Start small (3 X 1); 4.) Make shelter the priority it is, making _fortnightly_ payments; then I figure the balloons are filled in, Ned. Didn’t have any assistance like (1.) when we were young, so I had to leave the capital for over a decade, before I could _afford_ anything… . :) While we were seeking tenants for the new 3 X 2 X 2 rental, it was scorned by the first dozen couples through: no fourth bedroom, no home cinema! Horrors!!~… Read more »
Ned S
Guest

“While we were seeking tenants” – You aren’t allowed to call renters tenants anymore Biker – It seems to have become PIc? Still trying to figure what that makes me though … A rentee? A rentor?? Or something less flattering perhaps? :)

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