"Quick, the barn is on fire. Save the horses! Get more gas!" How else to treat the news of exotic new mortgage products called EFM's, designed to make housing more affordable by bring the bank in as a partner.
Australia, we need to talk. Have you been watching the American mortgage market? Yes? Then you know the affordability problem is not solved by providing more credit to people who can least afford it. That leads to home- price inflation and insolvency for marginal buyers.
The bitter truth, which current homeowners and investors are reluctant to admit, is that home prices are already too high. They will become more affordable when prices drop, not when new money floods in the market from new mortgage products. Sigh.
Please Australia, do not imitate America's mortgage market. It will only end in tears. Not everyone can get rich in a few short years buying and selling homes to each other. It is the great financial lie of our time (along with the idea that the stock market will pay for your retirement.) And there is plenty of daily evidence that it IS a lie. All we're really waiting for now are the Congressional hearings, the show trials, and to find out who the Ken Lay of the subprime market is.
Speaking of the American mortgage market, we went to the archives this morning and tapped out a few pages from our antiquated best-seller The Bull Hunter. We've published them here for enlightenment/punishment. The material is a trifle dated, but we present it below for those of you unfamiliar with what's going in America.
The important point about it all (well there are several really) is that you don't make house prices more affordable by making credit more widely available. By the way did you notice ANZ is already tightening its lending practices? Australia is not America, of course. What will happen here? Hopefully not a repeat of America's mortgage market.
Nobody knows, least of all an interloping American. But the belief that there will be a seamless transition between the equity bull market and new bull market property…well…umm…that seems like gamble to use. It's not a very good base to begin building a bull market in property. The only way to do it is really to crank up the speculative lending, as America did in 2003, and hang on for the ride.
With local credit conditions already tight, where will the speculative money come from? The Easter Bunny? Father Christmas? Mother nature?
Here's another question for you. Would you be a renter or a buyer in today's Melbourne property market? Your editor finds himself in possession of an eviction notice. He must be out of his palatial grounds in St. Kilda in sixty days. Where to next? Rents are rising. It might make more sense to buy. Or move to Adelaide. Hmm. Thoughts?
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by dave on 26 June 2007:
Buy in Sydney.
Prices NEVER drop in Sydney.