Property Buyers Are Not Buying Property at All

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It’s tempting to make this week a ‘Property Week’.

We weren’t surprised to see the Money Morning mailbag bursting at the seams here at the Old Hat Factory yesterday.

Within minutes of yesterday’s email going out the replies started flooding in.

Perhaps the most remarkable response was from the property bulls.

Look, let’s be fair about it. When we asked on Friday if readers had authentic research to back up the ‘housing shortage’ claim, it was probably the busiest day of the week for property bulls.

After all, there’s all those ‘open for inspections’ to prepare for over the weekend.

So it’s not surprising that we received less than a handful of emails from property bulls, offering opinion – which is fine – rather than the real evidence for a housing shortage.

We’ve no problem with people expressing opinions – we’ve done that once or twice ourselves.

But roll forward to yesterday and ‘BANG!’ The property bulls have woken from slumber. The responses were enough to split the Money Morning mailbag.

Unfortunately, there was a distinct lack of hard evidence in the responses. In fact it was the usual stuff – not enough houses being built, too many immigrants, not enough ‘quality’ housing.

So, rather than getting into a “yes there is, no there isn’t” argument, we should probably follow the lead of Money Morning reader Jason:

“The resilience, stupidity and arrogance of the ‘property’ crowd is incredible. I no longer even entertain them with a discussion any more. When I hear them say ‘Property prices always double every 7 yrs’ or ‘Housing shortage’, I reply with. ‘ I completely agree now is the perfect time to buy a house, I’d get in while it’s still cheap’.”

We couldn’t have put it better ourselves. Hats off to Jason.

But despite Jason’s example, we will stick with property for today. But we’ll take a slightly different tack.

Regularly we receive emails into the Money Morning mailbag asking us for advice on whether the reader should buy a home now, or sell their home now.

Our response is always the same – no response. That’s because unfortunately our licence prohibits us from offering personal financial advice. All we can do is keep things nice and general in these emails.

But the reader emails do have a striking similarity. Almost always – when asking if they should buy – the phrasing is the same: “I can borrow $500,000” or “I can borrow $700,000.”

We don’t recall ever seeing an email that states, “We’ve seen a nice house in X suburb, with three bedrooms. It’s a nice area and the price is $450,000. Do you think we should buy it?”

Obviously, our non-answer would still be the same.

For all the talk about property being excellent value and a great long term investment, we’ll make a bold claim – that property buyers actually don’t have any interest in the property they’re buying.

In fact, I’d go so far as to say that property buyers are not buying property at all.

Rather, they are ‘buying’ a loan and using the house as security.

Why would we make such a claim? And what point are we trying to make?

Well, it just seems that the actual house is a secondary consideration. Sure, we see plenty of comments about a lack of ‘quality’ properties, but as soon as the property loses its ‘quality’ it seems to become a ‘renovator’s delight’ or a ‘demolition job.’

Then even though it’s only land value, the price of the land suddenly becomes the value of adjacent properties less the cost of building a new house. That may be obvious, but is it logical?

But back to the buying ‘psyche’ for a moment. The fact that property buyers see property as an investment rather than a dwelling is precisely the reason why there will be a property price crash.

It’s no different to the stock market. If investors were always rational and approached the buying of shares as though they were buying the whole company, then share prices would be unlikely to rise to such extreme levels.

But that’s just how a market works. Speculators add liquidity to the stockmarket through buying and selling. They don’t buy because they believe the company has strong cash flows or because they like the net profit after tax forecasts. They buy because they believe the price will rise – nothing more, nothing less.

Property investing is the same. Many people buy a house because they want to live in it, and because they prefer ownership to renting.

However, more and more, property buyers and home owners have been brainwashed by the ‘location, location, location’ mantra. They are buying not because they want a place to live, but because they believe the price/value will rise. They buy not because it is close to the train station for their own benefit but because they are told it will ‘add value’ when they sell.

They don’t buy because it is close to the shops, but because it will ‘add value’ when they sell. Even though the buyers are just as likely to drive a car to the station or the shops. But that doesn’t matter, it’s all part of the ‘location.’

Take a look at this brief news story from News Ltd: “The average price of a Sydney home could rise by $100,000 in the next two years, according to an [property] investment group.”

The article states, you guessed it, “A shortage of homes and a growth in population will cause the property boom.”

See what we mean? Not a single mention of an actual property or a type of property, or the benefits of owning rather than renting, purely that the price will go up because there isn’t enough supply and too many immigrants.

As I mentioned above, property buyers are not buying homes or houses any more. They are taking out the biggest possible loan to buy the most expensive property they can, because, well, the more you leverage the bigger your returns.

Why buy a $200,000 loan against a house that will only be worth $400,000 in ten years after it doubles, when you can buy a $400,000 loan against a house that will be worth $800,000 when it doubles in ten years?

As for the other issue I mentioned above about land value, look, your editor is aware there are economic studies and theories that could fill entire libraries on the subject of land and rent. So we’ll state here up front that we have no intention of competing against such learned thought.

We’ll just write what’s on our mind, whether it’s right or wrong.

So what we say is this. Why, for example, should the land value in Richmond be X times greater than the land value in Dandenong?

What extra value does the land in Richmond have that the land in Dandenong does not?

The cost of building a home on the land should be the same.

Of course, the simple answers could be that land in Richmond is more desirable than land in Dandenong. That inner city types typically have more disposable income than outer suburban types and therefore they can bid the price up higher.

But is the land any more useful or productive in Richmond than the land in Dandenong?

Here’s our point. A house in Richmond is no more productive to the economy than a house in Dandenong. Yet it is X times more expensive, and most probably requires a debt that much larger.

So, the only things that can have driven the price is supply, demand and price. Which brings us to the final point. How reliable is price as an indicator of supply and demand?

This is perhaps the real reason the property market and property prices have taken off.

One of the comments we regularly receive is that: “There must be a shortage of houses because house prices have gone up. If there was a surplus of housing then prices would fall. Simple as that.”

Well, it’s not quite that simple. Let’s use an analogy to make our point and round things off for today…

Imagine that someone announced, “There is a shortage of apples, buy apples now.”

And then assume many people started saying it, almost every day. It would most likely have an impact on the price of apples.

You could quickly go to the local orchard and buy apples from the apple grower and he may charge you 50 cents, because that’s the current market price.

The apple grower is happy because business has been slow so he’ll sell them for 50 cents each. But then he notices an increase in business. More people are going to buy apples from him.

Within days queues are forming at the orchard door. The apple grower realizes he can charge extra because of the demand. So he raises the price to $1. But there is still demand because people believe there is an apple shortage.

So the apple grower raises the price further to $2. There is still demand… but not quite as much. But the apple grower doesn’t notice the queues are getting shorter, or if he does he doesn’t care because he’s making four-times as much money as he used to for the same apples.

So he cranks up apple growing production.

Eventually, the apple grower takes a look at the millions of apples that he has in the barn and works out if he can charge just an extra 20 cents he will be a multi-millionaire, so he raises the price to $2.20.

Unfortunately for him, when he opens the barn door, all the buyers are able to look inside and see there is not an apple shortage at all. There is an apple surplus. Buyers no longer feel have the same urgency to pay $2 per apple.

They figure the apple grower will need to lower his price to get rid of all the stock. The buyers are happy to come back tomorrow to see if they’re cheaper.

The price of apples plummets.

You see, supply, demand and price do not necessarily mean that all three are at the correct level. Levels or supply, demand and price change all the time. Therefore, just because prices are high it does not necessarily mean there is a shortage of supply.

Sometimes it is just the belief that there is a shortage which creates the high prices. And can you blame the majority of people for thinking there is a housing shortage?

Of course you can’t. Not when you read day after day in the mainstream press news items telling you there is a housing shortage, and telling you there are too many immigrants who are buying up all the property they can eat.

In summary, there is no difference between the application of supply, demand and price in the housing market to its application in any other market.

Strip away the distortions and the untruths about a shortage of property and the whole thing crashes around your ankles…

Of course, we could be wrong, and house prices could continue rising forever!

Kris Sayce
for The Daily Reckoning Australia

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.
Kris Sayce

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Comments

  1. Wow someone’s got their thinking cap on!

    I would like to direct readers to an extraordinary piece of work regarding what happens when popular delusions are unveiled, and they always are *eventually* (see link below).

    I will also suggest that yes there is a shortage of property for the manic, drewling hordes of ‘investors’ out there, bloodied and battered from Open For Inspection stampedes, each and every one of them feeling that they know how to turn base metals into Gold. That’s right, alchemy in it’s most recent incarnation! I’m afraid what they will soon discover is that their gold is not gold at all, but a marvellous but pure green.

    There may yet be another up-leg in this housing bubble.. who knows? Point is that a bubble has to pop. Who’s silly enough to risk their neck?

    Extraordinary Popular Delusions and the Madness of Crowds

    http://en.wikipedia.org/wiki/Extraordinary_Popular_Delusions_and_the_Madness_of_Crowds

    Reply
  2. Great article Kris. I am sure many people will rip apart your apple scenario, but probably for all the wrong reasons.

    On a slight tangent, this statement is great:
    “It’s no different to the stock market. If investors were always rational and approached the buying of shares as though they were buying the whole company, then share prices would be unlikely to rise to such extreme levels”

    Thing is, people can believe what they want. Speculation can create huge bubbles in almost anything you can invest in, be it shares, property, tulips or apples.

    One problem with the property market is something I thought Kris was alluding to, but didn’t quite get there: Credit.

    Property, being such a large proportion of wages, generally requires credit to purchase in Australia. Without credit, the number of people wanting properties would possibly stay at similar levels or slightly lower, but the number of people ABLE to buy properties would dramatically decrease.

    Credit is the enabler, and banks are the facilitators. Combine this with two other credit related features; lender interest rates and lender risk tolerance and we can get a pretty general idea of how available credit will be to the public (and speculators).

    Our property bubble needs high credit availability, which requires the following conditions:
    – lenders (preferrably competitive ones)
    – low lender interest rates
    – high lender risk tolerance

    Which we ‘had’. Now we are seeing:
    – less lenders (collapse of smaller non-bank lenders)
    – increasing interest rates (another topic altogether)
    – decreasing lender risk tolerance

    …which means lower credit availability.

    …which means less credit available to those wishing to purchase (and speculate) on property.

    …which means less volume of buyers (regardless of whether they want to buy or not)

    …which means a shift in the supply/demand balance.

    And potential buyers will see that the apple warehouse is fuller than they exepected.

    But I could be wrong…perhaps the Gov. will step in and act as the lender of choice. The day that happens, the property bubble becomes the least of our problems.

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  3. Yes, if people are expecting house prices to double in the next 7 years they just could be being a bit hopeful? But if they are saying I have a spare $450K lying around I managed to salvage before the stock market crashed and I reckon that if I buy a house with it I’ll get 3.5% pa rent after expenses and 3.5% pa capital growth in line with inflation and at a total return of $245K over 7 years (or 54.5%) then barring a major deflationary recession in Australia they just could be underestimating their return a bit.

    As to a housing shortage – None where I live – The bloke across the road has three on his one hectare block 450 m from rail and shops. It’s just that he isn’t renting any out. He obviously has his reasons.

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  4. Facts must be simple. If they’re not simple, their just information. So here’s a simple comparison that I came across in February 2009, which was the precursor to current state of apoplexy.

    Asset: Home (not investment) for sale.
    Year: 1996.
    Location: Anderson Street, Yarraville, Melbourne, Victoria.
    Price: $100,000.

    Asset: Investment (not a home) for sale.
    Year: 2009.
    Location: Exactly the same property as above.
    Price: $580,000 to $620,00 as estimated by Hocking Stuart in their Star Leader Newspaper advertisement.

    There is nothing to say.

    Prima Materia
    August 25, 2009
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  5. Ned S:
    Question: What do you think the proportion of property ‘investors'(?) who own their investments outright, compared the proportion of investors who have borrowed money to invest?

    (when I say invest I pretty much mean speculate)

    Basically, what I am getting at is how many people can sell up their investment and have most of (or all of) that money left over to purchase a different property?

    And can you not see a catch-22 situation? Unless that money is CURRENTLY on the sidelines just waiting to be invested (and if it was, these investors would ironically not be property bulls would they), then those properties would have to be sold for the cash to be available. Selling properties en-masse will drop the price.

    Then:
    – less sale price means less revenue to purchase properties
    – more sales of properties means lower prices
    – investors will see the trend and wait for the market to bottom, bringing prices even lower
    – so anyone who didn’t sell at the top, will now receive a much lower price for their property. What can they do? Swap it for a different one of same value?

    Bulls are too busy crunching numbers (without considering inflation or deflation) to see the fundamentals at play.

    Three things can stop this madness from ending (i know i’ve said it before):
    – Gov. intervention (and I still doubt this has the power to do it)
    – Increase in the availability of credit, particularly from international lenders
    – Black Swan events (I these usually do more harm than good).

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  6. Pete – I have no numbers on the proportion of investors who own property outright. So all I can do is give you a few thoughts and some anecdotal info – I know two blokes right now who are keen to buy. Both have very stable jobs and earn well over $100K pa. In their early 40s and 50s. So the banks will like them.

    My work circumstances are quite different to theirs. But I could buy with cash – And very well may once the Henry tax review is out in the open. And I think a lot of Oz SMSF’s could too. So there is cash money about.

    IP’s that were bought a decade ago are real safe. Way too much equity built up now to be at risk. Even stuff bought in maybe 2005 could take a 30% hit and not hurt – In the Brisbane FHB price range anyway.

    I have a small amount of super in an industry fund (QSuper) so I got their statement today – Their Balanced fund was the best of it – 4.76% pa over the last 5 years and 4.96% pa over the last 10 years. Pretty ordinary – Residential RE in Oz is a tax payer supported investment. Better returns there I fully suspect given its quite special status in the Oz economy. I could bleat about that – But it doesn’t change the facts.

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  7. Yes Pete I would guess a lot of people who have studied basic economics would have a lot of problems with the “apple” analogy because it is overly simplistic. Comparing a $2 apple to something that costs hundreds of thousands of dollars probably explains why the author does not run a company.

    I also think Kris is forgetting we do not farm in the city much these days so the comment “But is the land any more useful or productive in Richmond than the land in Dandenong?” is pretty irrelevant. What people look for are amenities, good schools, nice neighbourhoods, close to transport links etc. This is why a home in the city is generally worth more than the same type of home in a rural area. (even though the rural homes are probably more productive if you want a veggie patch!)

    If you go along with Kris’s view then a home next to a toxic waste dump under an airport flight path should cost the same as a quiet home on the beach!

    Greg Atkinson
    August 25, 2009
    Reply
  8. Greg – I think Kris might be forgetting (or even unaware?) of a few things – For example, despite our historical and somewhat folksy “bush battler” self-image, Australian is actually a very heavily urbanized nation. And one that has not easily accepted the joys of high density living as opposed to those of detached housing. Yep, it doesn’t surprise me too much that one is going to pay a premium to live in our cities – Unless the Y Gens decide they like living stacked on top of each other in boxes close to cafes and restuarants and street theatre and whatever.

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  9. I’m with Jason. Let’s bring the final fools into the market and get this thing over and done with.

    Everyone – buy, buy BUY!!! Prices are going to the MOON! You’ll be LEFT BEHIND!! You’ll be POOR. Everyone else WILL BE RICH!! BUY NOW! NOW!!!

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  10. So I wonder where might that “barn door” view onto the truth about hoards of excess properties be?

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  11. Interesting topic, with some really good points being made. Wasabu is the first person I’ve seen anywhere to make the point about investor demand (albeit tongue in cheek!). The ‘How I Bought 456 Properties in 18 months’ brigade have got much to answer for in this bubble. As they say, lever up, lever down.

    As for the supposed shortage, there is definitely a shortage of 3/4 bedroom family homes on 1/4 acre for $400K in Toorak, South Yarra et al. Many new buyers do not want to step up from the burbs like most have historically.

    Desirability is a huge factor. Evidence of this is a new estate about 20 minutes from the Melbourne CBD which currently has close to 200 (mostly new) rentals available. They aren’t being snapped up and in fact most are offering sweetners like 2 weeks free rent to stimulate demand. If there really was a shortage this would NOT be happening.

    At this point in time demand is clearly inelastic, but we might be surprised how this changes with the potential triggers of rising interest rates and un/under employment. Time will tell.

    Jimbo James
    August 26, 2009
    Reply
  12. So if there is a property price crash this puts people who are over extended in the property portfolios of going bust which then puts further pressure on the Aussie banks to writedown bad loans which could lead to another stock market crash or at least slump.

    Has anyone heard of the rumour… that there are more people who have defaulted on their homes than is being discussed? (which is almost non-existent)… And the banks are holding these properties back from sales on the market so it won’t create a glut of selling properties?

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  13. The Australian Bureau of Statistics has published some interesting trend information stating that people are staying in the family home for longer and are even returning to the family home, therefore diminishing the need for addional housing. Property Investor magazine had a short post saying that NSW has amended its planning scheme to allow granny flats in all areas zoned residential. This would give the gen Y some independance but further reduce the ‘housing shortfall’ if there is one. I seem to think that as long as there is a ‘vacantcy rate’ at all then there is sufficent housing.

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  14. This property Boom we saw went on FAR TOO LONG.
    Property is still way way way overpriced and people are not getting it.
    From were i see things, many projects and landbanks are being firesold & thats if they can find a buyer. Loads of developers and so called property experts are now bankrupt on paper and banks are calling in the loans and instructing to sell. We have seen 5 such projects come across our desk in recent months and even at the firesale prices the numbers still do not add up.
    When is this country going to wake up and see the sea of housing that has been and is still being developed? I wouldnt risk my money on a bunch of salesmen with self interest telling you there is a housing shortage! Really people grab a brain.

    Reply
  15. Hi all, this is my first posting here, so please bear with me.
    I don’t know whether to be a bull, or a bear, about property in the short to medium term. The way I see it, it could easily go either way.
    Therefore, in saying what follows is not meant to support either camp, but merely to point out nuances, strengths and weaknesses in Kris’s arguments.
    1. Chief strength: Property prices cannot double every 7 or 10 years. To suppose otherwise is absurd.
    2. The catch: The claim, while true, is jejune, trivial, and of not much use but the most unthinking and naive, and with no knoweledge of the meaning of compounding. This points us directly to the problem:
    3. The weaknesses:
    3.1 Kris’s arguments are aimed at strawmen property investors, as exemplified by his claim that the main or only reason for investing in property is the expectation that prices will go higher. This is incredibly naive, and could hardly be more off the mark where property investment psychology is concerned. If there is an interest, I will explain and elaborate.
    3.2 Granted point 1 above, that prices cannot double every so many years, it does not follow that we will have a price crash. A clear alternative possibility is that we will have a long period of stagnation, and unless such an alternative is entertained, the price crash argument remains simplistic and wobbly, and it might explain why it fails to convince so many people.
    3.3 Even if we are going to have a property crash at some point, it is completely useless to know this as a truth, unless we have some indication as to WHEN this is likely to occur. It is no better than saying that there will be a severe storm in Melbourne.
    Well, duh. While you are at it, tell me something new.
    All prognostication, if it is of any use, needs to come with a pinch of adventure, and say something about timing.

    Perhaps Kris might like to make a bet as well about where property prices are going to be in 1, 2, 5, and 10 years? That would make it really interesting. But without more substance to the argument, I see no reason for being either a bull, or a bear about property, even if Kris is right (as he seems to be) that there is no housing shortage in this country.
    Cheers all.

    Reply
  16. Happily renting until the property market crashes. May take a couple of years but it’s in the post. I’m in no rush.

    There’s one wildcard complication though. Normal economics will prevail sooner or later, BUT given every political party in this country will aim to keep everyone’s over-priced house over their head (locking out those without one), then we’ll see some political distortion in the outcome. First home buyers grant for example.

    How much this affects everyone is anyone’s guess right now. Based on past performance, I’d say it could be significant.

    It’s a case of economic mob rule really.

    Unpopular Truth
    August 26, 2009
    Reply
  17. Neil,

    I am aware of that sort of banking behaviour going on in the US, but not here. Having said that, a real estate agent I know is doing up to ten mortgagee auctions a week and unlike in the past they are not being advertised as mortgagee sales (for obvious reasons). They had to put on another agent to handle the mortgagee workload.

    There is absolutely no sense in the market at present because despite massive levels of underemployment and anecdotes like this one (and the one i posted previously), prices and demand apparently continue to be bullish. The end to the FHOB and rising interest rates will be interesting events if they actually occur.

    Jimbo James
    August 27, 2009
    Reply
  18. The ‘apple’ analogy is a bit silly. Apples are fungible. One apple is pretty much the same as another. Not so with houses. Most houses are unique, in terms of size, location, view etc. If I want a four bedroom house in Manly with harbour views then it is very easy to see whether there is a shortage or over-supply of such properties for sale. It is not the same as the sneaky apple farmer with a shed full of hidden apples. Where exactly would we hide a large surplus of available 4BR houses in Manly? Besides, even if the apple farmer did hide millions of apples in his shed, while claiming there was a shortage, wouldn’t we just go to some other apple farmer. Since apples are fungible, all apple farmers in the country would need to be part of this great apple hiding conspiracy. Houses are not fungible. If there is only one 4BR houses for sale in Manly with ocean views, and six parties want to buy it, then they are going to bid up the price. They are unlikely to decide that a 2BR apartment with no views in Blacktown will suffice instead. If there really is a large surplus of empty houses available for sale or rent in Australia, then where are they? Oh wait, you’re going to tell me that there is a large number of empty houses, but they are not actually available for sale or rent? If so, then what is the point? If they are not available, then they do not create a surplus! Cheers, Shadow.

    Reply
  19. Shadow:
    “Oh wait, you’re going to tell me that there is a large number of empty houses, but they are not actually available for sale or rent? If so, then what is the point?”

    The properties are not available for sale or rent right at this ‘moment’. Some people are just waiting for capital gains and don’t want to bother with the renting side of things. Usually these people don’t have mortgages, so it costs them very little to just hold onto the land.

    However…it still does costs them via inflation. And whilst property prices are rising they can see that a small loss in the short-term (eg inflation eating away at them, land tax) is completely offset by the huge capital gains they are expecting. It is a system that works (especially for taxation purposes).

    That is, it works until the capital gain reverses and becomes capital losses. Then this compounds with the inflation rate. Then the owners of that property need to make some decisions, such as:
    – do I sell and lock in my gain?
    – do I wait and hope that things turn-around soon?
    – do I try and offset the inflation-related loss by renting?*

    And there’s your answer.

    *Some of the people holding property will probably not have this option as they only own land, not actual houses. In some respects, this also applies to commercial real estate.

    Reply
  20. I had a think about the charts posted in on Chris Joye’s blog, the first which forecast that the number of people per occupied dwelling would continue on its downward trajectory (top green-blue shaded area) and compared it with the Westpac chart that shows that since 2006 the number of people per occupied dwelling actually rose before ending up roughly level from 2006-09. The number of people per occupied dwelling dropped from 3 in 1991 to 2.7 in 2006. After falling for a decade, this number flat-lined because Australians are now compressed into existing dwellings due to the shortage, rather than spreading out into new dwellings. This really proves there is a severe shortage of dwellings in Australia, because the construction of new residential property (& sales) has been falling over this period, and of course this has lead to price rises. This must be causing extreme pent up underlying demand. I would assume that the number of people per occupied dwelling must continue to flatline, or even increase, along with house prices, until a construction boom comes along to develop the necessary housing stock to soak up the pent up demand. Really the only thing that could prevent this is extremely high unemployment, but even that seems to be off the cards, for now. So I wouldn’t roll out the “mission accomplished” banner just yet, but it looks to me like house prices will continue to rise, and eventually a residential construction led economic recovery will occur. Cheers, DoS.

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  21. So how much “suburban consolidation” is available from within the existing residential market and at what point of economic duress or expanded personal taxation would it be triggered?

    I don’t think Ken Henry will be allowing his mates with the purse strings in academia to publicise PHD programme results on that one!

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  22. Hi Pete, I had typed you out quite a long response, but it disappeared when I sent it! I will respond again later when I get time to retype.

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  23. Thanks Shadow. I too have had similar problems, so much so that every time I type a response I copy the text before I submit it. It is a helpful habit in respect to posting comments on most websites.

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  24. Ha, ha… Daily Recking Australia figures my comments are too dangerous to print! (Quite a compliment!) :)

    Biker Pete, Wolfville, Canada
    August 28, 2009
    Reply
  25. Q: What’s a four letter acronym that rhymes with fog?

    A: FHOG.

    First Home Buyer
    August 29, 2009
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  26. Technically it’d be a homophone, but I digress.

    First Home Buyer
    August 29, 2009
    Reply
  27. I think the younger generation (GenY) are starting to appreciate how overpriced the bubble is. Most kids I know live with their parents because despite all the things they want the price of a house is too much to get it.

    Property investing if you already have property is ok. If you don’t and have to come up with $400,000 not to live in a crime filled area where you don’t have to travel 2 hours to get to work one way then on the average wage it will be very hard to pay off. Most of the older people with paid off houses would never be able to pay it off if they had to start over and accept the prices today (and I’m talking aboutthe average worker of course).

    In addition life isn’t as stable as it used to be. No one stays in the same job forever, couples are less stable, and so on. It’s hard buying with another person for a lot of people.

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  28. ‘Demand’ alone CANNOT determine prices.

    There’s a lot of ‘demand’ for housing in Somalia, but I’m preeeeeety sure that houses are not that expensive there.

    If credit suddenly becomes too expensive (due to high interest rates), people won’t be able to afford houses, no matter how desperate they are for it.

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  29. I must state that I am a property investor. It seems to be an assumption by Kris that all investors who prefer property investing to shares, purchase property with blinkers on and no research whatsoever.

    People will be burnt by property just like people will be burnt by shares. It seems that people who have suffered from the GFC (and their share investments) now want the property investors to suffer the same way! Questioning why the same is not happening to those damn property investors!!!

    I am a property investor who will only purchase if the property is the right price. I calculate the right price by analysing the median rent over the last 10 years in the suburb I am looking to purchase in. When Kris states why one property should be more productive than another. Well it is and it can be seen through the rent. Renting a property in the eastern suburbs of Sydney is more expensive than renting in the west of Sydney.

    I am not a rampant property speculator who buys 5 off the plan properties in one go through deposit bonds etc.

    I am not saying that property prices will not decrease (or crash) or double every 10 years. I am happy to walk away with a capital growth equal to inflation every year and 5% rental yield to pay my mortgage.

    I am confident that the properties I have personally purchased will not decrease to such a level that I will ever be forced to sell.
    Dee

    Reply
  30. Shadow,
    Following your logic then, there must be a surplus of people ?
    Strangely, I do not observe this surplus. Do you ever wonder where these surplus people go, when they’re not attending auctions or visiting display villages ? Certainly, I see the occasional one or two camped under a bridge, but nothing like the numbers at displays and auctions (and certainly not the same type of people). Maybe people aren’t fungible either – they all have their own unique needs and priorities, aside from housing, which for them is all ready met in some other way ?
    Or perhaps there’s a people hiding conspiracy ? Maybe like the comment “hiding” conspiracy on Joye’s blog ?

    Crazed Nutter
    August 29, 2009
    Reply
  31. Comment by Prima Materia comparing Yarraville Melbourne house price increase.

    I think there is something to say.

    As usual incomplete information is used. The same property,yes , but how much was the complete renovation it had ($200k? – have seen the property) add in that cost and use a realistic selling price not the price advertised.

    cost $300k
    sell $500k
    return $200 over 13 years on a 300k investment.

    I thought property doubled every 7 years? and 96-09 was in a rising market. Yarraville during this period has been gentrified so even in boom suburbs the figures seem overstated. Take a look at the home improvement costs they have pushed prices up but rarely get a look in to the arguments.

    and the fact 96-09 is the rise in the cycle and

    Even in the global village Australia always lags behind the world and property will fall. The Real Estate industry is

    Reply
  32. Additional considerations are that the ‘shortage’ pertains to properties for sale in populated demographics, with a high proportion of non-owner occupiers, who have been left out of the market because wage rises have not kept up pace with the returns to investor owners facilitated by government regulation which provides:
    *almost unlimited capacity to increase real rents (current ave 7+% per annum, excluding returns from almost unfettered bond retention, as well as the facility to remove renters and charge new ones in excess of regulated increases)
    *negative gearing returns which sustain the comparative advantage of investors over owners
    As well as:
    *migration requirements for, effectively, a minimum investment in housing of 300k
    * overseas investment liberalisation (see FIRB approvals and recent further liberalisation of property ownership by foreign corporations for employees – to be interpreted in tandem with the Free Trade Agreements massive increase in FDI)

    Effectively, when combined with the aforementioned credit supply factors (including no limit on banks guaranteed overseas borrowing, while Au banks require lower threshold deposits on FHO subsidised purchases), there are a whole suite of regulatory incentives to maintain the bubble, for the short term political advantage.

    It will be interesting to see how many more initiatives they can come up with to maintain the bubble until after the next election.

    Noting the government just reduced its announced investment in social housing to build primary school halls. It all poll/vote driven -because, as stated, the facts do not support spin required to continue these initiatives.

    Reply
  33. Dee:
    “I am not saying that property prices will not decrease (or crash) or double every 10 years. I am happy to walk away with a capital growth equal to inflation every year and 5% rental yield to pay my mortgage.”

    So you have not factored in a rise in interest rates?

    Or higher inflation rates?

    General price inflation for goods and services does not necessarily imply equal inflation (or even any inflation) of asset prices.

    In fact, unless there is wage inflation, inflation of goods and services prices reduces the amount of money that can be spent on assets.

    So essentially it appears that you are expecting stablised low interest rates, stabilised low inflation rates (CPI) and wage increases in-line with inflation.

    What were you saying about blinkers again?

    Reply
  34. interesting gabble as usual above. some almost got it. after studying mob mentality and large number theory many moons ago i decided to move to a mining town and expierence a better class of human. cities, from direct and elevated expierence create the most obnoxious of humans as i like to refer to them, battery hens, looking into the next cage and thinking theyre better as theres less shit in theirs!. The ladies taking their spawn to school in oversized 4wd’s was a mob trend which still exists today much to my amusement. Kris stated above that the mob thought there was a shortage, the mob decided to pay more for the same article and the mob saw there was no shortage, theres the key right there. Time and time again throughout history large groups create problems because there is no head to them, they dont stop and think of the outcome and the outcome is the sum of our fears, the first thing a group does is panic! then it decides where to run. I believe its in our genes, we are after all descended from primitive stock. Watch a group of small birds, bats or fish as they try to evade a preditor. Most documentaries i watch where groups are herded together theres not many left to carry on. the golden rule about not being the sheep is be the wolf. Theres a small downturn here in jobs but here is the most stable, there are few exports involving jobs in the cities. Hows this for a prediction :- mass job losses = mass hysteria = mass crime. napoleon said it best “deprive any society of two meals and theres anarchy” .Id be building a small arsenal if i still lived in the city.

    paul the miner
    August 31, 2009
    Reply
  35. Nice comment by Paul the Miner above but still failed to grasp the complete concept and quite clearly by the depth of his thinking probably never will. Unfortunately (for better or worse) Paul has used a distinct and separate species metaphor to describe a same species problem. The asset valuation and response Paul and others has described happens intra-species (i.e. we are all human) so observations such as these from the natural world do nothing to shed light on property prices or asset values.
    What happens to outliers in an interspecies battle is that it is more often than not that the outliers get picked off.
    Challenge the mob by all means – go against their collective instinct at your our peril!

    Reply
  36. What sane investor would buy property that is trading at an artificially overvalued level courtesy of a temporary (soon to end)socialist government stimulus boost aimed at bribing the most financially poor, naive in society.
    Hmmm what triggered the US subprime crash?

    Reply
  37. Have to smile at your comments, Bargeass. :) Actually helps us when you talk property down, discouraging many more investors from building. No wonder Perth rents have risen an average $46.00 per week during the last year! ;)

    Biker Pete, Ottawa, Ontario, Canada
    September 14, 2009
    Reply
  38. Biker, talking up or talking down a market is the sort of ineffectual short-termism that politicians have become obsessed with.
    Don’t worry about it, it won’t have any effect on the long term outcome.

    Reply
  39. Fully aware of that, Richo… but there’s a delightful irony in the bears’ contributions at times. ;)

    Biker Pete, Ottawa, Ontario, Canada
    September 14, 2009
    Reply
  40. When a socialist government has to pay the most financially naive and unsuccessful members of society money to encourage them to over commit on overvalued property you know it’s going to end badly.

    Reply
  41. I can give an authentic record of my experience, as I sold recently- August, 2013, a property I had held for 17 years. In fact, the flat I lived in in Sydney’s blue-ribbon North Shore. Incidentally, it was a 71 square metre flat in a refurbished small block, without a garage and 300 metres from the beach.
    To put it bluntly, I was a bit disappointed with the outcome. In 17 years, my auction achieved much less than a doubling in its initial value, inflation and all. (I think I would be correct to believe that average wages have more than doubled in 17 years.) If I had invested my own money in it (i.e. no loan) 17 years ago, then all I got for my trouble would be a growth in asset of less than 4% per year, compound. Not a disaster, but nothing to excite a specaultor. The reasons I am disappointed are that there is, allegedly, a shortage of stock for sale, at least in this district and that it is sold during a time of exceptionally low interest rates, coupled with decent economic growth and moderate unemployment.

    Reply

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