Real Estate Brokers: The Latest Victims of the Housing Crunch

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Who would have thought it possible? Asset values falling. That’s exactly what has happened and the remarkable thing is that even the so-called financial experts can’t believe it has happened.

Let’s take a look at two of the most popular Australian investments. Property and shares. I’ll be blunt, things are bad for property investors. But they may be even worse for what I like to call “real estate brokers”, or real estate agents. Why do I call them real estate brokers? Simple, for the last few years these real estate brokers have been advising buyers and sellers of property to churn houses just like shares.

Why? Because they thought that prices would always rise – and because they could earn a stack of commission. Buy one, wait for the value to go up, get it revalued then buy another and do the same. All of a sudden an average property investor has bought a dozen houses just from putting down $20k cash. The rest of the money they used was just ‘funny money.’ Although chances are that they borrowed the $20k ‘cash’ against their own home as well.

But to see just how bad things are in the property market you need look no further than the real estate brokers themselves. Not so long ago the car de jour for every broker or agent was a BMW. Shiny, 2-door or 4-door, it didn’t matter.

What are real estate brokers driving these days? Well, based on a very small sample of two brokers seen at an ‘open for inspection’ last weekend, they are driving a six-year old Holden Commodore and three-year old Holden Astra.

If that isn’t an indication that times are bad, then nothing is.

But maybe you can excuse the average punter for being made to believe that house prices and share prices can only ever rise in value. Or that if you ‘buy and hold’ then eventually everything will be fine. Remember the expression touted – “It’s time in the market, not timing the market.”

You know what, for shares the “time in the market” argument is starting to look pretty thin at the moment. Take a look at the chart below:

Even for investors that bought index weighted stocks in the early 1990’s their return until today is probably not that much better than those that had been in cash. For those that started investing around 2000 then the returns are most probably even worse. That’s if the investors bought and hold, which is what a typical fund manager will advise – obviously because it is in their interest to do so.

My guess is that more active investment management will be the key for anyone wanting to make a better-than-inflation return from shares over the next five years.

Whereas for property investors it will be a case of ‘buy and hold.’

The Most Important Money Morning Story This Week:

The ‘free market’ has been getting some bad press lately. It is a shame because the market we have had could not by any definition of the word be described as a free market. You only have to look at the number of rules, regulations and codes for nearly every aspect of life and business to see that this is not and never has been a free market. Not only is the free market having to take the blame for what has actually been socialism, but it is also being made the scapegoat for criminality and fraud – neither of which has any connection whatsoever with free markets. This week’s story on Wall Street veteran Bernard Madoff explained it all. Click here for more…

Monday: They may see it as politically unpalatable, but the fact is, if you are prepared to except an economy that goes ‘boom’ you must be prepared to except one that goes ‘kaboom.’ That is what we have at the moment. Left to run its course the economy will be purged of the ills that caused the boom and will emerge stronger. Click here for more…

Tuesday: Alas, this is how a public bureaucracy works. The same bureaucracy that will be responsible for spending billions of dollars on infrastructure projects as part of the stimulus package. Good luck! Click here for more…

Wednesday: The big surprise was what else they have done with the rate. Having seen that the market was pricing interest rates well below the target rate, the Fed has thrown up its hands. Click here for more…

Thursday: If, as CBA claim, Merrill’s were told about the revised write-offs then CBA is obliged to notify the market immediately. Failure to do so would result in Merrill’s and its clients acting on information that was not widely known to the market. In other words, insider trading. Click here for more…

Friday: With six and a half billion people in the world, the demand for energy has never been greater. This demand – especially from China and India – is the hidden engine behind Australia’s economy. One Perth based company is perfectly poised to capitalize on the voracious demand for energy. The “energy metal” they mine is critical for sustained renewable energy. Click here for more

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.
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11 Comments on "Real Estate Brokers: The Latest Victims of the Housing Crunch"

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SteveG
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Worthy victims, indeed!

alf
Guest
Things are certainly not going to look good. The financial system that grew up over 30 years has evaporated in the space of 18 months. The collapses – subprime, ABC Learning, property and financial meltdown – you named it, this is just the beginning. It is not just the market that has collapsed, not just the economy that is going down the drains. In the frantic race to get rich, richer, individual has lost their moral compass. Bernie Madoff affair is not the only case, more surprises similar to Madoff and ABC will soon resurface during this period of financial… Read more »
Greg Atkinson
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I think we can actually overestimate the current crisis. For example our financial system has not collapsed. Last time I checked my money was still good at the shops, my bank account was still intact and credit card transactions etc. carry on as normal. Companies still pay salaries, world trade still flows and the old capitalist method of transferring wealth continues even in communist China. I know things are bad, but the doom and gloom crowd were just as sure the sky was about to fall in after 9/11 and were predicting the virtual demise of the tech sector when… Read more »
Pete
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Greg:

yet…

no point speculating on the present, we speculate on the future

gloomboom.com
Guest

It it incredible that Realtors thought the prices of homes would rise forever. But based on the last few decades they had a point! I lived in California for about 40 years and prices just kept rising, really rising. Now reality hits. Bang!

Greg Atkinson
Guest

Pete, I think it is a little early to write off the world at this stage. Readers also need to note the little tricks people employ such as the use of the ASX All Ords chart…if we are talking about investment returns it is more accurate to use the accumulation index or have the bears suddenly forgotten about dividends? (many of which are fully franked) Of course the accumulation index chart is not as scary as the the plain All Ords chart and hence the reason the doom and gloom crowd seldom use it.

alf
Guest

Some life are still running on borrowed money, borrowed time and borrowed ‘hope and promise’. Anything in life that once thought to be solid and storm-free will be shaken.

For those who will be facing severe financial realignment first time in their lives, may you be blessed with a new perspective of life purpose. Choose and live wisely.

Biker Pete
Guest

Yes, you can judge a man by his car, all right. That’s how we here at ADR evaluate how well people are doing. Giggle!~

Pete
Guest

Hey Biker Pete… we don’t discriminate! We hate just about everyone: realtors, developers, investors, homeowners, landlords, politicians, banks, borrowers, lenders, FHBs, new car owners, old car owners, the rich, the spendthrift poor… and optimists, particularly optimists! We’ve a stereotype to fit every situation and a handful of cliches to describe it. Welcome to our exclusive group! ;)

Greg Atkinson
Guest
Biker Pete…actually I reckon you can judge a financial adviser by his/her car. The way I see it most cars are the worst purchases we ever make (most often zero return and they cost us a fortune to run/maintain) so if your financial adviser has some top of the range sports car I would suggest: 1. They are pretty carefree with their money. I mean if they were so sure of the advice they were dishing out they would invest every spare cent in the products they were selling..oops I meant advising on. 2. Your fees are helping him/her be… Read more »
Pete
Guest

Mostly agree with you on this one Greg, except that I think some creative business people can write a lot of the ‘sports car’ off on Tax… :\

But points taken :)

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