Investor Trap

A few days ago a reader “Wayne” informed us that Western Australian real estate agents are giving some interesting advice to the market.

The Real Estate Institute of WA is warning property sellers to take their investments off the market or risk selling below their asking price. REIWA figures show property sales in Western Australia are down 30 per cent compared to last year.

The Institute’s deputy president David Airey says there is a 40 per cent over-supply of property in Perth which has created a buyers market.

“There’s around 17,500 residential properties on the market which is somewhere like 5,000 properties more than our normal long term average,” he said.

“It’s a fabulous time to buy, certainly not a good time to be selling if you don’t have a reason to sell.”

There is a small problem with this advice; David seems to be assuming two things.

  1. That the market is going to come back.
  2. That people can afford to wait.

As we have said many times before

A market driven by debt requires every increasing returns to keep the speculators in. This in turn requires every increasing debt to fund it. Once the demand and/or availability of new debt slows then prices have nowhere to go but down. Once this occurs anyone in a risky debt position (not just speculators) wants to get out.

Due to the high cost of housing relative to rent, most property “investors” who joined the market in the last couple years have loss making investments, even with massive government incentives to hold them. They are only in the game for the capital gain. As the cost of maintaining their loss making investment rises and the capital gains disappear they all want out. As you can see above, this leads to far too many sellers and far too few buyers as the buyers become aware of the problem.

As we have shown previously in most markets without some future government intervention peak housing debt issuance is in the past. The problem for the investor market is that with just a little bit of searching it is already very easy to find investments that have been a disaster. Here are two examples from Queensland that we found this morning after just 2 minutes of searching.

This property has been on the market for 118 days according to refindhouseprices it is now priced at $379,000 after a reduction of $10,000 and a contract crash. It still is not sold. The problem is that it was purchased on the 26th December 2008 for $358,300. Once you add stamp duty of approximately $12,000 , legal fees approximately $1000 , conveyancing $1000, and real estate fees approx $9000. This property is well underwater, and if we assume a 10% deposit on a $320,000 interest only loan these “investors” have to find approx $400/month to cover the difference on their loan repayments.

Here is another. These lucky “investors” actually escaped. After they purchased their investment for $310,000 in August 2008. It sold for under $315,000 in September 2010. With all the additional legal costs, stamp duty and the lovely real estate agent only taking 2.2% of the sale price, these people would be lucky to escape with a loss of $30,000. All the while paying $300/month to the bank for the privilege.

This is just the beginning of the collapse of the Ponzi market and the ugly end of greater fool theory. It is just a great shame that the rest of the economy is going to suffer because of this delusion and the denial of the government that the problem even exists.

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  1. Link "Property" in the article leads to this

    "Sorry, the property you are searching for is not currently available."

    Using refindhouseprices we find that some Port Douglas dog boxes have been listed for 372 days.
    Boots on the ground view:
    Some of these dog boxes have been on the market longer than that. Some others not listed have been on the market for 3yrs.

    Some of the R/E guys in Port Douglas are like the monsters from the black lagoon that crawl out at midnight and eat small children.

  2. Financial Follies

    "It's a fabulous time to buy, certainly not a good time to be selling if you don't have a reason to sell."

    If you reverse buy and sell in this quote, he might be on the mark 🙂

    You know it's desperation stakes when they start talking about fabulous buying opportunities and a "buyers market."

    Exactly the same thing some people here said about shares in Bear Stearns, Lehman, Merrill, etc etc in the initial phase of the crisis.