Christmas Guest Post : Homes4aussies on Spruikers

Brett Edgerton is a long time campaigner for affordable housing and an advocate for social equity in housing policy. He runs a website Home4aussies and is also a long time contributor to bubblepedia.

Although the post below is about his perceptions on current real estate market strategies, he has a very broad expertise in housing policy and has recently been at the forefront of a campaign to pamphlet drive Wayne Swan’s electorate to inform voters of inequitable housing policies and their effect on Australians.

We are probably understating his knowledge; so we recommend you pop over to his website and have a poke around. In the meantime, please enjoy a little guest post from the man himself.


Spruikers give up on Gold Coast and Melbourne Apartment markets

I noted a month or two back that there were signs amongst the spruiker brigade that a strategy had formed where they had drawn battle lines – defensive ones as the market retreats, i.e. around cities/regions and around different market segments.

That was clearly on show last night as I watched (quite uncommonly I must say) the property talk back show on the business channel.

One guy rang in and asked about buying an apartment as an investment in either the Gold Coast or Melbourne. The negativity came out in spades amongst all 3 talking heads, and the message was clear – what ever you do, stay away from Gold Coast and Melbourne apartments.

Consider the command bunker, or perhaps a modern day election campaign headquarters, “We’ve already lost the Gold Coast and Melbourne – no point sending in more resources (investor dollars) into there – better to pull back and send our scarce (and getting more scarce by the day, see below) resources somewhere where they might have some impact – that’s the only chance we have of holding the line….”

So let’s look at (some of the major reasons) why the spruikers are fighting a losing battle. Let’s look at current investor psychology and the immediate to medium future for them.

The majority of investors now acknowledge that Australian house prices are overpriced – well, you can’t ignore that one seeing as virtually everybody agrees on that (with the exception of the banks’ talking heads )

In March of this year, 60% of investors responded affirmatively when asked in a survey “Do you think Australia has a property bubble”

http://www.smh.com.au/business/australias-property-bubble-its-here-20100324-qwi1.html

However, apparently at odds with this finding, according to the article “When asked if it was a good time to buy an investment property, 67 per cent agreed that it was because the supply shortage would support rental and price yields. Another 21 per cent thought prices would stagnate and only 12 per cent believed that prices would fall.”

And “On the future of the boom, 32 per cent could see it running another year, 44 per cent for two or more years, and 7 per cent forever.”

After reading this I mentioned online that I believed this to be part of the psychological cascade which occurs as a bubble pops – first is the acceptance of the bubble (degree of overpricing) but without full comprehension of what it means for a market to be in a bubble.

The subsequent survey 3 months later suggested a further progression in that cascade.

http://theage.domain.com.au/real-estate-news/bubbleburst-fears-rise-20100715-10bod.html?autostart=1

“For the first time this year, the number of investors expecting house prices to remain flat or fall outweighs those who see prices rising. The fundamental reason for the shift in sentiment is a dawning belief that Australian housing is in a bubble that at some point will burst and return to historic levels of affordability.”

Only 25% of investors disagreed with Jeremy Grantham’s assertion that our house prices are a bubble. Admittedly, almost one in three were still undecided (apparently not an option in the former survey).

That is hardly a bullish position and I think it is reasonable to assume that many would have made their mind up in the affirmative in the 6 months since that last survey. (Note I can not find any reference to subsequent surveys -> .)

More tellingly in the latter survey: “62 per cent of investors concluded that although a property price correction was clearly under way, it was most likely to resemble the kind of long-term flattening of prices seen in the Sydney housing market after the effects of the first round of the first home buyer grant abated in 2003”

So, from March to June 2010 investors’ attitudes changed such that instead of 83% of respondents believing the “boom” would last at least another year, to no less than 62% believing the market is correcting but in a long term flatlining fashion.

Of course this is what many spruikers are saying, also, and so seem to have drawn another defensive line below current house prices – “OK, they’re not going to rise, they will plateau for a prolonged period”.

And one of the most bullish commentators seems to have developed the line that “house prices will plateau or fall slightly over the next year or two, and will move in line with incomes over the medium to long term”.

Defensive is the operative word here. None of that is hardly a repeat of the last few decades, and it is certainly not the “double every 7-10 years” crapola that has been fed to investors.

My view is that the spin is all about trying to stop investors (at least the lesser informed ones) from liquidating. It is hardly a strong sales campaign – “hey guys, I’ve got a great deal for you, and the best thing is you won’t lose money over the next few years, (grumbling below their breath) as long as you don’t consider inflation or worse still opportunity cost”

So, perhaps some investors that bought the majority of their portfolio pre/early bubble might hold on in the hope that they will actually be able to crystalise some of the capital gains in the future, possibly choosing to think about the rental yield in terms of their original purchase price (in the mean time) rather than thinking about the actual opportunity cost of holding onto an asset which is unlikely to appreciate considerably for the foreseeable future.

Then again if they are long term investors, who have experienced more than one bull-bear cycle, they might be more likely to be sceptical

But think about what recent investors and potential new investors or re-investors would think. The former, highly geared, and with large debts, in an asset class that instead of doubling in value over the next 7-10 years as “the experts” said at the time is now only likely to hold it’s market price, according to “the experts”. Firstly that’s not exactly an attractive investment.

Secondly, at the same rate of decline of opinion/sentiment by “the experts” they might soon be predicting a halving in price in the next 7-10 years. Surely they are sceptical of “the experts” after swallowing their original spin.

So “holding the line” (preventing them from selling) with recent investors is going to problematic. More importantly, the number of investors buying property is going to continue to decline while there remains limited possibility of capital growth.

What I find comical as a value oriented individual is this aversion to markets that are correcting strongly. It shows the typical spruiker strategy of getting people excited by momentum as opposed to searching for value. I don’t suggest that a market that has been falling makes it a good time to buy over one that has not, but if both have been strongly overpriced, I think I would spend more time looking in the strongly falling market to see if I can find value.

Anyway, this is the other point to make, that most certainly is the attitude of retirees. Now I do not profess to know much at all about developing, and I am certain that there would be differences between apartments developed for the retiree market versus holiday apartments/rentals. But with large developments struggling in virtually all of the favoured holiday come retirement areas throughout Australia, due to the lack of investor demand, you know that there is going to be a steady stream of retirees taking advantage of the discounts to replacement value sales going on in these popular retirment areas.

Those sales will be putting pressure on the entire porperty market in those areas, and also on nearby city prices. For example, there have been major bankruptcies on both the Sunshine and Gold Coasts in south east Queensland, with one just a few days ago having problems with 80% of apartments which were sold off the plan. There are going to be a lot of Brisbane retirees saying “yippee, it’s time to buy our retirement pad”. This in turn is likely to have an affect on prices achieved in the middle ring suburbs of our capitals as those retirees are not dependent on bubble prices to make their retirement dreams possible, and recent younger buyers will see prices falling around them.

That is why I believe that the correction will extend to all sectors of the market, not just the investor holiday apartments or the mortgage stressed outer rings.


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Comments

  1. great article.

    The other thing to I've note with apartments and units has been the steady increase of body corp fees which is making apartments less attractive.

    We may well see a deflationary mentality in R/E kick-in "it will be cheaper tomorrow".

    I wonder what the Gov will do when everyone is claiming capital losses.

  2. @ssofar, capital losses can only be offset against _future_ capital gains AFAIK. Some may get out with capital gains – the "smart money" – but I don't think the government has much to worry about when it comes to future capital gains … Unless, of course, there is gargantuan printing of money here.