One of the best stockbrokers I have ever known once said to me, in characteristically gruff fashion” “Mate, the market is always right. Even when it is wrong, it is always bloody right.” He was a great broker because he understood crowd psychology and the limited utility of numerical analysis. A great lesson in humility. Now, like most of my fellow bloggers on macrobusiness, I am a bear on Australian property. Have been for a decade. So why have I been wrong for a decade? I can highlight three reasons which I don’t think have received much attention.
The first reason is the extremely narrow range of investment options in Australia (assuming one does not venture overseas or into more exotic areas). Take the stock market. About half the Australian stock market is miners and banks. According to The Age, BHP Billiton, NAB, Westpac, ANZ and CBA account for 37% of the market. What happens if you don’t like banks and miners? Sure, its a nice cosy relationship between a few cartels and a constant flow of superannuation money which always goes to the big end of town. Nice for franked dividends. But it is extremely narrow. And the results are terrible. As any number of studies have shown, over the last decade superannuation returns have been worse than putting the money in the bank (after taking out all the gouging by fund managers and financial “advisers” of course).
Then we have bonds. To invest directly in corporate bonds you need about $500,000. In other words, as a retail investor, you can’t. After the GFC there was some muttering about retail bonds, but it never happened. Or say you want to invest in venture capital. Not much about. Worse, the smaller end of the stock market is continually penalised by the bias of the institutions towards arbitrage in the big cap stocks.
You could put the money in the bank, but it will be taxed as income. You could start up a business, but if you do will have to mortgage property to get a business loan. Ninety per cent of business start ups in Australia have the family home, or similar property as collateral. Disguised property investment in other words. Is it any wonder that there is a massive bias towards property investment, especially when it is protected on the downside by negative gearing? And that is not going to change any time soon. The gearing argument, by the way, does not stand too much scrutiny. In America, the deduction of interest costs applies to the family home as well as investment properties, but that did not prevent a property collapse. But in America, of course, investment opportunities are far more extensive.
That is the investment scenario. A second factor is changing consumption patterns. A home is a far bigger proportion of a good lifestyle than it was even 20 years ago. The reason is that all the other parts of a modern lifestyle – cars, fridges, TVs, computers, clothing, to some extent food – have been getting cheaper and cheaper in real terms. As a recent article in The Economist points out, capitalism is at a late stage in developed economies. Most innovations are refinements of something that already existed.
Mr [Tyler] Cowen reckons that the gains from two centuries of rapid technological innovation are largely exhausted, and that new discoveries lack the same revolutionary quality. To take one example, a kitchen from 1973, complete with refrigerator, microwave oven and dishwasher, would strike a person living in 1900 as a marvel. A time-traveller from 1973, on the other hand, would find a modern kitchen fairly ordinary. The world has gone from great leaps to refinements, and the refinements are petering out. Mr Cowen cites Charles Jones, an economist who uses deconstructed growth statistics to determine the drivers of progress across eras. Mr Jones reckons that 80% of the growth between 1950 and 1993 came from the new application of old ideas, and these old ideas are now mostly wrung dry. Other data point in a similar direction: rich economies spend more than ever on research, but the number of new patents has plateaued.
As innovation fades, the importance of the family home rises. That is not to suggest that there is no housing bubble in Australia – there unambiguously is – but it does suggest that there is a changing relationship between incomes as house prices. More household income can be spent on homes if less is needed for other things. (I know some are going to tell me it is all about an explosion of capital into investment properties – but see reason one).
A third factor, for which I have no quantitative evidence other than brief acquaintance with the portfolios of new wealth in this country, is the effect of high migration. Australia has the second highest migration in the world (behind Israel) since the Second World War. Many of these people came from countries where property investment is the most reliable and tangible investment play. Banks collapse, stock markets are tiny, what is a bond? But property is something on which you can rely. Plus it is also strong evidence of having made a place for yourself – literally – in your new country. Chinese investors have also skewed much of the market in some areas (paying in cash) but that means if there is a massive correction coming in the Chinese property market, it will spill over here.
None of this suggests that a property correction is not imminent. I am usually the kiss of death, so this blog might be the straw that breaks the camel’s back. But the three influences will not go away. The Australian bias towards property will remain. The market will still be right, even when it is wrong.