Buy a house because I said so!

It seems the ah…fans…of housing are getting nervous. I’m not sure if there has been recent guild meeting but last week saw a number of bullish property pieces. It’s worth assessing their merits.

In the latest Eureka Report, Monique Sasson Wakelin penned an attack on the “bubble brigade”. In it she argued the real question facing housing is when will growth resume. To support this contention she offered the following analysis:

The four surveys more or less measure the same parameter over the same timeframe; averaging their results gives a pretty good guide to the state of the market.

You can see from the table that at a national level property prices have eased back around 1.2% in the last quarter. And over the past 12 months prices have risen 0.6%.

The real story behind these numbers is the resilience of the Australian property market in the face of global and national adversity, be it economic, environmental or natural disasters.

After peaking around May 2010, prices have clung to nearly all their recent capital growth despite several interest rate rises, the removal of the national First-Home Owner’s Boost, rising petrol prices, an increase in the consumer savings ratio and much scare-mongering by the “bubble brigade”.

If you’ll pardon the expression, this is statistical butchery. RPData’s index is hedonic, created in an attempt to adjust for compositional change across real estate sales. You can’t average it against APM and Residex median house price data. The comparison is made worse by the fact that Ms Wakelin is comparing national prices against a capitial city index and claims that they all “more or less measure the same thing”.

Ironically Cameron Kusher from RPData is mentioned in the article.

“The market has slowed down. Values are holding up better in Sydney and Melbourne, with Brisbane, Perth and Canberra doing less well. There are a lot of listings and the stock is taking longer to shift. There aren’t many first-home buyers or investors out there, which is making it hard for aspiring upgraders to sell their current property. Rental yields have started to improve across Australia’s capital cities – outside of Melbourne. Over time that may attract some investors back to the market.”

Kusher is relatively sanguine about the prospects for the market. “While the market has definitely softened, with fewer transactions and lower activity, I expect these falls will be relatively contained, largely because I don’t see which factors not already in play would cause people to sell for significantly less than today’s prices.

“Unemployment is low, the economy is doing reasonably well – and very well relative to the rest of the world. If people can’t sell at today’s prices, most will just take their property off the market and try again at some other time.”

Is it just me, or is it odd that Ms Wakelin takes Mr Kusher’s opinion at face value in the same article that she distorts his company’s index. She continues:

Importantly, this is exactly what property commentators such as myself said would happen at the start of the year (see Property’s Year of Affordability). Rather than focusing on capital falls, the crucial question for investors is how long property prices will remain in this holding pattern before capital growth resumes.

… And, just quietly, provided my cat Isabella does not cost me a small fortune with her extravagant culinary preferences, this is the year I’ll be adding to my own portfolio too.

I have a cat, I could coat him in a thin layer of platinum and I would still be burning less money than I would be if I was to buy a house in the current market.

House prices haven’t “clung” to anything. This is a misleading “point in time” view of data. Property data only makes sense in terms of trend. Housing is not a liquid asset, it takes months to sell and settle. Changes in market dynamics do not occur overnight.

Ms Wakelin maybe able to talk down “small” changes in property values, but if I had purchased the “average national house” over the Christmas period I would have been approximately $10,000 worse off by the end of March according to Mr Kusher’s company. That is over $3000 per month. That is some expensive cat.

You can see from the charts of Mr Kusher’s company that in March 2010 the YoY growth for capital cities was 14%, 6 months ago it was 8% it is now -0.6%. This is a ‘holding pattern’ only in as much as a crashed aircraft is one. Moreover, as we know, property investment is a capital growth play. The income returns are poor, and non-existent for the negatively geared, which constitutes 66% of all investment property. Such markets do not find ‘holding patterns’. They are either rising and investors are making money or they are falling because when flat most investors are losing money.

Surely the question for any person who is seeking advice on housing investment is not what has already happened anyway, it is what is going to happen. And to answer that you must understand the trends and the fundamentals of the market. Credit trends, population, demographics, inflation and commodities boom, the RBA and government policy are all major contributors to the housing market. This article mentions none of them. At least Mr Kusher bothered to mention unemployment even if it is a trailing indicator.

But to Ms Wakelin’s credit, her ‘analysis’ was still reserved in comparison to  Terry Ryder’s major work of fiction on the subject of  negative gearing published in The Australian.

[The] pattern of rising home values is a good thing for most Australians, because about 70 per cent of households own their homes. It’s also good for the nation because the value of the family home is the financial imperative by which many Australians fund their retirement. Those who think it’s a bad thing are an insignificant minority. But these people appear determined to allocate blame for rising real estate values and to find ways to reverse the laws of real estate physics.

Some of them blame the federal government for inciting first-home buyers into action with its grant (they tend to overlook state governments that also give handouts to first-time buyers, as well as stamp duty concessions). Others blame state governments for restricting land supply (this is a furphy). A few have accused foreign investors who apparently are swarming across the nation forcing up our property prices (that’s not happening either, but a good headline has never been stopped by boring facts).

Some have even blamed me. The local Greens candidate harangued me in my home town after seeing my website signage on the side of my car. I’d love to think I have so much influence as to cause national prices to rise.

But the perennial favourite is property investors. According to this theory, marauding investors are paying inflated prices for houses in great numbers. And, so the theory goes, the main catalyst for this un-Australian activity is the tax incentives provided by negative gearing. So if you stop negative gearing, you stop investors. Nobbling investors will force property prices to fall, the affordability issue will be solved and we’ll all live happily ever after in really cheap houses.

The time wasters who called for a first-home buyers’ boycott are among those who subscribe to this theory. Media reports suggest some federal politicians are considering axing negative gearing to improve affordability. But it won’t, of course.

People who own investment properties comprise just 13 per cent of taxpayers and only some of them are negatively geared. Investors who are negatively geared form a tiny percentage of the overall market and are much too few in number to influence prices.

They’re also the last people likely to get emotional about a piece of real estate and pay an inflated price. Investors buy by the numbers — if they can’t get a property at the right price, they move on to the next option.

If investors really were the catalyst for rising values, Surfers Paradise would lead the nation for price growth. Forty per cent of properties are owned by investors, well above average. But the median price for Surfers Paradise apartments is lower today than it was five years ago. It’s the same in Noosa Heads, where the median unit price is 16 per cent lower than five years ago, despite the strong presence of investors there.

… The only outcome of stopping negative gearing will be to create a shortage of rental properties, which will force up rents and make it harder to first-home wannabes to save a deposit — that’s what happened the last time it was scrapped.

At this point I’ll offer the following graph from the Unconventional Economist to show how distorted many of these claims are:

Yep, 94% of property investment goes into existing dwellings. Yet, magically that hasn’t boosted prices, wouldn’t change prices if removed, and is worth the trade off of a paltry 6% going into new homes?

The remainder of the article is filled with similar errors that it is not worth my time offering more detailed analysis. All I will say is that if you find yourself agreeing with anything in it then you need to read this piece from the Unconventional Economist to learn the truth.

You have to ask yourself why it is that these self-proclaimed experts can make these analytically dubious claims over and again. Where is the regulation and licensing that governs other forms of investment? Why is there no AFSL or equivalent for these people? Where is ASIC?

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Comments

  1. adayinthe life

    The only advice from Monique Wakelin ABC’s radio show that I thought made any sense
    was don’t buy on a busy main road.
    She also regards anything under 650k as the ‘low end of the market’.

    • First Home Buyer

      Well on 774 the other week she was trying to convince FHB’s to buy now; instead of after the stamp duty savings kick in supposedly because it will be cheaper to buy now due to less competition from other buyers, who would be coming out of the woodwork to take advantage of the stamp duty saving and pushing prices up…

      I think the only competition to come will be between the sellers.

    • “She also regards anything under 650k as the ‘low end of the market’.”

      And that in a nutshell is why she deserves, in some style I would like to add, to be unemployed. Forever.

  2. michael francis

    I know one cat that is soon going to have to catch mice if it wants to eat.

  3. The_Mainlander

    Clearly she has equity to burn including her company’s brand equity.

    Oh noes no crashed market here look at the past… maybe Monique is an Accountant rather than Economist/Finance gal as she prefers the past to the future as any quality accountant would!

    😉

    Let her eat cake!

    • Armand Tamzarian

      Not to mention Eureka Report brand. If I was paying money to a commercial blog I’d want fair dinkum research and analysis not “content.” A lot of these sites seem to be content mills.

      • Yeah, that idea was what stopping me to subscribe to Eureka Report. I tried their offer of free trial of 3 months but at the end of it I could not see any value to pay the cost for the biased “content”.

        • Eureka Report gave away 3 months free??? I could only find 3 weeks free. Did the trial, didn’t see the value in the content either. Too much all over the place – and not enough specifics. The only thing good in there is Roger Montgomery and you can get him for free from his blog anyway.

  4. michael francis

    http://wakelin.com.au/

    Wakelin also advertises regularly in Melbourne’s Age Newspaper and is often interviewed as an independant expert on property. She also has a regular 30 minute timeslot on ABC Radio 774 Melbourne on Saturday mornings dicussing property investment.

    • Have heard this program a couple of times and nearly made me sick! Had to hear her out though, she talks with such determination re never ending upward price movement of real estate. What realy prickles though is the ABC bod that seems to be in total awe rather than aksing sharp questions. This in fact is the ABC ramping property as a one way bet for all the ‘lead by the nose’ fools calling in with simplistic questions, rather than offering caution and contrary opionon as a ‘real’ investment program should.

      • The ABC has a handful (almost) of first rate investigative journalists. The rest think they are.

  5. Yes there’s the usual disinformation, ignorance & falsehoods in Mr Ryder’s article, but what disturbed me most was his attitude and mindset.

    Makes me all the more prouder to be in the “Bubble Brigade”.

      • Dave From Pakenham

        Hi aushousingcrash,

        I think you are referring to a sales line in their report which is based on underlying mortgages insured.

        This doesn’t mean anything other than they wrote less insurance premiums this period from last, it may have been something as simple as having bought a book last period and selling a book this period.

        Their profitability for this period is greater which indicates payouts have not worsened, if anything they have improved profit/sales are better. So at this stage banks are not calling in their customers mortgage insurance.

        So I don’t think we can’t read anything negative in these figures as yet.

        • It indicates credit tightening if anything. less people are being allowed to take out 80%+ LVR after the new regulations came in at the end of the year.

  6. I’ve just been reading David and Libby Koch on news.com.au who I assumed were mainstream media and they sound as if they have been reading your blogs recently! They are certainly not talking up the housing market “The property downturn will end eventually. It’s just a matter of timing. But given present conditions, any pick-up will be a long way off.”

    Read more: http://www.news.com.au/money/david-and-libby-koch/david-libby-koch-property-slide-is-on/story-fn7kicty-1226052283453#ixzz1Lr9Bq4Mm

    • Well that is the end of the bubble then.. When Koshie speaks the sheeple listen.

      Watch for a massive spike in houses for sale in a subrub near you !!

  7. aushousingcrash

    Hi Dave, I’m in the first volumes crash, then the prices follow camp. The genworth data merely backs up what figures we have seen thus far from abs, Afg and rp data.

    • Dave From Pakenham

      With you on that. I think its probably very highly correlaqted to the smaller component of first home buyers and higher risk borrowers where there is a requirement for insurance.

      So while it says loan quality is going up it probably proves that the trade up cycle has collapsed, so not long now until the yearly numbers start showing double digit declines.

  8. Denying there is a bubble is bleedin’ comical, but it’s not peculiar to Aussie. Even Ben(Nobel prize in economics)Bernankie did it before their fiasco. Makes you wonder the true value of tertiary education on the mugs of this world

    • Their tertiary education apparently completely ignores level of private debt (mortgages, credit cards, etc.). Hence everyone in main stream media just talking about government debt even though it is peanuts compared to the private debt elephant. Our government even encouraged more of it with the last stimulus first home buyers grant.

      According to these ‘experts’, after I get a loan with repayments 60% of my income (that’s what bank calculators tell me I can afford), somehow I can still afford my holidays, go shopping and stimulate the economy like I did when I was debt free???

      It also annoys me when they say – Retail industry is struggling as Australians have started ‘saving’. Why don’t they say we are sitting at home paying of debt. I guess ‘saving’ sounds less depressing.

      • Few days ago I went to bank (NAB) regarding my TDs and (as always) they offered me a mortgage. This time instead of a quick decline I asked how much I could borrow. They did calculations and I was shocked after they told me. They offered me loan of 7 times my gross combined family income with repayment equal to 70% of our net disposable income. I’m also required to pay 7% deposit. They just subtracted fixed amount from our after tax income (poverty level living allowance) and allocated the rest of income to loan repayments. What banks are doing is just crazy.

    • It bears repeating that the standard, neoclassical economic view of private debt is “it doesn’t matter” because someone’s debt is always netted off against someone’s asset.

      Therefore the level of private debt is at equilibrium and is never a concern.

      • Armand Tamzarian

        That is also the same bizarre theoclassical logic behind no concern over derivatives volumes. Derivatives are a zero sum game so someones profit is balanced by someone elses loss. While that is correct it ignores what happens when someones loss leads to insolvency and collapse because the system cannot absorb the losses. …plus liquidity crunches because every one is shitting themselves about the exposure of a possible counter party.

      • So that’s how they explain it. But value of asset is determined by whoever is willing to take on highest amount of debt. Now I am even more confused.

    • If I were more cynical I’d say advertising dollars and newscorp’s stake in REA group which owns realestate.com.au

  9. Good find Endorortsonhousing. I bet you he probably bought one of those over-priced apartments…and now he is a believer in the wealth creating power of real estate! ; )

  10. When you look at the emotive language used by this bloke:

    “… an insignificant minority.”
    “… foreign investors…are swarming ”
    “… Greens candidate harangued me..”
    “…marauding investors…”
    “The time wasters…”

    you can see quite clearly that he brings nothing definitive, useful or informative to the debate. He specialises in appealing to the emotional, macho aspect of the property decision-making process. In short, he plays on the emotions, much the same as do real estate agents, only Terrys’ emotional play is on steroids.
    He is trying to be the Alan Jones or Rush Limbaugh of real estate.

    In regard to his comments about investors and negative gearing, the investor decion-making process, and what’s happening to the Gold Coast and Noosa markets – well, I’m really not sure whether to laugh or cry. Is this simply a case of total delusion and ignorance, or something else?

    One question I have always wanted to ask these blokes who have discovered the secret of infinite riches in the property market is this: If there is so much money to be made, and you know exactly how to make it, what the hell are you doing buggerising around writing newspaper columns and books, and running rinky little websites? Shouldn’t you be out on your luxury yacht cruising the Caribbean, lounging around St. Tropez, or preparing for your next run on the slopes at Aspen?
    I’m bloody sure I would be.

  11. “The only outcome of stopping negative gearing will be to create a shortage of rental properties, which will force up rents and make it harder to first-home wannabes to save a deposit — that’s what happened the last time it was scrapped.”

    Is this not exactly where the market is now? FHB that are struggling to get into the market and investors that have little to no prospect of capital gains (high risk of capital depreciation)?

    • Torchwood1979

      “The only outcome of stopping negative gearing will be to create a shortage of rental properties, which will force up rents and make it harder to first-home wannabes to save a deposit — that’s what happened the last time it was scrapped.”
      Someone should tell him that isn’t what happened last time. Rents actually fell in some capitals (eg. Brisbane) and there were only modest rises in others. The whole “Removing NG hurt the battlers” story is just an urban myth.

  12. “There aren’t many first-home buyers or investors out there, which is making it hard for aspiring upgraders to sell their current property. ”

    Sounds like a pyramid scheme to me….

    And so one might like to ponder for a moment what happens when borrowing all but collapses?

  13. THIS guy is right onto it:

    Armand Tamzarian says: May 10, 2011 at 10:28 am “That is also the same bizarre theoclassical logic behind no concern over derivatives volumes. Derivatives are a zero sum game so someones profit is balanced by someone elses loss. While that is correct it ignores what happens when someones loss leads to insolvency and collapse because the system cannot absorb the losses. …plus liquidity crunches because every one is shitting themselves about the exposure of a possible counter party.”

    Why, when the approved narratve about the famous US crash, is that it was caused by “rampant deregulated free markets” in “adventurous financial instruments”. NOW, in the context of the Australian housing bubble, the same financial instruments are said to be an “assurance” that all is well?

    I never cease to be amazed at how much MORE stupid humans can be, than people BEFORE them who made the SAME mistakes, (and had less excuse for doing so, because they had no historical negative example to draw lessons from). It is especially ironic, that people in this part of the world have revelled in insulting “stupid Yanks”.

    Is Michael Lewis already building up his dossier of research on Australia, I wonder? His book on “the great Australian crash” should be his best yet, given his telling ability to describe stupidity in prose.