Bulls at sea in falling market

As we recorded at the time, it was two months ago that Residex CEO, John Edwards, had the following to say on the falls in Australian house prices:

I have been researching the housing markets for more than 21 years and I am sensitive to ensuring we have a properly informed market. Because of this, I am concerned that the market understands when values are actually adjusting or are simply not performing as well as they normally do.

While it will always be difficult to prove, any result in a market is caused by a particular event. When there are many forces at work that affect a market, each of them can individually cause an adverse reaction. However, I believe that a reasonable person would come to the conclusion that the recent misleading information concerning the market has contributed to some level of the correction we are now seeing.

In the past few weeks there has been widespread press that Australia wide housing values fell by 2.1 per cent in the March quarter. The truth is they didn’t and the correction was in fact five times less than this.

It’s too tedious to recall further, but Mr Edwards went on to castigate R.P.Data Rismark, his competitor, for making the falls appear worse they are.

In the last few days, however, Mr Edwards, has had a revelation:

I have been studying the housing markets for more than 25 years and have probably looked at more models on the residential property market than anyone else in Australia (other than my chief statistician). Yes, you may claim that I have passed my used-by date, but this time and experience has brought about a wisdom that is very difficult to learn or teach.

I can tell you that in the whole time I have been studying the market I have not seen the makings of such a perfect storm. The June quarter numbers in some states are the worst recorded for more than 30 years (you would probably have to go back to the 1960s to find worse).

The market right now is very patchy. There are bright stars on the horizon but they could be dimmed very easily as their glow is weak and flickering, like any new flame is in its infancy. Our star is Sydney, which is the market that generally points to the future performance of other markets across Australia, and the worst performing capital city, Brisbane, is in trend terms indicating that the worst of its corrections are probably over…

Leading into the global financial crisis, I called the potential for a 1 in a 100 year event when all markets in Australia were correcting. The event was averted as the Reserve Bank held back on making an interest rate increase, then later made some dramatic interest rate reductions. Today, all markets are not correcting but some have done very poorly. Poor management of our economy at this point in time could easily bring about that 1 in a 100 year event that was previously avoided…

So, in two months, we’ve gone from “nothing to see here”  to being on the verge of a one in a hundred year event, and the tenure of Mr Edwards expertise seems to be growing along with his bearishness.

I’m not saying house prices aren’t falling. Of course they are. The latest credit aggregates (from May) signal that, especially in places such as my own state, Queensland. The Unconventional Economist has argued, leading the nation, Melbourne looks especially vulnerable, just as Edwards says:

…when we look at the supply of stock of properties in Victoria it is clear that this market could have a considerable amount of adjustment in it. Our numbers indicate that Victoria could have a significant stock surplus of something in the order of 24,000 dwellings, mainly in the medium density market. The net outcome, without careful economic management, could see reductions in value in this market that are considerable higher than those recently seen in Brisbane (where there is more than likely no shortage of stock). Overall I view the Melbourne market as our most at risk market at this time…

However, Mr Edwards dramatic volte face looks more like jawboning rate cuts to get the party going again than it does a forecast:

Late last year I suggested the next interest rate movement would be down and reiterated this just before Easter as it became clear that consumer confidence was turning down and our housing markets started to produced some negative numbers. I remain of this view and think that a rate cut will be sooner rather than later – I expect this to take place in September, however if the carbon dioxide tax does not come to pass then I predict the rate cut will be later.

And yesterday he succeeded in his quest to go national.

Meanwhile, another of our old bullish friends, Monique Sasson Wakelin, produced a revealing piece for Eureka Report:

Putting aside forecasts about the ultimate direction of the market, one of the unintended consequences of these predictions of a moribund property market is that it assists the case of those who promote positively geared or positive cash flow properties.

… It is clear from a review of the media over recent months that the case for positive cash flow property investment is being increasingly promoted by proponents of high-yielding property schemes with a vested interest in selling their product.

Be careful about the logic of this sales patter! It positions these high-rental-yield, low-capital-growth properties in a manner analogous to safe and boring bank deposits in a time of turmoil.

… Cash flow positive properties underperform in a softening market for two reasons. First, high-yielding properties are disproportionately bought by people with fewer funds to invest compared to investment-grade property buyers. Consequently, they tend to buy cheaper property in outer lying areas because of the lower price tag and are less likely to obtain professional advice. These assets, and therefore their owners, are less able to withstand a downturn in the economy, so are more vulnerable when it happens.

Secondly, high-yield properties tend to be in areas with less diverse and secure economic prospects so provide a pool of tenants that are also vulnerable in tough times. The result is that positive cash flow properties generally suffer far greater capital losses in the downward part of the property cycle and experience a greater turnover of tenants.

…If you see a property marketed with a high yield – at or over 5% – don’t buy it. It’s a dog when the market is doing well, and it’s a dog when the market is soft!

Ms Wakelin is, in my opinion, correct. Buying an expensive property does tend to serve you better because it’s in an area of high demand. However, the argument here also exposes the total perversion of the Australian property market.

If 5% is considered high yield, and it is, then it is quite obvious that property has zero appeal as a yield play. After costs, that yield is cut again, probably by half. With 6.5% available in the bank, why would you bother?

Ms Wakelin has exposed the fact that the ONLY reason to buy property is capital gain. And, as we know, such markets tend to be unstable. They are either rising as they excite speculation, or they are falling as losses mount and folks run for the exits.

What a perverse way to frame the families’ largest asset. Perhaps Mr Edwards is not so wrong.

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Comments

  1. “There are bright stars on the horizon but they could be dimmed very easily as their glow is weak and flickering, like any new flame is in its infancy.”

    Real estate must be going bad. It looks like he’s penning a script for the Harry Potter prequel on the side and got the two mixed up.

  2. Aah, I get it, so when the property market is going up, there are sound fundamentals supporting this. When it is falling it is a perfect storm, 1 in a 100 year event, a very unlikely coincidence. 🙂 Easy to be an expert in a growing market.

    • >Easy to be an expert in a growing market.

      Yes it is, as long as the banking system is spewing credit and the government supported housing as a “superior investment” then you could say just about anything and be correct…

      That is now changing, and we are seeing the desperate calls from a bunch of “experts” who have had it sooooo easy for over a decade.

      The ironic thing is that in this market you really DO need to be an expert to make the right call. Which is why, IMHO everyone else should be in cash ( or shiny stuff )

  3. hahaha! DE, you are a beauty!

    “So, in two months, we’ve gone from “nothing to see here” to being on the verge of a one in a hundred year event, and the tenure of Mr Edwards expertise seems to be growing along with his bearishness.”

    How typical….two months ago he had only 21 years experience…now he has 26 years experience…sums up the rubbery way RE spruikers use figures

    • haha nice catch Stavros, didn’t notice the difference in years. Perhaps he feels like he’s aged 4 years as the market has disintegrated around him the past 2 months!

      • haha good rational BB..I was going to say maybe real estate agents are using Dog years now for their predictions etc…

        To be fair, I didnt notice the experience difference. It was DE’s clever turn of phrase that alerted me

        • First thing I noticed. I am always wary when the first thing an “expert” tells you is how long they have been in the industry. It sounds alarm bells. TRUST ME!, they shout. RUN!, I hear.

    • Well given that he’s gained four years experience in the past two months, then his 1 in 100 year event will occur approximatly every 4.16 years.

    • > How typical….two months ago he had only 21 years experience…now he has 26 years experience…sums up the rubbery way RE spruikers use figures

      It’s the time dilation effect which proves that the Relativity Theory also holds in the realm of RE 🙂

  4. Had the 7 news (Melbourne) was on last night in the background and caught a little bit about some story of the booming number of apartments being built in Melbourne. It sounded like spruiking. They had a couple of people telling viewers how great apartment living is and why would you ever want to own a house etc.

  5. The backflip from Residex CEO John Edwards was incredible. July’s commentary is even a far cry from a month earlier in June.

    23rd June “The market looks to be bottoming out, meaning things are about to begin to improve”

    And now suggesting we are potentially on the cusp of a 1 in a 100 year event/crash…

    The suggestion that 5% is a high yield… what an absolute joke.

    • >The suggestion that 5% is a high yield… what an absolute joke.

      Yeah I sort of coughed up my coffee when I read that.

      Its not her fault though – the Aussie market has had structurally low rental yields since the early 80’s, when we went on a debt binge (rental yields are correlated with real-mortgage rates). We are in a speculating market – not a real asset market, so her advice is based on the only requirement is capital gains.

      When property stabilises as a proper asset class, not for speculation, we’ll see yields again averaging around 5-8% pa which is where they should be, and capital gains will be 0-1% at best (but will not be the raison de etre for investing).

  6. > “If 5% is considered high yield, and it is, then it is quite obvious that property has zero appeal as a yield play. After costs, that yield is cut again, probably by half. With 6.5% available in the bank, why would you bother?”

    You’d have to pay tax on that 6.5% in the bank, with absolutely no chance of capital gain, and a strong possibility that interest rates are going to fall soon.

    > “Ms Wakelin has exposed the fact that the ONLY reason to buy property is capital gain. And, as we know, such markets tend to be unstable. They are either rising as they excite speculation, or they are falling as losses mount and folks run for the exits.”

    At least property does provide some yield, unlike gold, for example. Since the ONLY reason to buy Gold is capital gain, does this mean the gold market tends to be unstable?

    • >At least property does provide some yield, unlike gold, for example. Since the ONLY reason to buy Gold is capital gain, does this mean the gold market tends to be unstable?

      Good point Shadow. Gold (traded, not physical) as I’ve pointed out many times here is a speculative asset for capital gain. Physical gold, like your home, is another thing entirely – its a security asset with no yield – its insurance.

      As I’ve said before, residential property is currently a speculative, not an investment asset.

      There is a difference between these 3 beasts (security, investment and speculation) – and investors, spruikers, amateurs and academics are easily confused into thinking they are all the same, when they are not.

      • What is it that gold is insurance against? It certainly isn’t insurance against inflation. Prices of goods and services measured by the CPI actually more than doubled through the high inflation of the 1980s. The price of gold halved over that time, meaning that after the 1980s inflation your gold bought only a quarter of the goods and services that it bought at the beginning of the 1980s.

    • What percentage of the population go up to the eyeballs in debt to buy bullion?

      If I didn’t frequent these sorts of blogs, I probaly wouldn’t know a single person who buys gold at all.

      But a helluva lot of people I know are up to the eyeballs in debt because they bought investment property, which as everyone apparently knows, can only ever go up.

      • > “a helluva lot of people I know are up to the eyeballs in debt because they bought investment property, which as everyone apparently knows, can only ever go up”

        Although Australian house prices have been on a generally rising trend in real terms for the past 60+ years, this doesn’t mean they *always* go up.

        Sydney investors saw falls of 20% in real terms between 2003 and 2008 before growth reverted to the 60+ year uptrend.

        Do you believe the rising trend seen over the past 60+ years was just an anomaly or a blip?

        Also, please define “up to your eyeballs” in debt? How much debt is that exactly?

        • Shadow,

          have a look at today’s Goldman cable,

          ‘over the past 2 decades household debt has risen from 70% of income to 175% of income’

    • Only a fool would buy gold or put a deposit with borrowed money aka leverage.
      .
      But if you use leverage to buy a property with poor yield, just for the sake of capital gain, then you are a “smart” property investor with oodles of “wealth” (as you like to put it).

      • Not too sure you understand that cash has the potential for capital gains and losses – through deflation and inflation. Getting a real rate of return on cash is very tough in a pro-inflation environment – particularly so in a world of ZIRP central bankers.

        Locking in a “high” interest rate for your cash before a deflationary period sets in (e.g imagine getting only 3% on your cash during the Japanese deflation when prices fell 3% plus a year…) can be the equivalent of “capital gains”.

    • Absolutely the price of gold is unstable – a quick look at its price chart will show you that (I know it was a rhetorical question).

      But as Prince points out, it should be looked at as insurance, not an investment. No matter how confident I was in the future price of gold, I’d never let it make up more than 10% of my asset portfolio.

      (I think the price is already high in USD but may well increase significantly in AUD if/when our dollar drops.)

    • yes, cash has no potential for capital gains, but more importantly, investors will not experience capital losses on this asset class. given that property is on the slide, i would expect this is a major benefit.

      on the taxation side, income is taxable at a maximum of 15% in super, or even nil for those in pension phase.

  7. > “Ms Wakelin has exposed the fact that the ONLY reason to buy property is capital gain”

    Further to my point above… actually, the main reason people buy property is to provide shelter from the elements. Buying property provides security of tenure, freedom do do what you want with your own home, and means you don’t have to pay ever increasing rent for the rest of your life.

    Even initially negatively geared investment properties become positively geared over time as the loan is pain down and the rental income grows in line with wages. At this point, the IP not only provides capital gain but also a steady retirement income. Bad luck if you’re still renting in retirement.

    Claiming that capital gain is the ONLY reason to buy property is just plain wrong.

    • Not bad luck if you invested the hundreds of thousands in bank interest you didn’t have to pay along the way in cash or shares.

      Capital gain is the ONLY reason to buy property as an investment.

      • > “Capital gain is the ONLY reason to buy property as an investment.”

        No… not for positively geared investment property, and not for negatively geared property either, if that property will become positively geared in the future, as all investment property does if held for long enough.

        • You are right, that in the very long run (>20years) over the past century this has been true. Of course, even with long run amibitions there are far better times to buy than others.

          But what of the situation in Japan or the US? Where prices and rents have deflated for 20 and 4 years respectively? For American investors still holding on to their properties it will take a very long time to just break even in nominal terms – or perhaps never.

          But if there was no capital gain, no sane person would buy property now with a <5% gross yield (say 2.5% net). And yes, you have to pay tax on that income as well unless you have actually incurred costs to make the income from the property negative.

          You would just rent, and save/spend the difference knowing that you can buy in at any time if you like at the same price (in real terms).

          Of course I don't think property is all bad as an investment. I still have one investment property and believe that over the next 25 years I will probably be better off keeping it than selling it now due to capital gains taxes, possible value add (improve the property for better rents)amongst many other reason (although I sold three others in 2007 and 2009).

          • > “what of the situation in Japan or the US? Where prices and rents have deflated for 20 and 4 years respectively”

            Different markets. If Australia ever looks like heading in that direction then of course house prices could go into terminal decline too. The Japan land boom was much larger than anything we ever experienced in Australia, and Japan property prices are unlikely to ever recover from the slump while the population is shrinking. Every year there are fewer people competing for the same pool of houses. Similarly, the USA had a massive construction boom leading to oversupply, along with lending on no deposit to people with no jobs, no income, and no assets. We don’t do that in Australia.

            > “if there was no capital gain, no sane person would buy property now with a <5% gross yield (say 2.5% net)

            You could say the same about gold, silver, gemstones, art, collectibles. There are lots of low yield asset classes that plenty of sane people invest in.

            Australian house prices have been on a rising trend in real terms for the past 60+ years. Is it sane or insane to believe this capital gain will continue for another 10, 20, 30, 40 years? If it does continue for another 20 years, is it *then* insane to think it might continue for another 20?

            Perhaps the insane people are those who think the last 60+ years was an anomaly?

          • Any references to support the idea that our land boom isn’t comparable to Japan’s? I’d suggest that it’s pretty damn close. Japan reached 3.8xGDP and we were at 3.2 during 2010. Smaller yes, but comparable, also yes.

            From UE’s old site (http://www.unconventionaleconomist.com/2010/08/battle-of-bubbles.html):

            “First, there was the mother of all housing bubbles – Japan in the 1980s – where total residential housing values reached a stratospheric 3.8 times GDP. It burst shortly after the Japanese stock market bubble and both markets have since fallen by around 80%. The Japanese economy has been in the doldrums ever since.

            Second, came the Hong Kong housing bubble, where total residential housing value peaked at 3.1 times GDP. It burst shortly before the Asian financial crisis began in 1997 and the housing and stock markets lost over 50% of their value before recovering. However, due to the rapid ascent of China, the economic fallout in Hong Kong has been relatively benign.

            Third, came the United States housing bubble which, compared to its Asian peers, was relatively small peaking at only 1.8 times GDP. Their housing market is still deflating having fallen more than 30%.”

            and

            “At 3.2 times GDP, Australia’s housing bubble has surpassed both the United States and Hong Kong housing bubbles, but remains below both the Japanese and Chinese bubbles. Nevertheless, it is clear that Australia’s housing market has entered dangerous territory and, based on HSBC’s analysis, a fall in home values of more than 30% could be expected should our housing bubble deflate.”

    • Thankyou!!! People do not estimate the power of the rent returned on their properties.

      Example:
      Property price in 2011- $500,000
      Rent received in 2011- $500

      If a 20 year old bought a property on the usual 10% deposit they would not see a return for atleast 8-10 years. But let’s fast forward another 10 years to when the said 20 year old is 40 and he has a property that is paid off and earning him almost $25,000pa gross in real terms.

      Now if at the age of 40 you want to be able to live off the rent and the combined income you are earning from your job you would be quite well off. You would be able to take days off work and have extended holidays with your family from the cash you receive from that now fully paid off property.

      It all depends on people’s individual goals & lifestyle choices. If the person wants to slug it out in the first 10 years of their adult life having to sink all your extra cash into a property instead of going out and enjoying life then that’s their choice. If people want to live their life, pay check to pay check that’s their choice.

      I believe high yielding properties are much safer and give better retunrs than speculating and chasing capital gains with the rest of the get rich quick bogans.

      my2c

      • > “It all depends on people’s individual goals & lifestyle choices. If the person wants to slug it out in the first 10 years of their adult life having to sink all your extra cash into a property instead of going out and enjoying life then that’s their choice. If people want to live their life, pay check to pay check that’s their choice.”

        Exactly. Negatively geared property, or buying your own home rather than renting, is a deferred gratification thing. Sure, you take a bit of a hit to your cash flow in the short term, but 10-20 years down the line it pays off in spades. I’d rather kick back and relax in my fifties, rather than have all the latest gadgets, flashy cars and foreign holidays now.

        • Well that all sounds like typical wise uncle patronage, but is a very simplistic view of perceiving how people want to and choose to live their lives. What it suggests is that the the future is more or less likely a mirror image of the past. It also suggests that Australian society will remain static, like some kind of 1950s nirvana.

          • what also is not taken into account is the increase in life expectancy. I cant find the paper now but people born today in 2011 will have the average life expectancy of 100 in the future. The retirement age will be well into the 70’s so you have to think. when you are 20, do u want to work for 50 years or work hard for the initial 30 years and retire at 50 rather than 70.

            If we continue to multiply at the same rates and live longer than our ancestors we will certainly have a shortage of property/land.

        • Personally I’d rather invest in historically low-priced assets than those at (close to) record highs. I’m not sure why the only alternative to buying a house is to buy an iPad…

        • Isn’t there more than two options available here ie the choice is not just:
          1. buy a house and put all your cash into it; or
          2. don’t buy a house and then spend all your money on cars and TVs.

          An alternative would be to rent and put the extra money available into non-housing investments…

          Buying a house in your 20s isn’t the only way of securing your financial future.

          • “Buying a house in your 20s isn’t the only way of securing your financial future.”
            .
            Yeah, Property investment for the sake of capital gains is basically robbing your kid’s financial future to secure your own financial future.

          • I agree Karlos. Although I’m fond of what Shadow has to say, mostly because it reminds me of my own parents advice (You’re not my dad, are you Shadow??), it’s not really relevant advice for young people for whom the pros and cons of home ownership are irrelevant as it is simply too expensive to enter the market at current prices. So I continue to rent and save and listen to the good people at MacroBusiness debate yields, RBA, supply constrictions and other fascinating topics 🙂

      • This sort of strategy is great if you happen to retire at the top of the market (hello boomers everywhere), but I’m not willing to bet my life savings (literally) on that happening.

        Even if one is inclined to engage in delayed gratification for the purposes of a cosy retirement, the property market seems like a worse bet than a term deposit.

        It’s quite interesting to re-visit some of those mortgage brokers’ ‘rent vs buy’ calculators (which were all designed to show you how much equity you’ll accrue in a property market steaming along at 8% per year). Now that the property market is shuffling along at CPI or worse, the results on those things are truly illuminating. My favourite was http://www.yourmortgage.com.au/calculators/rent_vs_buy/ which tells me that “by buying your home instead of renting, we estimate that your wealth should be $345,893 less greater over the next 20 years”.

        Looking forward to living on all that ‘less greater’ wealth when I retire!

        • I don’t care for those calculators. The play the clever trick of assuming renters will only invest the difference between rent and potential mortage repayment. Plus, there’s no mention of eventual or ongoing tax costs for either scenario. I’d love to find a comprehensive Australian rent vs buy calculator.

          • You need to make one.

            I don’t trust most of the commercial ones, most are from mortgage brokers.

            I made my own to determine when to buy and I can control all my variables – expected appreciation, wage growth, rent growth, maintenance costs, moving costs (for renting), interest rate, any additional payments to the mortgage. It shows that if it is purely an investment, how fine the line is between renting and owning when times are normal, but it also shows how quickly you can end up in serious trouble if you have a low deposit or expectations of appreciation are not realised.

            My current calcs when I open it are for moderate appreciation in the long run, stable interest rates, average wage/rent growth and it’s clearly signalling a bad time to buy, probably in the vicinity $60K worse off (between equity and savings) and that’s if prices don’t tank…

          • I agree with Ron and MissP that the commercial calculators can’t be trusted – they are geared entirely to generate the outcome “buying beats renting” (for example, who thinks council rates and maintenance costs will be the same in 20 years’ time as they are today?)

            But even with that in-built skew, I still can’t get a result that favours buying unless I assume that the market will grow 6%-plus every year for the next 20.

            A tax-inclusive calculator would be very useful (although I can’t see negative gearing being sufficient to generate a ‘buy’ result with the current market outlook)

      • So If a 20 year old buys a 500k house and rents it out 5% gross yield, where does that 20year old live for the next 20 years. He is either renting or living at home.
        Unless he inherits his parents house he will have to buy a second house to live in.
        meanwhile he is loosing 10k a year assuming interest rates don’t rise!

      • Your planning is still based on the assumption that rent will always go up and doesn’t factor in any additional costs.

        Property rates, maintenance, conveyencing, commissions (when you sell), interest, etc. are all costs you have to pay. Do you assume that these will always go down too?

      • Most of the wealthy people I know work considerably harder and longer hours than others.

        My favourite line from the film Office Space:

        Peter: What would you do if you had a million dollars? I would relax… I would sit on my ass all day… I would do nothing.

        Lawrence: Well, you don’t need a million dollars to do nothing, man. Take a look at my cousin: he’s broke, don’t do shit.

      • Georgie, paying off a loan which is 3-4 times median household income in 20 years is fair enough. House prices at 3-4 times income is distant past in Australia. Paying off a loan 7-8 times household income in 20 years is close to impossible. Why do you think banks came up with 25, 30 year loans. Total cost of a 30 year $500,000 loan is $1.1Mil. Good luck paying this off in a lifetime.

    • “Even initially negatively geared investment properties become positively geared over time as the loan is pain down and the rental income grows in line with wages. At this point, the IP not only provides capital gain but also a steady retirement income. Bad luck if you’re still renting in retirement.”

      Really?

      I’d suggest that a large portion of egatively geared property investors (speculators) pay interest only, give or take some, using the rents for the property. They don’t fork out any of their own cash for mortgage repayments, that defeats the purpose.

      So the property won’t pay itself off over time (maybe 100 years!), but it doesn’t need to providing that equity/capital value grows.

      There will be plenty of cases where this isn’t true, and there are a portion of landlords that even positively gear their property. But the two main features of current property investment are a) interest only loans and b) negative gearing.

        • Exactly.

          I’m going to stop replying to Shadow now… this feels like the same type of pointless discussion I used to have back in 2007.

          Another property Bull living in some alternate universe where risks are low and we all retire at 40 from capital gains on property.

        • i am genuinely surprised that it is that low for investors! nevertheless, the important thing here is that IO loans only exist short term. they have to be rolled over in full. the next gen. loan will acquire any market devaluation via LVR and may not be granted at all, leading to an immediate capital loss on the back of years of negative gearing.

          • Even Alan Greenspan of all people didn’t like interest-only mortgages. But it’s just a normal part of life here in It’s Different Land.

            http://www.washingtonpost.com/wp-dyn/content/article/2005/06/09/AR2005060900661.html

            But Greenspan did note some troubling aspects of the booming housing market. He highlighted the recent surge in interest-only loans, which allow borrowers to lower their monthly bills by paying only interest for the first years, and other forms of adjustable-rate mortgages.

            “The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other relatively exotic forms of adjustable-rate mortgages, are developments of particular concern,” he said.

            Nearly a fourth of the mortgage loans made this year nationally have been interest-only, according to LoanPerformance, which tracks loan originations. In the Washington area, more than a third of home buyers are using interest-only mortgages, up from about 2 percent just five years ago.

  8. The key point to consider is do all these rants from vested interests like Gotti, Mark Bouris and now John Edwards/Fairfax, will they actually force the RBA to cut rates?
    .
    What about the RBA mandate? As the bullhawks like to constantly remind us, inflation is at the upper band of 2-3% mandate.

    • The RBA mandate is not to keep inflation at 2-3%. The RBA mandate is here…

      http://www.rba.gov.au/about-rba/our-role.html

      1. the stability of the currency of Australia;
      2. the maintenance of full employment in Australia;
      3. the economic prosperity and welfare of the people of Australia.’

      Inflation targeting is a *mechanism* they sometimes use to meet those objectives. Inflation targeting is not the objective itself. As we saw in 2008, the RBA started slashing rates with inflation at 5%.

      The RBA raised rates over and over again, supposedly to cool inflation, right up to 2008. But despite all those rate hikes, inflation kept on rising to 5% due mainly to external forces.

      The RBA rate hikes had negligible effect on inflation, apart from strengthening the AUD which would have put mild downwards pressure on some forms of imported inflation, but not much.

      Inflation was at 5% when the RBA started slashing rates in 2008. Inflation then fell due to a reversal of the same external pressures that caused it to rise.

      The RBA are virtually powerless to control imported inflation using interest rates.

      • Allowing inflation to get out of control just to cushion the impact on highly leveraged property speculators and naieve Owner Occupiers who bought at the peak of the bubble WILL NOT HAPPEN! And nor should it.

        Allowing inflation in the cost of food, energy etc… would be the worst possible thingt he RBA could do to maintain the economic prosperity and welfare of the Australian population.

        So as much as you Bulls think that rates can get cut when this crash fully kicks in…you are sorekly mistake as we now have family budgets already stretched by inflation and the cost of borrowing likely to sore with Greece on the brink of admitting its broke/insolvent.

        Shadow I wonder, is there any news that could come out that would shake your belief that we are not headed for a serious correction.

        You could not get a worst run of news for property bulls..what is there to back up your claims that housing is gonna be ok.

        • > “Allowing inflation to get out of control just to cushion the impact on highly leveraged property speculators and naieve Owner Occupiers who bought at the peak of the bubble WILL NOT HAPPEN! And nor should it.”

          Rates will be cut primarily because of weakness in the non-housing sector. Inflation won’t be a problem due to that weakness. The property market (in most places) is stronger than the wider economy. Therefore as interest rates rise, they negatively impact the non-housing sector to a greater degree than the housing sector. Similarly when rates fall, housing gets a greater boost, and an earlier boost, than the non-housing sector. So the level that rates need to drop to in order to just avoid a recession in the wider economy, is a level that is stimulatory for the majority of housing sector.

          Obviously there will always be weaker segments within the housing market during any downturn – parts that are more heavily impacted by the general economic downturn. Last time it was the top end of the market that was hit hardest, because even though interest rates fell and stimulated the lower and middle end (along with FHOG boost), the upper end homeowners were more negatively affected by the stock market crash (margin calls) and banks tightening credit conditions for $1M+ homes, and obviously the FHOG boost didn’t help the top end much.

          It will be the same this time. If the non-housing economy requires stimulus, then that stimulus will have the side-effect of stimulating housing to an even greater degree. House prices will generally start to rise overall when that happens, although there will be weak sectors within the housing market as always – for example, I expect Melbourne to be weaker this time due to its recent strong price boom and resulting supply response – supply that is going to start hitting the market at just the wrong time.

          • “Therefore as interest rates rise, they negatively impact the non-housing sector to a greater degree than the housing sector. Similarly when rates fall, housing gets a greater boost, and an earlier boost, than the non-housing sector.”

            Please elaborate the logic above. I would have thought that as the largest private debt is in housing, the interest rates impact housing sector first and foremost.

            Also, falling interest rates would not translate into direct purchasing power as that would mean falling AUD and a significant rise in petrol and imported goods.

            Add to that the increases in the cost of lending which would mean banks not passing on the full rate cuts and you have a different outlook on the proposed recovery of housing as investment.

          • Firstly welcome back.. It has been a while, glad you have returned with your valuable comments.

            Your statement

            >It will be the same this time. If the non-housing economy requires stimulus, then that stimulus will have the side-effect of stimulating housing to an even greater degree.

            Although I agree in principal there are two issues with this statement as I see it. Firstly the RBA has been pretty clear that its intentions this time are too push against any new exuberance in the housing market if it sees it, so although I too think they will be forced to cut rates I think it will not be in the dramatic way we saw last time because it has now handed itself a new mandate.

            Secondly, and probably of greater issue was the fact that in 2008 were saw another run-up in credit issuance on the back of foreign lending from banks. It would seem at this stage that there is unlikely to be a new appetite from overseas money into australian housing and this is likely to limit the capacity of the banking system to support another boom.

            That is not to say that it can’t happen, if anything the current state of Europe shows that when push comes to shove policy makers are willing to bend all sorts of rules on prudent banking, and if we do see some sort of “crash” ( whatever that actually means ) then it is likely that rules will be bent to kick start the system again.

          • Thanks DE. I agree the cuts won’t be as fast or as large this time. The RBA went too far last time and created a new property boom, which would not have been their intention.

            I think they will aim for a recovery in the non-housing sector, with national house prices treading water – which will mean prices falling moderately in Melbourne and rising moderately in Sydney.

            I think Melbourne will experience something similar to what Sydney experienced post 2003 – i.e. a few years of single digit falls followed by a few years of stagnation.

            The challenge for the RBA is whether they can maintain that balance. Can they find an interest rate level where the non-housing sector is doing OK, but where house prices don’t take off again…

          • “I think they will aim for a recovery in the non-housing sector, with national house prices treading water – which will mean prices falling moderately in Melbourne and rising moderately in Sydney.”
            .
            Ahh.. The “Sydney will not fall” meme again.

          • A non-housing sector economy excluding mining is still the housing sector because everything else in that sector depends on House hold spending. So this is just play of words.
            Shadow today the household sector has become more intolerant to the current interest rate setting. E.g 7% has become contractionary when it wasnt 2007. As more and more debt keeps piling up 7% will go down eventually to point where RBA can not lower below that, otherwise it would decimate the currency. So the idea that every interest rate cut is stimulatory is wrong.

            In my view
            For House price rise = more debt
            more debt = lower interest rates for service

            lower interest rate cannot be less than the lowest interest rate possible. Beyond this house price rise is impossible!

          • Shadow
            The RBA does not have the tools to balance the economy but the government has. The government through its taxation and spending power can target specific financial flows and specific parts of the economy, this is not a blunt tool. If it chooses it can restrain house price growth but not household spending.

            So Bulls hopefully wish the government does not come to its senses and does this.

      • I tend to agree with you here. Domestic monetary policy in our very integrated global economy is very weak.

        I think we will catch up to the rest of the world fairly soon – negative real interest rates. We are not isolated from global problems.

        • I tend to diagree that this ‘trick’ can be engineered twice by the RBA. The rate cuts in 2008 was not the only thing that bounced the property market back to life…there was also:
          1) Direct fiscal stimulus that CANNOT be repeated (the Government is committed to spending responsibly and surplus by 2013.
          2) A massive propertyganda campaign launched by the Politico-Housing complex that had the arguments of record immigration and rising rents on its side.
          3) Naive house hunteres who were tricked to enter market in low interest rate environemnt, only to see their standard of life plummet when the RBA raised rates again.

          So in summary, interest rates cannot be used as a tool to simply turn the property market ON and OFF at a whim. They need people to take on debt…I dont think that will happen like it did in 2008/09…

          • Absolutely agree Stavros.

            1. Even if they break their promise to move into surplus “due to unforeseeable adverse economic conditions”, they couldn’t take the thrashing at the polls if they miss the target by much.
            3. FHBs were induced by around 90,000 households, with the drop off we’ve seen we’re still about a year away from normal FHB activity and certainly years off enough potential FHBs to get the ponzi scheme rolling again. It’s not that people won’t believe the ‘propertyganda’ but they next wave are still in high school.

          • Some believe that Carbon Tax is a tool directly linked to the Govt’s attempts to ‘return to surplus’ (RTS).

            Labor is so scared of the label of deficit spenders that seemed to cripple them in the Howard years that they are desperate to RTS.

            But an RTS at any cost? The detriment of the RTS plan far outweighs the issues relating to the deficit.

      • Actually Mav is correct. Glenn Stevens has spoken about the 2-3% band before.

        Surely you don’t believe that the RBA can actually achieve those three things listed in their ‘role’. Some of them are conflicting, and all the RBA has to control them with is a big blunt instrument named ‘interest rates’. And they’re not even the same interest rates the banks use.

        They also use plenty of posturing and threats, but they all relate to their big interest rate stick.

        There’s the money printing thing too, but that’s another issue.

        “The RBA rate hikes had negligible effect on inflation”.

        How do you know? Perhaps inflation was accelerating and they merely subdued it?

        “The RBA are virtually powerless to control imported inflation using interest rates.”

        This depends on how you define inflation. The RBA can’t actually control anything, except the RBA interest rate. The RBA may be able to affect inflation, imported or local, by raising rates (though not directly), which affect different aspects of the economy (eg CPI, debt levels, lending).

        I’d say that generally I disagree with everything you write on here – which I think would make you a pretty good economist.

      • “Inflation targeting is a *mechanism* they sometimes use to meet those objectives. Inflation targeting is not the objective itself. ”
        .
        The RBA disagrees violently with your assertion.
        .
        Please re-educate yourself with this: http://www.rba.gov.au/education/monetary-policy.html#what-is-mp
        .
        More specifically, section 2.2:
        “These objectives are made more explicit with the adoption of the Bank’s inflation target.”
        .
        i.e. Inflation target is an explicit objective to achieve the three catch-all “motherhood” objectives stated in section 2.1.

        • Your link actually backs up my point!

          Inflation targeting is a mechanism (call it a secondary objective if you like, but I would argue about that definition) that the RBA (sometimes) uses to achieve their primary objectives.

          They haven’t always used inflation targeting to achieve those primary objectives, and won’t necessarily always use that mechanism in the future.

          The RBA slashed rates in 2008 with inflation at 5%. They were more interested in ensuring they met their most important two objectives…

          – maintenance of full employment in Australia
          – the economic prosperity and welfare of the people of Australia

          Those two objectives will always come first, for the RBA or any other central bank. Look at the UK or USA – inflation is rampant, but interest rates are practically at zero.

          People (voters) come first, not inflation targeting. Any central banker who forgets that will soon find himself out of a job.

          • Shadow are you kidding…People come before Inflation!! WTF??

            Inflation is the WORST thing for the people.. lets see if Glenn Stevens would honestly say…”Sorry your heating has doubled and bread and milk now sets you back $10…but I had to keep rates low just to keep house prices high so people felt irch and so speculators didnt get crushed!

            Yeah right! If there is a choice between stemming inflation and crushing housing, they will choose the latter.

            Stevens warned people to be careful with their debt levels…he has a legacy and does not want to be the first RBA government in decades to create a spike in inflation that lessens the average Aussies standard of living.

          • No. It does not.
            .
            Again, please refer to the heading of table 2. What does it say?
            .
            Formal Inflation Objectives
            .
            All this stuff about the “RBA (sometimes) uses” is purely your invention.
            .
            The inflation target is a distilled, measurable objective as against the three motherhood, subjective “objectives”. (I know, an oxymoron).

          • >> “The RBA slashed rates in 2008 with inflation at 5%.”
            .
            I doubt that is true. But even then, you should note that the inflation objective was adopted in September 2010.
            .
            >> Look at the UK or USA – inflation is rampant, but interest rates are practically at zero.
            .
            How does that concern with inflation objective of the RBA? Nice try at mis-direction, but I am not interested in your fishing expedition.
            .
            >>People (voters) come first, not inflation targeting. Any central banker who forgets that will soon find himself out of a job.
            .
            Funny, I don’t remember voting for Glenn Stevens !!

          • Perhaps you’re looking at cooked CPI numbers or a monetary metric, but in terms of meaningful rises in prices to consumers, Australia is experiencing dramatically higher cost of living increases than the USA. I can’t speak for the UK.

            The RBA and government chose crippling upward living costs and low unemployment to claim to be the envy of the world. Personally, I’d be much better off in the USA right now and I have to consider making the move back there right now.

            Melbourne makes Manhattan look cheap. This is nothing to be envious of.

          • re cutting of interest rates when inflation was at 5%.

            I’m no expert, but wouldn’t the RBA adjustments to interest rates be largely forward looking ie not just concerned as to current inflation rates but expected future inflation.

            So the cuts in 2008 could have been based on expectations that inflation would fall because of the GFC and therefore the cuts wouldn’t be contrary to any inflation objective of the RBA.

          • >>they adopted inflation targeting in 1993…
            .
            Yepp.. And I didn’t disagree with that.
            .
            What I said was that RBA adopted inflation target as an explicit objective in september 2010 and they explicitly state that on their website.
            .
            Perhaps they saw the folly in letting the property investment mugs out of the cage in 2008 and adopted this explicit objective.
            .
            >> You voted for a government. The government sets the rules.
            .
            The next election is 2 years away. And the current one is a minority government that relies on Greens. Anyway, what makes you think this or any future government will somehow force the RBA to lower rates, therby breaking the independence of the RBA?
            .
            http://www.rba.gov.au/education/monetary-policy.html#what-is-mp
            .
            Section 4 for ya:
            “The Reserve Bank Board makes decisions about interest rates independently of the political process – that is, it does not accept instruction from the Government of the day on interest rates. This principle of central bank independence in the operation of monetary policy, in pursuit of accepted goals, is the international norm. It prevents manipulation of interest rates for political ends, and keeps monetary policy focused on its long-term goals.

    • Unsurprising. GoGecko worked on a low cost, high volume strategy. Great in a hot RE market but with current sales volumes I was wondering if they had the cashflow to stay afloat.

    • In a few years all of the big RE firms will be gone…

      http://www.zillow.com/

      I have no affiliation with the ^ site, but apparently it is taking over in USA and coming to Oz soon.

      The idea we need a middle man to help buy and sell homes in the age of the internet is hillarious.

      The fact agents were still making such large commissions with little effort is another symptom of the bubble. Every agent I know is working the ass off at the moment and still cant make deals.

      • My Wife pointed this out when we were looking for a new car on carsales.com.au. “If it’s so cheap and easy to list a car for sale online, why do people still need RE agents? Wouldn’t it be cheaper and easier to list online?”, she asked.

        She’s a clever one, my better half.

        I responded, “To do some negotiating? To talk one through the process of selling, legal hoops and all? To give people who are hesitant about negiating directly with buyers the separation?” But with all of these it’s pretty easy to find alternatives. Do your homework thoroughly and if need be, use a trusted friend or family member as a middle person in the negotiating process.

        For what they charge the actual value added to the sale process by RE agents is quite low. I can see clever RE agents reinventing themselves as selling consultants, to fill the gaps in the negotiating and selling advice part. But the idea that an RE agent is needed to do the advertising in the Internet age? Silly.

        • Anyone can list their house for sale on the internet. But how many people are prepared to do the Karma -ve stuff needed to sell it “at market price”? There are a whole lot of people who’s careers, training and ethics would put them at a huge disadvantage compared to a prefessional agent. Would they have to put on their signs, “Genuine price, all faults revealed, please don’t attempt to chip us down”?

          Fix the root problem instead.

          1. Progressively Cap -ve gearing to exclude existing housing stock. (10% x 10 years)
          2. Remove the “real estate is not financial advice” exemption.
          3. Regulate the market so that basic information of when the property was listed for sale, all formal bids and all previous sale histories are available on the web, at the point of sale, free of charge. Include the section 32, floor plan and a structural report as mandatory downloads.

          • I just dont see real estate agnets as possessing any special skill. That is whole point…you go to a doctor, mechanic, lawyer because you cant do what they do..

            I could sell my own house…I know it better than anyone

          • I didn’t imply they had skill, just that it takes a certain mindset to do that job well.

          • I’d like to meet one who does do it well.

            In general they overstate what you’ll get for it to get you on their books, then talk you down when a buyer comes along to get their commission from as little work as possible.

            RE agents get a higher price on their own property than equivalent properties for clients because even if they know it would go for an extra 10K if held for a little longer it’s not in their interest to spend the time for the marginal increase in their commission for the extra work. Their money is in shifting properties, not in getting you the best price.

          • I’d like to meet one who does do it well.

            In general they overstate what you’ll get for it to get you on their books, then talk you down when a buyer comes along to get their commission from as little work as possible.

            RE agents get a higher price on their own property than equivalent properties for clients because even if they know it would go for an extra 10K if held for a little longer it’s not in their interest to spend the time for the marginal increase in their commission for the extra work. Their money is in shifting properties, not in getting you the best price. (info from “Super Crunchers”)

  9. Well given that he’s gained four years experience in the past two months, then his 1 in 100 year event will occur approximately every 4.16 years.

  10. See the Residex media release for what it is: getting the excuses in early for when the property market(s) go pear shaped. i.e. The Oz Housing market(s) is robust and set to return to exponential growth any minute, unless Juliar breaks it (or the pesky RBA!).

    Setting up the “hey you broke it, now you fix it” call for fiscal stimulus for the housing market should this Spring not bloom…

  11. “Yes, you may claim that I have passed my used-by date, but this time and experience has brought about a wisdom that is very difficult to learn or teach.”

    How Messianic!

  12. Devilled Advocate

    The one thing missing from the arguments postulated by the property investment camp is an analysis of how the fundamentals support your position.

    Leith and others have clearly and clinically demonstrated how the factors that provided the supercharged capital gains simply cannot continue vis a vis baby boomers, liquidating properties, tightening credit, sentiment and more so than anything else just plain old unaffordability.

    Other than population growth I struggle to see what else would generate returns even remotely close to inflation.

    Shadow – while I dont agree with most of your positions I admire your chutzpah in posting here – that takes courage…

    DA

  13. Devilled Advocate

    The one thing missing from the arguments postulated by the property investment camp is an analysis of how the fundamentals support your position.

    Leith and others have clearly and clinically demonstrated how the factors that provided the supercharged capital gains simply cannot continue vis a vis baby boomers liquidating properties, tightening credit/LVR’s, sentiment shift and more so than anything else just plain old unaffordability.

    Other than population growth I struggle to see what else would generate returns even remotely close to inflation.

    Shadow – while I dont agree with most of your positions I admire your chutzpah in posting here – that takes courage…

    DA

  14. @ Shadow

    You remind me of my other sparing partner ‘the Captain’

    The RBA would be wise to test out the Ricardian law of rents, just to get some understanding of just how much Ponzi finance sits in the banking system.

    When mortgage refinance is 40% of all loans for years and years, that has the very strong smell of unpayable mortgage interest + household expenses being capitalized into rising loans secured against a rising asset price.

    Lets all see what happens when prices are stable for a few years, because the truth may hurt, but not admitting the truth would be catastrophic!

    Lets let the RBA test how just much bad behaviour is in the financial system before they run out of bullets.

    There is nothing like having some very public executions to change bad behaviour.

  15. Wow, very interesting debate and commentary! My own two cents having (tried) to read all this is that if there’s one thing that’s certain its change (as Buddha once wisely remarked).

    For example, the commentary about the 20 year old with the 500K investment property being positively geared by age 40 is totally redundant because (as other people have observed here) anything could happen in those intervening 20 years and it often does.

    Nobody in Gen Y has ever heard of property values going backwards because it hasn’t happened in their adult lives… so we have a lot of ‘safe’ assumptions regarding an asset class because nobody has ever seen any different. Hell, there hasn’t been a major economic disaster since WWII but that doesn’t mean to say it can’t and won’t happen; I mean, the Great Depression was preceeded by the huge growth in the 1920’s and lots of government debt, not unlike where we are right now?

  16. I love these threads. It’s like a Monty Python sketch.

    “It’s different here.”
    “No, it’s not.”
    “Yes it is.”
    “No it’s not.”
    “Sorry. Is this the right room for an argument?”

  17. I see some of you disagree with what I have recently written and what I have said in the past and I’d like to take this opportunity to respond and answer what has been said. I will do this in point form.

    1. In two separate articles I said to have “more than 21 years” of experience and “more than 25″ years of experience. Neither is incorrect; let me explain why. I have in fact been assessing and working in the real estate information market for around 27 years. My company, Residex, is 21 years old and I am the founder. Previous to Residex, I worked with the National Australia Bank as a senior manager in the Corporate Banking area, responsible for structuring large financings of many types of assets. In my later years with NAB, I was involved in housing related product ($100’s of millions). In fact, I was responsible for what could have probably been the only CPI to Housing Growth Swap done in Australia and to do that, I had to understand the way the housing market performed.

    2. I did not name RP Data Rismark in any of my writing. However, let me say that seasonality in a very well constructed capital growth index is difficult to find; the way it should be. Frankly, we don’t seasonally adjust figures because we can’t find much seasonality. There are seasonal factors in sales. Seasonality adjustments are usually made because of compositional changes occurring at different times of the year and the index technology is not good enough to pick up the compositional changes.

    3. Did I change my attitude over the last quarter? Yes, I did and I don’t apologies for doing this. Instead, I have reported what has actually happened and what is happening, rather than try to defend my original statements. Why did my attitude change? Let me provide some Australia wide housing data:

    Date Change in Aus HPI

    30/11/2010 0.35%
    31/12/2010 -1.10%
    31/01/2011 -1.12%
    28/02/2011 0.92%
    31/03/2011 -0.35%
    30/04/2011 0.44%
    31/05/2011 -0.38%
    30/06/2011 -0.89%

    As you can see, there were significant adjustments in both December and January, then in February the market appeared to stabilize and in March it reverted to a slightly negative number. At the time of writing the March data newsletter (which was in April) I had access to what was happening and it all looked to be going in the right direction, hence my upbeat comment coming from a prior concern I was feeling. In these circumstances, my reaction to the negative news that came from a particular party was natural. The last thing I wanted to see was something that would, or could, send the market back into adjustment due to negative press that diminished consumer confidence.

    I very much do not want to see our housing markets correct significantly as consumer sentiment is based on the consumers perception of their personal wealth position and environment. I want a carbon tax or energy tax but do not believe it is the right time for it to be introduced, particularly when we are going through a period of reallocation of the workforce to the resource sector. This is occurring at a time when international issues are looking more difficult also. I do want to see a reduction in interest rates of 0.25 per cent sooner rater than later; I don’t want to have the markets excessively stimulated as housing is already too unaffordable. I do want consumer sentiment improved so our markets remain stable. Remember, poor consumer confidence has flow-on effects. Poor retail sales ultimately lead to job losses which translates into increasing unemployment which translates into mortgage defaults etc. I would prefer it if there was no debate about the carbon tax at this time. Uncertainty at this time results in reduced consumer sentiment. I think a 0.25 per cent reduction in the cash rate (provided it is passed on by the big banks) might be sufficient to allow consumer sentiment to recover a little. This may help hold housing values until we all see the benefits from the resource sector growth flowing through all areas of the economy. I am sure we all recognise what will happen if housing values do adjust too strongly.

    Yes, going public on my concerns could have the capacity to further impact (badly) on consumer sentiment. However, sometimes risks need to be taken for the good of long term outcomes. Wouldn’t it be good if we did have a small interest rate decrease and the carbon tax debate ceased to exist at this point in time?!!!

    • Thanks for responding.
      .
      I have a fundamental question – Why are falling house prices are risk (as you like to put it)?
      .
      I didn’t hear anyone complain or call it a risk or 1 in a 100 year event, when house prices went up by 18% in a year.
      .
      Surely, if prices going up by 18% isn’t a risk (of a bubble) to the economy, then, nor is it a risk when house prices come back to earth.

    • Yes, thanks for responding. My only point would be that business cycles happen and recession is one phase of that cycle. We are allowed to have them (indeed, they’re necessary).