Is 2011 the right time to invest in real estate?
NO! Now move on or read on 
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This post began life as a comment to an article by Michael Yardney: “Is 2011 the right time to invest in real estate?“. The comment was too large for their system so I decided to post the whole thing here. Michael sees “five green lights to selectively invest in now, in the early part of 2011″. I beg to differ…
It’s difficult to find a point where I have any agreement at all with the article! On point 3 – demographics – I agree with the premise but hardly the conclusions! Here are my thoughts, point by point.
1. The Australia economy is stable?
Last year, Queensland began experiencing the largest number of bankruptcies for many years. Is this stable? The cracks are showing WA too I hear. It does seem rather odd that the resource states of QLD and WA are both hitting the skids ahead of the pack. I don’t know what it is but there’s no denying it.
2. Increase demand but lack of supply?
Come to Queensland! The Brisbane rental market has the highest vacancy rate for some months. Gold and Sunshine coasts are in even worse shape.
3. Demographics – smaller households will push up property prices and rentals?
Well, I agree that there has been a growing trend towards smaller households, however your conclusion is trite. This will not lead to higher house prices and rents. Not now. In an ordinary market, an increase in demand without a sufficient increase in supply would indeed put upward pressure on prices. However, we do not live in ordinary times. We live in most extraordinary times. We are living at the top of the greatest credit bubble in history. Supply and demand are not driving house prices. House prices are a function of credit growth – almost exclusively. Other factors such as supply/demand are swamped by the gargantuan volumes of credit that people, banks and governments have thrown at this over the last decade (and longer). At appears that, in a credit boom, incomes (salaries/wages) do not keep up with interest repayments as the public take on larger and larger debts. I’m not entirely sure why they don’t keep up, but they certainly don’t. Once you approach a point where people struggle to take on more debt, you get a slowing of credit growth – disinflation. Subsequently, you are in for credit contraction. This is when prices will come under extreme downward pressure despite what the underlying supply/demand may be. Credit contraction is associated with recessions and depressions and increases in unemployment etc. This leads to folks changing their minds about how much debt to take on, which leads to further credit contraction. Also people will change their minds about how many people can comfortably live in a house. People will go into crisis mode. Like in the floods in Brisbane, people will stay with friends and family – some temporarily and others on a more permanent basis. Once the delusion of the “ever increasing house price” is broken, people will not forget for a least a generation or perhaps two. This being the biggest credit expansion in history, I feel that the contraction will not be one forgotten quickly. This will be worse than the great Melbourne land boom of the 1890s.
4. Rents will strengthen in 2010?
I presume you mean in 2011, because they declined in 2010 
. In Brisbane, rents have already been declining for a few months as vacancy rates have increased. This is particularly telling in bayside area of Wynnum/Manly. Places which previously would have rented for $750/week are going for $600. I was stunned that one spectacular place at Manly went for $600. It was over my budget though unfortunately. Other places that remain over-priced have been sitting their for months! On the cheaper end, 2 years ago it was almost impossible to find a house in Wynnum below $400/week but now there are many to choose from – with quite a few near the foreshore. The floods will certainly cause a temporary demand shock to the rental market in Brisbane but many flood victims have been able to get back into their homes despite flood damage on lower levels. Others will stay with family and friends – they still have their mortgages to pay! There are only 900 flood affected homes that are uninhabitable. That figure is across the whole of Brisbane. Some of those houses that have been sitting there for weeks and months might finally be rented to a flooder – until their home is cleaned up and rebuilt. Most will make their homes habitable within 6 months and so there’ll be a supply shock in the middle of the year.
5. Steady interest rates?
It’s difficult to know what will happen here but “stable” will hardly be a word to accurately describe it! The RBA might might not increase or decrease rates for a few months but would that lead to steady variable mortgage rates? Certainly not if our banks and other ADIs cannot fathom their funding issues. Personally, I’d imagine that the RBA will be concerned with credit disinflation and will begin cutting the cash rate by the middle of the year. They will struggle to meet their ‘charter’ but will fail on all three points in time because they have been complicit in growing this credit bubble with it’s false feeling of prosperity and wealth.
Conclusion
We are in a very precarious situation. The damage is already done (i.e. the credit bubble has been blown to the point it can take no more air). Private demand for credit cannot blow this bubble higher at this point. This is why federal and state governments have been stepping in with massive intervention which they tell us will “help” affordability:
- Grants, including the first home “owner” boost
- Stamp duty concessions
- Purchasing mortgages from the banks – another 4 billion recently
- Allowing the banks to issue covered bonds. Something the banks have requesting from the regulator – APRA – for years. APRA has repeatedly refused these requests, explaining that covered bonds put depositors funds in jeopardy in the event of insolvency. Our PM, Julia Gillard, has used her special privilege as PM to override the usual requirement of an investigative report when changes are made to the banking act. Have you heard that there’s a national emergency our banking system that would require such measures? No, I’m sure you’ve only heard that the banks are strong…
The government are taking desperate measures in an attempt to keep interest rates down (e.g. covered bonds). I don’t know exactly where we go from here or how it will pan out. I do know that it will not be good. Not for savers like myself or for debtors like Michael Yardney (assuming he eats his own dog food and borrows to invest in property). However, we do know that ZIRP (Zero Interest Rate Policy, aka 0% cash rate) isn’t much help at this point, it does however seem to delay the inevitable so we can be fairly certain that it will arrive before long. Beware though: when we kick the can down the road, it becomes more and more leaden – the final kick may break our foot! The US and UK are prime examples of how ZIRP does not work, with house prices continuing to decline despite the policy and more declines predicted this year. The US have even tried to copy our “First Home Owner Grant/Boost” but with little success. There is no magic sauce that can fix this.
Now is the worst time in history to take on debt.
