NO! Now move on or read on .
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 – disleveraging. 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 slowing credit growth 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.
For those unfamiliar, the RBA charter is:
- a. the stability of the currency of Australia
- b. the maintenance of full employment in Australia
- c. the economic prosperity and welfare of the people of Australia
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.
I highly recommend MacroBusiness to keep abreast of news related to the Australian property bubble and the economy in general.
SQM research have released an index on rental vacancies Australia wide. They show that vacancies increased throughout the whole of the 2008 calendar year.
Australia’s residential rental crisis appears to be easing with new data suggesting vacancy rates have been rising throughout 2008 for Australia’s Cities.
Australia’s nationwide city rental vacancy rate stood at 3.3% in December 2008, which is up from 2.1% recorded in December 2007. Melbourne has recorded the highest vacancy rate at 3.9% while Hobart recorded the tightest rental market, with a vacancy rate of just 1.1%.
Rental vacancies appear to be the tightest in the nation’s affordable suburbs. However, in the middle to upper end of the market place there is an increasing oversupply situation with a number of inner and top end suburbs recording vacancies above five per cent and in some cases, above 10 percent. This is particularly the case in Sydney where suburbs such as Vaucluse (11.4%) are now oversupplied.
SQM’s vacancy rates are based on monitored online rental listings, adjusted for false listings and properties that have been withdrawn from the market within the monitored period concerned. The available rental properties are then divided into the total number of established properties available for rent as provided by the Australian Bureau of Statistics.
The vacancy rates and full methodology are available for free on http://www.sqmresearch.com.au. The data is also freely available down to a regional and postcode level with a monthly back series to 2005.
According to Louis Christopher, SQM Research founder and Head of property with ratings house Adviser Edge:
“Notwithstanding a seasonal dip from November, vacancy rates for most postcodes around the country have been rising throughout 2008. We believe this phenomenon, which is most notable in inner urban and affluent areas, has been as a result of more and more vendors entering their properties into the rental market after failing to sell their properties.
It is also to do with the fact that rental demand has been flat to falling, particularly in the affluent postcodes where upper end rental accommodation is perceived to be a discretionary expense that can be cut back during lean times.
“This combined with the re-launch of the First Home Owner’s Grant, will mean that vacancy rates are likely to keep rising in 2009. And so, we believe that rents are likely to now flatten going forward for most cities, notwithstanding remaining pressure on the lower, affordable sections of the rental market.”
News.com.au reports that auction clearance rates have plummeted across the nation. Brisbane has fallen to 23% from 48% last year. The direction of auction clearance rates is a well-known leading indicator for property prices.
It’s unusual to hear gloomy news from domain.com.au but here it is: House prices set to slide in capital cities. Some highlights:
- Credit growth slows to 15 year low
- Michael McNamara of Australia Property Monitors predicts 10% fall in prices this year
Even the article Maybe not all doom and gloom (by McNamara) is certainly negative on the property market saying that you need a long term view as an investor and that short-term speculators don’t make much money using that strategy anyway.
In Up or down? Next three months are crucial, Tim Colebatch discusses the slowing economy and the possibility of cash rate cuts by December.
Lateline Business was certainly very negative on the economy. The RBA left the cash rate unchanged today and everyone seems very excited that the RBA governer, Glenn Stevens, said today that rates were likely to go down next. Well, that’s not quite what he said but it does seem a reasonable way to interpret his words: “with demand slowing, the board’s view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing”. I guess we must wait to be sure that inflation is under control after all CPI to June is running at 4.5%.
I was glad to see Steve Keen on Lateline Business last night who said “I don’t think there is any way of avoiding a recession” and it will not help even if the RBA were to reduce the cash rate. Steve mentioned that 40% of house prices were merely fueled by speculation and that “when this expectation goes, ultimately goodbye 40% of the current price of houses”.
See article on Bloomberg entitled Australia Facing `Once-in-100-Year’ Housing Slump.
The data from Residex showed that there were prices drops between 0.6% and 2.2% across Australian capital cities. The median Australian house dropped 3%. One analyst predicts 30% drops by 2010 and a spokesperson from the Salvation Army calls it a “debt tsunami”. The tide certainly does seem to be heading out a long way…
Note that the article does not mention which month the Residex data is for. i.e. May, June or July. I imagine it’s June.
I have just today come across two excellent Australian resources.
The bubblepedia front page describes why “It’s a crazy idea to buy a house in Australia at the current prices“, blows away the myth of the housing shortage and answers many common questions to the nay sayers.
The Contrarian Investors’ Journal seems to be a economics commentary with an Austrian Economics slant (i.e. not a mainstream economics viewpoint). I have been on a journey of late into Austrian Economics and Libertarianism. It started with videos such as “Money as debt” and “The money masters” which introduce the little known facts about where money comes from. I’m currently finding free resources from the Mises Institute very interesting. The Contrarian Investors’ Journal provides a much needed Australian perspective as much of the information available about the Austrian/Libertarian economics viewpoint is from a purely American perspective.
Domain.com.au’s article “Property crash not likely” only helps convince me that the bust is already on the way . ABC’s MediaWatch have reported that the “rental crisis” may not be as bad as all that. Domain’s article does say there’s a “tight rental market” particularly in Brisbane (but it’s Sydney where we have seen all the footage on TV!). It seems however that this is the real estate agents pushing this line in the news. Trying to make the last few easy dollars out of bubble. They say that increasing rents would lead to investors gaining interest again however the rental yields would still be below average even if rents go up 50% over the next 2-3 years! And once the “full employment” myth is blown away that will have it’s affect on confidence along with making future immigrants reconsider their options .