Kris is at home today. He claims to be taking care of a ‘sick nipper’, but we all know that he’s actually busy framing the front page of the weekend edition of the Financial Review. That’s because it features a chart of Australia’s falling house prices. Remember that such an event was once considered a ‘virtual impossibility’.
‘This transition involved lower interest rates, better-anchored inflation expectations, and increased availability of housing credit. Without some reversal of these structural changes – which is a virtual impossibility – we do not expect Australian housing prices to fall.’ – Paul Bloxham, chief economist, HSBC (formerly at the RBA)
Oops.
What’s surprising is that the housing spruikers were allowed to say things like that. Kris can’t tell his Australian Small-Cap Investigator subscribers that ‘it’s a virtual impossibility’ his beloved small-cap stocks will fall. The regulators would be up in arms. And yet the big banks came up with ridiculous ways to fool you into buying a house and paying them interest. Here’s ANZ’s chart of how house prices are meant to work:
How House Prices Are Supposed to Work
Notice how falling house prices show up nowhere in the chart? The Financial Review’s house price chart, which tracks actual prices, looks a little different. It shows falling house prices. Melbourne is down almost 9% in the past year! So will the banks be sued for misleading borrowers about the most important decision of their lives? Pah.
(Kris tells us he sent an email to the ANZ economics department last week asking if they could model a similar chart showing falling house prices. Unsurprisingly, they haven’t replied yet.)
The Downward Slope of Australian House Prices
Not that you should worry too much about all this. The Financial Review’s headline below the chart of falling house prices is optimistic. Don’t worry – the RBA’s rate cuts will save us all… Yeah right. What concerns you more? A 9% fall in your house price or a 25 basis point cut on your mortgage? And with the house price drop ‘accelerating, confounding Reserve Bank of Australia suggestions that they are stabilising,’ why wouldn’t you sell?
At least the editors of the Financial Review’s Life and Leisure magazine are on the ball. Their front page headline says ‘The Only Way is Down’. Whether they’re talking about house prices, the stock market or skiing in North America, they’re right. Given the background image of the magazine’s cover, it’s skiing that they’re referring to. But still, at least they can admit that what goes up must come down.
So what now? Is it time to buy? How will the Australian economy handle falling house prices? (Remember that America’s collapse began with falling house prices and Spain’s real estate bubble is the gorilla in the European room too.)
If you heeded Kris’ warnings about the housing bubble, congratulations. If you’re licking your lips at the thought of finally buying a house at far lower prices, there are some things you should know.
First of all, prices may have much further to go. On the downside of course. And they might not rediscover their uptrending ways for quite some time. That’s because assets that experience a bubble tend to find it very difficult to reinflate. It’s kind of like trying to blow up a balloon that popped. It just makes a rude noise.
Not that housing need be a bad buy forever. Remember though, that your time horizon for buying a house will need to be long. That’s because capital gains could be hard to come by. So, here’s our advice on the matter: the purchase of a house will have to be justified on other grounds. Don’t expect capital gains. Instead do the math on saving yourself the cost of renting, earning a good return on investment from the rental income, or the emotional pleasure of living in a house you own.
All of those are important factors you should be weighing up when buying a home, but that got lost amongst the capital gains frenzy of the past few years. We’re back to reality. Reality isn’t good or bad, it’s just real. Housing will become a place to live again, rather than something to speculate with.
Then again, we may be completely wrong about that. Maybe the new normal won’t be so normal. Maybe interest rates in Australia will be absurdly low, but people will be too scared to buy a house for fear of further price declines. That would make housing quite a profitable opportunity in terms of yield and price.
So for those of you looking for a place to live, patience is a virtue. For those of you looking for a bargain, patience is even more of a virtue.
Don’t Care About House Prices?
There’s also good news for those who aren’t interested in buying a house. That’s because Australian house prices are what explains the ridiculously high cost of living in Australia. So all sorts of costs might come down alongside house prices.
What kind of costs? Well, if shop rents fall, so will the price of their goods. If restaurant rents fall, so will the price of their beer. If office space becomes cheaper, financial newsletters will…
Ok, so you get the idea. The question is whether your wealth falls more or less than prices do. Actually, the question is how do you invest to make sure your wealth falls less than the cost of living does?
We summarised the investing strategies you should weigh up in the last weekend edition of The Daily Reckoning, the sister publication of Money Morning.
Nick Hubble
Editor, Money Morning
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