Everywhere we looked yesterday it was gloom, gloom, gloom.
BHP Billiton [ASX: BHP] reported a 30% drop in profit.
Coca Cola Amatil [ASX: CCL] has seen earnings fall.
And QBE Insurance Group [ASX: QBE] shares fell 5.5% after posting a 37% drop in first-half profits.
Isn’t there any good news anywhere?
Perhaps one place: the Australian housing market…
It seems ridiculous to say it, but Australian housing seems to be the one market not suffering from a confidence crisis.
As a long-time housing market bear, we hope you can appreciate how difficult it is for us to acknowledge that.
Now, don’t get us wrong. We’re not saying house prices are good value and that you should rush out to secure a million-dollar mortgage. But it’s also true to say that for the most part Australian house prices haven’t suffered the huge correction we predicted in 2009.
That’s when we pencilled in Australian house prices to fall 40%. Aside from notoriously volatile markets such as the Gold Coast, that didn’t happen.
So, what’s next for the Australian housing market? Is it truly a ‘miracle market’ that will never crash? Or, like the one-time miracle Australian economy, is its luck about to run out?
Markets Crash When You Least Expect it
Not according to Terry Ryder at Property Observer. He says that in order for prices to collapse after a price bubble, you need a price bubble to form first. Fair enough. But Ryder says that hasn’t happened yet.
He notes:
‘Three years ago BIS Shrapnel, which makes part of its living from mis-forecasting property markets, declared in 2010 that capital city prices would continue to rise strongly.
‘By 2013 Perth would be up 22% and both Sydney and Adelaide would have added 20%.
‘Nothing of the sort happened, of course. Three years on, Perth is up about 7% and Sydney a meagre 4%. Adelaide is still down 3%. These are not statistics that support bubble theories.‘
On the surface, it’s a fair argument. It makes sense that a bubble can only burst if you inflate it. However, we’ll make one point. As we’ve seen recently with stock and gold prices, bubbles don’t always burst exactly when you expect.
In fact, it also fair to say that bubbles don’t burst as long as people expect them to burst. The gold price bubble is a great example. Look at the chart below:
Source: Goldprice.org
The gold price peaked in mid-2011. After that it dropped and rallied several times. But it never took out the high price. The assumption in the mainstream was that the gold price was in bubble territory and would collapse at any moment.
It may well have been in bubble territory, but the price didn’t collapse. As recently as late last year, the gold price recovered again and looked strong.
As the money printing continued, it now seemed logical to many that gold would have to remain relatively high. Talk of a gold bubble started to wane…and then it crashed. The event folks had predicted for two years finally happened, just when they least expected it.
Is Now the Time?
To us – in a way – the gold price action looks similar to the Aussie house price action. Only the timeframe is different.
Aussie house prices soared in 2007, they fell a bit in 2008 and 2009 and then surged higher through 2010. Since then prices have seen more modest gains.
Now there’s almost no talk about a house price bubble. In fact, the new theory is that low interest rates will support the market forever (well, not quite).
Perhaps more evidence of the lack of bubble talk is that our publishers have even agreed to publish the controversial analysis of Aussie economist, Phillip J Anderson. He says Aussie house prices are set to enjoy a 14-year bull market run. You can’t get much more bullish than that.
We don’t know if that seemingly outlandish forecast will come true. To be honest, even though we like his argument (it’s the most compelling case we’ve seen in more than five years) we still can’t get past the fact that Aussie house prices boomed due to an unprecedented expansion of credit from the 1980s through to the 2000s.
Simple maths suggests the market won’t repeat that kind of credit growth, because people are already up to their necks in debt. That wasn’t the case 30 years ago when the boom started.
If the housing market crash follows the same pattern as the gold market crash, a house price crash may not be far away. As for a 40% drop, you may think we’d be reluctant to put our name to that big a claim after getting it wrong last time.
But to us, it’s just common sense. There isn’t a single market anywhere else in the world where prices soar and then never fall. The mainstream would have you think the Aussie housing market is still a ‘miracle market’. We don’t buy a word of it.
The Aussie housing market is heading for a fall…it’s just a matter of time.
Cheers,
Kris+
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Pursuit of Happiness: Inflation is Not Progress, This is Progress…
Australian Small-Cap Investigator:
How to Make Big Money from Small-Cap Stocks
