eureka

For more than a year I have watched Alan Kohler (ABC News and Eureka Report) with great interest. As long ago as the start of 2007 Alan has been a property bear. He was showing graphs on ABC news which showed the ratio between average wages and median house prices way back in early 2007, way before other commentators were getting onto the bandwagon.

Let me say that I respect Alan Kohler a lot more than other economic commentators. He seems to actually understand what he is talking about, he's not simply a theoretician.

His "Eureka Report" has provided many articles from himself, Robert Gottliebsen and others who showed the "inescapable" conclusion that property values in Australia were set to follow those of the USA and take a dive.

Of course I read these comments with great interest. I was quite concerned about the availability of credit and I was concerned about affordability. For a long time I had trouble resolving the tug-of-war between these forces and the upward-pushing forces (lack of supply, increased immigration, exodus of money from the sharemarket towards the property market etc).

I was never in any doubt that interest rates would move down by the end of this year as my posts from a year ago will show. Infact it is looking like I was overly cautious in this regard as I felt we would get a 25 basis points drop between Sep and Dec but it is beginning to look like more than that.

Anyway, back to Alan Kohler. His most recent edition of the Eureka Report (Number 126, August 14) surprised the socks off me.

On page 2 of his report under the article heading "China is the least of my worries" Alan had this to say:

"First, house prices. Christopher Joye’s piece in Eureka Report last week (see House price surge is building) scared the hell out of me; not because I think he might be wrong and that house prices will fall, but because he could be right."

What??? Alan what are you saying mate? After all the commentary that said a dive was on the cards how can you now turn around say this?

He goes on to say later on that:

"Chris Joye says these things are not really comparable across countries, that real interest rates are still historically low and that, in any case, the persistent shortage of housing will not only keep prices high, it will lead to another surge. In his Eureka Report piece he pointed out that both Treasury and the ANZ Bank believe that in 2010 housing demand will rise to 200,000 per year, while housing starts will fall to 140,000. Building approvals in NSW are now below where they were 44 years ago, while the state’s population has doubled during the same period."

Now I have to be fair and add that Alan did have a bet each way later and said:

"Mind you I’m not entirely convinced that house prices won’t fall. Existing house prices fell in June for the first time in years, and the softness in the market has continued. The Melbourne auction clearance rate fell three percentage points to 60% over the weekend, also the lowest for three years. We could see a situation where the inflated prices of upmarket existing homes fall, while the shortage of basic housing holds up the price of cheaper outer-suburban housing."

This is in keeping with previous recessions where overall medians hardly moved but this median disguised the fact that top end properties dropped quite bit whilst demand for lower end housing rose and drove those lower-end prices up. This has been discussed on this thread many times, maybe Alan should become a HC member, we can help him a lot methinks.

Alan added later:

"I worry that as the economy slows and incomes fall, if house prices don’t fall because there is a shortage of them, then consumption spending will collapse as Australians have to devote more and more of their incomes to keeping a roof over their heads. Forget about luxuries, restaurants and expensive holidays. It’ll be bangers and mash and an on-site caravan at Christmas for a while, just to be able to save enough for the mortgage or the rent."

Again, this has been hammered home again and again on the property thread. A roof over your head is not a discretionary spend. Most other things are discretionary. It is clear what has to give.

So, for those people waiting for the massive crash of property prices in our major cities I think you need to uncross your fingers and try to understand fundamental drivers of Australian land prices.