We never thought we would put the words good article and Michael Pascoe in the same sentence. Never.
It was something that we expected to go to our grave never having written.
But yesterday Mr. Pascoe surprised us with Housing bubble trouble for the middle class.
So here we go, it was a good article by Michael Pascoe [shudder!]
Mr. Pascoe even links to one of his terrible articles that he wrote on the 18th July, RBA myth busters explode debt headlines. Were yet to come across a more sycophantic and embarrassing analysis of an RBA speech than that effort.
But hats off to him for linking to it because it shows how flimsy the RBA argument is when it comes to the housing bubble.
So what can explain Pascoes sudden about face on housing? Is it the urge to provide a balanced view? Or is it just the old tactic of having one bearish housing article to say, I told you so after the market crashes?
We dont know for sure. Thats why were asking.
But anyway, we wont give Pascoe too much praise for his latest article. Because out of the 1,064 words in the article for The Age, only 455 of them were Michaels thats a shame.
The rest of the article directly quotes from a research report put out by Morgan Stanleys Gerard Minack.
According to Minack as quoted by Pascoe:
There is no value to society from rising house prices. It is simply a wealth transfer to existing owners from potential buyers. Pumping up house prices creates no more wealth than the RBA printing an extra six zeros on every piece of currency.
Worse, by increasing the leverage in the household sector and financial system, it increases the financial risks in the economy, as the last two years have demonstrated elsewhere.
Id say thats the key comment from Minack. Much of the rest pretty much confirms what weve written over the last couple of years.
There is no benefit to rising house prices. Housing is an expense. Its a cost. It doesnt produce anything. Housing is completely unproductive.
Its basic purpose is to provide shelter. Once the size of a house exceeds what is necessary for shelter then it is a wasted resource.
Even all the jobs that are supposedly supported by a buoyant housing market are a wasted resource. They could be better deployed elsewhere producing items that are beneficial to the economy rather than an expense.
But the pumping up of house prices cant last.
At some point property investors will figure out theyre losing money due to rental income being below the cost of keeping the property.
Right now investors are prepared to suffer because theyre still falling for the fallacy that house prices always go up. Although Im sure there are those that have figured out that the game is up and so theyve been trying to get out while they can.
But make no mistake, just like every other asset bubble at some point sellers will look to leapfrog over each other in their rush to sell.
Thats when the bubble pops.
But we will disagree with Minack on one point, its this:
If Australia could achieve a cycle where house prices are steady or see moderate nominal declines, while growing incomes at a trend 6 per cent growth rate, it could reduce the over-valuation and financial risks associated with excess debt.
According to another article in The Age, Total pay rose 4 per cent over the 12 months to August 2010 Thats a fair shake of the sauce bottle below the 6% Minack mentions.
The fact is, its the very slowing of the housing market and the so-called flattening of house prices that will ultimately cause the crash. Property investors are in the game for capital growth and nothing else.
As you know, where possible we like to get our hands on these reports rather than rely on the filtered nonsense you get from the mainstream press. So, not having Gerard Minacks contact details instead we got in touch with our old pal Professor Steve Keen to see if he could help out.
Quick as a flash the Prof got back to your editor with the report. In it, Minack produces a couple of interesting charts to prove the case about how much landlords rely on capital growth rather than income.
However, as of this minute we havent yet received permission from Mr. Minack to reproduce those charts. When or if we do then Ill show them to you. Until then youll just have to take your editors word for what they show
The first shows a staggering 70% of landlords claim a rental loss:
Unfortunately I cant show you the chart yet, but you can see some of the stats from the Australian Taxation Office (ATO) by clicking here
If you start at page 17 youll see that at every income level bar one there is a net rent loss. The exception being those on a taxable income of $6,001 to $10,000 where there is a positive rental income.
All up, based on the 2008-2008 tax year there was $12.7 billion of rental losses with only $4.1 billion of rental profits. That leaves a net loss of $8.6 billion.
In other words, the rent received is less than the cost of operating the rental property.
And the second chart shows exactly how that happens:
Again, I cant show you that yet, but click here, scroll down to page 17 and youll get the raw figures from the ATO. Well see if we can chuck this info in a chart for you tomorrow.
But what it shows is gross rent, less costs, less interest equals a massive bubble producing net rent deficit.
Rental properties are a bad investment alright. We couldnt agree more. Just look at how steep the red net rent line has moved in recent years. Property investors are by now losing $10 billion a year.
Those two charts alone should be enough to convince anyone that property is set to collapse. That consistently running a loss making investment just isnt sustainable. And thats why were prepared to say that the housing market wont be able to achieve any such moderate decline in house prices at all.
You see, moderate declines tend not to happen when the game is up on any over-extended market. Hoping for a moderate decline is like suggesting all share investors gang together and agree never to sell their shares If nobody sells well all stay rich and everyone else will miss out
As you and I know, that just isnt possible.
The bubble is a result of a manipulated market. And like any bubble it becomes unsustainable and bursts. Regardless of the attempts to manipulate a soft landing.
Is it likely the same crowd that rushed in to buying property would calmly and coolly exit the market? We wouldnt have thought so. Theyve rushed in thinking they can make an easy buck and sure enough theyll rush back out again when they face up to their mistake.
The fact is, you can have as many charts and statistics as you like giving reasons for house prices never falling, but what it comes down to is human action and reaction.
For instance, we vaguely recall a study into airline evacuation procedures a few years back. As part of the study, when participants were asked to exit the plane at the nearest exit they did so in a reasonably orderly fashion.
Remember, it wasnt a real emergency so the passengers knew they werent in any danger.
However, when a financial incentive was provided to some of the participants providing they were one of the first to exit the plane, then all bets were off. Those that had the financial incentive to get out quicker naturally tried to push their way past others in order to get out first and claim their prize.
Those that didnt know about the financial incentive were naturally confused and also tried to get out quicker even though there was no real danger and no financial reward for them to do so.
What Im saying is, in that test the financial reward was minimal, about $20 we think. In the case of the housing , the penalty for not getting out will be huge. Can we really expect the exit to be orderly? No, I insist, you sell your house to this willing buyer first. Ill wait for the next willing buyer to come along. Im sure itll only be a few months
Of course not. The charge for the exits will be just as vicious as the crashes you see in the stock market.
If youve been reading Money Morning for some time youll know that we like the idea that property investors could be the ones to kick off the housing slump.
Minacks analysis shows just how rotten property investing is right now.
But think about it this way. One of the claims made by the spruikers about the difference between the Australian housing market and the US housing market is that mortgages in America are tax deductible for owner-occupiers whereas they arent for Australian owner-occupiers.
Therefore so the argument goes there was little incentive for borrowers in the US to pay down their mortgage debt, especially when house prices continued to rise. Simply because they could deduct the mortgage repayments from their income, plus they could withdraw equity in their high valued home.
Granted. Well accept that.
But now lets think of it this way. Who does qualify for tax deductibility of housing mortgages in Australia? Thats right, property investors.
So, by the same token, if its argued that there is little incentive for American owner-occupiers to pay down housing debt, then surely its also the case that theres little incentive for Australian property investors to pay down their housing debt.
Again, Minacks numbers prove this. 70% of landlords receive a negative rental income from their properties.
Although were sure the spruikers will still try and claim that somehow Australia is different on that score as well.
But dont forget about the way property investing works. Youre not just talking one investor with one property. The game of property investing is to continue leveraging up, to buy one, wait for the price to rise and then use the so-called equity as the down-payment for the next leveraged property.
The whole mucky scheme involves going ever further into debt. The greater the debt the bigger the tax deduction. Just ask 70% of Australias 1.7 million landlords how it all works. Theyll tell you
Its all tax deductible mate
"All content is - 2007 - 2010 Port Phillip Publishing Pty Ltd All Rights Reserved
We encourage you to republish our material, all we ask is that you provide a working text link back to the original article on this site. More information on our free financial content."
