We?ve told you many times house prices are gonna go south. If you hadn?t taken notice by now, you never will. But that?s OK. We can?t help everyone. We?ve warned home-owners and home-buyers for the last two years that the Australian housing market was at the tipping point. We were ridiculed for saying so. We told you to only buy a house if: you don?t see a home as an investment. You?re prepared to see zero or negative price growth. And you?re pretty sure you can keep up repayments when interest rates go up, or when the economy crashes and unemployment soars. If you fit into any of those categories then sure, go ahead and buy a house. Just don?t expect to make any money from it. Remember that you won?t have the same luxury that house buyers had during the 1980s, 1990s and early 2000s. They rode the coattails of the credit expansion boom, where interest costs were more than offset by rapid price growth. The next ten years will be different: interest costs will outpace price growth. And soon enough, property speculators and owner-occupiers will realise this. And that will cause the biggest hit to house prices. They?ll realise they shouldn?t take out the biggest mortgage possible, because price growth won?t offset the interest costs. Landlords will realise it too. For years they?ve taken a loss on the income because they knew house prices would go up. They could afford to be negatively geared because in the long run it would pay off. Not anymore. Negative Growth Arrives With no capital growth, landlords will have to increase rents. Or rather they?ll try to increase rents. But it?ll be hard to do that with a glut of properties on the market. If they increase the rents too much, new landlords will undercut them as they will likely have smaller mortgages due to lower house prices. Not only that, but the higher the rent the more attractive it becomes for renters to buy ? especially when house prices have slumped 30-40%. Yet, after all the warnings, the spruikers continue to peddle the story that Australia is immune from a housing crash. You know the story, there?s a housing shortage? a shortage that doesn?t exist. The only place it exists is in the minds of the spruikers and the bankers who need to peddle the shortage myth. Just so they can postpone the inevitable ? a painful housing slump, a credit contraction and another economic recession? or maybe depression. The reason we?ve decided to bring up the subject of housing today is because the beginning of the housing slump has been confirmed. We warned you at least three months ago the crash had begun. It?s just the dodgy indices hadn?t shown this yet. Well now they have. Yesterday?s The Age reported: ?City home prices dropped more than a full percentage point in January, retreating for a second month in three, as floods in Queensland and Victoria deterred buyers.? OK, the floods did play a part in knocking down prices. In fact we told you they would. But house prices were set to plummet anyway, regardless of the floods. The spruikers are always looking for an excuse. Anyway, The Age states ?City home prices dropped more than a full percentage point in January.? Strictly speaking that?s true. But Melbourne?s favourite snoozepaper could have been a bit more honest with the figure. According to RPData, the source of the number, ?Capital city values were down -1.6 per cent [seasonally adjusted].? Just a slight difference. Annualised, you?re looking at a 19.2% price drop. Of course, I know it?s not fair to annualise a one-month figure. But if you look at the non-seasonally adjusted RPData numbers for house price growth you?ll see it?s truly awful:
Source: RPData The year-on-year growth in Australian capital cities is just 1.2%. So much for house prices doubling every seven years. At that rate it would take sixty years for prices to double! The thing is, that?s where house price growth should be. It should only rise and fall by this amount because housing is supposed to be a low-risk investment. You shouldn?t get the double-your-money returns over seven years that the spruikers rave about. That kind of volatile growth is for the stock market. If you want high risk and high possible returns, invest in shares. If you want low risk and low returns then you should invest in property? or that?s the way it should be. But thanks to the unsustainable credit boom that has been fanned by retail and central banks over the past thirty years, the market is out of whack. Even though central bankers like Dr. Luci Ellis at the Reserve Bank of Australia (RBA) refuse to believe there has been a credit-fuelled boom ? although shortly I?ll show you that even one of the banks admits easy credit has fuelled house price growth. Aussies Have Hit the Credit Limit The fact is house prices are too high. And consumers are now maxed out on credit. And don?t ? please don?t ? fall for the guff that Australians are saving more, just because the savings rate is up to 10%. Even the Australian Bureau of Statistics (ABS) warns the savings rate statistic is unreliable. Simply because it just minuses national consumption from national income, and voila the difference is what?s saved. Wrong. It simply means that those who have saved are still savings. But those who live on credit have reached their maximum credit limit. It?s not that people have suddenly become savers. It?s that they?ve borrowed as much as they can. Even the ropey banks are thinking twice about extending credit ? although you wouldn?t know it from the number of credit card limit increase offers they send in the post or by email (your editor was getting about one a fortnight until a couple of weeks ago!). The so-called deleveraging that the mainstream told you had happened in 2009 and 2010 never happened. Credit continued to soar in the belief that Australia was immune to global problems. Australian household debt now stands at over $1 trillion. But now there?s nowhere left to go. And that means the great deleveraging has arrived. The Ponzi scheme that is the Australian housing market is on the verge of collapse. The banking and property spruiking chickens have at last come home to roost. Of course, the spruikers and bankers will claim they saw a slowdown coming all along. They?ll say, ?Well duh, of course nothing could go up forever, but any price falls will be mild.? In fact, we?ve scanned the websites of some of the usual spruiking suspects this morning. Guess what? [Whisper: Shhhhh! They haven?t mentioned the latest house price stats, even though they?re usually right on top of it when the index goes up. They must be in denial. House prices do go down after all. Most likely they?re thinking up an excuse for the price fall even as we write]. Remember, these are the guys who tried to tell you that Australia?s house prices would plateau, but they wouldn?t go down. That after a thirty-year credit-fuelled boom house prices would keep going at top speed. They even got in the big guns. One bank economist after the other has waded in with an excuse. The most recent is the ?Housing Overvaluation? research report from ANZ Bank. There?s not much in it apart from the usual banker spin. And needless to say it concludes Aussie house prices aren?t overvalued. But there are a few delicious lines in the conclusion: ?The transitory forces are delicately poised, but in the absence of a rapid escalation in interest rates to combat unwelcome higher ?core? inflation? a wholesale downward shift in house prices remains unlikely. ?Conversely, a risk scenario based around a major collapse in the terms of trade in future years, contrary to expectations, is more likely to prompt policy settings that can only be favourable for house prices, particularly if house price momentum has been restrained in the lead-up. Policy-makers intent on preparing for a ?post-terms of trade collapse? environment are likely to shift settings to a more accommodating stance. While the economy is likely to slow, the interest rate-sensitive sectors such as housing will benefit considerably and swiftly.? In other words: Economy bad = house prices rise. Economy good = house prices rise. Great eh? The bank concludes that house prices will rise in both a good and bad Australian economy. When you hear that sort of rubbish from a mainstream economist you know it?s time to batten down the hatches. And prepare for the mother of all price falls. Win-Win or Lose-Lose If you believe the banks, you can?t lose with Australian housing. It?s the world?s one and only completely risk-free investment. What clowns. They argue that even if the Aussie economy hits the skids, that?ll be good news because the government and central bankers will try to prop up the housing market with low interest rates and stimulus. Oh stop it. It may have worked once, but it only postponed the inevitable. Besides, all the suckers have been suckered in. The fact is bankers and spruikers are desperate. They?ve resorted to the ?good news is good and bad news is better? argument. It?s the same argument playing out right now with the US Federal Reserve and its money-printing programme ? if the Fed stops printing money it means the economy is doing nicely. But if it keeps printing money then that?s even better because it?ll give the economy another stimulus. Just when we thought we?d heard it all. What do they teach kids in economics classes these days? Voodoo-nomics and witchcraft-nomics by the sound of it. But the ANZ report isn?t all bad ? just 99% of it is. The one good part is this chart:
Source: ANZ Bank It?s pretty much an admission from the bank that the house price gains have been the result of a credit-fuelled boom: ?credit supply boosted by??, ?credit demand boosted by?? Although for the recent price rises, it?s not the fault of the credit boom at all? no, that?s all in the past? it?s all to do with that non-existent housing shortage. You know, the one that the National Housing Supply Council claims is proved by the number of homeless people and people who live in caravans! In fact, that?s the most disgraceful thing we?ve seen from the whole housing shortage ruse. Trying to make out that homelessness proves a housing shortage. We?re no psychologist, but we?ll tell you the major reason for homelessness is family breakdown and mental health problems. Homelessness most certainly isn?t caused by people being unable to afford a $500,000 mortgage in the Melbourne suburbs. But back to the point. Some spruiking clowns tried to tell you that a slowing Australian housing market would just mean prices would rise only 5% this year. These people were considered housing ?bears?. But what they?re trying to say is that growth will revert to the mean. Normal Growth, Not Bubble Growth Their fatal mistake is that mean reversion only occurs after the market has overshot both sides. So far we?ve had a huge overshoot to the upside. Next is a huge overshoot to the downside ? hence our call for a 40% drop in house prices. Only then will the market go back to some kind of normality. But normality won?t mean house prices doubling every seven years. That?s not normal. That?s abnormal. It was created by easy bank credit. House prices doubling every seven years was the excessive growth that led to this bubble. Of course there will be attempts to re-create the bubble. Just as the bankers and governments are now trying to re-create the stock market bubble. To them, ?normal? is the stock market at a perpetual high. But it can only remain at the high levels seen in 2007 if there is a mad expansion of paper and electronic money. Once the credit stops growing, the manic growth stops and? no, it doesn?t plateau? it crashes. Without central bank manipulation you wouldn?t get the long boom periods followed by painful crashes. You only see these booms because of central bank manipulation. It?s happened in the stock market. And it?s happened in the housing market. Both were booms and both are busts. So a return to normality in the housing market means house prices rising and falling. This is exactly what happened to house prices worldwide until the early 1970s. The danger is the bankers and pollies will try to engineer another house price asset bubble before this one has been fully purged from the economy. We can expect them to try that, because they always do. That?s how they postpone the inevitable bankruptcy of the financial system. Unless credit continues to grow it?s impossible for bank customers to repay debts. And if debts aren?t repaid that means a whole lot of trouble for the banks. But even a bailout can only provide a pause. Something as immense as this can only be postponed for so long. In order to postpone it, credit must always grow. As soon as it contracts, the banks are in trouble. That?s why the Aussie bankers made a beeline straight to The Lodge in late 2008 to get the Fairy Ruddfather to bail out the Aussie banking system. Without the bailout, Australia?s banks would have been toast? and they know it. Bailouts Helped Banks and Hurt Aussies Make no mistake, a 1.6% drop in house prices is huge. And a 19.2% annualised fall is even huger. Especially when home buyers are already behind the eight-ball. When you add stamp duty, interest payments, establishment fees and rates, a homebuyer needs their new home to rise over 10% in the first year just to break even. But if the house price falls 19.2% in that first year, they?ll need it to gain more than 30% just to break even. And for every year the price growth is lower than the interest repayments, home buyers are falling even further behind. That?s when buyers start to lose faith in the fable that house prices always go up. You see, rising house prices is a psychological thing. I mentioned a few months back after returning from a holiday to the UK that the people I spoke to no longer believed house prices always go up. House prices weren?t even a topic of conversation. Housing was no longer a goose laying golden eggs? for many Poms it was more like an albatross around the neck? years of negative equity beckoned for those sucked into buying property at the peak of the boom. And contrary to mainstream opinion, hundreds of thousands of Australians will suffer the same fate. Perhaps many have already woken up to the fact. We hope so. They were betrayed into believing house prices always rise, and even bribed by the crooks in Canberra to take out mortgages. For what reason? To live the dream of Australian home ownership? Don?t make me laugh. It was for one reason only, the pollies and bankers needed to sucker-in gullible and innocent first home buyers in order to bail out the fraudulent and bankrupt banking system. As I say, without those taxpayer funded bailouts, the Australian economy would have collapsed, banks would have gone bust, and the pollies would have been kicked out. Trouble is, while it may have saved the bacon of the banker and the pollies, it has lumbered hundreds of thousands of Australians with unaffordable debt, secured against an asset that?s set to plummet in value. Do the numbers: the Aussie housing market is valued at $3.5 trillion. One third of that is debt free. The remaining two-thirds of homes have about $1 trillion of debt secured against it. That?s about $1 trillion of debt against $2.2 trillion of housing. By anyone?s figures, that?s a high loan-to-valuation ratio. And it?s set to get a whole lot worse and painful when the proverbial finally hits the fan.
