by Kris Sayce on September 11, 2009Wow! I thought I was grumpy...

by Kris Sayce on September 11, 2009

Wow! I thought I was grumpy and angry.

Compared to the property bulls your editor is just a soft kitten.

When we embarked on exposing the sham claim of the housing shortage we didn’t think the response would be so hostile.

Look, we’re not an innocent victim here. We rattled the cage, and the property beast bit back.

So, after all that, we’ve got this to say…

We concede defeat, reader.

Not in the argument about whether there will be a crash in property prices – because there will, no doubt about that – but in our ability to get even one ounce of sanity from the property bulls.

Over the last three weeks we’ve written a few articles on the Australian property market. About five in total – even though it seems more than that.

In those articles we’ve soundly laid down our position. It’s a simple one. It doesn’t need graphs or charts or tables or PhDs. We’ve based it on common sense and logic. Something the property spruikers are in short supply of.

Our argument is that property prices will crash because there are three elements to achieving a market driven price: supply, demand and price.

That’s it. Nothing more, nothing less.

We’ve shown the entire basis for the property bull market – a housing shortage, is a fiction. It’s based on 85,000 homeless people in Australia last year. We don’t think we’ve ever seen a flimsier statistic.

We’ve argued another ’supply’ statistic used by the bulls, Housing Approvals, can more convincingly be considered a ‘demand’ statistic. In other words, the number of dwellings being built is based on the number being demanded.

We’ve also argued that it’s impossible for an asset price to rise forever without a significant correction. But I’ll have a little more to add on that below.

And we’ve also argued that manipulation and distortion by government agencies is creating a false demand. First home buyer grants are the most obvious example.

Previously we’ve argued that the property market is the most distorted and manipulated market in existence. But that doesn’t automatically mean the property market can be propped up forever.

The opposite in fact. The greater the manipulation, the greater the fall.

And then there’s immigration. We haven’t received one single item of evidence that proves higher immigration leads to higher property prices. The conventional wisdom among property bulls is that’s the case. But as we know, conventional wisdom has a pretty poor track record when the chips are down.

Besides, the immigration theory only holds if the ‘housing shortage’ argument holds. And as the government’s own agency has proven, there is no housing shortage.

The facts are, in any market – yes, including housing – you have to consider supply and demand and price.

Not just one or two, but all three.

You can’t just take rising prices and rising immigration and make the assumption there is a housing shortage.

And you can’t take a housing shortage theory and rising prices and then claim that it’s due to rising immigration.

All three elements have to be considered.

As you know, we’ve looked at common sense and logic rather than statistics. There’s a simple reason for that. Most of the statistics you come across are from those with a vested interest in rising property prices – property idol Christopher Joye and his gang at Rismark is a prime example.

But basic common sense will tell you that the price of something cannot rise infinitely without a correction. We see this in effect every day in every other aspect of the economy.

Prices rise and fall over time due to supply, demand and price. The price will increase if demand increases. But there will always be a point at which people are not prepared to pay the price so they seek alternatives or they decline to buy.

Housing is no different. The argument that there is no alternative to buying a house is false. There are plenty of alternatives and at a given point the housing market will adapt to them. This means as the housing market changes and buyers dry up, prices will fall.

So, what are the alternatives? Well, here’s a quick list we’ve thought of in two minutes: new houses, smaller houses, smaller subdivisions of new land, subdivisions of existing land, high rise buildings, subdivision of existing housing, renting, staying at home, moving back home, house sharing, etc…

Then you’ve got migration: country to city and city to country. Interstate movement.

There’s more than one way to skin a cat.

At a certain price point, buyers will seek alternatives. Remember, buying a house isn’t compulsory.

But the biggest chink in the property bull armour is their irrational stance. They fail to acknowledge even the slightest possibility that housing prices can fall.

And it is this, along with the ‘property values double every 7-10 years’ claim that shows their case to be a sham.

Because what they are saying is that property is a risk-free asset.

Actually, we’ll clarify that. They are arguing that Australian property alone is a risk-free asset. That Australian property prices are somehow different not only to any other asset price in Australia, but they are different to any other asset price anywhere else in the whole world.

According to the property spruikers you can’t lose if you invest in property. That you can buy property at any point in time and you will always make a profit.

That even though buyers are using 20-to-1 leverage or more to buy a house, and paying a variable interest rate, a property buyer cannot lose. Accordingly they argue there is no double-edged sword to leverage in the property market.

In any other market, leverage can increase your returns but also increase your losses. Not apparently with property. That’s because if we believe the spruikers, Australian property is a unique and magical investment.

How many times have you read news reports about a drop in interest rates and a property spruiker saying that is good for Australian property? Then if the news reports a rise in interest rates they say that is good as well.

If unemployment drops then that’s a positive for Australian property prices, and if unemployment rises it’s also good news.

A housing shortage is wonderful for property prices, but if more houses happen to get built then that’s even better.

It seems the Australian property market is invincible. There is nothing that can make prices fall.

But not only that, they also tell us house prices double in value every 7-10 years. Not that they could double, but that they do double.

If that really is the case it does make you wonder why they are keen to get people to buy property now. You’ve probably seen the comments on message boards, “buy property now before it’s too late.”

And that’s another argument that bothers us. How can it ever be too late to invest in property if prices always double every 7-10 years?

According to the spruikers, if you buy a property today it will double in value in 2019.

But what’s the rush? If you wait until next year to buy a property then it will double in value in 2020.

Do you really care if you have to wait an extra year to double your money?

Do you see how illogical the spruikers case is?

The reason the spruikers have the sense of urgency is because they know the property market is on borrowed time. They are desperate for people to keep buying so the slump is postponed.

Property has dodged one bullet over the last twelve months, but can it dodge the next one?

But it’s not all about the spruikers, what about your editor’s standpoint?

We’ve received several times that ask the following, “You’re bound to be right one day, if you keep saying there will be a property crash. Why don’t you tell us when?”

Well, as I wrote in Money Weekend recently, it’s a fool’s game to try and predict an exact time and date for anything. I don’t even do that with the tips I give in Australian Small Cap Investigator.

In the newsletter I try and give rough guidelines on when a price could reach a certain level, but there’s still a lot of guesswork involved.

The reality is we don’t need to give a date and a time to argue that an asset class is over-valued. As an investor you should be looking for investments that are fairly valued.

Right now property is not one of those investments.

And let’s remember, if you’re just buying a house as a dwelling then why should you worry about doubling your money in 7-10 years? If that is your only consideration then you are buying the house as an investment and not as a dwelling.

In that case it is more likely that you are considering your investment returns above your needs for a dwelling.

We’ve argued many times before that the property spruikers are making property and indeed home ownership a riskier investment than buying shares.

That’s a big call I know. But it’s true. Their claim that property doubles in value every 7-10 years is exactly the same kind of return you would expect from investing in a risky and volatile investment like shares.

A share portfolio may be able to double in that timeframe because it’s risky. Companies can make all sorts of decisions that either lead to success or failure. None more so than small cap companies.

Property however, is bricks and mortar. It’s something tangible. A property by itself cannot make a bad decision.

However, the people that invest in it can.

The spruiking of property has taken a lower risk asset class and turned it into a high octane, high risk investment. In terms of leverage, it’s on a par with financial derivatives like CFDs.

The whole principle of risk and reward tells you that the higher the potential return, the higher the potential risk. It’s true for every other asset in the entire world. Why should the Australian property market be any different?

So far all we’ve heard is illogical rather than logical arguments from the property bulls.

The facts are simple, if the property spruikers insist property doubles every 7-10 years then they have to concede such high returns are not possible without considerable risks to the downside.

I mean, when I tip a stock in Australian Small Cap Investigator and look for it to gain 548% I do so with the disclosure that it could also mean a 100% loss. But that’s part of the risk/reward small cap investors are prepared to take.

And besides, most small cap investors are only playing around with a few hundred or a few thousand dollars. And they are unleveraged dollars.

Conversely, property spruikers claim you can get a 100% profit guaranteed, with no downside. You can check the website of any number of property spruikers. I received an email this week from one saying Australian property is “different” and that financial people “don’t understand Australian property.”

Well, I know a rat when I smell one. And the Australian property market is full of them at the moment. We’re just waiting for the Pied Piper to put in an appearance.

Claims that property prices will always be supported by a housing shortage, rising immigration and homeless people are pure fantasy.

But look, we know none of the above will convince the property bulls of their crazy position. And heck, it may not even convince property bears either.

But that’s OK, you don’t need to agree with everything we write. You’re more than welcome to disagree. We don’t mind.

So, we’ll close off our series on the Australian property market by following the lead of Money Morning reader Jason:

“When I hear them say ‘Property prices always double every 7 yrs’ or ‘Housing shortage’, I reply with, ‘I completely agree now is the perfect time to buy a house, I’d get in while it’s still cheap’.”

I’ll be back on Monday with something not related to property!

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