why property is heading over a cliff

From my inbox, especially interesting (in light of recent discussion) is the last paragraph....

Please read my signature before crucifying me....

Why Property is Heading Over a Cliff

We notice the corporate, special interest and regulatory busy-bodies are in full flight at the moment. Nothing is out of their grasp.

Locally there are the six 'economists' making a case for a Pauline Hanson styled "People's Bank." Fronted by property spruiker Christopher Joye, no doubt its mission statement will be to print as much money as inhumanly possible to keep property prices from falling.

You can listen to Christopher Joye's interview yesterday morning on 3AW - if you can be bothered.

It's mostly the standard mainstream fair. We can sum it up with the following statement "The government needs to do something."

One of Joye's 'bright' ideas include making it easier for investors to buy government bonds. Based on recent reports, the Australian Securities Exchange (ASX) is already on to that game.

The concept of investors having access to a freely traded financial product is fine. The real question is whether the government should be spending so much that it needs to go into debt in the first place. Doesn't it take enough of your hard-earned dollars through taxation without lumping you with an extra $300 billion in debt?

We think the government steals enough money from your wallet/purse without encouraging it to snaffle any more. Unfortunately, the policy boffins and their mainstream economic parrots think it's the 'government way or no way.'

But it was in the final few seconds of Joye's interview with 3AW he gave the game away. The government owned People's Bank would:
"Allow mum's and dad's to invest in Australian government bonds and to provide really low cost mortgages on which the government basically just covers its costs so it may not necessarily be a for-profit entity..."
Do the words Fannie Mae and Freddie Mac ring any bells? What about 'credit crunch' and subprime?

"Really low cost." We'll assume that means pricing mortgages below the commercial lending rates of the banks. Talk about manipulating the market. It's exactly what the US Federal Reserve did in the early 2000s.

Rates were kept artificially. Banks were then incentivized to lend out as much money as possible. The same would happen here. The People's Bank would lend out below the commercial rate, so banks would have to artificially lower their rates just to try and retain business.

That would mean they would need to take on more and more risk. Seeing as charging interest is their main source of income the banks would have to write considerably more business which means lowering even further their already slack lending standards.

But of course there wouldn't be enough cash deposits in the local economy to maintain their capital adequacy levels so the banks would need to source even more money from offshore - something we remind you is one reason the banks needed the government to bail them out because they are so reliant on foreign investors.

Of course, this isn't a fresh idea from Christopher Joye and his company, Rismark International. Last September we wrote in Money Morning about Rismark's idea of creating a property derivative that would allow home owners to 'hedge' their home against falling prices.

Back then Rismark claimed their derivatives would help cure the 'housing affordability crisis.'

Not content with that, Joye also thinks it would be a wonderful idea to allow 'mums and dads' to invest in the Future Fund as well.

But the main focus is the property market. We've noticed an increase in bullish sentiment towards the housing market based on the mail that's come in to the Money Morning Mailbag.

One example is a letter we received from one Money Morning reader:
"Kris

Money morning continues to forecast a slump in Australia's property market. I agree for a number of reasons (to a limited extent), but am yet to see any reasonable response from money morning to the counter-argument in relation to supply and demand (ie the property shortage in Australia).

Can you shed any light on money morning's position in relation to this? That is, how is there to be a material decrease in the price of real property when there is a clear shortage of housing in Australia?

Cheers
Alex"
It's a good question. From reading Money Morning you may think we don't have a solution to the 'housing affordability crisis.'

The fact is, we do. And it's simple. Are you ready?

It goes something like this. You remove all the subsidies, taxes, and duties that distort house prices. And you leave it to a free market to decide what the price of a property should be.

It's the simple, and it's not hard to implement. The problem is it won't happen because policy makers, banks and special interests are worried that it would cause a massive slump in property prices.

As for this idea of a "clear shortage of housing in Australia", well, we hear that all the time. We hear that there is a shortage of 100,000 houses. But that doesn't mean prices will always rise, or even stay the same.

As we've written before, supply and demand isn't just about supply and demand, it's about price as well. The argument over the shortage of housing seems to argue that because there is more demand than supply then prices can continue to rise without a crash.

This is blatantly incorrect. The very fact that government's and spruikers such as Mr. Joye have to come up with so many hare-brained schemes is a clear admission by them that the property market is over-priced.

And is if further proof was needed, I'll leave you with these two news items to compare...

This first one is a story a quoted from recently. It's from the Herald Sun in February 2008 and notes that "50 homeowners a week [are] being hit with repossession notices."

That of course was near the culmination of the Reserve Bank of Australia's interest rate rising period where mortgages went to a peak of around 9% from a low a few years previously of around 6%.

The next story is from The Age newspaper this week which notes, "Nearly 60 Victorians a week face losing their homes..."

So even before interest rates have risen significantly, more homeowners today are struggling to pay off the mortgage than were struggling when interest rates were at 9% plus.

But don't think that's as bad as it will get. It will get much worse. And the mainstream media are happily cheering the property market all the way to the edge of the cliff.

"Australia in the Red" panelist Steve Keen's prediction of a 40% drop in property prices could be seen as optimistic by the time this crunch hits.