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 We're
back on the property beat today. So if you don't like the idea of reading more
about a catastrophic fall in property prices you may want to skip this bit and
head straight down to see what Swarm Trading technical analyst Gabriel Andre
has to say about commodities.
As for property, we'll touch on something we covered several months ago. And
that is the notion of risk/reward.
You see reader, we aren't bashing property for the sake of bashing property.
We're giving the property market a bash because someone has to. It's a big
bubble waiting to burst, yet the drones in the mainstream media and mainstream
economists for some reason see a continued rise in property prices as a
positive sign.
It isn't. It's just expanding the bubble further. The further it expands, the
bigger the bust.
But I'll have more on that in a moment. First a bit of this...
Over at the Business Spectator our property spruiking friends are full of beans
about rising house prices. So much so that they've forgotten all about property
and instead have become obsessed with the prospect of property bear Professor
Steven Keen walking from Canberra to Mt Kosciusko.
We don't really care for the details, but apparently there's a bet between
Professor Keen and the interest rate strategist at Macquarie, Rory Robertson.
The loser of the bet does the walk.
Only to be helpful, property doyen, Christopher Joye has even taken the step of
preparing a map
for Prof Keen to show him the way. Nice touch.
Remember, although Prof Keen and I are both property bears we certainly don't
see eye to eye on everything. In fact, at the recent Australia in
the Red debt summit, I think we agreed only three times during the
one-and-a-half hour debate.
But while the property bubblers are popping corks and dancing a jig, perhaps we
should pose them the following problem...
If property values always rise; and if there is a 85,000 - oops, sorry a
200,000 housing shortage; and if there is a rising population; and if there are
over 657,000 temporary immigrants, why did the value of apartments in the inner
city Sydney suburb of Ultimo drop by 43 per cent over the past year?
We thought the argument was you couldn't lose by investing in the inner city.
You can't get much more inner city than Ultimo, a stone throw from Darling
Harbour.
Look, we don't know all the facts about property in Ultimo, and we don't know
all the circumstances. We're just relying on numbers provided to News
Ltd by John McGrath of McGrath Estate Agents.
In all honesty, most of the story in looks as though it's a copy and paste job
from a Rismark press release - housing shortage, population growth, blah,
blah...
Never mind, it makes an easy story for the journo - cut and paste, no thinking
required.
But still, we're curious how the bubblers can explain the 43% drop. So, in the
spirit of cooperation, below I've included a map so the guys at Rismark can
track down and destroy the errant suburb of Ultimo. We've even provided
directions on how to get there from their Sydney office:
It's a lazy 46 minute walk. Maybe they can let us know how the impossible has
happened - falling property prices.
But the reality is the isolated falls in a few Sydney suburbs is not even the
beginning.
When the crash does happen, journos won't be writing about 'bargains' with
Harbour view, they'll be talking about people trapped in a home with negative
equity wasting thousands of dollars on interest payments, or forced sellers
lumbered with hundreds of thousands of dollars of debt with no asset to back it
up.
Recourse loans won't look quite so hot when that happens.
But that aside, let me get back to the problem of why the property bubble is
continuing to expand. It's the absence of any notion of risk.
This isn't something that's unique to property of course. After all, that's how
bubbles in the stock market are formed. Investors forget about risk, they
assume prices will always rise.
I mean why shouldn't they? There's a limited number of shares, there's a
constant demand due to compulsory superannuation, there's a rising population,
and immigrants, and even temporary immigrants might like to dabble in the
market as well.
All that points to ever rising share prices doesn't it? Doesn't it?
Well, we've already seen it isn't true for shares, and it isn't true for
property either.
You see, here's the problem. The whole financial market is taking a risk
holiday. The concept or the notion of risk is absent. We're almost prepared to
say it is deceased. Government bailouts of the banks are a prime example.
But in all this the property bulls have got one thing right. It's just the
context, the value and the risk they've got wrong.
We have received more emails than we can eat from property investors who tell
us they've made a mint from buying property. We don't doubt them. In fact we
believe them.
We've received just as many emails from property investors who tell us property
is safer than shares. That property is tangible whereas shares, well, you don't
even get a certificate anymore. "Shares
are too risky" they say.
Do you know what? They are partially correct. But only partially.
Because they've got one thing wrong...
Property should be safer than share investing, but it isn't. That's
because the risk scale has been thrown out the window.
Rather than being safer, property is now many times riskier than shares.
Not just a little bit, but many times.
Let's look at just a couple of reasons why this has happened.
Easy credit is one reason. Forty or fifty years ago you would have to stump up
a whacking big deposit and only then could you get a mortgage. But especially
since the 1970s, banks can create as much money as they like.
Fractional reserve lending it's called. We won't go into the details here, but
it's the main reason behind the mess in financial markets.
Anyway, for those people that were home owners with little or no mortgage
through the 1970s it was perfect timing.
They could emulate the Melbourne elite and buy a beach house in one of the
bayside towns. They could use their main residence as equity for the loan.
Who wouldn't want a nice little weekender?
The expansion of credit meant a greater demand for housing. And over time,
lending requirements have been loosened further so that now you don't even need
a deposit to get a loan.
The creation of more money by the banks has allowed them to create even more
and lend out even greater amounts.
For the next generation it didn't seem fair, "How
come mum and dad have a beach house and I haven't? And there's no way I'm
waiting until I'm 50 to get one!"
Have no fear, because now you can get a 100% mortgage on your main house, wait
for the 'guaranteed' rise in price and then extract 'equity' to use as a
deposit for the holiday home.
How easy is that? Two houses.
It gets better, because you can also buy a property to rent out to some poor
sap who can't afford to take out a home loan. Three houses.
Four, five, six, seven houses. All for no money down.
It's like making money out of thin air!
It's a never-ending credit spiral.
Almost, except that nothing is never-ending. Like an elastic band that can
stretch and stretch and stretch, eventually it will break. That's exactly what
will happen to the banking system.
And when it does the housing market will follow. In fact the housing market
could lead the way. It doesn't matter. Once one goes, they both go.
Another reason is the 'guaranteed' returns the spruikers claim property can
deliver. If we accept the story from News Ltd then we can see it's not true. Of
course, we don't need the mainstream press to tell us property prices can fall
as well as rise, simple logic and common sense told us that long ago.
But what the property spruikers have done is create competition between
property and shares. Instead of using the 'tangible' investment argument, or
the possibility of a steady rental yield, they've chosen to compete directly
with the share market on capital growth.
And there's the problem. They have taken an asset class which should be lower
risk and therefore lower growth and have manipulated it so that property can
produce a guaranteed growth return that is higher than share investing.
That unarguably makes property investing right now much riskier than the stock
market.
Look, shares have created more bubbles than Mr. Matey in the last twenty years,
yet they've mostly all been popped.
Yet property has been pumped up to a morbidly obese size by easy credit,
government manipulation and the 'guaranteed returns' claims made by the spruikers.
You've got to remember that property, like any other asset is determined by
supply, demand and price. At the moment all three are being artificially
manipulated.
And if you remove the idea of risk, well, you're asking for trouble.
Even the spruikers admit the property market is being manipulated. You can read
their comments on the Money Morning
website. But the fact is, anything - and we mean anything - that is manipulated
to try and defeat market forces will end in disaster.
The housing market has been manipulated more than any other market and will
therefore suffer a bigger crash than any other market.
It's not any bias against property - because we have none, we're all for money
making ideas - it's just that we like to know the risk and return parameters
before we invest.
And based on what we can see from the property market, logic and common sense
tell us that the property market is heading for a bigger crash than anyone can
possibly imagine.
Other Stuff on the
Markets
The S&P/ASX200 crunched 1.7% yesterday, while overnight on Wall Street the
Dow Jones Industrial Average slipped 29 points. In Europe the FTSE100 eased
0.04% and the CAC40 dropped 0.29%.
The price of gold in Australian dollars is trading at $1,171.36, while in US
Dollars it is trading at $977.89.
The Aussie dollar remained steady versus the US dollar and Japanese Yen,
trading at USD$0.8344, and JPY76.96.
Crude oil closed overnight at USD$68.36.
For the biggest movers on the market yesterday click here...
Cheers.
Kris. This article is contributed by Money Morning. Click Here to Subscribe to their free newsletter.
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