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Don’t Believe ‘the Bull’ on Australian House Prices.

In yesterday’s Money Morning our old pal, Dr. Alex Cowie, wrote to you about the terrible outlook for the Melbourne property market.

According to Morgan Stanley research, Melbourne house prices could fall by 30% from peak to trough.

That’s a bitter pill for the hundreds of thousands of investors who need house prices to rise in order to offset the losses from interest payments and running costs.

But indebted housing investors needn’t worry — if they believe BIS Shrapnel and academics at two Aussie universities — because help is on the way. In what form? Trains and the end of the resources boom!

To find out the latest excuses used to justify a housing boom, read on…

The Rising House Price Myth
You must remember that everything you thought you knew about investing has changed over the past four years.

You may have thought that despite a few bumps along the way, share prices would keep going up as the world economy grows. That was until share prices fell…and economies stopped growing.

You may have thought that money in the bank was safe. Until banks in North America, Europe and the UK went bust…and Aussie banks St. George and BankWest were taken over before their balance sheets were put through the mincer.

And you may have thought that house prices always go up. Because that’s what you’d always seen. And that’s what your parents told you. Until house prices stopped going up…and in fact started going down.

But with the old housing-never-falls claims revealed for what they are — myths (growing population myth, water views myth, better quality housing myth, housing shortage myth), the Aussie housing industry needs new ways to convince people to buy.

The two latest are right from the top drawer: trains and the end of the resources boom.

Let’s start with the trains first…

The Credit Boom Spurred Australian House Prices
 As with all claims made by the housing bulls, at first glance they seem plausible. It’s only when you stop and think, that things don’t add up.

Yesterday, the Age reported the following:


‘A railway line to Doncaster could be built for $840 million and paid for using taxes raised from the higher property values it would generate, says a report…

‘The report’s authors have modelled their cost estimates for the proposed Doncaster railway on the highly successful Mandurah line in south-west Perth, a 70-kilometre railway that was built for $1.3 billion and opened in 2007…

‘The “funding possibilities” the authors propose are based on a US model called tax increment financing, whereby higher property values boost stamp duty, land tax and local government revenues and help pay for infrastructure projects.

‘The report found that property values in Brisbane in the past 25 years had risen 23 per cent more in suburbs with high-quality public transport than those without.’

As we say, the argument seems plausible. But strip away the layers and perhaps the claim isn’t quite so convincing.

First up, using 25 years of housing data covers the biggest house price boom Australia has ever seen. It would be like using the period from 2003 to 2007 and saying that’s how stock markets always behave.

The only reason Australian housing boomed during those 25 years is because of the huge increase in mortgage debt.

Even Reserve Bank of Australia (RBA) governor, Glenn Stevens admitted this in a speech yesterday:


‘It suggests that the global dwelling price dynamic had a lot to do with financial factors — and there is little doubt that finance for housing became more readily available.’

No kidding!

But back to the report. Are public transport and rising house prices a cause and effect, or is it a coincidence? After all, all house prices went up, not just those near transport.

House Prices Fall AFTER Rail Line is Built
 The main reason house prices went up was due to ‘more readily available’ financing, rather than access to public transport. The availability of public transport was simply an added benefit that some would pay extra for during a credit boom.

And besides, the relationship isn’t uniform. As an academic paper from the Tinbergen Institute, titled ‘The Impact of Rail Transport on Real Estate Prices: An Empirical Analysis of the Dutch Housing Markets’, in March 2006 noted:


‘Finally we find a negative effect of distance to railways, probably due to noise effects: within the zone up to 250 meters around a railway line prices are about 5% lower compared with locations further away than 500 meters. As a result of the two distance effects, the price gradient starts to increase as one moves away from a station, followed by a gradual decrease after a distance of about 250 meters.’

Some prices go up, some go down…and we dare say some stay the same. But how will it impact house prices in a falling market? Arguably, now the credit boom is over it means those closer to rail lines will fall more than those less close to rail lines.

In other words, there’s absolutely no guarantee that a rail line will increase house prices and therefore result in increased stamp duty revenue for state governments, and rates rises for local governments.

But what about other examples of house price behaviour due to rail lines?

A paper from the University of Technology Sydney presented to the 18th Annual Pacific-Rim Real Estate Society Conference in January claimed:


‘Our findings show that dwelling prices appreciated more before the commencement of construction and after the opening of rail service than they did after starting the construction and before the opening.’

The study was based on the University of Sydney train station and the suburb where the station sits, Macquarie Park. The station was completed in December 2008. And it’s true that unit prices climbed in Macquarie Park.

But then, house prices climbed in many other Aussie cities and suburbs — those with and without rail lines. Remember that the Aussie credit boom went on after it had collapsed elsewhere. But if we look at house prices this year, now the Aussie credit boom has finally ended, you’ll see the link to public transport may not be clear cut…or at the very least, it doesn’t guarantee rising house prices.

House prices in the neighbouring suburb to Macquarie Park, Marsfield (we’ve chosen it because it has more sales data), have gained nothing since 2010. And in fact, this year the trend is lower rather than higher.

And this is exactly what happened to house prices in the other suburb mentioned in the report, Mandurah, Western Australia. According to RPData, in 2007 when the Mandurah line was completed, Mandurah’s median house price was $400,000.

In the latest numbers from RPData (April 2012), the Median house price in Mandurah was just $270,000. So much for public transport providing a boost to house prices ‘after the opening of [a] rail service’.

And what about South Morang in Victoria? That suburb benefited from the extension of the Epping line. South Morang median house prices have been falling since 2010. The new station opened in April this year, and according to RPData, the median house price is $364,000. That’s 13.3% lower than July 2011.

Bottom line: forget the notion that you can make a quick killing from buying a house near a new rail line. The biggest impact on Australian house prices over the past 30 years wasn’t access to public transport, it was access to easy credit.

Things like public transport, water views and extra bedrooms are things folks paid for during a credit boom. Now the credit boom is over, buyers are less willing to pay for these extras.

But that’s only half the problem…

Putting Taxpayers on the Hook With The Foolish Belief That Land Prices Always Go Up
 The academics from Curtin University and RMIT who think that tax increment financing (TIF) is the answer to public infrastructure projects would do well to read an article from this week’s Chicago Tribune. And the politicians who are likely to follow the academic advice should read it too. Because it could stop them putting taxpayers on the hook for a multimillion dollar debt burden:


‘Revenue in the city’s 163 tax increment financing districts will drop by $56 million to $454 million, Orr said as he released his annual report on TIF districts. In nine districts that poured millions of dollars into city coffers just last year, nary a penny will be collected this year, he said.’

Tax Increment Financing (TIF) is nothing more than a currentgovernment spending money it doesn’t have. What makes it worse is that it’s robbing the wealth of future generations to spend on vote-winning follies today.

It’s nothing more than land speculation. The foolish belief that land prices always go up, just because land is finite. Wrong, land prices don’t always go up. They get a boost if there’s an expansion of credit, but once the credit expansion disappears, land prices will fall.

Simply because there are fewer buyers who can afford to pay the higher prices. If you’re in any doubt about that, check out Japan’s property bubble of the 1980s.

The fact is, bureaucrats, politicians and vested interests love nothing more than spending other people’s money. And they’ll go to amazing lengths to ‘prove’ how easy it is to raise the money.

One day it’s building rail lines…the next it’s roads…then special buildings…and soon enough as reported in the Lincoln Journal Star , it’s ‘brick archways’ and ‘large TV screens’ for a public area.

Or according to the Chicago Tribune‘a grocery store’.

As for the second reason why house prices will rise…well, it’s almost too ridiculous to mention, but we will anyway…

Houses Are Just One Big Consumption Item
 Yesterday, the Age quoted Tim Hampton, senior economist at BIS Shrapnel (Aussie housing uber-bulls):


‘Mining investment will soon stop growing. It should remain high but it will stop growing. In its place we see an upswing in residential property investment from later this year.’

This is something we’ve tried to convince Aussies of for years: housing isn’t a productive asset. It’s just an expensive consumption item. You buy it or build it and then you live in it.

Housing is the reward you get for productive labour. It’s why most people lived in slums or mud huts for thousands of years, simply because there was no access to capital and limited productive labour.

But as soon as the power of Kings, Queens and Emperors faded and capitalism gained a foothold, people became productive. They worked and produced goods for consumers, and in return they earned a wage.

Eventually the accumulation of wages (savings) enabled people to consume more. They gradually bought more expensive trinkets until their wealth became so great they were able to afford the biggest consumption item of all…a house.

The availability of credit during the late 20th century sped up this process.

The point is, housing isn’t the means by which nations become productive and wealthy. Housing is the reward for a productive and wealthy nation.

So for any organisation to think that housing investment for domestic consumption will replace the export-driven mining boom is living in the clouds.

If there’s one message you can take away from today’s Money Morningit’s that housing isn’t a magic investment that just needs a multimillion dollar rail line running next to it to make you rich…and it isn’t the answer to Australia’s big problem of what to do when the mining boom ends.

Housing is for consumption, and the answer for what Australia should do after the mining boom is for it to rely on freer markets andcapitalism…and for the government to keep its nose out.

Kris Sayce.

This article is contributed by Money Morning. Click Here to Subscribe to their free newsletter.