More nails in the coffin or the 'housing shortage' spruikers. This time from Deakin's Philip Soos.
This is often balanced by the by the shills in the mainstream media pretending to be journalists (see The Implant for an example or the SMH/Age property articles) but the message is slowly getting through.
Blowing away the bubble deniers
For over half a decade in Australia, a fierce debate has occurred over whether a bubble exists in the housing market. The vast majority of experts, institutions and the public believe that the idea of a bubble is nonsense. On the other side of the coin, a handful of individuals have contested this notion, pointing out the flaws in the bubble deniers’ line of thinking.
We will look over some of the common arguments made by the bubble deniers, to see how they stack up with the facts.
One of the major arguments made by experts and industry is that a housing bubble cannot exist because mortgages are recourse in Australia, rather than non-recourse. This means that borrowers are liable for the full amount of the mortgage, whereas non-recourse means that borrowers have no legal liability to pay back the mortgage if they default.
This is often compared to the United States, which is alleged to have non-recourse loans. This line of thinking asserts that borrowers took upon irresponsible amounts of mortgage debt to speculate on housing, knowing that if they defaulted down the track, they would not be liable to pay back the full amount.
This has led to the popular term called ‘jingle mail’, referring to the notion of a defaulted borrower mailing back the keys to their lender, and walking away from the property. This typically occurs when the borrower is in a position of negative equity, that is, the property is now worth less than the loan. The lender thus makes a loss on their accounts, to the value of the difference between the loan and the current market value of the property.
As the argument goes, non-recourse lending in the US was a major factor in the run-up in housing prices, whereas Australia has recourse mortgages, and thus does not have irresponsible amounts of mortgage debt.
There is one small problem with this view: it is total nonsense.
A study by two Federal Reserve economists debunks the notion that the US has non-recourse loans. Out of the fifty states, 11 are non-recourse. All of the remaining 39 states are recourse. On top of this, in some of the non-recourse states, the first mortgage may be non-recourse, but all proceeding mortgages are recourse. Also, it often depends on the legalities and judges’ decisions as to whether a borrower is required to pay back the full value of the loan in a non-recourse state.
Worse yet, some of the states that experienced the largest housing bubbles have recourse loans, for instance, Florida and Nevada, whereas California and Oregon, similarly affected, have non-recourse loans. Overall, there is no real difference between states that have recourse and non-recourse loans, apart from recourse borrowers who tend, on average, to hold onto their properties longer before defaulting.
Ireland experienced a colossal run-up in prices over the last decade, resulting in a crash and subsequent debt deflation that has ruined the economy. What is not said is that Ireland has recourse mortgages, governed by strict rules, and non-payment may even result in imprisonment. Clearly, recourse mortgages did not prevent a bubble from forming in the housing market.
The idea that recourse mortgages enforce responsible and conservative behaviour cannot be upheld. A cursory search through Google on this topic provides information that debunks this notion (like the above study). Yet, this has not stopped the leading ‘experts’ within the RBA, Treasury, the banking and real estate industry, and academia from repeating this falsified argument again and again over the years.
Housing prices always go up
Another popular myth that abounds is that housing prices always go up and never crash. If a bubble denier reluctantly admits that past downturns did occur, it certainly won’t occur this time around.
Australia’s recorded housing price history, going back 131 years to 1880, easily debunks this myth. The nine major increases in prices have been met by eight resulting downturns, with the only exception during a small three year period from 1961-1964, where prices leveled off. The table below, from my Prosper Australia report, shows this.
We are supposed to believe that the largest increase in housing prices in Australian history will not result in the same fate as eight of the nine have.
The housing shortage
This is probably the most popular argument used by the bubble deniers. The story is that as Australia is suffering from a chronic deficit of properties to shelter a growing population, so demand is greater than supply, leading to rising housing prices.
The problem with this argument is it can’t explain why prices started to rise in 1996 and skyrocketed from 2001 onwards. Annual population growth between 1996 and 2005 registered at approximately 1 per cent, taking off between 1.5 per cent and 2 per cent from 2006 onwards. (Fundamental supply and demand issues explain rent prices, not housing prices, which is why rents have increased from 2006 onwards).
2007 was the first time since 1950 that the population increased faster than the number of dwellings. If the housing shortage argument was correct, housing prices should’ve started to rise from around 2006-2007 onwards, not 1996. The historical data shows that there is no correlation, let alone causation, between population growth, dwelling supply and housing prices.
According to the 2006 ABS census data, there were 830,376 unoccupied dwellings during the time the survey was taken, out of a total of 8,426,559, or 10% of the dwelling stock. Unfortunately, no indication is given to the status of the vacant properties (derelict, holiday house, undergoing sale, renovations, speculative vacancy).
The Melbourne-based organisation Prosper Australia performed an innovative study of vacant properties using water usage figures. Applying a conservative methodology, it was found that almost 45,000 properties were lying vacant in the areas under study, and extrapolated across Melbourne, 61,000 properties were lying vacant for more than six months. This gives credibility to the idea that speculators are withholding properties from the market to capture capital gains rather than rental income.
Australia’s peak housing body, the National Housing Supply Council, had to include the homeless, caravan park residents, those sleeping rough and couch surfers into their figures in order to arrive at an undersupply of dwellings.
This is reminiscent of every other country affected by a housing bubble whose experts and authorities claimed that rising housing prices were caused by a housing shortage.
Australian banks have lent conservatively
This is one of the more ludicrous defences made by the bubble deniers. Our mortgage debt stands at $1.2 trillion, or 90 per cent of GDP. If personal debt is included as well, as some analyses do, it totals 100 per cent of GDP. A report by the Bank of International Settlements shows that a ratio above 85 per cent becomes damaging to the economy.
That Australia has such a high ratio is unsurprising considering the major banks have lent up to 97 per cent of the value of the property (called the loan to value ratio or LVR) and some non-banking lenders have lent out a staggering 125 per cent. The housing debt to disposable income ratio has reached 160 per cent.
Comparatively, Australia has a greater mortgage debt to GDP ratio than the US. Australians have taken upon an enormous debt load to speculate on housing prices. Why bother to work? Australia is not unique in having a disbelief in the idea of a housing bubble. By definition, a bubble requires that complicity of the majority of people and institutions to believe that there is no bubble. Otherwise, individual rational action would be promptly taken, which would result in bursting the bubble in the early stages or preventing the formation of one altogether.
The only difference between Australia and other countries affected by housing bubbles is that bubble deniers are as plentiful as kangaroos down under.
Kris Sayce, another sharp tack, chimes in...
Why the End of the Credit Boom is the Only Reason Stocks are Falling
The real reason is the end of the credit boom.
Not So Smart After All
Yes. It’s simple. For years, big business executives have been praised as geniuses. And the Aussie economy has been labelled a miracle economy due to 20 years of growth.
In reality, it’s all about the credit bubble. Remember, a bubble can make anyone look like a genius when the market is going up.
It’s the same as the housing bubble. An entire generation of 50-60 something’s still think it was their know-how and street-smarts that caused them to buy a house for $10,000 in 1971 and sell it for $2 million in 2011.
Where in reality they benefited from nothing more than a good old-fashioned easy-money credit boom.
But based on that brief 40-year period, an entire industry was born – property spruiking.
The good news is, slowly but surely the message is seeping through to the mainstream that asset prices don’t always go up. But boy is it slow. Yet we note a good article on the Business Spectator website by Phil Soos, a researcher at Deakin University.
Mr. Soos pretty much says everything we’ve said for the past three years.
He even mentions the ridiculous National Housing Supply Council (NHSC) report that counted the homeless as proof of a housing shortage!
By the way, we’re waiting with bated breath for the latest NHSC report. According to correspondence we’ve had with them, the 2011 report is due this month.
It’ll be interesting to see what the report says on the housing shortage (especially the impact of homeless people) and whether it acknowledges falling house prices.
But back to our point…
It’s the Credit Boom What’s Done ItWhether it’s slower retail sales or falling house prices, there’s one thing that links both – slowing credit growth. It was credit growth that fuelled the boom. And it’s lack of credit growth that has halted the boom and is set to send Australia into a recession.
Bottom line: the only reasons you go into debt is if you want to buy something now because you aren’t prepared to wait to buy it, or because you think it will be more expensive in the future.
And credit growth compounds that belief. The more people borrow, the higher prices grow, which requires people to borrow more.
That happens until credit growth reaches breaking point (where we are now). The fact is there just isn’t enough new credit to repay the old credit… let alone enough credit to increase the supply of credit.
That’s why Myer is downsizing and closing stores… it’s why JB Hi-Fi is set to post lower profit growth… and it’s why the Aussie housing market is heading down the toilet.
The era of the miracle economy is almost over. It’s now just a matter of “when”, not “if” the Aussie economy finally hits the skids.
It pleases me no end that more and more commentators are throwing a few facts out there. The main stream media and the spruikers only will turn AFTER the shit has hit the fan, just like Ireland, Spain and the USA. Tassie RE Trouble has an excellent article on Dr David Lereah (former US Spruiker-in-chief) called Hiatus you google him and get 99,200 hits.
David Leareah, random three:
David Lereah Watch
Time - 25 people to blame for the financial crisis
I like this one from 2006 (just as she is rolling of the bubble peak)
NAR Housing Report: Declining Home Prices Induces Heavy Spin
David Lereah, NAR’s chief economist, said home sales appear to be leveling out. “After a stronger-than-expected drop in July, the fairly even sales numbers in August tell us the market is at a more sustainable pace,” he said. “It keeps us on track to see the third highest sales year on record, but we do expect an adjustment in home prices to last several months as we work through a build up in the inventory of homes on the market.”
The national median existing-home price for all housing types was $225,000 in August, down 1.7 percent from August 2005 when the median was $229,000. The median is a typical market price where half of the homes sold for more and half sold for less. “This is the price correction we’ve been expecting – with sales stabilizing, we should go back to positive price growth early next year,” Lereah said.
Total housing inventory levels rose 1.5 percent at the end of August to 3.92 million existing homes available for sale, which represents a 7.5-month supply at the current sales pace – the highest supply since April 1993.
"We've been anticipating a price correction and now it's here. The price drop has stopped the bleeding for housing sales. We think the housing market has now hit bottom.''Date of that quote: September 25th, 2006.
It would be worth a laughing icon except its brought the USA into technical bankruptcy and teetering on the edge of financial Armageddon.
Next time you open a newspaper and read the journo shills just reproducing bullshit releases that the 'industry' and vested interests give them to publish, some bullshit on population growth and housing shortage or you read some 'Dr' vested interest industry insider proclaiming 'its a bottom' stop and remember Dr David Lereah.