Property Buyers Are Not Buying Property at All

It’s tempting to make this week a ‘Property Week’.

We weren’t surprised to see the Money Morning mailbag bursting at the seams here at the Old Hat Factory yesterday.

Within minutes of yesterday’s email going out the replies started flooding in.

Perhaps the most remarkable response was from the property bulls.

Look, let’s be fair about it. When we asked on Friday if readers had authentic research to back up the ‘housing shortage’ claim, it was probably the busiest day of the week for property bulls.

After all, there’s all those ‘open for inspections’ to prepare for over the weekend.

So it’s not surprising that we received less than a handful of emails from property bulls, offering opinion – which is fine – rather than the real evidence for a housing shortage.

We’ve no problem with people expressing opinions – we’ve done that once or twice ourselves.

But roll forward to yesterday and ‘BANG!’ The property bulls have woken from slumber. The responses were enough to split the Money Morning mailbag.

Unfortunately, there was a distinct lack of hard evidence in the responses. In fact it was the usual stuff – not enough houses being built, too many immigrants, not enough ‘quality’ housing.

So, rather than getting into a “yes there is, no there isn’t” argument, we should probably follow the lead of Money Morning reader Jason:

“The resilience, stupidity and arrogance of the ‘property’ crowd is incredible. I no longer even entertain them with a discussion any more. 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’.”

We couldn’t have put it better ourselves. Hats off to Jason.

But despite Jason’s example, we will stick with property for today. But we’ll take a slightly different tack.

Regularly we receive emails into the Money Morning mailbag asking us for advice on whether the reader should buy a home now, or sell their home now.

Our response is always the same – no response. That’s because unfortunately our licence prohibits us from offering personal financial advice. All we can do is keep things nice and general in these emails.

But the reader emails do have a striking similarity. Almost always – when asking if they should buy – the phrasing is the same: “I can borrow $500,000” or “I can borrow $700,000.”

We don’t recall ever seeing an email that states, “We’ve seen a nice house in X suburb, with three bedrooms. It’s a nice area and the price is $450,000. Do you think we should buy it?”

Obviously, our non-answer would still be the same.

For all the talk about property being excellent value and a great long term investment, we’ll make a bold claim – that property buyers actually don’t have any interest in the property they’re buying.

In fact, I’d go so far as to say that property buyers are not buying property at all.

Rather, they are ‘buying’ a loan and using the house as security.

Why would we make such a claim? And what point are we trying to make?

Well, it just seems that the actual house is a secondary consideration. Sure, we see plenty of comments about a lack of ‘quality’ properties, but as soon as the property loses its ‘quality’ it seems to become a ‘renovator’s delight’ or a ‘demolition job.’

Then even though it’s only land value, the price of the land suddenly becomes the value of adjacent properties less the cost of building a new house. That may be obvious, but is it logical?

But back to the buying ‘psyche’ for a moment. The fact that property buyers see property as an investment rather than a dwelling is precisely the reason why there will be a property price crash.

It’s no different to the stock market. If investors were always rational and approached the buying of shares as though they were buying the whole company, then share prices would be unlikely to rise to such extreme levels.

But that’s just how a market works. Speculators add liquidity to the stockmarket through buying and selling. They don’t buy because they believe the company has strong cash flows or because they like the net profit after tax forecasts. They buy because they believe the price will rise – nothing more, nothing less.

Property investing is the same. Many people buy a house because they want to live in it, and because they prefer ownership to renting.

However, more and more, property buyers and home owners have been brainwashed by the ‘location, location, location’ mantra. They are buying not because they want a place to live, but because they believe the price/value will rise. They buy not because it is close to the train station for their own benefit but because they are told it will ‘add value’ when they sell.

They don’t buy because it is close to the shops, but because it will ‘add value’ when they sell. Even though the buyers are just as likely to drive a car to the station or the shops. But that doesn’t matter, it’s all part of the ‘location.’

Take a look at this brief news story from News Ltd: “The average price of a Sydney home could rise by $100,000 in the next two years, according to an [property] investment group.”

The article states, you guessed it, “A shortage of homes and a growth in population will cause the property boom.”

See what we mean? Not a single mention of an actual property or a type of property, or the benefits of owning rather than renting, purely that the price will go up because there isn’t enough supply and too many immigrants.

As I mentioned above, property buyers are not buying homes or houses any more. They are taking out the biggest possible loan to buy the most expensive property they can, because, well, the more you leverage the bigger your returns.

Why buy a $200,000 loan against a house that will only be worth $400,000 in ten years after it doubles, when you can buy a $400,000 loan against a house that will be worth $800,000 when it doubles in ten years?

As for the other issue I mentioned above about land value, look, your editor is aware there are economic studies and theories that could fill entire libraries on the subject of land and rent. So we’ll state here up front that we have no intention of competing against such learned thought.

We’ll just write what’s on our mind, whether it’s right or wrong.

So what we say is this. Why, for example, should the land value in Richmond be X times greater than the land value in Dandenong?

What extra value does the land in Richmond have that the land in Dandenong does not?

The cost of building a home on the land should be the same.

Of course, the simple answers could be that land in Richmond is more desirable than land in Dandenong. That inner city types typically have more disposable income than outer suburban types and therefore they can bid the price up higher.

But is the land any more useful or productive in Richmond than the land in Dandenong?

Here’s our point. A house in Richmond is no more productive to the economy than a house in Dandenong. Yet it is X times more expensive, and most probably requires a debt that much larger.

So, the only things that can have driven the price is supply, demand and price. Which brings us to the final point. How reliable is price as an indicator of supply and demand?

This is perhaps the real reason the property market and property prices have taken off.

One of the comments we regularly receive is that: “There must be a shortage of houses because house prices have gone up. If there was a surplus of housing then prices would fall. Simple as that.”

Well, it’s not quite that simple. Let’s use an analogy to make our point and round things off for today…

Imagine that someone announced, “There is a shortage of apples, buy apples now.”

And then assume many people started saying it, almost every day. It would most likely have an impact on the price of apples.

You could quickly go to the local orchard and buy apples from the apple grower and he may charge you 50 cents, because that’s the current market price.

The apple grower is happy because business has been slow so he’ll sell them for 50 cents each. But then he notices an increase in business. More people are going to buy apples from him.

Within days queues are forming at the orchard door. The apple grower realizes he can charge extra because of the demand. So he raises the price to $1. But there is still demand because people believe there is an apple shortage.

So the apple grower raises the price further to $2. There is still demand… but not quite as much. But the apple grower doesn’t notice the queues are getting shorter, or if he does he doesn’t care because he’s making four-times as much money as he used to for the same apples.

So he cranks up apple growing production.

Eventually, the apple grower takes a look at the millions of apples that he has in the barn and works out if he can charge just an extra 20 cents he will be a multi-millionaire, so he raises the price to $2.20.

Unfortunately for him, when he opens the barn door, all the buyers are able to look inside and see there is not an apple shortage at all. There is an apple surplus. Buyers no longer feel have the same urgency to pay $2 per apple.

They figure the apple grower will need to lower his price to get rid of all the stock. The buyers are happy to come back tomorrow to see if they’re cheaper.

The price of apples plummets.

You see, supply, demand and price do not necessarily mean that all three are at the correct level. Levels or supply, demand and price change all the time. Therefore, just because prices are high it does not necessarily mean there is a shortage of supply.

Sometimes it is just the belief that there is a shortage which creates the high prices. And can you blame the majority of people for thinking there is a housing shortage?

Of course you can’t. Not when you read day after day in the mainstream press news items telling you there is a housing shortage, and telling you there are too many immigrants who are buying up all the property they can eat.

In summary, there is no difference between the application of supply, demand and price in the housing market to its application in any other market.

Strip away the distortions and the untruths about a shortage of property and the whole thing crashes around your ankles…

Of course, we could be wrong, and house prices could continue rising forever!

Kris Sayce
for Markets and Money

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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42 Comments on "Property Buyers Are Not Buying Property at All"

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Wow someone’s got their thinking cap on! I would like to direct readers to an extraordinary piece of work regarding what happens when popular delusions are unveiled, and they always are *eventually* (see link below). I will also suggest that yes there is a shortage of property for the manic, drewling hordes of ‘investors’ out there, bloodied and battered from Open For Inspection stampedes, each and every one of them feeling that they know how to turn base metals into Gold. That’s right, alchemy in it’s most recent incarnation! I’m afraid what they will soon discover is that their gold… Read more »
Great article Kris. I am sure many people will rip apart your apple scenario, but probably for all the wrong reasons. On a slight tangent, this statement is great: “It’s no different to the stock market. If investors were always rational and approached the buying of shares as though they were buying the whole company, then share prices would be unlikely to rise to such extreme levels” Thing is, people can believe what they want. Speculation can create huge bubbles in almost anything you can invest in, be it shares, property, tulips or apples. One problem with the property market… Read more »
Ned S
Yes, if people are expecting house prices to double in the next 7 years they just could be being a bit hopeful? But if they are saying I have a spare $450K lying around I managed to salvage before the stock market crashed and I reckon that if I buy a house with it I’ll get 3.5% pa rent after expenses and 3.5% pa capital growth in line with inflation and at a total return of $245K over 7 years (or 54.5%) then barring a major deflationary recession in Australia they just could be underestimating their return a bit. As… Read more »
Prima Materia

Facts must be simple. If they’re not simple, their just information. So here’s a simple comparison that I came across in February 2009, which was the precursor to current state of apoplexy.

Asset: Home (not investment) for sale.
Year: 1996.
Location: Anderson Street, Yarraville, Melbourne, Victoria.
Price: $100,000.

Asset: Investment (not a home) for sale.
Year: 2009.
Location: Exactly the same property as above.
Price: $580,000 to $620,00 as estimated by Hocking Stuart in their Star Leader Newspaper advertisement.

There is nothing to say.

Ned S: Question: What do you think the proportion of property ‘investors'(?) who own their investments outright, compared the proportion of investors who have borrowed money to invest? (when I say invest I pretty much mean speculate) Basically, what I am getting at is how many people can sell up their investment and have most of (or all of) that money left over to purchase a different property? And can you not see a catch-22 situation? Unless that money is CURRENTLY on the sidelines just waiting to be invested (and if it was, these investors would ironically not be property… Read more »
Ned S
Pete – I have no numbers on the proportion of investors who own property outright. So all I can do is give you a few thoughts and some anecdotal info – I know two blokes right now who are keen to buy. Both have very stable jobs and earn well over $100K pa. In their early 40s and 50s. So the banks will like them. My work circumstances are quite different to theirs. But I could buy with cash – And very well may once the Henry tax review is out in the open. And I think a lot of… Read more »
Greg Atkinson
Yes Pete I would guess a lot of people who have studied basic economics would have a lot of problems with the “apple” analogy because it is overly simplistic. Comparing a $2 apple to something that costs hundreds of thousands of dollars probably explains why the author does not run a company. I also think Kris is forgetting we do not farm in the city much these days so the comment “But is the land any more useful or productive in Richmond than the land in Dandenong?” is pretty irrelevant. What people look for are amenities, good schools, nice neighbourhoods,… Read more »
Ned S
Greg – I think Kris might be forgetting (or even unaware?) of a few things – For example, despite our historical and somewhat folksy “bush battler” self-image, Australian is actually a very heavily urbanized nation. And one that has not easily accepted the joys of high density living as opposed to those of detached housing. Yep, it doesn’t surprise me too much that one is going to pay a premium to live in our cities – Unless the Y Gens decide they like living stacked on top of each other in boxes close to cafes and restuarants and street theatre… Read more »

I’m with Jason. Let’s bring the final fools into the market and get this thing over and done with.

Everyone – buy, buy BUY!!! Prices are going to the MOON! You’ll be LEFT BEHIND!! You’ll be POOR. Everyone else WILL BE RICH!! BUY NOW! NOW!!!


So I wonder where might that “barn door” view onto the truth about hoards of excess properties be?

Jimbo James
Interesting topic, with some really good points being made. Wasabu is the first person I’ve seen anywhere to make the point about investor demand (albeit tongue in cheek!). The ‘How I Bought 456 Properties in 18 months’ brigade have got much to answer for in this bubble. As they say, lever up, lever down. As for the supposed shortage, there is definitely a shortage of 3/4 bedroom family homes on 1/4 acre for $400K in Toorak, South Yarra et al. Many new buyers do not want to step up from the burbs like most have historically. Desirability is a huge… Read more »

So if there is a property price crash this puts people who are over extended in the property portfolios of going bust which then puts further pressure on the Aussie banks to writedown bad loans which could lead to another stock market crash or at least slump.

Has anyone heard of the rumour… that there are more people who have defaulted on their homes than is being discussed? (which is almost non-existent)… And the banks are holding these properties back from sales on the market so it won’t create a glut of selling properties?


The Australian Bureau of Statistics has published some interesting trend information stating that people are staying in the family home for longer and are even returning to the family home, therefore diminishing the need for addional housing. Property Investor magazine had a short post saying that NSW has amended its planning scheme to allow granny flats in all areas zoned residential. This would give the gen Y some independance but further reduce the ‘housing shortfall’ if there is one. I seem to think that as long as there is a ‘vacantcy rate’ at all then there is sufficent housing.

This property Boom we saw went on FAR TOO LONG. Property is still way way way overpriced and people are not getting it. From were i see things, many projects and landbanks are being firesold & thats if they can find a buyer. Loads of developers and so called property experts are now bankrupt on paper and banks are calling in the loans and instructing to sell. We have seen 5 such projects come across our desk in recent months and even at the firesale prices the numbers still do not add up. When is this country going to wake… Read more »
Hi all, this is my first posting here, so please bear with me. I don’t know whether to be a bull, or a bear, about property in the short to medium term. The way I see it, it could easily go either way. Therefore, in saying what follows is not meant to support either camp, but merely to point out nuances, strengths and weaknesses in Kris’s arguments. 1. Chief strength: Property prices cannot double every 7 or 10 years. To suppose otherwise is absurd. 2. The catch: The claim, while true, is jejune, trivial, and of not much use but… Read more »
Unpopular Truth

Happily renting until the property market crashes. May take a couple of years but it’s in the post. I’m in no rush.

There’s one wildcard complication though. Normal economics will prevail sooner or later, BUT given every political party in this country will aim to keep everyone’s over-priced house over their head (locking out those without one), then we’ll see some political distortion in the outcome. First home buyers grant for example.

How much this affects everyone is anyone’s guess right now. Based on past performance, I’d say it could be significant.

It’s a case of economic mob rule really.

Jimbo James
Neil, I am aware of that sort of banking behaviour going on in the US, but not here. Having said that, a real estate agent I know is doing up to ten mortgagee auctions a week and unlike in the past they are not being advertised as mortgagee sales (for obvious reasons). They had to put on another agent to handle the mortgagee workload. There is absolutely no sense in the market at present because despite massive levels of underemployment and anecdotes like this one (and the one i posted previously), prices and demand apparently continue to be bullish. The… Read more »
The ‘apple’ analogy is a bit silly. Apples are fungible. One apple is pretty much the same as another. Not so with houses. Most houses are unique, in terms of size, location, view etc. If I want a four bedroom house in Manly with harbour views then it is very easy to see whether there is a shortage or over-supply of such properties for sale. It is not the same as the sneaky apple farmer with a shed full of hidden apples. Where exactly would we hide a large surplus of available 4BR houses in Manly? Besides, even if the… Read more »
Shadow: “Oh wait, you’re going to tell me that there is a large number of empty houses, but they are not actually available for sale or rent? If so, then what is the point?” The properties are not available for sale or rent right at this ‘moment’. Some people are just waiting for capital gains and don’t want to bother with the renting side of things. Usually these people don’t have mortgages, so it costs them very little to just hold onto the land. However…it still does costs them via inflation. And whilst property prices are rising they can see… Read more »
I had a think about the charts posted in on Chris Joye’s blog, the first which forecast that the number of people per occupied dwelling would continue on its downward trajectory (top green-blue shaded area) and compared it with the Westpac chart that shows that since 2006 the number of people per occupied dwelling actually rose before ending up roughly level from 2006-09. The number of people per occupied dwelling dropped from 3 in 1991 to 2.7 in 2006. After falling for a decade, this number flat-lined because Australians are now compressed into existing dwellings due to the shortage, rather… Read more »

So how much “suburban consolidation” is available from within the existing residential market and at what point of economic duress or expanded personal taxation would it be triggered?

I don’t think Ken Henry will be allowing his mates with the purse strings in academia to publicise PHD programme results on that one!


Hi Pete, I had typed you out quite a long response, but it disappeared when I sent it! I will respond again later when I get time to retype.


Thanks Shadow. I too have had similar problems, so much so that every time I type a response I copy the text before I submit it. It is a helpful habit in respect to posting comments on most websites.

Biker Pete, Wolfville, Canada
Biker Pete, Wolfville, Canada

Ha, ha… Daily Recking Australia figures my comments are too dangerous to print! (Quite a compliment!) :)

First Home Buyer

Q: What’s a four letter acronym that rhymes with fog?


First Home Buyer

Technically it’d be a homophone, but I digress.

I think the younger generation (GenY) are starting to appreciate how overpriced the bubble is. Most kids I know live with their parents because despite all the things they want the price of a house is too much to get it. Property investing if you already have property is ok. If you don’t and have to come up with $400,000 not to live in a crime filled area where you don’t have to travel 2 hours to get to work one way then on the average wage it will be very hard to pay off. Most of the older people… Read more »

‘Demand’ alone CANNOT determine prices.

There’s a lot of ‘demand’ for housing in Somalia, but I’m preeeeeety sure that houses are not that expensive there.

If credit suddenly becomes too expensive (due to high interest rates), people won’t be able to afford houses, no matter how desperate they are for it.

I must state that I am a property investor. It seems to be an assumption by Kris that all investors who prefer property investing to shares, purchase property with blinkers on and no research whatsoever. People will be burnt by property just like people will be burnt by shares. It seems that people who have suffered from the GFC (and their share investments) now want the property investors to suffer the same way! Questioning why the same is not happening to those damn property investors!!! I am a property investor who will only purchase if the property is the right… Read more »
Crazed Nutter
Shadow, Following your logic then, there must be a surplus of people ? Strangely, I do not observe this surplus. Do you ever wonder where these surplus people go, when they’re not attending auctions or visiting display villages ? Certainly, I see the occasional one or two camped under a bridge, but nothing like the numbers at displays and auctions (and certainly not the same type of people). Maybe people aren’t fungible either – they all have their own unique needs and priorities, aside from housing, which for them is all ready met in some other way ? Or perhaps… Read more »
Mr Pastry
Comment by Prima Materia comparing Yarraville Melbourne house price increase. I think there is something to say. As usual incomplete information is used. The same property,yes , but how much was the complete renovation it had ($200k? – have seen the property) add in that cost and use a realistic selling price not the price advertised. cost $300k sell $500k return $200 over 13 years on a 300k investment. I thought property doubled every 7 years? and 96-09 was in a rising market. Yarraville during this period has been gentrified so even in boom suburbs the figures seem overstated. Take… Read more »
Additional considerations are that the ‘shortage’ pertains to properties for sale in populated demographics, with a high proportion of non-owner occupiers, who have been left out of the market because wage rises have not kept up pace with the returns to investor owners facilitated by government regulation which provides: *almost unlimited capacity to increase real rents (current ave 7+% per annum, excluding returns from almost unfettered bond retention, as well as the facility to remove renters and charge new ones in excess of regulated increases) *negative gearing returns which sustain the comparative advantage of investors over owners As well as:… Read more »
Dee: “I am not saying that property prices will not decrease (or crash) or double every 10 years. I am happy to walk away with a capital growth equal to inflation every year and 5% rental yield to pay my mortgage.” So you have not factored in a rise in interest rates? Or higher inflation rates? General price inflation for goods and services does not necessarily imply equal inflation (or even any inflation) of asset prices. In fact, unless there is wage inflation, inflation of goods and services prices reduces the amount of money that can be spent on assets.… Read more »
paul the miner
interesting gabble as usual above. some almost got it. after studying mob mentality and large number theory many moons ago i decided to move to a mining town and expierence a better class of human. cities, from direct and elevated expierence create the most obnoxious of humans as i like to refer to them, battery hens, looking into the next cage and thinking theyre better as theres less shit in theirs!. The ladies taking their spawn to school in oversized 4wd’s was a mob trend which still exists today much to my amusement. Kris stated above that the mob thought… Read more »
Nice comment by Paul the Miner above but still failed to grasp the complete concept and quite clearly by the depth of his thinking probably never will. Unfortunately (for better or worse) Paul has used a distinct and separate species metaphor to describe a same species problem. The asset valuation and response Paul and others has described happens intra-species (i.e. we are all human) so observations such as these from the natural world do nothing to shed light on property prices or asset values. What happens to outliers in an interspecies battle is that it is more often than not… Read more »

What sane investor would buy property that is trading at an artificially overvalued level courtesy of a temporary (soon to end)socialist government stimulus boost aimed at bribing the most financially poor, naive in society.
Hmmm what triggered the US subprime crash?

Biker Pete, Ottawa, Ontario, Canada
Biker Pete, Ottawa, Ontario, Canada

Have to smile at your comments, Bargeass. :) Actually helps us when you talk property down, discouraging many more investors from building. No wonder Perth rents have risen an average $46.00 per week during the last year! ;)


Biker, talking up or talking down a market is the sort of ineffectual short-termism that politicians have become obsessed with.
Don’t worry about it, it won’t have any effect on the long term outcome.

Biker Pete, Ottawa, Ontario, Canada
Biker Pete, Ottawa, Ontario, Canada

Fully aware of that, Richo… but there’s a delightful irony in the bears’ contributions at times. ;)


When a socialist government has to pay the most financially naive and unsuccessful members of society money to encourage them to over commit on overvalued property you know it’s going to end badly.

I can give an authentic record of my experience, as I sold recently- August, 2013, a property I had held for 17 years. In fact, the flat I lived in in Sydney’s blue-ribbon North Shore. Incidentally, it was a 71 square metre flat in a refurbished small block, without a garage and 300 metres from the beach. To put it bluntly, I was a bit disappointed with the outcome. In 17 years, my auction achieved much less than a doubling in its initial value, inflation and all. (I think I would be correct to believe that average wages have more… Read more »
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