“Thomson buys Reuters for $20 billion,” “OPEC holds world demand estimate steady,” “Oil prices spike,”, “Dow leaps to new record.” Yep, it’s just another heyday in the great global melt up.
Heyday, by the way, has a murky origin as a phrase. It means period of great strength or vigour, or of great prosperity and productivity. It can also mean high spirits, when the predators of capitalism roam wild and free.
Either way, the first thing to check every morning is if the financial world has come to serious grief overnight. It has not. The sun is still reliably rising in the East and setting in the West. You can generally count on this. What about house prices, though? Can you still count on those to rise and rise, and never set at all?
“U.S. home prices tumbled to a two-year low in the first quarter, with declines in almost half of U.S. cities, the National Association of Realtors said,” this from a wire service story. “The median price for houses and condominiums slid 1.8 percent to $212,300 in the first three months of this year, the lowest since the first quarter of 2005 when it was $199,700, the Chicago- based real estate trade group said. The median price for a single- family home fell in 62 of 145 metropolitan areas.”
1.8% might not seem like that big of a decline. But a few years ago, it was simply unthinkable and practically unutterable that house prices would ever decline. We remember answering questions about the subject on American radio shows. “Surely you mean that house prices will simply grow less fast, right? You don’t really mean that house prices will go down do you?”
“Yes, that’s exactly what I mean,” we replied. “House prices will fall both nominally AND in real terms. Over the next ten years, home price growth will be lucky to keep up with inflation. It’s going to take a long time for the market to clear out excess inventory. All those investment buyers have inflated prices, and so have cheap mortgages. When credit tightens up, the loss of liquidity is going to leave house prices flat in real terms for a good long while, to be precise.”
We mention that because Australians today seem to have the same messianic faith in property Americans did a few years ago. It’s almost an article of faith. It’s best not to ask probing questions. It’s a little creepy really, as it was in America four years ago when we noticed the same pathology.
At first, like mad cow disease, the signs are innocent enough: dementia, memory loss, hallucinations. Investors believe prices will always go up. And not just a little, but a lot. If prices never go down, it is safe to borrow and even use negative gearing. You will make it all up with huge capital gains, probably in just a few years.
By now it’s become a collective dementia with mass hallucinations of effortless prosperity. No one bothers to tell people that it’s just inflation. But then, medical research also shows that mad cow disease can lie dormant in the human brain for up to 50 years before symptoms start appearing in someone who has it. Homeowners don’t have that much time, unfortunately.
And then this from Anthony Klan in today’s Australian, “The number of home repossessions around the nation is up to four times higher than reported figures because lenders are disguising the nature of forced sales to prop up property prices.” We’ll keep the crash alert flag up here at the Old Hat Factory for the stock market. But with money flows into stocks strong and getting stronger, it may be the property market that catches everyone by surprise, and crashes first.
Markets and Money