The Inevitability of Reality

The housing gloom virus is spreading to mainstream newspapers. And property spruikers are revising their ‘property always goes up’ rallying cry. Now the market is ‘steadying‘, faces ‘stabilisation‘, feels ‘softer‘ and prices are ‘flat‘.

Editor Kris Sayce points out in our sister publication Money Morning that ‘flat’ means declining if you actually look at the numbers in the Age.

Perth recorded the largest fall in house prices, down by 2.7 per cent, over the quarter. It was followed by Brisbane, down 2.1 per cent; and Darwin and Adelaide, each falling 1.9 per cent. Melbourne and Sydney again proved to be the most resilient of the state capitals; Melbourne’s low fall of 0.9 per cent was followed by Sydney’s, down by 1.1 per cent.

But let’s take a look ahead rather than back. From the Age again:

Separate building approval figures show just 7600 private sector houses were approved in July, almost unchanged from June and down 12 per cent over the year. About 2900 houses were approved in Victoria, down 10 per cent on a year earlier.

These figures add weight to our view that the housing sector is going backwards at a rapid pace,” CommSec economist Savanth Sebastian said.

“Homes sales have hit 10-year lows, house prices have been tracking lower for six months and housing credit is at the weakest levels since the late 1970s,” he said.

So the housing sector isn’t expecting things to be pretty either. Over at the RBA, they are one-step ahead according to the Australian:

RBA deputy governor Ric Battellino said today there were concerns that buyers who bought into the market in 2009, when the federal government grant was increased, may have over-committed themselves

Yes, remember those first-home buyers who had to ‘get on the property ladder’? They will soon be found at the bottom of the pile of people who fell off.

To get an idea of what might transpire over coming years, consider what happened in the US, UK and Ireland, just to name a few, when house prices stopped rising. (Here we mean the real definition of ‘flat’, not the property spruikers definition.)

Property investors suddenly stopped believing their houses were appreciating in value. (Something that is inherently odd to your editor, as houses don’t grow.) And it became difficult to justify making a loss year after year on the expenses of owning the property.

Suddenly the true value of the investment asset emerges – it will have to fall in price dramatically before it can return a profit (rent minus the costs of owning, which include paying back the debt).

So the very tax advantage that sucked gullible property investors into the market will be their downfall. Investing in a loss-generating asset may be tax deductible, but that asset obviously isn’t much of an investment.

That’s what the Americans, Brits and Irish figured out. Then the real selling began, unleashing mayhem on financial markets.

When Australians figure out that a loss-making investment isn’t a good one … well … they will lose a key part of their national psyche. Perhaps they will no longer be Australian?

Here is another odd phenomenon about housing bubbles. Gold, which is in a bubble according to many property spruikers, has had margins go up with the price. That is, as the price went up, it cost more to hold a position in gold futures. Property investments are the opposite.

The higher house prices go, the less risk banks perceive in lending. That meant they felt comfortable reducing required deposit ratios in the housing boom of the US, UK and Ireland. The initial cost of buying went down as the price went up.

This just adds fuel to the fire. And whenever things slowed, the government stepped in with all sorts of grants and tax breaks, further reducing the costs of ‘getting on the property ladder’. The Sherlock Holmes of property investing, Intelligent Finance mortgage broker Justin Doobov, comments: ‘I have a suspicion that the grants tend to push the price of a property up by the value of the grant.

Well done, Justin!

This may be a particularly bad time to be over-optimistic about property.

Ratings agencies, governments and private institutions continue to forecast recoveries that are unlikely to emerge. In fact, many economists who predicted the 2008 economic woes are explaining why recession is a virtual certainty in the US. Some say it has begun already. Factor in Europe’s sovereign debt woes and China’s attempts to slow down and you get a dismal outlook for Australia.

The ‘reputable’ forecasters above (people think ratings agencies, governments and big banks are more reputable than people who are consistently correct) base their projections on recoveries that happened back in the day when more debt could be borrowed to spur ‘growth’. Too much debt is the problem now. It has to be paid back, or defaulted upon, before growth can re-emerge.

Very few countries are actually in debt repayment mode. But there are some encouraging signs in some countries. The UK for example. The Telegraph reports how the rebalancing of the economy away from debt is taking place:

While our economy as a whole has grown by 2.5pc, the financial sector has shrunk by 4pc. Take the financial sector out of the equation, and economic growth in the rest of the economy during the recovery has actually been above its average rate of the last two decades.

This is precisely what a healthily deleveraging economy should look like. (The British government is still borrowing though.) What forecasters don’t seem to understand is that this ‘good’ process of debt reduction necessarily has a dampening effect on GDP. So slow or negative GDP growth may be a sign the economy is healing. It shouldn’t be interfered with. Especially when those interferences involve more borrowing.

In times like these, it is important to remember that the market will correct misallocation of capital in the end. People who shouldn’t have borrowed money will be foreclosed upon. Banks that should have failed but were bailed out will pull governments down with them. The bankers that would have lost their jobs if the banks hadn’t been bailed out will lose them anyway. Houses that shouldn’t have been built will be bulldozed. The inequality that was not corrected by a financial crisis, after years of inflation, will be corrected. And so on.

As you will have guessed by the links, these corrections are already underway.

Hole or no Hole?

The debate over Jackson Hole continues. As is typical of economic arguments, this one has little to do with economics. Instead, the argument is about whether Jackson Hole is in fact a place or not.

To settle the ongoing hullabaloo, here is a map courtesy of Google Maps:

Nickolai Hubble.
Markets and Money Weekend Edition

Nick Hubble
Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

Leave a Reply

6 Comments on "The Inevitability of Reality"

Notify of
Sort by:   newest | oldest | most voted
Alexander Malejew

I, unfortunately, know dozens of people who have their properties for sale in inner Melbourne.
Not one is even remotely in the process of being sold in the last 9 months.
I think ‘flat’ should mean ‘collapsed’.
Sellers really have to take 25% off their initial asking price to get a “hit” on Real Estate sales websites.
It’s really bad out there, already! The banks really have to take some pain in the future I believe.


Alexander, I can attest to that. Recently sold a house in Brisbane, initial asking price was somewhat more than I thought but real estate agent recommended. We got a few people to open days, but not a lot of interest for about six weeks. Dropped the price by a price bracket and sold the house within a week.


We have a “Seneca cliff”. The housing market goes up slowly over many years, then it collapses quickly. As Seneca stated – “the way to ruin is rapid.”


Jackson ….. slow witted but deadly was my impression.

With the charting resources of DR perhaps the current account deficit plotted against corporate salaries, investor returns, and house prices might provide an interesting visual of the polarity

Fools Gold

@SG: Thanks I like the view of not actually address any fundamental issues and we can make it all just go away through positive spin.

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to