Yeah…but nah. This time is it.
Surely, it must be.
It can’t go on…
I’m talking about Australia’s national obsession: house prices.
And another week brings another prediction about their inevitable demise. This time it’s investment house UBS warning that we have reached a top.
Join the queue guys…
The Financial Review reports this morning:
‘The booming housing market could finally be about to turn as auction clearance rates fell back over the weekend and analysts from investment bank UBS “calling the top”.
‘Investment bank UBS published a 69 chart deep-dive analysis and said it was now “ringing the bell” and “calling the top” for both activity and house price growth.
‘“While the historical trigger for a housing downturn [of RBA hikes] is missing, mortgage rates are rising, and sentiment of home buying collapsed to a record low…”
‘UBS’ economists Scott Haslem, George Tharenou and Jim Xu said in a note to clients. “Looking ahead price growth has likely now peaked, and we see a moderation ahead amid record supply and poor housing affordability.”’
I have about as much an idea of whether this is the top for Aussie property as the folks from UBS. That is, neither of us has a clue. But they have convinced themselves otherwise by gathering 69 data-slides as ‘evidence’ of a market peak.
While such evidence may appear compelling, the folks at UBS have simply succumbed to the ‘illusion of understanding’. That is, because they can make sense of the past by putting together a powerful presentation of compelling historical facts, they think they can predict the future in a similar way.
They may be right…or wrong. Property prices may well have peaked. But what if the Aussie economy starts to slow, political reform remains as elusive as ever, and the RBA sees no other option but to cut rates again? In such an environment, prices would receive another boost.
I’m bringing this argument up (again) because I think it’s important to talk about the futility of prediction. So often when the topic of property comes up, the discussed outcomes are binary in nature. That is, the property market is either going to go bust or keep soaring higher.
The position we take in the argument often depends not on the facts, but on our own biases. That’s why it’s such an emotional topic, and why media outlets always prominently run a good ‘housing boom/bust’ headline.
The fact that I’m writing about it — again — is evidence of housing’s emotional pull. Except that I’m encouraging you not to be emotional about it.
Because when you lose the emotion, you make better investment decisions.
When it comes to house prices, the only thing to keep an eye on is official interest rates.
Sure, banks have increased borrowing rates marginally for investors and those on interest-only loans, and this will take some heat out of the market. But you won’t see serious pressure on house prices and the economy until the RBA decides to raise rates.
The next piece of the interest rate puzzle comes this week with the release of the March quarter consumer price index. The thinking goes that, if this measure of consumer price inflation is strong, the RBA might be forced to increase interest rates for the first time since…November 2010!
In my view, there will be enough ambiguity in the numbers to have the RBA sitting on their hands for a few more months at least. For example, if the number comes in higher than expected, will it be due to price rises starting to flow through from higher east coast gas prices?
It’s probably too early for higher gas prices to show up in higher consumer prices but, even if they did, the RBA would be mad to respond by raising interest rates.
So rates aren’t moving anytime soon. And if rates don’t move, capital will still avoid cash and gravitate towards property.
Even the UBS guys acknowledge that, despite calling a top, Aussie house prices are unlikely to crash.
‘“We are ‘calling the top’, but stick to our forecasts for commencements to ‘correct but not collapse’.”
‘The analysts did note however that they did not think there would be a price crash because of the lack of RBA rate hikes.’
So don’t rush out and dump stocks because you fear the housing market will crash and bring the economy down with it. And don’t rely on the mainstream media to inform you about the housing market. Whenever there is a prediction, good or bad, they will write about it.
Instead, look to the market for clues. This is where real capital flows respond to real world happenings. For example, check out the share price of Lendlease Group [ASX:LLC]. LLC has one of the largest land banks in Australia, and is one of Australia’s largest property developers.
The stock price is trading near two-year highs. This tells you that there is still plenty of activity going on in Australia’s housing market. Often, stock prices will turn down amid a flurry of activity and hype about the good times continuing. This is a sign that the good times are about to end.
[Click to enlarge]
But in this case, we have stock prices rising amid continuing messages of gloom about the housing market. That tells me the real world of housing isn’t anywhere near as bad as the world of housing we have concocted in our heads.
So quit worrying, and learn to love the housing bubble. It could be with us for many more years yet.
For Markets & Money
Editor’s Note: This article was originally published in Money Morning.