“Melbourne house prices flat” – that headline is from today’s Age.
Trouble is, it doesn’t match the story:
“Melbourne’s median house prices stood at $551,056 over the July quarter, a fall of 0.9 per cent from the $555,958 recorded in the April quarter.”
Dontcha just love ‘em?
So prices weren’t flat. It turns out house prices – go on Age, you can say it – fell.
They’re a funny bunch, housing spruikers… unable to admit what we can all see with our own eyes.
Even the supposedly rock-solid Sydney market is feeling the pinch. Another Age article states, “Sydney’s median house price fell from $646,806 over the April quarter this year to $639,484 over the July quarter, a decrease of 1.1 per cent.”
It doesn’t sound much. But it is.
Because don’t forget, the housing market is super leveraged… and leverage magnifies falling prices.
The Aussie housing market is more than three times the size of the Aussie stock market. So falling house prices are bound to have a bigger impact on individuals’ wealth than falling share prices.
Because contrary to belief Aussies are vastly overweight on property investments. Sure, that’s not the case if you isolate super funds, where shares tend to rule.
But when you look at the big picture, housing accounts for more than two-thirds of private assets… and close to 100% of all household debt.
That’s why the current housing slump is such a big deal.
They didn’t believe us
And it won’t be long before Sydney and Melbourne see the same falls as Perth and Brisbane. According to the article, based on Australian Property Monitors data, “Perth and Brisbane were the worst performing capitals over the July quarter with falls in median house prices of 2.7 percent and 2.1 percent.”
But don’t worry, because apparently this is all fine because:
“Despite the decline over the July quarter, Sydney’s median house price has remained steady over the past year – down just 0.6 per cent. This is good for stability and confidence, considering prices rose 20 per cent in the 18 months from January 2009 to June 2010.”
Of course that’s drivel. Stable house prices are terrible for leveraged buyers. Even if we believed prices on the average house gained 20% (which we don’t), it only takes one-two years of flat prices for buyers to lose out.
Simply because once you add in buying costs (stamp duty) and ongoing costs (interest charges), the costs soon wipe out the capital gain.
This is exactly the reason why owners are flogging off homes in Queensland and Western Australia.
Last week our old pal, Geoff Brand from Geoff Brand Real Estate on the Gold Coast dropped us a line. He simply wrote, “And they didn’t believe you!”
He added a link to a note on his website. It’s headlined, “Queensland Property Market Free Fall“. Geoff writes:
“A recent sale in Brisbane is proof the property market in Queensland is falling at a rate of nearly three per cent per month. The property at 20 Lilley Street, Hendra sold for $955,000 on the 19th February, 2011 and again sold on the 6th August for $800,000. That’s 2.7% per month, or 16.2% in just 6 months.”
And here’s the kicker:
“And it was not a flood affected property!”
According to the sales history of that property, the previous time it changed hands in 2007, it went for $960,000. That’s zero growth for four years. And then a 16.2% drop.
Even if the 2007 buyer paid in cash that’s an opportunity cost of over 5% per year. That’s what they could have made just by sticking the cash in the bank!
Or put another way, $200,000 of missed compounded gains.
All up, it makes us wonder where this fits into ANZ Bank’s simplistic – and as we always knew – wrong stylised vision of the Aussie housing market:
In ANZ’s world house prices never fall. They only go up… when demand falls, supply withdraws and prices flat-line… or even goes up.
Tell that to the folks in Queensland where demand has dropped, but supply has gone up… causing prices to fall… causing more people to rush for the exits. Model that ANZ.
Not that we’ve heard from ANZ recently. The bank’s last published housing commentary was in March when it claimed:
“The extended period of ‘sideways prices drift’ expected through 2011 will consolidate foundations for current price levels, reducing further the already low risk of a more substantial decline.”
Wrong. As we’ve pointed out, “sideways prices drift” will be the spur for faster price declines.
The longer prices don’t go up, the greater the cost of carry for house owners. And that means it’s more likely owners will get out while they can.
All that said, remember one thing…
Ignore the indices
We advise you to be very cautious about house price indices. Because they mask the real price falls on individual homes.
What we’re getting at is this: don’t get fooled into thinking prices haven’t dropped. Because they have. In some cases they’ve dropped a heck of a lot.
And that means, if you can finance a house purchase and you look at housing as a consumption item rather than an investment, you may be able to strike a good deal…
Just don’t think you’ll get rich from it.
Even the spruikers are starting to say house prices are unlikely to outpace inflation for the next 20 years!
In our view that’s the best case scenario. But more likely, housing will vastly under-pace inflation (as has happened this year) as credit growth slows and the bursting of the Aussie housing bubble picks up pace.
The fact is Aussie housing remains just as risky as the stock market right now. And just like the stock market, the era of easy money-multiplying gains are over.
Money Morning Australia