Fear and Loathing with the Housing Market

The market has entered into a new phase. It is a phase, which in my opinion is closely affiliated with coming to the peak of a market bull run.

There is considerable fear out there by residential real estate buyers. And it’s the fear of missing out. And with it, the loathing of not buying sooner.

These are buyers that have been sitting on the side lines, some of them for years now, waiting for a market crash. They have been severely disappointed and emotionally crushed. They almost had their way; however the government of the day put an end to their property crash dreams.

And now it is they who have stepped up to be today’s buyers. And they are the most fearful as they are also the ones who have fallen further behind in the housing market bull run. What they are doing now goes against their logic and core beliefs. And they loath and they despair at it; yet they buy.

That, in its essence, is the raw emotion moving the curent housing market.

Sadly, they also could be some of the very last surge of buyers to enter into the market.

Make no mistake, the Reserve Bank of Australia will lift rates again and lift them shortly. The markets suggest another 25 basis points in either April or May. And possibly yet another rise by June.

What the Federal Government had done is massively distort the market. If it wasn’t for the extension of the First Homeowners grant, a larger correction of the 2008 housing market would have occurred instead of the very light 5% decline that we did have. The Bears would have been right if it wasnt for Rudd.

Now, almost everyone thinks there can’t be a crash. The unspoken feeling is the government will come to the market’s rescue again at some point. And they may well be right.

However more and more government intervention in the housing market cannot be a good thing. It means more and more of the country’s resources are spent holding up housing. Money, which could have been used on health, education, infrastructure, you name it.

Even so there are other factors in the market that can no longer be ignored and which are also flaming ever higher house prices. It is a simple fact that many states are not building enough dwellings. In NSW the number of monthly building approvals is at the same level that the state had in 1983. Think about who you were and where you were in 1983! To think that back in those times NSW was building more dwellings than now!

No wonder SQM’s vacancy rates have headed to new lows of late.

Overall what higher house prices and higher rents mean is a drop in the standard of living. No, we won’t have more people on the street or more of the populace not being able to eat because of their outrageous rents or outrageous mortgages. But what we will have is more people grouping together. And importantly the gap between rich and poor will widen. Indeed it is possible the gaps between all the various classes will widen.

So when will a crash come? Will there be a crash at all? Now that the bears have been capitulating, one has to wonder.

I am looking for at least two or three of the following events to happen simultaneously or at least within a 12 month period of each other in order for a property crash to occur:

• The major banks reduce their loan to value ratios down to 80% for a first home buyer that has a sound credit history.

• Average home loan lending rates to hit 8% or more.

• China to enter into a recession.

• The globe to have a double dip recession.

• Our unemployment rate to breach 7%.

I suspect it’s going to take more than one of the events to do the trick. If for example we have 8% average lending rates or more, this may dramatically slow down the housing market, but in doing so, the RBA may just decide to cut rates accordingly.

No it’s going to have to take more than just a lift in lending rates. Bear in mind a property market slowdown where house prices have an entered period of being flat will still feel painful to many.

However the rest of the possible events could be a death rattle for the market. The most dangerous is a double dip recession, possibly bought on a sovereign debt default, China stumbling, or both.

You see, the danger with a double dip recession, created by government default is very serious.

Firstly it may prevent the government of the day coming in and propping up the market. A sovereign debt default would mean there would be ample pressure on governments to avoid borrowing and so, as the theory goes, there might not be much in the government kitty for First Home Owner grants, etc.

Secondly, the psychological damage behind a double dip recession would be devastating. It would mean, potentially a far deeper recession where unemployment would very likely rise above the 2009 peak.

But for now, there is no double dip recession taking place, only rising interest rates in this country to try and tame a kangaroo economy. Our forecasts, made at the start of the year remain in place. That is 4-6% house price increases as the National City average, with Sydney possibly outperforming this. We believe Sydney may come in at 7-9%.

We have been on recent record as stating the market could be on the brink of a downturn. That follows four months of declines in housing finance approvals. However it is becoming increasingly obvious, that the departure of First Home Buyers has not, this time, lead as yet to a material downturn. And the reason behind this is that while demand has fallen, so has supply. National listings are down by 30% from the peak recorded in November 2008.

No, Investors have not entirely taken up the slack left by the departure of First Home Buyers but it seems they have taken it up enough to hold the market up.

Certainly, it will be a very interesting number when the ABS reports on Housing Finance approvals for February. I am now expecting a bounce, probably brought upon by the RBA holding off lifting rates for that month.

All up we are expecting a slowdown to start at any point in time but we do not rule out the market in the capital cities to continue to boom until at least the 2nd half of the year.

So there is still upside risk in our forecasts. The fear and loathing may continue just for a little while yet. Just enough to get the very last bear into the market.

Louis Christopher


"No sympathy for the devil; keep that in mind. Buy the ticket, take the ride...and if it occasionally gets a little heavier than what you had in mind, well...maybe chalk it off to forced conscious expansion: Tune in, freak out, get beaten." — Hunter S. Thompson



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