Real Estate 101 – Lecture 1: Never use the "F" word

Have you ever wondered what happens at training courses for people joining the real-estate industry? Well I can’t be 100% sure, but I reckon the first session would go something like this:

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Good afternoon and welcome to this first lecture on real estate.  In today’s session we look at the golden rule of the industry: NEVER use the “F” word. 

Definition of a bubble (part 3)

In Definition of bubble (part 2), I ended with the question: 
 
“So if higher prices leads to more demand, which feeds into higher prices, what’s to say this cycle can’t continue indefinitely?”
 
Well, the cycle of rising prices can, and did, continue longer than most of us (including myself) imagined.  But for the housing market to keep rising beyond wages and rental growth, there needs to be ever-increasing debt and a never-ending stream of new buyers. Both of these have limits. 

Definition of a bubble (part 2)

In Definition of a bubble (part 1), I aimed to prove that high house prices during a bubble are not caused (or justified) by any of the ‘fundamental’ reasons claimed by spruikers. 

The question then arose: if it wasn’t fundamentals, what did cause the over-valuation in Aussie house prices?

Going back to economics 101, you learn that when the price of something goes up, all other things being equal, the demand for it comes down. For example, when the price of petrol rises, public transport becomes a more attractive option. This reduces the demand for petrol, which puts downward pressure on price. 

The familiar path to financial crisis

Critics have been vocal about the efforts by government to pump up the property bubble – including the doubling of the First Home Owner Grant, negative gearing and the halving of capital gains tax.

However, there's another measure that seems to have been overlooked.

In a statement on Friday, Treasurer Wayne Swan said:

"Today I announce that I have directed the Australian Office of Financial Management (AOFM) to invest a further $4 billion in high-quality, AAA-rated Australian residential mortgage-backed securities (RMBS) to help smaller lenders continue to offer competitive loans to families and small businesses."
Source: www.news.com.au

Definition of a bubble (part 1)

The first step in defining a bubble is to identify that price rises are not driven by “fundamental” reasons.

Property bulls and spruikers claim that Aussie house prices are not in a bubble and are, therefore, not going to burst. They argue that high prices are justified due to fundamentals such as population growth, a “chronic” housing shortage, the mining boom, low unemployment, dual-household incomes etc. etc.

The median folly

Hypothetical scenario: the newspapers report that median house prices rose 10% in your suburb last year. 

As a property investor or home owner, do you celebrate the fact that you’re sitting on a 10% profit?  As a renter, do you lament the fact that you’ve missed out?

REIV capitulates

This is the moment I’ve been waiting for.  The biggest property spruiker in town, the Real Estate Institute of Victoria (REIV), has admitted that house prices are set to fall!  No, they didn’t say there would be an “easing in prices”, or an “improvement in affordability”, or “slower growth”.  Yesterday, they announced that:

“Members report positive expectations for market activity in the March quarter at the same time as a drop of 3–5 per cent in the median house price is expected.”

http://www.reiv.com.au/news/details.asp?NewsID=1049

Can our leaders save the property market again?

In my last post, "The crash has begun", I posed the question to myself:

"If the government and RBA managed to save us from a crash in 2008, what’s to say they can’t do it again?"

Well that question assumes that the government and RBA did save us from a house-price crash.  I don't believe they did.  So in fact it was a trick question ... to myself.  But I didn't fall for it.

The crash has begun!

It’s official - the crash has begun! 

Let me explain using the following chart.  It was developed by Jean-Paul Rodrigue, Ph.D. who studied 500 years of bubbles and found that they all look remarkably similar.

Never-ending capital growth

In my recent post, "Rent money is dead money", I highlighted that fact that there is lot more dead money when owning a house in comparison to renting. In the ‘Comments’ section, some people acknowledged this extra cost, but argued that house-price growth would more than offset this.

Anonymous, for example, said:

“Either way, a gap of $17,000 or $7,200 is a far cry from the appreciating gains a $500,000 property on average will give you. You do the maths!”

There's no bubble after all

Sorry everyone, I was mistaken. There's actually no house-price bubble:

"Buyers have been told that Melbourne is not suffering from a house-price bubble.  Property valuer Greville Pabst, of WBP Residential Advice, said that although property prices were higher than 10 years ago, these prices had become the new norm."
http://www.heraldsun.com.au/news/victoria/telling-weekend-for-property-market/story-e6frf7kx-1226008425010

Confident property investors rush the exits

In his weekly property spruik summary, Enzo Raimondo from the REIV said:

“The next three weekends will see significantly more auctions with 695 next weekend followed by 980 and 910 in the following two weekends. The high number of listings shows that sellers have a reasonable degree of confidence in their prospects, reflecting the overall health of the national and state economy.”
http://reiv.com.au/home/inside.asp?ID=162&nav1=1226&nav2=162

"Rent money is dead money"

It’s been drummed into us by the real-estate industry, by the media and by family and friends. It’s the catchphrase ‘Rent money is dead money’, meaning that if you’re renting, you’re wasting your money.

Interestingly, you rarely get advised that you’re wasting your money buying food from the supermarket, or by going to the movies for a night out. But when it comes to providing shelter for yourself or your family, you’re apparently throwing your money down the drain.

It’s different here

If I had a dollar for every time someone said to me: “It’s different here; we didn’t have the dodgy lending practices that they had in America”, I reckon I would have a good $12 by now.

So what do you consider to be a conservative requirement for a deposit for a potential home owner?  10 per cent? 20 per cent?

Australia vs. America

I thought it might be fun to see what around $1 million gets you in Albert Park (Australia) vs. Atlanta (USA).

The results are pretty interesting. 

Note, for each link, it might be easier to right click and select ‘Open in New Tab’.

Will property prices plateau?

In 2010, the media was reporting that house prices will keep rising indefinitely due to population growth and the supposed housing shortage. More recently, they have been saying that there will still be growth, but it will slower. Well it looks like they’ve changed their tune again. No, they are not yet brave enough to predict falls. Here’s what they said:

Keep the champagne on ice

Right, that’s it!  I’ve had it up to here* with both Enzo Raimondo and the Herald Sun (*blogger’s note - I’m pointing to my forehead).

Let’s start with Enzo Raimondo.  He’s the CEO of the Real Estate Institute of Victoria, whose “institute” relies on the voluntary reporting of sales results from real-estate agents.  Anyone see the credibility problem there?