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Tuesday
Sep242013

Awesome Six Dogs Comment & Sydney Housing = Insane, Crisis, Ponzi

Disclaimer: As always, you seek professional financial advice (not listen to my speculative rant) before doing something like taking out a 30+ year mortgage, investing in any Australian or international stock market, or any other thing that could lose (or if you're lucky make) you a lot of money. No one knows the future of things such as real estate prices, and anyone who suggests otherwise is almost certainly lying to you.

I'm just a moderately well-off punter looking at the numbers and the hockey-stick graph of real house prices and thinking there is no realistic way the average Sydneysider can make the numbers work without fudging them. Hence my thesis is what goes up must eventually come down. Why?

It is my hope that a not unreasonable 50% down part happens in the next 5-10 years as the baby boomers retire (needing to sell assets such as real estate to try to finance their retirement, there's support to my thesis if you believe people like Harry Dent on TDI #330 who claims to have been a bull for 20 years turned bear in the last 3 years due to the demographic cycle changes primarily from the baby boomers, applicable to the US and probably by reasonable extension to Australia). I can barely believe my parents only had a $130K mortgage on a double-block house on the Northern Beaches just 25 years ago, but such is life sometimes.

To balance that, it is my fear that governments do nothing about the six dogs (see copied comment below) and Ponzi fever infects the market driving prices even higher - 17th century tulip mania or house prices in Sweden where I think I read it's common to have a perpetual loan you just never pay off, proves it is certainly not impossible. It's easy to add other evidence like Chinese speculation driving up prices. Perhaps I should just give in and change city or even country, it would certainly be a lot easier. Scrap that, it would be hard to give up the fact Australia is definitely a very good place to live. e.g. our biggest long-term gun threat is from 3D printed guns unlike the regular high school and other massacres occurring in the US.

This is in the context of hopefully getting to the stage of starting a family and wanting a stable family home somewhere that isn't at risk of up to a 75% decline in price if governments really get their act together (i.e. chase off 4 or more dogs), or run out of magical stimulus bullets, 2.5% nominal RBA interest rates is terrible, but not that far from 0% from which they can't go any lower without money-printing like QE3+. Though with the kind of money we're talking about I could literally add another child or two to the proposed family, buy a half-decent new Ferrari (almost making a really cool status-symbol Tesla look cheap), probably make a small fortune in the stock market, see a huge chunk of the world on overseas trips, go into space, the list of wants is practically infinite ...

 

The article was good (though I feel MacroBusiness is pushing this housing = Ponzi theme so take it with what grains of salt you will), but this particular comment was just brilliant. Kryptonite for me (since I know while it might go a bit higher in the short term, I believe it's very unlikely to outperform (from such a high base) in the long term, and if a mortgage is typically 30 years then all I'd rationally care about is the long term. All said while the statistics are against you, if you really have done the hard yards researching and found a genuine bargain in real estate then good luck and more power to you!

 

http://www.macrobusiness.com.au/2013/09/the-history-of-australian-property-values-redux/#comment-281321

Stoking Demand and Choking Supply

Government has done something very bad to the supply and demand of starter homes which has led to outrageous prices of starter homes, and supported much higher prices of better homes. In short, government has stoked the demand and choked the supply of starter/marginal/extra homes.

Stoking Demand:

* Government brings in many immigrants

Choking Supply:

* Government rations permission to build extra housing on the fringe or extra units in the city, and new cities
* Government allows landbankers to monopolise the permission and dribble it onto the market to inflate prices
* Government adds taxes, charges and levies to extra housing
* Government requires onerous compliance with regulations
* Government creates delays in approving dwellings.
* Government neglects transport and other infrastructure which reduces the area in which well-located and well-serviced homes can be built

There is much debate on which of the six chokers (refusal, cartel, taxes, compliance, delays, neglect) is the biggest and baddest. Interestingly, if refusal is the big one, then lowering taxes will give a windfall to developers, whereas if refusal is a small one, then reducing taxes will cause a drop in prices. This debate is fascinating from an academic point of view, but rather pointless if the aim is to solve the housing crisis.

It is like watching a man being attacked by six dogs and debating which dog has the bigger bite. Far better to chase off ALL the dogs and save the man.

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