By Kris Sayce – Port Phillip Insider (Australia) –
We’ve banged on about high house prices for so many years that we’ve almost lost count of when we started.
We think it was back in 2005, when we started writing The Daily Reckoning eletter. That was when the average Aussie home was about 70% cheaper than it is today!
But it seems hard to us to deny that the Aussie housing market is finally starting to crack.
Remember that one of the big spurs for the housing market is negative gearing. Negative gearing only works when investors believe house prices will keep climbing.
If investors start to feel bearish about house prices, they’ll hold back…they won’t borrow hundreds of thousands of dollars knowing that there isn’t the capital growth to pay off the loan.
That’s the other thing. Many property investors take out interest only loans, which may last three or five years. In many cases, the aim is to give the place a lick of paint and a facelift, and then on-sell it without ever paying off a dollar of principal.
But nobody is going to do that if house prices aren’t going to rise. And that even makes buy-to-renovate deals uneconomical. The reality is that during a boom, an investor could just buy an un-renovated place, do nothing to it, and then on-sell it at a profit after six months or a year.
The rising market would take the price higher. But if house prices aren’t rising, the only ‘profit’ that a renovator is adding to the price of a house is the cost of labour.
And seeing as that labour cost is the renovator’s own labour, or labour they’ve had to pay for, the ‘profit’ is likely no more than they would make from doing comparable labouring work elsewhere.
This is a long way of saying that everything most folks think they know about the dynamics of the Aussie housing market is only applicable as long as house prices keep rising.
When they stop rising, everyone (including the so-called experts) will suddenly realise that when house prices fall, a whole new dynamic enters the frame.
Of course, we’ve been saying that for 12 years. One day, we’re bound to get it right…