Wednesday, March 16, 2011

Prosper.org.au: Don't Buy Now, Home Buyers Strike

Tax reform group Prosper Australia today called on first home buyers to delay buying real estate ahead of the flip into a falling market, which it described as ‘imminent’.

RP Data reports there are over 900 Melbourne auctions scheduled for the weekend and 2700 over the next three weeks. Prosper believes this enough to decisively tip the market into oversupply.

“When the Great Australian Land Bubble bursts – just as land bubbles all around the world have – the freshest buyers are totally exposed. They face financial ruin as house prices fall below their debt. The crippling mortgage repayments become pointless,” Prosper campaigner David Collyer said today.

“The bursting of the land bubble is signalled by simultaneous downturns in auction clearance rates, building approvals and housing finance. ABS data already shows the latter two elements in place (ABS 8731.0 Building Approvals; ABS 5609.0 Housing Finance).

“We cannot help those who have recently bought, but we can warn prospective buyers – particularly first-timers whose innocence and heavy borrowing leaves them uniquely exposed.

Australia’s housing market is widely regarded as being in a price bubble and ‘most severely unaffordable’. Warnings have been issued by a long list of agencies and experts, including the IMF, the OECD, The Economist newspaper, Jeremy Grantham and Steve Keen.

“Residential properties are trading at between six and nine times earnings – depending on assumptions. Historically, they have fluctuated between two and a half and three times earnings,” Collyer said.

The largest element buyers are paying for is the land, not the building.

“A buyers’ strike is the only rational response to current land prices. Frankly, prices are ridiculous. How anyone can pretend Australia has a land shortage beggars belief!

“Some argue prices have arrived at a new and permanently high plateau, but the historical record shows reversion to the long term average – in every case without exception.

The experience in the USA, Europe and the UK is for sudden, jagged falls in property prices. Sales volumes also shrink dramatically.

“I remind you there are 1.3 million Australians with negatively geared rental properties. They are diverting all rents and some personal income to meeting interest payment in the hope of capital gains. When only capital losses are expected, investors will flood the market and overwhelm demand. Buyers will step back, making it virtually impossible to sell at any price.

Do not underestimate the scale and significance of the transformation that is about to unfold. Price falls are imminent – protect yourself. Don’t Buy Now!” Collyer concluded.


PROSPER.ORG.AU

The above article caught my eye yesterday and thought I would discuss the suggestion made that home buyers should strike and not buy property. I created a campaign on the Australian site 'GetUp!' (I just think it's a good idea so doing what I can to promote it, I'm not affiliated with prosper.org.au), so if you think the idea has merit please take 20 seconds to vote here: LINK. You need only enter an email address/name and no confirmation is required, you can allocate up to 3 votes to the idea. Would be great to see GetUp! pickup the idea and run with it for one of their officially supported campaigns.

Let me start by saying that I don't personally see this campaign getting very far. Tens of thousands of first home buyers make the leap into property each year; this campaign/message is likely to reach only a few hundred potential buyers without mainstream media promotion and let's face it the mainstream media has a heavy bias to avoid covering such a campaign. Most mainstream media organisations derive a large portion of their advertising income from real estate advertising; they can hardly be considered independent or a source for unbiased real estate news with this dependence. That said as was mentioned on the Macro Business Blog, there is an increasing amount of fair coverage such as critical talk about negative gearing and the FHOG, so perhaps I will be proven wrong on this point and mainstream media will pickup on the strike.

Australians seem to have an unhealthy need to "own" rather than rent. I understand the benefits of owning one’s home, it provides security (no landlord to decide when you have to move out), you can make alterations to the house, you can have pets where most rentals do not allow it & it’s something you can call your own (even though in reality the bank owns the property). What I don’t understand is the desire to own no-matter what the cost or financial burden. As I discussed a few months ago (Rent vs Buy: A cost comparison) the cost to rent is approximately half the cost of buying in most situations with housing yields at around 4% and interest rates over 7%, if you are a disciplined saver there is definitely financial benefit in renting while saving or investing the difference.

Renting in Australia is looked down upon. Renters are often talked about as if a lower class of society. As an ex-home owner one of the questions I’m asked in many social situations is “So when are you buying again?” as if expected that renting is only a temporary situation while on the lookout for the next property to buy. Of course when friends and family ask I do the polite thing and say we’ll look in a couple of years. Talking about falling house prices is almost like taboo at the dinner table, some of those I have raised the subject with have dismissed it as “house prices never fall”, I’ve mostly just given up talking about it.

Some questions you should be thinking about when looking to buy:

What happens if I lose my job?
What happens if I get sick/injured?
What happens if interest rates increase?
What happens if prices drop in my area and I want to move?

In some ways property provides security, but there are still plenty of risks if the right precautions are not taken. If you are unable to make your repayments the bank that holds your mortgage is likely to be as unforgiving as a landlord.

Housing is overpriced on almost any metric you measure it:

Price/Income Ratio
Total Land Values/GDP Ratio
Price/Rent Ratio

In my opinion even without an "official" movement buyers are already sitting on the sidelines, the increasing inventory of housing stock, weak auction clearance rates and crashing volumes indicate this is the case. So regardless of whether the "Don't buy now" campaign goes viral I think price falls are already taking place and will continue. If this campaign only reaches a few people that would have otherwise bought and makes them seriously consider the financial consequences of buying then it has done it's job.

Renting is not only cheaper, but allows dwellers to live in a property without taking on the risk of price falls associated with owning.

Rent or Buy?

I know which makes sense to me at the moment.


BB.

5 comments:

  1. Good work BB, I might just have someone in the MSM ready to give this run, he is monitoring how much traction this gets.

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  2. Very interesting to hear aushousingrash, hopefully the campaign gets the traction needed to pickup the attention of some mainstream commentators and writers...

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  3. I think that this campaign is fantastic. Everyone seems to think prices are too high but somehow justify it with whatever the media/spruikers feed them.

    It's time for common sense to prevail.

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  4. It is going to be a 3-ring circus if it goes viral on say facebook:

    in ring #1 - RE lobby kissing goodbye to parasitic commissions;
    in ring #2 - fradulent banksters kissing goodbye to over-the-top interest repayments;
    in ring #3 - over-leveraged speculators kissing goodbye to 'their' capital gains

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  5. What a fantastic effort BB. I've noticed that media columnist Andrew Bolt has made a comment and given a 3 vote (if it's too be believed). I'm not his greatest fan, but he has a huge readership so I'd be great if he did jump on this one or the other Getup idea about the investor tax breaks.

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