Sunday, March 20, 2011

Who will lose in Australia's house price correction?

While following the updates of's buyers strike I noticed a comment on the site:
Don’t wish terrible financial ruin on the people who bought homes for their families in the last ten years. No one wins in that situation. LINK
I think saying those expecting a housing correction wish financial ruin on families is a very unfair suggestion. Like most people I have friends, family, colleagues and likely regular readers of my blog that have exposure to housing either through the purchase of their own home or as investments. I don't wish financial ruin on any of them or anyone else who has bought property in the last couple of years. That said it doesn't change the fact that house prices are high. 

Believing that housing is due for a correction and even writing about it is likely to make little difference in the outcome so it amazes me that some people (in blog comments, forums, etc) would take such offense to the suggestion that house prices could fall. Of course in many cases those that fire up have an emotional investment in the topic, so are possibly over exposed to property in one way or another. It's important to stay objective when it comes to ones investments, that might sound funny coming from someone who has almost their entire net worth tied up in one asset class, but reality is if the fundamental reasons I invest in Gold/Silver changed overnight I believe I am mentally prepared to sell the lot.

I also take issue with the suggestions that it will be families who bought housing for their families that suffer in a correction. Here are a couple of facts/figures:
The figures show that one in seven taxpayers now own at least one investment property, about 1.7 million taxpayers, and claimed $33 billion in tax deductions over the 2007-08 year. Negatively geared property resulted in losses of over $8.6 billion, representing an increase of 35%. Smart Company
An Australian Housing and Urban Research Institute report this month said 80 per cent of investors buy for long-term gain, but at least half sell within five years because of cashflow problems or disappointing capital growth. One in four investors sells within 12 months.
The above suggests that not only are there a large number of property investors, but that negative experiences with property and lower than expected returns are a major reason for investors selling up sooner than they expect. Given this information, in the event of a property price correction does it seem likely that the home buyer who bought for their family will be selling and realising the losses or will it predominantly be investors who clearly haven't done their research? 

Chances are that many families that have to sell and realise the loss will be moving into another purchased home at the same time, so if their own property has fallen 20% and so has the one they are buying, then there is little loss to them. The real loss will be to the investor that has purchased in the last year or three and has been paying money each week to hold the property only to sell it a little later down the track when prices have gone backwards and future gains are looking unlikely. Buying a property that is returning less than it costs to hold is only a worthwhile venture if the capital growth exceeds the losses being made...

No doubt as house prices fall the guns will come out blazing about how the bears spreading fear are to blame, other excuses for the fall will be made, such as blaming it on the Queensland floods, the global economy and other such nonsense. Anything to divert attention from the real reason:

Housing in Australia is too expensive!

It's not a secret and anyone who can objectively look at a set of data can work it out for themselves.

If there is a housing correction (posed as a possibility, but in reality the prices are already correcting) it shouldn't be those that saw and commented about the bubble that should be demonised, it should be those that encouraged buyers to get in at the peak with blatant disregard for that persons financial capacity to afford the purchase.

If you want to warn first home buyers about the potential bubble, then I would suggest taking 20 seconds to vote for the following campaign on GetUp:

The campaign suggestion has over 1250 votes and 450+ supporters. That's a pretty decent number given that the strike has only been linked off blogs and forums and has only been live for less than a week. Most of the other campaign suggestions on the site that have similar numbers have been active for months, so here's hoping the GetUp! staff take the suggestion seriously.



  1. Hi BB

    Just noticed a recent comment on your Getup campaign alluding to a unit purchased in Malvern East. Nothing particularly sinister about that, although the followup comments about coincidentally purchasing gold and now selling sound a little too fishy for my liking.

    The recent sales data on Malvern East is readily accessible, and aside from a few expensive houses, the only units sold were 1 bedders above the 300k mark.

  2. It's like decades ago when short selling companies was considered "un-American".

    Over-valued assets eventually reduce to fair vale in the long-run.

  3. Thanks for the heads up Anon, I had suspected Tom was a troll from the start so put on my game face, congratulated him on the purchase and then threw in a comment on how renting was better. He took the bait and revealed the obvious.

    I doubt he made a purchase last weekend, probably just an RE agent trying to talk up their area!

    Agreed Shervin, they will eventually return to fair value and will even likely dip into undervalued territory...