Did you remember to sell the house today?

Prof. Ross Garnaut gave the Hamer Oration at Melbourne University on Thursday. He pointed out that Australia has not experienced a recession for 17 years, a record for The Lucky Country. Such a period of unbroken growth is not just an Australian record, it is a world record. But one-way tickets have built-in risks for the return journey.

Australians seem blissfully unaware of the burdens in high housing costs. We’re onward and upward!  Home Sweet Home is not just a haven of privacy and rest, it is a profit centre now.

But is it? Let’s look.

The Stoics, raised in the struggle of WW2, are fading away – their houses sold as they die or money is needed for nursing home bonds. They are real estate winners, the fruits of their investment to be enjoyed in death or dementia.

The Baby Boomers – now 50 years and older – have superannuation and valuable homes. Super took a devastating tumble in the Global Financial Crisis, yet there’s buckets of equity in the house ratcheting up day by day. But if we sold, where would we live?

Generation X have their foot in the market too, enjoying the gains on their starter homes. Secretly, they think they should have been able to flip their crummy house for something better by now. Oh well, it will be our turn soon.

And Generation Y is doing the sums. Sums that don’t add up. Two incomes, a giant deposit and a big thirty year mortgage buy a ‘starter’ home: a worn house in a poor suburb with bad schools and criminal neighbors. Can we blame them for declining to commit?

All these groups are trapped – tortured by the dream of land ownership in an era of high real estate prices, steep transaction costs and limited supply.

Dr Gavin Putland of the Land Values Research Group has released a remarkable graph comparing Aussie house prices to the usual suspects.

The real estate bubbles have burst in Europe and America. Australia has been protected by its stellar economic performance.

Did I say protected?

The banks are. Your mortgage is full-recourse and the bank can strip you of all assets if you default. Much of their housing book is well aged, protected by principal repayments and rising house prices.

If house prices fall by 30 per cent as they have in the US, Aussie banks will be unharmed.

The Stoics wont notice the change in their fortunes.

The Boomers will be financially ruined, their plans of spending a third of a lifetime playing golf erased. Retirement will be spent writing very angry letters to the media and their MP.

Gen X will remain stuck in their starter homes, suddenly worth less than the mortgage.

Gen Y will be able at last to buy. But they wont – because the price falls will go on and on for years.

Who benefits from high house prices? No one really. A price bubble can only leave regrets: ‘If only I had sold at the peak!’ But no one does. No one.

My wish is that we vow to never let this happen again.  The  real estate market needs automatic stabilizers to smooth the peaks and troughs. The stabilizer is Land Tax, a reform called for by the Henry Tax Review and long advocated by Prosper Australia.

14 Comments

  1. Gavin R. Putland10-08-2010

    ACKNOWLEDGMENT: The source for the graph for all countries except Australia is http://www.imf.org/external/pubs/ft/scr/2010/cr10240.pdf, p.11 (citing other authorities). The sources for the Australian curve are ABS 6416.0 Tables 1-6,10; ABS 6401.0 Tables 1,2.

  2. Toluol turkey11-08-2010

    As Homer Simpson would say, “It’s funny ‘cos it’s true”!

  3. Glenn Peters11-08-2010

    The picture depicted is not accurate. Baby Boomers with substantial equity may lose its notional value, but their relative position remains unchanged. My house is worth $1m and I have no mortgage, and somewhere down the track, I’ll downsize and move out of the city. The houses I’m contemplating are worth ~$350k. If my house loses half its value, I can still buy the country house, for a substantially reduced price! Yes there will be a gross loss, but not as catastrophic as you say. Hey, as a baby boomer, sorry for amassing wealth through discipline and sacrifice, the latter mostly to educate my Gen Y kids and leave them something to build upon. I should have what? Blown it all on Lotto tickets, booze and depreciating toys?

  4. jed12-08-2010

    glenn makes it sound like he’s the only one to have discipline and sacrifice. i don’t know what category i fall into being 32, but 10 years ago i had no equity to get a stake in the inflating credit bubble.
    with the equity i have today I could have bought 3 houses, outright where i live 10 years back (i only want one FWIW) but today i can barely buy one outright.
    given the deleveraging ahead i’ll be sitting on the sidelines until my cash affords me an entry with some spare change left over, because as anyone should know it’s real discipline to ensure your whole net worth doesn’t reside in one asset. (btw i feel dirty calling a house an asset, unfortunately that’s what it’s become)

  5. David Collyer12-08-2010

    @ Glenn: Oh, Glenn, if only the picture you paint were true! In a property crash, not only do sellers dry up, but so do buyers – there is no incentive to purchase in a falling market. Further, valuable houses fall more – much more – than cheap ones as purchasers practice strict economy in the face of uncertainty. The trade-down you are contemplating will be much less attractive than you think.

    And the bust will prove whether the wealth you amassed through discipline and sacrifice is durable. Good Luck!

  6. Glenn Peters12-08-2010

    @David: Oh David, history shows it to be true! Fortunes were made during the Depression by cashed-up buyers who bought at the bottom of the market, who were rewarded by having little or no debt. If the Australian property market is a Ponzi as many suggest (like Steve Keen) then let’s remember that people get into Ponzis for a reason. If you get in and get out periodically and accurately, you amass wealth, your just have to be the penultimate ‘greater fool’. The buyers who will get washed out of the system are the faux buyers, as the US experience has taught us. If you borrow 6x your annual income, you deserve all that’s coming to you. I’m an ‘old school’ lender who can only shake his head the foolish lenders and borrowers who made this mess. I bought my house to live in, not to be a wealth vehicle. That it has turned out to be so is merely in the scheme of things.

  7. Nick13-08-2010

    Sell your house & buy gold.
    Then sell your gold when it’s high & buy back into the property market when it’s at it’s lows.
    This cycle is as timely as the Dow/Gold ratio.

    See the Aussie Houses/Gold ratio here:
    http://www.sharelynx.com/chartstemp/Australia002.php

    Cycles from approx 100 to approx 500 ounces of gold per house.

    100 ounces of gold per average Australian home is were the ratio is heading.

    History has a heartbeat…

  8. Adrian13-08-2010

    Some points not covered here
    – Europeans except for the Brits mostly rent so not a good comparison for that chart.
    – In the case of the USA they really did build an over supply, and I lived there for a few years is different states and saw it; I’ve come back recently. BTW not as bad as China is now however.
    – For the UK a lot of immigration by Eastern Europeans, and many of those have gone back home, and look at the stats of the Polish e.g.
    – I’m convinced we in Australia will see the last point if/when times get tough. Australia is getting very expensive (not just for housing), and look at the balance of the economy for a few alarm bells. Also many jobs now are not full time.
    – Regardless of what the RBA or mainstream say we are likely to get higher rates in the next twelve months, and it’s well know by the bankers that raising finance is getting harder. It will not take much to show some big cracks globally before too long, and then see how hard it will get to raise foreign funds.

    I know people who have sold their houses here and rent because of what they believe is coming.

  9. Greg13-08-2010

    I’m a Gen X with four baby boomer siblings. My two eldest siblings, now in their sixties will be fine. They have no investment properties and no mortgage. I guess my nieces and nephews won’t get much though!

    Unfortunately my brother, who only bought a property a couple of years ago will be screwed. My next eldest sister too will be stuffed as she has a mortgage still and has helped a few of her kids into investment properties. She looks after my Stoic parents…so I hope they’ll be ok.

    Me? I sold my home (which I had no debt on) and an investment property 6 years ago to start a business. I now rent a million dollar rural property for $300 a week.

    I feel I should have a mortgage at my age (41) and my wife pynes for a house of her own but we just can’t bring ourselves to do it…emotionally and financially.

    It’s going to be an interesting time…

  10. Mike14-08-2010

    Glenn, most people are heavily leveraged. Your position, while admirable, is not typical.
    The fact that the young are now locked out of the market entirely should give you some clue things are not OK (the young that are buying are taking on insane debt loads or borrowing from their parents – both are awful options).

  11. sell gold in clearwater fl15-08-2010

    My house is worth $1m and I have no mortgage, and somewhere down the track, I’ll downsize and move out of the city.

  12. shirley20-08-2010

    1 million will only get you an acre or two with the down sized house in the country any way best hope for the pension like all the other millioners.

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