Is the housing boom a sham?

It seems strange that no matter how bad the market condition is, the local housing boom seems to go up and up. Economists who predict any downward trend are proven wrong time and time again. How can it be? Something seems to be wrong with the law of supply and demand. Perhaps the clue to this is misleading data intentionally fabricated in order to feed a real estate bubble.

This is what happened in the US and I wonder if it might also be happening here. The National Association of Realtors in the US publishes data on home sales which most people refer to. It is found that it has been regularly misreporting the housing sales figures, being overly rosy so as to encourage people to keep on buying. The overstatements appear to have widened since 2006. That was when the first signs of trouble in the housing market appeared. Recently NAR reported homes sales in 2010 was 4.9 million, when CoreLogic (a real estate analytic firm) says it was 3.3 million. In another example, NAR's chief economists told people in 2007 that the market had bottomed out when it was still falling.

The story on NAR was reported in the TIME magazine yesterday. See: http://curiouscapitalist.blogs.time.com/2011/02/22/did-realtors-inflate-home-sales-by-1-6-million-in-2010/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+timeblogs%2Fcurious_capitalist+%28TIME%3A+The+Curious+Capitalist%29

My say: Real numbers or fake, we will all be victims of the people who manipulate information. The market will continue to behave in the way the data (real or fictitious) tells us to. Unless the unscrupulous parties are brought to task, they will continue to do what they are doing, which is to stoke the real estate fire for as long as they can, so that they can continue to reap the fat commissions and fees from selling real estate. Real estate prices will never come down by virtue of supply and demand. It will only fall when the economy crashes due to other reasons.

When will Aussie house prices stop growing?

This is my own prediction. It is not based on any gathered data. Aussie house prices will continue to grow unabated as long as the government ignores the China factor. For your information, Melbourne house prices rose 28% last year alone. Real estate agents say that 30-40% of the buyers are investors from mainland China. In recognition of this, the government last week reversed its policy of allowing non-residents to buy homes here. This has not cooled the market one bit and I think the government fails to recognize the extent of the problem. The astute will recognize that there are still ways for non-residents to buy into the market here despite the policy reversal. Non-residents, mainland Chinese in particular, seem to be on a buying spree overseas. Perhaps they are doing this to hedge the yuan, which is under pressure to devalue. Perhaps there are reasons why they do not want to keep the money in China. Surely they'll find the price of houses here to be a bargain compared with what they have to pay back home. Why wouldn't they? All the major urban areas are heavily congested and landed properties are only for the super rich.

I believe that as long as they are able to, mainland Chinese will keep buying all the properties that they can get their hands on, either directly or indirectly through a third party, either here or in another Western country. The Australian Central Bank thinks that raising interest rates will cool the housing market. I think it will only reduce the number of local buyers and make it even easier for foreign cashed-up buyers to keep acquiring properties here.

Overseas home buyers

Of late, house prices have skyrocketed, caused in part by foreign buyers. It is reported that 30-40% of property are sold to cashed-up Chinese buyers who are non residents in this country. They are able to do so when Kevin Rudd relaxed the rules after the global financial crisis of Q4 2008. Since then they have relentlessly snatched up properties here. Even when guidelines are breached, nobody is stopping them - until now. Today, Assistant Treasurer Nick Sherry announced the scrapping of those rules and at the same time tightened the enforcement. It is the same Senator Sherry who only three weeks ago denied that foreign investors were a factor in the Australian real estate market.

Politicians need to be educated. Too many of them are making unsound policies based on misconstrued beliefs. Senator Sherry believes that international investments will boost the number of houses available for people to rent. This is a fallacy. There is no significant increase in the number of homes built, so how can foreign buyers boost the number of rental houses? Foreign investment is good only if there is a need to bring in the capital. In this case, the problem is not capital; it is escalating land prices. This is caused by a huge demand; further fueled by the Chinese buying spree. I am only surprised it has taken Senator Sherry so long to see that.

Victoria housing bubble

Victoria has a crisis, but no one is admitting to it. The Victorian government is silent about it. Newspapers report escalating house prices with seeming glee. It appears that only certain economic malaise deserves government attention, such as a rise in unemployment, a drop in retail spending, or (God forbid!) a decline in GDP. Of course, all these translate into a drop in living standard of the average populace, whichever way you look at it. But there's more. A rise in house prices is much more punishing to the average wage earner looking to own a home, than a similar percentage rise in anything else. That's because a house mortgage takes the biggest bite out of his pay packet. Since the GFC (i.e the global financial crisis of Q4 2008), the median cost of a house must have risen at least 25%, making the median cost of a house close to $500,000. This is slowly but surely creating a big gulf between the older people, most of whom have bought houses years ago, and the young people just starting out in their careers. For the latter, the standard of living has plunged to a very low level, and the government is still not sitting up. Isn't this an economic crisis?

Without a direct disincentive for investors to buy up properties, people will always continue to buy more than what they can use. The government is already doing that with electricity bills: as your usage goes up, you pay a higher rate. There should be no qualms about doing the same for houses: the second house you own should cost you a lot more in stamp duty. Houses should go to families who need a roof, not for people to profit in the get rich game. In my opinion, the best way for the government to address this issue is to remove negative gearing and to increase the capital gains tax or stamp duty so as to discourage people from treating houses as an investment.

The trend in house prices

I read an interesting article published in The Age today, written by Robert Shiller, professor of economics and finance at Yale. Here is what I have gathered.

According to Shiller's observation, real estate market moves very slowly. That is because sales of existing houses are mainly by people who are planning to buy another. In other words, they are already "in the market". If they wait to buy low, they also sell their houses for less, and vice-versa. For such people, there is no reason to hurry.

The real shift in real estate market trends are effected by those entering the market for the first time (e.g. a young couple buying their first home), or those exiting (e.g. an old couple selling out to move into a retirement home)*. The decision to move into the market or to move out of the market usually reflects the growing pressures of economic necessity. For the former, it may be that the cost of rentals outweighs the cost of home ownership. For the latter, it may be due to foreclosures, or a changing opinion about the future. Typically, the decision-making sentiments can last long after the actual economic factors have changed. A new couple may decide to stay longer with their parents to delay buying into the market, based on their perception of what the future holds. An elderly person can decide to cash in early in a declining market, or to delay in a rising one.

Shiller says that the fall and subsequent rise in house prices do not exactly follow the timings of an economic recovery. He says "Any trend may suddenly be reversed if there is an "economic regime change" - a shift big enough to change their thinking. But market changes that big do not occur every day. And when they do, there is a coordination problem: people all won't change their views about home ownership at once." Shiller believes that even if there is a quick end to the recession, house prices may be subdued for years. "After the last price boom, which ended about the time of the 1990-1991 recession, house prices (re:US) did not start moving upwards, even incrementally, until 1997."

In my opinion, the government should do its bit to prevent speculative buying. Housing is a basic human necessity, not an option. When people's income is largely spent on servicing a home mortgage so that the rich can get richer through speculative buying, the overall quality of life declines accordingly. Until the current global financial crisis, so-called democratically-elected governments of the world seem to be "of the people, by some people, for few rich people."

* p/s This ideal scenario excludes investors or speculators. In reality, investors moving in and out of the market can also make an impact on house prices. The Howard government implemented the previously-abandoned negative gearing scheme, thereby ensuring that investors remain in the market through up and down cycles by providing tax offsets for losses. This essentially provides a perpetual upward lift to house prices in Australia. Ugh!