How Did We Get It So Wrong on Australian Housing?
It’s hard to admit it when you get something wrong.
The fact is, we predicted a huge and painful Aussie house price crash.
With the exceptions of the Gold Coast, some areas in Perth, and the holiday home market, the house price crash hasn’t happened.
So, after getting it so wrong, how come we’re so keen to talk about it? The answer is simple…
While we predicted disaster for the Australian housing market, what we didn’t predict is what’s happening right now.
And that is something much, much worse than anything we could have predicted.
One argument they could still fall back on was the idea that the Reserve Bank of Australia (RBA) could cut rates to support the Australian housing market.
But even that argument is dead. After the release of the latest RP Data housing index, National Australia Bank economist Rob Henderson told The Age:
‘Three months after two interest rate cuts, what has happened to house prices? They have fallen. ‘So it doesn’t suggest interest rate cuts are much of a panacea for the housing market does it?’
They laughed at your editor when we said lower interest rates wouldn’t help house prices.
Two years ago we pointed out the level of interest rates was only part of the reason for the housing bubble. The biggest factor was the credit boom.
The credit boom blew up the bubble…the lack of a credit boom would burst the bubble.
So when the credit boom ends – as it has – it would be over for the Australian housing market.
But rather than a crash, what’s happening to the Australian property market is worse. It’s a slow and painful death. The reason it’s so bad is that most homebuyers and homeowners can’t see what’s happening.
They assume because house prices haven’t crashed, they must be doing OK. But according to RP Data, Melbourne house prices fell 7% over the past year.
Add to that interest repayments of 7% and that’s a 14% hit. Add another year of even a flat housing market and thanks to interest repayments, the average homebuyer is down 21%.
We don’t know about you, but in our portfolio any investment where we lose 21% within two years is a bad investment.
As we’ve said many times, at these prices Australian housing is a bad investment.
And if you think low interest rates will help the Australian housing market, think again. You only have to look at the U.S. housing market to see that nearly four years of low interest rates haven’t helped to boost house prices.
Even so, the RBA has taken a desperate step to try and boost asset prices. It had an immediate – if short-lived – impact on the Aussie stock market yesterday.
You’ve probably seen the news that the RBA cut interest rates by 0.5%. That cut is the largest single rate cut since the RBA cut rates by 1% in February 2009.
So, was the RBA right to cut?
Why ask us? We don’t know. The fact is, no individual can know what the price of money (interest rates) should be.
The only true way to find the real price of money is to leave it to the market. That financial markets bet billions of dollars based on a decision by a group of faceless men and women is ridiculous.
They can’t possibly get it right. If a free market determined interest rates, the rate would change according to market forces. It would provide a clear signal to investors, letting them know if they should spend or save.
But when a central bank intervenes, investors get mixed messages. And so the market behaves in ways you wouldn’t expect.
This article is contributed by Money Morning. Click Here to Subscribe to their free newsletter.