Tuesday, November 9, 2010

Good news is bad news

Is funding so desperate at the Sydney Opera House that it must resort to hosting this kind of bubble stunt? From the SMH:
An auction of luxury homes held at the Sydney Opera House last night raised just $4.1 million, much less than the $30 million vendors were hoping for, less than a week after borrowing costs increased.

Only two out of the 11 homes were sold. The Ray White Group, which organised the auction, is in talks with potential buyers and expects to sell three more properties in “the next couple of days,” chairman Brian White said after the event.

Mr White said he had hoped to sell at least five of 11 houses at the auction.

Mr White's stunt has done a terrific job of broadcasting to the world that Australian real estate is headed into trouble. Bloomberg picked up before and after stories.

Anyway, for those looking to get an alternative view of how much downside momentum is developing in the market, Delusional Economics has an excellent post this morning. The dynamics he (she?) describes are spot on:
The banks are unlikely to worry about this in the short term, because they, like the Real Estate industry seem to be confused about the debt driven market dynamics of housing in Australia.

The story they have told themselves is the delusion from property spruikers about "stagnating" prices. But as noted by some in the industry
Investors are momentum operators, and they will only jump in the market when they see capital growth on the board. And looking forward, it's not certain there will be much capital growth in the medium-term.

And there is the problem. A market driven by debt requires every increasing returns to keep the speculators in. This in turn requires every increasing debt to fund it. Once the demand and/or availability of new debt slows then prices have nowhere to go but down. Once this occurs anyone in a risky debt position (not just speculators) wants to get out.

This blogger is still not convinced that we face worse than the half bust/half stagnation repeat of 2003, but it is feeling the analytical heat.

The trillion dollar question is just how weak or strong are the hands of the capital growth-dependent buyers? The one million Australians who are increasingly confronted with, at best, flat returns? The real estate obsession is so old and deep in Australia, and the bubble has been bailed out so many times, that this blogger has reckoned they are more likely to perceive this as another cyclical turn and hang on.

However, as this blogger has recently written, whether it means to or not, the RBA is running down these speculators with its predictions of a runaway China boom and endless rate rises. It is getting more and more difficult for even the most optimistic property speculator to see this as just another cycle, with a dip in prices and then more growth.

Indeed, Australian property investors face a bizarre new reality in which good news on the economy is bad news for them.

Add the banks and isn't pretty.

1 comment:

theblissfulignoramus.com said...

"Australian property investors face a bizarre new reality in which good news on the economy is bad news for them."

And bad news on the economy means ... ?!?!

Rock. Meet hard place.

Great blog David. Daily not-to-be-missed reading for me.