Real Estate myths are being destroyed: “There’s never been a worse time to buy…”

Like all marketing exercises, real estate is primarily sold by exploiting our fears. In order to exploit our fears, marketers must first stoke fears. And the stoking of fear requires one or more invented problems, which we must be taught to fear. Finally, the salesperson requires corresponding myths about the product that will allegedly solve such invented problems. The magical snake-oil, with exceptional unexplained properties, that solves non-existent ailments.

The more persistent and culturally ingrained those mythologies, the easier the swindle can be passed off. Unlike the humble snake-oil salesperson, a real estate agent does not even need to create their own problem-fear-solution package; the social context does it for them. In Australia we have developed a bad case of economic, financial and cultural amnesia, that has enabled real estate mythology to thoroughly infect our collective psyche, and thus, has led to the largest wholesale economy-wide marketing exploitation that we’ve probably ever known.

We suffer from a textbook case of speculative bubble psychosis, where even our nearest and dearest seem determined to draw us in using that inalienable motivator and marketing tool in this Age of the Hipster: the dreaded FEAR OF MISSING OUT.

But sadly for the marketers, spruikers and myth-pedlars, the foundations of our FOMO are now being shaken to the core, with a swathe of souring news in nearly all facets of the real estate fear-factory. In recent months we have had news of rapidly slowing population growth, major pending oversupply of apartments in major cities, falling house prices in mining-focused regions, rapidly cooling auction clearance rates, record low rental growth, record low income growth as well as admissions by our economic regulators that investment lending has been majorly underestimated, lending standards are far worse than presumed, and that our banking sector is under-capitalised and putting the financial system and economy at risk.

Additionally, we have seen the introduction of macro-prudential policies to slow mortgage lending and house price growth and increase capital reserve requirements for banks, (both reducing the availability and increasing the cost of mortgages). And most recently we have had the introduction of proper oversight and enforcement of foreign investment laws locally, and stricter capital controls offshore, putting a pin in a key contributor to recent market extremes.

Finally, we have had our economic regulators, ratings agencies, investment banks, hedge funds, sell-side analysts, and a vast hoard of economists, researchers and journalists lining up to call the top of the great Australian real estate boom. Most are predicting price falls, and many are predicting price collapse. And either way, price falls in some areas, and slowing price growth everywhere else has commenced in agreement with these negative forecasts.

What a difference 6 months makes in the wonderful world of Aussie Real Estate Mania. In remarkably quick succession, most of Australia’s real estate myths are being destroyed. FOMO will soon become:

  • Fear of Market Overshoot
  • Fear of Money Owed
  • Fear of Mortgage Oppression / Ordeal / Odyssey
  • Fear of Mistakenly Owning

The egregious and pervasive myths used so far to generate exploitable fears are almost too numerous to list. But given this rapid changing of fortunes, I wanted to provide a comprehensive guide to the reversal of these foundational real estate myths. I for one am so very tired of explaining the reality of problems we face and busting the associated myths. I’m sick of avoiding the old real estate “barbecue stopper” for fear of causing offence or losing respect.

If I was me, I’d want someone to create a handy printable myth-busting cheat sheet to pass to doubters and loved ones who simply “want the best for us”. I want a neat little explainer to save my breath, and to prevent getting worked up and embarrassing myself as I try to explain in great detail the 24 lies and platitudes that we get bludgeoned with daily. Rather than wait for someone else to make one, I made myself one, and thought I’d share it with anyone else who has run out of energy to keep explaining the obvious.

The aim is to challenge the spruikers with some reality-checks about the circumstances and factors that have been used to sell real estate over the last 20 years, usually summarised by the eponymous “Buy now or forever miss out / There’s never been a better time to buy”.

These circumstances and factors were never proof that there is no housing bubble, they were the cause of the bubble. Why? Because they were all temporary, and were always going to eventually change. The fact that they all coalesced at the right time to create a bubble means that their temporary and coincidental nature equates to an incredibly tenuous alignment of the stars. Chances are when they reversed course, they were all going to do so. Which as detailed in this helpful and comprehensive cheat sheet, they now are.

Australian Real Estate Myths Destroyed – A Barbecue and Dinner Party Cheat Sheet

For maximum convenience, I’ve created three versions to read or handout. I’ve created a two page version, to print on two sides of an A4 handout (for example – but print it on anything you like, such as two sides of a t-shirt, a hot air balloon etc), and an A3 landscape poster version, which I recommend you put up on your work notice board for a good laugh and some awkward conversations:

Australian Real Estate Myths Cheat Sheet (A4 double-sided)

Australian Real Estate Myths Cheat Sheet (A3 poster)

For those of you who are lazy or sticklers for quality, you can also purchase a professionally printed glossy poster in three different sizes, available here:

Australian Real Estate Myths Cheat Sheet (Professional Poster)

Lastly, in all of it’s mobile-unfriendly glory, a copy for you to read right now (if it’s too hard to read, just zoom in on your browser or tap/click on the image to download the pdf version):

Australian Real Estate Myths Destroyed - Cheat Sheet

So is it sinking in yet? These bubble forces are all pointing in the wrong direction now. Every single mythology or temporary distortion mistaken for a permanent change of economic circumstances is now acting in exactly the opposite way.

For example: “We don’t have enough houses because we’re not building enough and population growth is permanently high” becomes “Oh shit, we have too many houses because we’ve been building too much and population growth has fallen to decade lows“.

And: “Investors will keep piling into housing because it’s a government guaranteed get-rich-quick scheme…” will become “Record numbers of housing investors taking large rental losses are panicking now that capital gains are vanishing before their eyes, and have no personal attachment to their house and mortgage to stop them heading for the exits; which are quickly becoming clogged, leading to panic spreading to owner occupiers, many of whom are banking on as-yet untapped housing wealth to fund retirement…“.

The snake-oil salesperson is about to go out of business.

Economic Regulator Actions have Busted the Myths and are Bursting the Bubble

For all of our glorification of enormous house prices in this country, there is now universal acceptance amongst economic regulators, banks, the investment community and economists who haven’t sold their credentials off to the highest real estate auctioneer, that these much celebrated prices are a problem. A big problem. They only tend to disagree about scale, but as history unanimously demonstrates, scale is actually of minimal consequence to the inevitability and pain of rebalancing – either by regulation and force, or by virtue of terminal imbalance.

A market driven almost exclusively by the growth of debt is either expanding or contracting – it never stands still for long. The ‘permanently high plateau’ often touted as an answer to severe overvaluation is always a vain hope once debt deflation sets in and erodes asset prices.

If prices were to rise faster than incomes indefinitely, what do we suspect would be the outcome? Our top economic regulator the Reserve Bank, whose job it is to manage inflation and employment, and to ensure financial stability, has specifically explained that further real price escalation and indebtedness will destabilise our financial system even more than it already is. That’s the reason that the RBA in concert with other regulators have finally taken decisive action to slow down investor lending for residential real estate. They need to see price growth flatten or even fall in order to ensure financial stability. And as the last few months have proven, it’s now working, with price growth across the country slowing fast, and year on year falls being suffered in Perth and Darwin.

They’ve also explained three or four times in the last year or so that prices are due to fall. And as explained above, a whole host of global investment banks, hedge funds, ratings agencies and economists agree, forecasting price falls starting next year. Yep, prices are going to fall folks. They don’t go up forever, and the market is at very high risk of investor exodus once price falls set in. And in our investor-dominated market, that in turn creates a very high risk of collapse, which creates a very high risk of widespread economic fallout.

The fear of that kind of contagion (a genuine fear, not a marketed fear) should send a shiver down the spine of real estate speculators, as it means one of only two possible outcomes for the future of house prices is now assured. Either the RBA, APRA and ASIC fully succeed in slowing the growth of house prices leading to price collapse via market contagion, or they fail, and our financial system is further destabilised, leading to price collapse via some kind of atrophy. If prices continue to rise above the rate of income growth indefinitely, then the mathematically certain conclusion is a terminally unstable financial system. We only need to look at nearly any country in the developed world in the last ten years to understand what happens next. If that’s hard to visualise, here’s a little flowchart to illustrate the logical possibilities facing the housing market:

House Price Macroprudential Regulation Outcomes

So the conclusion is that in the medium term, prices are going to fall relative to incomes. Either they do so gradually, if our economic regulators are able to engineer a soft landing, or quickly if the ‘soft-landing’ triggers a run on negatively geared investment properties, leading to a self-fulfilling and rapid downward spiral (this is my base case), or catastrophically if the regulators fail to control further escalation of real prices, as the aforementioned financial instability finally leads to a panic moment amidst a rapidly slowing economy.

The last case is what most bubble-denier commentators and insiders are unwittingly calling for. They want/predict strong price growth to continue just because it can, or because they need to sell that prediction. But the logical options presented above are not negotiable with market and economic realities. Whichever case above you think more likely, it is utterly certain that spending money on residential real estate at this juncture is at best a bad investment, and at worst committing financial suicide.

In conclusion, that’s all you need to explain to your loved ones and real estate lusty peers when asked when you are going to buy a house, or told that you’re at risk of missing out forever. It’s a logical impossibility to miss out forever by virtue of price alone. As long as you are employed, and save and invest wisely (outside of real estate), there will always be an opportunity to enter into the hallowed ranks of home ownership. But right now, what slim opportunity there is to purchase, is a terminally risky proposition. But it won’t be like that forever. And the only difference between successfully navigating the terminal risks of the current real estate bubble and our massively tanking economy, and the completely preventable and disastrous outcome of financial ruin, is patience.

Patience is the toughest word to utter in this debt-addicted house-horny consumerist western culture and its obsession with instant gratification. But for your own sake, and that of your family, and your friends, and indeed the financial and economic well-being of the country, please remember that this current era of real estate mania will not last and is already unravelling, and as such: “There has never been a worse time to buy“!

11 thoughts on “Real Estate myths are being destroyed: “There’s never been a worse time to buy…”

    1. My take is roughly this (to quote myself): “The last case is what most bubble-denier commentators and insiders are unwittingly calling for. They want/predict strong price growth to continue just because it can, or because they need to sell that prediction. But the logical options presented above are not negotiable with market and economic realities. Whichever case above you think more likely, it is utterly certain that spending money on residential real estate at this juncture is at best a bad investment, and at worst committing financial suicide.”

      This prediction is from a particularly bullish industry insider, which makes reference to price growth in Melbourne in September. Making future forecasts based on a month’s data is folly, and even more so when you know that prices in Melbourne fell by 3.5% in November – from the same data set quoted here. Either way, the RBA / APRA / ASIC’s actions to control price and debt growth proves that further escalation of prices of the order predicted here are very dangerous, and will lead to further financial instability.

      I for one look at all of the changing circumstances detailed in my article, and cannot see how such reversal of all of the contributing market forces can play out other than large and self-reinforcing price falls. If not, then we face an even worse market / financial / economic schism down the track – which our regulators are trying to prevent. Does that make sense? There’s two options here. Neither result in continued indefinite price growth above the rate of incomes, rents, inflation and GDP. But one is much worse than the other – the option of somehow kicking the can further down the road, and delaying the day of reckoning.

  1. How do you know you’re not unconsciously incompetent ?
    You’re clearly young & haven’t experienced many market cycles.
    Do you think there are many people (doomsayers & bears) who have been saying v. similar things to you for 20 years ?
    What will it take for you to acknowledge that everything you’ve written is completely wrong ? Will you acknowledge it publicly if prices fail to fall by 25% within 3 years ?

  2. This article is spot on. Heard of an ATO wind up sheet doing the round of administrators and it is blowing administrators minds how many small businesses are going under at the moment. Rising unemployment may very well be the trigger for a housing collapse.

    1. Hi Jimmy,

      Gavin R. Putland has shown that it is the fall in house prices that precedes rises in unemployment. This makes sense when you think of the wealth effect and all the debt that slushes around the place when people are in a house buying mood. Once they stop taking out debt to buy houses, the house prices go down and money is not being added, thus lay offs ensue.

      I’ve probably fluffed the explanation but there is a good piece here on the topic, and Mr. Putland himself adds an insightful comment at the bottom.

      http://www.macrobusiness.com.au/2011/08/unemployment-and-house-prices-revisited/

  3. Excellent article, especially the cheat sheets! I’ve witnessed and been in the middle of 3 housing bubble and busts, so don’t let some condescending “know it all, seen it all” tell you you’re too young to understand a bubble and discount your analysis. You’ve hit the nail on its head.

  4. The elephant in the room of interest rates the US Bond markets. Currently the 30 year bond is only paying about 3% per annum and the 10 year bond only 2% per annum. This has been as the result of the Federal Reserve Bank’s open market activities (that some people would call market manipulation.)

    When you think about the change in the value of money over the last 30 years 3% per annum doesn’t appear to be a good investment. Actually it looks awful! In my opinion the US bond markets are in a bubble that is prime to burst as interest rates rise. There will be a stampede of bond holders from long term holdings to short term treasury notes as the bond market crashes.

    As a consequence of this the US 10 year bond will return to a rate that is more normal ie. about 7.25%. This implies a rise in Australian mortgage rates to perhaps 9%. This will pop our housing bubble and drop Australian housing prices between 25% and 50%.

    The size of the US bond market is about $30 trillion and the balance sheet of the US Federal Reserve is only $4 trillion. Therefor the market is much bigger than the Reserve Bank and there will be nothing the Fed can do when the Bond market bubble bursts.

  5. Mark Ellis has it,the bond market will be the ultimate determiner of our housing market,because it sets the interest rates.

  6. Excellent article!! Those fact sheets should be handed out at all social events so Australians can try to talk about something other than real-estate 😉

    The crash here is very likely to be severe. My observation of parts of the world that were hit by severe real-estate crashes is not only will there be considerable “political instability” after the event, but most neighbourhoods will fundamentally change their character. For example the area of Houston Texas I lived in with other petroleum company professionals is now a semi-agricultural barrio of mostly Mexican nationals. Large areas will be “re-purposed” to more sustainable economically profitable activities. That could mean estate homes become barns, swimming pools get used for fish farming, apartment complexes and parking lots get razed and used as cattle pastures.

    It is easy to check what happens. Just look up historical real-estate crashes (by crash is meant 90 percent or more price collapses). The Southern USA provides some good examples, so does Ireland, Greece, Spain, Cyprus, South Africa, and a fair number of others. Then take a good look at these places with Google Earth and/or Streetview. It will be apparent the buildings and roads had a totally different use a decade or so ago and the areas have fallen on hard times. Of course the pictures of Detroit and New Orleans are classic. Some areas do not recover, at least within our lifetimes or those of our children’s children.

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