Can't happen here mate...

Why house prices are going to fall 75%

Took the fam to the Central Coast for a holiday recently. Lovely place.

The little one liked the beaches, the missus liked the landscape and I liked the serenity.

Even the dog had a ball. He had a romp on the beach with a bitch called Bow. His first romance.

Got 99 problems
tfw your first crush is twice your size

Everywhere we went though, everyone, bloody everyone, talked about real estate. A random Boomer chick on the beach. The ferry driver. The pharmacist.

“Sydney prices have gone too high, so there won’t be any growth there for a while. People are finding out about here now, so the growth will be here for the next few years.”

“There are still some pockets where you can buy in the 400 range. You’d want to hurry up though, the money’s flowing out of Sydney to here now.”

“If you buy in Bateau Bay, buy on the sea side of the highway. There’s housing commission flats on the other side. You won’t get the same return.”

Return? I just want some sunscreen. We’re not buying a house, or moving here. It was just a holiday. But the topic of conversation, at least between strangers doing transactions in shops, is just how high Forrester’s Beach will go now they’re putting in the new light rail to Sydney.

I was already planning on writing a piece on the imminent and catastrophic housing crash facing this country when I saw Matty’s recent piece on the topic. Then this sealed it. It’s the final omen. I’m calling it.

The housing apocalypse is finally upon us.

Can't happen here mate...
Burn, baby. Burn!

Yeah, I know, it can’t happen here, it’s just a small downturn in the cycle, the long-term trend is up, there’s too much immigration for it to happen, the government won’t let it happen, there’s not enough land, whatever. I’ve heard all the arguments from the bubble-deniers. Here are three reasons they’re wrong, and we’re screwed.

Or, in the case of the young and prudent, we’re about to finally have a shot at something like the Australian dream that the Boomers took for granted.

We’ll enjoy all those renos you did for us. Thanks.

Busters
You better cut back on those smashed avo brunches, guys.

Old people these days just expect too much…

The first reason I’m certain that this is it is the Taxi Driver Indicator, which I just mentioned. It’s a classic indicator of a bubble top among serious investors. It’s when everyone is talking about an asset class. This happened with cryptos in December last year, with tech stocks in 2000 and gold in 1980. When everywhere you go people are talking about a given asset class, then everyone is all-in. People who would have bought, or have the capacity to buy, have. The moment arrives when there are no new marginal buyers to keep pushing up the price, and when that happens, confidence begins to erode. It’s only a matter of time before the panic, the freefall and the blood ensue.

We’re in the ‘confidence beginning to erode’ phase right now.

What will make this housing collapse a tale for the ages is how eye-watering our levels of household have become. We’d become so confident of infinity house prices, we gorged ourselves on debt like Michael Moore at a seafood buffet.

Right Royally Screwed

And the most worrying thing about that chart is that the parabolic increase in debt in the last few years has happened during a period of record low interest rates. Not only are house-horny The Block watchers betting on rising house prices, they’re betting on interest rates staying low. And when we look around at geopolitical risk, a hawkish Federal Reserve chair and Europe about to implode, that’s not as sure a bet as it used to be.

At the moment, the percentage of repayments covering interest is relatively low. It seems very unlikely it will stay that way for long, pushing out repayment costs and breaking households’ ability to repay.

Interest percentage
Rising debt with declining interest rates

Received wisdom would suggest that the risk would be most pronounced for the poorest and youngest Australians. That’s not the case, however. Martin North from Digital Finance Analytics has been doing some sound empirical research on the Australian housing debt supernova, and he’s uncovered that the highest levels of mortgage stress are among the most affluent postcodes. His research has also found that about one quarter of Baby Boomers, themselves on the cusp of retirement, have mortgage debt, mostly from investment properties they bought after leveraging up on the paid-for family home.

Oops.

It turns out the people who are most at risk are the ones who benefited most from the initial widespread housing bubble boom from about 1999 to 2006. It made them overconfident, and rather than sit on their windfall or sell and downsize to enjoy their unearned winnings, they doubled down.

And they seem to be having their ‘Oh shit!’ moment right

about

now.

But, I hear you ask dear reader, what makes me confident it’ll be 75%?

It’s because bubbles, even inter-generational ones like we’ve had in housing, always return to where they began in nominal terms. In fact, they usually over-correct and prices shoot past the point at which the bubble began. And our bubble, like most of the world’s real estate bubbles, began around 1999.

Let's all party like it's 1999

On average across the country then, prices have tripled since 1999. That means a two-thirds drop when the crash happens, with a shoot-past point to a low of around 75%. Like during the depressions of the 1890’s and 1930’s, cash will be king. The young, having the time to earn as they will, will benefit most. The old, or at least those with debt and precarious income, will suddenly not be making jokes about spending the kids’ inheritances. They’ll be offering to babysit.

And maybe that will be a good thing. If this crash also manages to cause a global sovereign debt crisis and make governments unable to fund the welfare state, we may get the white extended family back. The great replacer of the family, the socialist state, will be no more.

And it will be glorious.

The white family
So. Much. Patriarchy.

Big Sister won’t go down without a fight though. Expect some form of cryptocurrency-AI-drone SkyNet tyranny before we get there.

The third piece of evidence I use to anticipate a 75% drop in house prices on average across the country are house price to income ratios.

House price to income

We can see that the real gains in real estate were made by those who owned in 1999. Since then, the house price to household income ratio in Sydney and Melbourne has doubled, and this was at a time when female workplace participation was increasing. Should house prices collapse, however, this will most certainly cause an economic depression. What’s worth remembering is that during recessions and depressions, incomes fall by up to 50%. This means a drop in house prices by two-thirds to three-quarters to return to the ratios of the 90’s.

I will feel pity for the hardworking people who will lose everything when the catastrophe comes upon us. Everyday Australians didn’t engineer this monster that has eaten the country. Crooked politicians in bed with slimy bankers did. They introduced negative gearing. They kept cutting interest rates to keep the thing going. They opened the floodgates for a demographic replacement which kept the Ponzi going for a few more election cycles.

They did it, not us. But we kept voting for it, with no thought for the future. And Boomers, I’m looking right at you.

Before this frenzy of debt, renos, flipping and consumption began, we looked like this.

Neighbours before #metoo

White school

 

Now we look like this.

 

Macquarie-University-Grads

Was it worth it?