28/06/2005 - 22:00

Tim Treadgold: Briefcase - Plenty wrong about property prices

28/06/2005 - 22:00


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If you’re not in the mood for a touch of gloom, then go and read something else, because this week Briefcase is in a black mood.

If you’re not in the mood for a touch of gloom, then go and read something else, because this week Briefcase is in a black mood. It wasn’t caused by oil hitting $US60 a barrel, or Australia losing to that giant of cricketing nations, Bangladesh; it was more a result of reading more self-serving nonsense from the real estate industry that property prices will not fall in Perth.

No names need to be dragged into the open for readers to know what is meant by ‘self-serving’.

In fact, it’s not just the real estate agents who are guilty, it’s the entire industry which hangs off real estate, and which makes a living from it; daily newspapers which sell advertisements, investment advisers who say ‘buy it’, and authors who preach the wonders of ever-rising property prices.

For some reason, perhaps to do with the resources price-cycle, there is a belief that WA is immune from the global forces that are bearing down on property – but, we’ll deal with resources in the second gloom-laden item.

Property is the primary area of concern at the top of this week’s column for a number of reasons. Firstly, because a lot of people are going to get seriously hurt as values continue to slide, and secondly because a property crash (albeit one that takes years, not days) can be more damaging to an economy than a stock market crash.

Evidence that the real estate industry is collectively guilty of gilding the lily can be found all around us, especially by following a simple test. Next time you’re reading a real estate section in the daily paper of your choosing check how many advertisements these days have the word ‘reduced’ included. Last week, while checking values in a favourite suburb of many, Cottesloe, one of the biggest upward movers of the past decade, there were at least four high-priced homes on which the price had been cut – and this at the same time some agents were saying that prices would continue rising.

Compounding this do-it-yourself test of the property market was yet another wholesale assault on the market by the London-based business magazine, The Economist.

Since very few of the readers of this column get this august journal, a few select titbits are used to illustrate the thesis of the property market being poised for the mother-of-all corrections; or as The Economist put it “the worldwide rise in house prices is the biggest bubble in history”.

Yep, not just Australia, the problem of the housing market run rampant is a worldwide event. Capping off the survey are these words: “prepare for the economic pain when it pops”.

To prove its hypothesis, The Economist went to a little more trouble than counting the number of times the word ‘reduced’ is used in advertisements – though Briefcase claims this is just as accurate. The Economist survey covered 20 countries and measured house prices over the past eight years. Winner in the bubble stakes was South Africa, where average prices have risen by 244 per cent since 1997. Ireland came second at 192 per cent and Australia claimed a top 10 berth with 114 per cent.

Significantly, Australian prices have started to fall. But, even more significantly, they have a lot further to go if they are to comply with one of the immutable laws of property investment (as immutable as the price/earnings ratio on the stock market) and that it the ratio of prices to rents. In America, this ratio is 35 per cent above the long-term trend, and 50 per cent above trend in “Britain, Australia and Spain”.

To get back to the long-term trend, which can be traced back to a start in 1975, there are only two solutions. Rents must rise, or property values must fall.

As if that isn’t bad enough, the popping of the bubble in the US will create a crisis that will affect millions of families who have subscribed for what are called ‘negative amortisation loans’. Never heard of them? Well, this is how they work.

A home buyer takes out what is essentially (a) an interest only loan (bad enough) and adds (b) the negative amortisation part – which means he/she pays less than the interest due which is added, along with the unpaid principal, to what’s owing – which means ‘whammy’, the amount being paid goes through the roof in the future.

Talk about betting the house, the family, the dog and the goldfish on a belief that property values will continue to rise.


In the resources market there is an equally sobering event under way – it’s called falling steel prices.

‘So what’, you say, we don’t produce steel here. No, but we do sell an awful lot of iron ore to countries that make steel, and if our customers are starting to hurt it won’t be long before the pain flows up the supply chain to the miners.

According to what Briefcase has seen, the phenomena of falling steel prices, down from $US590 a tonne to around $US470 a tonne since early this year, is largely confined to Europe where the finger of blame is pointed at excess stocks – code for supply exceeding demand.

In isolated WA we see the problems of the European steel industry as being far away. But they’re not really because steel is a highly mobile commodity. Once it’s neatly packaged in what they call hot rolled coil it is easily bunged on a ship and exported to, say, fast-growing Asian markets where it can potentially replace steel made with Australian iron ore.

This may seem somewhat fanciful, but supply/demand imbalances in products as fluid as steel have a habit of affecting even innocent bystanders.


The third item of gloom is more one of sympathy for poor old Bill Turner from Anvil Mining – the chap who copped a slam-dunking at the hands of the ABC Four Corners program a couple of weeks ago.

The charges against Anvil centred on an alleged massacre in the Congo not from its copper mine. Some of Bill’s chaps were said to have loaned a jeep to the army.

Briefcase sympathises with Bill for two reasons. First, in places like the Congo when a man with a gun, whether he’s from the government of the day (and they do last about a day over there) or from a rebel group, asks to borrow a jeep, you lend him the jeep or he might accidentally shoot you in the knee. This is known as the first rule of cowardice, or in the Briefcase rulebook, the first rule of staying alive.

The second reason Briefcase sympathises is that no-one in Australia is taking much notice of Bill’s plight – and that’s his fault because he is one of the chaps who thought it would be better to shift his stock exchange listing to the more active Canadian market.

This creates what Briefcase hereby dubs “the first rule of relevance”, which in Anvil’s case reads like this: who really cares that a Canadian-listed company, with an office in Perth, and a mine in Congo cops a television pasting, no matter how unfair?


“Politeness is organised indifference.” Paul Valery


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