September 30th 2008
by Neil Jenman.
In late 1972, I worked in a real estate office. My job was to chase-up tenants who hadn't paid their rent. I was getting about fifty dollars a week, barely enough to pay my own rent, never mind buy a home for myself. I wasn't very happy.
Then came some worse news. One of the salesmen told me, "It's too late for you to buy. The prices have all boomed and there's only one way they'll go - up."
He was adamant. I could never afford my own home. "You are part of a new generation of Australians, mate. Doomed to rent forever."
"Rubbish," I said.
"Oh, really, well, tell me. How are you gunna do it?" he shot back.
"The prices will come down," I said, a lot more confidently than I perhaps felt.
"You're dreaming, mate."
"Well, you tell me," I asked, "How can prices keep going up if people like me can't afford to buy? If there are no buyers, prices must come down, surely? Or my wages must catch up so that I can pay the house prices."
"That's the trouble with you young people today," he said. "You think the world revolves around you. It doesn't. We don't need you to buy real estate, mate. We've got investors. And they know real estate will never come down. It's because they're not making any more of it, mate."
And with that little lecture he strode out into the Queensland sunshine, probably to sell more real estate to more gung-ho investors who believed the boom would never end.
But that boom did end. The credit crunch came, property companies collapsed and prices plummeted. That salesman lost his job and a heap of his investors went broke. That's how it should have been. Greed and hubris got them all. It always does.
In 1976, I bought my first home, a little one-bedroom unit. I was happy.
You see, what that old salesman had told me hadn't made sense. How could young people be 'locked out' of the housing market just because investors wanted to make plenty of profit?
Not only did it not make sense, it didn't seem fair.
And, despite what we may think - or how things often appear - fairness is resilient. It never completely vanishes. It always seems to come back.
I believe it's unfair for a generation of young people to be 'shut out' of a housing market. Just like I was told in 1972, when I hear it today, I want to yell, "RUBBISH!"
Over the past few years - especially the last decade - we seem to have lost our ability to think sensibly about the natural order of investing.
We either see what we want to see; or we see what we are told to see.
"Invest in real estate, there's another boom coming," scream the spruiker's advertisements. "We are facing a new generation of people who are doomed to rent forever," says just about everyone.
I believe both are wrong.
When it comes to prices, we forget (or ignore) the obvious. We forget that the value of an asset should sensibly be measured by what that asset can pay us. It's called dividends. Yield.
For property investors, that means rent.
It doesn't make sense to invest in assets that pay small (or near-zero) dividends.
Oh, don't be silly, say the modern investors. "These days, we invest for capital gain not yield."
Well, that's just an admission that we've all lost our senses.
If the reason we buy something is because we think fools who've lost their senses are going to come along and pay us a bigger price at a later date, we are truly fooling ourselves. At best we are high-risk gamblers. At worst, we are complete mugs.
Now, a lot of people are not going to like this next statement, so please, let me make it clear. I did not write it. I read it in an investing book called Your Money Matters by Jonathan Pond (so send your abuse to him).
Pond writes, "Any property that is selling for much more [italics added] than seven times the annual gross rental is probably not going to be a particularly good investment."
So, grab your calculators and work out your own investments or the investments that some spruiker is trying to sell you. Guess what? It doesn't make sense, does it?
Something else that has never made much sense to me. This constantly repeated claim that land is in such short supply, so that's why it must keep going up. We live in Australia. We've got plenty of land, so how can so many of us fall for such nonsense?
Roger Bootle, one of Britain's leading economists said that the argument about a shortage of land and population pressures pushing up property prices is "bordering on the economically illiterate".
All my working life I have been observing property. One of the main methods I used to determine what's going to happen is whether or not things "feel" right. Whether or not it makes sense.
When I visited Adelaide in the mid 1990s and properties were renting for $140 per week and selling for $50,000, it didn't make sense. It felt too cheap. The same applied in Sydney in 1999 and Tasmania in 2002 and Perth and Darwin in 2003. The assets were giving good returns. People could afford to buy properties.
But not today. Today, most real estate in most parts of Australia is unaffordable to the point of absurdity. It's return as an asset is so poor if it was an employee it would have been fired years ago.
And yet, some people - as usual, mostly those who are selling it - are telling us that property is going to boom again soon and that a generation of young people are forever shut-out of the housing market.
It doesn't make sense.
Real estate in Australia is about the most over-valued real estate in the world, based on affordability.
In just about every other country in the world, property prices are plummeting.
And yet "it's not going to happen here".
Yea, yea. It's different in Australia.
In the current edition of Time magazine, the cover is The Price of Greed, the title of a wonderful essay by Andy Serwer and Allan Sloan that ends with this bit of sense, "The four most dangerous words in the world for your financial health are: "This time it's different".
It's never different. It's always the same, but with bigger numbers."
And in last Sunday's Sun-Herald, David Potts quoted eight words at the end of his article about property prices. They are eight words that, as usual, will be ignored by almost everyone. But they should be remembered by everyone because they make perfect sense.
"Because of the affordability problem prices can't rise."
You see, it's really quite simple. It doesn't matter how much buyers may want it, if they can't afford it, they can't buy it. And if they can't buy it, then it can't boom.
To me, that makes sense. It's the sense of property prices.
But who's listening?