Being a bear in a bull housing market

I have a bearish outlook on the Australian housing market. It's a difficult position to hold at the moment because all the figures disagree with. House prices are going up, even COVID failed to dampen it much. I feel a bit like the guys in the movie Big Short scratching their heads thinking 'why', why are prices still going up? What is the basis for this? Of course, the Big Short story is a very different situation to Australia's housing market. But there is at least one thing that is similar. That is, when prices are going up, people make money, and the more people see other people making money the more willing they are to put their own money into the market and to abandon their rationality, with well, gay-abandon. 

Markets do operate on a supply and demand model. More demand, limited supply, prices go up. However, this in my opinion, is now probably and outdated and overally simplistic way to look at economies as it sometimes insinuates that this behaviour is rational, and that people understand when something is indeed limited as opposed to them believing it is limited, based on well perceptions. Often ill-considered and poorly informed perceptions.

In my mind Australia's housing market is overpriced. I maintain that sooner or later there should be downward pressure on prices. I stress should as I am trying to discount irrationality in the market, which is probably a flawed concept in itself. 

Anyways, there's a few things that lead me to the conclusion that Australian housing prices are inflated and based on irrational, but understandable, factors. For one thing, housing supply is pretty good in Australia. If you are looking to buy a house in Australia for example, if you miss out on one today then there will be others on offer in the next weeks. They are not goign to 'run out', like toilet paper does from time to time during a pandemic. And while you're looking to buy a house, you can still rent a house. It's not cheap, but you can look around, there's options, but in the end, you are not going to completely miss out on a roof over your head. And where you might not get a place with a backyard, there's always apartment options. Maybe not ideal, but they exist, you can live with it. Also there's dear old mum and dad, or grandma or something.

Also, new houses - including apartments - continue to be built. And why wouldn't you? With an already overheated housing market getting supercharged by very, very low-interest rates, you'll most likely find a buyer for your new house/ apartment pretty easily (though it appears less so for apartments which are still seen as the poor cousin to a free-standing house in Australia). I'm not going to throw a bunch of statistics in to support this, mainly because I feel lazy as I'm doing this on a rainy Sunday morning and I'd like to finish it off and get back to watching the second half of the Lord of the Rings - The Two Towers. But when you drive around you can see, there's plenty of apartments being built and also plenty of free-standing houses.

So what is driving Australian housing prices higher? Well, I've already mentioned one - low-interest rates, but this is also coupled with a period of time when household spending was down for the best part of a year due to people not being able to go out and spend much. So the money for the holiday to Bali sat in the bank. Plus all the money for the restaurants, petrol saved from commuting to the office for months and also savings from less use of soap because you know, why the hell do you need to shower if you're just sitting at home brewing beer and making bread? So the deposit on over-priced house was more easily achieved for new entrants to the market. The so-called 'first home buyers'. 

The second major factor I see driving housing price rises is FOMO. The fear of missing out. Despite there being plenty of supply, the rise in house prices has a feedback effect which of course adds to the feedback (by very definition) and which drives more irrational behaviour. 'Oh my god, house prices will rise forever!' you think, if I don't buy this house for $680K today, well, by next year I'll have to pay $730K, and the year after that god only know, it could cost $950K (this affects both investors and owner-occupiers). It's similar, but different, to the rise in Bitcoin. Oh my god it's gone up 300 per cent in a year, I should just dive in without thinking to buy it now as it'll be out of my reach shortly. But unlike Bitcoin, which supposedly will have a very limited supply, with houses, you can just keep building more. There's plenty of space in Australia. And when you can't expand out, you can expand up. Or, like the Chinese government, you can just start building artificial islands to make claims on the South China Sea. Plus, at the moment at least, there's limited.

Also, on the demand side, there has been no real rise in household wages in Australia for about the last 10 years, so really people are relying on the increased availability of cheap credit, and the short term forced saving increase due to COVID, rather than actually having extra income. Also on demand, there hasn't been anywhere near the immigration numbers coming into Australia that we have had in recent years. An interesting argument raised by someone I spoke to the other day compared Australia's housing market to a giant ponzi scheme which relies on having new investors coming in all the time. While this is an entertaining idea, I think the last COVID affected year suggests maybe it's not immigrant money in the market driving higher prices, though it possibly has some influence.

So, I think irrational factors will continue to drive growth in housing market prices, including FOMO, coupled with other more tangible factors, such as cheap credit. But I think with an increased supply of houses, the eventual rising of interest rates, and the likely stagnation of wages, house prices should level out and probably go down. Of course, who the hell really knows what's going to happen. I've been bearish regarding the Australian housing market since COIVD began, and so far I've been wrong (see my earlier blog comparing house prices to the tulip craze of Holland). But just as in the Big Short, I feel I will likely not be wrong for too long. True markets fluctuate. To think they don't is insanely ludicrous and delusional. To buy a house based on FOMO is, in my opinion, a bit stupid. But stupidity has a lot of influence in economics. It's something us humans aren't going to jettison any time soon. While house prices continue to rise due to FOMO, and low interest etc,  we will likely become stupider and put even more money into an already overheated housing market. For example, using the rising equity in houses to go buy more houses, at whatever cost - because, prices go up forever.

Whether I'm right or not, I think the consequences are quite profound. Housing is an essential part of life. To price it in the same way as discretionary purchases (like tulips) has very real impacts on people's lives. At least in the short term, and let's for argument sake say I'm completely wrong and house prices keep rising forever, high housing prices can mean higher rents, which then affects everyone who doesn't own a home, as well as many who have purchased recently. It's probably ultimately a bad thing for the economy because more of our disposable incomes go on paying rents and servicing loans. This means less money for truly discretionary spending like going out to restaurants, holidays etc. It also means less money for stuff that would really help our economy - like investments in businesses, tourist infrastructure, manufacturing and the like. For money invested in residential housing only really stimulates a very narrow part of the economy, basically it means people are possibly more likely to go build more houses and apartments, so really just the construction sector is being stimulated. And like I said to someone else the other day, builders build, so you know, they'll build as long as there's profit to be made, but I don't think it's a good basis for an economy to rely on residential building. And as my father found out in the late 1980s on the Gold Coast, when apartment prices plummeted and new construction halted, he was left without work for another 5 or so years, finishing his working days as a taxi driver.

So that's it, that's my opinion. If I'm right there will be some correction in the housing market. If I'm wrong I think there will be very real negative impacts on millions of Australians. Impacts that are probably already being experienced due to people being priced out of the market - both in terms of ownership and renting. Or, if not priced out, having their daily budgets uncomfortably and slowly squeezed, like the first stages of a boa-constrictor attack.