"That’s Not a Land bank, It’s a Housing Glut"

“PROPERTY speculators have locked up 46,220 empty homes in metropolitan Melbourne, the housing campaign group Earthsharing Australia says.

“In a documentary soon to be released, Real Estate 4 Ransom, the group says that 4.95 per cent of the city’s potential housing stock is unoccupied, double the rental vacancy rate of 2.4 per cent published last week by the Real Estate Institute of Victoria.”The Age

Personally, we don’t believe a word of it.

You know we’ve criticised property investors for their unwavering belief that property prices always go up. And even if they don’t go up, they’ll never fall.

But we don’t believe for one minute – not even one second – landlords are purposely leaving properties vacant.

Instead, it proves two things we’ve said all along…

House price indices hiding the housing bust

First, that Australian housing is experiencing the consequences of a price bubble. And second, there isn’t a housing shortage. Before we go into the details, it’s important to make one point. Do not, under any circumstances rely on house price indices to give an accurate gauge of house prices.

If you believe the indices you’d think house prices have had a steady decline… that Melbourne prices are only down about 1-3%… that Sydney prices have gone up a bit… and Perth prices are only down 6%.

The reality is far different. If you’ve kept your eye on the property market – as we have – you’ll know prices in many suburbs have fallen much further. And those who refuse to cut the price are, well, taking a price cut anyway.

How? Because they’re paying more in interest charges.

You see this all the time. Folks hang out for the extra $20-30 thousand they believe their house is worth. But because it takes them an extra six months to sell the place, even if they get the asking price they’ve most likely paid more than 20 grand in extra interest repayments.

But more likely is after six months they work out they are not going to get the asking price. So not only do they sell at a lower price… but they’ve just forked out an extra six months of interest to the bank.

That’s the real danger of using housing indices to gauge the market. It’s made sellers foolishly think they’ll get the same price their neighbour got when they sold two years ago –“House prices are flat…” or “House prices are only down 1%…” Sorry home owners, house prices are in a hole… a deep hole.

Which is why, as we’ve said for the last few months, if you’re patient and you’re not over-extending yourself, there are some good value homes on the market right now. We won’t say they’re cheap. And we won’t say prices can’t fall further.

But as long as you’re not going into it with the old-fashioned belief that house prices double every seven years, you’re more likely to pay a sensible price. Because we mean it, house prices will not double over the next seven years.

If you’re lucky, your discounted purchase will be the same price as it is today. More likely it’ll be cheaper. So the attitude you need to take is that making mortgage payments will be similar to making rental payments. In other words, you’re paying a price for shelter.

And because shelter is a consumption item, that makes it a cost (liability)… and not an asset.

But let’s get back to today’s story in The Age – the idea that speculators are purposely leaving properties vacant.

Housing shortage doesn’t exist

It’s nonsense. They’re doing no such thing… or not intentionally anyway.

The high vacancy rate just shows there isn’t a housing shortage. Those properties are vacant because the landlord has an unrealistic idea of the price people will pay for shelter.

The vacancy rates and high rents are just a result of a housing bubble. Investors leverage up and pay any old price in the belief house prices double every seven years. But soon enough the investor figures out they’ve paid too much and can’t afford the mortgage.

Their only option is to charge high rents to offset some of the cost. And why wouldn’t they… there’s a housing and rental shortage… renters will surely pay any stupid price… they’re desperate… right? Turns out renters aren’t so desperate after all.

Because there is not a housing or rental shortage. This means renters can be choosy. And right now, they’re being choosy.

They don’t need to pay the inflated prices demanded by some landlords when they can shop around for a cheaper price somewhere else. And that means those high-rent properties remain vacant.

But that’s not all. It gets worse for the “hold-out” landlords…

Because there are so many landlords in Australia there’s zero chance of a landlord cartel forming. The landlords who wise up to the madness or aren’t as leveraged as the peak buyers can afford to drop their rents… or charge realistic market prices. So at some point the super-leveraged landlords will have to give in. They’ll either sell at a loss or drop the rent to at least get some cash flow coming in… and then pray house prices go up again.

You see, land banking only works if asset values continue to rise… and if the rising value outpaces holding costs. At this point in the housing market, land banking with leverage just isn’t profitable. Many landlords have already figured this out. And the rest will soon get the hang of it.

It’s like buying shares in a margin-lending account during a time when there’s no market growth. If the stock pays a dividend you’ll claw back some of the holding costs. But if it doesn’t pay a dividend then it’s the same as having an investment property without a tenant… it’s a loss maker.

Greater fools taking a bath

In short, it’s nothing more than an extension of the Greater Fool theory. The idea that it doesn’t matter how much you pay for something there will always be someone else who’ll buy it from you at a higher price.

Speculators who thought they could get rich flipping properties have taken a bath, holding stock that’s now fallen in value. And now speculators who thought they could charge enormous rents due to a so-called housing shortage and rental boom are taking the same bath – we hope the water’s clean!

Of course, it’s not all bad news for property investors. If you’ve got no or low leverage on the property you can take the hit or drop the rent to the market price easier than the over-leveraged landlords.

All up, we don’t know what point the lobby group mentioned in the report is trying to make. But it seems to us it’s just helping to prolong the housing shortage myth. As we’ve said all along, it’s not the availability of housing that’s the problem. It’s the overblown expectations of investors and landlords who think they can charge any old rent and expect tenants to pay up.

Unfortunately for them, they’re learning a lesson the hard way.

An article by

Kris Sayce
Money Morning Australia

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