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It's a trap

Property bubbles have an uncanny knack of following a particular pattern. At first, nothing, then prices rise and optimism begins, turning to euphoria as property becomes a ‘sure thing’ and people develop a strangely selective memory. This time, they say, for some reason, things are different. Except they aren’t. In Australia, the mining boom is no panacea for high household debt and the amount of equity redrawing that has been going on by some just to make their mortgage payments – a bit like a snake eating its own tail.

Of course when prices keep on rising, then hell yeah the house can and will get used as an ATM. Need a new car? A wedding? A honeymoon? Stick it on the house, maaate.

Problems occur when the equity is judged to have run out. This happens in a downturn when the banks reassess the value of their properties versus the amount of loans secured on them. And find the equity’s turned negative. That’s when the Aussie battler is on their own. Australia was experiencing such a downturn for all of 2011 – until in December, something miraculous appeared to happen. Housing rebounded – or surged uncontrollably like a rocket as Andrew Wilson in the media would no doubt froth – 0.02%.

That’s right. A recovery built on less basis points than the banks have been awarding themselves after February’s RBA Rates announcement ended in a Mexican standoff.

The RBA of course also let it be known that they held rates steady because the economy is picking up. So we have, in the middle of the biggest bubble and outbreak of financial dutch disease exacerbated by the currency wars, a recovery. With Aussies having seemingly dodged a recession and a housing bust in 2011, 2012 is looking great. The sun is shining, the house has stopped dropping – and mine’s nicer than the others so wasn’t going down anyway, the hols in Bali are booked, that 2012 year of the dragon tatt and singlet with ‘Bintang’ already budgeted for and….it’s a trap!!



See, every bubble has them. Two, in fact. A Bull Trap and a Bear Trap. Yes, at some point in a bubble prices actually fool us bears too, but here, at the opposite end of a cycle’s orbit we have the Bull Trap. It marks the point where enough people think things have hit bottom for that idea to gain traction and actually reverse the slide. Gaining about 50% of ground on peak prices sometimes. It’s a profit making opportunity for the more scandalous out there, for people like my neighbour Roy, who wonders if he should sell and rent a while it’s a final boarding call he probably won’t heed.

Unfortunately the Bull Trap phase ends and the final descent begins quickly because the fuel was exhausted. Like a marathon runner being told to go back to the start and run it again after 10 minutes downtime. It’s not going to work – even with energy drinks (more stimulus will just result in sub-prime at this stage). The runner’s knees will buckle and he will have to recuperate normally. For the many who got double-suckered into this phase by the timely axing of New South Wales Stamp Duty Exemptions targeted at lusty property virgins – buy now or get extra taxed forever – it’s going to be a slow bleed.

The same goes for the economy. For all that talking up, of 5.3% unemployment and so on it’s difficult to go through a day right now, in profit reporting season, without hearing another profit warning or, more ominously, another large round of layoffs by a household name. The Aluminium industry isn’t immune. Nor it seems are the unstoppable 4 horse banks of our financial apocalpyse – the ones who’ll be screaming for bailouts from the same taxpayers they’ve taken such delight in hosing around about 2013 if the correction goes to schedule. If it’s good enough for General Motors, they’ll whine…

In the UK, Woolworths fell. An early sign of big trouble. Who is going to account for Australia’s “Woolworths moment”?

But look at the media, they’re doing their level best to stoke the embers. Something has to fill the pages of the Sydney Mining Herald vacated by articles critical of Gina Reinhart and the mining industry now censored by their new oligarch. The likes of Andrew Wilson and Chris Joye with his interests now in the mortgage business via his unctuous mate Mark Bouris are using their platforms to scream that this is the bottom. Time to get on the next wave or lose out forever.

Other inconsistent economists like the Sydney Mining Herald’s Jessica Irvine hail our mighty overvalued dollar and give thanks praise be to the lopsided economy and absent government that made it all possible.

One will lean on the other now, all the way to the bottom of the cycle. Housing and the economy, wrapped in each others’ arms in a death embrace. And yes, I’m saying once the music stops for the second time this winter, housing and the coming recession will egg each other on until Australia experiences a pretty similar bust to what’s going on in the UK, But with more damage to housing values.

And to those, once again, thinking of buying in. Of upgrading the car. Of maxxxxing out the credit card to the maxxxtreme and going on holiday like Jess has told you to. Mind the trap! Now is the time to be letting contracts run down, of finding cheaper alternatives. Of being ahead of the curve and hunkering down.

Damn it’s gonna be ugly by 2013. And I don’t just mean my face.

nofriends

16 Feb 2012, 09:43 PM

I also recall people saying there was going to be rises in property in 2011 - there was not.

I also recall people saying there was going to be rises in 2012 - i doubt there will be and the downward trend looks like it is going to continue.

Everyone likes to make predictions - whether they are right or wrong in the past will not change what happens in the future.

Trojan

17 Feb 2012, 01:26 AM

You are right, I should ignore predictions from people who get it wrong regularly.
Actually I do ignore them - both bull and bear extremists
I think people who expect property prices to double in next 7 years are nuts and likewise to people who think it will fall 40% or more in the same time frame.

Cannon

17 Feb 2012, 07:24 AM

Fair point.

However, I would like to understand your thinking on why it can't fall 40% in the next 7 years.

Did you foresee the drop in house prices in USA, Ireland, etc? If you did; what thinking made you come to the realisation that prices were going to drop there?

If you did not see the drop in prices there; do you not think it is possible that prices can drop here to the same extreme?

Why not?

I am interested in hearing your response, as I am sure many people abroad held similar views to your current one; and were proved hopelessly wrong with time. I would like to know why your views are different - something more than 'it's different here' - because mate; it's different EVERYWHERE you go.

Cheers

Cannon

Shadow

17 Feb 2012, 03:07 PM

The great prophet Bear Trap did say that 2011 was going to the the second year of the bear trap (2008 was the first year of the bear trap).

It's looking like BT will be proved right, once again.

Shadow

17 Feb 2012, 03:07 PM

The great prophet Bear Trap did say that 2011 was going to the the second year of the bear trap (2008 was the first year of the bear trap).

It's looking like BT will be proved right, once again.

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Sydney all-clear for "bull traps", but Adelaide investors should be wary: Pete Wargent

By Pete Wargent
Tuesday, 10 September 2013

Canberra house prices have hit an all-time high according to Australian Property Monitors.

I'd be very wary about buying property there, however, because as has been flagged for the last couple of months the public sector is likely to shed a significant number of jobs in the city and thus demand must surely fall.

There has also been talk of a glut of apartments coming online in the city, which, if true (I haven't visited since 2011 myself - I've done the tower thingo and cycled round Lake Burley Griffin) may kill growth in that sector.

Canberra is only Australia's eighth largest city by population at around 370,000, so if thousand of jobs do unfortunately go, then the housing market will doubtless be impacted.

Nevertheless, Canberra's recovery to all-time high prices is another kick in the teeth for the property "bull trap" theory, which suggested in 2012 that those buying property on the back of dwelling price rises over the past 18 months would not see them recover previous highs.

The bull trap is traditionally a term used in the equities markets and is defined as a false signal which indicates that a declining trend has reversed and is heading upwards when, in fact, the security is set to continue its previous decline.

The bull trap causes some investors to buy into the stock which then resumes its previous decline, thus "trapping" the investor who has been suckered.

We saw two classic bull traps in the Aussie share markets through 2008:



Prices in Sydney's broad middle market, particularly in the apartment market, are already miles above previous peaks and have been for many months.

The wider city market in Sydney has increased in median dwelling price by more than 10% since its trough in H2, 2012.

I've continued to be bullish on Sydney dwelling prices since around 2007, and given the current low interest rate environment, it's no surprise at all to see prices up by more than 6% quarter on quarter, and Sydney's incredibly strong uptrend looks likely to continue.



There was no bull trap in Sydney, because prices have vaulted way past previous peaks.
In Perth, prices have also increased by more than 10% since their trough and have recaptured all-time highs there too, albeit only just at this point in time.

Prices are up by close to 3% in Perth in the last quarter but there has been some talk of those pesky ubiquitous headwinds and gains slowing as the mining sector rebalances from construction to production.

Watch this space.

Melbourne continues to confound the sceptics (including myself) with dwelling prices up an astounding 6%+ quarter on quarter there too.

The RBA will find it very hard to cut rates if this rate of appreciation continues in the two major capitals.

With luck it won't happen, for such rapid gains are neither sustainable nor desirable.

Melbourne still has a little way to go if it is to recapture its previous peaks. Mind you, if its current outrageous rate of progress continues, it will be there or thereabouts in just over a month.

The Brisbane recovery has been slow to date, with prices up a little over 3% since their trough, and prices still a long way below their previous peak, around 9% or so down.

Brisbane's recovery has had a few false starts, although there has been talk on the ground of some response to stimulatory monetary policy. Strong price gains have yet to be seen, though.

Therefore, Brisbane is also one for the not sure yet basket.

In Adelaide, prices have barely moved a muscle in 12 months despite record low interest rates, and prices are still around 5% below previous peaks.

Adelaide: bull trap alert.

If interest rates really are close to the bottom of the cycle (which is how the futures markets have interpreted the RBA's amended wording in its Statement of Monetary Policy and its dropping of the specific reference to easing bias - for mine, I remain far from convinced) then Adelaide prices could get clobbered as the cost of capital reverts upwards.

There have been a few lame and half-hearted attempts to talk up the Hobart housing market, but with the population growth of Tasmania considerably flatter than the Bass Strait, there may be yet further choppy waters ahead for the housing market.

Read more: http://www.propertyobserver.com.au/trends/sydney-all-clear-for-bull-traps-but-adelaide-investors-should-be-wary-pete-wargent/2013090964817