“Plenty of glitter left in gold price”

The Australian Financial Review’s, David Potts notes:

“For a bubble, the gold price must be the slowest forming ever, having taken 29 years to beat its previous peak.”

He goes on:

“And never mind that in Australian dollars, gold peaked two years ago at $1550 an ounce.  If gold had kept pace with inflation it would be worth at least $US2292 an ounce… gold is nowhere near its peak, unlike oil, which passed its 1980 inflation-adjusted peak more than three years ago.  Nor are there any other typical bubble characteristics.  For all the attention gold gets, it is not heavily traded.”

Diggers & Drillers editor, Dr. Alex Cowie agrees with this point.  In his recent monthly issue the Stock Doc wrote:

“Gold bears like saying gold is in a bubble.  It makes them feel better about not owning any yet.  It’s hard to see how gold is in a bubble when it still only makes up 0.6% of global financial assets – the same as it did 20 years ago.”

Personally, we don’t believe gold is in a bubble either.  In our opinion the price has risen in response to past and expected central bank monetary policy.

Of course, the same could be argued for house prices.  Several readers have asked why can’t the same argument be made about house prices as is made about gold.

That house prices rose due to the same central bank monetary policies.

It’s a fair question.  Let’s see if we can answer it…

The difference between gold and houses

Look at is this way: house prices have risen because of a credit-fuelled boom created by central and private banks.  Gold has risen as a consequence of this.

In other words, the easy credit created by banks directly pushed house prices higher.  The money created by banks has been used to buy houses at ever increasing prices.

In contrast, the price of gold has simply reflected the increased credit.  Very little of the new money created has historically gone into buying gold.

Or to put it another way, gold is like the thermometer you use to measure the effects of a credit-fuelled boom – but rising house prices are the actual fever… brought on by easy credit.

Even so, bubble deniers won’t have a bar of it.  The lame housing-won’t-crash articles roll on.  This time it’s the turn of John Beveridge at the Herald Sun.

Seriously, we swear these articles are just the same thing being syndicated across the entire mainstream press.

Beveridge claims:

“That lack of new supply effectively puts a floor under the price of existing properties, along with changing lifestyles which favour inner-city living with better public transport compared to the poorly served outer fringe.

“There are a number of other reasons why property prices in the major capitals are more likely to move sideways or down slightly for a while before resuming their upward trajectory.

“One is that while property is very expensive in Australia, that reflects the fact that houses and units have been getting bigger and the construction and renovation is of a higher quality.

“The other factor international property sceptics point to is the very high level of household debt in Australia.

“They make a good point but the important thing to note is that the households that hold debt can afford it…

“A whopping three quarters of the household debt in Australia is held by the top 40 per cent of income earners who have substantial assets.

“Vulnerable households that owe more than 90 per cent of the value of their house and use more than half of their income to service their mortgage are less than 2 per cent of outstanding mortgages.”

And on he goes.  It’s pretty much the same argument made by HSBC chief economist, Paul Bloxham in Business Spectator in March.  We won’t say it’s word for word, but the arguments are almost identical… even using the same or similar phrases.

Syndicated reporting

Here’s Bloxham’s original:

“As we pointed out above, since 2006, population growth has exceeded new supply of dwellings, which is the first time this has happened in the postwar era.  This will put a floor under ohusing prices and is a key reason why we have little concern about a sharp (or large) house price decline.

“More fundamentally, we do agree that housing is fairly expensive in Australia, though we see good reasons for this.

“First, the quality of the housing stock is high.  Australia has the largest dwellings in the world, and they are of high quality…”

“Third, public transport from outer suburbs in most cities is generally of fairly low quality, limiting the distance which people can productively live from the city centres and further enhancing demand for property in the centre of the cities…

“However, there are other reasons why levels of household debt should not be a large concern.  The key one is that 75 per cent of all household debt in Australia is held by the top two-fifths of income earners… Vulnerable households – in this case, ones that have a loan-to-valuation ratio of 90 per cent or above and also use more than 50 per cent of their disposable income to service their mortgages – constitute less than 2 per cent of all owner-occupied households with debt in Australia.”

No wonder we had déjà vu when reading Beveridge’s effort.

The Sydney Morning Herald’s Jessica Irvine used Bloxham’s article as the basis for her housing-isn’t-a-bubble article a few weeks back.

We tore that effort apart here, Why it Won’t Take a Shock to Knock House Prices for Six.

We noted at the time it was “the year’s worst housing bubble article”.  Although Beveridge gives it a run for its money.  If for no other reason than its complete lack of originality.

Housing debate in June

Anyway, last week we mentioned we’d been invited to appear at a housing debate in June.  According to the organiser of the event, there will be six people on the panel.  On the housing-bubble side will be Professor Steve Keen from the University of Western Sydney, David Collyer from Prosper – the group organising the buyers’ strike – and your editor.

On the no-housing-bubble side will be AMP economist Dr. Shane Oliver, Mr. Harley Dale from the Housing Industry Association, and Mr. Christopher Joye from property index firm Rismark.

We’ve been told the date to pencil in is 7 June.  When more details are available you’ll read about it here.

We’re looking forward to the debate for a number of reasons.  But most of all we’re looking forward to the property bulls providing some original arguments.

It’s boring combatting the same old tired excuses.  We’ve bashed down each argument as they’ve made it.  Now their only option is to recycle the same old trash and hope they can get away with it.

I mean, after spending the past two years denying a house price crash was possible under any circumstances, we’d like to hear them explain the situation in Queensland.  After all, they never made any distinction between Queensland and the rest of Australia…

If anything, Queensland was compared to Western Australia as a safe place to buy due to the resources boom.

But according to the Courier Mail article sent to us by Money Morning reader Bill:

“Housing slump falls to 2000 levels as access to finance cuts construction”

And don’t even think about blaming the slump on the floods.  As many spruikers now admit, the Queensland property market has been dead for two years… not that they admitted it until recently.

Don’t blame it on the floods

And the examples we printed recently about multi-million-dollar homes selling for half the previous sales price, were all examples of sales from before the floods.

But we’re still waiting for someone to send us proof of the claim that Australia’s houses are better quality than houses built in the US, UK, Ireland or Europe.  The reason no-one has sent us anything is probably because there’s no proof.

Some property bulls have simply confused quality with quantity.

Bigger houses don’t always mean better houses.  A quarter pounder with cheese burger from McDonalds is pretty big, but is it better quality than the smaller “open wagyu beef burger, foie gras, quail egg, onion jam, smoked tomato and truffle oil mayonnaise” available from the swanky Ezard restaurant in Melbourne?

Maybe it is.  Who knows?

But we do hope the debate isn’t titled, “Will Australian house prices crash?” Simply because it’s already happened.  What we’d prefer as a title is something like, “How did the property bulls get away with it for so long?”

Anyway, we’ll keep swiping down the attempts by spruikers who claim Australian housing is different.  But we’re also keeping our eyes wide open on other economic events.

Stock market ready to fall?

The Aussie stock market is still struggling to bash through the 5,000 point level.  The surge since mid-March has seen the index add nearly 10%.  But the index is still no higher than it was this time last year:

Source: CMC Markets Stockbroking

What a wowser!

In our view that makes the stock market just as vulnerable to a big decline as the housing market.

Investors need an excuse to buy stocks.  With few exceptions, there isn’t much reason to buy right now… certainly not blue-chip growth stocks anyway.

But that doesn’t mean completely avoiding the market.  We’ll always buy good dividend-paying blue-chips.  And we’ll always keep tipping promising small-caps.

Because, unlike housing, it’s much easier – and less risky – to still have your toe in the stock market “water”.

You can take a punt with just 5% of your portfolio in the kind of high-risk/high-return small-cap stocks I look at, without it causing you sleepless nights or putting your entire savings or lifestyle at risk.

By contrast, try taking a punt on the housing market with just 5% of your portfolio and see how the risk/returns stack up.

That’s right, having your toe in the housing market “water” means taking 5%, leveraging it up twenty times, paying out thousands in interest costs each month and still having no guarantee the investment will make you a buck a year from now.

Make no mistake, the stock market is a risky place to invest right now.  But compared to the housing market, it’s rock solid.

Cheers.

Kris Sayce
For Money Morning Australia