The US crash shows us what we should, and should not, be scared of.
I've been thinking a lot lately about the next step for the Australian real estate market. There are many opinions out there on what happens if our real estate market crashes.
I have found that you can predict the future by being a keen student of past trends and cycles. A great example is what happened in the US 7 years ago and where that market is at now.
I remember when the US market ‘crashed’.
People went nuts talking about a ‘lost generation’ and how it would take America 30 years to dig itself out of a hole.
Steve Keen was patting himself on the back for being the only ‘economist’ to pick it, and then said that it was coming here.
He’s still saying it’s coming here. Any day now. This time for sure…
But fast forward 7 years – just 7 years – and where are we at? US house prices are rising, have past peaks in most states, and people are now talking about a rental crisis.
Yep. A rental crisis.
That housing glut that was meant to leave America in a puddle for 30 years dried up surprisingly quickly.
Too bad if you didn’t follow Warren Buffett’s lead and buy in at the bottom. The bottom’s now long gone.
Anyway, the Enterprise Foundation estimates that over 20m Americans are in “housing stress” – where 30% or more of their income goes on rents. Over half of those, or 11 million, spend more than half their incomes on rent.
On their figures, about half of all renters spend 30% of their income on rent, while 25% of renters spend more than half.
This, in their eyes, is a “rental crisis”.
I’d have to agree that this looks like a problem. The question though is where it comes from.
In part it’s been driven by the unequal recovery of the US – where QE has juiced up the top end of town, and hasn’t done a whole lot to help poorer Americans – who typically are the ones who rent.
So if you’re not earning very much, it’s easy to spend a lot of your income on rent.
But it’s also true that housing costs are increasing. Rents are rising, and so are house prices and mortgage payments.
And since rents are rising faster than lower-level incomes, more and more Americans are finding themselves in “housing stress”.
And why are rents rising? Well you remember that glut that was going to take 30 years to unwind. Turns out it didn’t take that long. Actually, it was more like 3.
Take a look at US vacancy data. Vacancy rates have come way off, from a peak of over 11% in 2010, to a current rate just under 7%.
To Australians who are used to vacancy rates typically in the 2-3% range, 7% might sound like a lot. But 7% in America is actually the lowest level since the mid 80s!
As I said, so much for that glut.
And the absence of available rentals isn’t because everyone took advantage of the market bottom and bought into their own place.
Home-ownership rates have actually fallen to lowest levels since the mid 90s.
So there’s a shortage of homes, there’s a shortage of rentals, and rents are getting too expensive for many people.
Suddenly America has a housing crisis on its hands.
Just 7 years after an apocalyptic housing market ‘crash’, America has a housing crisis again.
And this is why I roll my eyes when I hear characters like Steve Keen banging on about 30-50% declines in house prices.
Seriously bloke, it’s been 7 years already. Give that milking cow a rest.
And look, we’re looking at some testing times for the market right now. It’s going to be interesting to see how it all plays out. We’ve got a few headwinds coming at us – government regulations, rate hikes, foreign buyer breathers…
But the biggest swing factor in all of this is sentiment.
I think it’s not entirely impossible that we could see a fall of 7% in the next year or two. That’s not my prediction. But I can see that it is possible.
And that could happen if the market gets spooked. The GFC is still fresh in people’s minds. A lot of people thought it was coming here. If the sentiment of the herd goes sour, then a fall of 7% could be possible.
But the question is, for the investors with staying power, at what point do the market fundamentals kick in and give the market a floor.
As the US showed us, those fundamentals can kick in surprisingly quickly. Almost no one saw it coming.
… except Warren Buffett and friends, perhaps.
And the fundamentals that have taken us here are still in effect. I’m talking about the lowest interest rates in a generation (even if they’re inching higher). I’m talking enduring shortages. I’m talking population growth and our major cities bursting at the seams.
And a lot of people point to the construction boom we’re currently enjoying. There’s a lot of supply coming on-line. That will give us a glutty market, and prices will go into free-fall.
But America had a construction boom too. And for a few brief years, America had a glut too.
If you’re a family of 5, a glut in inner-city shoe-boxes is totally irrelevant. You need a house, or at least a large town-house. And if there’s a shortage of them, you’ll just pay what you have to pay.
So this is my thinking. There is a chance we’ll go down the same path as America.
That’s sounds scary to the people who don’t know, but as I’ve told you, the American path involves some great buying opportunities at the bottom, and a quick return to profit.
If you see Warren Buffet making a play here in a year or two, don’t say I didn’t warn you.
Are you expecting a property crash?
What markets will be the big performers in 2016?
…and will Steven Keen EVER be right?