Property Cheerleaders

Michael Matusik writes a regular column in the Saturday Courier Mail's Property pullout. He is a self-styled property "expert" and I've heard him interviewed on the radio on occasion and I have no doubt he does other media gigs too. In the latter half of 2010 the tone of his columns in the Saturday CM was decidedly bullish just at a time when the market was softening up and I had him tagged as just another "cheerleader". However, at the start of 2011, the tone of his articles changed and he tried to present a more balanced view of the market and its prospects, a development that naturally challenged my opinion of his credibility as an expert and led me to believe that perhaps he did have some genuine value to add.

In today's CM column (Apr 9th, 2011), the "tide ran out", so to speak, and all readers will be able to judge for themselves whether Mr Matusik is in fact "wearing any bathers" after all.

He outlines seven reasons "why I believe we will not see major falls in home values", and I believe all seven reasons are worthy of closer examination:

1. Population growth - roughly speaking he argues that growth in the number of migrants in the 20s to late 30s will keep prices under-pinned.

This statement is somewhat wishy-washy and Mr Matusik offers no other information to back up why this should make a material difference. The statement pre-supposes that most migrants a) want to buy a property rather than rent b) have the necessary deposit handy c) have the salary to afford the property they want and d) are completely oblivious to the fact that Australia's market is the most expensive and wouldn't therefore wish to wait for a better entry point (in short, most migrants are 'crassly stupid'), which I find highly unlikely. It is a "demand-side" argument which simply doesn't stack up. Students of property crashes know that demand can evaporate in a flash - all it requires is a change in sentiment. If people think prices are falling, or going to fall, they stand on the sidelines, plain and simple.

2. Tight Lending practices - here he talks about Australia's apparently unique "full recourse loans", while "many overseas markets which experience which a housing crash have non-recourse loans".

This claim I take real issue with and it's about as tardy a bit of journalism as you're likely to see. The U.S. mortgage market has non-recourse loans and has crashed, but actually has some significant advantages over the Australian market like fixed rate loans for the full duration of the mortgage which borrowers are able to refinance at will, virtually cost-free. The UK and Irish markets have full-recourse loans and their mortgage makets are about as similar to the Australian model as you could get. The Irish housing market, as all who have not been living under a stone for the past 24 months will know, has completely melted down -- we're talking a 40%+ fall across the board. This makes a mockery of Mr Matusik's claim. As an aside, diligent readers of the AFR will have seen an article a couple of weeks ago on how the major lenders are loosening lending standards again in order to attract borrowers. Yup, 97% mortgages are back and the mortgage indemnity fee can now be capitalized i.e. added to the borrowed amount and paid back over the life of the mortgage. So much for "tight" lending practices.

3. High Equity - according to mortgage broker AFG, current loan-to-value ratios are around 53% "reflecting our conservative position towards debt. Simply, most of us own about half of our homes."

It is statements like this that gave rise to the phrase: "Lies, damned lies, and statistics".
On the face of it this aggregate LTV number looks impressive but broken down, the picture looks a lot less rosy. This is an average and does NOT reflect the situation of each borrower. There are a horde of baby-boomers out there whose mortgages are approaching maturity which means their mortgages will have, say, a 5 to 10% LTV, balanced on the other side by more recent borrowers who are mortgaged to the eye-balls and have 90 and 95% LTV on their homes. It's this latter group that are the issue -- you only need a relatively small percentage of homeowners to become "stressed" to precipitate a fall in prices.

And here's an anecdotal reason that may help people understand how the LTV picture can be enhanced: a neighbour bought a house in the area for around $1m at the end of 2008. They did extensive work on the property, financed by their lender (to the tune of $350k), who valued the property at the end of the renovation at $2m. This makes the LTV on that property 67.5% which is impressive indeed, right up until you consider that this property in the current environment would struggle to fetch enough to break-even if sold, thereby making the real LTV around 100% (perhaps higher). Multiply this situation, which involved Mickey Mouse valuations tens of thousands of times, and perhaps the mortgage industry's LTV is not that great after all. And here's another question: in the current weak environment, are banks revising property values lower across their loan books to reflect reality? I think I know the answer to this one....

4. Undersupply - this speaks for itself

...and it is complete garbage. There are 340,000 houses and units for sale across Australia as of a few days ago and this number is increasing by the week. If this is undersupply then I'm Luke Skywalker. Mr Matusik does qualify this claim slightly by saying the undersupply may be at the lower end of the market i.e. "affordable housing", but how people who don't have the wherewithall to buy property can help support prices, I don't know. Someone please explain that one to me. And lets hope all those migrants that are arriving daily are able to help mop up this burgeoning supply, which is only likely to increase over the coming months.

5. Economy growth - "housing markets usually crash with large falls in employment".

Again, complete trash and the tardiest of journalism. The U.S. housing market peaked in early 2006 and started to decline shortly afterward. U.S. unemployment was around 5% at the time, roughly what Australian unemployment is right now. Australian interest rates are among the highest in the developed world and its people the most personally indebted -- at risk of sounding controversial, I'd say that's not a good combination.

6. Low unemployment - "as long as unemployment stays below 8%, then wholesale falls in property prices are unlikely"

Hey?! The riposte to the above ludicrous claim is the same as that for reason 5 but where, oh where did Mr Matusik come up with that 8% figure? Was this gleaned from some academic text book? Is he suggesting that, if Australian unemployment hits 7.9% the market will be A-okay but the moment it ticks up to 8% all bets are off? Only someone with an IQ in single figures would grant any credibility to this claim.

7. Few mortgage defaults - while the number of mortage defaults is currently rising, overall the number is still low.

The number is rising -- the trend is UP and there's no knowing when or where this trend will peak, so how could this possibly be a positive for the housing market?! Where is the logic in this? If we are only at the beginning of a housing market correction, then it's only logical that the default rate will still be low.

Make no mistake, the key to property prices rising or falling is people's expectations of what is likely to happen. Mr Matusik and his ilk (i.e. property "experts") have been riding the wave (and nurturing it) for the past decade but despite the best efforts of the "spruikers" to keep the bubble inflating, reality is finally dawning and sanity is hopefully returning to the housing market.

I don't know if there is a body in Australia that monitors standards in journalism, but if there is, they may wish to review some of Mr Matusik's recent work. I do wonder whether today's piece contravenes any guidelines pertaining to "investment advice" because I'd hate to think that any poor soul taking him at his word might go out and do something stupid like make an investment in property at the present time.