Mr. Tulip’s delusional grasp of reality

You have o question the intelligence of some people. First the RBA tries to spin the “Everything is fine, keep buying houses – They are a great investment”, Then we have the latest shill, some obscure Peter Tulip.

Australian house prices are 30% undervalued compared with the cost of renting, according to new research.

Financially, Australians would be better off buying a house than renting, said Reserve Bank of Australia economist Peter Tulip.

Mr Tulip said low interest rates made it the best time in 30 years to buy rather than rent, local media reported.

His comments come at a time when house prices in Australia’s capital cities are out of reach for many Australians.

Prices for Sydney residential property are so high some people have predicted the market will bust.

Mr Tulip said his findings were based on changes in bond prices which implied mortgage rates would remain at record lows for a further decade.

The Reserve Bank kept Australia’s official cash rate steady, this week, at a record-low of 2%.

Mr Tulip presented the preliminary research at a Queensland conference on Wednesday.

Better value

A year ago the cost of renting was similar to the cost of regular mortgage repayments, Mr Tulip said.

“What has changed since then is that real long-term interest rates have fallen substantially,” he said, according to Fairfax Media.

“That fall made housing more attractive relative to renting, despite the increase in prices,” he said.

His research found that the annual cost of owning a home bought in April was likely to be 2.7% of its value, while the annual cost of renting the same home was likely to be 3.9%.

Meanwhile, separate data published by Domain Group showed rental costs had continued to rise in nearly every Australian capital city.

The median weekly rent for a Sydney house was A$530 ($393, £256), up 1.9% over the past quarter.

Over the past 12 months, house prices in Sydney had risen 16.2%, in Melbourne they were up 10.2% while average prices in other capital cities had risen by 9.8%, according to Fairfax Media.

Are you serious?  House prices are NOT dependent on rental prices.

Prices are set by what people are willing to pay. Personal residences are based on nearby sales prices plus the emotional factor. Rental properties are purchased for yield. Yield is set by a number of factors :

  • Comparative investment products (Shares, Gold etc.)
  • Growth expectations of the product over the expected duration of ownership
  • Amount of cash or equity required to buy
  • Leverage available (Mortgages, loans etc.)

Rents are set by :

  • Comparative properties
  • Value of the accommodation (The nett result from earnings minus costs). If it costs 60% of your wages to earn $300 nett, then a move to a lower paid job in another place will increase your disposable income.
  • As wages are basically fixed, rents cannot increase directly in line with property prices without bankrupting the tenants. The shopping malls are the premiere example of this – tuned to the very edge -Their example actually crosses the line with tenants expected to be driven to bankruptcy at the end of year 2 of a 3 year lease, thus providing the opportunity to re-lease the property early and collect double rent in year 3. After all, the nearly bankrupt tenant has limited ability to fight the corporate sharks.

Mr. Tulip’s delusional grasp of reality leaves us with “What is the answer?”

Property in the main cities of Australasia are in a speculative bubble. The Chinese are converting their gains from selling cheap items into real assets in a place safe from their own pollution and Communist Party controlled crony-ism to democracy, a safe place to run to. The other appeal is more prosaic – They love a gamble, and what better place than a red hot property market?

The locals have to pay the price to compete or leave their family, friends and jobs. Grudgingly, they pay the maximum rent they can afford, but there IS a breaking point.

Until there is a credible investment alternative, speculation will continue to inflate the property bubble. After all, who leaves the casino when they are on a winning streak? Renters will not increase their payments. One day, the prices will deflate to a level that pays a realistic return based on about 40% of the tenant’s wage.

The recent sharemarket crisis in China will hasten the foreign investment fever as the wealthy remove their cash to a safe place. Once there is no incoming flow of cash, the locals will gradually push the bids down.

There will be no explosion, just a gradual hissing sound. The property market is too big to fail. Joe Average and the banksters have credit cards, car loans and their employment all tied up in the balloon, so a bang will end it all, very badly. A carefully managed let down keeps it all in the juggler’s field of vision and nobody gets hurt (Except the middle classes as usual, who get squeezed).

Mortgagee sales will be carefully rationed to avoid the truth hitting the ‘news’ papers.