Why Not to Buy a House

Hmmm, hopefully you can see the detail - click on the graph for a much bigger version. Nigel Stapledon of UNSW (and formerly of Westpac) created this graph, and Steve Keen has created similar graphs. It should raise all of our eyebrows, but alas doesn't.

Here's a fast-track way to be considered a dribbling lunatic in Australia, and probably in many other places too. Don't buy a house.

I once bought a house, and sold it for a variety of reasons not long afterwards. But for the past decade I've refused to do it again. This graph is why, although I didn't know about the numbers until the past year or so. (I'll talk about Australia, but many other countries will have experienced similar trends, for example the US, which shares the graph.) Take a look at what happens to house prices from about 1990 onwards. Cancerous growth. Off-the-scale growth. Growth utterly at odds with the more than 100-year trends preceding it, on the graph. The sort of deviation in a trend that would tell any half-functioning human being that something weird is going on, unless the graph represented the number of flies on a fresh bit of doggy do, over time.

What the graph alarmingly shows is an exponential (for the non-mathematicians, astronomically big) growth in housing prices in the past 10-15 years. Living through those times, I sat and watched the proliferation of lifetsyle home improvement shows, adding a lick of paint to the walls and flattening any character in the garden into some homogeneous mulched low maintenance wasteland, and then voila - the house sold for $100,000 or so more (and even more in some areas) than the original estimation, pre-renovation. (Interestingly when I was younger my dad and others who had something to do with real estate always said a garden didn't add much value to most houses, because realistically it isn't 'worth' much, in the sense of what it actually costs to produce, at least in comparison to the house. Of course it adds an enormous amount aesthetically and in other ways, but buyers and investors hadn't yet reached that frenzied lunacy then which saw a couple of barrow-loads of mulch and trucked-in exotic natives as reason to add another few thousands to the price, or even tens of thousands.)

There was a sense of complete unreality about those times. It was the new gold rush. People were falling over themselves to buy property, and sell it on as fast as they could to reap obscene capital gains, even in ridiculously short timeframes. It's not difficult to notice by the way that most if not all of those get-rich-quick home improvement shows have disappeared from the telly, hopefully at least in part out of utter embarrassment, but likely more because the mortgage-stressed have little appetite for this sort of bullshit any longer. No point rubbing their faces in it now the cold light of day has hit. At that time I knew it all smelt horribly wrong, that the prices bore no connection with the actual long-term value of the properties in a tangible goods and materials sort of way. And that it was just another boom, and all booms bust, with lots of idiotic hand-wringing and apportioning of blame to everybody except the flock of lemmings who not long before couldn't wait to board the gravy train like everybody else. Many times when interrogated ('asked' doesn't quite capture the mood of it) at those times about why I wasn't boarding as well, I would get snide and superior little sniggers or outright belly laughs of disbelief that I thought the whole thing was a mirage.

Just recently the government kick-started a mini-boom for first home buyers, who were largely locked out of the boom times due to the astronomical prices being asked i.e. they're some of the last suckers left standing, the few eligible home owners not already saddled with usurious loans. Which has led to talk about 'green shoots' in the economy, and the usual guff from self-serving property industry types about the end of the downturn etc. Because one of the other dominant mythologies of home ownership is that prices always rise and fall, that it's a 'cycle'. And that over time despite the fact that there are booms and busts, on average prices go up over time, so housing is a great investment.

If you look closely at the graph you'll notice that this is actually rubbish. It has been true since about the 1960s, but for the whole nearly 100 years before that house prices did move up and down, but never budged from the same average amount. (In fact one of the longest-reaching historical studies of house prices, in Holland, shows that over the past 350 years they haven't budged an inch, in real terms: see here.) The mythology of the home as a source of wealth only took off in the 1960s, when debt started to become a dominant force in the economy. Before that people largely saved to acquire goods, rather than take on enormous debt, and as a result mortgages were much smaller because housing prices were much smaller, the price of houses then reflecting more their actual, physical value, rather than 'what the market will pay'.

It's debt that's allowed this exponential increase in prices in the past decade or 15 years. And the debt financed pure speculation, using housing. It astonished me then that more people didn't watch the home improvement shows and wonder why it wasn't blatant fraud to be buying a few tins of paint, rented temporary furniture and truckloads of mulch and then jacking up the price by tens of thousands of dollars. Can you imagine a show about any other good, such as cars or white goods, where the participants might add a few coats of paint to something and then increase the price by 30-50%? You'd have consumer affairs bodies and tabloid TV shows after them. But not for this holiest of sacred cows, housing. (And maybe doctors, who seem to be able to continuously rape the public purse with impunity, and are lauded for doing it.) The postwar generation started this mythology, whereas their parents who lived through a Depression and then the war would have been horrified. Which is why even today well-meaning parents and grandparents urge their young folk to get into the market as soon as they're old enough to sign up for a loan.

So I'm glad I didn't buy a house. And I won't buy one either, at least until prices have returned to those early-1990s levels, or even lower. That would mean price drops of at least 40%, which shocks people. At that point anybody who bought in the boom will be sitting on a white elephant that has sucked tens or hundreds of thousands of dollars out of their life earnings, which they'll never get back. And I'll struggle to have the slightest sympathy. As Adam Schwab says, "...the price of an asset will ultimately return to its intrinsic value, even one as cherished and misunderstood as residential property."