So, over on that other fringe economic news site there has been a lot of housing crash fear porn pumped out due to imminent rise in interest rates beyond everyone’s wild imagination. Sydney houses are in free-fall already, dropping at 2.5% year-to-date, with Melbourne not too far behind with an equally horrid slide of 1.7%! Thankfully, the economy of the state that 113% of WA population has entrusted me to lead during the last state election, Perth is sitting at a healthy 4% gain YTD, with a number of suburbs sliding into a million-dollar club just hit 56, according to the CoreLogic recent data.
But let’s examine what does a house price crash really look like. Being an astute political leader, I will present you with one specific anecdote, and you can extrapolate, or annualize it to reach your own sordid conclusions as to where we are headed, and decide whether you need to reach for a comfort blankie. The story below is what has led to events so well presented in the Big Short and Margin Call.
I give you the house. Quarter-acre block, backing onto a golf course, a live stream in the back corner of the property, brand new build, top of the line finishes and the largest model available from that particular builder in a brand new development in heavenly retirement oasis of southwest Florida, a couple of miles away from the waters of the Gulf of Mexico.
The house was built in 2006, and listed by the developer for sale at $675K USD. The buyer, being astute in the ways of the local economy, an avid reader of ZeroHedge, USAGold and other fringe economic websites that existed in their unadulterated form back in the day, had an inkling that the economy was tanking and there was room to negotiate. So, the buyer offered $500K, and, as the sales manager later told the buyer, the message from the head office was: “don’t let the buyer leave!”. The deal went through, the builder got a sale, the buyer got a 25% discount off the listed price and they all lived happily ever after. That was in July 2006.
Come October 2006, an exact same house, but on a smaller block, 4 doors down, sold for $380K. The buyer started to get nervous, as the mortgage cost, even when allowing for a tax-deductible interest, was way over the house value at a current market price.
Fast forward to 2008. The buyer secured a new job away from the heaven of SW Florida, in metropolitan Atlanta, Georgia. The craziness of house price speculation did not hit that area nearly as hard, and houses, while going up, did not reach nosebleed levels, as Atlanta was not an attractive migration point, as it lacked “livability” due to being a manufacturing hub, no ocean front and higher taxes (Georgia has state tax, Florida does not). And it snows in Atlanta once every 4 years or so.
Having paid the mortgage and rent for another year, the buyer decided to walk away, Florida being a non-recourse state, and mailed the house keys to the bank. Partly the decision was informed by a $800B bailout that was given to the banks by George W. So the bank put the house on the market and it finally sold for $117,500 in June 2012. That, my friends, is an 82% haircut from the original listed price over 6 years.
The house since has been upgraded, with a swimming pool addition, but is still valued at ~$700K, full 16 years after the original build. Given the cost of internal upgrades and the addition of the swimming pool, it is still priced below the original listed sales price on a nominal bases and forgetting the inflation.
And now you know, on the solid data point of one example, what the housing crash look like. Until Sydney and Melbourne have median house values on par with Perth, there is no crash, free-fall, slide or implosion. Just a “negative sideways movement leading to the next super-boom” (c), quoting MB’s favourite hedonist.