Sunday, April 18, 2010

But I can't Make Them Drink

Last week a friend asked me to talk another mutual friend out of investing in the property market, which they would call 'buying their own home' which may seem like an odd request but taint so given that we three all belong to an organisation that rails against the unethical speculation and monopolasation of land. And since buying a home is really buying a 'house + land' proposition, it could concievably not be out of bounds.

But I declined as an exercise in futility. A) I'm not qualified to give financial advice so B) it would just amount to criticism and C) from the point of view of monopolising a natural resource, you may as well own your own home than pay rent to a monopolist (strictly from an ethical, not financial point of view).

I rail against property investment a lot, and my experience has been that people will nod and say 'uh uh' and act like they absorb everything I say and take it on board then go get a large mortgage and invest in the property market.

Hence as they say 'you can lead a horse to water but you cant make them drink.' And broader than somebody as widely uninfluential as me, this is true of high profile advisors like Steve Keen, Peter Schiff, Scott Pape, Michael Hudson, Robert Schiller etc. They are on record as predicting the GFC (though being unable to prevent it) and stress and emphasise the true risks of property speculation and urge in their capacity to offer general advice for people to stay the hell away.

And yet, these high profile prophets of economic disasters and personal financial tragedy have little or no impact, as do I. Why is this? I feel the answer lies mostly outside the sphere of economics and has more to do with marketing.

1. The Perceptual Cage

In the landmark book by Al Ries and Jack Trout, in my mind THE book on marketing: Positioning the Battle for The Mind. Ries & Trout pointed out the futility of comparison advertising, using the example of RCA copywriting that took on then market leader IBM 'Head to head RCA wins...' or something, basically the add reeled out RCA technical specifications and compared them directly to IBM's. Therefore 'proving' that RCA was a superior machine and thus IBM customers should switch over. Nothing seems more self evident, Ries & Trout though pointed out that 'consumers' minds don't work like that. In thier mind they know IBM's are better (even though factually speaking it may not be true) and as such rather than rejecting their perception, they will reject the evidence to the contrary.
A more modern example being the Mac vs the PC, from the 80's through to the 2000's Mac user groups were eternally frustrated that what they thought to be objectively better was not subjectively percieved as better by the vast PC using majority. Now the reverse is probably true.
You can also look at nationalism as an example, Noam Chomsky simply goes through publically available government documents and records as well as free press archives and can routinely show that US foreign policy is to crush democracy and any social programs, seize natural resources and spread poverty throughout Latin America and the Middle East. It is all on public record.
But everybody knows that US foreing policy is to protect the world from tyranny and defend democracy wherever they can. Thus people will reject mountains of bona-fide evidence in order to keep the perception.
So so, when I tell people that ABS data clearly indicates that Australia's housing stock is in oversupply and new housing projects are roughly 14% more than our population growth demands, people reject the ABS data, they won't even look at it because everybody knows that our population is growing faster than our housing supply.
Or even when you suggest that California made the exact same arguments right before the GFC revealed an enormous housing glut in California (and the source of all present economic woes) people will not consult the facts because the facts don't match their interpretation.

2. Contrary Evidence

I can't predict when the housing market will crash, I simply predict that it will, and the sooner the better.
But prediction and the evidence to support it is a difficult matter. For my prediction I just need the market to crash once, to disprove my prediction you would need the housing market not to crash every day for the rest of my life.

Now housing occupies a quasi gray area of prediction.
For example if I were to entertain the hypothesis that I was immortal and submit to you every day I have lived so far as evidence, you would reject my claim andf substantial evidence as plainly ridiculous because everybody is 'immortal' right up to the moment they die.
At the other extreme if I submitted to you a table of measurements of the distance from my mattress to the floor every day I got out of a given bed and said that the table values were 'inconclusive' at predicting the distance from mattress to floor tomorrow you would say 'nonsense, your bed isn't going to change height over night!' and accept all the evidence as proof of the unwavering distancde from my mattress to the floor.

But property, if I say 'property prices will crash' people will take the daily evidence that it hasn't yet, as evidence that validates the hypothesis that it wont.
People will have a ready supply of empirical data points to contradict my claims right up until the day house prices tumble whether that takes 30 days, 60 days, 180 days, 3 years, 10 years etc.
The only useful thing I can do is predict a 'crash floor' thus the longer it takes for the market to crash, the greater the distance between the peak and the rational price floor (which it will probably overshoot and create bargains).

3. Life Story

This is perhaps my most controversial and depressing claim. I have long held the theory that certain luxury goods exist because people need something to spend their money on. SOmething Ricardo Semler calls the Da Vinci Constraint. The existence of $10,000 watches I submit as proof of my theory. Whilst a case could be made that not having a watch could cost an important buisiness person $10,000 I don't think a case could be made that a $150 watch would not suffice in averting that disaster.
In plain speak, you would never get $10,000 value out of a $10,000 watch, they are a waste of money.
But you are rich (hypothetically) you have lots of money, what is the point of earning more if you have nothing to spend it on?
Thus prestigious brands cropped up in the 90's and 2000's during the good times (and the 80's before the last big crashes) so that people could keep spending even though they had far more wealth than they needed.
Now here's the amazing part, I've almost always earned more money than I needed. Having savings ratios in the 30% range. Evene when my wages are objectively quite shitty. I'm a special case, in that I don't really drink, or use a car so my weekly expenses (excluding rent) are about $100, maybe $120 if I'm being luxurious.
It's pretty easy to beat $100 a week. It's still easy to beat $300 a week with rent and bills added.
But if like most young Australians you drink and drive a car, you need to beat like $500 a week which is hard on a casual uni-student job but still pretty easy with an entry level full time position at about $30k a year.
As such, by the age of 28 you should be like me - that is earning more money than you need to survive, and saving.
Now most people don't have any particular dream or ambition, if they do it's short term like a holiday around the world or whatever. Most people don't want to finance a cathedral or make a movie starring themselves. So the savings are sort of doing nothing.
They are (no offense intended) rat-racers. They are in the rat race racing for an elusive happiness. Life can become void and meaningless because few jobs are truly infused with meaning, they involve checking financials, running reports, focus groups, attending trade fairs, visiting customers, researching polymers in a lab etc. The vast majority of jobs simply don't bring a tear to the eye, they provide agregate benefits through consumer durables that have an individually small to insignificant impact on peoples quality of life.
The answer to to much money not enough meaning? Get in debt and buy a house.
Once again the universe is in balance, you need more money (hence justifying ambitions to climb the corporate ladder, work longer hours and spend less time with your family) and have a long term goal (paying off a house, never mind the unlikely outcome that you actually live in the same place for 10 years, or even 3).
Most people reject my and other commentators warnings about the property market I feel because put simply - payign of a house is their reason for living/working. If they gave it up and sold out they would be at a loss. They can't because they cant imagine a better use of their money, or one that in their eyes involves less risk (even though I would argue the risks they are currently sitting on are enormous).
Thus my gloomy outlook and outrage is merely distressing.
This thoery depresses me though and I hope it isn't true.

4. Laziness and Greed

I suspect the overriding attraction to property is greed/laziness. I most commonly try to compare property investment to business investment (if your rent doesn't cover your mortgage your house is losing money, would you buy a business that was losing money? Would you borrow $300k to buy a share portfolio? If not, why would you do it to buy just one house? etc.) but these really shouldn't go without saying.
I shouldn't have to question why an assett that costs you more money than it earns currently (makes a loss) should sell for a higher price than you paid for it.
But I do, and I blame largely what I call 'the Biggest Loser tragedy' let me explain:

The Biggest Loser is a wonderful tv show and one of the few bright spots to come out of reality tv. In it overweight people are finally forced to work hard and eat right to get their weight off. No short-cuts. The program is paid for by advertising, the advertising most often features former contestants plugging quick fix solutions like Slimfast, Fatzap etc. Encouraging over-weight people to do no work and seek an effortless solution.

The attraction to property is largely under the same money-making ethos as the dieting products that directly contradict and subvert the Biggest Loser's message to fatties. Namely, don't worry about working hard at creating genuine value through productive enterprise, simply buy a house, don't maintain it, charge rent and earn 'passive income' by flipping it at a profit.

Just as the track record of crash diets and fads support the notion that even if real weight loss is achieved the benefits are short term - so too the long term history of property suggests that the returns from property investment are outdone by 4-6% in securities investment (shares).

But shares are a lot of work, they are a lot of work becuase companies create value, property doesn't. You need to pay attention o the companies you own, you don't to a property, many believe you don't even have to rent it out.

When all the real alternatives to property involve, work, knowledge and understanding. Many who hear my gripes on property do nothing perhaps because they simply cant be bothered.

5. Terrible Advice.

There's these two guys that were topping the business books best-sellers for a year or two with a series of books on how to legally reduce your tax, create lasting wealth etc. They advocated investing in property and 'helpfully' clarified myths, like properties should be 'cash flow positive' etc.
They also assured their readers not to listen to property naysayers, their advice 'if anybody is telling you not to invest in property ask them how many properties they own.' As if that somehow disqualifies somebody from offering qualified advice.
I read this statement as ridiculous because it is the equivalent of saying 'if your doctor tells you you should quit smoking, ask him how many packs a day he smokes.' Or 'if your friend tells you you are drunk and shouldn't drive home, ask him if he has ever driven drunk.'
Plainly, if somebody is telling you to buy property, you would hope at the very least that they had some exposure to the market themselves ie. they eat their own cooking. But if somebody is telling you not to buy property, you would expect for them to have no property exposure, (or I guess to have fully paid off their property).
But these are minimum requirements, what you should really be asking is who is actually qualified to give advice? Here's a clue, I'm not, the newspapers aren't (because the message is general not specific), your parents aren't, real estate agents aren't, mortgage brokers aren't nor is any member of the general public. Seek out an actual financial advisor and check their creditials rigorously, don't ask for their predictions, ask for their estimations of the risks and probable returns.
Alas, people won't take this advice either, they take the initial advice, dismissing anything I, or other economic commentators say because they aren't invested in the very asset they are telling people NOT TO INVEST IN.

Concluding Remarks:

One of the most depressing things about being in the scant few who think property is a bogus investment right now is that those that share my views are largely competing for bragging rights. The housing market will collapse one day and they will say 'I told you so.' Some may even have invested such that they profit immensely from the collapse and sweep in to buy up properties at bargain basement prices.
I don't really like this, its ugly and opportunistic. I'm genuinely frustrated and upset that people don't listen to me, (though relieved people don't follow my recommendations because I'm not legally allowed to).
If the housing market crashes, by 40% or so, I think the first thing I will do is get very upset at my parents. Largely because they are an on-hand face of the generation that is unwittingly pressuring their children (my peers) into getting exposed to this highly speculative market.
Why? Because their naive grossly unqualified advice is potentially ruining their own kids financial life. I hope most of my friends are still young enough to sell out, cop the loss, declare bankruptcy and try and preserve a few assets by hiding them in their parents garage for a while.
But the others, who will hang on to the property for 20 years, servicing a mortgage on a negative equity waiting to sell their property at a price close to what they originally paid for it achieving a return of 1% or so after adjusting for inflation I really just feel so sorry for, and I'd apologise for not being forceful enough or getting qualified sooner.
Theirs risks of course, and wherever their are risks their is money to be made. As I said, I have no idea when property prices will crash, I simply believe they will.
I'll be pissed off if people turn around and blame me for not talking them out of it, but I'll also take it to heart. I will blame myself, because almost inevitably I back off somebody thinking about buying property because A) I don't want to upset them & B) I have to declare my own uncertainty.
The best I can do is try to point out that the risks are there though, so you are better informed when you take them. As Scott Pape says: 'remember, all the people urging you to get into the property market are the same people trying to sell it.' whether they be your parents (financing their retirement) or real estate agents (making commissions) or mortgage brokers (charging you interest), or newspapers (selling real estate advertising).

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