Realty or Reality?

In 2005 it probably seemed like a good idea - $560k for this 3x2 in Devonport. Five years pass and at $500k, no one seems to think it's a good idea any more. 

This, after an initial listing at $569k, six months back.

I can only speculate what was happening back in June 05 when over half a million was laid down for something, that frankly looks like a block of flats, but I suspect there was a lot of real estate agent bluster and a whole lot more of rampant house hormones on behalf of the buyer.

It wasn't a $560k house then and it sure as hell isn't a $500k house now. So how did the owner find themselves thinking $560k was a good buy?

It's here I'm reminded of a article written by Peter Schiff back in 2004. Schiff visited a rental house in Orange County, California. Out of interest, Schiff asked the agent how much the house was recently bought for. The agent replied 1 million dollars, Schiff then inquired as to the holding costs and taxes, adding them to the loan costs and subtracting from the rent the house would bring, Schiff quickly figured the owner was losing several thousand dollars a month.

Schiff asked how the hell can the owner afford to lose so much money a month? (no negative gearing rorts in the US) The agent, bold faced, told Schiff the house was $500k a few years back and will easily sell for $1.5 million in a couple of years more - it's just what property does.

Schiff's next question - what happens if the price falls?

Agent: (in disbelief) Real estate prices don't fall, they're not making any more land, you know.

And you know how that ended.

Peter Schiff is a smart guy, an investment manager and can think on his feet - he can easily pull apart any real estate BS in record time. But it's not Peter Schiff anyone has to worry about, it's the young couple, fed every real estate boogeyman and now scared witless that their future is a caravan, with a very small annex, if they don't buy now.

So, back to Devonport, Tasmania and more broadly Australia. Over the past year, Devonport has lost a pulp mill and now a carpet factory is doomed. Tasmania barely has 1% population growth and the percentage of Australian households without debt has crashed from 43.2% to 36.2% - the lowest in nine years.

People are either supremely confident in taking on more debt - if the newspaper says your house is worth 20% more than last year, it must be time for a home equity loan, right?

Or they're in the midst of doing a dangerous juggling act with their finances.

Whatever the case, if you were in the market for a Devonport 3x2, that resembled a block of flats and just missed out a few years back, you might be in luck.

That's if you think $69k is the first and only discount.

I wouldn't bet on it.