At the height of every boom, bullish clowns inevitably come out of the woodwork touting the “permanently high plateau” prices will not drop much theory.

Such a theory is presented in the Herald Sun although one might not quickly spot it because of the headline Decade of pain for Melbourne’s property market

The good news for homeowners is that AMP Capital chief economist Shane Oliver and Grattan Institute program director Saul Eslake – the ANZ’s chief number cruncher for close to 14 years – say Victoria will avoid a US-style property crash which saw prices plunge by 30 per cent.

Instead, house prices will continue their single-digit slide into 2012 before stagnating for five to 10 years as wages catch up with a median house price which has climbed 133 per cent since 2000.

“We are facing a situation where we are just spinning the wheels for up to 10 years until incomes catch up with property prices,” Mr Oliver said. “You could have a five to 10-year period where you have prices rise before they come off again and basically track sideways within a range.”

Totally New Paradigm, Permanently High Plateau

That does not sound like a decade of pain, nor is it a “bleak” outlook. Rather, it’s none other than the entirely laughable “Totally New Paradigm, Permanently High Plateau” theory.

Flashback March 26 ,2005: It’s a Totally New Paradigm

Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors says that “South Florida is working off of a totally new economic model than any of us have ever experienced in the past.” He predicts that a limited supply of land coupled with demand from baby boomers and foreigners will prolong the boom indefinitely.

“I just don’t think we have what it takes to prick the bubble,” said Diane C. Swonk, chief economist at Mesirow Financial in Chicago, who was an optimist during the 90’s. “I don’t think prices are going to fall, and I don’t think they’re even going to be flat.

I look at this as a short-term investment,” said Mr. Farquharson, 36, who works for a venture capital firm, “and plan to unload it as soon as things look dangerous.

Now there’s a laugh. By the time it looks dangerous will there be anyone looking to buy?

Talk of “new paradigms” or “new economic models” has been associated with every major bubble in history, typically near the peak. Wasn’t it just 5 short years ago that Greenspan proclaimed the “productivity miracle” and everyone was counting “clicks” on dot coms as the “new economic model”?

Just as soon as I finished writing this post, I found a new quotation to add.
It’s perfect.

Gregory J. Heym, the chief economist at Brown Harris Stevens, is not sold on the inevitability of a downturn. He bases his confidence in the market on things like continuing low mortgage rates, high Wall Street bonuses and the tax benefits of home ownership.

“It is a new paradigm” he said.

Scroll back up and take a look at that first chart again. Current talk of “New Paradigms” and “New Economic Models” should tell you exactly where we are and where we are ultimately headed.

Flashback June 7, 2005: It’s time to shift the arrow

Yes, Mish readers I am pleased to announce that housing has now reached “A permanently high plateau”. I offer the following quotes from a New York Times article as evidence:

“I think we don’t expect prices to continue to rise at this pace, however, we don’t see a bubble bursting either,” he said. “I don’t recall a real estate bubble ever bursting that wasn’t preceded by bad economic conditions or some dramatic shock, and nobody is predicting any of that right now.”

“The interesting thing we’re seeing is, it’s a very stable, brisk market,” said Steven B. Schnall, the president of the New York Mortgage Company, a mortgage lender. Mr. Schnall pointed to continued low interest rates as the most important factor in the market. “I don’t see prices continuing to skyrocket,” he said. “They’ve reached a very high level and this almost appears to be a new normal, and interest rates are helping that.”

Flashback …
“Stock prices have reached what looks like a permanently high plateau.”–Irving Fisher, esteemed economist, October 1929

Flashback November 01, 2005: Thoughts on Housing Construction

Many seem to thing that housing will plateau and there is no fear of a real slump. At the top of the list in believing the “permanently high plateau” theory is David Seiders, the chief economist for the National Association of Home Builders. According to Seiders, single-family starts numbered about 1.6 million, in 2004. He expects another record this year, even as the industry begins to hit “the plateau we’ve been watching and waiting for.”

Also chiming in on the permanently high plateau theory is Erik Bruvold of the San Diego Regional Economic Development Corp. in the San Diego News article Housing economists raise yellow flag over San Diego.

Mr. Bruvold predicted a flattening in prices rather than a dramatic falloff. Already, the inventory of homes on the market is growing and sales prices are lower than asking prices. “I think we’ve hit a plateau,” Bruvold said. “I would not refer to it as a turning point.”

David Berson chief economist of Fannie Mae and David Seiders, chief economist for the National Association of Home Builders also seem to be giving some credence to the “plateau theory”. “Prices are so high that at some point there is the possibility people may simply decide it’s too expensive to move there,” Berson said. “Alternatively, prices may simply slow for a period of slow or no price gains.”

No one seems to be as optimistic as the Toll Brothers according to the New York Times article Closing Ground.

At the moment, Toll controls enough land for nearly 80,000 houses. Its competitors, which tend to build lower-priced houses on smaller lots, have even larger accumulations. K. Hovnanian has land for more than 100,000 houses. Pulte Homes holds 350,000 sites. Still others – Lennar, Centex Homes, D. R. Horton, KB Home – control hundreds of thousands as well. And all of them are in ferocious pursuit of more.

The company expects to grow by 20 percent for the next two years and then will strive for 15 percent annually after that. Those estimates suggest that the company’s expected production of around 8,600 houses this year will expand to at least 15,000 houses by 2010. Individual Toll developments now range in size from a few dozen to 3,000 houses.

“Why can’t real estate just have a boom like every other industry? Why do we have to have a bubble and then a pop?” asked Toll.


This cycle will not be any different. I do expect some home builder bankruptcies out of this mess but it is not easy to predict which ones.

Here is what the housing evidence suggests:

  1. Homebuilders are clearly ignoring business cycles, affordability issues, tightening credit, and liquidity concerns. Money has been too easy for too long for anyone to understand what might happen in a liquidity crunch.
  2. Homebuilders will keep buying more and more land and adding more and more to housing inventory in a foolish attempt to grow 20% every year fighting for “market share” right at the peak of the boom.
  3. No one seems to see or believe the devastating consumer led recession that is staring them in the face. It’s simply “build or die”.
  4. People will likely borrow to buy this housing bubble until lending literally seizes up.

I believe we can now answer Toll’s question: “Why can’t real estate just have a boom like every other industry?”

My answer is “Patience Mr. Toll, you will, and it will end up looking a lot like the telecom bust of 2000 as well.”

We are now hearing exactly the same nonsense out of Australia.

Agents Withhold House Price Data

Please consider Agents Withhold House Price Data

MELBOURNE real estate agents and vendors are increasingly withholding or manipulating data provided to the Real Estate Institute of Victoria, prompting calls for the mandatory reporting of all property sales to protect consumers.

A Sunday Age investigation has found that 27 per cent of all auction results published by the industry body in June were missing critical information – including the sale price, passed-in price or the reserve. Many auctions were not reported at all, distorting clearance rates that are used by buyers and sellers to gauge market strength.

Nearly one in five properties sold at auction are now reported to the REIV with the price marked ”undisclosed” – a significant increase from last year’s property boom, up from 11 per cent then to 18 per cent now.

The investigation also revealed that 43 per cent of properties scheduled for auction in June had no published quote range, further frustrating buyers’ attempts to obtain basic information.

Last month, agency RT Edgar sent a newsletter to clients warning there was a ”serious question mark” over media reporting on the market because many agents were withholding sale prices and passed-in results.

REIV head Enzo Raimondo defended the institute’s voluntary reporting methodology, saying the ”small increase” in the number of undisclosed results did not affect the integrity of the system.

”It is not the role of the REIV to force home owners to publicly declare the amount for which their homes sell. If a person really wants to know the price for which a home sells, they can attend the auction,” Mr Raimondo said.

Favorite Comments From the Article

    • Moral of the story? Don’t buy now. Wait. And with every day that passes take comfort in knowing that property investors and RE agents are dying the death of a million cuts (with every month, comes more news of further price falls)


  • If a person really wants to know the price for which a home sells, they can attend the auction,” Mr Raimondo said.” Bit of a childish, simpleton’s response there, Mr Raimondo. As head of the REIV your attitude only serves to underscore your industry’s dodgy reputation.


Dear Real Estate Buffoons

  1. Prices are falling whether you disclose them or not
  2. Not disclosing prices makes people mistrustful and rightfully so. That will hurt, not help sales

Mike “Mish” Shedlock
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