MoneyMorning

Special Report

The Hidden Trigger That Could Send Your House Price Crashing And The Price Of Your Shares Climbing

The Great Aussie House Price Conspiracy Of 2012

REVEALED INSIDE: Property Price Dominoes Why the price of your home in your suburb is set to crash in 2012 Property or shares? Which is best to grow and protect your wealth in 2012 The answer revealed on Page 7 Three Surprising Steps To Wealth: Leverage, Volatility and Risk
This investing technique breaks all the conventional rules... But it might be the only way you can make a return in this market Page 8

Kris Sayce
www.moneymorning.com.au

Money Morning - Special Report

The Great Aussie House Price Conspiracy Of 2012

The Hidden Trigger That Could Send Your House Price Crashing And The Price Of Your Shares Climbing

Dear Friend, I spent the last three years convincing Australians that house prices can and will fall. In 2012 theyre falling And theyll keep falling for the rest of the year... Weak sentiment will see house prices continue to drift sideways to lower over the coming 612 months. Australian Housing Snapshot ANZ Bank

As you can see from the quote to the right, the Australia and New Zealand Bank finally admits house prices will drop in 2012. (As youll see in a minute, this is a big step for them.) And theyre not the only ones who think this Check out some of these recent headlines from the mainstream press Aussie homes will halve in value economic forecaster, Harry Dent TVNZ, 3 October 2011 Property values sliding, says Bill Moss [former Macquarie Bank property chief] The Australian, 18 October 2011 Home prices continue downward trend Chris Zappone, BusinessDay Sydney Morning Herald, 31 October 2011 Theres no point me or anyone banging on any more about whether Australian house prices can fall because they can. And they are. So now there are two big questions that need answering 1. When will the price of your home fall? And 2. If house prices are falling, what can you do to rescue your wealth in 2012? Ill answer these two questions in this report. And Ill also show you The number one reason why the price of your home will fall How it will send a wave of price collapses rippling through the Aussie property market And then Ill reveal the 3-step technique that could help you make money in this market no matter what it does in the next 12 months. But first, more on why your house will fall in value in 2012.

The GreaT aussie house Price consPiracy of 2012

The Butterfly Effect and what it does to house prices

Let me ask you this: If a butterfly flaps its wings in Frankston, Victoria, will house prices fall in St Kilda? Weird question, right? Let me explain The Butterfly Effect is a small part of Chaos Theory. And it suggests that a very small action in one place at one moment in time (like a butterfly flapping its wings) can have catastrophic consequences later on. (In the example, it causes a hurricane.) Understanding this secret may be the key to you protecting your money from a total wipeout in the weeks and months ahead. Dont worry. It has nothing to do with fancy economic theories. And I wont confuse you with charts claiming to show something only a PhD could understand. No. What Ill explain is something most economists and mainstream commentators dont understand. And that is, how human behaviour really affects prices.

The Single Most Important Trigger of A Price Collapse That 99% of Economists Ignore
As you saw, ANZ economists have finally admitted house prices can move lower. But back in March 2011, they created this chart that proved house prices could never fall.

Source: ANZ You see, back then according to the ANZ economists if income growth didnt keep up with house-price growth, prices would flat line. And then the supply (of people selling houses) would drop from the market at least until wages growth caught up. Then the cycle repeats.

Money Morning - Special Report

The only problem with this chart is that house prices are now falling According to an article on news.com.au in October 2011, house prices had fallen for five months in a row and Canberra was the only Aussie capital to record growth for the year. And another story in the Herald Sun from 24 November 2011 reported: MELBOURNE homes have lost $200 in value every day for the past nine months. Thats $53,800... wiped off the value of Melbourne homes... in just 269 days. The ANZ economists got it wrong. Why? Because, like most economists, they forgot you cant plug human behaviour into a spreadsheet. The fact is, rather than the amount of houses for sale decreasing when prices fall more houses go up for sale. Why? Well, for the same reason volume increases when a share price falls As you can see from this 5-day chart of the BHP Billiton [ASX: BHP] share price

Source: CMC Markets Stockbroking When BHP share holders see the price starting to fall they start to fear it could fall further. So they think, Im not going to wait and potentially get a lower price for my shares later. Im going to sell now and get the best price I can before it falls more. And you can clearly see those wait for me spikes on the chart above. Yes. Volume also increases when the price rises. Thats the rush of buyers trying desperately to get into the stock before the price goes higher. And weve seen it in the housing market too What were seeing now is the reverse. The behaviour and the principle is the same for the share market as it is for the housing market. Although price movements and reactions happen much quicker with stocks. But its only one group of buyers that bail out and buy in on the price fluctuations. The speculators. Buy-and-hold share investors will keep holding even when prices fall. And buy-and-hold home owners will keep holding when prices fall. But generally, those arent the folks who set the price on any given day. The ones who set the price are the investors and home owners who are in the market to buy and sell. If supply is up then home buyers have more choices and that means lower prices.
4

The GreaT aussie house Price consPiracy of 2012

Why It Doesnt Matter If Where You Live Is Popular The Price Of Your Home Can And Will Fall
You should also consider relative prices. Let me show you what that means, using this straightforward example Im sure youll have heard people say, Such and such a suburb is so popular, house prices will never fall there. Because people will always want to live there. It seems to make sense, doesnt it? Well its not true. Why? Because of relative pricing. You remember this question from the top of this report: If a Butterfly Flaps its Wings in Frankston Will House Prices Fall in St Kilda? It seems crazy. Until you stop and think it through. Then its not so crazy. Lets put it this way, using examples from The Worlds Most Liveable City of 2011 Melbourne, Australia: Port Melbourne, in case you dont know, is a desirable area. It has lots of nice old houses and lots of nice new apartments. Its close to the beach, city and has lots of pubs, clubs, restaurants, markets, food and clothes shops (and so on). It has everything a lifestyle seeker could want. But what if house prices dropped in the nearby suburb of St Kilda? Would Port Melbourne prices stay the same or would prospective buyers think, I like Port Melbourne, but just down the road I can get something bigger for less? Thats right. Sellers in Port Melbourne would have to reduce their asking price to keep up with cheaper prices in St Kilda. Or theyd risk losing buyers to their less pricey neighbours. Now it might seem to you that thats an overly simple explanation. Well lets take the argument a few steps further.

The Silent Shockwaves That Send Property Prices Tumbling

If prices fall in Frankston what affect would that have on neighbouring suburbs? Well, buyers may choose to buy in Frankston instead of a suburb closer to the city (such as Seaford, Carrum Downs or Chelsea). So prices in those suburbs fall in order to attract buyers. You can guess what happens next Buyers in Mordialloc, Mentone and Cheltenham start looking further afield so house prices fall in those suburbs. And so on. Until finally house prices in St Kilda fall because of price falls in Moorabbin and crazily enough, because of falling prices in Frankston. Of course, this wont go on forever. And it wont happen all at once or even in a particular order. But one thing is certain Prices fall until they reach a stable level The point where prices are low enough that buyers can afford to buy And the point where sellers can put a high enough asking price on their property that they can afford to sell Maybe youre thinking Its alright for you to tell me this, you idiot. But wheres your proof? Well, for proof of this, just take a look at this list of the top 10 Melbourne suburbs where houses fell
5

Money Morning - Special Report

in price this year The distance between Port Melbourne in the west and Ashburton in the east is roughly 15 km. And its about the same distance between Hawthorn in the northern-most part of the map and Caulfield South down the bottom. Within this tiny square, roughly 15 km by 12 km, house prices in 10 suburbs fell

Source: Google Maps As you can see in this table (below) from The Real Estate Institute of Victoria... This knocked $50,000 off the median house price in metro Melbourne between December 2010 and September 2011 and about $30,000 off the median price of units and apartments in the same time

Source: reiv.com.au According to RP Data a provider of property information in Australia and New Zealand: More than two-thirds of Melbournes homes having either lost value or stayed flat in price over the past three months, with just 78 of the 272 reported suburbs growing in value over that time... And dont think this is limited to price moves in Melbourne. It can hit interstate too. For example, if prices drop in Melbourne whats to say it wont make it more attractive for people to
6

The GreaT aussie house Price consPiracy of 2012 move to Melbourne rather than Sydney? Or it could reduce the chances of people moving from Melbourne to Sydney which might reduce demand for Sydney houses. (Sending prices down.) I know its a simplistic argument. But why does it have to be complicated? What if the argument really is that simple? You see, these ripples can spread far and wide. Then, after a time, the market turns the other way and prices rise just as they do in the stock market. Its fairly simple. You dont need a PhD to figure it out. Trouble is its pretty hard for most economists to do that as they spend most of their time playing with Gross Domestic Products, Consumer Price Indexes and other irrelevant statistics. They dont get that economics is all about human behaviour (how people think, act and react), not spreadsheets and numbers And thats why every last one of them failed to predict Australias falling housing market. And why so many of them continue to spruik real estate as a great investment. This is the ripple effect in action. It happens in rising markets. And it happens in falling markets too.

A Better Investment Than Property In A Falling Market

Think about it. The point of investing is to make money. If youre buying a house as an investment, thinking youll double your money in 7 years, forget it. The glory days of double-digit annual gains are over. And the same goes for the share market. The financial markets are so unpredictable now that you can measure the volatility in hours and minutes... not just weeks and days. Take a look at this snapshot of the Volatility Index (VIX). The VIX measures danger in the market. When its below 20, the market is safe... Above 30, its a rocky road for investors.

Volatility on the Australian Stock Market

Source: asx.com.au
7

Money Morning - Special Report

Since 2008 things have been far from safe. For example, the Sydney Morning Herald wrote on 3 October that volatility had wiped another $32 billion off the value of the Australian market in one day. On 6 September the SMH wrote: Aussie shares lose $60b as fear returns... These wipe outs happen in less than six hours... Imagine what that sort of market collapse could do to your personal wealth. But that doesnt mean you cant make money from stocks. In fact, the opposite. Im not saying shares are perfect. But, unlike property, they give you the chance to make a big return on investment... without having to risk a huge sum of money. You dont have to take out a $500,000 bank loan to invest in shares... You can do it with as little as $550 in your pocket! Now, as you may know (if you saw my name at the top of this report), Im Kris Sayce. What you may not know is Im the editor of an investment newsletter called Australian Small-Cap Investigator. Im telling you this because I want you to give you a real example of the kind of gains you can make investing in small-caps. And I wanted you to know where this example comes from... Back in December 2008 I tipped a little stock called Bow Energy. It was selling for 17 cents at the time. Six months later, I sold it... for 95 cents. Thats a 458% gain! Here... Take a look at the chart...

Bow Energy (ASX:BOW)

Source: Google Finance Youd never make that kind of a return on a property. And anything you did make in property price growth would be eaten up by the interest payments youd have to make on your loan!

Long term, share prices can grow bigger and faster than property
Even in a global economic downturn, you can make money from stocks. But you need a tight investment strategy one that allows you to take your money off the table when youre up, avoiding having your gains erased if the market moves against you quickly. Which it can. In short, you can try and outrun the ripple effect. And, if youre game, Ill show you the strategy I believe you can use to do that right now...

The GreaT aussie house Price consPiracy of 2012

Three Steps to Investment Wealth in 2012: Leverage, Volatility and Risk Step 1: Leverage
This is where you try to bet pennies to make pounds by trading small-cap stocks... like Bow Energy I told you about before. Stick a few small-cap stocks in your portfolio that are leveraged to market events. For example, a friend of mine Dr Alex Cowie (editor of resource stock newsletter Diggers and Drillers) did this recently with a bunch of gold and silver stocks. Hes aiming for these small-cap stocks to go up 20, 40 or 60% on the back of a 10% rise in the gold price. Like when gold rose 3.8% between 1 October 2010 and 15 February 2011 and the price of small-cap miner Gold Coral Resources leapt 144%. Now these stocks are risky. But with gold edging higher in 2011, small-cap gold plays should outgain physical gold at some point. Why? Because, in theory, a gold stock is worth the value of its future cash flow. So a stronger gold price should give gold stocks a lift. Although right now nothing is certain. But small-caps arent just about growth... If youre conservative, there are a number of profitable ASX-listed small-cap stocks that offer growth and better-than-the-bank dividends. Again, you can make a small investment in them and get a good yield, plus growth. Although theres also a chance youll only get one or the other. Or none at all. Thats the risk you take with investing. But, from my point of view, small-cap dividend payers are less risky than volatile growth stocks. Many investors write off dividend-paying stocks as boring. And unlikely to make you real money. But a company with a long track record of making dividend payments is probably less of a risk than a company with NO track record of paying dividends to its shareholders. The reason being that it (generally) proves the company generates more cash than it needs... If you buy a good small-cap dividend-paying stock at a fair price, over the long term you should receive a healthy mix of income and growth. And your wealth will be better protected against vicious moves in the share market. To research the dividend payment history of any Aussie small-cap youre interested in, simply go to www.tradingroom.com.au click on Quotes and Charts enter the stock code and select dividend details from the drop down menu. And it will give you up to 15 years of dividend payment history to look back on.

Step 2: Volatility:
As you can see from the graph of the ASX200 below, the market looks like a lot like the Swiss Alps. It goes up and down. Jutting skyward before plunging mercilessly.

Money Morning - Special Report

2-Year snapshot of the ASX200

Source: Google Finance If youd bought shares in an ASX200 index fund on 20 November 2009 and sold on 21 November 2011, youd have made an 11% loss. But if traded on the highs and lows youd have made a combined gain of 67.71%. Thats the secret to taking advantage of volatility in the market... trade stocks. That is, try and buy at the bottom and sell at the top dont just buy and hold. Try and make money by buying and selling stocks you think will move up or down based on current market trends and movements. If youve never done it before it probably sounds hard. But it doesnt have to be. You can start off small and these days, with the market volatility what it is, you can even make good returns trading more stable blue-chip stocks. The key difference buying blue-chips this way and the way Warren Buffett buys them is that were trying to squeeze short-term gains of these stocks. Not hold onto them for a lifetime. The market is too volatile to make any real money with a buy-and-hold blue-chips strategy. But you can make money trading blue-chips on the way up and on the way down. Of course, picking the right stock to buy at the right time isnt easy. So be careful. Trading isnt for everyone. And if you dont have the time to do your own research, you either need to make time or pay someone to do it for you. My colleague, Slipstream Trader Murray Dawes puts out a free trading video update on YouTube every week (click here to visit his YouTube Page). He gives you free insight into where he thinks the market might be heading and what the latest trading opportunities might be. So once youre done with this report, if youre interested in learning more about trading, make sure you check it out.

Step 3: Risk.
Id suggest you buy no more than a handful of reliable blue-chip stocks that pay a regular dividend. Now I know Ive said buy and hold is dead. And I believe it is in the traditional sense of the word. What Im suggesting is you buy bottom drawer stocks. That means, stocks youre prepared to hold on to through thick and thin simply because youve only got a small part of your wealth invested in them. If the blue-chip stocks youve picked are really good you should think about taking part in the dividend reinvestment plans (DRPs) so you can compound your returns. A DRP allows you to receive extra shares instead of getting a cash dividend.

10

The GreaT aussie house Price consPiracy of 2012 But its better than it sounds. Because when the next dividend is due, youll not only earn a dividend from your original shares but youll get a dividend from your new shares too. Every dividend payment date, your shareholding increases without you having to buy another share in the company again and without having to pay commission to a broker. It means that five years from now, your shareholding could increase by 50%... and 10 years from now, your shareholding could have more than doubled. Heres how: Imagine that in 2011 you buy 1,000 shares at $1.74 each = $1,740 By 2016, thanks to reinvested dividends you now own 1,507 shares. If we assume the share price has risen to $2.04, your shares are worth $3,074. If you hadnt reinvested the dividends your shares would only be worth $2,040. Roll forward another five years, and by 2021 you could own 2,329 shares. And assuming the share price has climbed to $2.34, your investment would be worth $5,448 (2,329 x $2.34). In other words, your initial one thousand shares have compounded to be worth more than three times your initial stake. Thats the power and magic of compounding returns. And thats just with 1,000 shares. If you can afford 5,000 shares today, for a total investment of $8,700, youre looking at turning it into $27,244 in 10 years. Thats not bad from just one small-cap investment made today. Getting access to the DRP is easy. You simply buy shares in a company that offers this plan and then complete a form. Check with your broker for more details.

One Last Word Of Advice...

Property prices can fall, are falling and, in my opinion, will continue to fall. If youre looking for a way to protect your wealth with a solid investment, I would say now is still the wrong time to buy. Because I dont think the price falls are done rippling their way through the property market. But it could be time to dip your toe in the share market. For a fraction of what it would cost you to invest in property, you can make good, solid returns. And you dont need to take out a bank loan for hundreds of thousands of dollars! Now, dont ask me how much you should invest in each of the three areas Ive suggested you look at above. Thats up to you to figure out. The most important thing is to do whats comfortable. If youre not comfortable trading, then dont do it its not the end of the world if you dont. Thats a decision you have to make yourself. But perhaps I can give you a small piece of powerful advice

Use the sleep well test.

In a recent issue of the investment newsletter, Australian Wealth Gameplan, Dan Denning wrote the following to advise his readers how they should go about buying gold: my recommendation is to buy some and see how you sleep at night before buying more. I figure the same applies to small-cap stocks. If a stock investment is giving you sleepless nights then youve either misjudged your attitude to risk taking or youve invested too much.
11

Money Morning - Special Report

So if you decide to take the plunge on a few stocks you like, never invest more than youre comfortable with.

Money Morning: financial news that matters to you, every day

We tackle lots of little-known money-making ideas and other issues that the mainstream media just cant wrap its head around in the free daily email, Money Morning. There are plenty of opportunities in the market that people arent taking advantage of for one reason or another. Money Morning offers insight and plain-English advice about what moves to make, when and why. There are a lot of uncertainties surrounding the economy right now. But we are sure property is a bad investment right now. We are also convinced investing in shares is a better option than buying property. Housing is a serious issue and one that will affect most Australians at some point. The decision to buy, when, or if, it ever becomes a viable option again, is not one to be entered into lightly. We have lots of ideas about investments and property. And over the coming weeks and months you can expect to receive our individual take on the traps and benefits that the mainstream media wont report on. In sending you Money Morning, our aim is to keep you better informed and help you make the smart play when it comes to investing and making money. You dont need any specialist knowledge just a healthy interest and an inquiring mind. Well do the rest. Watch out for your first issue in your inbox in the next few days. Cheers, Kris Sayce

Editor, Money Morning

Port Phillip Publishing Pty Ltd 2011. While useful for detecting patterns the past is not a guide to future performance. The value of any investment, and the income derived from it, can go down as well as up. Specifically, changes in the rates of exchange between currencies may cause a divergence between your nominal gain and your currency-converted gain, making it possible to lose money once your total return is adjusted for currency.For any investment, never invest more than you can afford to lose, and keep in mind the ultimate risk is that you can lose whatever youve invested. If in doubt of the suitability of an investment please seek independent financial advice. The Daily Reckoning is published by Port Phillip Publishing Pty Ltd. Registered Office: Port Phillip Publishing Ltd Pty, Level 1, 10 Fritzroy Street, St. Kilda, VIC 3182 Port Phillip Publishing Pty Ltd (ACN: 117 765 009) (AFS License: 323 988).

12