Watching the Aussie Housing Market Burn

“Most suffer mortgage strain,” reports Anthony Klan in yesterday’s Australian. It now requires a third of your average family’s income to have a roof over their head at night. In the great scheme of things, we rank having a roof over your head second only to having food in the belly as things worth paying nearly any price for. You have to eat to survive and you have to sleep somewhere in order to get up the next day and do it all over again.

But as financial decisions go, there are fewer important decisions in your life than when to buy a home, how much to pay for it, and how much leverage or gearing to use for your purchase. Your editor realized this dramatically a few weeks ago, when he confronted the possibility of having to liquidate assets and return to Colorado and buy a home in order to take care of an ailing parent.

As fate would have it, it’s not a decision we had to follow through on. But it got us to thinking that sometimes there is no good solution to a problem. There are only solutions which make better or worse financial sense given the current conditions. The current conditions find rents rising in Australian capital cities and affordability declining for new and prospective homeowners. Between the stretched finances of middle-class Australians, rising rents, and the cost of servicing, something has to give. What will it be?

The irony of the housing situation is that rising prices and interest rates-which are making homes unaffordable-are being driven by people who bought houses and investments in order to sell them to the people who can no longer afford them, because they were bought as investments in the first place. Convoluted, isn’t it? Here at the Markets and Money, we have a name for such ironies of the marketplace. Our founder Bill Bonner calls it the Law of Perverse Outcomes, where people get what they deserve, not what they expect.

You buy an investment property during a property boom because everyone else is doing it and you’re told it’s the quickest way to get rich without doing any work. Then, price growth slows, interest rates rise, and there’s nobody to buy your house. Instead of sitting on windfall profits, you’ve had the wind knocked out of you by a punch to the gut.

We’re not saying property investors deserve a punch to the gut (although perhaps a slap to the head wouldn’t hurt.) We’re just saying nature and the markets (which operate on similar principles) never quite give you what you expect, but what you deserve. We wouldn’t call it justice. When a lion eats a zebra, it’s not justice. It’s just the way things work. And the way things work in this world, you don’t get something for nothing. Ever…or at least not for long.

Our suggestion yesterday that Australia is uniquely suited to becoming a large dump for the world’s radioactive waste touched a nerve and flooded our inbox with response. We’ve posted some of them here for you. There is lots to say on the subject, though it’s so broad we’re not sure where to begin.

First is the news that a parliamentary committee has approved uranium sales to China. This should boost Australia’s export profits even more, which is a good thing, given the latest figures show business investment is drying up as a source of economic growth. Increasing exports are going to have pick up the slack, or the slack might turn into a recession.

After fifteen years, perhaps the Australia is due for a recession. But not if households have anything to say about it. “Households have taken over from business investment as a key driver of economic growth, with increasing wages and a tight labour market supporting spending,” we read in today’s Australian Financial Review. Growth is a good thing. But not when it’s financed by household debt. Households obviously have their hands full paying off the mortgage. About the only way to increase consumption with such high debt- service levels is…to go deeper into debt.

We’ve seen this story before in America and we can jump ahead to the end if you’d like: bankruptcy and chronic debt for the average Australian. Now is the time for Australians to take their cues from nature and reduce consumption, lower expectations, and consume less than they produce.

Frugality is not exactly in vogue in the modern world. But we find the modern world pretty tasteless to begin with, so we don’t mind not being trendy. Some trends, like platform shoes and bell bottom pants, are better avoided than joined. Non-conformity pays, if you have he courage to be and look a little different.

Which brings us back to the nuclear issue. The by-products of bad-taste and high debt levels are an ugly wardrobe and a lifetime financial servitude. Both should be avoided if possible. And here’s a thought about nuclear energy…a question really…when a whole way of life produces toxic by-products, is it worth pursuing?

Any time you harness energy in its various forms, there are waste products. Through the miracle of its stomach, a sheep can turn the light from the sun into a sweater on your back in the winter. But it will leave a whole pasture full of by-products.

Similarly, whether you’re getting your energy from water, wood, sun, steam, oil, gas, or nuclear, there will be chemical and physical leftovers you have to dispose of or store. Nuclear energy may produce fewer emissions than coal, but it’s undeniable that its toxic by products last a long, long time.

That doesn’t mean it should be pursued. We’re just acknowledging that for everything, there is a cost which must be counted. That said, why shouldn’t Australia host the world’s nuclear detritus? England has its wool, China its silk, Canada its timber, Saudi Arabia its oil, and Australia its uranium…and its vast, unexplored, uninhabitable spaces which are practically begging to become a home for radioactive waste. What better use for this land?

Since there are so many reader mails on this subject, we’ve decided to post them here, where you’re free to comment directly. Also, you’ll find more on a crucial idea to the energy debate…energy return on energy invested (EROEI).


Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, Markets and Money is published in 7 countries with a worldwide readership of almost 1 million people.

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If we stopped all imports today, and continued exporting at current levels, we would pay off our foreign debt in 37 years. We are right where the global powers that be want us – indentured servitude.
In the future we will gladly allow dumping of nuclear waste in exchange for some debt relief.

Our “vast, unexplored, uninhabitable spaces” are not so vast when rainfall characteristics and underground aquifers are taken into account. Nuclear impacted ground water is already historical fact in US an d India.

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