Aussie Property — Boom or Bust?

Ouch! Wages growth in Australia, on an annual basis, is now at the lowest point in the past 16 years. Yesterday, the Australian Bureau of Statistics (ABS) reported wage growth data for the September quarter. It rose 0.6% for the quarter and just 2.6% for the year.

Throw in a bit of inflation (which, in the real world, is a fair bit more than the bean counters would have you believe) and the ‘worker’ is going backwards.

Perhaps this is why ‘owning’ an investment property is so hot right now. I’ll come back to that in a moment.

The crunch on wages has everything to do with the unwinding of the mining boom. More specifically, it has to do with the collapsing iron ore price and the related sharp fall in Australia’s terms of trade.

A rising terms of trade acts as a national income booster. It’s an external injection of money into the economy. In this case, the external injection came from China’s credit bubble. A falling terms of trade has the opposite effect. It drags income growth down.

With less income flowing in from Australia’s trade position, we’re reliant on home grown income and asset growth to keep the economy afloat. In that case, thank goodness we have the property boom…or more specifically, Sydney’s property boom.

Following yesterday’s ugly day on the stock market, where the ASX 200 fell 54 points, I read this comment on the Australian Financial Review website. It’s not often you hear broker talk that hits the nail on the head, but this one from BBY’s Henry Jennings certainly did:

If you’ve got consumer confidence falling, if you’ve got unemployment at 6.2 per cent, and if the only thing going for the Australian economy is the Sydney property bubble, it’s not great.

Yep, the Sydney property bubble, and to a lesser extent Melbourne, is about all Australia has going for it at the moment. And when I say Australia, I mean the half of Australia that actually owns property without being up to their neck in debt because of it.

The other half, especially your kids and grandkids, probably aren’t too enamoured with the way things are turning out. Or at least they won’t be when they grow up and realise they’re holding a lemon…or nothing at all.

Just to hammer home the point, in a cruel and twisted way, the ABS accompanied yesterday’s wages release with lending finance data. It showed that lending to investors, rather than owner-occupiers, in Sydney (or NSW, as they quaintly put it) now accounts for a record 56.1% of total mortgage lending for the state. Investor loans rocketed 40% in Sydney in year-on-year terms.

Melbourne (Victoria, if you must) wasn’t far behind, with investor mortgages representing a new record of 47% of total mortgage finance.

Investors are taking over the market from the traditional owner-occupiers. Or are they? There is anecdotal evidence that suggests traditional new home buyers are buying ‘investment homes’ while staying at home living rent free. Fair enough. Anything to get on that rung…

And apparently ‘owner-occupiers’ now buy as an investor because the bank likes the sound of lending against the security of rental income rather than the insecurity of a wage.

As the saying goes…what could possibly go wrong here?

I’ve said it before and I’ll say it again. Australia’s property market is peaking after an amazing 25 year bull market. I know this view flies in the face of the work done by Phil Anderson, who predicts ongoing price growth for years to come…but Phil and I agree to disagree.

Despite disagreeing with Phil on Australia’s market, I think he is one of the most original thinkers in the country, and I read his work regularly. It’s great stuff and makes you think entirely differently about property…or rather, land. I urge you to check it out if you haven’t already.

I’m just not convinced the historical cyclical work Phil has done is relevant for Australia, given the recent rise and economic influence of China.

But what do I know? I should point out that I’m clearly wrong so far, and Phil is right.

But I would also point out that the property cycle is not widespread…it’s largely Sydney, and to a lesser extent, Melbourne-centric. And the latest boom was (as far as I can tell) the result of a dramatic 225 basis point cut in official interest rates from 2001–2013, followed by an international search for yield that pushed bank borrowing costs even lower.

The two-city centric growth of Aussie property over the past few years is a sort of periphery-to-the core event. That is, I see it as the culmination of a very long boom manifesting in a blow off top in Australia’s ‘core’ property markets. The periphery has been left behind.

If I’m wrong, it means interest rates go even lower and foreigners continue to finance our property habit at these lower rates, regardless of risk. And let’s face it, in this central bank dominated world, anything is possible. Central banks could just end up being so successful at ruining their currencies that they create perpetual asset prices booms as people offload currencies for ‘things’.

I don’t know much. But I do know that a median inner ring of Sydney house price of $1 million is a little ‘cray-cray’. Is everyone, husband and wife, partners…kids…on 200 grand in inner Sydney? If not, then the RBA should probably look at their house price to incomes model.

But maybe the money shufflers are earning a skinful…the Reserve Bank is certainly at the centre of things in Martin Place. Maybe they have a secret window?

Anyway, time will tell on the great Sydney property boom. Is this as good as it gets…or is it just getting started?

To finish up today, here’s a little reminder of just how corrupt and degenerate the financial system is. This was the headline from Bloomberg this morning:

Six Banks to Pay $4.3 Billion in First Wave of Currency-Rigging Penalties

This is not the first fine levied on the banks, and it won’t be the last. As I’ve told you before, this is simply a cost of doing business for them.

Easy money produces a massive incentive to cheat and rig the markets. If the authorities were serious about cracking down on it, they would impose criminal charges and send these thugs to prison.

But they don’t. They see it as a revenue raising exercise and a way to show they are doing their job and maintaining confidence in the system. What a bunch of phonies. A few hundred years ago, counterfeiters and cheats got a rope around their necks. Now they get a wad of cash and ushered out the back door. Oh how we’ve evolved…

Central banks rig price signals (interest rates) and banks rig everything else, from currencies, to gold, to commodities, to interest rates (libor).

This is crony capitalism, Western democracy style. Aren’t you proud of it?

Greg Canavan+
For Markets and Money

Join Markets and Money on Google+

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:


Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money