Caught Between Debt and a Property Bubble

The ‘used’ apartment market is growing. And by ‘used’ I don’t mean second hand, lived in apartments.

I mean apartments that foreign investors have bought off plan and secured with a deposit. Now these investors are unable to complete the buy. Mainly because they cannot take the money out of China or get financing in Australia.

So investors are offering these ‘used’ apartments on the secondary market. They want to get locals to take them off their hands, so they can get their deposit back. And as an incentive, they are trying to offload these properties at the same low price they were bought for years ago.

According to Maddocks Lawyers, two out of three foreign apartment investors gave up their off-plan buy in June. And they are not the only ones warning about this. The richest man in Australia, Harry Triguboff, has never seen these many foreign investors walking away from apartments. And forfeiting their deposits.

So it looks like off-plan apartment prices have peaked. The UBS Global Real Estate Bubble Index report is already alerting of a Sydney housing bubble.

A combination of cheap debt, strong employment and a high demand from Asia has inflated property prices the last few years.

Now, with 250,000 new properties expected to flood the market, there are concerns of an oversupply. This has lowered demand as investors take a wait and see approach, hoping prices will fall.

And the construction sector is starting to wind down. In August, the Ai Group and Housing Industry Association Performance Construction Index fell to 46. Anywhere below 50 indicates that the sector is contracting.

And as you can see in the chart below, construction is set to slow in the next years, with the majority of the decrease seen in the apartment sector.

housing-stars-by-type Source: HIA Economics

Construction reached a record high this year. Yet you don’t need me to tell you that, you just need to look around to see the amount of cranes clouding the view. But it is set to slow in the next years, and with construction decreasing, there is a big concern.

You see, when the mining sector went into a slowdown, the construction sector picked up many of the unemployed from the mining crisis. According to Ai Group, there are currently over 1 million people employed in the construction sector. That is almost 9% of the total workforce.

Housing Industry Chief Economist Harley Dale said to the Australian:

When new home construction inevitably peaks by 2016/17, people will look to a plan for further growth. Right now, there seems to be nothing, because housing is the convenient bedrock and nobody has the vision to look beyond the short term.’

The construction boom has been a big saviour for the economy in the wake of the mining boom. A downturn in this sector would not only affect workers, but also suppliers and manufacturers.

That’s why it has been so important to keep the property market going, in order to keep the economy going.

And the construction sector is not the only one slowing. Activity levels in the services and manufacturing sectors are also slowing. This could lead to a rise in unemployment.

With low growth and a risk of unemployment rising, the OECD is already recommending an increase in fiscal spending. That is, to bring in helicopter money to create job programs:

Fiscal space has increased in many advanced economies as interest rates have declined by more than GDP growth and the decline more than offsets the increase in the debt-to-GDP ratio, raising the amount of debt that can be sustained,’ it says.

Concrete instruments include greater spending on well-targeted active labour market programs and basic research, which should benefit both short-term demand, longer-term supply, and help to make growth more inclusive. Easing of the fiscal stance through well-targeted growth-friendly measures is likely to reduce the debt-to-GDP ratio in the short term. Furthermore, provided that fiscal measures raise potential output, a temporary debt-financed fiscal expansion need not increase debt ratios in the longer term,’ said OECD.

The key word here is ‘provided’.

Translation: Governments should take advantage of cheap debt. They need to increase spending to create jobs and growth. Provided countries manage to create growth with this debt, then the increase in spending will increase GDP. And the increase in growth would offset the increase in debt, even if the amount governments owe has increased. Though it’s anything but guaranteed that the debt will successfully create growth.

Once unemployment rises, we will be one step closer to helicopter money.


Selva Freigedo,
For Markets and Money

PS: Too much global debt could be the catalyst that ignites the next great crisis of our time.

Yet according to Markets and Money’s Vern Gowdie, we’re already in the throes of this crisis.

Vern is the Founder of The Gowdie Letter and Gowdie Family Wealth advisory services. As one of Australia’s top financial planners, Vern says the next crisis is already in motion.

Australia has gone through two credit bubbles in its history. The third, and latest, has built up over the past 65 years. When it pops, the impact will leave a lasting mark. One that will make the 2008 financial crisis look like child’s play.

The fallout of this crash could damage your wealth. But you can safeguard your wealth from the worst effects of the coming crisis, provided you act now.

Vern will show you how to do this, and more, in his latest report, ‘Global Financial Crisis 2016: 3 Crisis Scenarios, and How They’ll Impact Australia’. To get your free copy today, click here.

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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