A financial crash is coming to a home near you.
While we’re not there yet, the property market is fast approaching bubble territory.
On this topic, I’m sure that some of my colleagues (Phil Anderson, Terence Duffy and Callum Newman) over at Cycles, Trends and Forecasts will disagree with me! The team of property bulls do make some solid arguments, pointing towards another 15-year rally in property prices. If you ask them, we’re nowhere near the top in real estate.
Admittedly, they could be right. This is why I don’t ignore what they have to say. And neither should you. I suggest checking out what they’re saying here.
That said, having done my research on the property sector, I’m not about to run out and buy an investment property.
Australia’s property market now worth $6 trillion!
A good place to start is questioning whether property has already peaked. In some Australian states, it appears so.
Looking at Perth, in a clear sign that the mining boom is over, the June REIWA figures show that the medium house price sits around $530,000. Prices have crashed by $20,000 on average in the last six months.
While you don’t want to hold Perth property, it’s another story over in Sydney and Melbourne. The average house price has now reached the $1 million mark in both states. And, according to the Australian, the good times may be over:
‘Amid booming prices in Sydney and Melbourne, regulators have in the past year grown increasingly concerned that lending standards are slipping, as banks battle to lend and buyers take advantage of record low interest rates.
‘In December, the Australian Prudential Regulation Authority stepped in and told banks to limit lending growth to property investors to 10 per cent a year…
‘Despite the banks constant shrill of super-safe housing, APRA have comprehensively dismissed this given the major banks all failed the APRA November 2014 mortgage stress tests. And in May APRA highlighted serious deficiencies in bank housing lending credit underwriting standards.’
Indeed, the brakes are on with bank lending. And this is a cause for concern.
The entire property market is built on the premise that the lending and leverage will continue forever.
Unfortunately, it’s unrealistic to expect debt to grow forever.
Eventually, the system requires a major restructuring to grow again. This isn’t rocket science. The editors at Port Phillip Publishing have argued for years that the increasing global debt load is totally unsustainable.
With limited economic growth and deflationary conditions, it’s likely that the debt cycle will blow up soon. And when the overleveraged system goes down the drain, this won’t be good news for property prices.
The Reserve Bank of Australia’s Governor, Glenn Stevens, is also worried. He said that he was ‘concerned about Sydney‘ house prices, which he described as ‘crazy‘ in June. This week he backed up his view by saying that ‘dwelling prices continue to rise strongly in Sydney‘. And that the RBA is working to ‘assess and contain risks that may arise from the housing market‘.
Given the extraordinary debt levels, authorities are even starting to look at regulating negative gearing. Dr Luci Ellis, the RBA’s head of financial stability, told a Senate economics committee inquiry into home ownership on Tuesday,
‘The combination of negative gearing and concessional taxation of capital gains creates an incentive that makes people more comfortable about taking on leverage… It’s worthy of a holistic review.’
At the end of the day, it’s really simple…
Increasing regulation and slowing lending growth are ominous signs for the housing sector. And if these measures go ahead, the knife will be put to the property bubble.
And if you didn’t know, 60% of Aussie wealth is tied to the property sector. This compares to the global average of 45%. So when, and not if, property prices crash, household wealth will take a huge hit.
The property peak is approaching
We’re also facing the largest financial crash of our life time — the sovereign debt crisis. This will be the real trigger for the collapse in property prices. Don’t just take my word for it…
Doug Casey, from Casey Research, has been saying this for years now. Martin Armstrong, Chairman of Princeton Economics International, started warning about the coming ‘Big Bang’ back in 1985! And our founder, Bill Bonner, has been warning about financial systems flaws and faults since, well, before I was born!
The sad fact is that no one listens.
Unfortunately they will hear it when the bond bubble pops…and the majority of overleveraged products collapse. And this includes property prices.
Don’t be the last one standing
Already, the smart money is getting out…
Billionaire James Packer just sold his mansion for $70 million, breaking the all-time record. This kind of activity typically happens at the top of the market.
And my close friend’s dad, a multi-millionaire in the Melbourne property development space, is about to sell all his properties. When the smart money is getting out like this, you don’t want to be the last one standing.
You need to look after yourself.
The best way to do this is by moving your money into quality resource stocks. Compared to property, they are dirt cheap. And when resources rebound, as I’m sure they will, you stand to make a tidy profit. But you have to play your cards right, buying into the right sectors…at the right time.
If you want more information on how to best play these markets, you can start here.
Resources Analyst, Resource Speculator
Ed Note: this article was first published in Money Morning.