Trouble’s for Aussie Housing

Trouble mounts for Aussie housing.

As the Sydney Morning Herald explains:

Hundreds of new home owners have been left in limbo after the collapse of a land developer in Melbourne’s outer north-west.

Developer Land Source Australia was placed in administration last year leaving residents of Waterford Estate unsure if key features of the estate — parks, ovals and shopping centres promised by the developers — will be delivered.

Bank-appointed receivers KordaMentha last week moved to sell the remaining 200-odd dwelling sites, advertising a mix of townhouse and traditional land lots for sale.

No doubt the mainstream folks will blame this on the growth of suburbia and the suburban sprawl.

But to blame folks for buying homes in the suburbs, would be akin to blaming the victim of a burglary for the burglar’s crime.

The blame of course, lies elsewhere. It lies with those who perpetuate the ‘easy money’ financial environment.

When money is easy (in other words, when interest rates are low), people will borrow and speculate. That’s not just true of consumers. It’s true of businesses too.

We’ll hazard a guess to say that’s what has happened in the case of Land Source Australia. Its proverbial eyes must have grown as big as saucers as interest rates fell.

The opportunity would be huge. Aussies love houses. Therefore, what could be a more sure-fire way to make a wad of cash than to give Aussies what they love?

We’ve been told over the years that Aussies have a different attitude to housing than any other people in the world.

Aussies Love Houses

They appoint them with features, fixtures, and fittings of a quality like no other.

What’s more, the overall quality of Aussie houses is better than anything known to mankind…not only now, but throughout history.

Of course, evidence is to the contrary when you look at the voracity with which developers knock ‘em down, in order to build more up.

But anyway, developers that build on such a scale, do so believing the market will only go one way — up.

And because of the competition to build houses, to satiate the Aussie homebuying hunger, each development needs to show that it’s better than every other.

They aren’t just building two, three, and four bedroom houses, with in-home move theatres, al fresco dining areas, and 3.5 bathrooms. If they were, it would be a low risk proposition.

Make the sale. Take the deposit. Build the home. Easy.

But not anymore. Now the drive is to build entire new communities. The home buyer isn’t just buying their four-bedroom McMansion, with al fresco dining area, theatre room, and faux marble topped kitchen benches.

The buyer is helping pay for a shopping mall, school (or schools), GP surgery, footy oval, and a playground or too.

That adds to the cost. Not just for the homebuyer, but for the developer too. And because new residents likely won’t want to wait five years, until the estate is fully populated, before they get their footy oval, the developer has to build it and pay for it now.

But what does that matter, when money is easy?

Money Won’t Always be Easy

It matters. It especially matters when money becomes less easy. And it matters even more when money becomes expensive…as it always does.

And that, dear friend, is what money is about to become. Both here, and in the US.

The next stage arrives tomorrow morning our time, with the decision by the US Federal Reserve on whether it will raise interest rates.

The futures markets and analysts’ opinions say that the Fed will raise rates by 0.25 percentage points.

As Bloomberg notes:

Federal Reserve officials are widely expected to announce an interest-rate increase this week amid buoyancy in the stock market and indications the U.S. economy continues to grow steadily, without signalling they anticipate accelerating their pace of policy tightening.

In other words, the Fed wants to raise rates, but it doesn’t want to frighten the ‘inmates’.

Even so, based on the median of projections by Federal Open Market Committee (FOMC) members, the Fed Funds Rate could be around 1.375% by the end of this year.

That would be well above the current upper bound rate of 0.75%. In other words, indicating that after tomorrow, the Fed looks set to raise rates twice more this year.

Will that happen?

In a way, we’re not sure it matters. In terms of what will happen to the markets, to quote Suetonius, ‘The die is cast.

The Dow Jones Industrial Average is up 218% since the 2009 low. That’s better than the gain from the 2002 low to the 2007 high, of 94.4%.

Although admittedly, it trails the 1987 low to 1999 high return of 574%.

The difference we’ll argue though, is that the early part of the stock market gains during the 1990s came as interest rates were falling.

Once interest rates began to rise in 1994, the Dow Jones Industrial Average ‘only’ added another 210%. Not far from the Dow’s current gain from its low point.

As for Australia, it’s hard to imagine that trouble is far away.

Whereas the US bubble has presented itself in the form of a stock market bubble, the Aussie bubble presents as a housing bubble.

Americans love stocks. Aussies love housing.

Based on the sky-high prices, it seems both love their respective loves a little too much.

Trouble ahead. And soon.


Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005. He is the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service, Markets & Money.

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