Australia Faces Its Demons

[aussieboy]

I was there just after the olympics and then in 2008. Only in Sydney really and the place felt different. Have to admit I preferred it in 2001 (talking eastern suburbs/cbd life here), although as a pom the exchange rate move probably had something to do with it. But in all seriousness, I felt a real change - less friendly and open. I think it's related to the obviously greater immigrant population and perhaps some local worries about it. Whatever, it was more insular.

I remember reading stuff in the press there about different ways of measuring farming and how marking commodity prices differently lowered costs and boosted volume pushing up the numbers. I can't remember any details though so could be totally wrong. I had a quick google but cann't find anything about it. Only thing in theaustralian was about selective choice of measure, whcih I reckon must be a global thing: http://www.theaustralian.com.au/news/opinion/read-the-data-it-was-a-recession/story-e6frg6zo-1225772446559

99/00/01 was the best time for a brit to be here: pre-GST, strong pound etc. IMHO this place is a lot less parochial these days... I enjoy going to the rugby (normally...) and not having to sit through a thousand Aussie Aussie Aussies. The Olympics were unbelievable: saw one poor brit being berated by a group of Australians for being too loud whilst supporting (IIRC) Kelly Holmes. Jesus, they'd put up with a lot worse earlier in the day. Reminded me of the way the US president seems to end each speech with "God bless America: the greatest country in the world". If that's so, there's no need to say it all the time. That's what we were like - Roy and HG jingoism without the tongue in cheek.

Truly believe this country is a lot less insecure now.

Across the ditch here in NZ prices are falling in most places, with record low sales: http://www.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=10686859

NZ has been in the clacker since 07, I think. In my previous career, in early 08 I saw a lot of real estate forecasts each of which was forecasting price declines through 2012 and some beyond.

I'll probably be heading back into the Sydney market in the next year (Woollahra council area) or so to trade up and have started EA conversations. As I think I've mentioned, top bits are slowing which is good news for me. However, houses are still moving.

[aussieboy]

I hope so, in fact maybe it has gone too far the other way. I actually like the Australia's patriotism, but there's a fine line between that and racism/xenophobia.The changes in 2008 may have just been about the economic uncertainty, but I heard a lot said, inferred about indians, aborigines etc that made me feel pretty uncomfotable. Maybe it's the same here but I just don't notice it because I'm not an outsider. I'm also no longer a backpacker damn it so perspective defintiely differs!

Woollahra? Get you Nice area. I lived in the junction, spring street and hollywood avenue in 2001/2 - just round the corner sort of.

Hey, I live the dream.

Got to love the Junno. Nice big Westfield there which I think wasn't finished until 03. If you miss the place, just head down to the Shepard's Bush version... once inside, it would be hard to tell the difference.

[Tiger Woods?]

it's not crashing here yet from what i'm witnessing

prices certainly won't go any higher though

+1 (more or less) House prices versus salaries in most areas are nuts, especially given Australian interest rates (and their history.)

Having said that there is some weakness in the local market where I am. It will need something to cause a rout though. The number of people who think that rentals returning 3% gross yield are a good investment is a bit scary. Had dinner with some friends last week. They are renting a huge house on a tiny block of canal front land. Lovely. 1.2 million to buy, but you can rent it for under 600pw, rates included.

Edited November 15, 2010 by Tiger Woods?

[aussieboy]

+1 (more or less) House prices versus salaries in most areas are nuts, especially given Australian interest rates (and their history.)

Having said that there is some weakness in the local market where I am. It will need something to cause a rout though. The number of people who think that rentals returning 3% gross yield are a good investment is a bit scary. Had dinner with some friends last week. They are renting a huge house on a tiny block of canal front land. Lovely. 1.2 million to buy, but you can rent it for under 600pw, rates included.

As discussed, it's (a) the tax treatment and ( b ) the option value of upside. You only need to anticipate a 30% chance of a 10% price increase to achieve a decent yield with the downside protection of a tax write off which, if you're a marginal tax rate payer, is not insubstantial.

[South Lorne]

A friend of ours who has a buisness here was looking at setting up a branch in Australia and he went out and spent several weeks in Aus ... He walked away as in his opinion it's a "Cluster******" it looks like Ireland in 2006 (which he also walked away from) .. Apparently the funniest thing is that NOBODY can even concieve that housing might fall .. He commisioned a report from some consultants on what would happen if house prices fell 10% and the report came back "House prices cannot fall 5% let alone 10%" He tried not to pay for it on the basis that they hadn't done what he had asked and they took him to court for the money (second 50) he was advised by a lawyer to pay .. as a judge would be unlikely to understand the difference ..

...sounds like delusion is knitted into the infrastructure....

[Tiger Woods?]

As discussed, it's (a) the tax treatment and ( b ) the option value of upside. You only need to anticipate a 30% chance of a 10% price increase to achieve a decent yield with the downside protection of a tax write off which, if you're a marginal tax rate payer, is not insubstantial.

Capital losses can only be offset against future capital gains, so the write off will only help you if you have other appreciating capital assets. Most of the people I know who have houses like this have most of their investments in property. If they take a capital loss they will have nothing significant to write it off against in the future.

At current interest rates you would need, as a higher rate tax payer, a bit more than what you suggest to equal the cash rate, taking into consideration costs associated with the house. (I'd estimate about 3.5% or 4% expected capital gains required) During the past 4 years in my area the average has been about 1.5%. Take away transaction costs, and it has been a bad deal - to the tune of about 12% net - or about $150k for the capital tied up in the house in question. Personally, at least locally, I believe prices are (or were - they have dropped a fraction) at the peak of what people can afford (8x to 9x earnings), so the assumption of 4% annual gain requires wage inflation running at that rate. It may happen, but as I've said on here before, I fully expect stagflation. Wages static or falling, cost of food, energy etc. up, and hence cost of housing down.

Professsional landlords in the past worked on 8% gross yields as a minimum. 3% (or in the case I mentioned, slightly less) is a long way off that. You have to argue that the old rules of thumb are now completely misguided. I think a 3% yield is pointing at having paid too much for the house, especially given that many similar houses in this area are not moving, even when people knock 200k off the price.

(I'm not a perma bear by the way. I did think land was incredibly cheap around here, even 7 or 8 years ago, and would have been all in had I had the money at the time. Returns were on the order of 200% over a period of 4 years between 2002 and 2006. It has been stalled ever since for good reason.)

Edited November 16, 2010 by Tiger Woods?

[aussieboy]

Capital losses can only be offset against future capital gains, so the write off will only help you if you have other appreciating capital assets. Most of the people I know who have houses like this have most of their investments in property. If they take a capital loss they will have nothing significant to write it off against in the future.

The thing is, you don't buy all your portfolio on day 1. For most, the longer - held properties will have appreciated, perhaps the more recent will lose money. This is how it works for many. Plus, I don't have the stats to hand, but there are plenty of shareholders who could use property capital losses to offset share gains

At current interest rates you would need, as a higher rate tax payer, a bit more than what you suggest to equal the cash rate, taking into consideration costs associated with the house. (I'd estimate about 3.5% or 4% expected capital gains required) During the past 4 years in my area the average has been about 1.5%. Take away transaction costs, and it has been a bad deal - to the tune of about 12% net - or about $150k for the capital tied up in the house in question. Personally, at least locally, I believe prices are (or were - they have dropped a fraction) at the peak of what people can afford (8x to 9x earnings), so the assumption of 4% annual gain requires wage inflation running at that rate. It may happen, but as I've said on here before, I fully expect stagflation. Wages static or falling, cost of food, energy etc. up, and hence cost of housing down.

Professsional landlords in the past worked on 8% gross yields as a minimum. 3% (or in the case I mentioned, slightly less) is a long way off that. You have to argue that the old rules of thumb are now completely misguided. I think a 3% yield is pointing at having paid too much for the house, especially given that many similar houses in this area are not moving, even when people knock 200k off the price.

(I'm not a perma bear by the way. I did think land was incredibly cheap around here, even 7 or 8 years ago, and would have been all in had I had the money at the time. Returns were on the order of 200% over a period of 4 years between 2002 and 2006. It has been stalled ever since for good reason.)

I'm not sure I agree with your numbers on the costs of owning property. Nor with your wages statistic (up 5% in the last year - hardly falling) but concur that the yields demand a decent amount of capital growth. Unlike Bardon, I'm not a fan of negative gearing but each to their own.

Also - I've never seen rental yields approach double digits in the bits of Sydney I've lived in. This was post-CGT so the tax shield effect has always been a factor. The rent has always been per week however many hundreds of thousands the properties was worth ie around 5%.

[Tiger Woods?]

The thing is, you don't buy all your portfolio on day 1. For most, the longer - held properties will have appreciated, perhaps the more recent will lose money. This is how it works for many. Plus, I don't have the stats to hand, but there are plenty of shareholders who could use property capital losses to offset share gains

I'm just looking at the decision to be made today. Would I purchase this house in my area at 1.2 million.

I'm not sure I agree with your numbers on the costs of owning property. Nor with your wages statistic (up 5% in the last year - hardly falling) but concur that the yields demand a decent amount of capital growth. Unlike Bardon, I'm not a fan of negative gearing but each to their own.

Negative gearing made a huge amount of sense in 2002. It is madness now.

Annual wage growth has been running at a little over 4% for a few years now, so I admit the figures do stack up at present assuming houses remain as overvalued as they have w.r.t. wages, but I suspect there will be a pull back, even if the nominal price increases, i.e. they will underperform wages. They have been doing so for about 5 years in my area.

Also - I've never seen rental yields approach double digits in the bits of Sydney I've lived in. This was post-CGT so the tax shield effect has always been a factor. The rent has always been per week however many hundreds of thousands the properties was worth ie around 5%.

But the rent on the high end properties around here is half that. In this case, 600 pw versus 1,200,000.

Sydney has always been a bit strange. Queensland has suffered from the London/Cornwall effect for a long time. The prices in my local area were driven up by foreign money and, prior to that, people cashing in their chips in Sydney and Melbourne. Will that continue?

[aussieboy]

did anyone see Frank Lowly the creator and owner of Westfield on the tally last night, this guy is an inspiration, he probably screwed a few people on the way but the storyline and his creative use of fiance was excellent

Nice bloke I hear and a generous donor. He endowed the UNSW business school library ("biggest in the Southern Hemisphere" - not sure what the competition is) which the uni then proceeded to dismantle, the ingrates. Saw him when he came to open the new cancer centre at UNSW earlier this year. Let's hope they don't decide to close that too. I've not heard anyone (ex-the ATO...) have a bad word for the man, which for some reason I like to hear.

I'm just looking at the decision to be made today. Would I purchase this house in my area at 1.2 million.

Negative gearing made a huge amount of sense in 2002. It is madness now.

Annual wage growth has been running at a little over 4% for a few years now, so I admit the figures do stack up at present assuming houses remain as overvalued as they have w.r.t. wages, but I suspect there will be a pull back, even if the nominal price increases, i.e. they will underperform wages. They have been doing so for about 5 years in my area.

But the rent on the high end properties around here is half that. In this case, 600 pw versus 1,200,000.

Sydney has always been a bit strange. Queensland has suffered from the London/Cornwall effect for a long time. The prices in my local area were driven up by foreign money and, prior to that, people cashing in their chips in Sydney and Melbourne. Will that continue?

WRT your first point, I'm referring to those who have an existing portfolio, eg Bardon.

Rental in my part of the world stick to the 5% rule as far as I can see - up to $3m value anyway (I haven't seen many rentals ex-Malcolm Turnbull's spare mansion on Domain).

Overseas money is still arriving, just it's worth less I suppose. Plenty of poms moving via the lawyer / banking / accounting swap system that I travelled through a couple of times.

[Tiger Woods?]

Overseas money is still arriving, just it's worth less I suppose. Plenty of poms moving via the lawyer / banking / accounting swap system that I travelled through a couple of times.

Yes. This is what I mean. It is worth less. Australian houses are no longer complete bargains for the average chav selling their two up two down. Lawyers/bankers/high end accountants are a very small proportion of the market though, surely.

Of course, when the world goes into melt down again, the AUD will crash and the foreign money will probably make Australia look cheap again. I'm still trying to fathom whether this means we will remain at high wage multiples regardless of what happens. At present, because of these out of phase aspects of the AUD, I'm wondering whether any sort of crash in Australian housing markets will be the long slow soft landing that appears to be going on where I am.

The future of things here certainly aren't as clear here as the UK housing market.

[aussieboy]

Snip

The future of things here certainly aren't as clear here as the UK housing market.

And that, Sir, is the most accurate and succinct sentence describing the Australian market that I have read on this entire forum. Chapeau!

PS Don't forget to head over to the expats forum if you want to see just how badly the A$ has affected those not in the magic circle who are planning to emigrate here.

[aussieboy]

BTW rang up my banker to see how much they would gear me to head up the "ladder". How does 5.5x single (albeit chunky) income sound?

Scared the cr@p out of me.

[aussieboy]

That means you can make an offer on Malcoms gaff.

Not that chunky...

[South Lorne]

BTW rang up my banker to see how much they would gear me to head up the "ladder". How does 5.5x single (albeit chunky) income sound?

Scared the cr@p out of me.

...IR,term and deposit%.....?.....

[aussieboy]

...IR,term and deposit%.....?.....

80bp off SVR, IO if I want it, up to 80% LTV, more if I commit to paying it back in <2 yrs.

"Rolleyes" to you too.

[South Lorne]

80bp off SVR, IO if I want it, up to 80% LTV, more if I commit to paying it back in <2 yrs.

"Rolleyes" to you too.

....lenders seem quite relaxed over there....?.....

[aussieboy]

....lenders seem quite relaxed over there....?.....

I've no idea what the standard offer is, just what I've been offered.

I think I'll choose as my random emoticon.

[South Lorne]

I've no idea what the standard offer is, just what I've been offered.

I think I'll choose as my random emoticon.

...thought there was a restriction introduced recently preventing non residents buying in Australia ....?......

The properties were marketed in Australia and Asia and drew interest from bidders based in Singapore, China and Indonesia, the organizer said.

http://www.bloomberg.com/news/2010-11-07/sydney-opera-house-luxury-home-auction-challenges-australia-bubble-fears.html

[JonoP]

....lenders seem quite relaxed over there....?.....

They have to be. There would be no ‘new blood’ able to afford to enter the housing market if they lent at more normal salary multiples. Gotta keep that Ponzi fuelled somehow.

On a similar note, I saw an article a few weeks back in one the newspapers. It was one of the usual ‘pat ourselves on the back’ type articles that Aussie financial journos churn out on a daily basis. This particular article was praising the big four Aussie banks for being so risk averse in their lending. The article soundly chastised US/European banks for issuing mortgages at 100% of the property value. This, the article stated, would lead to disaster. The article then went on to state that the big four Aussie banks were capping their LTVs at a ‘sensible’ 98%. Which, they had recently raised from 93%......

The reason that prices are static here is that the pot of potential new mortgagees has been ‘fished out’. They are very few people left who could potentially afford a mortgage that do not already have one/some.

It will be interesting to see what happens next. My guess would be that the banks would like to go down the Northern Rock path and start issuing crazy LTV mortgages (or, as they would class it ‘fight for market share’). The only problem is that they are struggling to secure funds to do this. There was an article in the paper yesterday saying that they want the government to start allowing them to underwrite their bonds with depositor’s cash savings. Interesting times.

The other thing over here is that you have the usual issues around the wider economy being reliant to house prices to drive spending. All those new cars, boats, couples on cruises, designer sunglasses, handbags, IPods/Pads etc that you see everywhere….. I wonder how many of those could have been afforded without the ‘miracle’ of easy housing cash………

[South Lorne]

......On a similar note, I saw an article a few weeks back in one the newspapers. It was one of the usual ‘pat ourselves on the back’ type articles that Aussie financial journos churn out on a daily basis. This particular article was praising the big four Aussie banks for being so risk averse in their lending. The article soundly chastised US/European banks for issuing mortgages at 100% of the property value. This, the article stated, would lead to disaster. The article then went on to state that the big four Aussie banks were capping their LTVs at a ‘sensible’ 98%. Which, they had recently raised from 93%......

...thanks for the info....this is scary ....journalists like to keep their advertisers the Estate Agents happy ...both national and local newspapers will depend a lot on this revenue.....funny journalists praising banks ...in other words keep lending ...no US/UK property contagian here....!....

The reason that prices are static here is that the pot of potential new mortgagees has been ‘fished out’. They are very few people left who could potentially afford a mortgage that do not already have one/some.

...sounds like the frozen FTBs situation here in UK......

It will be interesting to see what happens next. My guess would be that the banks would like to go down the Northern Rock path and start issuing crazy LTV mortgages (or, as they would class it ‘fight for market share’). The only problem is that they are struggling to secure funds to do this. There was an article in the paper yesterday saying that they want the government to start allowing them to underwrite their bonds with depositor’s cash savings. Interesting times.

.....bubble blowers for sure ....maybe Gordo the Broon could go over from here as a bubble consultant.....

The other thing over here is that you have the usual issues around the wider economy being reliant to house prices to drive spending. All those new cars, boats, couples on cruises, designer sunglasses, handbags, IPods/Pads etc that you see everywhere….. I wonder how many of those could have been afforded without the ‘miracle’ of easy housing cash………

...sounds like the UK 2003 when I returned from overseas.....different picture 2010......

Edited November 17, 2010 by South Lorne

[JonoP]

Is that you telling porkies again ?

Nope.

[Tiger Woods?]

Is that you telling porkies again ?

I don't think so. I recall reading something like that very recently. Had to go and buy some screen wipes to clear the coffee off my monitors.

[Tiger Woods?]

They have to be. There would be no ‘new blood’ able to afford to enter the housing market if they lent at more normal salary multiples. Gotta keep that Ponzi fuelled somehow.

On a similar note, I saw an article a few weeks back in one the newspapers. It was one of the usual ‘pat ourselves on the back’ type articles that Aussie financial journos churn out on a daily basis. This particular article was praising the big four Aussie banks for being so risk averse in their lending. The article soundly chastised US/European banks for issuing mortgages at 100% of the property value. This, the article stated, would lead to disaster. The article then went on to state that the big four Aussie banks were capping their LTVs at a ‘sensible’ 98%. Which, they had recently raised from 93%......

The reason that prices are static here is that the pot of potential new mortgagees has been ‘fished out’. They are very few people left who could potentially afford a mortgage that do not already have one/some.

It will be interesting to see what happens next. My guess would be that the banks would like to go down the Northern Rock path and start issuing crazy LTV mortgages (or, as they would class it ‘fight for market share’). The only problem is that they are struggling to secure funds to do this. There was an article in the paper yesterday saying that they want the government to start allowing them to underwrite their bonds with depositor’s cash savings. Interesting times.

Can you find a link for the bit in bold.

Certainly in this area a couple of younger people I know have bought their first house (or should I say, unit/flat/hovel), but are renting it out and living at home, so they can pay the mortgage. Doesn't suggest a long term stable state to me, but the market can remain irrational for a long time.

[blue skies]

And all that new money and leverage helped hoodwink Western consumers into believing that it was an age of new prosperity. Of course, it wasn’t though was it?

The new wealth, the bigger houses, the fancy cars and consumer goods were all bought on credit. Credit which some day would have to be repaid.

And here’s the thing. Early on the repayment of credit seems easy. As inflation takes hold incomes and asset prices go up, and therefore debt liabilities go down as inflation erodes the value of the debt.

Everyone seems to be a winner. To the extent that inflation becomes the consumers’ best friend, “Yeah, I’m not worried about debt, because after five years inflation will take care of it and I’ll be fine.”

The outcome is that this becomes a new form of personal financial management. Not only is debt good for you – the story goes – but the more the better. Hence the creation of asset price bubbles as we’ve seen in the recently popped Australian housing market.

We’ve warned you time and again not to fall for the ruse that inflation is good for you. That inflation will pay off your debts and you’ll be better off.

I’ve advised you to look no further than the experiences of people in Zimbabwe. They had hyperinflation. If normal inflation is a good way of paying off your debts then surely that means hyperinflation is even better, right?

Wrong.

How many Zimbabweans did you see jumping for joy that they’ve experienced hyperinflation? None… apart from Mugabe of course. How many Zimbabweans are now proud owners of houses that they’ve paid off thanks to hyperinflation?

None.

No, the reality is, if you’re leveraged to the hilt, when the crunch comes, the rate of interest and the cost of living will far exceed any supposed benefits (there are none) that you’ll get from inflation.

But, getting back to the Great Inflation, by the time the markets reached the year 2000, asset prices had peaked. Markets fell for the next three years as realisation set in that much of the new wealth was nothing more than, well, nothing.

That brings us to the next phase:

Source: Google Finance

We’ll call it the Great Reflation. Here’s the close-up:

Source: Google Finance

Rather than accepting that asset prices had been pushed unrealistically high, the mainstream was intent on finding the next excuse to reflate the market.

It didn’t take them long to find it – China.

From 2003 until late 2007 investors the world over came to the conclusion that demand from China would help take the market back where it belonged, to the heights of the dot-com boom.

Do you see a pattern emerging?

That’s right, it’s the craving for an asset bubble. Governments and central bankers and vested interest groups are in search of the perpetual boom.

They want stock markets and house prices to rise forever. In their world, “normal” is where the stock market was in 2000 and again in 2007. They want, at any cost, to do everything in their power to push markets back up there.

Whether they realise it or not, that ain’t normal.

Absent the meddling and interference from governments and central bankers, “normal” in stock market terms would see the Dow Jones closer to 2,000 points rather than 10,000.

But chaps like Ben S. Bernanke and his Keynesian pals don’t see it that way. They believe that the last thirty years has produced untold prosperity for the West.

And maybe it has – for some. But it’s all been achieved by borrowing from the future.

Prosperity in the 1980s and 1990s has been achieved by denying prosperity from those that will live through the 2010s and 2020s. Look no further than budget deficits and household debt for evidence of that.

What else can explain the shocking results from a survey by Rabo Bank, that according to The Age:

“One in 20 said they’d be forced to sell, with baby boomers under the most stress – 15 per cent of borrowers aged 50 to 65 years say they’d have to sell.”

Aren’t the baby boomers supposed to be the ones that have benefited the most from rising asset prices? How can 15% of them be in so much financial stress that they’ll have to sell their home if interest rates rise by another 1%?

They’re in this bother because they’ve fallen for the inflation trick hook, line and sinker. They’ve cashed in the on the increase in house prices, but thinking that they’re geniuses rather than lucky, they’ve leveraged up and bought an even bigger home and gone further into debt.

Just when they should be debt free, they’re lumbered with a whacking big mortgage going into retirement.

The Great Reflation is where we are right now. The US Federal Reserve wants markets to rise. It wants asset bubbles because asset bubbles make people feel rich, and if you feel rich you’re more likely to take on more debt.

And if you take on more debt, it prevents the banks from collapsing under the weight of dodgy and un-repayable loans. Furthermore, it postpones for a while longer the inevitable crash that will herald the next Great Depression.

Make no mistake. Governments and central bankers are doing everything they can right now to entice you into taking on more debt to help create the next asset bubble.

[JonoP]

Can you find a link for the bit in bold.

Certainly in this area a couple of younger people I know have bought their first house (or should I say, unit/flat/hovel), but are renting it out and living at home, so they can pay the mortgage. Doesn't suggest a long term stable state to me, but the market can remain irrational for a long time.

Thought it was in The Australian but it was actually in the local WA paper (I was in Perth yesterday and read both papers on the way home)

http://www.perthnow.com.au/business/new-bank-bonds-to-cut-rates-pressure/story-e6frg2qc-1225954202969