Australia’s Apartment Block Economy

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The news on home soil has been intriguing. It turns out that the Australian government acted on advice from investment banks and accounting firms when deciding on the Qantas bailout. Well, the lack of a bailout. That doesn’t seem quite right.

Investment banks and accounting firms will be the first to profit if Qantas has to reshuffle its business. Finding suitors for joint ventures, capital raisings and new corporate structures are what these firms do. Conflict of interest anyone?

Then again, it’s good to see a government using some sort of financial cost-benefit-analysis. It would’ve been far easier to just chip in and save Qantas for political reasons. But, as we explained yesterday, even if the government gets its way over Qantas, the company is still very much under the finger of the government. A second law that won’t be repealed still restricts its practices. No doubt Qantas’ future struggles will be blamed on the law that was repealed, not the one that remains.

For now, the obvious answer to the Qantas problem is Jetstar. Tickets are much cheaper without the services being much worse. In any self-respecting capitalist system, that leads to one result. The other possibility is one Australia just learned the hard way with Holden.

Besides, cheap is valuable in Australia. The Economist Intelligence Unit reckons Sydney and Melbourne come in at fifth and sixth for the world’s most expensive cities to live.

These comparisons are always a bit dubious. For example, currency moves determined much of the outcome. But it still tells you something about the size of the opportunity waiting for those willing to take it.

Australian housing costs are of course our biggest gripe with Australia’s cost of living. Thanks to the RBA leaving rates at a 60 year low of 2.5% yesterday, that situation is only expected to worsen in the short run.

Wait, aren’t low interest rates making housing more affordable, not less? We doubt it.

That’s the irony in what the RBA tries to do. On the one hand, it tries to control the Australian economy by manipulating housing affordability through the interest rate. But it does so at the expense of making houses more expensive, or more unaffordable.

For every shift downwards in the interest rate to stimulate demand, Australian house prices rise more, making them less affordable. In the meantime, the debt load steadily rises, as lower rates just end up meaning borrowers take on more debt to pay for more expensive house prices.

In the end, people can afford…well…they’re willing to pay a certain amount a month to be in a house. Whether the interest rate is low or house prices high, the cost of owning a home will simply adjust. For now, it’s higher house prices.

Perhaps this explains the cannibalisation of housing on the rest of the Aussie economy. In Sydney, office towers are being converted into apartments at an increasing pace. In the CBD alone, 10 buildings are being remodelled.

Surely this isn’t what economists meant when they said a housing construction boom would replace the mining boom. Developers seem to be taking things a little too literally. Either way, the Australian stock market doesn’t seem fazed that Australia’s business capital is turning into an apartment block. But it’s not exactly conducive to economic growth, is it?

Regards,

Nick Hubble+
for The Daily Reckoning Australia

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Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.
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3 Comments on "Australia’s Apartment Block Economy"

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nihal bhat
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agree massive bubble, probably one of the longest asset bubbles in history(>10 years). anyones guess as to whether and when it will burst as its lasted a decade. mirroring asset bubbles all across the world, esp. in technology shares and the broader stock market.

Ross
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If low interest rates haven’t made houses affordable, what happens if risk is ever priced again?

What happens when you are forced to acknowledge those rackets that de-risked everything? Do you “do something about it”?

http://www.breakingviews.com/boe-suspension-underscores-fx-market-limbo/21134798.article

Answer: You would only have looked if you knew the game was already over and needed scapegoats.

The AUD borrowing interest rate swaps alone is enough to blow up the global derivatives market. Bank balance sheets owned by government, houses owned by government, is what is coming at us (if it is that orderly).

garry
Guest

Ah .. still not up to speed on the why of high priced housing yet

Like – The investment bank estimates that 12 per cent of all new housing purchases and up to 18 per cent in Sydney and 14 per cent in Melbourne are by Chinese buyers.

Try that with any stock on the ASX, where a hike of 12 to 18% in willing buyers doesn’t affect the price

wpDiscuz
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