Australian Housing More Unaffordable in 2010

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Whoa nelly!

Let’s clear something up before we get any further into today’s reckoning. Yesterday’s letter closed with this cryptic comment, “But what’s bad for shares might, just might, be good for housing.” We didn’t elaborate. And some readers wrote in asking if we’ve become property bulls all of a sudden. Nope.

Australia is a two-speed asset market. Aussies speculate on houses AND shares. From what we’ve seen in the last four years, the investing public is convinced that if you can’t make money in the share market, you just turn to the property market and everything will be fine. This isn’t true. But it IS the sort of thing that could support house prices in 2010. And they’re going to need it.

2009 was a great year for existing homeowners. Nationally, prices were up 11.3% through the first eleven months of the year. Sydney prices were up 11.6% and Melbourne prices soared nearly 17%. That’s going to be tough to replicate, especially when interest rates are set to rise and the first home buyer’s grant has expired at its elevated levels.

But all that skirts the issue. Housing affordability didn’t improve one jot or one tittle last year. Australian housing became more unaffordable than ever. Yes, yes, the Reserve Bank says just the opposite. But it says so based on the presumption that access to cheap credit is what makes buying a home affordable.

We use a more conventional measure: the average home price. It’s rising a lot faster than inflation-adjusted wages. Unless you’re willing to saddle yourself with massive debt (encouraged by the government) you don’t gain any exposure to rising prices (supported by the government). In our view, it’s a financial risk well worth avoiding.

Not that shares are inherently safer. Housing price adjustments happen over years. Share market adjustments happen a lot faster. Right now the Aussie indexes are trying to crack 5,000. We poked our head in the trading room yesterday to see what the trading guys had to say. They are market neutral and have trades on both sides of the ledger at the moment.

A couple of interesting things happened yesterday, though. First, February gold futures went up by over $22 and two percent to close at $1,118.10. Gold closed up $218 in 2009. It was a 24.8% gain for the year. In nominal terms, it was a smaller rise than the $286 gain in 1979 and in percentage terms it was smaller than the 31% rise in 2007.

But gold has closed higher nine straight years in a row. That made it a pretty good “trade of the decade.” Bill writes about it below. But his question, and the one we take up now, is whether buying gold and selling stocks is the best trade of the NEXT ten years.

Well first, we wouldn’t count gold out yet. In fact the whole precious metals complex had a stellar year. Silver finished 47% higher. Platinum was up 58.7%. And palladium was up a hearty 200%. Those are great numbers. And with stocks, you have even greater leverage to rising commodity prices. But obviously the question remains: are those numbers the sign of a top?

To be brief, no. Gold gained against all major global currencies over the last ten years, not just the U.S. dollar. The evidence is in the chart below from our friend Adrian Ash at www.bullionvault.com . Commodity currencies, high-saving countries, managed floats, large debt-to-GDP ratios…none of it mattered. Real money beat paper money over the last ten years, hands down.

Gold vs. Major Currencies over last 10 years

Currency

Gold’s Decade Gain (%)

US Dollar

292

Euro

181

Yen

249

Chinese Yuan

218

UK Pound

298

Brazilian Real

273

South African Rand

365

Canadian Dollar

179

Indian Rupee

313

Mexican Peso

434

Russian Rouble

310

Australian Dollar

182

South Korean Won

299

Source: www.buillionvault.com

Speaking of gold, the black kind-oil futures crossed $81 in New York futures trading. It’s hard to argue that energy prices are going higher if you think the global economy is contracting (or will contract). But because of its relative scarcity (and higher extraction and production costs) we like energy as one of the best investments of the next decade.

Oil’s one day gain was 2%. And with the northern winter settling in, you’ll have your usual mix of demand for fuel oil and heating oil and refineries struggling to get the mix right. At a 15-month high, it’s hard to blame this recent price surge on futures speculators. So what should investors do?

According to business analyts IBISWorld, have a look at fast growing industries. Oil and gas should be on your list. IBISWorld says world oil production will decline in 2010, according today’s Australian. “The firm’s general manager (Australia), Robert Bryant, said: ‘This[decline] will be more than offset by a rise in natural gas production, seeing the sector post 13.8 per cent growth in 2010 to $37.3bn, generating a 3.5 per cent increase in employment.'”

“‘In the coming year, Australia’s oil and gas industry will benefit from higher international prices, increased production volumes of natural gas from existing fields, and the development of new fields.'”

Ah yes. All apparently good news. Conventional and unconventional gas projects featured prominently in last year’s stock picks in the Aussie Small Cap Investigator and Digger and Drillers. They’ll probably feature again this year, but at the more speculative end of the market (not up at Woodside’s). But even energy stocks are exposed to a China bubble, about which more tomorrow. Until then!

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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202 Comments on "Australian Housing More Unaffordable in 2010"

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Unpopular Truth
Guest
In my opinion there’s only one way to really measure home affordability, and that’s by looking at the % of average monthly income you’d need to devote to the monthly repayments. This accounts for everything that matters in day to day life, from the cost of food/shelter to inflation and wage growth. Access to cheap credit really helps home INVESTORS rather than people looking to get out of a rental market and into something they plan to own and use. In fact, cheap credit can actually hurt home affordability, as counter-intuitive as it sounds, because people with a large asset… Read more »
Greg Atkinson
Guest

UT..you mean net income after tax and basic expenses?

Ned S
Guest

I’m confused – Is Great Depression II over? With DRA absolutely and totally missing the turn last March. Or can we still look forward to dripping on bread for brekkie. And an Oz house price crash?

Greg Atkinson
Guest

Ned I would say on balance that DRA had a pretty bad year. Our paper money still pays the bills, the world did not enter into a Depression to end all Depressions and things are slowly stabilising. Gold was not a good buy in AUD terms and investors would have been better off in stocks. But as you know I have been saying this for a long time :) See: http://www.shareswatch.com.au/blog/stockmarket/farewell-2009-goodbye-gfc-and-a-happy-new-year-to-all/

Pete
Guest

Yes, your call was pretty good, Greg. We baled at 3800 even tho’ you predicted the run would be maintained! So did our eldest son. Even the global pessimists are listing Australia as one of the winners in the next decade. Our paper money has been worth more while we’ve been travelling, too… a bonus we hadn’t really expected… !

Greg Atkinson
Guest

Sadly Pete I did not quite time the market bottom with any great accuracy but heck, such is life. But I reckoned the world’s markets would stablise like they always do..it isn’t the 1930’s any more.

I am not entirely sure Oz will be a winner over the next decade. I sense we might be getting outflank by China. We also appear to be selling off our resource assets fairly cheaply. (e.g. Gorgon)

Mark
Guest
Greg, do you think the US will continue their multi-Billion stimuli forever? When they withdraw the stimulus, then we will know if the recession is truly ended. I suspect they will return to stagnant growth and stimulate again. However the real worry for Australia is when things begin to improve and all this quantative easing turns into inflation and thus leads to higher interest rates. As the banks need to fund externally the Reserver Bank may not be able to do that much to counteract this. Then I suspect Australia’s property market will experience the price correction experienced abroad and… Read more »
Greg Atkinson
Guest
Mark there are now far more middle class spenders in Asia than the U.S. This year spending on consumer electronics in Asia will be greater than the U.S and Europe combined. The fact is that the U.S can struggle for years but it is not going to keep nations like India, Indonesia, Vietnam and China back forever. The global centre of economic activity is moving to Asia. I don’t make this stuff up by the way: See: http://www.nni.nikkei.co.jp/e/fr/tnks/Nni20100106DA6J1061.htm The problem with the western finance media is they are so biased towards western economies. They cannot see the woods for the… Read more »
Pete
Guest

I agree that we flog our resources too cheaply, Greg. On the question of inflation, it has always worked _very_ favourably for us, so I see it as no great threat to us personally. I recognise that this will be interpreted as a selfish view, but as my No. 1 Fan will confirm, I’m a greedy money-centred b*astard. Tough job, but someone hasta do it…! ;)

Nirvan
Guest
..and because there wont be any big Austrlian businesses to take on the Asians we should see more of them of coming in and buying up real assets like premium suburbs , mines , gas , oil. Well a few Australians would get lucky. My advise would also be to stop learning French and doing those Europe tours post college working as waiters and head off to Asia and see what works there. Its going to be a cognitive dissonance otherwise, not really knowing where you belong even in your own country!. We are already becoming butt of their Jokes… Read more »
wasabu
Guest
The vast majority of personal views have a critical Achilles Heel which prevent them from forming a confident long term view of the likely direction of market dynamics that sit atop certain foundational realities. DR have cosistently pointed to the fundamental weaknesses which, thus far, have not been fixed. Indeed, the majority of G7 actions have been to further compound the problem. Not a true, moral leader in sight. As an investor, or indeed a humble worker looking to protect their family, the focus should always be on the foundations of the structure, not the day to day, month to… Read more »
Greg Atkinson
Guest

Nirvan I was ranting on a year ago that we were becoming the “Thickheads” of Asia. Most people seem to think we either dig stuff up or farm. Ever had anyone marvel at Australia’s high tech sector when travelling overseas?

People in Japan think I am either an English teacher or worse still…an American!!

Ned S
Guest

Seriously mate, ya gotta bone up on ya strine – I’ve had some crook things happen ta me in me life – But, jeez … I’ve never bin mistook for a septic tank!

Ned S
Guest

Or an English teacher. :)

Bargeass
Guest

The Australian property market bubble will correct as bubbles do.
How when and by how much will be there for all to see when the time comes.

Greg Atkinson
Guest

Ned short of dressing and acting like Sir Les Patterson I am not sure what else I can do. Even when they pick where I am from the best I can hope for is a few compliments about our tasty beef. (our wine is not even that popular these days)

Pete
Guest

“How when and by how much will be there for all to see when the time comes.”
Now there’s some useful specifix!

I’m mistaken for a Kiwi frequently in the Northern Hemisphere. Flightless without my bikes, I guess.

Aussie wine is still popular in Canada, but it tends to be overpriced quaffing stuff. We do appear to be ‘dumping’ some good stuff in their LCBs, though. Saw a 2004 Grange for $425 yesterday…. cheaper than in Oz… and the freight isn’t cheap… . Interesting to see two big mining deals come unhinged in WA, Greg.

Unpopular Truth
Guest
Just wondering for anyone who thinks we’re the ‘thickheads’ of asia.. When was the last time you heard of anyone going to China to study in a better University? Perhaps someone can tell me the last medical cure that came from China? In fact, any major technological breakthrough will do, not just medical. Nothing comes to mind for me.. I’m pretty sure we’re ahead of the game. They can call us idiots, farmers and whatever if they wish, but like much of the politically acceptable western bashing, it’s mainly penis-envy. Oh and even if we do have a lot of… Read more »
Greg Atkinson
Guest

Unpopular Truth we are talking about Asia not just China but just in case you have not noticed China have sent a man into space, developed a maritime ballistic missile that has the U.S Navy worried and have a company bidding to provide high tech telecoms gear for our NBN.

Next look around your house and see how much consumer electronics you can find that was designed, developed or even glued together in Oz. Found anything yet?

Get my point?

Toto
Guest

Unpopular Truth, maybe you should look at how the Chinese find the cure for malaria.

http://news.bbc.co.uk/2/hi/health/194160.stm

Unpopular Truth
Guest
No argument that the build a lot of stuff, but as for design it, they usually pinch the design/tech/ideas from OS brains and then copy it. Story is the same whether it’s CPU’s, Missles, TV Remotes or Kettles. Get my point? As for focusing on China, I gave the region the benefit of the doubt. They’re probably on the cutting edge as far as this stuff goes in the Asian region. The other countries would only be worse than them, so I didn’t bring them up due to irrelevance. Japan being the obvious exception. You also ignored the point about… Read more »
Greg Atkinson
Guest
Unpopular Truth there are plenty of high tech, well paid workers in Asia especially in Taiwan, South Korea, Singapore and Japan. Asia is not one big sweat shop. Maybe China does copy a few things, but then again we copied from them also in the past. The Chinese have been inventing things for many, many centuries. As for studying overseas Asian students also travel to other Asian countries for that but the plus for Australia is students come to Oz for English (and many for a Visa) However we are only seen as a centre of academic excellence by ourselves.… Read more »
Chris
Guest
Unpopular Truth, I have to second Greg on this. I work in the semiconductor industry in AU, and let me say it is almost completely gone. Lots of R&D takes place in various Asian countries, in addition to manufacturing, and often the salaries are higher than here. Further, having a high cost of living is no excuse for having a weak R&D capability, e.g: the Netherlands, with a smaller population than AU and also having large natural resources still has a respectable number of multi-national companies engaged in high tech. I don’t see many citations of groundbreaking research from Australian… Read more »
prozak
Guest

I travelled for 12 months through asia on motorbike.

I can tell you now I am not concerned about their aussie jokes. Whatever helps them forget where they work and live.

I could of course tell some very accurate jokes about their culture and economic situation, but I imagine that would be considered racist!

Ned S
Guest

I read the joke and concurred fully – With the Aussie being mocked that is!

Steer clear of the Dame Edna Everage look though Greg – I don’t know that my heart’s strong enough to stand the thought of the old girl being shanghaied down Okinawa way with her face painted white to serve tea (or somesuch?) to the troops.

Ta Biker – re cins. I’ll ask you what you reckon about laundries one day – Not like the missus spends 1/4 of her life in them blue bagging the white linen anymore is it?

Nirvan
Guest

Even the Canadians have the Blackberry and nVidia to speak off as indigenously developed high tech companies.

The chinese just unveiled the fastest train ever. They didnt copy this stuff because nothing like this have ever been built before.

http://www.chinadaily.com.cn/bizchina/2009-12/28/content_9235505.htm

Ned S
Guest

I knew a bloke a few years back who wasn’t real well educated but real, real smart – He expressed the thought to me: “Whitey’s stuffed!” (Or a similar adverb ending in “ed” but starting with “f” just maybe?)
But either way, he definitely had a point … Time for all the little white boys to grow up and start to get competitive if they want to stay boss cockies in the chook house … :)
(As I said before I’m not an English teacher … I’m just guessing that “stuffed” is an adverb???)

Ned S
Guest

DR is big on things “reverting to their mean” – Like gold being what it was worth back in King Neb’s day and such like.
So where exactly do such thoughts take us in a globalising world that they reckon is getting a bit short on for resources re stuff like per capita national purchasing price parity (aka standard of living?)
Could this mean that whities ‘n chinks ‘n coons all pretty much end up “leveled out”??? … Perish the thought! Just keep workin’ on ya house plans Ned … :)

Pete
Guest

“The Aussie handed back his drink and said: “Me too, I didn’t know we had a choice.”

The interesting thing is that it’s likely an Aussie wrote the joke. We’ve always had the capacity to laugh at our own foibles. That may mean we don’t take ourselves seriously enough, or it may just mean the rest of the world needs to develop a sense of humour. ;)

wasabu
Guest

Pete, any competitive organism has as much sense of humour as is required by the circumstances of the competition. There is no doubt that “Australia Is The Lucky Country”. It is not mere coloquialism. Down under is an ecosphere that is more giving than most.

In terms of resources, cultural historical apathy, and geographical optimity (hey thats 2 new words :), you really can’t beat this place.

We can afford to make mistakes until the Chinese come home!

Pete
Guest

Optimity: State of being the best. I’m inclined to think that’s gotta be WA or QLD(?!) Have to agree after six months in five countries this year, Oz still has my vote.

Ned S
Guest

Must be WA then because it’s definitely not QLD with Cap’n Bligh steering the ship – Dunno who’s running WA – Idi Amin maybe? Dunno, Don’t care – Wanna swap?

Pete
Guest

QLD is definitely on our list, Ned. Got only as far as Noosa, back in ’71. Colin Barnett (Lib) is in charge in WA… but it’s an uneasy coalition with the Nats. Works for us as there’s money for ‘the regions’. ;)

Ned S
Guest

Here’s a cute one – This economist reckons it’s the Y Gens refusing to move out of home and let their poor old ma and pa downsize who are pushing house prices up. I do love opinions! :)
http://www.smh.com.au/business/property/parents-property-help-could-harm-20100108-lxml.html

Pete
Guest
Do you realise what this means, Ned?! Rising houses values are Steven’s fault! ;) I have a mate who is downsizing at present, in Perth. He and his missus are 55 and retiring… and the kids have all moved out (finally). He’ll pull about a mil out of the house, after fees. We figure a lot of others, either retired or close to retirement, will sell off their homes in this bracket, to move to houses in the $380K – $450K market… hence our own focus on building homes within that range. Laundries: We keep them simple and straightforward, Ned.… Read more »
Ned S
Guest
Yes, the irony of the argument wasn’t wasted on me either Biker! :) Downsizing is good – 300 m2 plus highset houses don’t have that much to recommend them to an older empty nester. IMO. That’s good commonsense about the laundries. I’ve even been considering just going with 2 front loading washing machines – One in the kitchen and one in the ensuite perhaps? Yes, I’ll have to remember to do the sustainability stuff – The local council provides a VERY comprehensive document on same. And it’s ’71 since you’ve been here – There’s been some changes since then –… Read more »
Steve
Guest

You would believe Pigs fly Pete

Pete
Guest

Swine flu…

Ned S
Guest
Hey Steve, given all sorts of factors (many of which I’m NOT familiar with obviously), has it crossed your mind to use your cash to build a granny’s flat in ma and pa’s backyard? (FOR YOU – NOT THEM!) Don’t necessarily say it’ll be the “best” thing for you all long term? – It probably won’t be! But it just could fit with your risk profile/what you want re being close to work/etc??? Give it a bit of thought before you spit the dummy. As noted recently, 76 m2 is the average home size in the UK – And Brissy… Read more »
Bargeass
Guest

The bigger and longer the boom the bigger and longer the bust.

Ned S
Guest
I guess if I was a young bloke with $100k plus in cash and a low risk profile who wanted to enhance that plan a bit, I might think in terms of do the owner builder test on me old dad’s behalf, swap me chick magnet sedan for a ute I could drive around town picking up leftover building materials like concrete blocks, build me nice little two bedroom granny flat in ma and pa’s backyard (car accommodation doesn’t count in that 70 m2 – Not in Brissy anyway) – All for no more than $40k tops; And then continue… Read more »
Steve
Guest

WOOW Ned I really am speechless after that comment I really am!!!

Ned S
Guest

Let me know when you recover your powers of speech then Steve …

Pete
Guest

Ahhh, serves ya right for trying to pass on some good, timely advice, Ned.

Enjoying a day in HK. After flying with six or seven lesser carriers* during this trip, we can recommend Cathay Pacific Economy. Better in nearly every way than every other airline we’ve flown with recently. To our surprise, China is well ahead of any of the US and Canadian carriers in terms of technology, service and comfort.
* QANTAS palmed us off on British Airways. Last time we’d suffer that arrangement! :(

Ned S
Guest

G’day Biker – Not sure it’s “good” advice? – Except in so far as it probably is at least a step up on waiting for Steve Keen’s property crash for them that really DO want a home!

Never been to Honkers – But a mate told me his missus reckoned the shopping there was great – And he got some cheap software and a pretty convincing looking Rolex for $18 or somesuch?

Pete
Guest
I guess if anyone was still convinced Australia will have a GPC, a 40% discount might look a lot better than your backyard proposal, Ned. If _we_ believed in the Great Property Crash we wouldn’t be continuing to build. We’d have sold during the 2009 upswing… and waited, cash in ‘pause’, like the incredibly patient bears… to jump in all-vulturelike… to carry off the carcases! ;) No bargains that we could find anywhere we went in HK, Ned. I have a genuine Rolex, which keeps pretty poor time… and a couple of fakes I picked up in Mexico (’95) and… Read more »
Steve
Guest
Timely advice. Pete if you had saved the equivalent amount of money I have when you were my age you would be probably be two thirds of the way to owning a decent house OUTRIGHT, buy a nice 2 bedroom unit in a nice area OUTRIGHT. It had been that way for donkey years up until about 10-15 years ago. So of course I have a right not to be happy about the situation. Yes that was a classic Ned great advice I live at home in my bedroom now, building a Granny Flat out the back to live in… Read more »
Steve
Guest

I think even deep down Pete would also think that was stupid advice, not that he would admit it after all you are the number 1 YES MAN

Ned S
Guest

Thanks for that mate (re the Rolexes) – I do enjoy a good belly laugh!
Re housing – Yes, the good prof promised so much to us cashed up carrion eaters – But delivered so little!
I’m still lauighing over the watches – My approach to time tends to be I checked the clock before I left home and had fifteen minutes to spare – You mob of whingers must be early! :)

Ned S
Guest

It was just a thought Steve – If you you don’t like it (as is your right), come up with something way better.

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