Australian Property Speculation Continues to Grow

Growth in Real Estate with Magnifying Glass
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Following some pretty lacklustre action in overseas markets on Friday, Aussie stocks are set for an average day today. There will be a few gains here and a few more losses there. As I write, the market is down around 0.6%

The only thing of note happening in the market lately is a return of the bear for iron ore stocks. After rallying strongly from mid-January through to the end of February — for no particular reason — iron ore stocks are again under pressure.

For the first few weeks of March, it’s been down, down, down. After approaching $66 a share two weeks ago, Rio Tinto [ASX:RIO] is now around $57.50. That’s a fall of over 12%. BHP Billiton [ASX:BHP] is back under $30 (down around the same amount as Rio) while the more marginal Fortescue [ASX:FMG] is off by about 20%.

That means they could be due for a short term rally, with China the catalyst. The Financial Times reports today that:

China is prepared to take action to stimulate the economy and boost market confidence, Premier Li Keqiang said on Sunday.

Mr Li gave his assurance in Beijing’s Great Hall of the People while warning that China would struggle to meet its annual growth target of “around 7 per cent” this year.

The knee jerk reaction of iron ore stocks is to rally on any whiff of China stimulus. However, the rallies have always given way to further falls, so this ‘buying the stimulus’ trade doesn’t seem like a smart one. And judging by the market’s response today, the standard reaction is not in play.

The trend for iron ore is down, so stand aside and wait for things to turn. It could be a while though, so don’t hold your breath…

Meanwhile, the big four banks continue to trade near their recent highs, which is a bullish sign. It’s telling you that low interest rates will keep investors interested in the banks because of their yields, and also bolster bank earnings as the demand for debt continues to increase.

But how much more can debt levels increase? Household debt is already at record levels in Australia. David Uren writes in today’s Australian:

HOUSEHOLD debt is higher in Australia than anywhere else in the

advanced world, exposing the economy to risks in the event of another financial crisis.

Household debt is equal to 130 per cent of GDP, according to analysis by Barclays chief economist Kieran Davies, compared with an average across the advanced world of 78 per cent.

Not only is household debt higher here than elsewhere, it is also higher now than at any time in Australia’s history. The level of bank lending as a share of GDP can be traced back to the 1850s and the level now is more than double the share of the previous peak, during the 1890s land boom.

If you want to know what happened after the 1890s land boom, I suggest you read a little book called ‘The Land Boomers’. It’s currently propping up my laptop in the home office, and is a constant reminder that major land booms end in busts…and these busts have devastating effect.

In fact, the 19th century boom and bust produced a depression in Australia that was much worse than the global depression of the 1930s. Capital from London fuelled the boom…and then pricked the bubble as it realised what was happening and exited the country.

Here we are now, 125 years later and still reliant on foreign capital to fuel our booms. The property market is going crazy (in Sydney and Melbourne at least), which requires banks to increase their offshore borrowing to supply the loans.

As Uren writes:

The level of household debt in Australia is inflated by the much greater popularity of real estate as an investment than in other countries, fostered by the ready availability of negative gearing tax concessions and favourable capital gains tax treatment.

That’s right, record low interest rates and hugely favourable tax treatment encourages property speculation. Everyone in the industry saw this coming except APRA, the financial regulator.

Now they are belatedly trying to halt the speculation, as punters get ready for another rate cut…possibly as early as next month.

In December, APRA wrote to the banks and warned them about excessive lending growth. Needless to say, the letter went straight in the bin, and the banks continued to make hay while the APRA sun shone.

The afr.com reports today that small bank, ME Bank, grew investor loans at a rate of 35% in the year to January. But because investor loans represent only a small portion of the total loan book, the bank has ‘no intention’ of slowing its growth.

Gee, APRA really has some authority, doesn’t it?

There is a perverse side effect to this retarded form of economic growth. That is, Australia continues to sell off productive assets to fund this insane property speculation.

Last week, Philippines food company Monde Nissan purchased family owned Menora foods for $55 million. That follows its recent purchase of Nudie Juices for around $80 million and over $100 million for dip maker Black Swan.

Then there’s the recent Singaporean purchase of Goodman Fielder for $500 million. That means all the profits from these enterprises now head offshore.

This is what happens when you run a constant current account deficit. It means Australia consumes more than it produces. And when that happens, you have to borrow or sell off assets to make up the difference.

In Australia’s case, we do both. We borrow to speculate on property and sell-off productive assets to help fill the gap brought about by excess consumption.

There’s nothing wrong with this at the individual level. Incentives drive this individual decision making (like low interest rates). But at the aggregate level, it’s disastrous.

Australia is on course for a slow motion train wreck. You can see it coming from miles away but you just don’t know when it will happen. Looking at the strength of bank share prices, it’s not about to take place anytime soon.

So it’s all good! For the time being.

While APRA looks the other way, the RBA cuts rates and ‘smokin’ Joe Hockey fans the flames with insane policy ideas, the bubble will continue to inflate. But it will only make the eventual bust that much more devastating.

Greg Canavan,
for The Daily Reckoning Australia

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely 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. For more on Greg go here.
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4 Comments on "Australian Property Speculation Continues to Grow"

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watcher7
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“The land mania of the 1880s took two main forms. The first was based on a plethora of building societies, whose optimistic officials believed that every family in the colony could simultaneously build their own house, keep up the payments through good times and bad, and support an army of investors who were being paid high rates of interest for the use of their money. The second form of mania was the deeply-held belief that it was impossible to lose money by ‘investing’ in land – a belief which persists to the present day” (Michael Cannon, The Land Boomers, (Melbourne:… Read more »
sam
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I am completely confused. The government in charge & APRA knows what is happening in this crazy market. No one give ‘RA’ in this society as everyone try to look after their retirement. On the other hand foreigners are buying the houses like no other. I was in Auction last weekend and I think this is disgrace. People betting like their is no tomorrow. The house was sold at least $250.000.00 over the reserve. I am stress out when Sydney boom will end! Is there a price correction in near further or any at all. Everyone talking about bubble but… Read more »
slewie the pi-rat
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“…over $100 million for dip maker Black Swan.” L0L!!! ——————————————————– Dammit Janet was playing in the World Series Of Poker. she was in The Main Event, and she had “made the money”. although she wasn’t short-stacked, she was about 25th percentile from the no-longer-living. basically, she had been doing just fine, but not recently. then, she got involved in a hand from a middle position and found herself in a decent-sized pot, after the flop. after a bet and a raise, the turn-card was a “scare”. possible straights and flushes appeared, as if by magic. there were still five people… Read more »
speculator
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Too much theory by analysts. I have speculated around the world making milliuons. I have even borrowed cash on credit cards and speculated on property. This is economics 101. Demand and supply. Don’t overcomplicate it.

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