The Truth About the Current State of the Aussie Housing Market
I must warn you, today’s tale is both long and tedious.
It’s the story of two different parts of Australia.
Those rushing in to buy a property…and those already sitting on a six-figure loss.
The central bankers who need you to believe in the power of Aussie housing…
And the international eyes watching our credit-fuelled property sector, rise again…
In fair Australia, where we lay our scene
My web travels confirmed a few things for me this morning. First is that no one is quite sure how to report on the Aussie property market.
On one hand there’s a bunch of positive data to show we are rushing back in. We must buy bricks at any cost!
Then on the other hand there’s a bunch of Aussies whose homes are worth less than the mortgages attached to them.
Compounding this, is official Reserve Bank of Australia data saying that perhaps things aren’t that bad.
And observing all of this, is the international press, waiting on the sidelines wondering how they should respond to the miracle that is the Aussie economy.
However, to tell this story, let’s work backwards…and start with the international press.
Early this morning, I noticed Bloomberg had decided to weigh in, and offer their thoughts on the Aussie housing market, writing:
‘Australia’s property market is taking off again, but with few positive economic spillovers. Just look at the earnings report of the nation’s largest building materials firm Boral Ltd.
‘The brick, cement and plasterboard maker announced weaker results Wednesday, citing a softer housing market, and said local concrete volumes were down 8% in the three months through September from a year earlier. Yet that’s the period when home prices in Sydney and Melbourne roared back to life.
‘All this at a time when Sydney and Melbourne housing is back on a tear: up 5.3% and 6%, respectively, since bottoming in May. For the RBA, it’s the worst of both worlds: buyers forced to take out huge mortgages to get on the property ladder, putting future financial stability at risk, but with no associated jump in housing construction that would buttress the economy.’1
Bloomberg makes a solid point. Something local investors should note.
They are looking for a correlation in housing-related stocks to match the ‘surge’ in local property prices.
Essentially, they are looking for proof it’s an economic rebound, and not a credit-fuelled price surge.
See, the housing price gains in Sydney and Melbourne were phenomenal in a short space of time. With Sydney jumping 75% and Melbourne rising 58% from 2012 to 2017.
Those sort of gains inside five years for housing isn’t normal. And perhaps due to watching their own subprime crisis unfold, our price gains set off alarms, rather than enthusiasm for outsiders.
Of course, don’t tell that to us Aussies though.
We need to sleep in cars to make sure we can buy in…
A plague o’ both your houses
If we move over to the Australian Financial Review this morning, we see an entirely different sentiment splashed across the website.
That is those rushing in…and perhaps those that can’t get out.
There’s no denying it, house prices in Australia’s two biggest cities have been increasing.
And perhaps this is feeding into the idea that people will ‘miss out’ if they don’t buy now.
That is people are rushing in to make sure that prices don’t climb too far out of their reach.
Check out this headline from the AFR this morning:
Buyers rush in
Source: Australian Financial Review
As the article noted, people were camping out in the latest land release near Geelong, Victoria, writing:
‘A number of buyers including 22-year-old first home buyer Jesse White camped out overnight to ensure they got a slice of of the 94-hectare residential community located 10km from Geelong CBD.’2
The rush in factor isn’t just in Melbourne either.
General Manager Luke Fryer for Metricon Homes in New South Wales noticed that in a particular section of the state, there’s been a 25% increase in first home buyers from June to September.
The thing is, the idea of camping out to buy a plot isn’t sensible investing. It’s speculation.
Then if we move just a little to the right on the AFR web page, we see a completely different headline about housing:
Buyer can’t rush out
Source: Australian Financial Review
In complete contrast we have the people who bought an apartment, and now it’s valued a quarter of a million less:
‘The local buyer, who asked not to be named, bought the apartment for $972,000 in 2015, when the market was booming. It measures about 60 square meters and is on the 64th floor of the 100-storey skyscraper.
‘With settlement due in December, the apartment has been valued (twice) at $725,000, a fall of 25 per cent.’3
Here’s the thing.
The people camping out in Geelong, and the apartment falling almost $250,000 in value, are 80 kilometres apart.
We aren’t comparing a mining town with the plush suburbs of politicians in Canberra. We’re talking about a major city in Melbourne and a coastal town in Victoria roughly an hour’s drive apart.
For never was a story of more woe
Quite frankly, it doesn’t add up.
We have people camping out for a sliver of grass…
…then 80 kms east there are people who couldn’t sell their home for what’s they’ve paid.
We have international outsiders looking for proof that it’s more than a credit-fuelled bubble.
And in between this mash up, are people who’ve given up.
Just 32 days ago, The Guardian wrote that some inner city Sydney residents had given up on the ‘dream’.4
Adding to the utter confusion of the Aussie property market, is our own central bank.
28 days ago, the second guy in charge of the Reserve Bank of Australia told an investment conference that it’s about to face another ‘housing shortage’.
Deputy Governor of the Reserve Bank of Australia, Guy Debelle, said in an investment conference in Sydney last month that:
‘While the increase in supply has finally met the earlier increase in demand, demand will continue to grow given population growth but supply is going to decline. So there is quite likely to be a shortfall again in the foreseeable future.’5
The Australian property market is filled with mixed messages.
Do we hang on and believe the central bank, who have called the economic cycle wrong for the past 10 years?
Do you encourage your kids to camp out, and spend their hard earned on a block of land and hope it goes up?
Do you sell your undervalued apartment and just wear the loss?
Worse still, what if you can’t finance the apartment because of the lower valuation, and can’t sell the apartment, so you’re forced to walk away from the six-figure deposit, as the ‘better’ option?
Here’s the thing.
I expect to see many more stories like all of the above going forward.
Than that of Aussies and a property portfolio
In my past decade of investment writing, I’ve never witnessed such confusion in the property space.
Today’s spectrum of headlines, I believe, is a sneak peak into a confused sector.
Those that believe it will be fine, the believers turned sceptics, and the central bankers that want us to believe once more.
Perhaps the greatest takeaway here, is a preview of the sort of turmoil that is going to grip the Aussie property market into the next decade.
There are hidden problems and vested interests that need to keep the credit-fuelled property growth cycle growing.
I have no doubt the ‘rush’ to buy in now at all costs will spread…
And I have no doubt that many houses across Australia won’t be worth the mortgage they’re attached to…
I highly suspect the RBA will do everything they can to ‘talk up’ Australian property, because of its crucial links to the health of our banking system.
And I highly suspect that the pockets of trouble will be downplayed by the central bank.
We are looking at a lumpy housing market where some areas will be held up as a success story…and that will butt up against the areas that are falling.
What we do know, is that the price of shelter is nothing more than a gamble.
Your future is in the hands of central bankers and the speculators who don’t want to miss out.
Until next time,