Australian Property Bubble
The housing bubble or lack thereof seems to be a contentious issue here in Australia, although not to outsiders looking in. In 2015 the bubble is reaching a peak in Sydney and Melbourne and its drivers are clearly Chinese investment, negative gearing and super tax breaks and a rampant media holding onto its last great stream of advertising revenue.
The press likes to point out that the other capital cities are not part of this bubble but that is because they have peaked and are now already heading down. The fact that Perth, Darwin, Brisbane and Adelaide are at the coal face of the mining bust might give you a hint as to why they are ahead of the curve here.
"The locals don't get it" stated one returned expat made to feel like a heretic when questioning the logic of 'the market'. "I am not a bear. I am a rational person who has lived in various countries around the world and long enough to see a number of property bubbles and crashes in my day. And the prices people are paying for an average house with a 30 year mortgage in 'Dullsville', Western Sydney are simply incredible."
This Australian property bubble is an investor (local and foreign) driven market. It has nothing to do with rarity or demand for housing. Almost without exception all rented houses in Sydney and Melbourne are a loss making proposition with the need for greater and greater capital gains to keep the bubble going. This market has far overshot what is normal for any property market and will correct and take a lot of investors down with it.
A recent Buxton Real Estate report that estimated 1 in 3 houses in Melbourne in 2014 were sold to overseas buyers (FIRB are you reading this?), 15% and 21% of all property sales in VIC and NSW were to foreigners and a separate ANZ report that said that 60% of all mortgage loan capital in NSW in 2014 went to investors.
Kevin Rudd opened the floodgates to overseas investment and ramped up immigration to allow us to side step the GFC and he did a great job. But this has had the negative effect of giving Australians a sense that they are bullet proof and that property will go up forever and in a straight line. Anyone who was around in property in 1990-94 would know investors who went to the wall in that crash. This is not a new idea.
This is clearly not local demand and supply for housing at work in 2015. This is a once in a lifetime bubble caused by low interest rates, negative gearing and super investment tax break laws, massive Chinese investment and TV and newspaper propaganda whose biggest advertisers are real estate agents and property developers.
This land shortage/ scarcity argument was used in every other bubble the world has seen in the past 100 years and to use it in one of the most sparsely populated countries in the world is laughable.
China property has already been falling for a year and it will gain momentum this year. Commodities have already crashed because China is slowing and has overbuilt and the economic effects will lag about a year before this really hits home in Sydney and Melbourne.
The only unknown quantity is the illegal buying of pre-established homes by Chinese buyers which according to many real estate agents is rampant. However if Japan in the 90s is anything to go by a falling A$ and economic slowdown in their own country will mean a pull out of overseas investors in the next couple of years. Another possibility is that the FIRB might actually grow a set and do their job when the new enforcement regulations kick in on July 1.
Property has either already peaked or will peak in the next quarter or 2. The crash will be huge and will happen in the next 12-18 months. It will begin as a trickle but within 1-3 years will become a flood. If you are an owner occupier sit tight and in 5 years the climb back up will begin again. But if you own 3 investments properties with a 90% LVR and are using negative gearing and betting on further capital gains you may consider cashing in your chips.
The reserve bank will likely cut rates again on May 5 from 2.25% to 2% and then even further before the year is out. Why do you think they are cutting rates in the face of rampant property speculation?
Its because mining is gone, mining services are gone, we lost manufacturing in the high A$ period and retail is stagnating. All that is left in Australia is housing but this insane game of pass the parcel or selling our future to non Australians will eventually come to an end. Most likely 2016 and 2017 will see the biggest crunch when there is a realization that it is over and a mad rush for the exit. Until then the music is still playing, at least in Sydney and Melbourne.
