Below is how John Mauldin of the USA sees the Aussie housing situation. Mauldin called the GFC long before it happened.
Now, you could argue that Canada has something the US didn’t: cash-bearing Chinese buyers. Those buyers might make higher interest rates less harmful to home prices. True enough, but other things could discourage prices. We’ll come back to that later.
The chart below shows the crane count for Australia’s four largest cities. As of three months ago, Sydney alone had 350 cranes being used to build high-rise residential properties. That’s more cranes than were deployed in all of North America’s twelve largest cities. Construction is booming in Australia. In fact, the comparison is even more stark. On a per capita basis, Australia has 14.6 times as many residential construction cranes working as North America does.
It gets crazier still. Australians engage in “negative gearing.” For tax reasons, people intentionally buy investment property that produces losses. We do that in the US, too, but we have ways to keep cash flow positive even as properties produce tax losses. In Australia, investors get interest-only loans to buy properties, then rent them for less than the loan payments and absorb the difference. They think they will make it up by selling at a profit.
Josh Steiner describes it this way:
Negative gearing is (and should be) a truly bizarre concept to an investor, but it makes perfect sense to most Australians because home prices have only gone up for the last 25 years. There is a pervasive and genuine belief that they can’t lose.
If this is right (and I’m sure my Australian readers will tell me), it will likely end in disaster. But actually, I get why younger Aussies might think this way. Those under 40 have never seen a recession in their adult lives. They have seen a resource-driven boom as Australia exported staggering quantities of raw materials to China. That incoming cash kept the country afloat even as others sank. It’s easy to think that condition is normal if you’ve never known anything else.
