Bubbles down under

Having just returned from a couple of weeks in Australia for a friend’s wedding (all the best to the happy couple) I thought it might be worthwhile writing a note on what looks to me to be a bubble in the Australian property market.

On my first night out in Sydney I was fortunate enough to get chatting to a couple of the locals who were out celebrating, one of them having just completed the purchase of her second property. The other, who already has two, thought it totally normal that two girls in their mid 20s – one an interior designer, the other a shop assistant – should be able to do this.

A couple of mornings later, I was reminded of this conversation whilst reading an article that I felt I had seen many times before. The journalist was bemoaning the state of the market – house prices ballooning, first time buyers unable to get on the ladder, demand outstripping supply…..sound familiar?

After the wedding I headed up the coast to a small beach town for a change of scenery. The train journey was made interesting (if a little irritating) by an old lady at the other end of the carriage who must have forgotten to turn her hearing aid on that morning. She spent a good half hour telling a friend and the rest of us in the carriage about her grandson who was playing the property market. Apparently he has accepted an offer on his house and then pulled out in the hope of achieving a higher price twice already, and is considering doing the same again.

Once in my beach town (and gratefully out of earshot) I counted no less than seven estate agents/mortgage brokers in the parade of about 50 shops along the beach front. If I wasn’t already thinking “bubble?” I was now. So on a rare cloudy afternoon I popped into a few banks curious of what mortgages were on offer. Mostly I just picked up the standard leaflets but in the branch of one of Australia’s big 4 banks a very helpful member of staff offered me a seat so we could talk about my “options”. Once the disappointment of not being able to sign me up had passed, she told me how busy they had been and how the majority of people signing on for new deals were opting for variable rate mortgages.

With at least a 20% deposit on a property worth A$250,000 or more, the lowest variable rate one can achieve is 5.79% and 6.49% fixed for a year at this particular bank. Encouragingly there were no deals I could find that were offering an LTV of greater than 95%. However there was a decent amount of literature on re-financing existing deals and suggestions on how this cash could be used. Rather scarily one of these was to invest in the capital markets – and yes, you can trade on margin.

My helpful mortgage advisor also mentioned that a lot of re-financing took place last year when rates were at their lowest for some time. With every passing minute spent talking to her the bubble in my mind’s eye was growing larger.

Mortgage repayments increased by an average of 25% in Sydney in the 4th quarter of 2009, and if the experiences of this mortgage advisor are representative of Australia as a whole, last night’s rate rise from the RBA (of 0.25% to 4%) together with the further anticipated hikes that may be necessary to tame inflation could lead to tough times for mortgage holders further down the road.

19 thoughts on “Bubbles down under

  1. Unfortunately you don't comment on the aspect of the Australian tax system which continues to perpetuate this ‘bubble’ situation – and that is, the generous tax breaks (think ‘negative gearing’) available to taxpayers who purchase investment property – about the only way within the Aussie tax system to legitimately reduce your tax bill, and one which has long been a national pastime, as the correspondent has noticed.

  2. Couldn't agree more.  Australians are obsessed with property speculation.  This has recently been encouraged by the government who have been subsidising first time buyers in lieu of them being able to save a big enough deposit.  Most Aussies genuinely believe that their country is different and not subject to the same constaints as the US, Spain or UK.

  3. I'm currently emigrating down under, and watching GBPAUD with horror.
    I went to Westpac’s borrowing power calculator (http://bit.ly/aOdakY) – and plugged in $5000 and $3000 for monthly net incomes (about $80k and $40k gross pa respectively) over 30 years.

    This gave a borrowing power of $800,000 (!) – over 6.5x joint income.

    If you further go through to calculate the repayment on a 1st time buyer's mortgage the payments are about $4820 – this is before today's interest rate rise has gone through.

    Either way, if the second borrower loses their job, this leaves $180 per month to live on – so if anyone loses their job, or interest rates rise significantly, the mortgage is more or less guaranteed to default.

    Just need to find an Aussie mortgage insurer to short now…

  4. taxloss-  I have heard anecdotally that you can get up to 7.5x if you walk into a bank. I've just returned here from the UK and trust me, people are just as frightenly unconcerned about what's going on as the above post suggests. Prepare to be amazed.

  5. Australia has negative gearing tax advantages for investors which allows deduction against earned incomes – when i lived there people regularly bought a property a year 100% geared to take advantage of the deduction particuarly new builds as they come with a nice depreciation allowance. Better than paying tax.

    Combine this with high levels of immigration and far too generous banks.

    Yes its a bubble but I cannot see it bursting until migration is restricted unlikely with labour govt, negative gearing removed always a possibility but unpopular with voters or the whole commodity thing crashes which seems the most likely given how tightly Oz has hitched its wagon to China.

  6. Aussie living in London who has retained a house in Sydney. It is NOT a housing bubble. There is a chronic shortage of housing because of all the immigration. Even the RBA has acknowledged this. Chinese and other Asian investors are taking advantage of the relaxed foreign investments restrictions to invest too. I note that you said 'with at least a 20% deposit on a property worth A$250,000 or more….' Encouragingly there were no deals I could find that were offering an LTV of greater than 95%.' Aussie banks haven't gone stupid like the US and UK banks lending 100% plus stamp duty plus legal costs during the boom.

  7. Sydney real estate has been like this for as long as I can remember. The price corrections are always small and everyone wants to live by the water or with a larger backyard so between immigration and the death of country towns, there is endless demand. I agree it looks like an unsustainable bubble, but one what timeframe might it crash? I wouldn't be rushing to go short.

  8. Of course its a bubble. As well as the policies outlined earlier (tax deductibility, first home buyer's grant) you also have an oddly tight geographic population distribution (a few, large cities). Immigration' a factor, but mainly because migrants only want to live in Sydney. 

    But as ever, over what timeframe is it going to burst? Anonymous probably has it right by pointing to China, but I don't see that it needs to be a single shock that causes the pop.. what was the single event in the US sub-prime mortgage meltdown?

  9. I went home to Australia over christmas, it was so interesting (and slightly scary) to see the little impact my friends and family felt in terms of the world economic crisis over the last 18 months. There was a real 'what credit crunch?' feeling. Especially obvious with friends working in bars/shops etc who felt almost no impact at all. People seem to be spending more than ever.

    There are obviously an array of reasons for this (many mentioned above), but I think it's partially that the media did not play it up. I wonder how many Australians outside this industry have any real understanding of the weight of the economic crisis.

    They certainly don't seem to have stopped spending money the way the UK public have. It will be interesting to see the repercussions of this going forward, the future will definitely be interesting for the Aussie market.

  10. Of course it will correct and it is a bubble – to think otherwise is naive. The challenge is picking the point of inflexion. The house price income ratio has reached a point where buyers will not be there and there will be a raft of interest rate increases. The crisis in Australia will become one of deleveraging as the little people offload assets in the face of rising interest rates.

  11. US Crashed, UK Crashed, Ireland Crashed, Spain Crashed… but it'll be different in Aust. because…errr.. we have kangaroos!?

  12. Oh, eight times earnings aint a bubble, David Thurtell?

    Those who think population growth/immigration and so-called shortage of supply matters a fig in these mindless bubble times have been listening to real estate agents for far too long.

    We've put $2.4 trillion into real estate in the last ten years of which some $670 billion is in the bubble and will have to be written off – if history is a guide. (Click my blog reference to see the graph).

  13. Rismark median dwelling price for major cities on a rolling 3 month basis was A$470k in May 11.
    It was A$475k in December 10.
    Prices have fallen for 7 out of the last 12 months MoM based on this data.
    It is hardly a large correction, change has been between 0.5% and -0.5% for 10 of of the last 12.  Stagnation in my eyes.

  14. I’m an expat who has lived in AUS for 6 years, we sold a nice house in California when we came down here, got 5 simultaneous offers each more than $100k over asking, booked a $1 million gain in ten years. That house is now worth 35% less, ha ha. Here in Sydney we just sold our house, property is still ridiculously high but small declines have begun to creep in. We sold because we don’t think it’s going higher so is a lousy place to grow capital, and because we could rent an identical house for 40% less per month. AUS can stay overvalued for a long time but will it go up from here in the next five years? Doubt it.

  15. Re the “There is a chronic shortage of housing because of all the immigration”. You just have to look at ireland to see how transient this can be.

  16. One factor contributing to the bubble in Aus housing prices, not mentioned above, is the auction system here. Most houses are sold at auction, rather than by merely posting a price and expecting potential buyers to negotiate it down. The auction creates emotional competition between buyers, who then pay too much.

    As soon as the Asian economies drop into recession, they will emigrate to Australia less, because they will recognize the difficulty of finding employment in a worsening Aussie economy, where everything is outrageously expensive to begin with.

    House prices here will fall gradually, but the fall will continue over many years. In the USA, house prices peaked in 2006. They are still falling. Part of the reason that house prices fall slowly is because a person who is selling is likely to also be a buyer of his next property. While he is worried about his current house falling in price, he is becalmed by knowing that his proximate house is also falling in price. As far as renters go, we know that in this market renting is both cheaper and a more flexible lifestyle than being an owner. (But I really would like to have my own place someday!). Cheers.
      

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