Australian Property Bubble....

[ERICOPOLY]

It appears the average inheritance in Australia is over $501,919.  Here in the US, only $177,000:

 

http://money.cnn.com/2013/12/13/retirement/american-inheritance/index.html?iid=HP_LN

 

I'm sure that is heavily linked to residential property valuation.

[Valuebo]

2 Charts (see attachment) - household borrowing and Aus house prices relative to global

 

 

Thanks for the charts one-foot-hurdles! I'm from Belgium and try to persuade friends and family on a weekly basis that real estate is expensive here. Somehow there rationality goes out the window when it comes to owning a home or even buying it as an investment. Any chance you can link the complete presentations?

[Max Alpha]

Manufacturing is leaving Australia because of the high cost of blue collared wages/minimum wage.

 

They had a 20 year boom with no recessions. Unemployment levels have been extremely low and the mining companies increased demand for labour over the last 10 years especially.

 

If commodity prices drop for any reason what does Australia fall back on? The economy today is reliant on mining, finance (again related to the mining companies and Sydney has been the big beneficary), tourism, manufacturing (Melbourne) and real estate related construction.

 

1) Tourism has been slowing because of the high AUD.

2) Mining has recently started slowing and several projects have been called off due to Chinese demand not being there.

3) House prices are high and personal debt levels are fairly high as well - real estate can't go much further.

4) If mining companies slow down and the demand for capital isn't as high - Sydney would slow down.

5) There aren't many jobs for engineers other than the car companies and mining related stuff in Australia. If the car companies leave and mining slows down their wages will not be rising anytime soon.

 

I wasn't referring to white collared wages as much. If my cost of labour to manufacture is high, I don't see how engineers would have anything to design or build unless you manufacture locally.

 

Unfortunately there is no tolerance for meaningful reform in the Australian political climate, it will take a recession to put these issues back on the table so to speak. 

 

The currency has unfortunately been warped by the QE programs and record low interest rates persisting around the globe. In the long run though (several years away) Australia should cease having such a large interest rate differential with mature economies and a weaker currency should help offset some of the pain as the CapEX spend falls out of the mining sector.

 

The stubborn high iron price has helped mitigate the damage to the economy from the collapse that has occurred in thermal and coking coal prices, gold etc. Iron ore is the one that really has the potential to throw a spanner in the works, fortunately the issue is more one of near-term over supply versus the terminal structural headwinds that face thermal coal.

 

In the long term necessity will force reform upon Australia to help re-balance away from mining. In the medium term though it will take some suffering to create the political will.

 

The exodus of car manufacturers and manufacturing in general is due to a bit of a perfect storm of conditions but it is also largely a self inflicted injury due to the ridiculous state of industrial relations in Australia. Guaranteed annual pay increases for the blue collar work force well above rates of economic growth and huge union intervention in the day to day management of large public companies are not sustainable.

 

The Enterprise Bargaining Agreement's for the workforces of Holden, Ford, and Toyota provided a death sentence for the industry but industrial relations and productivity are dangerous political issues.

 

We also suffer from terrible over-regulation in a number areas. The supply of higher density housing options in our capital cities has been hindered by high development costs due to slow approval processes and red-tape that must be overcome, hence all the somewhat justified talk of under-supply from the real estate spruikers. 

 

This is finally starting to change however, especially in Melbourne and Brisbane where a lot of medium density apartment supply is coming online.

 

Another area where regulation has ruined our cost base is energy. We have the highest electricity prices in the world and also high gas prices and we are huge producers of both.

 

 

[one-foot-hurdles]

2 Charts (see attachment) - household borrowing and Aus house prices relative to global

 

 

Thanks for the charts one-foot-hurdles! I'm from Belgium and try to persuade friends and family on a weekly basis that real estate is expensive here. Somehow there rationality goes out the window when it comes to owning a home or even buying it as an investment. Any chance you can link the complete presentations?

 

Its a similar situation with me, though I’m starting to win over some of my family members.. I keep saying ‘Why put all this money in one house to earn 1-1.5% yield at best when you can be a part owner of Australia’s best supermarkets, shopping centers and airports at 4-6% yield easily?’.

 

I think the fundamental flaw with most folks is 1)they are blind to downside risks (the cliched false-truth - “Buy property, cos it’ll always go up”) 2)They have a predisposition to shun equities because its ‘too risky’ 3)They fail to understand the nature of the 2 major risks they are exposed to -  market risk (property value) and financial risk (mortgage)... but most importantly.. 4)They don’t appreciate what is opportunity cost.

home_prices.pdf

[Valuebo]

Very relatable! Most simply don't understand that taking a mortgage can be a serious risk and that by doing so, you make enormous assumptions about the future, market determined value of your real estate. So you often get young people lending money on 25-30 years, which gives great leverage to their personal net worth and paying a considerable sum of interest, hoping they will somehow be better of in the end, like their parents before them. But of course even those that don't need to take out a mortgage take on tremendous risks as well.

For some reason basic math and rationality fails when it comes to owning a home or RE as an investment. Some sort of risk aversion since the end of the dot-com bubble has made the average Joe even more attached to very tangible things like pure cash on savings accounts or real estate, further boosting an already long bull market in real estate. Most retail investors that you see today in more "untangible" investments like stocks are people that simply haven't lost (much) in the previous busts. Well that is the perception out there. Somehow "owning" a house for 10% with incredible leverage is perceived as less risky than owning productive assets at a reasonable valuation.

 

It's possible that the ultimate fall will be slow and unnoticeable. Maybe 20-40 years of - on average - flat or slowly rising prices that, once you take inflation into account, simply kill the net worth of many who own aggressively now.

 

Thanks for the presentation btw!

[ERICOPOLY]

Australian dollar headed to low 60 cents against USD in 2015:

 

http://www.bloomberg.com/news/2014-02-20/china-s-iron-ore-stockpiles-to-stymie-aussie-rally-insight-says.html?cmpid=yhoo

 

The Australian dollar’s rally this month will be short-lived as demand for the nation’s chief export wanes with China stockpiling record amounts of iron-ore, according to Insight Investment Management Ltd.

[Rabbitisrich]

 

 

Its a similar situation with me, though I’m starting to win over some of my family members.. I keep saying ‘Why put all this money in one house to earn 1-1.5% yield at best when you can be a part owner of Australia’s best supermarkets, shopping centers and airports at 4-6% yield easily?’.

 

 

Not disagree with your major points, but you also have to consider the implicit rent that the householder is paying to the landlorder. Plus there are significant non-pecuniary benefits to owning your home, and customizing it just so, and finding a niche in a community.

[one-foot-hurdles]

 

 

Its a similar situation with me, though I’m starting to win over some of my family members.. I keep saying ‘Why put all this money in one house to earn 1-1.5% yield at best when you can be a part owner of Australia’s best supermarkets, shopping centers and airports at 4-6% yield easily?’.

 

 

Not disagree with your major points, but you also have to consider the implicit rent that the householder is paying to the landlorder. Plus there are significant non-pecuniary benefits to owning your home, and customizing it just so, and finding a niche in a community.

Of course it goes without saying that any asset you own will provide you with unique benefits. The question one needs to ask is at what price are you paying to enjoy those benefits? And more importantly are its cashflows compensating for the costs of ownership. In Australia, buying a property today is a loosing investment proposition, if you're buying to live in then you must consider it as a sunk cost and ensure u're gearing is prudent and optimal from a tax perspective, thats it. And as an investment property, well you're basically taking a leveraged position on an overpriced asset with negative cashflows (low yield-managing costs-interest) and you dont get to enjoy any of the benefits you mentioned.