Post #43 – 10 Myths of the Australian Housing Market

Every time I try to suggest to my family and friends that the Australian housing market is in a bubble – the likes of which no developed Western nation has ever seen before – I’m dismissed as a bit of a ‘crackpot’. Amongst the sneers and chuckles, I’m told that the Australian housing market is ‘different’. Yes, different. What makes it ‘different’ is something nobody can really tell me – but here are a few of the excuses I’ve heard:

ARGUMENT 1: WE’VE GOT BIG HOUSESLargest in the world by some counts. According to our former Treasurer Joe Hockey, this means that Australia has a fundamentally different ‘asset’ class. Here’s exactly what he said:

A lot of Australians put a lot of new capital into their homes – renovate their homes, upgrade their homes – and we have the largest homes on average perhaps in the Western World, and the world more generally. So it’s a very different asset class in Australia than in other jurisdictions.

This means, naturally, we have to pay more for our houses – because they’re bigger than everyone else’s.

DEBUNKED: Hockey is correct in saying that a bigger house costs more than a smaller house. However, it doesn’t excuse why a median house price in Sydney is $1 million, whilst in Houston, a city of comparable size and wealth, it’s about $US146,600. Americans tend to challenge us for the title of most obnoxiously big houses in the Western world, so we’d hope to see some correlation there. But we don’t, the maths just simply doesn’t add up.

ARGUMENT 2: IT’S THE AUSSIE DREAM – The Aussie comedy The Castle isn’t just a funny piss-take of a movie about a man’s house, it taps into our supposed God-given right to own our own home. Australia prides itself on it’s laid-back suburban lifestyle, coupled with its egalitarian and ‘fair go’  ethos. It’s dependent on the idea of private ownership, the fundamental characteristic of capitalism, the bedrock of contemporary society. So in essence, buying a house is your patriotic duty, a signifier of your faith in the market – it is your civic calling. It’s part of our national psyche that you must own a home… at all costs. Thus, the argument goes, they cost a little more. You wanna join the club? You gotta work for it.

DEBUNKED: Yes, Aussies like the idea of owning a home (who wouldn’t?). But the data suggests the glean has come off that lofty goal. This can be for a number of reasons outside the fact that the current generation is practically priced out of the market. A more transient lifestyle and flexible living conditions mean than many Generation X and Y’ers no longer unanimously yearn for the white picket fence with the two car garage. The data backs this up. The rate of households who own their own dwelling dropped from 42 per cent in 1994-95 to 31 per cent in 2011-12. Conversely, one-quarter of all households were renting from a private landlord in 2011-12, up from 18 per cent in 1994-95. Take me for example – I’ve moved 3 times in 4 years, and in a few months I’ll be living overseas. I don’t ever expect to settle in one city. Why would I want to own a house? Like many people my age, it’s simply not a priority anymore. Renting provides my generation flexibility.

Moreover, why would I want to buy a property (either as an investor or owner-occupier) when rents are stagnant? Whilst Sydney was spiralling towards an average of a million bucks for a house, rents were flat. In fact in 2015, they posted their slowest annual growth. Over in Perth and Darwin, rents have plunged significantly. So not only are people not willing or not able to purchase an affordable home anymore, but rents are dropping across the country. The ‘Aussie Dream’ is in the process of being trumped by simple economic fundamentals. Too many investors chasing too little housing stock (and therefore tenants) will drive down rents and eventually undercut their profits.

ARGUMENT 3: WE’VE GOT ‘MICRO-MARKETS’ – This is a term I’ve heard used by Sky News Business commentator Lisa Montgomery. Not quite sure what she means by it (making shit up, perhaps?), but I assume she means that the housing market in Australia isn’t as interrelated as it seems. According to ‘property experts’ like her, the Australian property market is a “diversity of micro-markets, not all markets are like Sydney or Melbourne, and none are like Moranbah”. Sydney and Melbourne are different to Singleton and Mildura, goes the argument. Sure, Sydney and Melbourne might be a little overpriced or ‘frothy’, but the basic fundamentals behind the rest of the market are sound. When she refers to the mining town of Moranbah, she’s arguing that their housing market crash was quarantined to that mining town.

DEBUNKED: To look at the Australian housing market as little disconnected islands of housing markets’ is a deceptive and onerous approach. It’s also constructed on the presumption that one market barely affects another, which simply ignores basic market fundamentals. This argument ignores the role of state or national policies; taxes or incentives such as stamp duty, interest rates, inflation, negative gearing and capital-gains tax (CGT) loopholes; history, attitudes, media, public perceptions and regulation; and also simple things like minimum wages and overall tax policies in affecting the housing market. If, for example, a family is priced out of Sydney – where do they go? Most likely either out to the west of Sydney, the Central Coast or Illawarra – thus driving up the market there. This is really basic stuff.

Furthermore, this perspective totally dismisses the ‘canary in the coal-mine’ that is Moranbah. This is a sleepy little country town in south-west QLD that had a coal-mining boom a few years ago. Prices for existing housing stock went crazy. As the ABC reported,

Even decades-old weatherboard homes were selling for upwards of $600,000 while tenants could expect to pay $1,800 per week for a roof over their heads.

A young couple thought they’d get in on the action back in 2012, and they made such ‘stellar’ investment decisions they were crowned Investors of the Year in Your Investment Property magazine. Today, if this couple sold all their properties, they would still owe $3.5 million to the banks. The couple bought 16 properties all up, pocketing $570,000 a year in rental income. Now, they’re pretty much bankrupt. “But they didn’t diversify their portfolio”, I hear you say, followed by “that’s a one-trick pony mining town – duhh, of course that would happen”. But is it not that hard to apply this reasoning to Australia as a whole? We have no manufacturing base, we lack innovation, we’re too expensive, we are at the arse-end of the world and all we have to offer is our minerals in the ground – which nobody wants anymore. In fact, some senior economists are saying that at least one of the major mining companies (Glencore, Hancock Prospecting, BHP Billiton, Fortescue Metals or Rio Tinto – take your pick) could fold this year, thus sending a massive shock through the Australian economy. What, or who, will pick up the slack? How is this any different to what happened in Moranbah? The only difference is the scale. These are the questions we need to ask ourselves, but pretending any partial collapse in the housing market will be contained by this idea of ‘micro-markets’ is pure folly.

ARGUMENT 4: UNINHABITABLE WASTELAND – Yes, we have heaps of land, but have you not looked at a topographical map of Australia recently? It’s all desert! There are only a few hospitable locales in Australia, and we all want to live there. Thus, the price is driven up. Where there is liveable territory available, land just simply isn’t released quick enough. According to our current Treasurer,

If we have the pent-up supply issues and not being able to respond … then night follows day and prices go up.

DEBUNKED: Yes, I will concede that most of Australia is uninhabitable. That still provides no rationality to the fact that the median house price in Sydney is $1 million. This argument is kind of weak because all countries have ‘badlands’ where nobody (or very few) live. Comparable Western nations such as Canada and the U.S respectively have huge areas of frozen tundra and baking deadly deserts. According to this logic, the U.S has an extra 300 million more people than Australia does, so surely they’re pretty packed into the liveable parts of their country too, right? Depending on which metrics you use, compared to other nations Australia is still very lightly populated. The tiny island of Sumatra, just north of us, houses 55 million+ people – and that island is essentially one big frigg’n volcano! Tokyo has 28 million people in it (with a similar standard of living to us) – more than the whole population of Australia. However, the median price for a home in Tokyo and its surrounding three prefectures is 28 million yen, or around $US270,000. I know you can’t compare apples and oranges, but the whole ‘there’s no land’ argument doesn’t make much sense.

ARGUMENT 5: SO MANY INCENTIVES – See it as a positive or a negative, but there are so many incentives and tax loop-holes for investing in the Australian housing market that it will never catastrophically deflate. There’s too much at stake. Even if the market corrects itself, it’ll bounce back.

DEBUNKED: This is a pretty weak argument, but it is an argument that PM Turnbull and his foot-soldiers are currently making – however not very convincingly. The truth of the matter is that both our unique negative gearing and CGT have been shown to be incapable of keeping housing affordable. In fact, mounting evidence suggests they have actually fuelled the bubble and have essentially evolved the housing market into a modern-day Ponzi scheme.

ARGUMENT 6: HIGH LEVELS OF IMMIGRATION – Because we’re the greatest country in the world, everybody wants to live here (I’m assuming that’s why we have to systematically torture and imprison people in Nauru and on Manus Island who try to get here). So many people want to live in Australia it’s driving up the price of everything, including housing. It’s simple economics, more demand for a set asset means the price increases.

DEBUNKED: I’m not going to really debunk this argument, but rather question its current validity. Migration to Australia is slowing at a rapid rate, and we’re not the desirable location we once were. As Daily Reckoning Mat Spasic notes,

Australia’s population growth is slowing, and it’s hurting our economic prospects. On top of slowing migration, birth rates continue to fall, adding to the pressures on the economy. That leaves us facing a future of fewer consumers, fewer taxpayers, and fewer opportunities for growth.

Again, the Ponzi scheme nature of our housing market has caught itself in a vicious loop where we actually need high migration just to keep the housing market stable. Just like the game of musical chairs, once the music stops (and foreigners stop investing in our housing market), someone loses out. That loser will be us, the Australian people. Also, hasn’t the rest of the so-called New World (e.g. NZ, US, Canada) also had high levels of migration over the last two decades too? To argue prices are high in the wake of rapidly slowing migration ignores key social and migratory trends. On the flip-side, to ignore the inflationary characteristic of immigration would be folly, but it certainly doesn’t deserve as much credit as it receives.

ARGUMENT 7: WE HAVE A HOUSING SHORTAGE -Again, demand outstripping supply. Not enough houses, units etc. have been built to house everybody. People keep having kids, who eventually want houses, blah blah blah.

DEBUNKED: This is an argument that is popular amongst politicians, including my clueless local MP Fiona Scott. Even back in 2012 the investment bank Morgan Stanley said we didn’t have a housing shortage. In fact, we have a glut. Then back in 2015 the political-economist Michael Janda noted that…

supply seems to be in decent balance with population growth, and a rapid boost to construction (such as that currently under way) could quickly push it onto the other side of the ledger.

The former News Ltd columnist Callum Pickering also noted in 2015 that,

Australia’s infamous housing shortage is at risk of quickly turning into a housing glut with our residential construction boom set to undermine price growth over the next couple of years.

With population growth slowing and apartment buildings approved at a record rate — it is only a matter of time before capital growth begins to ease.

So although I will concede that there was at one stage a housing shortage in Sydney and Australia as a whole, that argument is becoming increasingly irrelevant. If you live in Sydney, Melbourne or Brisbane you only need to look out your bedroom window and see the high-rise residential towers popping up like daisies to know the shortage is overstated. In fact over the weekend I personally went to one of these new ‘off-the-plan’ high-rises being built in Penrith – they have been advertising for months (full-time salesman on site and everything) and he conceded to me that only 40% have been sold thus far.

ARGUMENT 8: WE HAVE HIGH WAGES & A HIGH STANDARD OF LIVING – We’re some of the richest people in the world. Obviously, the price of our housing is going to reflect this. Also, our economy is going well, inflation is low, unemployment isn’t too high, and we haven’t had a recession in over 25 years. Times are good, and thus the market is expensive – but stable.

DEBUNKED: Australia is currently experiencing it’s lowest wage growth on record. It’s not even really keeping up with inflation. In the job market, just last week the electronic chain-store Dick Smith‘s, the car manufacturer Holden, the quasi-governmental scientific body CSIRO, and the mining company South32 all slashed jobs. As singular events, it’s not too devastating (except if it’s your job that’s just been punted, that is). In normal circumstances, the majority of those losing their jobs would be able to find other jobs. But just within these four examples listed, this is a loss of approximately 3,000 jobs, 400 jobs, 300 jobs and 800 jobs respectively. All in one week! In the case of Dick Smith, consumer spending has slowed markedly in the last few months – those workers are unlikely to find similar work, quite frankly nobody needs them. In the case of Holden, manufacturing has been decimated in this country and is unlikely to ever come back in a big way. The mining sector has fallen off a cliff, with thousands of jobs gone already this year. Add a government hell-bent on gutting the public sector and you have a recipe for some serious job losses in the coming months. The majority of these workers won’t be absorbed back into the market. This means they won’t be able to pay their highly leveraged and world’s largest mortgages. The trend of last week only needs to be repeated a few more times and we’ll have a real crisis on our hands. The global economy is slowing to levels not seen since the GFC, possibly dragging us in to a separate economic crisis beyond our control – high wages and high standards of living don’t usually stick around if you don’t have a job.

ARGUMENT 9: OUR BANKS ARE SENSIBLE & WE HAVE GOOD REGULATION – Some say we have the ‘safest’ banks in the world.  These banks only conduct recourse lending, which makes us ‘different’. When a homebuyer is fully liable for all the debt, they’ll have more incentive to pay off that debt they owe to the bank. Our banks are so smart and safe, goes the old adage, they got through the GFC relatively unscathed. On top of that, we’ve got excellent regulation – none of this sub-prime rubbish that got the Americans into trouble – we’re sensible. Our government has a AAA rating, after all.

DEBUNKED: Worryingly, this is the argument I believe holds least credence. Do you really think we breed a different kind of wanker banker in Australia than they do in the rest of the world? Do you think that the big 4 banks’ (ANZ, Commonwealth Bank, Westpac, NAB) are worth more than all of the Eurozone’s banks – or (more realistically) that their portfolio’s might be somewhat inflated? Do you actually think it was sound regulation and diversified asset sheets that kept our banks afloat? The truth of the matter is it was direct government intervention that helped not only the big 4 banks in the midst of the GFC, but our shadow banking sector too. Shortly after, by the grace of God, China went on one of the biggest stimulus spending projects the world had ever seen. In conjunction with Rudd’s timely domestic spending packages (remember that $900 cheque in the mail?) the banks didn’t have to do a thing – the taxpayer stepped in to indirectly bail them out.

As noted by ANU economist Creina Day,

Australia enjoyed a double bonus during the global financial crisis: the first came from its own fiscal stimulus; the second from the public infrastructure spending of its major trading partner, China, reflected in increased exports. Given the timely implementation of infrastructure projects and a pegged exchange rate, China’s fiscal stimulus was particularly effective in stimulating demand for commodity exports from Australia.

The banks dodged a bullet and got to go on an underserved charm-offensive about how much better they were than their counterparts overseas. The truth behind the numbers is that our Aussie banks are heavily invested in mining iron ore and other minerals (which China has no need for anymore, as their so-called ‘ghost cities‘ can attest to) and the Aussie housing market. They have so much exposure to these two sectors that even a slight downturn in either one will send them insolvent pretty quickly. In fact, according to Lindsay David in his book Boom to Bust,

…the big 4 banks are similarly, and more so, exposed to private sector debt as Lehman Brothers was fifteen months before it went bust on September 15, 2008.

Our banking sector has all it’s eggs in a couple of baskets. It’s balance sheets are predominantly made up of massive mortgages people may never be able to pay off, including an increasing number of risky interest-only loans. They’re not smart or well-regulated. They’re just very lucky and cocky. Both these attributes are going to disappear terribly soon.

ARGUMENT 10: CHINA WILL SAVE US –  They want our minerals, our farm-land, and our penthouses. And they’re more than happy to pay good money for it. Yes, the cashed up Chinese, with their 1 billion+ consumers, will pretty much guarantee that the Australian housing market will never collapse. Whether they are propping up our mining industry, our farming sector, or our cities by consuming high-end goods and investing in our housing stock, the Chinese will essentially guarantee that the housing market is stable forevermore.

DEBUNKED: This argument can be debunked on two different fronts. Firstly, China isn’t gunna save us – in fact they probably can’t even save themselves. Secondly, the Chinese affects the Aussie housing market much less than one would think.

Getting back to the first part, this was always an argument that showed a lacked of understanding about the Chinese economy. As I had written over a year ago, China was going to be experiencing some pretty big problems sometime soon. Official margin loans in China’s mainland market have fallen 49%, with the Shanghai stock exchange dropping 6.4% just this past Friday (after heavy falls for about 6 months now). This sharp downturn will start impacting on the ‘real’ Chinese economy in the coming months, with many cash-strapped Chinese selling off their Aussie real estate to help shore up their portfolio’s back home. You can already see the decline in Chinese factory activity, overseas demand for goods and also export orders. The Chinese economy is not in good shape, so expect to see a further stuttering of growth coupled with a flight of capital back to the Chinese mainland.

Back to the second point, I think this is a case of Australia doing something it does well – being racist. According to Business Insider Australia, Chinese investors only make up 2% of all real estate transactions in Australia. It’s fun to blame the Chinese and the ‘yellow peril’, but this argument doesn’t hold much merit. The cold-hard fact is, if we are in the midst of what some are referring to as “the biggest property bubble that has ever existed in the history of modern civilisation” – blaming the Chinese ain’t gunna help us.

If you want to find a scapegoat, here they are – the mortgage brokers, the real estate agents, the banks, the regulators, the majority of Australian economists and talking heads, the media, the government, and last but not least – ourselves. We thought we were ‘different’. Sadly, we’re all going to find out how much we’re not.

 

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