Just take two aspirin & have a wee lie down.
Q – Is there a housing bubble?
A – Nationally no, but if we are talking about Sydney, Melbourne & new inner Brisbane apartments, then yes. That’s a YES in case you somehow missed it.
The Sydney & Melbourne property markets have been distorted by an influx of ‘grey’ money coming from China.
Many don’t like to hear this, but it is happening.
No hard statistics, but our groundtruthing is looking worthy of a hefty bet.
And of late, some of this grey has shifted north, along with local superannuation funds looking for cheap property & a longish timeframe to settle, in the hope of double digit price growth.
The Brisbane property market always follows Sydney, right?
Property is so cheap in Brisbane, hey! You can buy two in Brisbane for the price of just one in Sydney.
Bris Vegas here we come.
I have an internal debate several times each month – it’s fun, like talking to an imaginary friend – about whether or not to issue a Missive on a certain topic.
Do I let blast about China? Publish my thoughts about smaller apartments? Call out all those BS artists promising double digit price growth & rental increases?
And this week it’s a yes. Write something about the RBA, FIRB & how we will all be rooned.
We’ll all be rooned
Now, there is nothing wrong with a global property market; nor being in the recovery phase of the property cycle & having closer ties to China – or any of our major trading partners for that matter.
But a housing bubble is a different story.
Property values have almost trebled over the past two decades, whilst wages have not kept pace.
House prices in both Sydney, Melbourne, some parts of Perth & now across inner Brisbane, are often over ten times household earnings.
In many cases, weekly rents also far exceed 30% of a renter’s income.
And things can start getting out of hand when the proportion of investors buying accounts for around half of all residential sales – double the 25% of the housing market made up by private renters. This happens every cycle, but its current trajectory is unsustainable.
Got some doubts?
Well this year alone, housing credit & house prices have climbed at, respectively, more than two & three times the rate of household income growth.
It isn’t the actual rate of credit & price growth that is the problem but its relationship with our ability to afford this inflation.
It’s true that this is mostly a Sydney & Melbourne phenomenon, but we only have a few blunt tools in the back of our ute to temper the times.
And besides, we have never been that good at small, fiddly renovations. Slash & burn is more our style.
The good & the bad
Yes, there are reasons for property demand to be improving – we have record low interest rates; relatively low vacancy rates; high population growth & a strong penchant for owning property.
But on the flip side, we have falling commodity prices; an employment baton change which, for the life of me, I cannot see happening smoothly nor correspondingly; little wage growth; ageing demographics; high debt; an increasingly economically wobbly China & a close to epileptic Europe. Not to mention what may or may not happen with the rest of the world.
For those who only hear good news, you might have missed that Australia’s federal budget last year (2013/14) was close to $50 billion & yet PUP wants to keep the red ink flowing until the early 2020s.
If that happens, then our prized AAA sovereign credit rating could be at risk, especially if something goes wrong with our economy – or that of a major trading partner.
In short, PIIGS might start migrating down under.
But in true ocker fashion – it’s all “she’ll be right mate”…. “nothing to see here”.
Those questioning our “property at all costs” mentality need to take a double dose & retire to bed early.
Keep on moving on. Bid higher at that auction. Buy something tiny & off-plan.
Doesn’t property double in value every 7 years? You cannot lose.
Well, our real wages are falling. Yes, falling, as average earnings rose just 2.3% over the last 12 months – that’s 0.3% lower than inflation.
Unemployment is over 6%, without counting the 700,000-plus on disability pensions.
True, the RBA does predict higher economic growth next year; real wage growth in some distant future & lower employment one day, maybe, but this is predicated on the assumption that nothing economic will go bang or that China’s economy won’t slow down further.
Excuse me for being a sceptic, but trying to predict an economic future, these days, is almost impossible.
I would just love to read or hear one of those talking eco heads say something like, “well frankly we don’t have a bloody clue”.
If you ask me, your guess is as good as mine.
But I do like to guess, so here goes.
- Government will not reign in spending; we (the senate) won’t allow it.
- No workplace reforms, for fear of a union campaign.
- The RBA will continue jawboning & keep interest rates where they are (when looking at the whole of the Australian economy – not just housing in Sydney & Melbourne – they really need to fall).
- Plenty of talks about macro-prudential action – like higher investment LVRs; changes to property taxation or minimum product sizes – but nothing done. Maybe that is a good thing?
- No enforcement by FIRB regarding illegal overseas buying – and it has almost all been illegal in recent years.
And it’s the last point that is the most pertinent right now. If you want to slow down the Sydney, Melbourne & inner Brisbane property markets without stopping the rest of the country, then you must enforce offshore buying laws.
An inert FIRB has done nothing to inhibit the grey economy that exists to get money out of China (ironically, helping them deflate their own housing bubble) & into safer overseas havens like Australia.
It’s true that the Chinese government imposes a $US50,000 a year limit that can be sent out of the country, but cashed-up Chinese bypass this system via personal relationships rather than transparent bank transfers.
Heaps of property – just how much is unknown (but it shouldn’t be) – is being bought this way in Sydney & Melbourne, Perth, & now in Brisbane & starting to again on the Gold Coast.
Also, the Significant Investor Visa is dominated by mainland Chinese who meet the $5million requirement.
They are paying stupid prices for potential development sites (with site values doubling in the past five years), but property economics do not apply here as the SIV is really a fast-tracked qualification for a permanent visa.
Dual nationality is the want, but sadly, too many Chinese just want an Aussie passport as an insurance policy, not a new way of life.
Lower down the chain – much lower, if you ask me – is another sheltered workshop – property spruikers flogging Chinese investors little high-rise boxes in Sydney, Melbourne & now Brisbane.
Entire high-rise buildings are financed, built & sold for the Chinese market, with local buyers & developers rendered irrelevant. Small, one-bedroom dogboxes are the norm. The more the merrier. How divine, indeed!
And all of this should be illegal. If only FIRB would enforce the law!
All of this illicit activity is creating a demand that would not otherwise exist.
Well at nowhere near the levels that it is increasing spruiked. Quarterly newspaper lift-outs about Australia’s sudden urge to live on top of each other, I mean come on.
And this, coupled with local superannuation investors – many of whom appear to have been sold a pup – has created valuations that are dangerously detached from average weekly earnings & sustainable owner-resident demand.
But then again, it is Australia mate; stop all this fussing; she’ll be right; tyranny of distance & all that stuff.
But seriously folks
But seriously, something has to be done. We are now entering some serious hot water.
Here’s another guess.
Nothing will happen until this gets political; economic sense doesn’t seem to cut the mustard around here anymore. The political wedge, for mine, come next federal election, is overseas buying.
But between now & then, I will take Terry’s advice – take a couple of aspirin & have a good lie down.