The vested interests were out for blood.
By Mark Hansen, Australia, MarketCap:
A visit to Sydney by Jonathan Tepper, of Variant Perceptions, has caused much wailing and gnashing of teeth amongst vested interests in the real estate market. He considers that Australian housing is in a massive bubble, and he expects to see a price decline of 30% to 50%.
Along with John Hempton of Bronte Capital, Tepper toured western parts of Sydney, speaking with mortgage brokers and others. He was then interviewed on the television program, 60 Minutes. He presented considerable evidence that the market is overheated, such as the large percentage (about 50%) of all recent mortgages being interest-only.
One that I like is the “deposit guarantee,” which has become very popular. Instead of a deposit, the prospective purchaser takes out an insurance policy such that the deposit will be paid if the purchaser defaults. What could go wrong!
Well, didn’t Tepper get hammered! The vested interests were out for blood, and that continued over the weekend.
One of Tepper’s observations was questionable practices by mortgage brokers. That certainly got Australia’s biggest mortgage aggregator, Australian Finance Group (“AFG”), agitated. The argument by AFG is that delinquencies are low as is unemployment. Apparently this means Australian real estate is not in bubble territory.
Of course delinquencies and unemployment will be low, until they are not. AFG has around 2,600 mortgage broker members and manages around $100 billion in mortgage finance. A bursting bubble would be a disaster for AFG. As an aside, the Australian Securities and Investments Commission is currently investigating mortgage brokers.
I have written about the Australian housing bubble previously. Read more here and here. This post shows pictures of what $1 million will buy in Sydney. Hint, not very much.
One of the most overpriced suburbs in Sydney at the moment is Kellyville, circled in red below. It is on the far northern outskirts of the city, adjacent to farmland, market gardens and the like.
Image courtesy Google Maps
The image below is part of a new subdivision in Kellyville. You can see a market garden and paddock to the left of frame. Lots similar to these, without a house, are being sold for as much as $750,000. It is hard to understand how someone could pay so much for so little. And so far away – about 38Km from the CBD.
Image courtesy Google Earth
Here is an example with which I am familiar. A house in the Inner West of Sydney was bought by a developer for $1.0 million. He demolished the house and within 7 months built a new house for $0.7 million. It sold at auction for $2.2 million. The family that bought were transferred out of state and resold the property – six months after buying it – for $3.3 million. So from $1.0 million to $3.3 million in about a year. Move along, no bubble here.
Now the thing about bubbles, whether it be tulips or houses, is that they always grow far beyond any rational expectation. Australia is now building huge numbers of apartment towers. It is clear that this new supply will far exceed demand, and yet the building goes on.
The bubble has been deflating for some time in rural and mining communities, and on the outskirts of small cities such as Perth. As Tepper says, this looks like the canary in the coal mine. There will be a trigger for deflation in the cities, such as rising unemployment. But it is not possible to predict what the trigger will be, or when it will occur.
Nonetheless, Tepper’s bet against growth is risky. John Maynard Keynes: “Markets can remain irrational longer than you can remain solvent.”
And now some bad news for real estate. MasterCard’s SpendPulse report tracks retail trade in a number of countries worldwide. The latest report for Australia shows that household retail spending is slowing, and at an increasing rate in recent months. Where MasterCard tracks spending in other countries, a slowdown in spending on household goods is highly correlated with a housing downturn. By Mark Hansen, Australia, MarketCap
It’s “not a question of if but when there will be a mortgage crisis,” Tepper said. And it’s all about the big four Australian banks. So here he is. Read… Signs of Mortgage Meltdown in Australia
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Track NPL numbers very closely and the end will appear. It’s rally all that Bass did back in 2007.
John Maynard Keynes: “Markets can remain irrational longer than you can remain solvent.”
Can’t argue with this one.
We are seating on inflated bubble (not just real estate) of astronomic proportions. It is not going to be pretty when it bursts. The tremor will be felt all across the world, no individual or country will be spared.
What sort of mortgages do they have in Australia?
Do they have the rate fixed for the full term?
These tend to be safer.
In the UK we have time bomb mortgages, where the rate is only fixed for the first two years.
When interest rates rise the time bomb goes off.
The US had a brief flirtation with UK style mortgages that led to 2008.
When the fixed rate comes to an end and interest rates have risen, boom.
Bit misleading to intimate we onky have 2 year mortgages in UK. 2 year offers are only intended to be special deals. Most mortgages on domestic (residential) property are for 15-25 years at variable rates, repayment of capital with interest.
The 2 year mortgage suits borrowers who don’ t mind taking ihigh risk that when tines up they’ll be able to get another special deal or switch to a longer term. Also 2 year mortgages cone with lower arrangenent fees that the banks charge.
In UK too we akso have building societies which are I think unique to UK. Not as many now since they converted to banks they were formed to enable menbers to save (savers) to provide the society with the funds to lend. Now, buikding societies also get funds from rhe wholesale money market.
Also we used ti have interest-only mortgages but they are rarer now. Lending criteria has tightened over the years
Living in Sydney it seems the real estate market is running again since Feb. It dropped about 10% late last year, housing stock then dried up and now buyers are chasing what is available.
Madness to be sure, but it is being stoked by low interest rates and foreign capital. Proximity to asia, ease of entry, clean water and air, good schools, low corruption are the real drivers. I imagine many chinese visit a city like Sydney and see it as paradise compared with Beijing where you need a mask to walk around outside.
Rates are only going lower in Australia and i would also suspect foreign buyers see some protection in the oz dollar given it now trades around 70 c to the USD. In USD,s Sydney property hasnt moved anywhere near as much as people like to assert when calling it grossly overvalued.
In terms of mortgages, most people have a portion fixed for 3 or 5 years, few are interest only and mortgage terms are 30 years.
Having said this..I have been short Australian banks since late last year because no boom goes on forever and i expect to see Chinese authorities tighten up further where it comes to capital fows out of the country.
And when China tightens up… it’s not a suggestion.
Back out China and Aus is in the middle of nowhere- albeit a nice one.
Sorry but Sidney is not in the same class as Vancouver ( we have Chinese money too, and the second largest Chinatown) but it’s cheaper in Vancouver.
You have snow, Ice, Russians, and Americans, with lots of nuclear weapons, in close proximity.
Sydney has sun, beaches, that you can still use in the middle of winter, and lots of friendly, good looking, just dressed, women. Excellent inner harbour fishing.
Sydney wins.
Every time.
Just for you Mark:
Melbourne auction market records best results since last winter
http://www.domain.com.au/news/melbourne-auction-market-records-best-results-since-last-winter-20160227-gn5dbl/
Guess we’ll have to put the bust off in Melbourne for another week……….
Hello Lee
Same here in Toronto Canada, week after week record house prices, but when finally tips over it will turn ugly.
I am against doom and gloom but my brain tells me this is not sustainable because nothing lasts forever especially cheap credits and interest rates.
Lee, housing busts take YEARS to unfold. That’s how long it took during the last housing bust in the US. In some cities, prices toppled in late 2005. The national average peaked in mid-2006 before heading into an epic crash. In San Francisco, home prices peaked in Nov 2007 before crashing.
So this requires some patience. Don’t expect some kind of overnight fireworks.
There are already cities in Australia and Canada where home prices are falling. That’s how it always starts.
:-]
I for one agree. It’s all bullish here, but I don’t think anyone is looking further ahead than 6 months.
We have low government debt [that gets praise, but it’s a complete nonsense] but high private debt. It’s just not sustainable.
Heaven only knows what then!
This is an old cycle.
Your canary, even with all the hype and chinese money, will be, buy to let, Shoe-box Apartments.
The banks will again reduce the % they will lend against them normally down to 60%.
Then new second tier lenders will move in to keep the machine rolling.
These guys http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11499669 and their straw men are in this, Sydney Melbourne, Brisbane, up to the hilt, and have done it many times before.
When it falls over the last highrise developments, sold off plans, dont get built by them. But by whoever buys the project from the liquidators (Again, as was eventually shown last time, these buyers where in fact Straw men, for the original developers). The retail investors/ buyers in the original project get nothing back.
However the implosion will no be so by US standards as the Auckland, Sydney, develop-able land availability, is regulated, to hold up prices. A 20 – 30% price drop will occur in the grossly over priced sectors. Then a short period of stability (18 months 2 years )before they cycle is driven forward by the same sharks again.
There could be a small change in the cycle, as the growing number of inner-city apartments is making outer zones with new houses like “kelleyville” Almost foreign investor (Chinese) only.
Tepper made himself look stupid by claiming 30 – 50% which simply wont happen in those markets lack of market knowledge is what the bubble machine used against him not lack of accurate market behavior prediction’s.
We increased the value of a Large lot on the Remuera rise in Auckland by $ US 1.1 M, In 6 Hours, simply by backing 2 truck’s under the Existing house cutting it in half and taking it away.
“Here is an example with which I am familiar. A house in the Inner West of Sydney was bought by a developer for $1.0 million. He demolished the house and within 7 months built a new house for $0.7 million. It sold at auction for $2.2 million. The family that bought were transferred out of state and resold the property – six months after buying it – for $3.3 million. So from $1.0 million to $3.3 million in about a year. Move along, no bubble here.”
That can happen in Sydney, what sort of view’s did the new house have. Maybe when he sold @ 2.2 he sold light. How much did the re-locators spend on the developing new property, before they sold for 3.3?? not enough information to justify the no bubble comment.
Yes, someday prices will fall and in many places prices will fall more than others. Others will remain stable or increase.
I really get a kick out of some talking head from xyz flying in and coming up with some weirdo statement when they haven’t the least clue about what is going on.
We have a huge pent up demand for housing here. It is based on the simple fact that our population is growing. It is growing for two reasons as I have posted before:
1. Natural growth
2. Immigration
And as I have posted before many of those immigrants are rich.
If and when that population growth stops then demand will fall. In those areas where immigrants have been buying prices will react.
Building approvals fell quite a bit so supply is already falling.
“I really get a kick out of some talking head from xyz flying in and coming up with some weirdo statement when they haven’t the least clue about what is going on”
And there is your classic case of denial from your typically real estate besotted Australian who thinks we are smarter, more savvy and of course…….different.
Just label the ‘talking heads’ as clueless idiots and all is fixed, regardless of their background or expertise.
No problem, move along please, nothing to see here…..
Their claimed background and expertise is not consistent with market history.
50 % does not happen in the ANZAC Property market.
Not even in shoe-box apartments. Which are grossly overpriced, off plans.
The Foreign Expert ( X = unknown quantity, Spurt = drip under pressure) did not do his market research, he simply blurted this is a bubble and will drop by 50%, because I say so.
The Expert deserves to be globally ridiculed, as the Expert did not present Tenable price prediction.
The expert is simply another US good, Aussie going down, Talking head, with a “Promote America” Agenda.
AKA, big mouth, know nothing, yank..
They said that home prices in the US will NEVER go down, that they cannot go down, and they listed all the reasons. And then they crashed, in some markets more than 50%. If it can happen here, it can happen there.
It has happen in the ANZAC states before.
3 times in my Career.
The ANZAC Market does not have the super easy credit (NINJA) that the US did, and still does. So does not blow such HUGE bubbles.
0 – 30 % no problem 40 % in the grossly overvalued off plans market, if it gets really ugly.
NOT 50%.
The top end of town, and the imprudent new “Investment” property’s market IS and will face further correction, as it always does. This is evident in the slowdown of the (Flip) rate. The chinese who have brought are doing what they do in china, sitting on empty property, as they see it as a hard asset outside china.
Another Mainland chinese immigrant family just down the street has brought a good quality property $ 1.2 M, 20 houses up, from the one they live in, and is leaving it vacant. Its what they do.
Which is what skew’s the “Western perception” of the “Ghost city” Issue, in china. And is fueling the Housing shortage in Auckland and Sydney. There are vacant property’s in every good street “NOT FOR SALE”. New chinese ghost issues.
The only banks in the world not to have US sub prime CD’s on their books are not stupid enough to walk themselves in to that situation. in their own market by allowing Overvaluation to expose them as it did before they put on the first shoebox finance % cut, circa 2000.
They have not done yet, what they did last 2 time’s, reduced the available loan % on Shoeboxes.
They dont care if they crash the market by cutting spec shoebox finance, they didnt when they did it last time, and the blame didnt stick. last time.
This 50% guy is Meridith Whitney on munis. got the basic issue, but not the time frame, or the amount correct. On a sensationalist “Murdoch” TV Channel.
Sell that advertising, even if you use pictures of dead baby’s, and especially dead British Royals, to do it.
If this is all hot Chinese money changing hands, then I say good for them. Take the cash and run. Just don’t be the odd one out when the merry-go-round comes to a crashing halt.
The big problem is the Communist Party of China can not just take their money. It can take their passports as well.
Most Chinese buyers tend to be of the absentee landlord type: they pay the house cash, perhaps they make arrangements to pay property taxes and get back to the Heavenly Kingdom.
What use is a $5 million house in Sydney if you are effectively trapped in your own country?
The Chinese behavior resembles, on a far larger scale, that of the Japanese in the 80’s. Remember when Japanese buyers were the most active in SoCal, New York and other premium markets?
Japanese companies and individuals were flush with cash and in many cases drunk with success. One of the most egregious housing bubbles in history was reaching more frenzied heights each and every day. And Japanese hot money started spilling over into other housing markets.
China is still in the grip of a housing bubble larger than Japan’s. It winded down somehow in areas, but in first and second tier cities (prime markets as far as China goes) is still active. Chinese hot money has been spilling all over the world helped, let’s be honest here, by that same Communist Party which turns the other way on its own capital control measures.
In a way this frenzied purchases abroad are the daughters of President Xi’s anticorruption campaign. Chinese businessmen won’t buy a Cadillac once they have the money and then swap it for a BMW when they’ve made more. They’ll save until they have the money to buy a BMW.
Until they have enough money and feel secure enough (usually by building up contacts with local Party officials), Chinese businessmen tend to keep a low profile and then show off they’ve made it big.
The anticorruption campaign has made such outward displays of wealth risky. Unless one is 100% sure of his Party connections, they can lead to a prolonged stay in the laogai: no Chinese business keeps records or even ledgers as we in West intend them and it’s easy for persecutors to find something or manufacture it.
Hence buying a house abroad makes double sense for the Chinese: they store wealth outside of the PBOC power and they have something to show they are successful. A piece of paper saying they just paid $2 million for a small house in Sydney attracts far less attention than a Ferrari and serves the same purpose.
I live in the UK and got off the grid back in 2012, I dumped all my debt and have cash in the bank which I will take out when things start to get spooky. TBH I thought the collapse would have already happened but its hard to call with so much CB activity in the market place.
There will be multiple sovereign defaults and many banks are going to go bust. Big mistake re-inflating the last bubble, they should have let the markets repair themselves and taken our medicine but instead now we have the mother of all bubbles in many asset classes, this is a bubble super nova and many people are going to lose everything they own. I estimate that people here in the UK that have 50% skin in their property probably feel quite safe but they are in the danger zone.
At first I thought the preppers were a bit on the crazy side but now I am not so sure.
Hello to the “Land Down Unda”! Are you listening to the Northern Territories and the commodity rich (iron ore etc.) centers?
These areas have crashed and are going lower. As is their real estate.
Just like another commodity rich country, Canada. The oil province of Alberta is in the initial process of crashing. Throughout the mining, forestry, and attendant service industries, the commodity sectors are about to go into free fall. Real estate will soon follow.
The one saving grace is the relatively low cost of energy for the upcoming farming season. Provided the grains futures don’t pull the rug out from under the farmers feet.
Did you know that in some years more vehicles have been built in Canada than the US?
The most famous example is the Dodge Caravan, spun off to Canada in the early 80’s when Chryco went TU. At that time the only competition was the underpowered VW van.
That plant ran 3 shifts, 24 hours a day for almost 20 years.
Today Canadian plants still get the awards for highest quality.
But both Canada and the US are now under the gun from Mexico and Japan.
I remember reading about a Chinese concept called 6 dog rich. If you were prospering you changed nothing about the way you dressed or lived until you could afford to buy 6 guard dogs to protect you from thieves. Sounds like its still in effect…
I’m not sure what it’s like in the U.S., but the Australian print media would collapse if it wasn’t for the advertising dollars they receive from the Real Estate Industry.
The Real Estate Industry are also major shareholders in our print media so such retaliation against property bears is merciless.
Wow! I’ve heard something like this, but only vaguely, from one of my contributors in Australia, Lindsay David.
This is really an interesting topic. If you can flesh that out with some names and data, including links to sources, and make an article out of it, I would love to post it in the main column.
You can contact me via email (“Contact US” tab in the navigation bar at the top). Thanks!
News Corp. Australia
http://www.newscorpaustralia.com/
http://newscorp.com/business/news-corp-australia/
REA Group Ltd.
https://www.realestate.com.au/
http://www.rea-group.com/
REA Group is majority owned by News Corp. Australia, a subsidiary of News Corp. The group grew from realestate.com.au, Australia’s largest property website with 4.4 million unique browsers each month.
Source:
https://en.wikipedia.org/wiki/REA_Group
News Corp. reported a 56% drop in net income to US$63 million (A$87.52 million) for the three months ended Dec. 31, 2015, from US$143 million in the previous corresponding period.
However, the company’s digital real estate division, which includes earnings from REA Group, grew 28% to US$73 million, compared with US$57 million in the second quarter of last year.
“News Corp is evolving rapidly into a more digital and increasingly global company with a diverse revenue mix that we believe will drive long-term growth in profits and shareholder returns,” said News Corp. Chief Executive Robert Thomson.
“The company is, by most measures, the world’s largest player in digital real estate, a position certainly enhanced by the rapid growth in the US of realtor.com.”
Source:
http://www.smh.com.au/business/media-and-marketing/real-estate-not-enough-to-lift-news-corp-earnings-as-newspapers-cable-lag-20160204-gmluft.html
Fairfax Media
http://www.fairfaxmedia.com.au/
Domain Group
http://www.domain.com.au/
The Fairfax divisions cover:
Domain Group: a digital real estate business containing Domain.com.au, online property portal, APM Pricefinder, a property data business and MyDesktop, a SaaS platform for the real estate sector.
Source:
https://en.wikipedia.org/wiki/Fairfax_Media#Products_and_divisions
the Domain Group has grown from the real-estate portal domain.com.au into Australia’s second largest real-estate marketing business with 90% market penetration, competing directly with REA Group.
Source:
https://en.wikipedia.org/wiki/Domain_Group
Great. Thanks!
Wolf
Try this one for starters.http://www.domain.com.au/group/
Domain is the Real Estate Industry flagship magazine which is a major high quality insert glossy magazine that is enclosed in the Fairfax newspapers. Fairfax owns 2 major Australian Newspapers, The Sydney Morning Herald and Melbourne’s Age Newspaper.
The Domain Real Estate magazine which advertises Real Estate for sale and promotes Real Estate as an investment is almost as big as the newspaper it inserted within.
Will try and find the shareholder connections. I have seen them in end of year Shareholder report statements of past.
RP Data, another flagship investment bible of the Real Estate industry is also part of the mix.
Thanks!
Many Chinese parked their market gains all over the world.
#1 is Vancouver, London, Florida, California, Las Vegas.
Now what?
The craziness in Sydney….
6 whole streets in the Sydney suburb of Frenchs Forest (median price about $1.3m) have joined together to sell the whole area to property developers, with expectations of receiving $3m each.
Australians, esp the white ones, never like to blame themselves for anything. It’s always the foreigners or the migrants. I’ve worked both sides of the Pacific and Americans are non-judgemental angels in comparison.
From what I’ve gathered, foreign investors are not allowed to buy any ole landed property in Australia and they are specifically barred from purchasing on the secondary market. The only avenues open to them (e.g. the dreaded Chinese investors) are: (a) apartment complexes, and (b) primary sale developer-built landed properties. That’s it. Those two types are spruiked energetically throughout Asia via property road shows. The rest of properties (regular residential, rural, semi-rural, resales, etc.) are barred for foreign purchase.
Those old enough will remember similar hysteria around the Japanese buying up “all” of Queensland. And what about the Polish community on Bribie Island? Disgraceful!
If you watch the 60 Minutes segment and want to make a snarky comment about the “races” of people involved, remember that it was a secondary market auction and both the buyer and seller were probably Asian Australians and citizens to boot. But, as everybody knows, and I’ve been told to my face, a coloured Australian citizen isn’t a Real Australian (TM), so we’re ripe to be blamed for all kinds of ills, regardless of how long we’ve been here.
The Australians are stupid for thinking with their greed instead of with their heads (negative gearing is da bomb!), and the Chinese are stupid for falling for the imminent apartment glut and the delusion of a “clean”, “multicultural” Australia. Add the commodities crash, and the ripple effect through the Aussie economy of the housing market deflating (housing is the biggest economic driver/fantasy for most average Australians) and it ain’t going to be pretty.
My bet is a fall of more than 50%. I can’t wait.
You might as well ‘take the slow boat to China’ as that 50% across the board fall isn’t going to happen…………..ok, it might………………when the DJIA hits 4000…………and gold hits $10,000 an ounce
Rules for foreigners buying property here are convoluted, complex, and have all sorts of ‘loopholes’.
Certain visa classes are allowed to buy property while resident in Australia and then must sell it when they leave.
People with PR can buy anything.
Foreigners used to be able to buy vacant land with the requirement that a house be built on the land within a certain period of time – don’t know if that exists anymore.
Rules for companies are another area that is different again.
IIRC property investment used to be one way to satisfy the requirements for business investment visas which could then be used for PR and in turn for the basis of citizenship.
Agricultural/Industrial land – who knows – and all investment in Australia over a certain level by foreigners must be cleared by the FIRB (Foreign Investment Review Board).
And IIRC New Zealanders are not considered foreigners for the above!!
For all of you people that think Australian real estate is going to fall by 50% – guess what – here is the best trade in the world to put your money where your mouth is:
SHORT AUSTRALIAN BANK SHARES.
And by the way big article in the local rag about OVERSUPPLY of apartments in the in the CBD and a shortage of single family houses.
And another shocking stat for all you people who know little about the land down under and Melbourne in particular:
We have over 4 million people here now and our population is expected to double by 2050………..
You are acting like a “big salty”. With some justification.
Even Bloomberg labeled that trade, the “Widow Maker”.
Better watch out:
Real Estate in the USA is a lot more costly than in in Oz:
http://www.zerohedge.com/news/2016-03-12/north-americas-most-expensive-housing-markets