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.
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.
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.
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