There are some serious kinks in Australia’s economic chain
By Lindsay David, Australia, founder of LF Economics:
Regardless of what side of the economic fence you sit on, there is no doubt Australia faces some serious economic challenges coming into 2016. From the auto industry, to the predictable crash of the spot price of iron ore, to the most overvalued housing market in the world, there are some serious kinks in Australia’s economic chain.
From my point of view, we will begin to see a significant shift in media attention towards the first pillar of the Australian economy, the financial services sector.
And when I say shift, I mean a deeper dive into the risk profile of our highly leveraged banking system and its dependent relationship with the housing market and vice versa…not to mention bank and insurance regulator APRA and the Reserve Bank of Australia going through more scrutiny as the great Australian Credit & Property Bubble starts to burst and debt in the international wholesale lending market starts to become discriminately scarce for Australian financial institutions.
It has taken far too long for Australia as a whole to realize that house prices in Australia were never rising due to the common supply v. demand theory. This is due to the artificial sums of debt our banking system sloshed to home buyers year after year, and the party is nearing an end.
There is no such thing as a housing shortage and 3% rental returns in the same housing market. This will be realized by most Australians when its unfortunately too late. When it comes to the housing market, Australians got fooled, and unfortunately, will get burned.
Australia has built too many homes for its population, and the risk of emigration and default on the back of increasing job losses is high. Remember, all those residential construction workers need a constant flow of new housing developments to keep their jobs. And from the looks of the movements in the housing market today, there is little evidence there will be any incentive for the residential construction industry to pump out more unneeded housing stock.
The mining sector will continue to struggle into 2016. And unless there is some miracle, we can expect several Iron ore miners to begin to throw the white flag up in the air (alongside increased private jet movements between Canberra and Perth).
China has simply overbuilt, and there is no other country in human history that built as much housing and infrastructure over the last 15 years as China has. This incredible construction binge seems on track to hit rock bottom as we move into 2017. If it happens earlier, this will drive the spot price of Iron Ore to below $20 a metric ton as there will still be too many large players in the iron ore market struggling to stay afloat.
On the back of the challenges facing the three pillars of the Australian economy, there is some good news, albeit small in size. There should be more new Australian startups in the tech, biotech and fintech spaces coming in 2016. This is pleasing to hear and I’m looking forward to checking out the new innovation and technology the next generation of Aussie entrepreneurs that will be brought to the global market. And I look forward to making my small contribution to help facilitate it.
I wish you all a very Happy New year. By Lindsay David, founder of LF Economics
Those few warning of a housing crash are tarred as “scaremongers.” And this is now playing out in Australia. Read… Why Mainstream Economists Deny Housing Bubbles Until After They Implode – Which They ALWAYS Do
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Thanks for the next update in the ongoing ‘housing crash’ scenario.
I was wondering when it would appear.
So too many houses in Australia? I think that the author is confusing too many units/condos in the Sydney/Melbourne CBD area with the real world outside these areas.
The holiday season is here and of course the RE market is dead. It happens every year at this time.
In my little neck of the woods we have one, yes one, house on the market and it was put up for sale a couple of weeks ago.
The last sale was for the house I mentioned in one of my posts. It listed for A$825,000 and sold a couple of days after my post.
Further down in the village houses have been selling and only one RE agency I know of has been having a hard time. Lots of those listings are still on the market.
I wonder if it is the pricing or the type of property. Many are at the top of the range or ‘different’ types of RE: strange shaped blocks, hilly, or the style………….
In other areas we have been very busy at work. My area has been quiet which is nice. Last year it was chaos and mayhem!
The shopping mall near work (CHADSTONE) has also been unusual. For some reason there are still parking spots empty when I was there before Christmas. This was at different times during the day.
Last year cars were lined up waiting to get and there were no spots at all.
After every bull is a bear, this time it’s a nasty bear.
Lee
You can add all the other capitals to Melbourne and Sydney and include any suburb within an hour drives radius. The amount of construction (residential – particularly apartment, and commercial) is staggering.
35 years in the construction industry and I have never seen anything like it.
Who’s financing these constructs. Answer collective pools of mum and dad self managed super funds, many of which are leveraged with debt plus highly leveraged speculators.
Who’s going to lease them out to provide the returns. Answer. No one knows because there’s plenty of existing stock in the suburbs and industrial parks that are and remain ‘tennantless’.
The number of existing industrial parks festooned with For Lease signs is staggering.
Syrian refugees
Lindsay,
I have a genuine respect for your opinions and no doubt, you are one of the very few that understands the dire straits that Australia is in.
Steve Keen, a well respected economist attempted to pick the top of the housing bubble and famously failed.
The point I’m trying to make is simple. Human stupidity is hard to predict and I won’t be the least surprised if the madness in our housing market continues for a little while yet.
I am of the view that the whole economy will tank.
It’s deflating already and what with demographic pressure only getting worse there is no end in sight. The housing investment by retirees is all based on misinformation and sheep like behaviour. There are many retirees now with the boomers ageing but there are not enough younger cohorts to fill up the spending gap to purchase the units. We have an asian buyer influx but that is likely to end without warning. The whole world is deflating. Even though oil is priced low it is still too high to maintain our energy thirst needed for continuous growth.
Our civilization has plateaued and has been declining slowly since 1971.
A failed housing bubble will be the least of our worries.
Eventually all fiat loans will have to be written off. Debt that cannot be repaid will not be repaid.
“People go mad in herds and only recover their senses slowly, one by one.”
Living out in Broken Hill, there’s plenty of reminders how the housing market works….
$75 Billion has been taken out of the ground here over the course of 130 years. The population is a cool 17,000, off from a peak 35,000. There are more abandoned houses/milkbars than well maintained structures. With lead and zinc to continue to fall in 2016….I don’t see much changing except more people asking me to put them on Disability.
Houses are going for $30,000….no joke. Nice houses are going for $100,000….
Having survived the American housing bust in 2007-2009, here’s my New Years tip for those on the East Coast:
Housing Prices will fall
The Stock market will fall in parallel
It will take ~2 years for prices to bottom
Interest rates will also fall
AUD vs USD will fall
What to do:
-Sell and Rent
-Sell stocks (don’t be fooled that bonds are safe)
-Put your Super in cash
-Don’t be fooled thinking this is only a Western Sydney problem, the pain will also come to the Eastern Neighbourhoods. Just like apartments in Melbs, the pain will extend to houses in prime neighbourhoods.
-When prices come down 20%, and you are eager…wait…buy from a bank auction when it’s repossessed.
-Put your cash in USD or gold….as even the AUD will take a hit in 2016+
Happy New Year!
sorry mate, Broken Hill is far too hot in the summer for any new south welshman & the closest department store is in Adelaide.