Will the Australian housing bubble burst?
Disclaimer - this is just my opinion and opinions of investors/economist I follow!
Every bubble bursts. Everyone one. If people think the good times are going to continue in Australia, you should think again!
Before we get to Australia however, I think we should focus on China…
China has enjoyed incredible prosperity over the past few decades. Today, consumer spending is booming, the property market is roaring and the tech giants are dominating.
When we look closer at China’s debt figures and thing do not look so rosy.
China’s corporate debt has also boomed during these years, meaning that this roaring economist is based on the borrowing of money. It’s not real! (for reasons which I won’t go into, but look up nonperforming loans for some insight)
And things will eventually catch up!
How Does This Affect Australian Property?
With excess captial, the Chinese have been diversifying their investments over the years.
One of their targets has been Australian property.
Australia is geographically close, it’s wealthy, it welcomes foreign capital and it’s property market has boomed in recent years.
In the beginning these investments were probably welcome. However, as Chinese capital coffers have begin to buildup, the amount of property the chinese have been buying has been rapidly increasing.
Between 2012-2013, the Chinese invested a staggering $5 bn. in real estate - up a staggering 42%!!!
In 2017 almost one in four homes is purchased by a Chinese buyer, according to a Credit Suisse analyst.
Those figures are somewhat unsettling…
So we have established that the Chinese playing a leading role in the Australian property market. If the Chinese were to suddenly pull money from Australian property, things would not end well.
But things get a little more unsettling.
Australia’s Property Market Is A Leading Driver For The Economy
In 2015, Annual Financial Review reported that property was Australia’s biggest industry.
The industry constituted 11.5% GDP, contributing almost $182 bn. to the economy!
This is now very familiar territory. Lets look at another country with a property crash - Ireland - to compare notes.
Since 1980, Ireland’s housing prices rose exponentially. During these years the economy roared. After 2000, a large portion of that roaring came from property. At the height of the boom, Property was 10% of Ireland’s GDP!!!
When the 2008 crash decimated global housing prices, the Irish government realised it wasn’t going to get a much of their tax revenue from property, so they needed cash quickly (IMF Bailout)
Australia is now in a similar position. If the Chinese economy tanks, the value of many properties will collapse. When this happens, the Australian economy will suffer. Other people have begun to spot this. Its the reason why hedge funds have begun to bet against Australian property.
It’s worth noting that this is a big if. The chinese economy might be fine.
But when the governor of the central bank of China says that the economy is in serious trouble, but the communist part in China say they are going to address the debt issue later you have to ask yourself if things are really okay?
The Chinese communist party have already shown us that debt is not their property. From 2012, Debt has actually increased from around 180 percent in 2011 to 255.9 percent!]. For the communist party, this debt has made their economy look incredibly strong, why reign things in?!
I can’t predict the future - no one can. If you look at the records of leading institutions in predicting crisis, they always fail…
But when you review what I have said, I think it makes sense to protect yourself against a crash possibly happening!
If you are exposed to the Chinese/Australian economy in any way, I think the risks of not taking action are far greater than taking action.
If you have invested in Australian banking/property stocks, chinese stocks over the past few years, you have likely done very well.
I would get out while you’re ahead!
I would like to end by saying that I am not an economist, I am just an amateur investor who reads a lot. The argument above has mainly been a mash up of arguments from investors I follow and my own opinions…
I am from Ireland, a country which has experienced a property crash first-hand. I can tell you for a fact - the good times never last!!
I will leave you with a simple graphic which sums up this entire post:
Happy New Year!
Note: it’s just occurred to me that the figure for Chinese buyers is small - that’s absolutely correct. But these buyers have been responsible for a very large volume of new purchases on homes.
Credit Suisse analysts:
"We calculate foreigners are buying the equivalent of 26 per cent of the value of new supply in NSW, 17 per cent in Victoria and 8 per cent in Queensland."
Chinese buyers dominate, accounting for 87 per cent of the value of foreign purchases in NSW in the first six months of 2017"
I think these buyers are driving the market and market expectations. Think about the companies in Australia expending to cater to this demand - cement companies, building materials companies and real estate agents. The think about the investors in China who already have property and are buying borrowing to finance more purchases. Then domestic investors/companies increasing their borrowings to catch the boom.
All of these people are cranking up their operations expecting the demand to rise to keep up with seemingly unstoppable demand… all of these groups of people will be dramatically affected. Again, if Australia’s property industry constitutes 11.5% of GDP, they are in trouble! You don’t need to be Warren Buffett to see that. Just look how that ended in Q4 2008 for countries with those numbers in Q4 2007!!! (read: not well)