The rot at the heart of Australia’s housing market.

There’s a scene in The Big Short where Steve Carell’s character is quizzing a stripper about her property finances. There is a bit of a disconnect because at a certain point he shakes his head as if waking from a dream and asks her how many properties she has mortgaged. She answers, “I have five houses … and a condo.”

The line encapsulates the collective madness that consumed America with its rush to acquire housing debt regardless of the cost. The time period was 2007. Almost ten years later we have a new crisis developing in Australia, but this time it’s not strippers representing the demise of small investors, it’s pizza workers:

A FORMER pizza deliveryman has become an unlikely real estate tycoon after buying 13 properties and “semi-retiring” at just 28 to live off his rental income.

Western Sydney resident Tony Fleming said he decided to hang up his apron at Domino’s Pizza earlier this month after the gross rental income on his property investments grew to more than $130,000 a year.

I’ve bolded the word ‘buying’ because that word is the key to this sorry business. He may have purchased the properties but he doesn’t own them. The banks own them and the Australian banks are starting to get very nervous:

Behind the scenes an incredible drama is taking place in the Australian apartment market as a wide variety of people and organisations try to avoid a meltdown.

During the last week or so I have had the privilege of looking at some of what is happening behind the scenes. We are engaged in a high-stakes game that has never before been played in Australia.

To summarize the article, Australian property developers have been taking advantage of Chinese investors wanting to get money out of China for some time now. This surge of foreign ownership has artificially inflated prices and has led to an extraordinary apartment building spree in major cities. Melbourne and Brisbane are particularly exposed to any withdrawal of this investment money.

Now Australian banks are becoming extremely concerned at their exposure to Chinese money due to several factors but namely that the Chinese government is tightening the screws on money leaving their country. Now the banks are attempting to tie down their lending but it may well be too late as financial analysts have forecast that settlement failures from Chinese investment will be between $1 and $1.5 Billion per month for the next 12 months at least. But it gets worse.

Those are only the foreign investors. Australians attempting to purchase property have had to compete with this wall of foreign money which has artificially pushed up the price of apartments. Adding further complexity to the situation, once an apartment has been purchased by an Australian based investor that property can no longer be purchased by overseas Chinese due to foreign ownership rules. So the developers can’t run around off-loading to local buyers because the inflated price will never be recuperated.

Once apartments become Australian-owned, at least in Melbourne, they are worth much less because the local price is less than the overseas price.

However unsuspecting locals are still being “conned” into paying the “overseas” price.

Got that? Apparently there is an overseas price and a local price. That this sort of drivel can be confidently stated by the property writer for The Australian is testament to just how deep the fraud has penetrated. And which agency has sounded the warning blast that all is not well in the Australian property market?

In the worst case scenario a large number of apartment developers go to the wall taking with them many unsecured suppliers. Moody’s is warning that our banks face big potential losses.

Moodys. The same agency that sold its soul before and during the US housing crisis.

If they think that the worst case scenario is a bunch of property developers going to the wall then they are seriously deluded. We have Dimono’s pizza workers buying 13 properties and looking to get into more. I was warned a few months ago to stay well clear of the Australian property market by an investor. His take is that collectively properties are overvalued by over 40%. His view on apartments is much much worse.

Our Reserve Bank has spent the past 25 years doing its utmost to make sure that we didn’t suffer any recessions. Small recessions that would have cleansed the market of weakness and allowed new businesses to spring fresh from fertile ground were stymied by the banks manipulation of the market. Australia has not suffered any form of recession since 1992. We’re going to get a big one and it will be long and it will be ugly. All we need is a fire to light the spark and initiate the panicked run.

But what am I saying? We have pizza workers with 13 properties. It’s just all one big fat party that will go on for ever.

 

7 thoughts on “The rot at the heart of Australia’s housing market.

  1. Excellent post. Australia seems to have set itself up for a property crash even worse than the UK, although both governments would be prepared to go to war rather than see interest rates rise and the “wealthy” home-owning Middle Classes denied their delusion that they are millionaires. The pizza guy owning the houses is the equivalent of Joe Kennedy being given stock tips by the shoe-shine boy just before the crash that ushered in the Great Depression. In the UK we had Tesco checkout girls getting into the buy-to-let market. It’s insane.

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    1. The really crazy thing is how both Australia and the US have backed themselves into the corner with low interest rates. They have so much debt and their meager assets are locked up in areas that will be whacked if interest rates go up. So they’re damned if they do, damned if they don’t.

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  2. It’s all peaches and cream until the margin call comes, and it always does. I have taught my boys that real estate is a suckers’ game. The only reason to ever buy property is if you need it to generate income not associated with owning it. A house to live in is a different matter and there are strict rules on debt and income associated with it. I did enjoy the dotcom bubble in 1998 and 1999 though. I sat down at the table with a couple of thousand and had a great time. Big pots indeed.

    My wife worked for the CFO at a credit union during the last go around. Saving the damn thing was her only job. Reading this and articles here in the US I have to wonder about why people continue to inch towards the abyss.

    I love being retired. I retired a few years ago at the age of 52. I still work per se, the difference being is that I like the people I’m doing work for.

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      1. Yeah, I’ve heard about this new rule. However, it’s just a band-aid on a gaping wound. The major damage has already been done and they don’t want to take their medicine.

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