Oh, Sydney!

ScreenHunter_4462 Oct. 13 11.49

Marvel at it, peeps. In the post-GFC world, this is an increasingly rare sight. An unquestionable and out-of-control investment mania tearing the roof off. Now, if you’re playing it, add a few more facts:

  • the RBA and APRA are going to launch macroprudential tightening, probably by year end, probably targeting investors;
  • the offshore bid isn’t going to stop but it is facing a squeeze with Chinese and local authorities moving and the falling dollar hammering returns;
  • the last time Sydney went nuts like this and authorities sat on it, prices in the outer mortgage belt crashed and the under water mortgagees stalled the move up ladder (of entry level buyers riding the boom then moving up to more expensive properties closer in);
  • but in 2003, that bust was supported by a mining boom that took off simultaneously and supported income growth and employment;
  • this time, income growth across the nation has stalled as the terms of trade crash and mining jobs are about to crash as well as projects are completed.

It’s really that simple. Interest rates are going to fall when the boom goes bust and the dollar will come down much further but that’s not going to be enough support.

Hit the bid, peeps.

Comments

  1. The challenge for our illustrious finance lords is not how to shut it down but how to once again infect the rest of the country with Sydney Disease.

  2. “the RBA and APRA are going to launch macroprudential tightening, probably by year end, probably targeting investors”

    lol

      • MP is coming, and will do diddly w/o rates hikes

        A capex shock and income shock are coming too. But hey, I wanna house! so who cares what’s going on in the rest of the economy.

      • Hey Lorax – here’s an idea all the people that have more than one house give them up to the I wanna house crowd and in return they won’t crash your precious economy that serves … er.. you.

      • @Lorax, I’ve completely made peace with the fact that devastation is the only chance to get a home of my own for an affordable price.

        I’ve tried hard to do the right thing over the last decade (got uni degree, good IT job, lived within means, didn’t take on obscene debt, etc) but if anything I’m further away than I started due to the rampant land price hyperinflation delivered by those who are meant to ensure stability. They have let everyone down, not my wishes.

        Anyway, it is what it is. Time to look forward to new shoots rising from the ashes once we can wake up from this real-life nightmare.

      • Sorry Andy, if you think they will let this private debt mess roll over without a fight you are way way way wrong.

        Here’s some of the things you can expect:

        Lower rates
        More foreign speculation
        More land restrictions
        More gvt pump priming
        Further taxation support.

        TBTF

      • Certainly not expecting it to Aj, exactly for the reasons you state. Not that those reasons can sway me to take on the debt required.

      • How do they reconcile land restrictions with having to employ all the tradies to build dog boxes? And the foreign buying seems as full on as it’s going to get.

        Nice label for us Lorax. Nice of you to want us to be the patsy.

        This is Greens policy? Just as I thought.

        A slow melt might be worse for us, at least we can still, possibly, the way things are going, move to a regional town and set up something decent as a “community”.

        It’s now $1m for a McMansion semi in the north west, for a friggen semi.

      • migtronixMEMBER

        Oh Bluey cmon!!! Lorax NEVER ONCE gave thought to house prices NOT ONCE, but AUDUSD crushed his dreams. Boo-effing-hoo shoulda moved the operation to Thailand like he keeps telling us to up sticks if we want to not be on the landlords whims for the rest of our lives…

      • @ Andy!

        “(got uni degree, good IT job, lived within means, didn’t take on obscene debt, etc)”

        Mate, you work in IT…. I’ve got guys in Mumbai doing what you do for a quarter of the cost. Time to find a better paying job if you want that waterfront home you are dreaming of.

      • How do you make money in a bull market? Close your eyes and buy buy buy. But you’re smarter than that right? My specialty areas in IT have proven to be done terribly or very expensively when offshored – so your assumption is wrong, as is your waterfront rubbish comment – my needs are very simple but there’s not enough starter houses to go around in my target areas without going into very significant debt. Some are happy to do that, some not.

    • reusachtigeMEMBER

      Yeah, I lol’d at that too. No one will do anything to stop smart investors from continuing to make huge profits from THE investment class.

      • Strange Economics

        Bubble benefits banks, property companies, property developer companies ! All major party donor groups satisfied.
        (And the politicians 3 investment apartments each….)
        Its all good.
        Bank of Mum and Dad for deposit for deserving young people…
        the rest can rent…

      • Rent Seeking Missile

        Everyone wins!

        Bubbles are good for Straya.

        They haven’t even cut rates to zero and begun QE yet. We’re just ‘getting set’ for take-off.

        Straya, the best is yet to come. ‘More everything!’

      • “Man says someone else might think about closing the gate a little bit, in a few months time…maybe…after horse bolts. “

    • I want it so vertical it actually curves back towards origin… Take that bitches – it’s so big it has become a singularity – cosmic time rules do not apply anymore.

      • “it’s so big it has become a singularity – cosmic time rules do not apply anymore.”

        Both depressingly true and highly amusing!

  3. At the RE property seminar, I learned there was ‘good’ debt and ‘bad’ debt.

    This is ‘good’ debt, right?

    And, will it improve over time and reach ‘better’ then ‘best and finally, ‘excellent’ status like some wine and classic cars?

    • AlbyManglesMEMBER

      some good advice there, its the only game in town

      apparantly business finance dropped 16% in august, cos business is for morons.

      • Know IdeaMEMBER

        That could just be right. Businesses are, from what I can see, quite correctly deleveraging.

        As to why the consumers (of housing) are leveraging up at the same time is one of the greatest bifurcations of confidence about the economy that I have come across.

  4. but in 2003, that bust was supported by a mining boom that took off simultaneously and supported income growth and employment

    Yeah but, another rainbow is about to kick us in the arse in the form of Chinese stimulus. Didn’t you listen to Joe. What the world will want in 30 years is dirt, lots and lots of dirt.

    We are the chosen people.

    • innocent bystanderMEMBER

      Joe says India now…
      http://thedepression.org.au/?p=20400&cpage=1

      “On the ABC’s “Insiders” this morning Australian Treasurer Joe Hockey has just noted Indian Prime Minister Narendra Modi’s plan for $1 trillion in new infrastructure.

      That’s a big spend, and Australia excels at PPPs, says Mr Hockey, so we should seek to employ our expertise as India rolls out this program of capital works.”

      • “Australia excels at PPPs”

        BWAHAHAHAHAHA good luck getting your money out of India – ever heard of Sovereign Risk Joe.

        What an imbecile.

        .

  5. I still can’t see this house price crash happening (yet)

    Where do you expect all this money to go?

    There will be no forced sales as servicing costs are only going down, and unemployment doesn’t seem to be doing anything much.

    There is no better place to put money for yield, since bonds and cash yield next to nothing

    The sharemarket doesn’t seem particularly appealing.

    Perhaps foreign currency might be a good investment, but what % of Australians are sophisticated enough for that?

    I just don’t see the whole thing falling apart unless interest rates are forced up, or unless there is large increase in unemployment.

    • Australia has the highest unemployment in ALL OF ASIA – including the philipines.

      WE are heading for an unemployment spike.

      Ahh, forget it.

      • Unemployment has barely changed in the last 12 months.

        If it didn’t crash house prices at the beginning of the year, why would it change now?

        Are you expecting a big increase in unemployment?

        Perhaps you could explain why?

        Also, why would you compare Australia to other asian countries; it has very little economic similarity with these countries.
        Much better off comparing the rate to similar economies around the world (eg Europe, US, UK, Canada): it compares favourably.

      • I think you are correct as signing the Trans Pacific Partnership (TPP) and Trade in Services Agreement (TiSA) will accelerate off-shoring, in-sourcing and out-souring of jobs – both White and Blue collar. It is a ‘cost down’ and profoundly stupid model as we are ill suited to compete with Asia on a cost basis. TiSA exposes government services including health to corporates.

        The likely outcome is a collapse in living standards and a decline in the quality of available jobs. Probably along the lines of how the US economy has been hollowed out.

        Neo-conservative policies are of benefit to a narrow few at the top. For everyone else forget it. Given declining incomes and job loss how would you maintain the massive private debt mountain.

      • @Coming

        It isn’t increasing UE that will smash house prices, it is falling house prices that will smash the workforce. At least that has been the experience overseas.

      • @JC I ask you again what will be the catalyst that triggers the falling house prices if not unemployment?

      • @ coming

        The consumer is tapped out.
        All their money is going into over priced housing and they have nothing left as descretionary spending or even disposable income.

        An article on the ABC today said that one in eight people is struggling to pay their power bill. Thats right, the basic utilities are unaffordable for many Australians right now.

        Many people pay their bills and having nothing left over. They don’t go to the shops because they can’t afford to buy anything. They don’t go to cafe’s or the movies or on holiday. In fact they dont travel much at all. Maybe they dont get things fixed that they once would have. The leak doesnt get fixed, the ceiling fan doesnt get replaced…

        End result, businesses dont need as many staff. Sole traders like electricians and plumbers go broke. Cafe’s struggle or close. Unemployment goes up.

        It doesn’t need to a catastrophic event. It could be death by a thousand job cuts. Slow and painful cuts in small business, which the government forgets is the largest employer in the country.

        We are going to choke our own economy on housing debt. Our eyes will be bulging by the time Australia realises what is happening and by then it will be to late.

    • “There is no better place to put money for yield, since bonds and cash yield next to nothing”

      But once you deduct interest payments and inflation there is NO yield

      LOLOL

      • Are you suggesting that people investing the same borrowed money into bonds will not face inflation or interest payments?

        House price growth logically continues as interest rates are still falling (as bond price growth does), as people lock in yield.
        What happens when interest rates begin to rise again is obvious, but we haven’t reached that point in Australia (or the US or Europe). And we have all sorts of shenanigans like negative interest rates etc to look forward to

      • flyingfoxMEMBER

        @Coming

        Are you suggesting that people investing the same borrowed money into bonds will not face inflation or interest payments?

        No one borrows money to invest into bonds (unless you are a bond trader). The reason for that is that bonds are meant to be the safest form of investment. Least risky and therefore not worth borrowing for. Now if any other investment vehicle is yielding less than bonds, what does that tell you?

        It’s hilarious how when housing investment is mentioned, the first thing assumed is that leverage is used to buy the house.

        What if you buy cash? You cash-flow is below bonds and you need CG to come out ahead….

    • You can’t be serious.
      The gross rental yield in Sydney is only 40 basis points above the 10 yr bond yield.
      Yes that’s right – only 40 basis points above the 10 yr bond yield.
      To put it another way: somebody buying bonds only pays a 40 basis point liquidity & risk premium – to buy the most liquid and safest asset in the country. How can you possibly say it makes more sense to buy property for yield vs bonds?
      Anyone buying property for yield (or buying property full stop at the moment) needs their head read.

      • so you expect people to sell their houses into a crash at a huge loss to invest in something that yields slightly less than what they are getting?

        Why on earth would they do that?

        The answer is they wouldn’t unless they were forced to, by losing their main source of income

      • flyingfoxMEMBER

        Why on earth would they do that?

        They might have tooo…. either way, leveraged or not, those that bought in the last couple of years need CG to be ahead..

      • Coming,

        We are talking about new buyers are we not?

        ie. the risk/return of buying current gross rental yields in Sydney property vs the risk/return of buying the current 10 yr yield.

        In terms of why an investor would sell? Why does a speculator sell a stock when it has fallen 10%? Speculators only care about expected future gains/losses.

        By allowing all these speculators into the market there is actually a higher risk of a selling stampede. The market becomes driven by greed and fear.

        the ultimate buy and hold investor in real estate is really a owner occupier. because the landlord/tenant is one and the same person, there is an emotional angle in kicking themselves out.
        In summary the market is more not less susceptible to a crash.

      • @Sweeper,

        Barry had a good piece on what your saying not to long ago.

        http://www.ritholtz.com/blog/2014/10/what-if-you-were-the-worlds-greatest-stock-picker/

        Per his Successful Investors *Adapt (*or go Extinct) post:

        There is lots of wisdom behind recognizing the significance of that one small word: Adapt.

        That is a key insight into our so-called “secret.” The world is constantly changing, and whether its blogging or Twitter or automated software driven planning & management, being able to adapt to change is crucial:

        -Investors had to adapt to the Fed’s program of QE.
        -Traders have to recognize the latest research on psychology
        -Money managers need to recognize the impact of HFT
        -Regulators need to understand how rapidly the world is changing
        -Politicians need to adapt their outmoded ideologies
        -Investors now have to adapt to the end of the Fed’s program of QE.

        It doesn’t matter if you are a Finch on the Galapagos Islands, or a broker-dealer, adaptation remains the key determiner as to whether you will survive or go extinct.

        skippy… I find that list apropos…

  6. Macroprudential policies won’t affect foreign buyers.

    How about a big depreciation of the dollar? That will make … Australian properties cheaper for foreigners … oops …

    • Would you invest into an asset class that is losing money ?

      If I invest at $1 million and it goes up 10% – but currency goes down 30% – how much money have I lost ?

      • I would not invest in an asset if I think its value will go down. But if its value goes down first, then I might invest if I think it will not go down further.

        So if we get a quick fall in the exchange rate, property prices will be cheap for new foreign investors. For existing foreign investors, they will have a taken a hit, but there will be no more downside from the exchange rate.

        The trick is for the exchange rate to hit the bottom quickly.

    • Yep. Asset prices are baked in, they have to be.

      Deflation is a disaster, a total horrible, terrible, unimaginable disaster.
      (esp for asset holders)

      • Well if I take my glib hat off, it’s an interesting one. I would have thought the very wealthy had the most to gain from asset price deflation because they are the big bond holders, so it really does make things cheaper for them.

        After the response by the U.S. and Europe to the Great Recession, it has really started to look like the debt pile is so massive that the risk really is systemic in the eyes of the very rich (I.e. If credit growth freezes over then even the big bond ships start to list).

        So high asset prices and high debt are now intertwined for the status quo. This leads me to my favourite comment that they with destroy the currency before they can let asset prices correct. Especially housing, which has become the collateral for the world.

  7. I think we will see the blue line go vertical and Auction clearance rates hit 99% before this madness subsides.

    Everyone only wants to talk about Realestate and investing in Realestate. It is like a bad episode of the Twighlight Zone.

    In my area EVERYTHING is selling at ridiculous prices, a knockdown is selling for the same price you could have purchased a newish house on a reasonable block of land two years ago.

  8. Meanwhile….. I saw a headline saying that the bogans on The Block struggled to sell their houses. I don’t even know what state they’re in but all I have to say is…. REAP IT f*ckheads!

    The herd is turning…..Get your popcorn.

    • I wish it was like that.
      I dont watch that show, but i think the only issue is how much the contestants earned. The apartments all sold in the million dollar plus range, but the contestant keeps what ever is made above the set reserve price.
      The only ones who made good money where the apartments that sold to a couple with foreign money.

      The others are complaining that the reserve price was set too high so that they only walked away with what they see as a pittance and of course they count that as their income over the last 6 months or so.

      I hope they sue and get rid of this show.

      • flyingfoxMEMBER

        The apartments all sold in the million dollar plus range, but the contestant keeps what ever is made above the set reserve price.
        The only ones who made good money where the apartments that sold to a couple with foreign money.

        If you think those prices were not fixed, think again. How can the RE industry let it’s most prestigious campaign fail?

      • it would seem odd, that if the prices where fixed ahead of time it would require them to know what buyers where prepared to pay.
        If thats the case why would they set the reserve price so high that most of the contestants walk away with a pittance by comparison resulting in bad publicity and public recrimination ?
        Seems counter productive to me for the show.

      • flyingfoxMEMBER

        @AngryMan

        I didn’t say the fixed the upper bound. Just the lower one. The houses sold! At above the reserve.

      • flyingfoxMEMBER

        Heck I wouldn’t be surprised if they purposefully didn’t go with too low of a lower bound. Everyone this week will be thinking the markets turned, no need for MP or rate hikes…

      • @flyingfox

        “If you think those prices were not fixed, think again. How can the RE industry let it’s most prestigious campaign fail?”

        This has to be THE most ridiculus comment I have ever read…. but maybe not surprising from a bunch of whingers that wished they had saved a little harder to buy a house when their parents told them to.

      • flyingfoxMEMBER

        This has to be THE most ridiculus comment I have ever read….

        Your opinion. Couldn’t care less.

        but maybe not surprising from a bunch of whingers that wished they had saved a little harder to buy a house when their parents told them to.

        Righttt……you know everything about me and everyone else posting here right?

  9. My house in Sydney is probably worth 8-900k
    But I’ve had no plans to sell and intend to live in it for at least another 10 years so I haven’t really made any real earn unless I sell and I do see if not a correction then at least a long period of stagnation in Sydney prices.

    But who really knows?

    This current frenzy tempts me to put my place on the market for a very unrealistic 1.2-1.4 million , just to see if some silly foreigner might by it online in a rush to beat KODs closing of the flood gates.

    Mmm What percentage dose the agent take?

    • Do it yourself and save yourself 2.5% – and you won’t have to deal with RE scum.

      It’s not hard to plonk an ad on Realestate.com or Domain.com

  10. I thought the story goes – that the rats flee the burning ship…. not bloody throw themselves into the flames…

  11. The difference this time though is that we have an infinite supply of rich cashed up foreigners to sell more and more too, all being helped along by our unscrupulous FIRE industry. Locals are the peasant class not worth selling the patch of grass where the old backyard dunny used to be. Any specufestor worth his ego will care not two bits for the plight of the poor Aussie local, they are just uneducated scum deserving fully their knockdown to serfdom.

    • China has just announced it intends to prosecute Chinese who have taken money out of the country. They would no doubt imprison family members to force absconders to return.

      Australia will have absolutely no choice but to comply with a raging Beijing.

      The domestic market is screaming blue murder over the whole sale sell off of our nation.

      Sorry – that ship has also come to an abrupt end.

  12. Tassie TomMEMBER

    Off the topic, but H&H, if you haven’t seen “The Project” tonight, you must watch the interview with Nick Xenophon regarding using superannuation to fund one’s first house. It is about 45 minutes into the show – not sure exactly because it’s not up on Channel 10’s version of i-view yet.

    The really disturbing bit was the discussion that the panelists had after the interview. Nobody had any conception that property prices might go down. The bloke (don’t know who he is) sitting next to Carrie was super-enthusiastic – you should hear how he described property. Only Steve Price was apprehensive, but because it would push up property prices and it isn’t the purpose of super, rather than because it would lose people money.

    Depending on the night, between 600,000 and 1,200,000 watch this. These few minutes were BAD for public opinion.

    • That must be the sort of show that fires up bluebird with such low expectations of his fellow citizens.

      No wonder the RBA folk are starting to look a bit pale when ever they appear in public.

      They have suddenly realised that the pollies have no intention of backing them when this zeppelin comes in for a touch down.

      • Rent Seeking Missile

        Yep.

        I think realisation has dawned inside 65 Martin Place. They’ve made a meal of this, and they know it, and Canberra is going to leave them holding the bag.

        And once the protective gloss is gone, I bet the Securency bribery issue will come to the surface once more …

        Time to distribute the ‘motion sickness’ bags around the Bank.

  13. Couldn’t the rise in investor mortgage commitments in pure dollar terms be due to the position in the cycle?

    I recall earlier in the year Macrobusiness talking about dwelling approvals for units rising in Sydney. If those projects were approved and are about to start, they’d be showing a rise in investor commitments now.

    Sydney is going to be like New York and London and other alpha+ cities where the locals are just renters. Fact of life. Every country has a city like this, usually.

    I’ve been browsing Sydney real estate and the prices are not that bad considering there’s no real property tax. A brand new 2 bed / 2 bath unit with amenities on the harbor, 10 mins from the city by train, 10 min by car, and on train line for $850k USD is a bargain, in the ghettos of Brooklyn this gets you a run down rehab unit and you have to pay 2% property tax every year.

    As a New Yorker I look at this and think, it’s really not that bad. Expensive? Of course. But every alpha+ city is expensive!

    London, NY, Hong Kong, Shanghai, Dubai, … do you think locals can afford to buy there with their salary jobs? Nope.