A nation fixated on property speculation

By Martin North, cross-posted from the Digital Finance Analytics blog:

Today we round out the latest survey results, by updating our other segments. The property as investment bug continues to spread.

First, those looking to trade up. Property investment has now overtaken the desire for more space as the main driver to transact. We also see that life style changes and purchases due to job changes are of similar significance. Up traders will be looking the purchase property from down traders, who slightly outnumber them.


The one million households looking to trade down are still motivated first by the desire for greater convenience, but we also see an increasing desire to release capital for retirement and to lock in capital gains. This segment continue to be less bullish on future house price appreciation. Trading down because of unemployment and death of spouse also figure in the results. About 17% of down traders expect to use some or all of the proceeds of sale to facilitate the purchase of an investment property.


Refinancers are still motivated by the desire to reduce monthly mortgage repayments, though the proportion looking to lock in a fixed rate has fallen, on the expectation of lower rates in coming months. About 16% of these households are looking to release capital, thanks to lifting house prices. This capital will flow to purchase specific items like a new car, or holiday, or as a deposit for an investment property. The flow of money into further property assets of course works against the RBA’s desire to lift household spending towards facilitating economic growth.


Finally, as we highlighted before, the number of households who want to buy, but cannot continues to rise. The main barrier is the high price of property. Concern about interest rate rises has fallen in the light of RBA expectations.


This concludes the results from our latest surveys, and we will be incorporating the updated findings in the next edition of the Property Imperative, to be released in April.

Standing back, it is all about investment property. The nation is fixating on property speculation. A logical reaction to low interest rates, high house prices, and the search for yield, maybe. However, not good for long term productive growth. Yet, the recipe to address the underlying problem, greater housing supply, changes to negative gearing, increases in banking capital for housing, and other macroprudential measures seem beyond the powers that be. The current trajectory is deeply flawed, but I fear little will be done. Worst still, further interest rate reductions, would pour more fuel on the fire.

Unconventional Economist
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  1. The RBA is only interested in making sure that our banks don’t fail, but the leadership in the banking fraternity are taking advantage of this, deciding they are too big to fail, and going ahead with huge bets on residential property.
    We all know it will end in tears… but with both the government and the RBA disinterested in reining in the situation, we also know that when it hits the wall, we’ll get the “who could have seen that coming” from all parties.

    Despite the warnings from the crash of 2008, the powers that be will persevere with affluent mindlessness.
    Anyone with a gift for wisdom would not seek the answer there….

  2. Here’s the problem in one sentence:

    “….. households are looking to release capital, thanks to lifting house prices. This capital will flow to purchase specific items like a new car, or holiday, or as a deposit for an investment property. The flow of money into further property assets …. works against the …. lift (in) household spending towards facilitating economic growth.”

    It’s madness! Mark Carnegie appears to be on the right track from what I read in the AFR this morning. But regardless, frittering away ‘wealth’ from gains in property prices comes from one place and one place only …..someone else’s; more debt….for the Nation…and jeopardises the very financial security that many have spent lifetime accumulating. Then what….???.

    • Nothing can/will change until externally focused (export oriented) investment choices significantly out perform housing and replace housing as the go-to investment for both institutions and Aussie mums and Dads.

      Interestingly we saw just this situation wrt mining/lng, yet even in the wake of such an incredible once in a century investment opportunity housing is still the go-to investment for Aussie mums and dads.
      Think of it this way: If even direct exposure to China’s boom was an insufficient force to change Aussie investment/ housing attitudes than what force can possibly achieve this?

      My conclusion: An external force, as in Australia will have change forced upon it.

      If you’ve ever been through a company “re-structuring” you’ll understand that creditors will willingly extend credit way beyond the point of prudent lending, they do this because lending is what they do. Fortunately at some point in time they realize the folly in their ways and refuse to lend even one additional penny without taking direct charge of your most valued assets. I wonder if that’s what’s happening today wrt foreign ownership?

      For a company there are two possible end games:
      – Lenders own everything
      – positive Opex cash flow is restored and ownership is gradually regained
      I wonder if it’s any different for a country?

    • Hope so but doubt it.
      Next slogan after yours “A nation renewed by property price mean reversion”

      • what do you think will happen?
        Do you think our politicians achieved the ultimate dream: total control over the economy?

        even Chinese government is about to lose all control over economy

    • “soon: A nation destroyed by property speculation”

      What I want to know is who takes the blame for this? We all know it has been a collaborative effort, but the punters are going to want a specific target for their rage.

      I don’t imagine the Coalition will want to be in government when this thing blows up. They must see the writing on the wall. Even parts of the mainstream business commentariat are starting to suggest we might be stuffed.

      • It’s simple: They’ll need to check the mirror. The person looking back at them is 100% responsible. Advice or influence can be taken into ones consideration for making a decision but that decision is still theirs. Every week 1000’s of Aussies joyfully transact at bubble prices with bubble debt. It’s an own goal… If it ever happens.

      • “It’s simple: They’ll need to check the mirror. The person looking back at them is 100% responsible.”

        Be realistic Andy, most are not going to do that!

        “If it ever happens.”

        Yeah, there sure are a lot of protections put in place (and a lot of people thrown to the wolves) to prevent a collapse. The problem is this only fuels increasingly stupid and greedy behaviour. If regulators and governments aren’t careful they will lose control of this faster than any of this think.

        Mind you i’ve been predicting a recession/house price falls for almost a decade and a half. That’s a long time to be wrong!

      • I agree most people wouldn’t be able to face that fact… I promise to try and help them with questions such as “well why did you decide to pay/borrow so much?” to help them grow as an adult and also stomp on the disgusting RE/debt cultures we have.

      • Agree Andy! The FIRE sector can offer every “clever” financial scheme under the sun, the Government can make all the leeways for the FIRE sectors scheme but, whoever’s signature is on the form, owns the debt.

        When or if pardon time comes, it will come for the FIRE sector, not the authorised signatory.

      • “I promise to try and help them with questions such as “well why did you decide to pay/borrow so much?”

        That’s all you can do!

      • Hi RobW,
        If enough people are destroyed in the housing crash… including our children and grandchildren, we could end up like the Greeks and choose ‘rage government’ to let everyone know how upset they are.

        The party that wins may have an election platform which could include gaol time for central bankers who are unable to explain their actions….at the very least to the level of common sense.
        That could include:
        1) why did you follow this path after seeing Japan follow that path for 25 years with constant failure?
        2) why did you follow that path after the very clear warning of 2007/2008 when there was a housing crash that destroyed the US and Europe?
        3) household debt to DISPOSABLE income was 150% from 2005 to 2015… Why on earth did you encourage the country to continue on that path when it was 50% of DISPOSABLE income in the previous recession of 1991?
        5)why did you reach for Zero Interest Rate Policy when it was clearly a failure in the rest of the world?

        Could anyone else fill in questions 6) to 10) ?

        I can easily imagine some of our cross bench senators asking those questions now.

      • The banks, the Government, and the Chinese.

        The banks for foreclosing on our worthless homes, the government for not bailing us out and the Chinese for buying the foreclosed homes, also for driving up prices in the first place.

      • Some bloody good questions, Athalone! Although I do have some limited sympathy for the RBA. I mean China is slowing which is hurting, plus central banks and governments around the world are running some pretty wild monetary experiments which are messing with global currencies. Then you have Hockey and friends that seem more than a bit out of their depth. Add decades of bad housing and tax policies into the mix and you have a pretty toxic cocktail!

  3. It’s not beyond the powers that be – what is happening is exactly what they want to happen.

      • I have it on good authority that a humongous “mission accomplished” banner has been commissioned by the RBA and APRA. It is designed to be draped over the Sydney Harbour Bridge and will be large enough to cover most of it. It will be hung out in the coming months, when the median price of a Sydney house reaches $1m, making us all rich.

        Unfortunately, there wasn’t a manufacturer in Australia that had the capability to deliver something like this, so it’s being made in China.

      • Interesting comment Peachy. Looking at an old wallet the other day. Made of the finest kangaroo hide you could imagine. And on the metal zipper, in the tiniest of fonts, was etched: Made in Australia.

  4. It’s a pretty simple thesis

    Interest rates in Australia are almost surely headed lower.

    Houses become cheaper in service terms.

    Tax treatment remains constant.

    House prices go up.

    But it’s not just that. Banks use property as collateral against loans. Try going to your local bank with an idea as good as Uber and see how much funding you can get without a property.

    I would suggest the answer would be zero.

    At the moment the retail banks are glorified building societies.

    So to make a change to our current state would take a monumental shift in tax policy, financial regulation and most importantly, the thought ingrained in the Australian culture that to get rich all you need to do is buy a small patch of dirt in the suburbs.

    I am not sure what seismic event could trip that off. I doubt that even a second coming, an alien invasion or New Zealand winning the cricket world cup would suffice.

    • The global economy will face an externality within the next 18 months due to the US election cycle.

      Guarantee it.

      Cast your mind back to the last change of President – 2008 – yup – here we go again.

      And before that ? 2001

      Go and look at a graph of global recessionary cycles and you can set your watch to Presidential changes.

      Its been the same throughout history – major changes of leaders of dominant hegemonic empires have always caused significant turmoil. Always.

  5. We still have a way to go before ALL net new credit is created entirely by ‘Investors’ however we are on track toward achieveing the goal. Australian housing is ALL about making money… literally… it’s the asset for ALL net NEW credit creation aka money supply

  6. reusachtigeMEMBER

    Smart people know that property investment is like walking down the catwalk. They’re smokin’!!!

    • TheRedEconomistMEMBER

      It would seem that way Reus

      Low rates has led to Sydney becoming flippers central

      Looks to be a full time job of sorts for some ex footballer WAGS


      Bought Dec 2014 for $975,000


      Auction was supposed to be last Saturday (21-03-15)… but sold prior after front page infomercial in local Paper

      I said in an earlier thread someone must have come up with “something over $1.2M as I reckon it would have owed them conservatively $1.18m.” (my Numbers below)

      Sold for $1,320,000


      See approximate numbers below.

      Purchase Cost – $975,000

      Stamp Duty/Legals – $45,000

      Real Estate Fee on Sale – $25,000

      Holding Cost (4 months X 5%) – $15,000

      Full Renovation – $120,000.

      Total Cost $1,180,000

      Sold Price $1,320,000

      Profit $140,000. (between 3 and I guess they would pay some capital gains tax?)

      • If you knew how they might financed the purchase and the time they had taken to compete the renovation I would almost say they hardly would break even.

      • Wasn’t held for 12 months. Full marginal tax rate applies. The intelligence of the renoflipper…

      • TheRedEconomistMEMBER

        If they borrowed $1m in total in Dec 2014 for the purchase and did an interest only loan at say 5%, I would suggest their interest bill would be about $15-$20K.

        I have used that number as my holding cost.

      • Sorry the TheRedEconomist,

        I didn’t see that while reading the post on my phone.

        If that’s the case, just as the gentleman said above, if they hold it for four months then the whole capital gain goes into the taxable income and then taxed at marginal rates, unless they have losses to offset the gains.

        If it was their main residence, then no capital gain tax, but would need a proper mortgage, unless some how they get in there and undertake the renovation during the settlement period.

        My reservations are also on the cost of the renovation, but $1million is not the top end of town any more, so maybe you’re right.

      • That is also true TheRedEconomist,

        But on the flip side, if they are in the business of flipping housing, then the transaction wouldn’t be treated as a Capital receipt, but rather income, which then is subject to GST if it’s over $75K. The House becomes merely trading stock.

        It’s a minefield, tax is a head ache,.

      • Seems like it’s kind of okay if you don’t need the money, just want some spare cash for shoes and hairdos, and a hobby to talk about at footy functions. If you had to live on it could be a different story…

  7. I don’t think this will go much longer chill out – once the carnage really starts to hit the mining areas and bad debts begin to pile up on the banks books – the few interest rate drops we have left will have less and less effect on the wider economy (sure I know it is not about the wider economy but…)

    • This is an important point.

      Unemployment is the wall of inevitability heading our way – however the downgrading of Australia and its banks is another.

      Commodity prices collapses, like the real estate bubble in the US , must be exposing some banks to serious credit issues.

      Shale, tar and fracking energy is also on shaky ground. (Pun intended).

  8. Property has much further to go up – and for much, much longer = another three or four years.

    Interest rates have further to go down, and stay low for very much longer.

    Sustainable growth will accompany the business and consumer confidence turn-arounds, assisted by a helpful impending Budget.

    Our banks are really cheap, as a result.

    Our S&P 200 index is on course to take out the previous highs of 2007 – as has been the case internationally. Why should we be so differently rated. Easy logic.

    Jump on board – don’t fight the trend.

    • “Property has much further to go up – and for much, much longer = another three or four years.”

      Property prices are already starting to fall in Melbourne Eastern suburbs no matter what the “RP Data” says, some suburbs such as Glen Waverley are not due to Chinese buyers, but generally prices are softening.

      • arescarti42MEMBER

        To add, the current boom is almost entirely Sydney and Melbourne, and to a lesser extent, Brisbane.

        Every other capital city is either going no where or experiencing price falls.

    • You say the same thing every day – don’t you get sick of the smell of the cattle yards ?

  9. Last Sunday morning at a family breakfast, my step father’s daughter in law was going on about how she couldn’t find tenants for her one bedroom unit. This is also in the face of lowering the rent. She was still dogmatic though, “property is for the long game, I’ve made 250k worth of capital gain, more then I ever did with shares. But I won’t sell due to CGT.”

    I didn’t even utter a word, I couldn’t be bothered. Her children who both are just about to start high school, were at the table, and no comprehensive thought about the situation was made.

      • That’s near me @cool. My hairdresser and his part time nurse wife (with newborn) bought an original 60’s bv for $800k there recently with a LOT of debt.

      • “My hairdresser and his part time nurse wife (with newborn) bought an original 60’s bv for $800k there recently with a LOT of debt.”

        What?! Why would anyone pay that to live in Cheltenham (even if it was a nice house)?! That can’t be right..

      • Although some of the old blocks of land around Cheltenham were pretty large. Maybe that is a factor? Still..

      • I have a similar reaction RobW… although I use different words 😉
        50% swift nominal mean reversion required and hoped for.

    • “But I won’t sell due to CGT.”

      That says it all. I suspect very few of these specufestors have any exit strategy, they won’t sell at a profit for fear of taxes. However they don’t realise the corollary to that is the must sell at a loss.

      • Yet she is, at least for the tjme being, happy to pay rates and insurance, and possibly a mortgage.

        EDIT: Which is by way of wondering how resolute she would be if the rates billed showed up before a tenant does (not to imply anything about the likelihood of such an event)

      • Mining BoganMEMBER

        You guys still don’t get it. The only way to make money in Oz is by losing it.

        Get your head around that and you’re laughing.

      • MB, you are so right, the point is to get maxtreme tax return, which is basically free money for buying jetskis. How could I forget?

  10. “Our banks are really cheap, as a result”

    No…they are not by historical or global standards. And they are totally driven by record credit expansion to push ROE higher…

    Have you had a good look into bank valuation metrics?

    PS – I am not fighting the trend…actually doing really nicely investing in the tech sector thanks…

  11. “The nation is fixating on property speculation. A logical reaction to low interest rates, high house prices, and the search for yield, maybe”

    It has gone way past that now. the market is now trading on 60 times earnings. Fundamentals are out the window, this is behavioural finance material.

  12. This DFA stuff is very informative. But one analysis I would like to see – who are the top 20% most indebted and what are the income multiples? Owner-occupiers and investors.

    I think there is a very human failing going on here that never seems to be talked about. Theres an assumption the public at large seem to have that, over time, high levels of debt are inflated away so that 10 or 20 years from now, these massive principal loads won’t seem so bad. I think that assumption is absurdly flawed. I am no mathematician, but a quick calc I did showed that at a 2.5% rate of inflation, and assuming same rate of wage growth, over 20 years a given mortgage payment v wage ratio only moved from 40% to 25%. After TWENTY YEARS, its still a significant debt. So the people paying high prices and loading up with debt – they are the weak link in this whole mess.

    With this type of low-growth, low-interest rate scenario, these debts are simply unsustainable. Everyone seems to be assuming at some point they’ll be inflated away. YET IF this were to happen, it would smash the whole thing anyway. We’re right on the precipice here. It seems there’s only two ways out – a huge crash of decades of deflation. (or both).

    • Spot on Dave

      Our parents, or my parents generation had their debts inflated away

      They speak of heroic tales, of eating Spam (canned ham) and paying off their mortgage in four years

      Yet, often forget to mention they put down 50% as a deposit and had wage growth of 7%+, houses were still only 4x earnings at that stage

      Now they are 10x average incomes, wage growth low or non existent, the mind does boggle when you think of how your peers will pay off their loans

      But prices go up they cheer, I say well that is fantastic, but that hurts you when you want to move or upgrade, and they say yeah but my house will be over $1 mil in 5 years, and I say yeah so will the house down the road that you want to upgrade to so unless you are looking at selling up and building a shack in the woods you are no better off

      • Exactly. House price inflation is no good to you unless you stay put and are happy to drain your equity for its wealth effect… OR you want to cash out or move abroad. It certainly does not help you if you’re on the ladder and want to move up.

        Although high interest rates were bad for previous generations, the principal loading was so much lower than it is now.

        There truly is no way out of this mess, we are absolutely stuffed.

    • We can’t have that sort of inflation for many many many reasons and this is why the most likely scenario is that things will fall over as those that bought/upgraded circa 2003 come into retirement.

  13. This boom surprised me but it shouldn’t have

    In Melbourne two years ago the market was completely flat, heading slightly downwards, rates were low and I couldn’t understand why prices weren’t rising

    Around August 2013 the AUD took a hit thanks to the jawbone or Captain Glenn and then the boom started, especially in Glen Waverley, Surrey Hills and Balwyn, the Tsunami of Chinese money hit the market and it hasn’t stopped since

    Now with the AUD even lower it’s common to see 6-7 houses in Glen Waverley selling over $1million each week

    Then you have the other side, the cashed up locals, with rates so low and prices going up combined with negative gearing and the CGT discount they can’t lose, they are invincible

    And y’all can smirk and say when the market crashes they will lose.. well Captain Glenn will ensure they survive the rough times, we have another 9 cuts until QE so there is plenty of powder remaining

    The mugs are the commoners without their own home or just barely making repayments on their 1960s home in Mitcham with the L shaped lounge room because while they sleep more homes have been taken over by the top 10% and foreign buyers

    • I come from a Sydney perspective, rather than your Melbourne one, but I agree this boom should surprise no one.

      The signs have been well and truly visible since at least early 2013.

      The smart money was buying in 2013, interest rates have steadily come down since (should have been no surprise with the US at zero and a very high Australian dollar) and the latest cut in February 2015 has confirmed that low rates are not a short term temporary emergency level.

      I also believe that while large parts of Australia are in difficult economic times, that is not the case in Sydney. People here are doing very well. The Baird government will be returned because of that fact.

  14. Caught the end of some business type programme last night.

    Speakers were talking property – basically interest rates are going down, we’re zero bound – property to remain attractive and financing costs never so good.

    Didn’t see it all so may have covered risks but frankly that didn’t seem to be of concern. They were discussing whether better to buy one city property or divide sum between three or four in regional areas.

    It’s a mania. Propertymania.

    • RE Risks, poppycock that kinda defeatist talk will get you black-balled and banned from every BBQ east of the great divide (or more likely east of Rottnest island). I may not know much else about contemporary Aussie thinking, but that much I can say with certainty.

    • Mining BoganMEMBER

      Mania eh?

      Wonder if it all has something to do with the tightening of mental health spending.

  15. bernard collins

    On channel 7 news last night a dump in beaconsfield parade middle park sold for 2 million over reserve for 4 million dollars thats great speculation by the vendor.
    A knockdown in a great position .

  16. Anyone watch Q&A last night?

    Lady poses question about foreigners snapping up most properties at auctions

    Panel, Lib/Labours response was well we need to encourage investment for our farms and superannuation funds need to be used for this purpose

    The powers of deflection, absolutely brilliant, I was waiting for a response like there are many known knowns and unknown unknowns…

    • Yes I saw it too, but in the defence of those answering the question, the whole show was about rural and agricultural Australia, not about the city folks.

  17. Andrew William

    A property crash of Irish proportions they experienced in 2008 is not far away now. Interestingly everything about the Sydney property bubble mirrors the Irish situation less than 9 months before the crash there – and they were all in denial, from the banks to the buyers. The attitude was we have more people than houses, a shortage of land, a shortage of homes…..and a rental yield of circa 3%, a household debt level lower than Australia has now reached, house prices on similar multiples as Australia, low interest rates….and it could never ever happen there – never ever…..but it did.

    And it will happen here too, and when it does, it will happen quickly and people who bought three years ago will not feel much pain, people who jumped on the speculative property mania ‘gotta to be innit to winnit’ and who have borrowed a million to buy their $1.8 million Mcmansion with tiled pool and jacuzzi……..they along with the leveraged investor….now some 58% of the buying market…they will be hit hard and then some semblance of normality can return to Sydney and normal folk on normal wages can move back to the suburbs they were pushed out of and communities can return.

  18. Whatever Happens .. If this thing Blows Up .. All i don’t want to see is the Goverment Bailing people out. They took on the risk they take on the Pain! .. Its not the Goverments problem , its the person that took out the loan and took the risk!

    Thats the Last thing People like me who have not speculated and not over committed and have been waiting for this insane Ponzi to Pop! ..