Australia “a hedge fund gone long residential property”

By Leith van Onselen

Some sage words today from The Australian’s Adam Creighton, who has nicely encapsulated the Australian economy in just three paragraphs:

Regulations that keep Australia’s house prices high and rising have dangerously distorted the economy, which is now highly dependent on rising house prices. Australia has become a hedge fund that has gone very long on residential property. The model is to borrow heavily from foreigners, via the big four Australian banks, who take a cut, and then buy and sell existing dwellings from each other at ever higher prices.

Rising house prices explain everything from the Commonwealth Bank’s latest bumper profit to the dominance of furniture and household supplies in retail sales figures. In a world of anaemic wage growth, policy makers stress the importance of the wealth effect — rising house prices — to keep confidence and consumer spending up.

Building houses and apartments is not investment, it is consumption. They don’t create jobs, they don’t incubate new ideas, or increase productivity. In fact, the homes people are buying are worth relatively little — the quality of construction is in some ways inferior to homes built a century ago. It’s the land that matters, and even more so the regulations that limit how it’s used. Buyers are taking a bet that the political process won’t alter the rules in any way.

Spot on. It is for these reasons that the Turnbull Government will not apply any sensible reforms with regards to housing, for fears of endangering the bubble, and may instead introduce some kind of first home buyer stimulus in the May Budget in the guise of ‘housing affordability’.

[email protected]


  1. A hedge fund which can’t freeze redemptions when our foreign investors want 60% of Australia’s GDP back.

  2. Hedge funds aren’t this crazy. Many hedge funds have been short Australian property (well banks). Only Chinese dama investors are this crazy, and driving others to take stupid risks out of necessity.

    • True, but at least others are starting to catch on. Hopefully this shared opinion will only grow in popularity.

  3. ‘In a world of anaemic wage growth, policy makers stress the importance of the wealth effect — rising house prices — to keep confidence and consumer spending up.’

    Clearly the debt just doesn’t matter.

  4. reusachtigeMEMBER

    Wrong! Australia is just great at property investing and has some of the best looking people in the world. Unless there’s something severely wrong with you, people should be proud!

    • ”and has some of the best looking people in the world”
      and I thought that was the rotating McDonalds/KFC/pizza diet.

  5. It’s becoming more and more obvious that no-one want to implement policies that will actually improve housing affordability because there is only one way we can get from here to affordable housing: significant price falls. No party wants that on their record.

    So instead they will continue to make things worse until the market fixes it for them.

      • I’ll give Labor that, they are proposing something worthwhile. But yeah I doubt they will hold out when it goes to sh*t. The whining from people who have staked everything on a poorly diversified, highly leveraged, illiquid asset at record prices will be overwhelming.

      • Which was why I was secretly pleased the Coalition got back in. But will it happen in time? Will Abbott force an early election before then? It seems increasingly likely . . .

    • Given that no sane person could take the view that house prices will rise forever, our fearless leaders must be banking on the trend continuing for their intended stay in politics. For if a fall in prices was thought sufficiently likely, would that not motivate them to take corrective action?

      I suppose the other approach is to wing it, and simply blame external factors once prices do start falling. What is happening in WA where prices are supposedly falling? Is the Premier in denial, or blaming others?

      • That’s the part I don’t get either. How do they think this will end.
        Back-filling the bubble with fundamentals would be impossible. Fundamentals are based on real qty’s; people, jobs, building etc. Maybe they genuinely don’t think its a bubble. Bertie Ahern used that as his excuse.

  6. If they do any sort of FHB stimulus, my bet is that it will be something to do with stamp duty e.g. stamp duty discount for FHBs, or allow FHBs to delay stamp duty payments. They might also reintroduce stamp duty exemptions for new builds, or increase the stamp duty threshold so that more apartments and greenfield housing developments are below the threshold.

    Gotta bail out those over-leveraged developers somehow!

    Everything else (apart from the NG and CGT changes) is unaffordable in the budget – all those ideas about making PPORs deductible, allowing access to superannuation are either too expensive, or politically difficult. They will probably figure that FHBs are now such a low proportion that stamp duty relief for FHBs won’t cost them much, but will bail them out of a problem right now (apartment glut and not economic growth shortage), even if it creates worse budget and housing affordability problems down the track.

    • the stamp duty windfall has been immense for the states – especially when you factor in (for Vic at least) a) increased sales volume b) massive price rises c) effective removal of FHB rebate as few houses are under the threshold anymore and d) the creeping tax bracket. As an example, according to the stamp duty calculator, if i was buying a property for 450k (basically a bungalow in box hill 10 years ago) , the tax is 10,743.60 for FHB, 20,228.00 for non FHB. The same place would cost 1.5 mill now, tax is 86,500 (no FHB discount available). So an EIGHT FOLD INCREASE IN TAX for a FHB in box hill. This process is repeated throughout VIC to a greater or lesser extent. WHAT THE FREAK is the govt doing with this additional cash?

      Does anyone have comparable stamp duty revenue info for VIC 2016 v 2006. I am sure it must have at least tripled, but I am suspecting it is more likely a 5 fold increase.

      • ‘WHAT THE FREAK is the govt doing with this additional cash?’

        Cycle it back through their supporters, with whom they eventually accept positions once they’ve finished their political careers for the ultimate payback. Simple.

      • Good illustration.

        For me, a couple of culprits seem obvious. First up is labour on maintaining parks etc.This is truly epic in scale, they must employ thousands to do this. Its fantastic, but no idea how it can be sustained. Next up, and probably much much bigger – huge budgets for state dept organisations like Vic Roads, Health, Dept of Premier etc. These are voracious consumers of consultancy, IT systems etc.

        The scary thing is that that multipliers when the stamp duty windfall disappears will be epic.

      • My parents paid circa the same for their last bit of land (in Melb outer suburbs) in yr 2001 than the median house stamp duty price is now. circa $45k.

      • Ditto for local council rates, also based on property valuations. Just what have they been spending all that extra money on?

    • What a wonderful thought — inducing ‘youngsters’ to climb onto the housing ladder at the peak of the market. Lambs to the slaughter.

      When you think about it, it’s beyond immoral. And when it goes to sh1t our dear leaders, present and former will say: No one saw this coming …

    • Stamp Duty is a state tax, zero chance.

      Federal Budget options:
      1. FHB grant. Possible, but it would be a limited short term sugar hit and they know it.
      2. Tax deductible interest for FHB. Equally possible, but they’d need to count the cost carefully and put limits on how long the interest can be deducted for, as it would mean a lot of FHB would choose to keep the first place they every bought.

      Off Budget options:
      – Allow FHB to raid their Super funds for a deposit and/or put super directly into housing repayments. Likely, as the Coalition of Idiots can claim to be the saviours of Australia’s youth, without adding to the Federal Budget.

  7. When I was working in Dublin back in 2010, I remember people were saying the main cause of their property crash was the insanity of the Irish buying and selling properties at higher and higher prices amongst themselves. That was the reason why I never bought anything when I came back to Sydney as I could see the same thing happening here. Although I must admit, my timing has been terrible, as the bubble here is still stubbornly intact.

    • The continued ‘pumping up’ of the bubble just means that when the music stops it will be an epic experience. Particularly so as Creighton makes the observation that billions of Dollars have been invested in non productive assets.

      • “billions” ?

        we are at the very least in the ‘hundreds of billions’ range and in all likelihood in the lower end of a trillion.

        [this is fine gif]

    • John, same here mate. I was in Dublin saw the madness, came home and saw the same madness. This bubble is bigger and more epic than anything I’ve seen so far. It will be fireworks when this shit goes off. ;D

      • The real one-two punch will be when, after house prices go down, people’s super nest eggs disappear as the bank-heavy ASX collapses.

        “Events don’t cause bear markets, bear markets cause events”.

      • The whole australian economy has degenerated to financial inbreeding and incest, and the whole shittn works is going down the dunny if property prices drop 😉

      • rj2k000
        February 17, 2017 at 3:16 pm
        The whole australian economy has degenerated to financial inbreeding and incest, and the whole shittn works is going down the dunny if property prices drop ?’

        Good one. If the Australian economy was a building it would be a public toilet dedicated to unsavoury practices like dogging and sodomy.

      • Melbourne and Sydney *were* ok to live in and get around, but are now basically industrial toilets 😉

    • Ireland didn’t have the same warning we did, and the RBA and Australian Government took all the steps possible to kick the can to avoid an Irish/US style meltdown. Nearly a decade on and that can is still rolling…

      Also, while Ireland’s bubble was mainly caused by Irish selling houses to each other at higher and higher prices, in Australia we’ve got prices being set at the margins by (sometimes very dodgy) foreign buyers, and that equity maaaaate is used by vendors to splash out elsewhere. Witness the madness of ex-Sydney boomers selling up and spreading the bubble to NSW coastal areas. Without crazy cashed up foregin buyers this wouldn’t be the case or at least, not nearly as pronounced.

      Anyway, the music has to stop sometime, the question is when?

      • I agree in that Ireland’s bubble was not nearly as mad. The negative gearing rort here, the interest only loans, the fraud that is likely systemic in the banking industry (hence so much resistance to a royal commission), Chinese buyers, generous capital gains discounts vs actual input (work) etc.. Then a totally captured political class with many of their own Investment Properties.

        It really is the only game in town, I think what makes it worse the utter contempt that property owners have for those who can’t get onto the “ladder” I hate that phrase but anyway, this whole it’s just Gen Y’s fault they are unwilling to sacrifice. The cognitive dissonance drives me nuts. I feel like I’m taking crazy pills when people seem to think the current prices are “normal”.

        Throw in a bit of Australian exceptionalism and I want to puke.

  8. So the government is going to do what; play for time? This is not a test match; unless we are talking a timeless test where a team couldn’t play for a draw.

    • They are just hoping that the calamity does not occur on their watch when they are fumbling around pretending to govern the country.

    • The game plan for the LNP is simple and comes in 4 stages;

      (1) Let the ALP champion the housing affordability policies
      (2) Reluctantly implement them in office while keep reminding the electorate that they always believe all is good without any reform
      (3) Let the bubble pop and all the ensuing calamity play its course because you cannot do much once it pops anyway
      (4) Blame the ALP for bursting the bubble and causing the havoc

  9. remember uncle joe had the committed liquidity facility ready to go….300 billion wasn’t it????

    all your money, and your childrens money

  10. “Buyers are taking a bet that the political process won’t alter the rules in any way.”

    They are, and it is a good bet.

    • its a shame for them then that Australia is an open economy that is horribly (wonderfully?) exposed to externalities

  11. The term ‘hedge fund’ implies a degree of sophistication and a deep understanding of a market which is the product of careful analysis.
    Australia is far more like a drunk guy who has bet everything in every bank account, plus the same amount again that he borrowed from a friendly Hells Angel,on the next race at the Dapto dogs, based on a tip he got from a bloke he met for the first time in the back bar five minutes ago, and if he happens to win, the bloke in the bar gave him about a dozen more sure things to get onboard. On the other hand if he loses, the Hells Angel is hanging around to extend some further credit, so he’s got the whole day in front of him.

    • Good analogy, Mr Robert.

      And who’s that we see lifting the tails of those Dapto dogs and dabbing some hot english mustard on their arses to make them run faster? Could it be those nice folk from teh RBA?

  12. It should read – “It doesn’t create the right kind of jobs”. It does create jobs, they’re just short-term and apart of the problem. The government will hardly touch it as it makes them look like they’re managing the economy, the mining, finance & real estate industries are managing the economy and have been for years.

  13. There is a new TV series out called Mary kills people. Its about a doc who Euthanizes people for money.
    Ive watched 2 episodes and i wanted to hang myself after each one.
    And yet its still less depressing than reading about housing affordability in this country.

  14. MediocritasMEMBER

    The point of a hedge fund is that it’s supposed to hedge. If it’s long Australian property, it’s also short Australian property (or a closely correlating asset class), with the quality of the assets in the long position being much higher than the quality of assets in the short position.

    These guys ain’t hedged. It’s pure herd behaviour, more like a tide rising inexorably with the moon.

  15. Dont worry folks. If push comes to shove the Govt will simply reclassify residential property as an approved investment for gaining a permanent residency visa. Buy a $1m house get permanent residency. Just like Spain did. There’s half a billion Chinese buyers right there. This things got years to run yet – you’ll know its over when the Chinese stop buying here because its become too Chinese and all the Australians are living in caravan parks or on the street.

  16. My view is that it’s too late to “fix” this problem they call housing affordability.. The damage has already been done and a massive wealth that belonged to residents of Sydney and Melbourne has been transferred to a few. It’s not that a lousy 2bd apt in which you can barely raise one kid costs north of $1M, it’s that the echo system that existed for the past generation is now gone..It’s a new reality with regards to not just housing, but also schools, traffic, jobs, expenses, you name it, it’s gone in the wrong direction. This is the sad reality that non of the political parties want to talk about because it’ll piss off their constituents.. Politics in this country is in desperate need for renewal.