Aussie Property Bubble On A Scale Like No Other

Tyler Durden's picture

Submitted by David Llewellyn-Smith via Acting-Man.com,

Australian property bubble on a scale like no other

Yesterday Citi produced a new index which pinned the Australian property bubble at 16 year highs:

Bubble trouble. Whether we label them bubbles, the Australian economy has experienced a series of developments that potentially could have the economy lurching from boom to bust and back. In recent years these have included:

 

  •  the record run up in commodity prices and subsequent correction;
  •  the associated boom in mining investment and current reversal;
  •  record low bond yields;
  •  the boom in housing construction, specifically apartments, that was spurred by the low interest rates.

 

Housing indicators in the bubble meter are at record highs but interest rates remain at record lows. Typically monetary policy is well into tightening mode at this stage in the housing cycle. A destabilizing housing burst (both in activity and prices) is a clear risk, particularly the longer the upswing runs.

 

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The size of the Australian property bubble is old news. It’s extreme in valuation terms:

 

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Underpinned by world-beating household debt:

 

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And nose-bleed levels of foreign borrowing:

 

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What is less well understood is how such a large and sustained bubble has distorted the Australian political economy.  The bubble has been running for twenty years (which some argue proves it is no such thing) and every time it has been threatened it was saved by luck or a bailout which sold off a little more of Australia’s liberal democracy.

In 2003, the bubble first threatened to burst as the Reserve Bank raised interest rates. But the bubble was rescued by the combined forces of demand side fiscal stimulus for first home buyers in the form of large cash grants, and the arrival the Chinese commodity boom that flooded the economy with people and income. The government of the day learned its lesson and economic reform has been dead ever since!

In 2008, the bubble was jeopardised again when the pipeline of offshore debt froze solid and major Australian banks were rendered insolvent given they could not roll over their enormous foreign debts. The government of the day rode to their rescue with guarantees to all offshore funding, directly bought mortgage backed securities (which it still holds), unleashed the largest proportional fiscal stimulus in the world, doubled the first home buyer grants, opened the spigots on foreign investor buying, and other measures. Almost all of it violated existing financial sector architecture and governance and virtually none of it has been wound back. No housing market in the world enjoyed such wholesale and limitless support.

In 2011, the bubble again faltered when the China commodity boom returned and raised interest rates. But, when threatened, the bubble was bailed out, this time by a central bank that desperately cut interest rates to all-time lows because it had over-estimated the durability of the commodities boom, and an influx of Chinese capital that was allowed to price-out local buyers with barely a word of protest from regulatory authorities.

While those three saves of the bubble have been widely admired as solid Keynesian policy-making, and have allowed Australia to claim a “miracle” economic expansion of 25 years, they have also transformed its economy and political economy.

The Australian economy is now structurally uncompetitive as capital inflows persistently keep its currency too high, usually chasing land prices that ensure input costs are amazingly inflated as well. Unsurprisingly, Australian manufacturing’s share of outlook has collapsed to 5.8% of GDP (even before the exit of car manufacturing scheduled for the next 12 months) half that of the supposedly “hollowed out” US and UK economies, and on a par with the financial haven of Luxembourg. Wider tradables sectors have been hit hard as well and Australian exports are now a lousy 20% of GDP despite the largest mining boom in history.

The other major economic casualty has been multi-factor productivity. It has been virtually zero for fifteen years as capital was consistently and massively mis-allocated into unproductive assets. To grow at all today, the nation now runs chronic twin deficits with the current account at -4% and Budget deficit of -3% of GDP.

But the damage is in some ways even worse in the political economy. How have Australian authorities responded to this growing crisis? By egging it on.

Not only are they running unsustainable deficits into looming sovereign downgrades, they have sustained historically very high rates of immigration to attempt to back-fill and support property prices. These levels have been so aggressive in the major eastern cities, which are now projecting a near doubling of their populations within 40 years (from four-plus to eight million), that elections are now routinely won and lost on issues of choked infrastructure, and a vehemently anti-immigration movement is afoot in the polity. Younger generations are also boiling over with anger at being locked out of housing markets. A full half of first home buyers rely upon parents for equity and their numbers have collapsed to just 12% of total sales.

Five prime ministers in six years have come and gone as standards of living fall in part owing to massive immigration inappropriate to economic circumstances and other property-friendly policy. The most recent national election boiled down to a virtual referendum on real estate taxation subsidies. The victor, the conservative Coalition party, betrayed every market principle its possesses by mounting an extreme fear campaign against the Labor party’s proposal to remove negative gearing. This tax policy allows more than one million Australians to engage in a negative carry into property in the hope of capital gains. In a nation of just 24 million, 1.3 million Australians lose an average of $9k per annum on this strategy thanks to the tax break.

The campaign against tax reform was led by former head of Goldman Sachs Australia, Prime Minister Malcolm Turnbull, who is a large Australian property-holder, and Treasurer Scott Morrison, who is the former head of research at the Property Council of Australia, the nation’s leading realty lobby. Australia’s 225 politicians hold a combined property portfolio worth over $300m.

The property corruption has even undermined the nation’s strategic outlook. The large wave of Chinese immigrants and investors have been accompanied by a hard-edged soft power drive from Beijing that is sorely undermining Australia’s commitment to its traditional US alliance partner. Chinese bribery scandals have erupted in the parliament, usually from property-based sources, and have clearly perverted policy-making. So much so, that Australia’s defence and espionage agencies are in a rising panic that Australia is literally auctioning its strategic outlook to Chinese property speculators.

How could all of this happen without the media holding it to account? As the economy gets ever more reliant upon its great foreign-funded housing ponzi scheme, and the political economy wraps ever more tightly around it, Australian media has been engulfed as well. Aussie media is a duopoly divided between a conservative Murdoch press and liberal Fairfax press. But both are largely loss-making old media empires whose only major growth profit centres are the nation’s two largest real estate portals, realestate.com.au and Domain. Thus neither reports real estate with any objective other than the further inflation of prices. Indeed newspaper (print and online) operations are nothing more than loss-leaders for over-excited real estate eyeballs. In the event that the Australian bubble were to pop then Australians will certainly be the last to know and the propaganda is so thick that they may never find out until they actually try to sell!

Before the year 2000, the Australian economy was a vibrant mix of world-leading productivity growth, liberalised tradable sectors balanced between commodities, services and manufacturing, solid household wealth, a reasonable external position, a clean public balance sheet and reliable institutions.

Today, it is a wildly imbalanced propertocracy with enormous offshore debts, a polity soaked by a Goebbels-like property propaganda machine, and a government run by realty carpet-baggers willing to sell their children to Chinese communists so long long as they pick up a three bedroom apartment along with little Johnny.

In a world replete with bubbles, rarely has one been quite so complete!

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Dr. Bonzo's picture

Same shit in Hong Kong. Same shit in Shangcouver. Wherever commie monopoly money lands, same shit. Let's all take a deep breath and at ease with the hysteria. Eight years of marking time, and after hearing "sky is falling" for about the umpteenth time, shit's getting a little old.

I know. It's a bubble. I get it. Now chill the fuck out, pull up a comfortable chair and keep the brewskies cold, cause apparently, this is gonna be the longest-lasting shitshow in history.

erkme73's picture

What just happened with the article prior to this one?  The one saying that Hillary hates everyday americans?  It just vanished...

Dr. Bonzo's picture

 It just vanished...

Editorial I guess. I got locked out of editing my comment the instant I posted it. Happens.

Déjà view's picture

Southern 'Double' Cross...

Stormtrooper's picture

I was wondering the same thing.  When I clicked, I got the message that I was not permitted access.  And then, it was gone.

OpenThePodBayDoorHAL's picture

The Chinnk's are commies. That means they can do debt-for-equity swaps with their SOEs anytime they want, so the excess debtor just becomes anoher state-owned ward.

If we tried that people would scream "socialism!". On the day we gifted Citi $174B and $2.3T in guarantees, we could have bought 100% of the common for $4B. But oh, no, that would be the dreaded "soaialism".

So yes, Chinese funny money has a while to run yet. They step off the plane here in Sydney and find water they can drink, food they can eat, air they can breathe, and a place their kid can learn English while going to a good university. Their next stop is the realtor's office.

NoDebt's picture

"What is less well understood is how such a large and sustained bubble has distorted the Australian political economy"

What the fuck is a political economy?

 

Erek's picture

Political economy is where the politicians are paid (bribed) by lobbyists, corporations and other manure.

duo's picture

An economy that has certain sectors stimulated and bailed out by the central bank and gov favors.  In Australia, it's real estate.  In America, it's the Medical Industrial Complex (and housing once again).

TBT or not TBT's picture

Dont forget Big Education.  They are enjoying a gigantic politician created ramp in prices for their services, thanks to easy to get credit for studying "studies", that oops isnt bankruptable.  

Nexus789's picture

You can add in prison industrial complex, agricultural industrial complex, banking/insurance industrial complex, media industrial complex, fossil fuel industrial complex, military industrial complex and so on. All leaching taxpayer monies in one form or the other.

adr's picture

To your million dollar straw shacks serfs!

Can we just call this what it is. The global kippah being lowered to cover us all. 

Calculus99's picture

Austrailia is a nice place, but it's full of pussies/cucks debating whether ordering a black coffee is racist or not. Or how looking at a women's tits in a low cut top is demeaning. If you don't want men looking at your tatas don't fucking advertise them.

Rich Stoehner's picture

It's almost summer time down under

Counterfiat's picture

Wonder if my post is going to get deleted?

On an unrelated note

https://www.youtube.com/watch?v=dQw4w9WgXcQ

sinbad2's picture

Yes Basil, you are deleted.

TBT or not TBT's picture

The Chunder Down Under!   Suggested headline for when the property bubble does its thing.  

TheytookERjobs's picture

This fuk stick will soon know the true meaning of the word 'debt slave' http://www.goldcoastbulletin.com.au/news/national/tony-fleming-28-purcha...

nightwish's picture

Its safe to blame the chinks on this one

The Real Tony's picture

Without safeguards the Chinks could well destroy the entire planet.

Dr. Bonzo's picture

Without safeguards the Chinks could well destroy the entire planet.

Too late Tony. It's in the works. People just don't fucking get it. There's a meme out there that this generation of Chinese are "hard-working" entrepreneurs who are going to "enrich" our society. It's all a load of massive stinking bullshit.

The Chinese who enriched themselves at the expense of 1.3 billion illiterate peasants were commies and close associates of commies. When the US went off the gold standard it only took the commies about a decade to realize... wait a minute... the US is printing fiat... but... we can print fiat.... and off they went. It's not a fucking coincidence of history the US went off the gold standard in '72 and the Chinese economy was unleashed in the mid 80s. To launder their worthless monopoly money the Chinese glanced over the border and copied and pasted the Japanese, Korean and Taiwanese economic models of the 60s and 70s, with a commie twist. The commies weren't creating a middle class. The commies were only interested in one thing. Take their worthless renminbi monopoly money and make it legit on the world stage. And off they went, pumping out the most useless shit in the history of industrial manufacturing and swapping renminbi for Treasuries. The commies leveraged slave labor against their printing press and swindled their way to wealth like no other economy in human history. Let's think about this.... what exactly did Chinese manucturing add to the global economy? Answer: not one goddamend thing. Chinese manufacturing replaced manufacturing around the globe because the Chinese peasants could take more abuse, work for less, longer, with absolutely none of the fineries of labor laws, environmental laws. NONE of it.

They commies invested 30 years in this massive fraud. Ya know when they say the commies "lifted" hundeds of millions out of poverty? Newsflash: the commie party is approximately 80 million motherfuckers. The commie middle class is estimated at around 250-300 million people. Counting relatives, families and close friends, guess what you must conclude? The communist party elevated the communist party out of poverty, at the expense of the peasants who they have been abusing relentlessly for the last 80+ fucking years without letup.

Let me show you what this is about. If I had no conscience whatsoever, and my daddie was the local village commie chief, I could shove a few thousands peasants out of their houses, simply grab all their land, use my pappy's connections to go to a bank, point to "my" land, propose a plan to flimflam a few thousand sandcastles, badda-bing-baddaboom, few years later I'm sitting on a mountain of fucking cash from the sale of sandcastles to other swindlers who equally lied, stole, cheated their way to wealth, and were looking to "stash" their cash in "luxury" property because property always goes up. Right? Now I'm sitting on millions in cash, and I know exactly how I got it. I'm thinking.... goddamned, Vancouver's looking awfully good right now. I show at your doorstep with a few sloppy million. You welcome me with open arms. Right. Fuck YOU.

You think I'm making this shit up? Ask yourself this one simple question. Why is it exactly that literally tens-thousands of these monied Chinese cunts and faggots are escaping their country with trillions? Figure it out yet?

Now these selfsame fucking cunts are sneaking their stolen cash into our countries, buying their way into the top schools, the top companies, the top social-economic slots in the country, and guess once theyr'e comfortably ensconced what's going to start happening? Go ask a Chinese peasant.

Nexus789's picture

No different to what the British and US empires have done in the past. This is what happens when your empire starts to collapse and a new player emerges.

The Chinese did not take anything. For a few cents more profit US elites handed them much of the US industrial capacity. Only a bunch of half enlightened halfwits would do that and sell out their own nation.

When was the last time you went to China and spoke to a 'peasent'?

Dr. Bonzo's picture

No different to what the British and US empires have done in the past....

Aaaaaaaand the cultural / historical relativists arrive. Yeah. The US slaughtered 40 million people. Get-fucking-real. No, but my favorite is, we did it in the past, and while the commies were busy burying slaughtering murdering 40 million of their own countrymen, well, aw shucks, there was just no profit in it, as they realized later. Now they've brushed up on whitey's 17th and 18th century, they get to do it all over again. Because yeah, they went straight from medievalisms to the great commie genocide, somehow skipping mercantilism on the way. So yeah, they get a "do-over."

Un-fucking-real. "Yeah, they're mercanitilist cunts, but... so are we... so it's all good."

SMFH.............

The Chinese did not take anything.

Now I know you're a troll. Get the fuck outta here with your horseshit one-liners.

When was the last time you went to China and spoke to a 'peasent'?

LMAO. Is that supposed to be a fucking joke? I'm up to my goddamned ears in mainland peasants. You actually do think I make this shit up, don't you.

Christ almighty...............

Socratic Dog's picture

Fucking awesome post.

Looks like the Tribe has got some real competition at last.

Maybe we need to ally with the Tribe to fight the Chinks.  Wait, we're already doing that.  Sorta.  That rash of explosions seems to have stopped.  Or stopped being reported.  And they sure as shit looked like nukes.

If they were nukes, and if the Towers were brought down by nukes, and if nukes have been used in Ukraine and Yemen (there's evidence of varying strength for all of these) then there's been a nuclear war going on for 15 years now... and no one has noticed.

Spungo's picture

So the cap rate is about 3%? Yeah that's pretty shitty alright. The REITs I own say their newer commercial developments throughout Canada and the US are about 7%. Can/US residential is a bit more expensive, so it's around 5-6%.

The Real Tony's picture

Australia needs to extradite all the Chinese and ban all Chinese from buying real estate forever. This also works for all other cities the Chinese have destroyed.

Nexus789's picture

Actually the biggest overseas owners of land and property in Australia are the US and UK.

sinbad2's picture

Shh, your supposed to blame the Asians.

Did you know that during the great depression, the UK tried to seize the money being used to build the Sydney Harbour Bridge?

daveyboyfox's picture

Fuck Australia.  I hope the whole place implodes.

kiwigal's picture

The same thing has happened in New Zealand.  The country has been flooded with Chinese and Indian immigrants because of their money. We have dumps selling for over 1 million. Basically because of  the greed of property owners with stars in their eyes  great poverty and hardship has occured, particularly to the young ones who despite working hard can never own a home unless they have rich parents. 

kiwigal's picture

The same thing has happened in New Zealand.  The country has been flooded with Chinese and Indian immigrants because of their money. We have dumps selling for over 1 million. Basically because of  the greed of property owners with stars in their eyes  great poverty and hardship has occured, particularly to the young ones who despite working hard can never own a home unless they have rich parents. 

Sandmann's picture

but New Zealand has lovely timber homes without insulation or boilers built to best shanty-town standards available on multiples that only fools can count

DarkLordofSadNews's picture

I am so sorry that capitalism does not discriminate. .you cant have both buddy 

TradingTroll's picture

Must be Putin's fault

slipreedip's picture

Oh its that time again,  its basically every 5 weeks or so ZH wheels out the Aussie property bubble article.

Along with the Vancouver property bubble, or the Manhattan property bubble or the London property bubble etc (yawn).

Australia and Canada are pleasant big countries with comparatively small populations and people from less desireable parts of the world want to go with their money and their families to have a nicer life.  There is no shortage of willing immigrants with money who are happy to buy their way in to such countries if thats what it takes. Consequently property in the areas people want to live becomes more expensive because of basically capitalism, supply and demand. Even without wealthy immigrants there is then also the latent demand within the local population. So maybe its a bubble, maybe its just the new normal.

DO people want to move to Europe, already expensive and encountering refugee problems. No

Do people want to move to America, Trump/Clinton land, guns, taxes, and constantly in fear and at war. No

Do people want to move to China, or even asia generally, crowded, polluted although sometimes cheaper. Maybe

So where will these wealthy people want to go to have a nice lifestyle, a nice house , nice weather, safe, not too expensive, not at war, but with good coffee?

Property bubble....sure... wake me when it busts.

Spungo's picture

ZH was correct about Vancouver. The bubble started popping in mid Q2, and it accelerated when BC imposed a tax.

ZH was also correct about London. Brexit kick started the collapse of that.

Sandmann's picture

Canada is the biggest ONSHORE tax haven for non-residents

truthserum's picture

24% of the population are immigrants. That's the mind boggling fact that's missing from this article. Just how much longer does the west think they can jam people into their finite space untill they resemble the 3rd worlds shortages, poverty and crime.

Dr. Bonzo's picture

Just how much longer does the west think they can jam people into their finite space untill they resemble the 3rd worlds shortages, poverty and crime.

Amen brother. Amen.

Nexus789's picture

Starting already. Melbourne used to be very nice. Full of crap Indians. They have not bothered to build much new infrastructure so its becoming a congested dump.

Aussie Battler's picture

+1. Recently left Melbourne, turning into a heavily congested, disgusting place.

PC warriors left right and centre while the place falls apart, sold to the highest bidder.

Infrastructure just not coping with 2% p.a. pop growth, stuffing trains full of immigrants.

Big Cox's picture

So my average Sydney home which I just purchased for $1,000,000 isn't going to go up 10% per annum? YEA RIGHT!

Frankee_thecat's picture

You're fuckin' right.  And our worst is the government owned, huffington post POS.  

Here's that 'great future' we're leaving our children:

http://www.dailymail.co.uk/news/article-3526223/The-best-fixer-uppers-Au...

 

Nexus789's picture

No future is the answer. They have sold out the next and following generations. May even have a big war to terminate any possible future. 

radbug's picture

1893. Been there, done that, got the T-shirt. The 1893 Depression was deeper than the 1931 Depression. It followed a monster property property boom in Melbourne, which, incidentally, gave Melbourne the Block Arcade, a truly beautiful, and outrageously expensive, shopping arcade. The Australian Policy Elite have painted themselves into a corner, they can't get out by themselves. The sword that will cut this Gordian knot will from overseas, like DB, or the Italian referendum, or a massive RMB devaluation etc. The socio-economic consequences for Australia will be unimaginable.

gunzeon's picture

remember that the ~150,000 migrants (at least ), all loaded, all wanting a slice of the great Aussie dream ... imo, as long as people are clamouring to get in prices will be riding high; you'll be in your box long before they crash