The Perfect Storm Set To Pop Aussie Apartment Bubble Bringing The Economy Down With It

Tyler Durden's picture

Submitted by Guy Manno via Crush the Market

The Aussie apartment boom that has turned into an epic bubble with record, sky-high prices, is showing all the signs for the perfect storm which will ultimately pop. With the popping of the apartment boom, it will simultaneously bring down the Australian economy, as the apartment market is set to have a sizeable correction in 2017 and 2018.

A short Look At Australia's Real Estate Market

Australian real estate prices have been going up for over 25 years with hardly a pause in between since the late 80's. The last time real estate prices fell considerably was when Australia last had an official economic recession back in 1987, when interest rates skyrocketed to around 17-18%.

The chart below show the price growth of real estate, rents and CPI since mid 1987. Initially the price growth of Australia's real estate market climbed steadily taking 11 years to double in 1988. From there the price growth continued to accelerate with the next 100% increase in price taking 4.5 years to reach.

An interesting observation on the chart below is that real estate prices have risen by over 700% since 1987, yet rents have risen  just under 300% over the same period. This chart clearly shows that the majority of the price growth was not supported by a fundamental increase in rents to support the higher prices, but rather a massive surge in mortgage debt over the same period drove prices higher.

Australia

 

Rising Credit Leads To Booms & Contractions In Credit Lead to Busts

Professor Steve Keen in the interview shown below highlights his own reasons why he sees a recession coming in 2017 for Australia.

Steve highlights a number of reasons for his prediction, including deteriorating terms of trade, the ending of the mining investment boom, the Government's pursuit to cut spending and a reduction in foreign buyers for real estate, among others. However, the most important reason is a deceleration of credit / mortgage debt. Based on Steve's research and economic models the deceleration of mortgage debt growth is the leading cause for all economic downturns globally including the US, Japan and Europe economic recessions, with a correlation close to -1. What all his research shows is that the deceleration of mortgage debt growth leads to a collapse in real estate prices which then lead to an economic recession in those countries.

Due to this research, Steve believes Australia will react the same way as other countries based on slowing growth in mortgage debt. Especially, as the conditions have already begun to slow based on the bank's tightening their standards overall. However, most of the lending restrictions imposed from the banks are for off the plan apartments and existing apartments within most major cities around Australia.

 

Given Australia was recently ranked number 4 in the world in the UBS global real estate bubble index, see: Australia's debt addiction fuels record real estate bubble, its easy to see that prices could fall over 20% as lending conditions continue to tighten and their effects take hold.

Why Are Banks Tightening Lending Conditions With Record Real Estate Prices?

The simple reason is that the banks do not want to be caught in a credit crunch like they faced back in 2008 and 2009 where they had to have the RBA and the US FED provide considerable financial assistance to keep them afloat.

Right now the banks can see what everyone else can see if you look at all the data publicly available. Australia will face a major oversupply of apartment dwellings over the next 1 - 3 years from a major ramp up of approvals of apartments. The growth of approvals over the last 7 years which you can see in the chart below, is leading to a big jump in the construction of apartments with a number of them being competed in the next 18 months.

Australia

 

Due to the rapid increase in approvals, there has been a massive spike of cranes currently being deployed in Australia, to handle the apartment boom that is currently taking place. As you can see below in the chart Sydney and Melbourne are leading the way in Australia, dwarfing most major cities in the US including New York and LA.

Australia

 

With all the current construction for apartments taking place from the buildup of approvals, especially in the last 3 years, Australia is facing a glut of new apartments that are about to be completed in 2017 and 2018.

Knowing the upcoming glut of apartment completions is about to come available on the market soon, the banks have taken action to protect their capital by providing most of their tightening around new and existing apartments within the CBD's of Sydney, Melbourne and Brisbane where most of the construction has taken place.

Australia

 

Highest Housing Completions = Biggest Housing Price Fall

The chart below shows a comparison of house prices in Australia, UK, Spain, US and Ireland with an accompanying housing completions chart.

The most obvious data from the chart is both Ireland and Spain had the biggest fall in prices during the GFC in 2008 relative to the other countries shown. Those 2 countries also had the largest ramp up of new housing completed from 2000 - 2007.

Australia

 

Surging Bond Yields Leads To Higher Mortgage Rates In Australia.

Back in October US Government 10 yr bond yields were sitting at around 1.55%. Fast forward one month and rates are now sitting at around 2.3%.  A 0.8% increase from the October levels (see chart below). The reason why this is a big deal, is that the US Government bond yields are what are utilized to benchmark most of the different types of retail and commercial loans.

In Australia the banks also rely heavily on overseas markets and especially the US markets to provide the necessary funding to support their loan book. So as bond yields have skyrocketed in such a short period in the US, it has already led to the banks in Australia lifting rates by between 0.20% - 0.60% on their fixed loans as their funding costs have jumped dramatically.

With mortgage rates rising and lending conditions being tightened its becoming more difficult for developers to sell their off the plan apartments as investors find it more difficult to access bank lending to finance their purchases, resulting in a slump in demand for off the plan apartments.

Melbourne Developer Offers $21,000 To Encourage Buyers

In an attempt to lure buyers to a new off the plan development in Melbourne, a large well known developer is now offering $21,000 to investors in an attempt to sell their $420,000 1 br apartments in Southbank Melbourne. The idea is to match the investor or first time buyer's 5% deposit of $21,000 to assist them in meeting a 10% deposit.

The problem that this Melbourne developer and other developers will find, is even with this huge financial incentive, many of the banks in Australia have lifted their minimum deposit requirements for off the plan apartments in major cities to between 15% - 25%.

Australia

 

Apartment Bubble Bursting Leading To Australian Recession

Similar to Professor Steve Keen's prediction that a recession is coming to Australia in 2017 or early 2018, I also believe that the perfect storm of conditions are developing that will soon pop the apartment bubble that has been taking place in Australia.

When the correction in apartment prices takes hold, it will have a domino effect on the Australian economy, leading to a contraction in economic activity in Australia. The reason for this is because the real estate industry and related industries now has the largest contribution to GDP at around 28%. (See chart below)

With record amount of apartment construction taking place over the last few years, fueling a considerable amount of GDP growth, I believe the slowing of the construction industry will start to subtract heavily on GDP growth in 2017 and 2018 leading to Australia's first recession in over 25 years.

Australia

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y3maxx's picture

--What's a bubble?

 

Stuck on Zero's picture

I love the sound of bubbles bursting in the morning.

Dame Ednas Possum's picture

Streuth mate... we're screwed.  

Time to crack another tinnie. 

Harlequin001's picture

'Based on Steve's research and economic models the deceleration of mortgage debt growth is the leading cause for all economic downturns globally including the US, Japan and Europe economic recessions, with a correlation close to -1.'

Pure fucking genius. No one could possibly have ever foreseen that.

It must have taken years of research to figure that one out. Well done...

AUD's picture

-1? so less than zero correlation?

Harlequin001's picture

Negatively correlated or diametrically opposite.

but basically, yeah...

Who'dathought eh, banks stop lending money and house prices stop going up. Never would have believed it...

or should I say, banks create money from thin air and my kids have to work all their lives to buy a pokey little shithole of a house.

But getting someone to pay far more for something than its worth is not fraud anymore as long as it's a bank that's doing it eh...

Handful of Dust's picture

oi!

I looked at a place in 2001 in Darling Harbor for $320,000 that I thought was crazily overpriced. My friend who stayed there for a job said that same aprtment is now listed at $1.2 million. The building itself is almost 90% mainland Chinese who paid cashola for their aprtments and this one is one of the smaller, cheaper apartment!

he also said the flood of immigrants (and their loot) from Mainland, HK and recently the middle east (in Melbourne in particular) has pushed other immigrants further out (Greeks, Singaporeans, Brits, etc) who cannot afford these prices.

Salaries have barely increased during this same period.

Harlequin001's picture

$1.2 million.

The question is, how long would you have to work to earn that money?

and could you physically build a house yourself in less than that time.

If you can, then its more worthwhile to stop working and build your house, which gives you some idea of the real value of a house, and where house prices should be. If you can build it in 2 years, and average wages are $30,000/year, then average house prices should be $60,000. Otherwise, build your own.

It's only worth paying this kind of money if you can get an appreciation in the selling price, but once rates go up and house prices start coming down, house prices will fall a sight more than the 20% alluded to in this article. Like maybe 90% + before its over, and in the example here, 95%+ ...

So if you'd bought your house in 2001 for $320K, you're still facing bankruptcy unless something changes drastically...

Trolly McTrollface's picture

Canada can't be far behind. Vancouver and Toronto are in the stratosphere. All bubbles pop, right ?

SHEEPFUKKER's picture

Do they really have to anymore? The central banks can just add digits to a screen and buy everything and maintain the illusion of properity. The trickery should have already ended if that was the intention. 

slobbermut's picture

Unless the intent all along is to create such a hellish crash, global crash, that the sheeple will be cowed into accepting any solution, even a solution that hitherto would have never gotten off the ground - collapse money and just cooperate by taking this 'mark/number' on your hand or forehead - no need for fucking gold or cash as you can't spend it anyway without the mark; or are you some kind of criminal/subversive who refuses to go along for the common good?  Hmmmm?  Well, there are contingency plans for malcontents and subversives...no worry.

Handful of Dust's picture

Historiclly they pop but this time IS different since the Fed is propping them up artificially. As long as they continue, the Bubbles won't pop. Look at Beijing also. Despite numerous tightening measures the prices only go higher.

 

With zero yield on bank savings, wokrking people see no other reasonable option for their cash. And, of ocurse, as massive looting occurs in some nations (think China and the ME) RE overseas is still a safe harbor for hiding their loot. However, this appears to be changing as USA and others form more treaties with China and chasing down these looters and seizing their RE.

kiwigal's picture

A similar situation is being played out in Auckland, New Zealand. Numerous apartment schemes have fallen over, always a pretty good indicator that all is not as glossy as the media/interested parties would tell us. 

I have been cautioning my oldest daughter not to enter the market for quite a while, to wait. The big shake down was always going to happen once interest rates started to climb. When you have lived a while you do see that history does repeat and all the signs of 1987 are flashing again. 

WernerHeisenberg's picture

Hope so, just got a rent increase letter from the landlord.  Seriously, $400 a week for a leaky, noisy, mouldy, uninsulated 3rd story walk up studio flat with of course no bathtub, no heating, and no cooling is just Auckland all over.

kiwigal's picture

Just bide your time, save as much as you can but be aware also N.Z. banks do not guarantee deposits. 

Im possible's picture

Even here in Australia the Govt gurantees $250,000 per institution. Warning, PER INSTITUTION may have a few banks under them. So its not per BANK.... pls be vary of this. JFYI.

RaoulDuke66's picture

Yes, but how much is actually available to cover the liability? Ahoy - I think I see some naked swimmers.

Handful of Dust's picture

Wellington and Christchurch have also gotten out of hand and way out of touch of reality. Reality meaning compared to wages.

kiwigal's picture

That market will go pear shape now after the true reality of constant earthquakes will be part of their future,not just a once in a millennium event! Dont touch real estate from Christchurch northwards to Wellington and Kapiti Coast. Better include Bay of Plenty. .Edgecomb...Napier. The time will come where overseas insurers wont reinsure, then banks wont loan money...

WernerHeisenberg's picture

Unfortunately, I put my savrd money into shiny stuff and had a boating accident.  The only stuff in the bank is owing to the IRD.  If that vanishes, then FU-IRD

kiwigal's picture

It sounds like you have had some bad luck,here's hoping that new opportunities come your way. 

JohnGaltUk's picture

New Zealanders have always surprised me what they are prepared to pay for those flimsy wooden structures they call houses. They are nothing but glorified garden sheds, unlike here in Britain where the standard to double brick and clay tiles with central heating.

I remember being in a house in Wellington and when the wind blew, the carpet would rise up off the floor like a balloon. So the insultion was real good. Most houses in Auckland need a dehumidafier otherwise the windows turn into waterfalls by morning. 

What people pay for an old state house there is mentally insane.

kiwigal's picture

Yes so right, don't know how to build here.

Ed Jobb's picture

Got friends here with 10-20 properties that wont like that. Just glad I sold mine 

& got out a couple of years ago. Sleep better being debt-free.

07564111's picture

BBQ lamb on the Oz menu, Many have already been fleeced yet they still refuse to listen to anything other than the MSM shills telling that now is the 'time to buy'.

RaoulDuke66's picture

That will change when FOSI kicks in... Fear of Staying In.

NEKO's picture

Add to that talk in the MSN right now about a proposed extra tax on vacant properties for multiple property owners....

peak bubble?

Surrealist's picture

I bought y shithole unit in Canberra in 2009 for 265k after moving here from Sydney in 2008. Yes it is my place of residence but let me tell you dear ZH what a disaster it is.

It more than doubled in value from 2002 to 2009 and gone nowhere since. In fact I can assure that units here can't even sell for the prices we paid in the late 2000s.

Here's are a few links to that data.....

http://www.allhomes.com.au/ah/research/17-26-springvale-drive-hawker-act-2614/20383052711

 

http://www.allhomes.com.au/ah/research/18-26-springvale-drive-hawker-act-2614/201150228711

 

See the second link above.

That's my upstairs neighbor. Bought for 261.5k in 2008.

Here it is for sale today...

http://www.allhomes.com.au/ah/act/sale-residential/18-26-springvale-drive-hawker-canberra/1317175678111

 

Aussie Battler's picture

I just bought a unit in Canberra. Hoping the market doesn't crash on me :(

Déjà view's picture

Old W163 Canberra Bomber to visit east coast cities...guess Gold Coast incl.

Any refuge in Adelaide or Perth?

Alice Springs or Darwin?

Anywhere in 'Outback'?

MisterMousePotato's picture

@Surrealist: Looked at the links. If I understand correctly, in addition to paying a quarter million dollars for a freakin' apartment, one also has to pony up some $4000 per year in (what we here call) HOA fees?

Is everyone crazy? Everyone here talks about spending (many) hundreds of thousands of dollars for a place to live like it's the most normal thing in the world.

There are sensible alternatives. I live in one. I have no worries.

Surrealist's picture

Frankly I think it's crap in Canberra. Cool to meet you here btw. (Y)

RaoulDuke66's picture

That'd set you back 750k in Sydney.

euphoria's picture

Outside the capital cities on the east coast, sydney melbourne and brisbane, I don't think you'll see a massive correction for houses in regional centres. They have already had their crash and are a lot cheaper than they were 5 years ago. Maybe im in the bubble though....

Amicus Curiae's picture

rural towns depending on the size of the town..3 or 4 brm large home 1/4 acre or half acre blocks 300k or less Victoria

SthAus risen but still some nice spots for around the same

Qld and inland NSW ditto

homes arent NOT affordable

just some areas are overcrowded and way overpriced ;-)

 

negative gearing needs to GO!

screwed the market over for the benefit of a few

Kina's picture

Aust... cash is king..or will be

Im possible's picture

PM's is KING not CASH. (PM's - Precious Metals)

TradingTroll's picture

Let's see you buy a $2m house with gold and not cash

I founded a boutique Canadian brokerage firm and we need to maintain $50k capital

My auditor informed me a few years back that physical gold on deposit with my bank and broker didn't qualify as money. But Greek bonds do for example

So, we can stack all we want but if Trump isn't inaugurated then the odds may be stacked against us.

I see non convertibility of PMs into electronic money and a 50% tax on PMs used in any transaction

Tell me it can't happen and why

Razzle Dazzle's picture

Forget your common-sense compasses these days. In 2009 bought a high-end property in Melb, after watching years of twin digit growth. I thought I must be mad buying at the top of the market. Lucky I didn't listen to reason, it still hasn't stop rising. Yep it all has to pancake, and I dont care. The bit that gets me is the market has filled with punters. The govt tax system supports the ponzi scheme.People are leveraged to the hilt on percieved worth. Debt slaves, try selling when they all head for the door. I'll sit on the sideline with change found in the sofa. Such an opportunistic bastard I am. Serves themselves right. Now gold on the other hand... give me strength! 

CheapBastard's picture

Moar Chinee money, prease!

Im possible's picture

Old saying : When America sneezes the rest of the world catches a cold.

New saying : When CHINA farts we are in SHIT.

Mahatma Coat's picture

The prof didn't mention that Aussies' love affair with property is even stronger than it would normally be, because the family home has always been capital gains tax exempt and does not count for most asset tests to receive govt welfare handouts.  So, everyone buys a McMansion.  The apartment market is like a casino at the moment, and will get hit harder than quality stand-alone houses in good locations.

RaoulDuke66's picture

Didn't stop the crash in the UK.

katagorikal's picture

There was no crash in the UK - that's the problem!
Look at the chart, it's just a little dip. 
UK should have followed Spain and Ireland down. 

RaoulDuke66's picture

There won’t be a crash without a change in government policy or a revolution. All Australian government policy, and mainstream media commercial strategy, is specifically channelled towards keeping prices as high as possible for the real estate speculator and political class. Let’s put it this way – the current Treasurer was the National Manager for the Policy and Research Property Council of Australia. Tax policy is the clearest example.  Speculators are allowed to buy a property, claim paper depreciation losses, claim other deductions, and use the “losses” to reduce their employment income. This means that the government sends them a fat cheque at the end of the tax year, just for owning a property. The result is that people with pre-tax multi-million dollar incomes, pay zero in tax. The tax office published the figures on such individuals last year. The great inequality comes about because, in Australia, owner occupiers cannot tax deduct mortgage interest. In short, speculators can outbid home buyers all day every day. You might wonder how the real estate cartel gets away with this. The main media companies (which derive most of their income from real estate websites) continually push out the propaganda. The biggest lie is that this system helps poor people because generous landlords with their tax breaks charge lower rents than they actually could. What generous people! The second biggest lie is that the benefits flow to ordinary ‘mum and dad’ investors because most people using this have modest AFTER TAX incomes – yeah,  because of all the deductions! Australians, frankly, aren’t too bright, and are extremely corrupt. So don’t expect the system to change any time soon.

WernerHeisenberg's picture

Expose the ruling class as pedophiles and start a peasant uprising.  I am not kidding.  This is the only way forward.

JustUsChickensHere's picture

But it is a sneaky ponzi. A real hotel california.

All of what you say is true - you can extract significant ongoing benefits as outlined, until you sell and get crucified by the capital gains tax. This coupled with zero inheritance tax, creates strong incentives to not sell - just hang in there and refinance as needed - but it is a trap.

Of course it also means if you are forced to rearrange your affairs (eg as a result of a divorce) you get hit by the exit trap - Capital Gains - which are a simplistic brutal calculation that does not allow any inflation adjustment (the longer you owned it the worse it is) and the regressive scale of taxation (take 50% of the simple gain in market value and add it to your income that year!)