Thursday, October 7, 2010

Australian bubble pornography

I have a lot of readers who ask me about the Australian bubble and when it will burst.  I am not the person to ask – I have been wrong for ages – and (foolishly) have had much of my asset base either offshore or related to offshore – whereas the easiest thing to do was get long Australian high beta stocks.  The AUD has kept going up and up and the Aussie market has been OK too.

So – as a service to my international readers – and in answer to Business Insider’s insistent real-estate-porn articles – I give you a few photos from (one of the two dominant real estate sites in Australia).  For reference the Australian dollar is now trading at 97 and a bit US cents.  These prices are in Aussie – but you can think of them as US dollars and you are not far wrong.

For 1.65 million you can have this house on the main road down to (fashionable) Clovelly beach – about 25 minutes drive from the CBD.  The main selling point is that the house is about 250 meters from the beach.


clovelly rd a


You get off-street parking (pictured) which is essential that close to the beach (otherwise you can’t find a car park all summer). 

If you like period features you will really love the main entertaining area:

288 period piece


If your taste is to hipper (and younger) Bondi you can have this house for $2.55 million – and its only 300 meters from the beach.




This strikes me as a better deal (!) because you actually get beach views from the front balcony

sandridge front


And from the functional (non-period) living room:

sandridge living


If you don’t want to hang around all the young and beautiful people at Bondi (and the druggies, gangs, and the like) you can buy a house in decidedly conservative Mosman.  This is not waterfront – indeed is quite middle of the road for that suburb and will set you back $3.5 million.



But its nice out the back – your own piece of upper-middle-class and conservative suburbia:

mosman rear


And the main living room looks pretty cool too:



I am cheating a little here by choosing fashionable suburbs about 20 minutes from the city.  But I am choosing ordinary homes in those suburbs. 

It is hard to find the prices for most Sydney homes because they are mostly sold by auction.  What happens is you crowd into the back garden or the living room or (quite often) just hang around on the street and bid in an open auction by winking at the auctioneer.  People in t-shirts and shorts spend $1 million plus on small suburban homes at auction.  Americans think of auctions as something that happens on the courtroom steps.  This is more typical (though it is a real-estate agent’s self-promotion).  In this case a large crowd (typical) squeeze into the back yard and the living room for an auction.



And when you have finished with that real-estate porn I encourage you to look at the Wentworth Courier – the most profitable low circulation free newspaper in the world.  It is owned by News Corp – and is filled with over 200 pages of glossy real estate adverts weekly (billed at over $6000 a page and copied about 70 thousand times).  Look at the online version and start somewhere in the middle.  If you want to really understand the Sydney boom look at the adverts on page 277 and 278.  [The recently reduced size of that section indicates the Sydney boom might be slowing – but I see few other indications.]

For the many readers who asked.






Robert in Chicago said...

I have not bothered asking you the question (is the AUS housing bubble near bursting / when will it burst) because I assumed I would get the response you just gave to all: "Who knows?" But the fact remains that it is a bubble. So says man with the the world's best track record calling bubbles, Jeremy Grantham. In any event, I love the porn. You have some work to catch up to Jim the Realtor, but perhaps your talents are better deployed elsewhere.

Sydneysider said...

The Ozzie banks know how to support their own market.
I remember back to around 1984 when the going got really tough in Sydney Real Estate.
The banks could see the possible implosion.
They wrote to me and everybody saying your 20 year loan is now a 30 year loan, your payments per month have now reduced -- just keep paying the mortgage ( this went on for 3 ? years and the bank balance sheet was not impaired.)
Jeremy Grantham doesn't know the inner workings of this market.
Was it he that called for shorting Macquarie Bank as the model was broken ?
(Govt) intervention resolved the shorting strategy.


Anonymous said...


It may be worth looking at(for yourself or your readers) John Wilson's article published on the Business Spectator website.

I agree with John Wilson, we are not in a bubble.

Anonymous said...

@Robert in Chicago

I would love to have the confidence that you have.

This post contains absolutely no data.

See here's my opinion, also sustained with absolutely no data.

* Most of the commentary about an Australian housing bubble is due to prices of housing in Sydney.

* Demand for housing exceeds supply in that area.

* Sydney is beset by terrible planning problems, (mainly due to incompetent government.)

The word "bubble" implies "irrational exuberance", but maybe the prices that John Hempton reflect an efficient working of the price mechanism. Who knows?

The only way to be certain of a bubble is to look back after it has burst.

If you are really certain that this is a bubble, how do you plan to profit from the distortion?

Anonymous said...

Australia has one of the highest immigration rates in the world. Until recently, this was around 1% of population per annum.

Basically, the real estate bubble has been demand driven. Unlike the US, the banks have been responsible in their lending (they clamped down hard on low doc/no doc loans years ago).

The housing bubble in Australia bubble in Australia has little in common with that in the US. The eventual bust is unlikely to see large falls in property prices, with ugly consequences for the banks/financial system.

The recent fall in housing prices matches the fall in immigration rates - applications for PR visa's has fallen 35% in the last 12 months,

John Hempton said...

What in part we are seeing in these pictures is a massive appreciation of the Australian dollar. The house prices are now VERY high by global standards.

How this changes well that is anyone's guess - but here are three ways.

1). An appreciation of foreign house prices so Aussie does not look or feel so out of line.

2). A fall in Aussie prices.

3). A fall in the AUD.

4). No change - Australia just reaches a permanently relatively expensive plateau.

I express little opinion only because I know whatever I express will probably be wrong.


Anonymous said...

Products like this:

might keep things going for a while, the current interest rate is 2.55% payable in USD.

Steve Johnson said...

The stats are pretty straight forward. Net rental yields of less than 3% when risk free rates are closer to 6%. All the arguments that you hear justifying high prices (immigration, supply/demand etc) should also apply to rents, should they not?
The strange thing about the market is that we have a bunch of listed developers all trading at half book, because they can't make a decent return on their capital. It's a strange property bubble where developers can't make a profit. See my post on The Residential Property Conundrum.
The other thing you are guaranteed is more comments on residential property than any other post. It's a sensitive issue.

IF said...


I will stockpile some popcorn and dehydrated beer. Anything nice local? I did a quick search and most stills seem to be rather new. Maybe it is moot, as there doesn't seem to be a local source.

Anonymous said...

In response to the comment about John Wilson's article about the property bubble, John works for PIMCO Australia and he conveniently forgot to mention that his company has an overweight position in Australian Mortgage Bonds. He seems to be putting his money where his mouth is.

"Pimco has an overweight position on Australian residential mortgage-backed securities because the underlying loans are of high quality, John Wilson, head of Pimco Australia, said May 24. "

Pimco Buying `Bullet-Proof' Australian Mortgage Bonds Amid Europe's Crisis

Charles Butler said...

I'm impressed - 92 sq. mt. flat at 600,000 plus 9000 a year in carry. Are those water bills all you can eat or are there usage charges on top?

That other ex-British mineral producer looks pretty similar.

Duff Samoa said...

Just out of interest, I assume you own your house John and as such, any reason why you don't sell and rent instead?

If it really is a bubble this should be the easiest way to short the market.

Cost of rent is much lower than either value of money or mortgage costs.

I think that rents are no higher because people just can't pay anymore for rent.

With rent the upper limit on what one can pay is their income, with house prices the upper limit is what banks can lend. If banks have their calculations wrong for property appreciation then that affects their lending calculations. I think this is where trouble will arise.

Furthermore, I don't understand how poeple afford the mortgage payments on 3mln dollar houses. At 6% that's 180k per year. There aren't enough people in Australia making that kind of money to support all the AUD$3mln valuations. So if you look at where this money is coming from, overseas buyers, the high AUD will choke that off in a hurry causing a dampening of prices.

John said...

It's kind of challenging to find rational writing on this topic, when you have the regional rags pumping the same commercial baloney, the banks hedging on consumer appetite, and the real estate agents driving the bus. In my old neighborhood (Boston), you'd have the local District Attorney on the line within minutes of anything resembling an auction.

Why is CBA on an international roadshow to instill confidence with global investors who are starting to short AUS banks?

John Hempton said...

I have thought it was a bubble for a while... too long. I should have purchased a while ago. I held the wife off as long as I could. And then there was a choice called please the wife or do not please the wife.

Happy wife. Happy life.

Anonymous said...

The story is somewhat incomplete without some commentary on what leverage levels and lending standards are like for home mortgages, no, John?

It's easy to point to China, for instance, and claim a property bubble there, but most property there is bought 100% equity (and frequently, literally, cash on the barrelhead...there is little more surreal than seeing a man buy a Hong Kong condo with a paper sack of RMB).

With no significant leverage story, I would guess there is little effect of ultra-high property prices except some saddened home owners and somewhat muted consumer spending as the bubble deflates. However, without significant leverage, even the consumer spending story is lessened because the percentage of equity destroyed is lower.

Not trying to claim this isn't insane, just alleging the post misses an important set of facts for the reader.

Anonymous said...

can you sell your property to someone who will lease it back to you long-term, and can you do this without telling her?

John Hempton said...

Hardly - its in her name.

Anonymous said...

ahh, so from your point of view, you already have.

Anonymous said...

Where has my comment and the prior comment gone? Would u be censoring those who think u are exaggerating a little?

John Hempton said...

I did not knowingly censor anyone on this - so I do not know what you mean...

Repost if you like.


Alphonse said...

Steve Keen, who also thinks that gravity is being inexplicably defied.

NotZed said...

The banks are printing their own money as they reap the obscene profits from this overpriced market that they keep bouncing along.

Anyone who can't see this is a bubble is blind. Immigration is keeping demand up but it can't last forever and even if it does for the foreseeable future people can't work themselves to death on dual incomes forever whilst their children eat themselves to death.

When people are spending >50% of their income on their mortgage you know something is very wrong and unsustainable.

Mike said...

The surest sign of a bubble is people getting upset when you call it a bubble. The replies to this article speak volumes.
Bubble or not Australian real estate prices are bizarre. My wife and I lived in Sydney in 2008 and paid $2k per month rent for a property selling for close to a million dollars.
The biggest laugh reading Oz sites is the "foreigners are buying!" argument. You honestly think foreign buying is not a feature of the US market?!!
We used to think we were geniuses because our house prices were rising too.

Anonymous said...

I don't disagree with a possible bubble in the .au housing market. However, I do disagree with you presenting these houses and suburbs as average. These are *not* average houses and suburbs. They're the top end of the market where location matters more than the property and supporting infrastructure itself. I livewd in Sydney from 2000 to 2002, so I have some idea of what sorts of subrubs the US Government is selling to it's citiziens whihout there being any actual conseuences.

John Hempton said...

I specifically said they were "ordinary homes" in "fashionable suburbs" 20 minutes from the CBD.

I was not inaccuarate in that description.

I live in a slightly better home in a slightly more fashionable suburb (bronte). It is more of a bubble.

I could have chosen ordinary homes in ordinary suburbs and wound up with 650k if I am 50 minutes drive from the city in peak hour.

I was not inaccurate...

Anonymous said...

It's so funny to read these "reasons" why there is no bubble. Sad part is that in few months or few years (time is not so important) there will be hungry people in Australia because these reasons were wrong. Australia wastes almost all natural resource money (40 out of 55 billion USD) just to service (pay interest) on foreign credits ($800 billion) that are used not build or create anything but to buy and sell existing houses from each other. Instead of paying off debts during boom economic times Australians increased their debt to level not seen before. I'm wondering what will happen in few years when boom ends and creditors come and ask for their money.
Government (this includes RBA) is the one to blame for this, because they did everything to support bubble and noting to stop this money wasting process.

Bruce said...

For non-Australians, the Oz property market appears as a bubble. Reason? Because non-Australians are not using Australian market criteria to judge the matter.

Unlike elsewhere, there is currently a huge shortage in housing supply - something like 4 years lag at present. There is also a huge shortage in land release at the urban fringe (where housing is 'affordable', but commuting time is high). And, there is also a huge level on in-migration (about 1% of Oz pop'n). Any hint of oversupply appears a long way off.

Largely, the aged inner core of major Oz cities have been gentrified with mid to high rise, and the middle ring is considered high value residential - hence large scale densification is not occurring there.

But, the 2 biggest 'factors' are the Australian preference for house ownership, and the mortgage arrangement.

Australians seek home ownership - with about 65% pursuing the option. Home ownership is part
of the national psyche. Apartment living is the domain of the newly 'matched', or those awaiting 'despatch'.

The Australian lending system empowers the current overpricing. Those buying a house usually have to contribute 10 to 20% equity (or hold insurance to cover default if equity is less). And, if the borrower fails, the bank sells the property with any residual difference permanently indebted to the borrower. The banks rarely lose! This system inhibits 'walk outs'. Most householders seek avenues to continue repayments on the basis that they have a roof over their heads, and rent would be a worse housing option.

Past experience shows that in general, the pricing of the Oz housing market races ahead of long term trend for a short period, then prices sit idle till inflation catches up.

The current Oz housing market is 'out of kilter' because of a 'once in a lifetime' event. Australia has not had the burden of a recession for over 20 years. While some (foolishly) think the sun will never set, the probable outcome is a decade or more of flat house price growth. When the Oz economy falls into recession, most likely home owners (most as borrowers) will sit tight and continue to service their 'dream'.


Anonymous said...

Here is what I believe the best article on the Australian Property Bubble.

I think everyone (Banks,Govt,RBA etc...) is extremely worried about the state of indebtedness of the average Australian household, the exposure the Banks have on their loan books, the anount of capital they have to raise offshore at incresing prices. The next 12 months will be very interesting.
I believe sentimant is changing. Where will the animal spirits take us.. Who knows...

Brak said...

I'm afraid I could muster no salacious surprise at the prices paraded before my eyes in the bubble pornography. This is probably because when I was growing up I had it drummed into me that young people would never be able to afford to afford their own home and I believed it and so have never tried to own one. But almost everyone else I went to school with seems to have become obsessed with housing. It's like a sickness. And calling this post 'Australian Bubble Pornography' is appropriate because the obsession with housing does seem to be connected to sex. If I bring a date back to my rented home I generally don't get another date, but they do sometimes do things such as leave decent curtains on my doorstep or buy me furniture on ebay. Perhaps once a sizable portion of the population incorporates housing into their mating rituals a housing bubble like the one we have here in Australia is bound to result.

Anonymous said...

Interesting comments from people so far but...
I think the Sydney market is misunderstood.
There are 'fashionable suburbs' and there are 'suburbs'. Sydney is a huge LA like suburban sprawl. So you can pay $1m to live 20mins from the CBD or 280-450k [Campbelltown, Penrith] to live in the outer suburbs about 1 hour out. There is now a financial apartheid/gap for those who fluked the 'fashionable' suburbs 10-15 yrs ago and rode the wave up, whilst those in the outer suburbs have been left behind with lower price rises. The reality is that there will not be sufficient demand for the 'fashionable' suburbs over the next decade as boomer downsizing begins and more properties come onto the market. So there will be a slow deflation of the 'bubble'. Anyone paying $3m for an underwhelming property will probably find it is still worth $3m in 5 years time. Remember in Australia you cant 'hand in the keys' and walk away. The banks will hunt you down for any shortfall. So people and banks are not overly reckless.
But if you want to check a bubble, look at Perth, classic mining boom town.

Anonymous said...

As an employee of an Australian Bank's credit department, I find myself watching in awe on a regular basis at the willingness of competitors to take on clients from our asset management unit.

There has been a marked decline in quality in our loan book and I am certain that this is an industry-wide phenomenon. The problem appears to be exacerbated by stalling loan growth as sales people become more desperate to hit their sales targets, their standards are slipping further.

An email from an old colleague at a competing publicly listed bank bears the signature "95% LVR home loans, 70% LVR non-conforming".

Who needs to worry about sub-prime when prime lending standards look like this.

Anonymous said...

So much koolaid, so little time left to drink it up. Buy now or be priced out forever!!!

PlanMaestro said...

So the questions are not when and how, but who and how much.

If you have the time it would be nice to know more about mortgage insurers, securitization and bank exposure in Australia.

Do you have CDSs of CDOs? :)

john said...

Hello all,
the video placed in this article was created by my company. We shoot auction videos regularly all over Sydney. I have personally noticed that things are slowing down....for example; only two out of nine properties auctioned by one auctioneer we interviewed over the weekend actually sold.
My prediction is that prices will sit for a few years and in some areas, pull back by 10% or so.
Australia is a huge country with no land shortage.We are in a mining boom. We have high interest rates. A person is unable to 'walk away' from a mortgage. Eventually,very soon, the average house will simply be too much of a stretch for the average income earner. It will be cheaper to rent.
Australian household debt is amongst the highest in the developed world.
No 'pop' but a gradual drop followed by stagnation which will in itself hurt many people due to the reliance on increasing house prices to fund ones future.

Anonymous said...

One feature of all bubbles is locals saying that foreigners don't understand the local market, and how it is priced based on different criteria to foreign markets. Lol, as if the laws of economics are somehow different in one country.

Nevertheless, every single bubble in every single country has always ended in a giant bust. Still, we shouldn't complain about the true believers, if it wasn't for them, we wouldn't have the opportunity to make a killing from the inevitable crash. They will lose fortunes, watch their government's finances go up in smoke, and see unemployment soar to 10%. They will then blame anyone other the prime people responsible for the fiasco - themselves. Just like in the USA, UK etc, they will moan about bankers, mortgage brokers, realtors, anyone except those driving the bubble - clueless property gamblers. They deserve the financial proctology that will be visited upon them in due course.

John - I will make a sporting bet that when the crash comes and your house loses a fortune in equity, your wife will find a way to blame you for it.

tommygunne said...

Irving Fisher: "Stock prices have reached what looks like a permanently high plateau." RE: US Stock Prices, September 1929.

John Hempton: "Australia just reaches a permanently relatively expensive plateau." RE: Australian property prices, October 2010

I lolled.

John Hempton said...

Alas that is precisely how I feel. I know it is not good and the Stock Prices Have Reached a Permanly High Plateu is a real gripe.

I just can't pick the end and I live here.


Arish Mitchell said...

This will be a disaster. Will we see a Japanese style deflation ? Hopefully we can just print money to indebt future generations....

When will the madness end ? Record high rent to income multiples and high household debts will mean this will be very painful indeed.

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The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.