Australia's obsession with real estate over the last 50 years, has created a generational debt addiction and record levels of private debt to GDP of over 200% (see chart below). Because of the record debt levels Australia now has a real estate bubble and just received confirmation with the title of coming 4th, behind Vancouver, London and Stockholm in the UBS Global real estate bubble index.
See link for full story on UBS Global Bubble index - www.zerohedge.com/news/2016-09-27/global-housing-bubble-biggest-these-six-cities
Our private debt levels relative to GDP has been steadily rising since the 70's (see chart below), surpassing the USA and most advanced economies. Besides pulling back so slightly in 2009 and 2010 due to the GFC, we have not looked back. Since Australia's debt levels have kept rising, real estate prices have followed suit, as people outbid each other to drive prices higher. This in turn has further fueled more speculation into real estate as asset prices rise year after year without hesitation.
In contrast to the USA and advanced economies, Australia's private debt to GDP levels are at record highs, where as the USA private debt tapered off from 2009 - 2012 as the consumer deleveraged, after millions lost their homes. Since then the private debt has been going sideways relative to GDP, which explains one of the reasons why growth in the US in the last few years, has been so sluggish compared to previous recoveries from a recession.
Income Vs Real Estate Prices
A key ingredient to determining whether an asset is in a bubble is to compare the current value of an asset compared to income / rent levels.
The chart below shows since 1986 rents and construction prices have risen 25% -30% adjusted for inflation, compared to housing prices which have risen by 270+% adjusted for inflation over the same period.
If you take a look at household income it has risen by approximately 50% adjusted for inflation since 1986, which explains why its has become increasing difficult for first time buyers to get into market.
The exponential rise in real estate prices from the mid 80's has been clearly supported predominately by an equally significant rise in the level of private debt, rather than being supported by increases in household incomes or rent prices.
Australian Real Estate Bubble Parody Video
Below is a short real estate parody video that shows the crazy lengths Australians go to so they can participate in the real estate bubble as the fear of missing out drives their decision making.
Even though this is a parody the reality is, the themes shown here resemble behaviours similar to the current state of the Australian real estate market.
Real Estate Now The Biggest Contributor To GDP
Australia has experienced a record breaking 25 years of GDP growth without experiencing a recession, which is defined as 2 quarters of consecutive GDP declines.
Since the mining boom has slowed the last few years, the real estate and related industries have become more important within the economy, as it has been a big contributor to Australia's GDP growth.
Looking at the chart below of Australia's Industry share of GDP, I have outlined in black - Ownership Dwellings, Rental, Hiring and Real Estate, as well as Finance and Insurance. These 3 real estate industries account for a combined 20.3% of Australia's GDP.
When you combine the construction industry 7.7% contribution to GDP, of which real estate construction would be a considerable component of the construction industry. You realize that real estate industry is the single biggest industry by GDP in Australia, and any downturn in real estate prices and or construction activity would impact on Australia's GDP considerably in the future.
Lastly I wanted to show a real life of example of a house that was sold this week to illustrate how much real estate prices have risen. The picture of the house below is a 2 bedroom house located in Greenarce, a suburb that is 17km away from Sydney. It sold for AUD $926,000 and features 545 sqm of land and is un-renovated.
If you want to take a look at Australia's REIT's sector review and how it is holding up, despite record levels of debt and low interest rates you can click on the link at: Aussie REIT Sector Review
Mortgagee Property Youtube Channel
The 7 Year Experiment
Central Banks around the globe have experimented with a myriad of different policy tools over the last 7 years, with the explicit goal of reigniting global growth to prior 2007 levels. Central Banks figured if they could reverse falling asset prices and deflation, by creating inflation via Quantitative Easing (QE) they would be able to re inflate asset prices and kick start growth.
However since the global economy slowed down in 2007 and reversed course, crashing in 2008 and 2009, growth hasn't been quite the same. In fact the recovery from the 2008 recession has been the weakest in history.
By flooding the world with trillions of dollars in liquidity and creating money out of thin air, by printing digital money or QE and dispersing it through the banking system, the Central Banks have been able to create the illusion that the global economy is growing and things are back on track.
Yes the S&P 500 is just off all time record highs in price, and yes real estate prices around the globe have either recovered most, or all of the losses prior to the 2008 crash. Better still real estate markets in some countries like in Canada and Australia have surpassed their previous highs . Wages have also been rising steadily for the last 5 years after falling from 2008 to 2011. Yet for the average person it doesn't feel like we are better off with higher levels of standard of living. More importantly we cant seem to pin point the exact reason why.
The Hidden Tax
The actual reason why the recovery from 2008 crisis has been so sluggish, with the weakest on record is because real household incomes adjusted for inflation have gone nowhere. In fact real household wages are down 1.1% in the last 16 years. This is evident even though nominal wages have actually grown by just over 40% since the year 2000. (See chart below Titled: Median Household Income in the 21st Century)
Inflation is sometimes referred to as a hidden tax, because you don't seem to notice it as much on a day to day, quarterly or annual basis. Yet inflation over a 5 or 10 year period or longer can be really easy to spot when you take a look and compares prices over longer periods for goods, services and assets like food, rent, education and real estate.
Since real wages adjusted for inflation has not increased in 16 years, yet the level of private debt has grown dramatically over the same period, the share of wealth by the bottom 90% of US households has actually been declining. (See chart Titled: Distribution of wealth in the US since 1917)
The reason for the decline is because the bottom 90% have used debt to fund increasing consumption on their home and living expenses, since their real wages have stagnated. In comparison the top 0.1% have steadily been increasing household wealth as they have been able to utilize debt and higher equity / capital levels to take further advantage of rising asset prices over time.
Lastly to further illustrate the real cost of inflation, and how it can be subtly hidden from most people. Take a look at the chart below of the S&P 500 which has been adjusted for inflation.
If you take a look at the current level on the right hand side of the chart you will notice its only just above the price level from the year 1999 / 2000 level.
The second interesting point is that the last bull market that occurred between 2001 - 2007 did not reach the prior 1999 - 2000 level when adjusted for inflation, even though the nominal price chart for the S&P 500 recovered to the same level as 1999 - 2000.
Some Things Cant Be Manufactured
So after experimenting with so many different policies and trillions of dollars in QE, Central Banks have achieved the outcome they have desperately tried to create, inflation and an artificial type of manufactured growth. Artificial because when you factor or adjust for inflation, you realize that there isn't a whole lot of real growth to be shared around.
Commonwealth Bank (CBA) is the largest company listed on the Australian stock market (ASX 200) with a market cap just over AUD $123 Billion.
Being the largest company on the ASX it is a widely held stock among investors directly as shareholders and indirectly via managed funds and super funds both domestically and internationally.
Similar to Woolworths that was recently reviewed on this blog see: Has woolworths wow turned a corner?
CBA had experienced strong and consistent share price gains over a number of decades and has been a very popular stock for that very reason.
Below you can see that CBA has joined a great run from the $5.80 a share range back in 1992 to the more recent highs achieved in March 2015 of just over $96 a share.
More recently CBA has been struggling to reach new highs in its share price. Since touching the $96 level last year the stock has been in a downtrend and bouncing off the $70 a share range to form a strong support level.
Below on the weekly chart you can see the level marked with a black line labelled - $70 strong support level, has so far not been breached, as CBA is currently trading just under the $72 a share level today.
If CBA was to break the $70 support level the next support area would be around the $64 a share range shown below with the black line labelled - $64 next level of support.
Zooming in on the stock you can clearly see since October last year that CBA has been bouncing off the $70 a share level a number of times and is close to approaching the $70 level for the 4th time in 12 months.
CBA just recently reported its earnings last month and based on the market's response sending the share price from around $78 a share when they announced their profit result to just under the $72 a share today the market believes the profit results were underwhelming for the largest bank and company in Australia.
Disclaimer: This post was for educational purposes only and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide those services.
Australia has had an infatuation with real estate for a number of decades now, as many Australians have generated significant wealth through real estate as the local market has been rising steadily since the early 1980's.
Among a number of industries that have done very well from the popularity and boom of real estate prices has been real estate agents who typically charge around 2% plus marketing costs to vendors wanting to sell their real estate. Based on the median price property in Australia of just over $600,000 nationally the typical cost charged by agents averages around $12,000 plus marketing cost which can range but usually are around $2,500 bringing the total to around $14,500.
This where a new entrant to the Australian market comes in, based in the UK and has just expanded to Australia, Purplebricks is launching and is bringing a new low cost fixed fee disrupting listing model to the Australian real estate market.
By tapping into the latest digital media technology Purplebricks can lower the cost to sell real estate and is offering their service for a fixed fee of $4,500 per property. This includes all marketing costs including advertising on popular local online real estate sites like realestate.com.au.
Having listed in the UK and with a decent starting marketing budget of $17.2 million Purplebricks are looking to make a big impact in Australia as they look take market share from the local competitor real estate agency's.
For further information visit:
http://www.afr.com - Subscription required
In this short video Satyajit Das, gives a frank and dim assessment on the future outlook of Australia and their prospects for jobs, income levels and life in retirement.
Via Social Icons
I am a private trader and equities investor that loves the trading and investing world, following the markets and everything in between.