- Money Morning Australia

Why the Australian Property Bubble is Only the Beginning


Written on 14 July 2012 by Shae Smith

There are two things you can’t discuss at the Smith’s extended family gatherings. Religion and politics. And that’s mostly because there’s no talking when those subjects come up, just yelling, fist pumping and table thumping.

And after a recent weekend gathering, we added a third ‘no-go’ topic. After all the noise, thinly disguised name calling and our colour blind electrical engineer uncle setting fire to the dining room table, we decided to never discuss Australian property with them again.

Chances are, we would never have discovered the passion for the Australian property market if it wasn’t for all the media attention toward the deflating Aussie property bubble.

Just this week The Age commented on rising negative equity for homeowners in the outer suburbs.

Many people who bought houses on Melbourne’s fringes in recent years could be facing financial ruin after a slump in prices has left them owing more to the bank than their homes are worth, experts have warned.

But that wasn’t what grabbed our interest. It was further down in the article where a property spruiker changed his tune.

The average plot of land in the outer suburbs is [worth] half what it is in the middle suburbs and it is the land that appreciates, albeit slowly on the fringe. The houses they are building actually depreciate. On top of that, the quality of construction is often cheap. So that’s what’s behind the negative equity.

Say it ain’t so? Aussie homes are built on the cheap? For years property spruikers told you the reason Australian house prices are so high is because of the high quality of Aussie housing.

Six years ago, the Reserve Bank of Australia suggested in a report ‘Australian House Prices’ that the higher quality of new homes added to the overall housing quality in the Aussie property market.

And then in September last year, the Herald Sun repeated something similar:

Higher Australian property prices can also be justified by the higher quality of Australia’s housing stock, with renovations and extensions naturally adding value.

In fact, even as recently as six months ago the spruikers were still claiming Australian housing stock was of a high quality. As Paul Bloxham, an economist at HSBC wrote in The Australian Housing Bubble Furphy report:

‘First, the quality of the housing stock is high. Australia has the largest dwellings in the world, and they are of high quality. Estimates suggest that the average Australian dwelling is 214 square metres, and the real expenditure on new dwellings is now 60 per cent higher than it was 15 years ago, reflecting the increase in both the size and quality of dwellings.’

At the time, Kris Sayce didn’t buy the spruikers talk. He told Money Morning readers in his article Another Housing Market Myth Busted, ‘To our mind Bloxham had confused quantity of housing (the size of houses), with quality of housing (how good they are).

How is it that suddenly Australian houses have gone from being of the highest build quality in the world to cheaply built?

You see, the idea that Aussie homes were of a high quality was just a myth, often used to support overpriced houses. And now those myths and hype are falling apart.

But of course, an Aussie housing crash is nothing compared to another, bigger property bubble…

That’s right, China.

Economics professor Li Daokui from Tingshua University recently told the Financial Times, ‘The housing market problem in China is actually much… much bigger than the housing market problem in the US and UK… It’s more than [just] a bubble problem.’

Yes, We Really Mean Billion

Around 2009, hedge fund firm, Kynikos Associates, CEO Jim Chanos wanted to find out exactly why mining stocks were so profitable during America’s great recession. His team came back with one word: China.

So he started digging deeper. What could China be using all this copper, iron-ore and cement for?

One of his analysts looked into it. He did the math. And checked his figures….three times. During the northern hemisphere summer of 2009, China was building 5.5 billion square meters of high rise space.

Half of the construction space was ‘office/mix use’.

Chanos tried to put the data into perspective. He said: ‘Well gee, that’s 30 billion square feet use for office mix use. And 30 billion square feet is a five foot by five foot office cubical for every man, woman and child in China.’

Using this information, Chanos decided China wasn’t a stable economy.

But that 5.5 billion sqm of high construction was over three years ago. And the construction hasn’t stopped.

Even though both home sales and demand for high rises are slowing, building is still going ahead at a rapid pace.

At the current rate, every five days China completes a new skyscraper. According to a report by Skyscrapers Magazine, by 2016 China will have more than 800 skyscrapers taller than 152 meters. Four times more than the US.

Less than two months ago, Chanos told CNN, ‘We’re bearish on China’s property sector and the credit sector. This is a country that’s in the middle of an epic property bubble and construction bubble that will end at some point and it won’t be pleasant when it ends.

China Going From Boom to Bust


Chanos isn’t the only analyst who’s negative on China.

‘China is now on the other side of its boom,’ says Greg Canavan, editor of Sound Money. Sound Investments.

And the economic growth numbers are just the beginning of a China slow down. Gross domestic product was down to 7.6% for the second quarter, down from the previous quarter’s 8.1%.

Consumer price inflation grew by only 2.2% and the producer price index (PPI) dropped to 2.1%. Since March, the PPI has fallen every month.

I am absolutely certain that combining a credit bubble with a Communist regime was a recipe for disaster. The credit bubble is playing out like they all do — first the inflation, then the deflation. First the boom, then the bust,’ Greg tells me.

The Chinese slowdown is gathering pace. This has major implications for Australia.’

As an Aussie, you can’t stop the Chinese economy from failing, but you can prepare your portfolio.

Greg has detailed insight and information into what he believes is the most important development for Australian investors right now — how to protect your wealth from what he calls the ‘China Bust’.

China’s economy is changing…and fast. If you want to hear what Greg has to say about the coming ‘China Bust’, click here.

Shae Smith

Money Weekend

The Most Important Story This Week…

The reason Australia managed to dodge a recession during the global financial crisis in 2008 was thanks to China.  This was because China spent billions of dollars to stimulate its economy with huge levels of construction. This translated into huge profits for the big Aussie miners.

Thanks to this Australia has managed to avoid the worst of the global recession seen in Europe and the USA.  But just as China has held the Australian economy afloat so far, there is a massive risk that China will cause it to sink.  See what Kris Sayce says in How to Survive and Thrive from China’s Bust.

Other Recent Highlights…

Kris Sayce on Payday Loans: Why This Lender of Last Resort Isn’t the Bad Guy: “But there is one line of business that has resisted the urge to fiddle with interest rates. And not surprisingly, in a world where credit and debt have become dirty words, this line of business is doing very nicely indeed…”

Keith FitzGerald on What I Wish Ben Bernanke Knew About Japan’s Economy: “Ben Bernanke and his central banking buddies think it’s easier to print money than actually stimulate real growth. In doing so, they are re-creating Japan’s “Lost Decades” here at home with years of smouldering, piss-poor growth as our destiny. Yet it doesn’t have to be that way. We can still choose a different path.”

Dr. Alex Cowie on What A Slowing Chinese Economy Means For Pork Chops: “It’s been well over a year since I tipped any stocks in iron ore, coking coal, and copper – commodities tied to Chinese infrastructure and construction…But I’ve steered clear of those commodities for a while, focusing instead on strategic minerals such as graphite and lithium. This strategy is to avoid the effect of the crashing Chinese property construction sector.”

John Stepek on The Sticky Plaster Fix For the Spanish Economy: “There was the prospect of the European bail-out fund buying sovereign debt too. And yet Spanish bond yields soon ran back up to around the 7% mark. So there’s been another emergency discussion session. So here’s the big question: is another eurozone disaster looming? The answer might surprise you…”


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