Insanity on the Global ‘Bang for your Buck’ Index

I was reading Money Morning on Thursday. My fellow Money Morning Editor Callum Newman was writing about Germany’s precarious position.

In particular Callum made note of the incredible house price growth in Germany. Historically Germany has had the highest percentage of renters to homeowners in the developed world.

A fairly consistent historic number has been 60% renters, 40% homeowners. Today it’s closer to a 50/50 split. In Germany’s neighbours the Netherlands, France and Austria it’s roughly 65% homeowner, 35% renter.

The UK is also about 65% homeowner to 35% renter. Compare that to Australia, where the split is closer to 70% homeowners and 30% renters. In Spain the figure climbs up to about 79% homeowner 21% renter.

And what about our friends over in the US? Well their homeownership rate is around 64%.

But what does this all really mean?

Well not a lot. Who really cares what the proportion of owners to renters is? The thing people really care about is their ability to buy their own home. In particular, young people and their ability to buy a home.

The renter to homeowner ratio comes into play when it’s ‘forced’ renters versus homeowners. Now you could argue that anyone can buy a home if they really want to. The problem is people’s expectations.

You see, property prices all over the world vary. What you get in Melbourne versus what you get in Berlin, London, Amsterdam, New York, Madrid or Paris vary wildly.

I call it ‘bang for your buck’.

Now you might think that you don’t get much ‘bang for your buck’ in London or Paris or Amsterdam. And you’d be correct.

For instance in South Croydon, Surrey, UK, things are a little out of control. Now I’ll be frank with you. South Croydon isn’t the nicest area in the London. It’s not a slum, but it’s not exactly Richmond Hill either (Google Richmond Hill UK to see what I mean).

But over here in Britain, in Thursday’s Daily Mail was an article about a couple on struggle-street. With a combined income of £200,000 (just shy of AU$400,000) they are struggling to survive thanks to the high cost of living in London. They’re in the ‘squeezed middle-class’.

It’s also worth noting their house in South Croydon is worth £700,000. That’s around AU$1.4 million. Their plight was best summed up with a picture…

Small Violin

Source: Daily Mail

The family in question no doubt have a mortgage. After all, who really has a completely paid off house in South East London under 80 years of age? So why don’t they just sell up and buy somewhere more affordable?

I’ll tell you why. Irrational thought. And hysteria. But more on that in a moment…

Failing the ‘bang for your buck’ test

On my scale of ‘bang for your buck’ this $1.4 million South Croydon home is likely around 120 square meters of living space. That’s an insane $11,666 per square metre.

To give you perspective, your bed takes up more space that one square metre.

Look elsewhere in London and you can find a two-bedroom 60 square meter townhouse for sale at £500,000 ($1,000,000). That’s right, just 60 square meters. That’s an astounding $16,666 per square meter.

London does not pass the ‘bang for your buck test’.

What about on Aussie shores? After all you don’t believe Australia is in a property bubble do you? Well if you’re a homeowner, shopping for a home or recently bought a home, you absolutely don’t believe there’s a bubble…or you’d look quite the fool wouldn’t you?

Well in Richmond, Melbourne you can buy a two-bedroom townhouse for $1.25 million. It about the same size as the joint in South Croydon, 123 square metres. That’s also an eye watering $10,162 per square metre.

In Sydney, out in Alexandria you can jag yourself a two-bedroom place for $780,000. It’s enormous…at 73 square metres. You guessed it, that’s $10,684 per square metre.

Melbourne and Sydney do not pass the ‘bang for your buck test’, either.

In Amsterdam you can get a three-bedroom townhouse for €685,000 (AU$1.05 million). On 128 square metres of living space that’s $8,203 per square metres. Hang on…this is Amsterdam.

That positively cheap compared to London, Sydney and Melbourne.

What about Paris then?

In the 18th district of Paris you can also find a 100 square metre three-bedroom townhouse for €569,000 (AU$878,000). An agreeable $8,780.

And Berlin?

Well townhouses in Berlin are a little harder to come by. It’s mainly apartments in Germany’s capital. However a maisonette in Mitte with two-bedrooms at 107 square metres will set you back €699,000 (AU$1,079,000).

Oh dear. Callum was right. That’s $10,084 per square metre.

All rational thought out the window

What you’ll notice is that all the properties compared above are inner city. They’re all also two bedroom or more. That’s because this is the ‘entry level’ place for young people. Two young professionals perhaps wanting to start a family need that kind of space.

So to maintain the lifestyle they want they have to fork out the dough. Or move out — really far out — into the suburbs. Lifestyle or property, that’s what the equation now often boils down to.

But who can really afford a $1 million house? Well you might be able to afford the mortgage, barely. But then the lifestyle will disappear too. Or you could just fund it all with more debt. That seems to be the solution if you look at Australia’s household debt and credit levels.

Debt to buy the lifestyle — that’s how to do things right? Of course not. That’s outright insanity.

The problem is for too many people it’s not insanity. It’s just what it is. And that’s the real issue here. Callum was spot on when he described the ‘property ladder’ as ‘mythical’. There’s a social desire in many countries around the world to be on the property ladder at any and all cost — and at any and all debt.

Clearly in the past Germany has not had this desire, and the country has benefited from it. Now with a rush on house prices that’s all changing. Now Germany is becoming much like Australia and the UK.

The social delusion is that any price is a good price. After all, property only ever goes up…

So most new buyers will (at best) put down a 10% deposit. Maybe less. Barclays in the UK have a 100% mortgage again. Will they ever learn?

The fear of missing out drives prices higher. All rational behaviour goes out the window. Bids go in, prices go up. Hysteria sets in and prices go up. More debt, higher prices. Until…jobs disappear. Or rates rise. Then trouble sets in.

The strange part is what’s happening to property is exactly what happens to stocks in a bubble. Human behaviour and irrational though invades the psyche. All logical, rational thought goes out the window.

The major difference is it takes longer to happen with property.

With stocks you want ‘bang for your buck’. You want a stock at a good price with loads of potential. You wouldn’t buy a stock at the peak of hysteria. Yet when it comes to property it seems the peak of hysteria is just more reason to buy at a higher price.

Until the bubble bursts. And it will. It will be carnage on the property market at home in Oz and around the world. And it’s coming faster than you might think.

Regards,

Sam


Sam Volkering is an Editor for Money Morning and is small-cap, cryptocurrency and technology expert.

He’s not interested in boring blue chip stocks. He’s after explosive investments; companies whose shares trade for cents on the dollar, cryptocurrencies that can deliver life-changing returns. He looks for the ‘edge of the bell curve’ opportunities that are often shunned by those in the financial services industry.

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