In today’s Money Morning…the death of the great Australian dream…would you be willing to gamble with 40 years of your income?…why Australia’s love affair with debt could be the death of us…and more…
I’ve given up on the great Australian dream.
It wasn’t an easy decision. Like most Australians, I was raised to view home ownership as a rite of passage. Four walls and a roof are as crucial a stage in life as any part of your education or career. Hooking yourself up to a 20 or 25 year mortgage may well be a more important stage of adulthood than marriage or having kids.
But that’s part of the problem, isn’t it? A 20 year mortgage doesn’t cut it the way it used to. Hence the rise of the 30 year mortgage as Australia’s ‘new normal’. And if the introduction of 40 year mortgages to Australia in 2008 is anything to go by, the trend isn’t looking good.
I’m not the only younger Australian who’s given up on the dream of a home to call my own. An increasing number of my friends look at the prospect of saddling themselves with a lifetime of crippling debt…and choose another path.
You can see below the rise in median dwelling costs compared to incomes in Australia.
While the white picket fence may have been achievable for my parents (and for many of our readers), any young Australians looking to enter the housing market today face an intimidating climb.
Putting so much of your income, for so long, into one asset is an incredible gamble. What if you spend 40 years paying it off, most of your working life, and then find it’s worth less than when you bought it?
And we may be right to hesitate. Robert Mellor, managing director of economic forecasting agency BIS Shrapnel, said earlier this year that he expected stagnant or falling prices for the next three years.
He told the ABC’s Business PM:
‘Will there be a correction in prices in ’17, maybe into ’18? Yes — our view is actually quite pessimistic on the outlook for house prices across Australia.
‘BIS Shrapnel forecasts the strongest house price growth will be in Hobart and Canberra over the next three years, but even there the rises are tipped to be between 10-15 per cent, or less than 5 per cent per annum.’
If he’s right, then perhaps a correction will be enough to entice some younger Australians back into the housing market. Or perhaps not.
If the property market starts to falter, don’t be surprised to see the RBA once again ride to the rescue of landlords, foreign owners hiding their money in Australia, and Parliamentarians with half a dozen investment properties.
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Toxic Levels of Debt
This week in Money Morning, Sam and Greg both looked at the RBA’s continued ultra-low interest rate policy.
Sam discussed the toxic levels of debt that have crept into Australia’s economy. Cheap debt let many of us chase the housing dream, but what are the long term dangers?
And Greg looked at what a sustained low interest rate environment does to our perspective on stocks. What does ‘overvalued’ even mean in a market like this? But that’s not all. Let’s take a look…
On Monday Greg looked at the possible effects of President Trump rolling back financial sector regulation. Regulation that was put in place to prevent a repeat of the Global Financial Crisis. With the restraints coming off, is now the time to get out of the market? Should you put all your money in a mattress and wait patiently for everything to collapse?
Greg argues no. Or, at least, not yet. And the GFC is actually the perfect example of why. It took years for the extreme low interest rates of 2002 onward to lead to massive speculation and then collapse in 2007/08.
Few can afford to spend half a decade out of the market, just waiting for something to happen. And even if the deregulation of the financial industry does lead directly to another collapse, as many are predicting, there should be significant gains made along the way. The key is to invest to capture them, while never forgetting the risks that could be growing. You can read the details in Greg’s article, here.
Greg began with a similar theme on Tuesday. He asked, if markets are really as overvalued as some say, overvalued compared to what? That, he argues, is why interest rates are so central to stock and bond markets. If stock prices are high relative to their yields in a high interest rate environment, then yes, stocks might be considered overpriced. But with interest rates at 1.5% in Australia, good value for stocks might be at a very different level.
So, whether you like them, hate them, or simply don’t care, central banks remain vital to understanding stock markets. In Tuesday’s article, Greg explained why he expected the Reserve Bank of Australia to leave interest rates at 1.5% in that day’s meeting. And he looked at what that means for your investments. To read the details, you can find Tuesday’s Money Morning here.
When markets become quiet for a time, it can be difficult to guess where the next big move will be. Are we consolidating before the next move upward? Or has the bull market run out of steam, and is about to crash? On Wednesday, Greg used his unique mix of charting and fundamental analysis to forecast where the Aussie stock market is likely to head next. His conclusions involve a surprising new energy story; Australia’s largest in years. You can read Wednesday’s article here. And to find out more about the urgent energy opportunity Greg has uncovered, click here.
Debt to Fuel the Great Australian Dream
On Thursday Sam took his own look at interest rates, debt, and the potential dangers for the Aussie economy. Australians have leveraged themselves higher and higher to get onto the property ladder. And to support a standard of living they couldn’t otherwise afford. That seems to be working while rates are low. But Sam argues that a rising debt load and falling household savings are a recipe for disaster when rates rise. And even if the RBA doesn’t raise rates, retail banks might choose to. Or be forced to. You can read why here.
But if a debt-fuelled real estate bubble is the only thing in Australia that’s made any gains in the last decade, what real choice do you have? On Friday, Sam looked at the Aussie stock market’s ‘lost decade’. But he argues that appearances are deceiving. While the market may have gone nowhere for 10 years, if you could find the right individual stocks, you could have made incredible returns. But how do you sort through the ‘noise’ to find what you’re looking for? Sam explains in Friday’s Money Morning.
After this week’s RBA meeting, Kris and Woody couldn’t resist having their own stab at Aussie real estate in the podcast this week. They attempt to answer the million dollar question; when Baby Boomers start selling or downsizing, who exactly is going to buy? And they look at one ironic indicator that could be your sign that everything is about to fall off a cliff. You can listen here.
That’s it from your Money Morning team this week. But that’s not the end of the conversation. The great Australian housing debate is almost as large today as the great Australian housing bubble that we’re discussing.
Can prices keep rising? Will we see a correction somewhere in the next few years? Or even a crash? Will your disillusioned Money Weekend editor one day change his mind, amid falling prices, about opting out of the Australian dream, and buy a cute inner city apartment with just enough room for his girlfriend and two cats?
We’d like to hear from you. Perhaps you’re approaching retirement, and relying on your property investments to fund it. Or maybe you too are keeping your money out of the bubble. Tell us why. Write to email@example.com with the subject line ‘Aussie housing debate’.
Editor, Money Weekend
Numbers of Interest, as of Friday’s Close
Aussie Dollar to US Dollar: 0.7639
West Texas Intermediate Crude Oil: US$53.05
ASX 200: 5,720.60