Australian Real Estate: A Glimpse of the Future

The discussion of Aussie real estate tends to focus on our eastern seaboard cities, Sydney and Melbourne. But for an insight into what it could look like if it all starts to go wrong, turn your eyes west.

That’s according to the latest data from credit rating and research firm Moody’s.

According to Moody’s, mortgage defaults are on the rise in Western Australia. Income from the mining boom has well and truly receded, leaving many unable to keep up with repayments. As you can see below, mining investment peaked in 2012, and has been heading downward ever since.

Source: RBA, the Economist

Now, five years after jobs in resources began to evaporate, we’re seeing the delayed effect on the real estate market. It can take years for an over-indebted family, falling behind on payments, to exhaust their options and be forced to default. Some, the lucky ones, probably got out early, while prices were still close to the highs. But many must have held on, hoping things would turn around.

Now, in 2017, we’re seeing a spike in defaults, as these investors finally run out of options.

And, interestingly, it’s investors who are taking the brunt of the pain. That may not be what you expected. Surely an investor with multiple properties would be in a stronger financial position than a family trying to pay off their own home? But the Moody’s report found that investors have overtaken owner-occupiers on defaults. And the rate of investor defaults is growing much faster.

Source: Moody’s

The reason is simple. Rent.

Perth rental prices have fallen as much as 20% from the 2013 peak. As rental rates decline and vacancy rates rise in Perth and across WA, and income from the mining boom is lost, investors take a double hit. Owner-occupiers, meanwhile, aren’t dependent on rental prices to keep the mortgage paid. So, while owner-occupier defaults have increased, investor loans are defaulting faster.

Now, with house prices falling rapidly, investors are trapped between a rock and a hard place. They could sell, but at a loss, and possibly for less than they owe against the property. Or they could hold on, hoping to avoid default long enough for a recovery. With no clue as to how many years away that recovery could be. For investors in some mining towns, it may never come.

The Australia-wide average for investment properties sold at a loss is 12%. The average for Perth is now more than double that according to Moody’s and CoreLogic, at 26%. And for regional WA, it’s a shocking 45%.

Is this a preview of what’s to come for the rest of the country? With the rest of Australia’s real estate markets less dependent on the mining boom, they lack the same trigger for falling rental prices and rising defaults. In major centres on the east coast, the real estate market seems to be feeding on itself, with no need of a mining boom to drive prices. Prices go up because they’ve been going up. They keep rising because everyone expects them to rise. What other reason do you need?

That kind of irrational exuberance can only last so long. But trying to pick the moment when it all falls apart is a dangerous game. You can’t see the future.

At least, I can’t. But there’s one individual here at Port Phillip Publishing who may be able to. It’s not exactly that Phil Anderson claims he can see the future. Instead, Phil argues that real estate markets move in cycles, which can be understood and even predicted. Western Australia may have peaked and fallen earlier than the rest of the country. But Phil believes that a similar crash is coming for the rest of the country, eventually. And his research provides some insights into when, and the possible triggers that will cause it. You can find out more about Phil’s work here.

In this week’s Money Morning

On Monday Greg explained the concept of the ‘Network Effect’, and why it matters for investors today. Especially anyone exposed in any way to the NASDAQ. While US tech stocks made new highs last week, Greg asks how much higher it can go from here? To read why Greg thinks the tech sector is ripe for a sharp correction, you can find Monday’s Money Morning here.

Howard Marks, co-chairman of hedge fund Oak Tree Capital, sounded a warning on the US market recently. In Tuesday’s Money Morning, Greg looked at the story behind Marks’ note of caution, and explained why you may want to turn a cautious eye towards debt levels. Especially in the tech space. To read why, click here.

In Wednesday’s Money Morning, Greg looked at the arrival of Amazon on our shores. The threat to Aussie retailers, and through them to certain retail-focused real estate investors, is obvious. But Greg pointed out that traditional retailers are being squeezed from an entirely different direction, as well. And that could be bad news not just for retailers, but for Australia’s economic growth generally. To find out why, you can find Greg’s article here.

Sam wrote on Thursday about the phenomenal gains being made in the world of cryptocurrencies. With such a new type of asset, which many don’t yet understand, it can be easy to dismiss it. And as gains in the thousands of percent pile up, it all begins to sound a bit too good to be true. Sometimes it is; cryptocurrencies are still the ‘wild west’, and it’s easy to get scammed. But as Sam explained, the gains being made in the likes of bitcoin and other cryptos are real. While the market may be risky, with the right knowledge you could be a part of something rising so fast I hesitate to even write the numbers. Sam isn’t afraid to talk about multi-thousand percent gains, though. You can read exactly how high it could go, here.

On Friday, Sam examined the ramifications of a lawsuit that was announced on Thursday against the Commonwealth Bank of Australia. The Australian Transaction Reports and Analysis Centre is suing CBA for 53,700 breaches of money laundering and counter-terrorism-financing laws.

What will this mean for you? Sam sees an imminent Royal Commission into the banking sector. One which could damage the reputation of banks, even if it doesn’t hurt their hip pockets. But, with the Big Four banks acting as pillars of the nation’s superannuation system, it could also mean that you’ll be kissing any super gains this year goodbye.

On the upside, it could creating an opportunity for you in what Sam says is the biggest financial revolution of them all: cryptocurrencies. How? Find out here.

Tyler Jefferson,
Editor, Money Weekend

Tyler Jefferson joined Fat Tail Investment Research in 2012. With a background in publishing, he started out as part of the team working behind the scenes with your Editors to bring you Money Morning each day.

When he joined, Tyler was Fat Tail Investment Research’s 12th employee. Today that number has grown to over 50, as more and more readers turn to Money Morning as their source for independent financial analysis and ideas.

Today as Managing Editor, Tyler still edits the articles you read each day. Along with that, he occasionally contributes to Money Morning with his own irreverent take on the most interesting news and opportunities for you.

Money Morning Australia