When Housing Falls, Australia May Fall With It

A lot of ink is spilled every time the housing market hiccups. The doom and gloom headlines come thick and fast. Everyone want to be able to say that they called the peak of the market. And with good reason. Housing, and housing debt, have swollen to a frighteningly large portion of our economy.

Any market commentator who successfully calls the peak could dine out on it for years.

Of course, the more that housing doubters point to each stumble as the start of a collapse that never seems to come, the more it seems like they may be crying wolf. And that includes your own humble weekend Money Morning editor.

I’ve long since given up trying to guess when housing will stop booming in Australia. Yes, prices are out of control relative to incomes. Yes, housing debt levels are a huge risk to our economy. Yes, the banks are dangerously dependent on that debt, and themselves make up a huge portion of our stock market.

All of that has been true for years. And still house prices have risen. Every time it looked like the trend might reverse, it has instead regained strength.

Despite that, there are good reasons why everyone watches housing so closely for signs of a reversal. And why they can’t help debating if ‘this is it’ every time growth momentarily slows.

Controversial financial commentator, Satyajit Das, didn’t try to call the collapse this week. But he did argue that Australia is ‘still far too dependent on “houses and holes.”’ Das points out in the Financial Review how much of property’s growth is dangerously speculative. By measures such as price-to-rent or price-to-disposable income, our property market is ‘substantially overvalued’.

Those measures aren’t relevant if all you’re after is capital growth. If you can always sell the house for a higher price, any rent you earn is gravy. Who cares how small it is? Even if you acknowledge that the investment is foolish on its fundamental merits, there will always be a ‘greater fool’ to sell it to later.

But if people stop believing that property prices never fall, you may struggle to find your greater fool. Suddenly the income from rent becomes a much more important consideration.

On those measures, Aussie property looks pretty bad.

The lion’s share of the risk

Ryan explained in Friday’s Money Morning that 60% of the average Australian’s assets are in property.

That percentage skews even higher if you look at Aussies in or near retirement. Those Australians most dependent on income from investments, and least on income from work, would be hardest hit by any slowdown or fall in property prices.

Keep that in mind next time you see an article bemoaning how rising prices are locking young Australians out of the property market. Younger generations are finding it increasingly difficult to purchase their own homes — much less investment properties. But that restriction may one day soon start to look like freedom, when the bubble finally bursts.

The generation of Australians approaching retirement today have benefited greatly from the boom in housing. But of course, that also means that they are most exposed to any dangers in that market.

And even if you’ve taken your profits out of property and invested them elsewhere, you still can’t afford to ignore this issue. With so many Australians holding mortgages, and the big four banks making up such a large part of our economy, any shock that starts in housing could spread across the entire country. Few sectors, if any, would be entirely spared.

In the event of such a shock, we may be surprised by which shares are spared the chaos. Sam Volkering has recently published a report about the unexpected ‘shock proof’ stocks, which he argues should weather this kind of crisis. They may be the exact opposite of the stocks you typically think of as safe havens. You can read Sam’s surprising argument here

This week in Money Morning

Investors can’t ignore politics. Even when we may want to. The effects of national and international policies and events are just too large in markets. That was Ryan’s argument this week. He looked at some of the ways that politics and political instability are affecting the Aussie market right now, and what could be coming.

On Monday Ryan explained how US President Donald Trump has almost singlehandedly reversed social media platform Twitter’s fortunes, by making it his spiritual home. 140 characters (or 280, after its recent doubling) may not be enough for a nuanced approached to policy or international relations. But Trump’s frequent posts have clearly changed the face of the US presidency, and how the world views it. And possibly saved Twitter’s financial fortunes in the process.

As Ryan explained, Twitter was losing ground to the other social media platforms, until Trump’s outrageous statements brought the spotlight back.

Social media is a fast-changing and unpredictable sector. It can often be difficult to understand or predict, even for the young digital natives who make it their home. But as the millennial generation age into their strongest earning and spending years, you can’t afford to ignore it. To read Ryan’s insights into investing in the digital age, check out Monday’s Money Morning here.

Tuesday’s article also focused on Trump and his effect’s on global markets. Ryan discussed the three key pillars of Trump’s successful election campaign, and how each is translating into his administration (or failing to). Ryan believes that the third and final ‘Trump card’ will be played soon. And if he’s right, now could be your chance to get invested ahead of the market. Read the details here.

Modern technology consumers have been spoiled in terms of attractive, functional design. That was Ryan’s argument on Wednesday. And when you consider Apple’s fortunes, it seems he has a point. Apple dominated the early years of the smartphone revolution because of their attractive, easy to learn interface. It allowed people to try out new tech without being intimidated by learning complex systems.

In a world where an increasing number of potential customers grew up on iPhones and their imitators, it pays even more to make your tech accessible and enjoyable to use. That goes doubly so if you’re trying to entice them away from competitors who have very similar offers.

That’s why Ryan is concerned about Commonwealth Bank’s latest moves. The ideas may be sound. But could something as simple as an ugly, unintuitive design be enough to undermine it? Read more here

The Australian state and federal governments came together to slash civil liberties this week, with the vague promise that this loss of freedom will somehow make us safer from terrorism. Ryan wrote on Thursday about how worrying these powers are, and why we should be suspicious whenever governments award themselves more power over our privacy. Not just because of the dangers of government overreach and corruption. But also because of the dangers of government incompetence, and of invasively gathered data falling into criminal hands.

You don’t have to look far back to find examples of the Aussie government failing to protect their digital systems. And as more and more surveillance data is built up around each of us, with no way to opt out, the danger grows.

There may be little you can do to fight back against the sprawling growth of the police state. But Ryan argues that there are some private companies engineering viable privacy alternatives, and profiting from people’s desire to hang onto their freedom. To read how, you can find Thursday’s article here.

And if this week’s focus on all the (mostly negative) ways that politics affect your investments has you looking to opt out of the system, be careful. As Ryan wrote Friday, chasing ‘tax effective’ investments can be one of the biggest mistakes in stock markets. Plenty of tax avoidance schemes dressed up as clever investments blow up in their owner’s faces. To read why, and Ryan’s tips on avoiding them, find Friday’s article here.

Until next week,

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