Australia Has Everything Riding on One Bad Bet


Aussie property investors in Australia could be in for a rough year. Rising prices finally stalled in the closing months of 2017. But new data last week shows building approvals have been surging. Especially for apartments in the boom’s flagship cities, such as Melbourne.

Those two factors are on a collision course.

New construction takes a long time to complete. It’s difficult for property developers to adjust quickly to changing markets.

If they have a couple hundred apartments almost completed when the market suddenly cools, they have a tough choice to make.

No developer would want to sell apartments for less than they’d planned when they launched a project. But accepting a small loss could be better than holding on and hoping the market improves. Especially if the project was funded with debt.

If developers rush to offload stock into a cooling market, it could tip things over into a full-blown panic.

And a cooling market is exactly what we’re seeing. Every state capital in Australia except Hobart saw price falls in December 2017. UBS Group AG economists said this month that, ‘Australia’s world-record housing boom is officially over. The cooling may be happening a bit more quickly than even we expected.

The severity of a housing crash, if one happens, will go a long way to determining the health of the Aussie economy for years to come.

The value of Aussie housing has grown to $7.3 trillion, more than four-times gross domestic product. Our banks are addicted to mortgage profits. And the big four have grown to a massive portion of our share market. Years of record-low interest rates and tax breaks have moved housing to the heart of our economy.

The US housing crash is the elephant in the room here. No comparison is ever perfect. Australia’s market is not the same as the US in 2008. For one, Aussie homeowners can’t simply walk away from their home if they find themselves underwater. That’s a possibility in the US.

Many economists failed to see it coming. They assumed that no one would give up their home. But huge numbers of homeowners with zero-deposit loans, seeing their home’s value tank well below their mortgage debt, simply walked away.

Australia’s banks are able to go after a defaulting borrower’s income or other assets. And Australian real estate benefits from strong overseas demand. Meaning that we’re unlikely to see the same phenomenon here.

But in many other ways, the risk to Australia could be far greater.  

Residential real estate represents a much larger part of our economy than it did in the US in 2008. And foreign demand is estimated by ANZ to have made up 15–25% of new-construction demand in 2015–2016. That demand is seen as a strength. But it could evaporate quickly if the market shows signs of weakening. Much more quickly than domestic demand. Overseas investors can always find some other foreign market to park their money in. They’ll likely be first to leave at signs of trouble.

Domestic demand, meanwhile, has increasingly been squeezed out of the market. Home ownership among young Australians is at the lowest levels on record. And it just keeps dropping.

Young Aussies may take the opportunity to buy in as prices fall, helping to prop up the market. But prices are currently so high that only the wealthiest young Australians can hope to ever own a home. A pullback could change that. But prices would likely have to fall significantly before young buyers who had been locked out of the market found them within reach. By the time that’s happened, panic would likely have already set in.

And Australia lacks one distinct advantage that the US had. We just aren’t as indispensable to the global economy. We’re an important market for many other nations. But an Australian collapse wouldn’t carry the same threat of dragging the world down with us.

Australia, and Australian banks, simply aren’t ‘too big to fail’.

Australians, individually and collectively, have bet everything on housing. And every year, we double down on that bet.

There’s no certainty that 2018 will be the year our housing gamble goes bust. But it would be madness to be certain that it can’t.

This week in Money Morning

Shae Russell, editor at our sister publication Markets & Money, took over the pages of Money Morning this week. She opened on Monday with a look at why the Aussie dollar, and several other commodity-driven currencies, could be overbought and due for a sharp fall. To read why, find the details here.

Australian retail saw a slight bump in November. But one month of good results isn’t enough to turn a struggling industry around. In Tuesday’s article, Shae explained the cause of the rise, and why you shouldn’t bet on Aussie retail in 2018. Click here to read more.

Interest rates should be headed up in 2018. That’s the story from the Reserve Bank, at least. Almost everyone in the financial media seem to expect exactly that. But in Wednesday’s Money Morning Shae argued that they’re wrong. She explained the economic factors that will back the RBA into a corner, forcing rates to even further record lows. Read what those factors are, and why Shae thinks you should be prepared for lower rates in 2018, here.

With cryptos continuing to drop this week, Shae looked at the price action in Thursday’s article. Falls of this size and speed would be enough to rattle anyone. And plenty of investors are panicking. Especially those who only jumped into cryptos in 2017, chasing that year’s incredible gains.

However, Shae isn’t convinced that we’re seeing a bubble burst. In fact, she believes that this crash is necessary. For cryptos to achieve their long-term potential, some of 2017’s hysterical gains had to be retraced. To read why cryptocurrencies’ long-term potential hasn’t changed, you can find Thursday’s Money Morning here.

On Friday, Shae looked at the Dow Jones repeatedly breaking new records. The index has been on a strong run in 2017 and so far in the new year. But just how accurate a read does it give us on the wider US economy? Are there better tools to measure the industrial output it theoretically covers? Shae looked at what she thinks we can expect from the US economy in 2018, and what it could mean for Australia. Find the details 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