1. If you notice, those apartments being pitched here are 20 – 30% more expensive than existing. If you as a foreigner have to buy off plan and sell to locals, should you not then compare rigorously the new apartment you are to purchase against the slightly older one just across the street? If you’re buying 20 – 30% higher how many years will it take for you to sell at a profit?
2. I can tell you that there is generally an oversupply of dwellings in Melbourne, Brisbane and Perth. E.g. melbourne’s population growth is around 85k annually. They require around 38k of new homes per year but they are building 45k per year. In Brisbane, population growth is around 45k and you only need 16.5k of new dwellings. But they have permits to build over 25k per year. I suspect rental will fall and yields drop below AUD borrowing costs in the next 3 – 5 years.
3. 60% of the permits granted are for apartments for Melbourne and Brisbane. Majority of them are in CBD, the heart of the oversupply. Most locals DO NOT like to live in CBD but in the inner and outer suburbs around 5 – 15km away from CBD. There is an over supply of apartments and undersupply of houses.
4. Most of the apartments marketed here are mega mega projects of over 300 units. They pitch it with nice swimming pools, gym, 24-hour concierge, like a hotel. All very nice but if you notice all the mega projects in Singapore, once TOP, will have a lot of competition for rental. In a project of 300 units, if 80% are investors, you will have 240 competitors for tenants. I don’t think you will get very good rents. If you were to flip and just 30% of the owners do the same, you’d have 90 similar units on the resale market.
5. With the nice gym, swimming pools and 24-hour concierge, what happens when the maintenance shoot up? Will you be able to change the body corp manager? I’ve seen 5-year old “luxury apartments” where by the rent is 650 per week, but body corp 500 per week! How much will you get as rental?
6. If you own a house, hold on to it. If you own an apartment near a university, or in a suburb with a nice sea view, hold on to it. Otherwise, I would not buy anything now.
7. The population growth in Perth / WA correlates very closely with the fate of the mining industry. You will see vacancy rates of Perth dwellings slowly rise and population growth slow down in the next few years. And yes, there is also an oversupply of apartments in Perth.
Recall our comments some weeks ago when a shockingly positive jobs figure drove a sharp, one-day rebound in AUD/USD from 0.9089 to 0.9218? The Australian Bureau of Statistics reckoned the economy added 121,000 jobs, reversing the previous month’s loss of 3,000 jobs, and way above the consensus expectation of a gain of 15,000. Our take on the news was that it was an aberration at best or worse, a statistical error, and that the rebound in the AUD/USD could not sustain. Well, the rest is history. The market got wise to it pretty quickly and AUD/USD continued down the next day.
Now, to what really matters to us – where the currency is headed. We are back to the Aussie’s dilemma: It remains caught between an economy that needs a lower interest rate/weaker currency and an overheated property market that needs a regulatory crackdown on debt and household leverage. We had been of the view the Reserve Bank of Australia was caught between a rock and a hard place: Of wanting to cut rates further to push the AUD/USD even lower but fearing that further rate cuts would spark even more borrowing/leverage and higher property prices. The answer is macro prudential controls – limitations on how much leverage banks can offer households. Up until a week ago, RBA had been resisting macro prudential controls, doubting its efficacy. But now, under growing pressure to cut rates without sending the already bubbly property market into maximum overdrive, the RBA now reckons it is open to macro prudential controls. And not a second too soon.
According to the Bank for International Settlements, Australian home prices are the world’s fourth most expensive relative to rentals. They are the second highest relative to incomes. The IMF said much the same a few months ago, placing Aussie house prices the third most expensive amongst OECD countries relative to household incomes. Australia has become a nation of landlords. There are nearly 2 million property investors (excluding owner occupiers) in Australia today – in a country with only 13 million taxpayers. The percentage of taxpayers claiming losses on rentals has doubled from around 5% 20 years ago to around 10% today. That is attributable in no small measure to so-called “negative gearing” – that is, the policy of successive governments in Australia to allow tax deductions on the losses suffered from leveraged investments in property against other taxable personal income. So, borrow to invest and in the process, lighten your tax load.
OECD data shows Australia’s household leverage as a percentage of gross domestic income has picked up while the same figure for the US eased after the global financial crisis. The Aussie figure is now much higher than where the US ratio was at its peak in 2007. Australia’s household debt to GDP is among the highest in the OECD. Sure, there are higher ratios. Ya, in Scandinavia and Iceland.
But at the same time, the economy is suffering declining terms of trade that aren’t about to reverse anytime soon. A few months ago, mining industry people were saying iron ore should hold up around $100 per metric tonne. That was then - it is now doing $81 with the prospect of worse to come. It’s not just about China’s diminished demand growth. There is also the supply growth of past years to digest. Industry estimates of the cash costs of producing iron ore range from US$40 per tonne to US$90. This suggests prices may have to come down a lot more before supply from higher cost producers is taken off the market. To put into perspective the significance of this, consider that iron ore accounts for 20 per cent of the value of Australia’s exports. Then, there is the almost halving of the price of Australian thermal coal from early 2011.
Little wonder then, RBA Governor Glenn Stevens wants the Aussie lower. The Australian Dollar was by “most measurements...overvalued”, he said. Well, he can take it lower by cutting the RBA’s cash rate below the current 2.5 per cent. But he has been reluctant to do that because that will further inflate the property bubble. Well, if he really does bite the bullet on macro-prudential controls, he will have more wriggle room on interest rates.
Bottom line: The silliness of recent statistics is just noise. Australia’s problems are mounting on multiple fronts – declining terms of trade, a weakening economy, rising joblessness, and a property bubble to boot. The AUD has to come down further to support the flagging economy. There will be a bounce after the sharp September decline. Just as we treated the January to April rebound from 0.88 to 0.94 as a (our exact words) “get out of jail card”, we again view the ongoing rebound with suspicion. It is unsustainable.
