A Sign Of The Bubblepocolypse
A reader suggested a topic on the Australian housing bubble. “I want to talk about the craziness going on in Australia right now. Pure hilarity down there. I’ve been entertaining myself watching ‘The Renovators,’ a show currently on TV down under. The market down there is insanely deluded, to an extreme that I think easily meets or exceeds anything we had going on here (except in perhaps the most insane markets like Manhattan or San Fran).”
“For those who haven’t seen it - the show revolves around a group of individuals (Australia’s top renovators) who win keys to one of 6 ‘houses’ and have to renovate and sell them. The team who makes the largest percentage of profit wins the profit of all 6 houses. Where it gets hilarious is when they reveal the homes.”
“Like this one: The Inner City Terrace. It’s a 2 bedroom townhouse that’s completely eaten by termites and literally falling down (no updates since the 1950’s). No indoor toilet, It has an “outdoor bathroom” in the garden under a piece of corrugated metal. Purchased for only 750,000$ (AUS - and remember, AUS/US dollars are basically 1:1 today).”
“These people keep talking about how excited they are at the potential profits and how much money they are going to make on these homes. One insane challenge after another exemplifies the hilarity. One such challenge put both teams in side-by-side townhomes to ‘renovate’ for one day and see who could add the most value to their auction price in a SINGLE day.”
“One team added some paint, ripped out a beautiful quirky kitchen to replace it with an ugly squared-off ‘thing’ from ikea, put grass-matting down over the kitchen tiles, and supposedly added over 60,000$ to the value (which put the total value of the home at 1,030,000$ - for a tiny two story townhouse). I’m certain it’s a sign of their coming bubblepocolypse but damn if it’s not the funniest thing I’ve seen on TV in a long time.”
From Perth Now. “WA’S biggest property players have joined forces with Bankwest to try and reinvigorate the State’s struggling residential housing construction sector. Prospective first time buyers will be able to borrow up to 97 per cent of the value of the property, outstripping the usual 20 or 25 per cent deposit required for some first time home loan products.”
“‘Our research showed it took about four to four-and-a-half years to save for a deposit under a traditional 80 per cent LVR (loan-to-value ratio),’ said Bankwest managing director, Jon Sutton. ‘Under this product, at 97 per cent, that brings that down to about six months, so it does help West Australians get into their house a lot quicker.’”
“Mr Sutton was adamant that lending first home buyers almost the entire value of a property was not irresponsible practice, claiming the bank’s strict lending criteria, including a minimum annual income threshold of $80,000 for the borrower or at least one person in a borrowing couple capped at $500,000 per loan, would insulate borrowers. ‘The product itself is two years interest only, 40 basis point off the standard variable mortgage rate, and there’s a further 10 points reduction for each year up to four years,’ Mr Sutton added.”
The Herald Sun. “Victoria has a property oversupply of about 70,000 dwellings - enough to house a city the size of Geelong, tax reform lobby group Prosper Australia says. The group, which once launched a first-home buyers’ strike, renewed its prediction of a US-style property crash with price falls of 30 per cent across the state’s capital. ‘Melbourne will be the epicentre for foreclosures and price falls because we have overbuilt by so much,’ Prosper Australia spokesman David Collyer warned.”
“Australian Bureau of Statistics data shows Victoria has built a new dwelling for every 2.15 people in the 15 years to last year, while the occupancy rate per household stands at about 2.5 people. Residex chief executive John Edwards said Melbourne was oversupplied, but would avoid a crash. Mr Edwards, who has monitored the country’s property market for more than 20 years, estimates Victoria had an oversupply of about 24,000 dwellings.”
“Australia’s strong economy, low unemployment and absence of non-recourse mortgages, which were widespread in the US, would limit price falls, Mr Edwards said. ‘Unless unemployment climbs, there will be no need for the people who live in Melbourne to sell up and take a loss, and if they don’t have to, they won’t,’ he said.”
The Brisbane Times. “If there were a Logie for making something out of nothing, The Block grand finale would be a shoo-in for having crafted two hours of ‘event’ television from an auction at which three out of four houses failed to sell. Josh Densten and Jenna Whitehead provided two of the evening’s biggest surprises. First, Densten got down on one knee to propose to Whitehead. Second surprise was the performance of their house. Though it had been considered the most likely to secure a significant margin above reserve, it failed to sell. In fact, it failed to attract even a single genuine bid.”
“For close to 20 agonising minutes, auctioneer Ruth Roberts of Woodards tried to elicit an advance on the $900,000 vendor bid with which she had kicked things off. Someone from the floor offered a desultory $750,000, to which she replied, ‘I’d like to play with you but I can’t.’ Finally, buyers’ advocate Frank Valentic offered an apparently genuine $901,000, at which point the house was passed in.”
“Josh and Jenna were on a big screen at the front of the hall, the thrill of engagement having given way to the shock of defeat. At the back of the hall, the remaining contestants looked stunned. As the night wore on it became obvious this was no aberration.”
‘All the reserves were set before the renovations began and presumably based on the $3.6 million (including stamp duty) production company Watercress paid for the four derelict Victorian properties on Cameron Street in Richmond at the height of the most recent boom. Since then, a second storey has been added to three of the houses, all four were restumped, rewired, replumbed and re-roofed, and each has had $100,000 spent on it by the contestants.”
“Nine (network) has emerged a massive winner anyway with The Block averaging 1.336 million viewers a night for the past nine weeks. The finale is likely to have come close to doubling that figure – not a bad result in a market like this one.”
In the US, the first crack in the markets came in the builders:
‘Up to 20 people have lost their jobs after Trlin Builders & Co shut its doors last month owing millions of dollars to creditors and leaving about 25 unfinished homes across Perth. Master Builders Association executive director Michael McLean explained that with any builder who goes broke, clients’ projects are protected by mandatory housing indemnity insurance.’
‘And given the downturn in housing, there’s an abundance of builders to complete the work,’ Mr McLean said.’
Rationalizations:
‘Property in Perth is likely to become more affordable as prices continue to decline on the back of restrained investment and value growth amid climbing inflation, according to RP Data. RP Data highlighted that Brisbane was the weakest performing capital city market over recent times with property values down 7.3 per cent from their March 2010 peak. When the results are adjusted for inflation, the fall in values from the peak is much more pronounced at 12.3 per cent.’
‘Similarly in Perth, the fall from the market peak is more than double when comparing the 5.4 per cent drop in nominal home values from its March 2010 peak, as opposed to the 11.3 per cent plunge when the results are adjusted for inflation.’
‘Despite the recent falls in property values, for much of the last fifteen years growth in capital city home values has well and truly outpaced the rate of inflation,’ Mr Kusher said. ‘This has resulted in properties becoming relatively more expensive. However, there are some reasons for the surge in property values such as lower mortgage rates, greater availability of credit and a rise in dual income households to name a few.’
It’s kinda funny that time lines are set using sports to put things in perspective:
‘New Zealand home buyers haven’t had it this good since September 2003 when the Rugby World Cup was last held in this part of the world, a new survey of affordability has found.’
‘A fall in house prices nationwide and renewed expectations of lower interest rates for longer has improved affordability to its best levels since September 2003, just before the Rugby World Cup was contested in Australia and just before house prices surged, the Roost Home Loan Affordability report shows.’
‘Banks remain keen to grow their lending and are willing to do deals,’ said Rhonda Maxwell, spokeswoman for mortgage broking group Roost Home Loans. Some banks are offering loan to value ratios of up to 95% and are discounting establishment and legal fees, Maxwell said.’
‘The prospect of lower interest rates for longer is encouraging many first home buyers to look at their options now affordability is back at pre-boom levels,’ Maxwell said. The national median house price fell to NZ$345,000 from NZ$360,000 in June and a record high of NZ$365,000 in March. The first quartile house price fell to NZ$245,000 from NZ$249,000 in June.’
‘The Roost Home Loan Affordability measure for all of New Zealand showed the proportion of a single median after tax income needed to service an 80% mortgage on a median was 50.2% in July from 52.5% in June. The worst level of affordability was 83.4% seen at the peak of the house price boom in March 2008 when 2 year mortgage rates were close to 10%.’
‘More than 50% of home owners are now on floating mortgages and most new borrowers are choosing to float, given advertised floating rates at around 5.75% are cheaper than average longer term fixed rates at around 6.2%. The Home Loan Affordability reports use the floating rate.’
In Australia, there’s 1 thing for sure:
They are ALWAYS making more LAND!!
Except in very dense areas (Sydney, Coastal Byron Bay, etc)… there is sooo much land in Oz.. that u could keep building for decades, if not… centuries!!!
Good luck w/ your BUBBLE down below!!!
As far as manias go, available land isn’t much of an issue. People will always rationalize the insanity in some way. Las Vegas was out of land, and so was Manhattan. Both have bubbles and both overbuilt. Japan has a limited supply of land and their bubble sure popped.
In Australia, there’s 1 thing for sure:
They are ALWAYS making more LAND!!
Australia
A country that is nearly as big as the continental United States
With 10% of the US population.
Do the math on that…
less than 10% - more like 8%.
And something like 98% of it located within 50 miles of shoreline.
hence, the area known as the GAFA.
10% of the US population, but as many red necks in absolute terms!
Australia has a problem with water. Plenty of land, nothing to drink.
Science should be solving that problem… any day now.
No, in Australia there’s this thing for sure:
They’re all drunk.
Clean, simple explananation for everything that happens down there.
I never realized Australia was sitting on “full recourse” loans. That makes me cringe. Massive mortgages on rundown homes, and the added benefit of total ruin if things go sour… No walking away, no jingle mail. The fallout from a market correction would be horrifying.
It’ll be fine though. Mr Edwards assures us above that everything will be ok “Unless unemployment climbs…”. It’s not like there’s anything going on globally or at home that could -possibly- effect the job market down under, right? Right?
It’s different there… I hear the outdoor toilets in 750,000$ homes flush clockwise.
Interest only, for 2 years. How can that go wrong?
‘Banks remain keen to grow their lending and are willing to do deals’
This says a lot about where they are. Wait until they are crying, ‘banks were too lax, but now have gone too far in the other direction, turning down potential buyers with good credit!’
The vast majority of mortgages in Australia are adjustable. A fixed rate mortgage is for 2,3, maybe 5 years at most.
Second factor is that the interest on a principal residence is not tax deductible. This make paying down the principal on your mortgage to be the best investment that most Australian can make. Do the math, on a 7.5% mortgage, you would have to earn 7.5% plus the applicable capital gains tax payable on any profit mad elsewhere. The result is most Australian have their savings in their homes. As the saying goes “safe as bricks and mortar.
Last point is that young people here by a rental unit while renting another rental unit or living at home as the interest on the investment property is tax deductible. We are a country of landlords renting to each other.
I assume the difference between a full recourse loan and a non recourse loan is you have to go through the extra expense and formality of a bankruptcy filing if things go south.
That may be the case, but bankruptcy can be remarkably bloody. I wonder what bankruptcy looks like down under. Is it a fairly easy process or are you going to get taken to the cleaners? Can you walk away and bankrupt clean or will debt follow you? Any down under folk around to enlighten?
G’dday, ncinerate,
You are going to be torched something awful if you go BK in Oz.
Compulsory wage garnishment, loss of your principal place of residence, credit in the shitter for the rest of your life. BK is an absoute last resort in Oz.
In fact, if the “recourse” loan swings around against you, you are royally f@*%$@#. Foreclosure (at the present time) means death.
Not good, given the abjectly stupid levels of leverage here…
Well that is more or less what I feared… Sounds like a lot of bagholders are in for a world of hurt!
One positive of course is that we do have a lot of strategic defaulters today which I would assume there are few or none of in Australia. There should definitely be consequences for those who default while able to pay.
I have some friends in Australia.
Here is one guy’s plan (married, two kids, makes about $70,000/year and lives in one of their major cities).
He is buying a house 4 hours away for over $500,000 in a “tourist area”. He is going to fix it up (yes it needs lots of fixing), rent it out (rents do NOT cover expenses) and wait for the sure appreciation that is coming. Then sell it and use the equity to buy his own house close-by. He is currently renting now. He is also going to use most of his savings for this housing adventure.
I have sent him lots of articles. Nothing will deter him. Things are different there. Lots of mining. The Chinese are buying everything and will keep the economy humming for a long time. Housing keeps going up. Got to get on the train.
I know it is going to end very badly. And if would wait a year or two he would be in such a good position for the house of his dreams.
And so many are like him. They are going to be wiped out.
That is so sad.
Experience is a b#tch!!
Sounds like my brother..!!
I have a friend here who just had their house auctioned off last week. This is in the US, but they bought the house back in 1997 and only recently got a second against it and blew that on things (cars, boat, trips) which will return them no money. Then hubby lost his job and the rest you of course know. They did do a loan modification with their lender for about 9 months but while they were in the middle of that , they got the foreclosure notice.
They are looking right now to rent out further where their money will get more. It is just sad and unnecessary.
My advice to people like this: “Don’t bet the rent”
“…and absence of non-recourse mortgages, which were widespread in the US, would limit price falls, Mr Edwards said.”
That means a lot of people are in for a world of hurt. What are their personal bankruptcy laws?
It got to suck to screw up your entire life b/c of some ridiculous, toxic housing impulse. Same goes for China.
I just can’t agree more. I have also have a friend who invested her retirement in a West Palm Condo. I guess it is like a moth led to a flame or any bug to a bug light.
Good people making incredibly stupid decisions and no time to recover before retirement.
I have followed the Austrailian market for years through the online newspapers. There bubble should have popped when the US did but they got a boost from the Chinese and the demand for mining. This made their bubble much greater and last four more years.
Now it is popping and with the recourse feature in their loans, it will be true devastation. And their government is going big with a “carbon tax” which will be a major blow to employment.
Bluescope to close plants, swings to FY loss
SYDNEY(MarketWatch) — Bluescope Steel Ltd.will close operations and cut 1,000 jobs, the firm said in a statement Monday, as it swung to a sharp fiscal-year loss. Australia’s largest steelmaker will shut down one blast furnace in New South Wales and a strip mill in Victoria, and will exit its export business which will result in the loss of around 1,000 jobs, the firm said in the statement. For the full-year, Bluescope swung to a 1.1 billion Australian dollar ($1.1 billion) loss, compared to a profit of A$126 million in the year-ago period.
News article today says that it takes 92% of an average Vancouverite’s salary to make the mortgage payments on an average Vancouver home ! RE Brokers insist that there is not a bubble in Vcr !
“Bull Offers” in Toronto competing against seven others to purchase a house ! And overpay the asking price by $91,000 ! RE Broker in newspaper article says the purchaser was well informed and very smart !
Should RAL meet these REB ?
“it takes 92% of an average Vancouverite’s salary to make the mortgage payments on an average Vancouver home ”
Oh yeah, that’s sustainable.
Idiots.
I’m going to have to checkout the Renovators tonight online. I can’t imagine a garden toilet!
I have come to the conclusion that hit television programs, like the covers of popular magazines, are a strong indication of a top in any asset. I remember watching one of the housing shows here for a couple of episodes. I could not figure out how $25,000 to $50,000 worth of renovations translated into $100,000 to $200,000 of increased value to the house. No one on the program bothered to explain the strange mathematics, but everybody was supremely confident.
That viewship statistic of over 1.3 million viewers for the “Block” show is amazing — Australia has less than 23 million people. What’s more amazing is that the country’s financial leaders clearly saw that this road goes over a cliff, and chose to take it anyway. In addition to the economic impacts of the choice, there are possible social effects as well: the emphasis on speculation and asset-driven wealth has the potential to change the (pleasant) national character, just like the American national character has changed. Can any Australian readers speak to this?
I’ll say it one more time: when China stops building empty cities and unnecessary infrastructure, Australia is going to have the worst depression in its history.
Wonder what will happen when the Australian media and public start hollering things like “We’re being just like the Americans!”
I don’t know about Australia, but when such things are said in England, they’re not talking about positive trends.
1. Public unions are nothing more than money launders of taxpayer money for the democrat party (97% of public union money goes toward democrats)
2. When given the choice - most people would not join a public union as a condition of employment (and pay $1,000/year in dues)
3. The data is below
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(WI) Union cash cutoff has national implications
Washington Examiner | 8/22/11 | Scott St. Clair
Less than two months after Gov. Scott Walker closed the payroll dues deduction pipeline, state employee unions face some ugly financial realities after spending $40 million on Wisconsin’s state Senate recall elections.
It may be the last hurrah for government-employee unions in Wisconsin as they raid their piggy banks and slash overhead — including wholesale firing of staff — because budget-repair bill labor reforms let government workers decide whether to pay dues.
That has national implications as other states move to break the forced, self-feeding cycle of compulsory government funding.
Intended by Walker to help close a $3.6 billion budget deficit, the new law bans mandatory membership and forbids deduction of union dues from state workers’ paychecks. Unions face annual recertification votes.
Instead of government deducting — called dues check-off by labor relations professionals — and sending one check to the union every month, unions must collect dues from each member as existing union contracts expire. And now they must convince workers they are worth it.
Nothing terrifies a union more than the loss of mandatory membership — the union shop — and dues check-off. For unions, the only non-negotiable “must haves” are those two.
A case in point is the Wisconsin Education Association Council representing 98,000 teachers and education support personnel. WEAC fired 40 percent of its staff — 42 employees — a couple weeks after the new law took effect on June 29 claiming that its membership decreased because of retirements and limited hiring of new teachers by school districts. Union officials said the cuts weren’t related to drops in membership that might come as a result of Walker’s reforms.
But according to the Wisconsin Association of School boards, 150 of the state’s 427 school districts were without union contracts when the law took effect. That makes more than one-third of WEAC’s membership free agents no longer forced to belong to the union and pay dues that are, in some districts, as much as $1,000 per year.
The math is ugly. In 2008, WEAC received almost $24.5 million in membership dues and other revenue, according to federal tax filings.
WEAC also controls the WEA Trust, a pricey health insurance company that many school districts were forced by contract to use for employee benefits. Since the beginning of the year, the trust has lost 17 percent of its subscribers as more districts are free to shop the market for a better deal without having to get the union’s permission.
Lavish receipts resulted in lavish spending. In 2008 WEAC’s payroll was top-heavy with seven six-figure salaries totaling over $1.3 million. Executive Director Dan Burkhalter, at $242,807, up from $162,034 the previous year, almost qualifies for a high-earner income tax hike should the Bush-era tax cuts expire.
WEAC spent $2.5 million on 12,364 hours (17 hours per day) of lobbying during the 2009-2010 session of the Wisconsin Legislature. That was twice as much as any other lobbying effort and three times more than Wisconsin Manufacturers and Commerce spent.
In 2010, direct campaign contributions to mostly Democratic candidates — 97 percent of the candidates to whom contributions were made — totaled almost $150,000. Another $62,500 was to several political party campaign committees. The big dollars, however, were spent on independent expenditures. WEAC pumped $1.6 million, the fourth highest independent expenditure in the state that year, into four state Senate races, only one of which they won.
For the 2011 recall election, WEAC spent $500,000.
The nearly $40 million all of labor spent on the recall elections, where just over 450,000 votes were cast, comes out to about $89 per vote. Of that, $5 million was local union money with the rest coming from national union sources. Some in Wisconsin are talking about a recall effort against Walker, but that will require 500,000 signatures to make the ballot, which can’t, by Wisconsin law, happen until at least January 2012.
In 2010, nearly 2.16 million votes were cast in the Wisconsin race for governor. Multiply that by $89 per vote. In the maelstrom of 2012 presidential politics, where unions will spend heavily, and with a Wisconsin U.S. Senate race, is it realistic to expect a credible labor-promoted effort against Walker?
WEAC isn’t alone. Government-sector unions across Wisconsin are cutting staff and trimming expenses.
It goes deeper. Wisconsin is the 16th most unionized state in the country with 355,000 workers, 14.2 percent of total employed, belonging to unions. Of these, nearly half, more than 175,000, are government workers. Nationally, there are more government workers in unions than private-sector workers. Annually, the private-sector numbers decline, while the government-sector numbers go up.
Kick the props — the union shop and dues check-off — from government-sector unions and you kick the props from more than half of what’s left of the American labor movement that represents a scant 11.9 percent of American workers in total. In Wisconsin the props are gone, and the movement is listing worse than the Titanic.
Ohio will vote in November on a package of labor reforms that are similar to Wisconsin’s. And New Hampshire’s Legislature passed a right-to-work law (banning the union shop) only to have it vetoed by the governor. Many other states have similar proposals in play.
Soon more workers will have the right to decide whether to join a union and face compulsory deduction of dues from their pay.
That will shut off the automatic millions of dollars flowing to union leaders’ pockets and campaign war chests.
Uh … what does this have to do with Australia?
Yeah. Wrong blog, 2banana!
i was listening to some late night talk radio show the other night.
they had a guest on to talking about Australia’s new gold rush.
the “expert” made the comment that many people are putting their jobs on hold to become speculators.
he said that with near full employment they are very confident their jobs will be there for them when they return.
i thought about trying to call in to see what they thought about my pirate shop idea.
I have gold maps of South Carolina before the civil war. The mines were worked by slaves until they hit it big in 49 in California.
Anyway, I plan to buy some land in the larges gold mine area and call it my gold mine. Then when people ask me what I do I will say I am a gold miner.
The difference between me and a crazy person is I am doing it because it is funny and and I want to have a spot in the country. A crazy person quits his job to do it to make a living.
I recall at the peak of the Dot Com bubble, an architect I knew was leaving his job to go start up a web company. Six months later the whole dot com bubble blew up. Never did hear from him again.
Just prior to the top of the RE bubble an civil engineer friend left his job to go flip homes. Four months later, well…
Hucksters will always be with us, and forever chasing the new next thing. However, having lived through two bubbles now, I feel pretty confident in saying when you see well paid hard working professionals leaving good stable jobs to chase the next big thing, your within months of the top.
one of the folks the expert mentioned as an example was an engineer…i think maybe even civil.
pretty funny.
Wall Street has been hiring Ph.d’s away from legitimate positions for a long time now.
Indeed!
Matter of fact, a friend of the family got his Ph.D. in physics. Then he went to the Street and worked as a quant. AFAIK, he’s still there.
Heh. A VP I used to clash with did the same, leaving in 1999 to start a B2B dot com, taking good coworkers with him & promising better pay. He was TU in 6 months and the coworkers came back to us. Couldn’t happen to a better guy!
Getting torched by a BK sounds like a good idea. Here it’s been a way to improve your “position”…
I know several people who’ve done it multiple times and say they’d do it every year if they could. They go bankrupt, keep everything that matters and 2 years later they’re buying some big fancy crib, so bankruptcy is not even a venal sin in our culture and it carries few real world consequences.
I know a shltbird contractor who specializes in small commercial build-outs. He’s taken bankruptcy twice in the last 20 years. The last time was in the early “oughts” and six months later showed up with a brand new 4 wheel drive power stroke diesel truck. When I asked him how he could do that so soon after going BK he told me the BK was the best thing he ever did and now he had plenty of money…It’s been at least 7 years and he should be ready to do it again soon.
The Mongols under Genghis Khan had in some ways the first modern state (maybe after the Romans) and set up a postal service and the first modern banking system with fiat currency and all that. Bankruptcy was allowed, one time.. If it happened again you were put to death.