Aussie Bubble Not Safe If US ‘Falters’
One common topic suggestion is housing bubbles in countries other than the US. “London median prices resumed their upward climb last month, particularly on upper-end houses. What is going to kick the knees out from under that market? can we offer any words of hope to our good friend nhz?”
Another said, “We’ve lived in Brussels for almost 2 years now. A few observations: My husband does quite a bit of traveling for business in Europe, and asks about housing everywhere he goes. Someone from the Netherlands just told him this week that housing is only going up about 3% a year there, and has done that for the last few years.”
“Here in Brussels, my neighbors are doing major remodeling on their home, and are having a hard time finding workers, as there is more work than workers. And I do know that a recent survey here in Brussels showed that investors are cautious about the financial markets, the stock market, etc. It just sounds too frighteningly familiar to what is going on in the U.S. But, we in no way profess to be experts over here! Just watching…..”
The Australian looks at the subject. “Whether the turbulence in commodity markets turns into a very big fall might depend on what happens to the US east and west coast housing markets, the key drivers of US consumer spending. Australians must hope the US does not duplicate the mistakes of Sydney.”
“The Australian economy boomed in the first three years of this decade thanks to an unprecedented housing boom. When interest rates were increased, that boom turned into a slow slide rather than a crash, due partly to the subsequent China-driven commodities boom that allowed big tax cuts.”
“But a large part of the Chinese demand for our commodities came because the US’s housing boom drove consumer spending to record levels as the optimism created by paper dwelling profits caused people to increase their borrowings.”
“Most young Sydney couples now simply either can’t or don’t want to pay $450,000 for a two-bedroom unit and saddle themselves with a huge mortgage. An attitude is developing among the young that says: ‘We can’t buy a dwelling, so we don’t need to own one.’”
“Those who bought inner city units in the Sydney boom have suffered. A Sydney two-bedroom unit that might have sold for, say, $550,000 at the peak is now selling for $450,000. Many owners now have little or no equity in their dwelling.”
“Dwellings are still being built, mainly because developers have low-priced land and prefer to complete the building rather than have the land idle. The biggest unit developer in Sydney for the young market, Harry Triguboff’s Meriton Apartments, concluded that if it kept selling into a depressed market where investors were absent it would send the price of a two-bedroom unit to $400,000 or below.”
“He developed a scheme to withdraw his units from sale and either rent them or tap into the serviced apartment market, much to the dismay of hotels and motels.”
“So, we have a looming stand-off and while that continues, the real estate market for Sydney’s young people will remain depressed, causing an enormous cultural change in the city. The young people who might consider buying a dwelling are also those who are moving offshore, where they find more attractive salaries and tax scales.”
“Hopefully, the experience of Sydney will be a lesson for the US as well as the rest of Australia: if you don’t treat the delicate housing flower carefully, you will not only greatly reduce your prosperity (in the absence of a commodities boom) but you will also trigger unexpected social side effects.”
The US market is changing so fast that I don’t get to cover the overseas as much. I agree with the writer; that the tremendous amounts of spending related to property markets in the US has only postponed meanful corrections in Australia (and I would add the UK). Last year I found a BBC article that pointed out in great detail, the previous housing bust (90’s) had three convincing false rallies over the years. Each was met with a new low.
IMO, this is why a sharp correction is preferable to a drawn out one. People end up paying too much interest and taxes for years. Not to mention the delays in getting on with our lives.
Ben,
I hope that soon you can write a book about the historic US housing bubble & bust with the contributions on this blog and make tons of money with it.
I will be happy to promote your book in the Netherlands (maybe even a Dutch translation?), so all those who are still ignorant on this side of the pond can learn a little bit. And if they don’t want to learn, it might help to bring some desperately needed fear into the EU housing market so we can finally get on with our lives here as well
‘Even so, round two may yet go to the European Central Bank on June 8 as Frankfurt’s hawks lose patience with exploding M3 money growth, and a housing bubble threatening the viability of monetary union itself.’
H’ousing loans (ex Germany) grew 19.4pc in the year to March, on top of the 17pc surge the year before. Spain is a disaster waiting to happen. In Portugal it has already happened.’
I think the only inflation hawks left in Europe are some of the bankers from the German Bundesbank (they have the historic precedent to be very afraid of what will follow).
Most of the current ECB guys including president Trichet are just like their FED buddies, the most horrible moneyprinters you can imagine. Their talk about fighting inflation is nothing more than a smokescreen. I think the euro is doomed because of this, but maybe with some more German influence the disaster can be postponed.
The side-effects are already in full-swing. The smartest have left OC in droves. Those tied directly to OC in speciality jobs and professions have a greater work load because no one will move here to take their place. My wife’s place of work (the absolute only reason we live here) has had a specialized position open for over a year and can’t fill it because candidates laugh at the housing cost and won’t move. OC is rapidly becoming one of the richest and dumbest places on earth.
I told an ex-Californian that half a million had left his former state last year, and he said, ‘they are the lucky ones.’
I left 10 years ago - no looking back and no regrets whatsoever….
Personally I think that equating high housing prices in CA to it being a horrible place is not right. I left 8 years ago for professional reasons and miss the Bay Area dearly.
You can always rent in California. It’s what I do here in the NY area and life is fine because of it.
Sorry for the horrible grammar, it’s early.
There must be a sense of hopelessness in california amongst the working class that did not benefit from the absurd price appreciation around here. Most of them will probably never own a home so I don’t see why they don’t pack up their sh@t and bail. There is pleunty of other places to go besides the not so golden state.
I wish they would too.
I know someone who was in that position and did that exact thing last year.
He now resides somewhere near Txchic (before she moved to AZ) with his family.
A california update from Fontana. My father is an appraiser and told me this Saturday that last week he went to appraise a gorgeous 4 bed home in Fontana. Gated community with a small park that has a statue? (presumably for kids to climb on? )That is all they get for their $135 a month HOA dues. Anyway, he noticed nearly every house on the block had the windows open and several people were sitting on chairs in their empty garages. He appraised the home and saw that the only landscaping in the backyard was waist high weeds. Turns out most people on the street can’t afford to run the air conditioning or go out this weekend. Sad, they aren’t flippers but they are not very smart either.
They don’t call it Fontucky for nothing.
Actually, I am sure that there are nice people there, just maybe not the sharpest tools in the shed.
Here’s a blurb on an off-shore housing market:
‘It can be tough to live on Kiawah Island year round because it’s a long drive to school and work. But we missed the island, so a few years ago we bought our first condo here. ‘
‘Owning a condo is great. We don’t have to worry about security and we don’t have to worry about a yard. Plus, the rental income nearly covers the mortgage. We’ve since bought several other condos on the island.’
‘Even with renting out our condos we still lose anywhere from $10,000 to $20,000 year, but that is offset by the rising real estate prices.’
yeah, I think you can substitute almost every other overseas country for ‘Kiawah Island’ in this story …
The US is really going to suffer.
http://quote.bloomberg.com/apps/news?pid=10000006&sid=axXu7iAuws1Q&refer=home
The NEGATIVE savings rate is getting deeper. The consumer is going to get a haircut. This is going to get really bad.
” Because the increase in spending was larger than the gain in incomes, the savings rate fell to minus 1.6 percent from minus 1.4 percent in March. Last month’s rate was the lowest since August. A negative rate suggests consumers are dipping into savings to maintain spending.”
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I agree that things are getting ugly. We are watching the economy slide into a depression that will hopefully not be worse than the Great Depression of the 1930’s.
New South Wales and Victorian auction bidders are getting used to the idea of auctions without “dummy bidders”. NSW outlawed dummy bidding from September 2003; Victoria’s laws come into force in February 2003. Queensland already has similar laws.
Meanwhile, the Australian Competition and Consumer Commission has announced that it too is cracking down on the long-standing auction tactic.
Dummy bidding happens when real estate agents plant employees or friends among the auction crowd with instructions to pose as a buyer and bid up to a pre-determined level. Agents will also take imaginary bids from non-existent bidders. They aim to manufacture a facade of keen interest in the property where none or little exists, and create competition with any genuine bidders among the crowd.
The new laws follow years of complaint about dummy bidding. Consultant and real estate writer Terry Ryder’s book Confessions of a Real Estate Agent explained the tactic in detail. In 2001 a Victorian magistrate declared it “a deceitful, misleading and fraudulent strategem”. And buyer’s agency Morrell & Koren has campaigned loudly against it.
Under the new laws bidders will need to supply names, addresses and proof of identity, and once registered will be given a numbered card, or a paddle, to display when bidding. Auctioneers will not be permitted to take a bid from anybody without a number.
Governments in both states hope the new laws will mean the end of dummy bidding. Dumm bidding fines in NSW can go as high as $110,000; in Victoria, $60,000. And The Australian newspaper reported in August 2003 that up to 40 NSW government agents would spearhead the NSW Government’s efforts to police the laws.
interesting; it’s exactly the opposite of what happens at auctions in the Netherlands - probably because those are usually foreclosures.
It is documented fact that many homes at foreclosures sell for up to 50% discount, but only to a small group of well-connected speculators and not to the general public. The RE mob has their own tactics for making sure that a normal citizen cannot make a successfull low bid.
Last year an official investigation was started because the banks are loosing out huge on these foreclosures, and with numbers climbing every year they want something done about it. Maybe they have to team up with the RE crooks from Oz
I’ve been to hundreds of auctions and it is IMPOSSIBLE to stop dummy bids. They can simply “bounce you off the wall” meaning point to the wall and call a higher number. We don’t have eyes in the back of our heads, so as we look at the auctioneer, we can’t see what the auctioneer is looking at.
Auctions get paid a percentage or a flat fee. Either way, the higher the bid the better for business. Unless paddles (numbers) become like drivers licenses and the auctions are video taped and all bidders are tracked there is no way of stopping the shananigans.
It’s called “shill” bidding in the US, a more negative, criminal connotation. I suggest all other countries do the same.
I think about Austrailia like I think about some women…
Between the ages of 16 and 18, a woman is like Africa, virgin and unexplored.
Between the ages of 19 and 35, she is like Asia, hot and exotic.
Between the ages of 36 and 45, she is like America, fully explored, breathtakingly beautiful, and free with her resources.
Between the ages of 46 and 56, she is like Europe, exhausted but still has points of interest.
After 56 she is like Australia, everybody knows it’s down there but who gives a damn?
Hey…..Hey,
we aussies like yanks to.
hehehe
I appreciate the wit, but I hope that you hold back this bon mot on your dates. Still, your appreciation of middle-age women shows wisdom. There is a lot of territory to explore.
I think of AUS as a reflection of the USA and as such, without any special appeal. Besides the plane ride is brutal and for that amount of sitting I would rather go to a more “exotic” locale.
In the case of nuclear war, AUS is probably best positioned to survive and evnetually thrive.
Miami/LV/Cali is a leading indicator for the US and the US is a leading indicator for the rest of the world. To paraphrase James Carville, “It’s the INTEREST RATES, stupid.”
well, the US definitely was NOT the leading indicator on the way up, it was one of the latest countries to join the housing bubble party. The Dutch bubble started around 1992, the UK bubble around 1995 and most of Europe was in a severe bubble before the US housing bubble even started.
So I doubt as well if the US will be a leading indicator on the way down; it will probably follow its own course.
The UK bubble did not start in 1995 unless you use the trough of the last bubble as the starting point of this cycle’s appreciation.
From all the studies I have seen, the US is lagging by about 12-18 months and that is because of the interest rate cycle here.
?
as far as I know prices in the greater London area have been increasing every year from 1995 until now (except for maybe tiny decreases in some recent years - very much dependent on which numbers you believe).
The rest of the country followed later but that is normal with this kind of bubbles; in the Netherlands areas that were just 100 km from the financial centre were lagging by +/- 5 years.
Bingo.
I’m not proud or even particularly happy the US is the center of the current economic universe, but it is. As that changes it will be rough on everyone.
Some notes from Warsaw, Poland (2 week vacation).
Housing in Warsaw has also had a runup the last few years and they actively seek foreign investors (many say this is a sign that the locals are tapped out and the RE runup has stalled…sound familiar?).
But housing is relatively cheap compared to downtown housing in America. They really know how to fit a lot more living into smaller spaces here also. For example windows double as doors and have 3 positions (closed, open window - tilts in, and open door - window swings out like door). I have NEVER seen tilt-windows that double as doors but it is brilliant that the crappy slide up/down windows in many American homes. Bathrooms are more compact. Bathroom doors have “portholes” in the bottom to allow air to circulate. The clothes washing machine doubles as a dryer (single unit). Everything is smaller and more compact and yet, comfortable. It makes me rethink our passion for “big” in America.
Other observations…. America’s most insidious ambassadors (e.g. McDonalds) have taken root and may eventually cause the population to “flesh out”. Although people in the city tend to walk everywhere and this may save them from becoming fat.
Soon the slim and graceful young women I see everywhere in Arkadia (the big mall in Warsaw) may look more like the blubbery young women you see in American Malls. It is refreshing to see clean-scrubbed girls who enjoy being feminine (they actually wear dresses) as opposed to the rap-ho look (chains, purple hair, tattoos, etc.) adopted by American girls.
Everyone here is “white”. It is nice to be in a country where you feel like you are in THAT country instead of Africa, Asia, mideast, or wherever. On the other hand if I went to an Asian or African country and everyone was “white” it would be sort of disappointing.
Sadly, many young people here smoke. Locals say it is because of the high unemployment rate and everyone is scared about their future. With communism they didn’t have much but what they had was guaranteed. With capitalism it is “every man for himself” and now there are people with literally nothing.
I really like Warsaw but I worry about what will happen to this country as it is tries desperately to “ape” the west.
I think I am going to start a business selling Wal-Mart style “fat carts” over here after the population has fattened up on the “western diet” (e.g. McDonalds). You know, those carts that grossly obese Americans glide around in while shopping at Wal-Mart (e.g. Texas).
just look at what happened in Czechoslovakia after they joined the EU economy: suddenly they have HUGE problems with diabetes, overweight and similar diseases; could it have something to do with the fact that after the ‘reform’ their luxury shopping areas are plastered with the likes of McDonalds?
I’m not even talking about their housing market, because that is a disaster waiting to happen in the big cities (just like in Warsaw).
Prices are 100% based on foreign speculation and WAY above the level that local people can afford. Unfortunately it’s exactly the same in most other capitals in Easter Europe (Hungary, Rumania, Russia etc.). Like often when capitalism is left on its own, there is a small group (developers, politicians etc.) with huge profits and a large group that is stressed to the max.
Super Size Me
http://www.youtube.com/watch?v=i0Ayn-6BkeA&search=super%20size%20me
Great movie. Should me mandatory viewing at all schools across America. Of course we know THAT will never happen. Corporate america (big Pharma, big Med, etc.) has to protect it’s profits (thanx McRonald!!).
Those fries….even mold will dare eat them?
Beyond disgusting!
Bathroom doors have “portholes” in the bottom to allow air to circulate.
We have this too… Toll Brothers hangs all the doors perferctly off-kilter for maximum airflow and comfort.
Actually, I just visited my Dad in Atlanta. The new places there are too big and just feel ridiculous. 5000 sqft for 3 bedrooms? Why?
I think I am going to start a business selling Wal-Mart style “fat carts” over here after the population has fattened up on the “western diet” (e.g. McDonalds). You know, those carts that grossly obese Americans glide around in while shopping at Wal-Mart (e.g. Texas).
Ah yes. Americans. I hate them. Isn’t it so nice being better than all of them?
I have to comment on the remarkts from Brussels regarding the Netherlands.
Yes, the average price in NL has been rising by about 5% yoy in the last years. But this is just the median-average and like in the US, it does not tell very much about the market. There are huge shifts going on regarding the types of properties (and price range) that sell or linger on the market and regarding different regions of the country.
My province (Zeeland) had more than 20% median price increase last year; I know some other ‘outer regions’ also had huge increases recently and it has been like that for many years. Because the outer regions have a relatively small population, huge price jumps there don’t influence the published median-average very much. It is still quite normal here to put a home on the market for 2 or even 3 times the purchase price of two years ago; and some of those homes DO get sold.
For the whole country the price runup has been around 500% for the big cities (most of that in 1995-2000) and 600-1000% for outer areas (most of that in 1999-2004). Yes, inventory has been increasing for years and people (and RE agents) are complaining that it is more difficult to find buyers for their homes. Strange isn’t it, at prices that are just 10 times higher than 10-15 years ago?
As for the stockmarket: don’t forget that the Dutch market is up more than 100% from it’s 2003 lows. As for cautious: no way!! Dutch small investor sentiment is even more optimistic (at least three weeks ago) than at the top of the Nasdaq mania. I think the market in Belgium is not much different.
nhz ….In your country do you have a over-supply of homes ? I know you said the homes set on the markets for a long time , but do you have a massive over supply of homes ?
no, we don’t have a massive oversupply, but the housing market here is different from the US. Most of the sales is existing homes, has been like that for ages (homes last much longer here …). If any indication, inventory for sale is 2-3 times what it used to be in the nineties while sales turnover is lower.
Contrary to what some people think, the Dutch population is nearly stable and will probably start declining next year or so (reason number 1 or 2 being the ridiculous home prices).
Officially there is a shortage of homes but trouble is, no one tracks how many homes are empty because of speculation. This is a curse that has haunted the Netherlands since my childhood; laws do everything they can to protect and even encourage RE speculation. A home that sits empty on the market costs the owner just 2% or so per year, that’s nothing compared to the potential yearly equity gains. With current prices, the maximum return you can get by renting out is 3-4% so most speculators don’t bother (it is difficult to remove a renter once they are in).
If you look in my town, my estimate is that at least 30% of the more expensive homes that have been on the market for more than 2 years (some for over 5 years) are empty. I guess that the stock of empty homes that are for sale plus empty homes that are not for sale (yet) is bigger than the official shortage.
We do have a severe shortage for small (1-2 person), affordable homes - but I think that can be said for most of Europe.
Thanks …..interesting
I believe that Belgian house appreciation has been held back by huge taxes on mortgages, so it’s virtually impossible to profitably flip houses in the country. Nevertheless, I noticed a bubbly atmosphere there with my friend happily mentioning how much his value had gone up in a few years since purchase. (This was 18 months ago.)
I guess I should defer to NHZ being local but the national stats cited in the Economist showed that the market flattened in NL around 2002 but then picked up in 2004 or 2005. The effect of having rural regions boom at the end of a bubble is common and has been seen in the UK, US, Sweden, etc. I think it was calendar 2004 or 2005 when Kiruna in the Swedish arctic (no jobs, shrinking population) went up 20+%.
Denmark was the leading European bubble country with 25% average appreciation and an astounding 43% in the attractive northern CPH suburbs where Bruce grew up. This is due to the introduction of inteterest free loans and (possibly) neg am loans. (I need to look up what the heavily advertised “pause” loans entail; if you can both kip interest and paying off the loan amount)
BTW, NHZ, you have claimed that DK does not have mortgage interest deduction. This not correct. DK has historically been the leader in interest deduction. You can still deduct ANY loan from your taxes and this is how high income earners operated for many years. Before the first reform in 1987 the rich had typical top marginal tax rates of close to 75% so they would borrow like mad for cars, houses, and other big ticket items.
In the period 1987-1999 the tax was reformed and now interest is only deducted on the municipal, and county taxes, which is on average 32% flat rate and by far the largest part of the tax burden, especially for low to middle earners. The state income tax is 5.5% up to about USD 50,000. (The tax reform also introduced a flat 8% social tax on earned income only with no deductions, just like US social security tax but with no cap.)
In effect there is still a good tax break for interest income. This is also why Denmark has one of the largest personal debt to personal income ratios. I think both NL and DK are leaders in this department at around 200%. I found some analysis on this but can’t retrace it.
Bruce,
you are correct regarding taxes in Belgium holding back flipping; that was a huge difference with the Netherlands but there were major changes a few years ago (and Belgium did quite some catching up after that). Also, the recent ‘amnesty’ for people who would invest their ‘black/grey money’ in a home in Belgium was a very clever idea to boost home prices (still waiting for this idea to make it into law in the Netherlands …).
Regarding HMD I could be wrong of course, but Denmark is repeatedly mentioned here in political discussions about the risk of lowering HMD for homeprices. From what you say it sounds a bit similar to what happened in the Netherlands: the top tax rate here was 72% in the early nineties and has dropped to around 50% now. This income tax is still by far the biggest tax. Effectively, most homeowners have 45-50% HMD so the tax office still pays half of their mortgage. Officially you can no longer deduct loans for a car, vacation etc. from your taxes but in reality you can simply increase your home loan if there is some equity left and use the money for consumption, paid by the tax office.
Obviously, the lowering of the HMD in the Netherlands did nothing to stop the boom, especially because at the same time a lot of tax rules were changed in favour of ‘investment’ (speculation) in real estate. HMD is still one of the most explosive political subjects here, everyone knows it has to change but no one wants to be the bringer of bad news.