Warnings of financial 'catastrophe'

I posted this on another thread I started, may be appropriate to post here as well for those interested

A look into 2017 for Australian Investors - Prime Financial Group Ltd

extract

Australia – levered & lacking economic catalysts

• Australian interest costs will rise > Australia is a current account deficit country so finances much of its excess spending from foreign creditors > bond yield rises will raise funding costs for banks and the like > BIG RISK IS AAA RATING DOWNGRADE.
• AUD is highly likely to fall > excess domestic capacity remains Australia’s single biggest problem and is unlikely to be impacted by higher U.S domestic growth > rising U.S. interest rates reduce attraction of AUD cash.
• Household incomes remain pressured > wage growth is at a 20+ year-low > higher funding costs will put upward pressure on domestic Australian mortgages > will likely keep pressure on the RBA to keep rates low or lower them further > falling AUD will initially raise domestic living costs.
• Australia is unlikely to be materially benefited from a Trump fiscal expansion > United States represents ~8% of Australian trade, as against ~32% for China
• AUSTRALIAN HOUSEHOLDS ARE ASSET-RICH, CASH-FLOW POOR. THERE ARE NO SIGNS OF CASH-FLOW RESPITE IN 2017. FALLING AUD COULD PRECIPITATE 2018 ECONOMIC REBOUND.

Economic ‘Surprise’ – Australia’s (white) economic momentum not following the Rest-of-World (red)


Consumer Confidence – Australia’s (green) economy lacks genuine momentum in spite of household wealth creation > recovery is hollow relative to the United States (red)

 

extremely curious to see what will happen in 8 years when either rates are at double digits to combat rampant inflation or we have the greatest of depressions as Trump's fiscal policy drives the US economy below Mexico's

 

8 years you think ? Any specific reasons ?

OK , probably makes sense . Last BEST buying opportunity in Sydney was in the GFC , so that gives us the next good buying opportunity somewhere around 2024 - 2026 . I'll tell my kids to put it in their diaries .

By then the rest of Australia , with the exception of Perth and Darwin ( which will just be starting recovery ) will have doubled , we'll have sold down some properties and have a debt free portfolio and I'll be debating whether I want to continue working part time .

Sounds like a normal cycle to me . There always is some down turn and after that there will be another boom .

Cliff

 

It's hard for some to resist when all they see are others living it up openly on social media and have the latest and greatest widgets.

New financial tactics like Afterpay (4 weekly installments zero interest) are making it ever so easier to live within their means.

I work in marketing for products people can do without (or downgrade to less costly alternatives) and ironically, I'm frugal AF.

 

haha only being dramatic - though rationale is in the 1st term Trump spends like its going out of fashion, increases federal deficit to unheard of levels, gets voted in 2nd term off the back of increased infrastructure spend, tax cuts, record levels of low unemployment, wages growth, inflation increases, xenophobia increases, nationalism increases - everyone globally is merry and making mead - then as 8yr term ends... well remember what ended the roaring twenties! USD plummets, RMB becomes benchmark currency - China rules the world...

kinda like having a huge house party and then when the guests leave you have to clean up with one helluva hangover

*hoping someone gets abit of entertainment on a thursday from this post...

 

^ ^ what he said.

 

Except that this cycle has been going for 5 years and hasn’t peaked yet. Sydney median is now $1.2m as of last weekend auction results. There is nothing ‘normal’ about this cycle.

 

I'm not sure about a financial 'catastrophe' but there are definitely some signs that the economy is slowing. Private school enrollments have reversed for the first time in 15+ years and also the amount of people with private health insurance has declined from previous years. There is also a downward trend in new motor vehicle sales.

 

I assumed that you said it as a throw away line and was not going to reply , but thought about it and realised in terms of timing it's inline with what I'd expect .

Though I'll wait and see what happens before I act . Around then I expect to be cashed up , waiting for a trigger to stop the market . In that month or two after the GFC there were some highly motives people who had to sell , and the banks weren't lending . So you needed cash or in our case an unused LOC.

Cliff

 

My job is to be ready to buy in Sydney just before the next boom

 

I think this is why you are successful with what you have achieved in respect to not constantly be "doing" something and just waiting on the side lines in cash - my greatest enemy is myself in that I have to be negotiating or at least viewing property religiously trying to sniff out a "deal"

fact is what's the point of a $20k or $50k or even $100k bargain when in (say 8yrs) the market drops back to that level?

all the great fund managers and money managers preach the value of patience and waiting for the right moment - just in this day and age of instant gratification it is too hard to not be doing "something"

 

THIS!

It stuns me when people say they have a 20-40k credit card debt. What do people need that badly they need to go that deep into debt for?
Unless it's for an absolute emergency, you have to assume these people just can't control themselves.

I couldn't sleep at night if I had a credit card debt that big knowing that it accrued 18 percent a month on the debt or something insane like that... (I don't know how Aussie Credit cards work anymore - the banks refuse to give me one as I live overseas).

 

Personally I time a cycle from the previous peak at the end of the last major boom , which in Sydney was 2003. There was a trough after the GFC , but I'd call that a short term pull back .

Reason , since 2003 , places like mt druitt didn't go up until around 2012 . Nice central places did start moving up sooner after 2003 . My niece bought a unit in Coogee in the 400's in the mid naughties , and that had already gone up significantly before the boom started in 2012 .

The market in Sydney started booming in late 2012 , but it's been a relatively slow rise since then . As a comparison , in the boom in the late 80' s in some places Sydney prices doubled in around a year . Now that was a boom and we missed it ......

The boom is the end of the cycle not where it starts .

So , how many cycles have you lived through ?

I've been told many times that the last cycle was not normal and the cycle to end all cycles and that this cycle was nothing compared to the last one and that I was lucky with my timing in the last cycle .

The house my father bought in 69 when we first arrived cost them 25 k in a good street in warrawee ( very nice north shore suburb ) . That property has basically doubled each cycle since . I've looked back at historical records and seen a similar pattern to prices in 2770 .


If it is the first cycle you've watched close up , you're in good company . Most people think that their first cycle is not normal .

There are always different reasons associated with each cycle , but they keep coming

Sounds like a normal cycle to me and when you've seen more than one , they all look the same . Everyone is always surprised how far they keep going .

@Property Twins

Did you book mark that post about Mt Druitt and the expected price rises ?

Cliff

 

2 cycles. I’m only 31. Been in the game from 2007 when I got my first real job out of uni.

I’ve seen the highs of 2010, the lows of 2012 and now this.

Melbourne only though.

I don’t think my lack of age discredits my opinion on the current cycle

 

Each cycle is somewhat unique in what triggers, sustains, and ends it. There are some big lessons from the current cycle that prevent future cycles being as extreme, notably:

• Interest rates have effectively been falling since the early 1990's. In the last 8 years they have halved, meaning the cost of debt halves.
• ~2011-2014 was Australia's highest rate of underbuilding in recorded history. The approved dwellings came in the form of record levels of highrise, which take many years to complete (as opposed to detached houses, taking 2-3 quarters).
• The construction boom has been matched by record government spending (to the tune of $250bn extra debt in the last 10 years), driving huge jobs growth.

Much like multiple triggers aligning to lift a market, it takes multiple triggers to set off a downturn. There hasn't really been any bad news for property for a while now, and current market has quite scarily got to the point that banks are hitting their regulated lending limits. The perfect storm will happen when we feel the collective impacts of coming supply, increasing debt costs and a peaking labour market.

@zed_kid much like you I bought my first property in 2007. I remember feeling the pressure when my interest rate went from 7 to 9.25%, and I'm not sure what happened to eastern markets but in WA we had notable price falls. That increase represented a 32% lift in the cost of debt. Rates now only need to reach 5.3% to put the same pressure on, and banks are itching for a reason to do it.

If i were to have a stab at how the road to the next cycle will play out:
2018: interest rates start to rise, employment growth flat-lines and government spending falls. Property market has well and truly peaked.
2019: rates keep rising, job losses start happening. The AUD falls, which is great news for our major GDP contributors of ore, coal, gas, and tourism. Australia looks to be performing well, but many families start to struggle.
2020: interest rates hit 6% and infrastructure jobs begin to wind down. Government spending cuts are complete and the labour market begins to adjust accordingly. AUD gets really low, making our exports even more attractive.
2021: An elevated unemployment rate and an expensive but stagnant property market add to household stress. People begin to get tired of the current government. Interest rates are now falling again.
2022: new government is voted in with a plan to "fix Australia". This involves removing the words "budget surplus" from their vocabulary and bank-rolling infrastructure projects, much like VIC is doing now. Interest rates drop at least to 4%, representing a 35%+ fall in the cost of debt. Private investment again fires up.
2023: Effects of new government spending, lower interst rates, and increased international investment flow through the economy and house prices go up again.

If it doesn't happen in 2023, then next election cycle 2026. Until then, it will be a repeat of the flat years through the 1990's.

 

JL1

One thing you miss out , which most commentators do when they talk about property investing is there isn't one property market.

so while some might say you senario is reasonable to Sydney , there are areas that are only just starting to move and for property investors , that is highly relevant .

Cliff

 

A great point, and even in the current boom there are pockets that have gone backwards. In the theme of this thread, my timeline speaks to the overall market and not any sub-sector in particular.

My general point is that for any boom or bust there are multiple triggers which align to cause it, and this is true of sub-sectors of the overall market. The tip from REA search data right now is Melbourne 4x2's with land priced at ~650k. This is supported by population demographics showing record increases in early 30's age groups and young children (ie. new families), and Melbourne's jobs growth far outpacing the rest of Australia. What's important to konw though is how this situation will change.

Jobs and government spending are quite cyclical and no doubt will continue to play similar roles in future cycles, but the interesting thing about the current position of the RBA cash rate is that it has never been so low that there is almost no room left for further stimulus.

Considering that most property crashes are followed by falls in the cash rate, highly leveraged investors in the current cycle exposed to significantly more downside risk than any time before as that buffer will likely not be there for them (at least not to the same extent). Falling rates are generally a factor in a rising market too, which won't be able to occur until they have first gone up. I see the low-rate challenge as something that is new to Australian property cycles and will certainly make for an interesting 10 years ahead.

 

TG, me too.

On the other hand, if the majority of punters decide at the same time that incurring a bunch of debt, serious debt, is a "problem ownership" issue, then this never ending party will end with a big bang.

ie. If you owe the bank $1m, then the debt problem is probably yours, but if you owe them 10m or 15m... well, you know...

 

I cant think that far ahead, 6-12 months tops. Me thinks bank policy will continue to tighten, servicing will become a greater issues. Markets in the main 2017 will remain bullish.
Syd in particular will correct in 2018, followed by Melb......

and if I get it right I want a gold star sticker

 

I'm tipping a turning point in the new financial year, particularly for Sydney. Jobs growth has been flat for too long now (full time employment going backwards), I just can't see where the growth stimulus is coming from. I expect population growth rate to fall notably, pushing current construction well in to overbuild levels (personally i think it already is). This will send shockwaves through the construction industry and cycle more job losses. We wont see that in Q1 because Jan-March are the biggest population growth months of the year (the most overseas migration), but Apr-Jun are typically quite slow. So later in the year, the market will be starting to feel it.

Melbourne I agree will run a little harder due to more jobs growth and higher population increase, likely enough to pull a solid 2017, but yes agreed 2018 will be its correction.

Perth to me is the dark horse. not that it will perform super well, but it will see a positive year and get a decent mention in the media for its turn-around while all other markets are slowing. Which ever state government gets in this March will likely try to impress with a small stimulus package that will help jobs and consumer confidence, and slowing interstate migration will add 5-10,000 people to the population growth figures (most importantly, the late 20's early 30's age group). With completions down 30% on last year, we will see the effects of these shifts in the second half of the year. WA is also not exposed to the inflated construction workforce of other states (note I also think any remaining losses in mining are at most comparable to coming losses in eastern states manufacturing) so the outlook there has a lot of upside.

Bank policy will definitely be a constraining factor, but i also think the significance of government budget cuts is under-stated. Over $1-2bn/month spending is going to have to stop in the next few years. That's a lot of jobs and a lot of international investor perks.