What comes next is often a massive pop

Tuesday, 19 June 2018
Melbourne, Australia
By Bernd Struben

  • Boom to bust
  • Avoid panicking!

If you’re a homeowner in Australia, you’ve likely seen the value of your property going up…and up. Even as you’ve heard one warning after another about a looming real estate crash.

If you’ve invested in multiple properties — and taken advantage of Australia’s generous negative gearing and capital gains benefits — you’re probably laughing.

Particularly if you own properties in Melbourne or Sydney.

But when was the last time you heard of anyone making a 1,438% gain on their property in a matter of months?

Well that’s just what one lucky investor did in a place called Genesis City.

From Bloomberg:

In December, [Ryan] Kunzmann paid $15,000 for 62 plots of about 1,100 square feet apiece, and he recouped his investment three months later by reselling a mere eight of them. Today, resellers can reliably get as much as $30,000 for a Genesis City plot… The record is $200,000, sold by a user who’d recently bought the same plot for $13,000.’

What’s the catch?

Well, Genesis City doesn’t really exist.

It’s a virtual city…built with the Ethereum blockchain. That ensures there’s a fixed supply, a scarcity, to the…erm…land. Apparently, there are only 90,000 plots available, the equivalent to a smallish city. Investors are hoping it will eventually become a magnet for virtual-reality commerce.

So am I suggesting you run out and snap up a few plots?

No.

First, despite the fixed supply, the barriers to entry are quite low. It’s going to be a heck of a lot easier for a competitor to come in and build a newer version of Genesis City than it is to build another Melbourne or Sydney.

Second, when people drop $200,000 for virtual property it raises a different red flag.

These are the types of excesses you usually see at the tail end of a bull market. That’s when people who’ve done well with the rising stock, crypto, and property markets find themselves flush with cash. And they’re willing to invest large sums in wild speculations.

What comes next is often a massive pop. One that could see their virtual property worth pennies on the dollar. And one that will invariably hit bricks and mortar as well.

We’ll get back to that after a look at the markets.

Markets

Most global indices again closed in the red on growing angst over a US-Chinese trade war.

Overnight the Dow Jones Industrial Average closed down 103.01 points, or 0.41%.

The S&P 500 lost 5.91 points, or 0.21%.

In Europe the Euro Stoxx 50 index finished down 38.37 points, or 1.09%. Meanwhile, the FTSE 100 lost 0.03%, and Germany’s DAX dropped 176.44 points, or 1.36%.

In Asian markets, Japan’s Nikkei 225 is down 336.17 points, or 1.48%. China’s CSI 300 is down 2.71%.

In Australia, the S&P/ASX 200 is up 11.20 points, or 0.18%. Just as yesterday, the ASX is one of a very few global indices to be trading in the black.

On the commodities markets, West Texas Intermediate crude oil is US$65.68 per barrel. Brent crude is US$75.05 per barrel.

That puts WTI up 2.2% since I wrote to you yesterday.

The price rise comes as OPEC mentioned it may raise production by only 600,000 barrels per day. That’s less than the million plus barrels some analysts — your editor included — have been predicting.

The final decision won’t be made until Friday, when OPEC members, along with Russia, meet in Vienna. Russia has already said it wishes to increase production further. And I still expect the cash hungry nation to do just that, which should see oil prices slide.

Turning to gold, the yellow metal is trading for US$1,280.93 (AU$1,727.95) per troy ounce. Silver is US$16.53 (AU$22.30) per troy ounce.

Pundits predicting the imminent collapse of bitcoin have again been left flatfooted. One bitcoin is worth US$6,714.85, up 4.9% from yesterday’s low.

The Aussie dollar is worth 74.13 US cents. That comes after briefly falling below 74 US cents, marking its lowest level against the greenback in more than a year.

Boom to bust

Reader’s voice, ‘Really? Another housing market crash warning?’

I hear you. Forecasters of all shapes and sizes have been calling the Aussie property market a bubble for 10 years now.

And what’s happened?

According to the Global Property Guide, the average Australian house price is up 74.2% over the past decade. Gains in select capital city neighbourhoods have been much higher. And that comes after surviving the fallout from the 2008 global financial meltdown with only a few wobbles. (Thanks China!)

But all good things must come to an end. And signs are mounting that Australia’s property boom could turn to bust faster than you’d like to believe.

I’m sure you’re aware that the house price growth has been slowing for the past year. That’s not a bad thing. Prices were rising at an unsustainable rate.

But in recent months house prices have actually been falling. As CoreLogic reported earlier this month, national dwelling values posted their first annual decline since 2012.

Have a look at the chart below:



chart image

Source: CoreLogic
Click to enlarge


As you can see, nationally dwelling values fell 0.1% in May, bringing the annual loss to 0.4%. And the capital cities, which led the meteoric rise, are leading the way down.

Now a 1.1% annual decline in capital city dwelling values is hardly a crash. But in a nation with the second highest household debt in the world — and wages stuck in neutral for years — you can see how any slip is cause for concern.

That’s particularly true as lending standards are tightening. And interest rates in the US are heading steadily higher, which is only going to increase pressure on the RBA to follow suit.

This headline comes from The Australian Financial Review (AFR) ‘Property sales ditched as crunch credit causes auction values to plunge’. The article continues:

Cautious property lenders are ditching deals at the last minute amid growing nervousness as the value of property sales plunges by more than 50 per cent since the market peak, analysis reveals.

Mortgage brokers and buyers agents’ claim million-dollar property sales are collapsing as increasingly risk-averse lenders reassess their exposure and pull out, causing deals to collapse…

The average value of property transactions in November 2016 was about $1.35 billion a week, according to Domain monitoring of markets.

It fell to about $900 million a week in June last year and has since slipped to around $500 million, Domain analysis shows.’

On Domain’s numbers we’ve gone from $1.35 billion in property transaction per month to $500 million. That’s a 63% fall in transactions in 18 months, while prices are down less than 1% over that same time.

But don’t count on prices to remain as resilient in the year ahead.

Avoid panicking!

Macquarie Securities and ANZ Bank are predicting Sydney house prices to take a 10% hit due to tightening credit conditions. That’s including the 4.2% the city’s dwellings lost over the past year.

From the AFR:

Households should avoid panicking in the face of a likely 10 per cent slump in Sydney house prices, which would still leave them around 60 per cent higher than in 2012, say forecasters at two major banks forecast.

Analysts at Macquarie Securities and ANZ Bank both issued forecasts on Tuesday that the price falls in the nation’s biggest property markets of the past six months are expected to go for longer than first anticipated.’

Now read that first line again.

Please don’t panic!

When homeowners start panicking, the supply of homes hitting the market is likely to surge. While the demand for those homes…in the face of falling prices…is likely to evaporate. Economics 101 dictates what’s in store for property prices if that happens.

Enter controversial US economist and bestselling author, Harry Dent.

You may know Harry as the editor of our newest free eletter, Harry Dent Daily. As I mentioned yesterday he’s also the author of a new book, Zero Hour.

In this book he details why between now and mid-2020 the world economy is going to endure its worst crash ever. While he foresees the roots of that crash based in the US, Australia won’t be spared from this global crisis. Far from it.

As Harry puts it:

The “high-end” economies tend to collapse the fastest and hardest in “Zero Hour” events. And Australia is right up there in the top five…

I believe your property market, for instance, is very much like Manhattan’s right at the dawn of the 1930s. Real estate there dropped 64%. It took until 1954 — 21 years — to return to bubble highs.’

Harry readily admits this call may sound alarmist. Incredible even. He’s no stranger to his forecasts being treated with extreme scepticism.

But in Zero Hour he makes a compelling case for Aussie house prices to plummet by 50% or more, while unemployment rockets.

Importantly, he also offers a series of recommendations to escape the worst of the pain. To even profit from it by investing in a certain emerging market economy he expects to sail cleanly through the storm.

If you haven’t already, you can find out the full scope of the book along with details of how you can obtain your digital copy right here.

And finally, this from The Australian Tribune:

Trump Plans to Conquer Final Frontier’

Space…the final frontier…dominated by the United States Space Force.

That force doesn’t exist yet. But US President Donald Trump has plans to change that. And plans to clean up Earth’s orbit to make it safe for US Space Force personnel patrolling the heavens.

Trump is ordering the establishment of…’

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another then The Australian Tribune is for you.

And it’s absolutely free.

Sign up here to get The Australian Tribune delivered free to your inbox five days per week.

You can visit our website at https://www.theaustraliantribune.com.au/ to read the complete article above now.

Cheers,
Bernd