How to avoid this slow motion train wreck

Thursday, 4 October 2018
Melbourne, Australia
By Bernd Struben

  • The worst in 14 years
  • An important reminder
  • ‘Is The New York Times a “Deep State” Puppet?’

How did you go bankrupt?

Two ways. Gradually, then suddenly.’

Ernest Hemingway, The Sun Also Rises

You may not have read the book. But you’ve probably heard the above quote before.

It’s a Hemingway classic. And it could very well apply to the Aussie housing market, the entwined banks, and the economy at large.

For the last year Australia’s property prices have been going down gradually. But there’s something known as a ‘tipping point’. That’s where things go from gradual to sudden…in a hurry.

Analysts predicting a big crash will often describe this as the final snowflake that causes an avalanche. A nice image, but hard to reproduce at home.

If you want to get a visual on the tipping point — and what may be in store for Aussie real estate — all you need is a glass of water and an eyedropper.

Now fill the glass up to the rim. You’d think it’s full. That it can’t possibly hold any more.

But like the bears calling for a property crash since 2011, you’d be wrong.

Drop by drop you can add more. The water will form a mound higher than the surrounding glass. Right up until the tipping point. That’s the last drop which collapses the mound and sends water running down the side.

Bringing it back to property, CoreLogic data show that Sydney home prices are up 105% since 2009. Melbourne’s prices ‘only’ increased by 94%.

That phenomenal growth came in part thanks to the mining boom, foreign investors, and rapid population growth. But it was mostly driven by record low interest rates. This saw many hopeful home buyers load up on cheap debt, with little thought of what they’d do if rates went up.

And whether the RBA likes it or not (it doesn’t), rates are going up. As international borrowing costs are rising, the commercial banks are already beginning to pass these costs onto their customers. That trend will almost certainly continue.

At the moment property prices are still falling gradually. Average dwelling prices in Melbourne are down 3.4% year-on-year while Sydney values have fallen almost twice that much, down 6.1%.

But as with Hemingway’s bankrupt character in The Sun Also Rises, could we be about to see the price slide go from gradually to suddenly?

We’ll get back to that, right after the markets…


Overnight the Dow Jones Industrial Average closed up 54.45 points, or 0.20%.

The S&P 500 gained 2.08 points, or 0.07%.

In Europe the Euro Stoxx 50 index finished down 8.68 points, or 0.25%. Meanwhile, the FTSE 100 gained 0.48%, while Germany’s DAX was closed for the Day of German Unity holiday.

In Asian markets, Japan’s Nikkei 225 is down 78.97 points, or 0.33%. China’s CSI 300 is closed for the week for National Day.

In Australia, the S&P/ASX 200 is up 27.60 points, or 0.45%.

On the commodities markets, West Texas Intermediate crude oil is US$76.14 per barrel. Brent crude is US$85.92 per barrel.

That’s a 1.3% rise in WTI overnight. Certainly not the price fall I’ve been expecting…yet.

The oil bulls have their eyes on US$100 per barrel. They’re pointing out that Saudi Arabia and Russia have already increased output. Russian output is reportedly at record post-Soviet levels. And Bloomberg notes:

“Saudi production was below 10 million barrels a day for the first five months of the year; in October we’re producing about 10.7 million,” Energy Minister Khalid Al-Falih said at Russian Energy Week.

The prospect of US$100 per barrel oil isn’t good for global growth. It would also be a blow to the freight and airline industries. But it does have the EV market excited.

Also from Bloomberg:

Oil’s march toward $100 a barrel is coming at just the right the time for auto makers investing billions in the switch to electric cars.

Fuel prices reached a four-year high last month, concentrating consumers’ minds on the relative costs of internal combustion versus electric motors. For companies preparing to bring a record number of electric and hybrid models to market in 2019, oil’s rally could turbocharge demand.

That’s a good rallying cry for companies looking to draw investors into their EV projects. But I think they’re getting ahead of themselves.

Even with Iranian and Venezuelan production greatly reduced — for the moment — there is plenty of oil to meet demand at far lower prices.

Russia and Saudi Arabia may have upped production, but they have the capacity to do more. Russia’s Energy Minister Alexander Novak, for example, said his country could produce up to 300,000 barrels a day more within months.

And Trump is maintaining his characteristically undiplomatic pressure on the Saudis. At a campaign rally in Mississippi this week, he said he told Saudi King Salman, ‘King, we’re protecting you. You might not be there for two weeks without us’.

Insensitive? You bet. But it also rings true.

With more oil likely from the Saudis, and Trump still eyeing the 700 million-plus barrels in the US Strategic Petroleum Reserve, I still expect crude to take a tumble. And when the bullish sentiment turns sour, it could fall fast and hard.

Turning to gold, the yellow metal is trading for US$1,198.31(AU$1,688.95) per troy ounce. Silver is US$14.61 (AU$20.59) per troy ounce.

One bitcoin is worth US$6,586.74.

The Aussie dollar is worth 70.95 US cents. That’s down from 81 US cents as recently as 26 January. The slump comes in the face of surging US bond yields and signals from the US Fed that more interest rate rises are all but locked in.

The worst in 14 years

Living in the bayside suburbs of Melbourne, I keep a close eye on the sky-high prices of neighbouring properties. I also follow the auction clearance rates, which traditionally enjoy a bounce in spring time.

Not so this year.

From Domain:

Melbourne has had its worst start to the traditionally busy spring selling season since 2004, with auction clearance rates plummeting amid softening house prices.

One-third of all homes sold do so under the hammer in Melbourne, and September is considered the start of the usually frantic selling season as buyers and sellers aim to be in new homes before Christmas.

But auction sales are sluggish this year, and prices and the number of new listings are down, prompting fears of a difficult road ahead.’

You can see the plummeting clearance rates in the chart below:

chart image

Source: Domain
Click to enlarge

Analysing the clearance rates, Domain senior data analyst Nicola Powell points out, ‘Anything above 60 per cent you’re likely to see price growth and anything below deterioration.’

Going by her numbers, Melbourne’s property market could be set for a lot more deterioration.

But it’s not just Melbourne. And it’s not just property owners and investors that could be looking at big losses.

The following headline comes from Bloomberg, ‘Pimco Warns Australia’s Property Slump Threatens Banks, Economy’.

The article continues:

Australia’s housing slump has increased the possibility of debt downgrades for the country’s big banks, according to a report from Pacific Investment Management Co.

“We have grown more cautious with the external credits of Australian banks,’’ according to a note to clients from Pimco that was written by analysts and portfolio managers including Taosha Wang…

More than 60 percent of Australian banks’ loans are in residential property, the highest proportion in the developed world and more than double the U.S. ratio, according to data from the International Monetary Fund.

Now Pimco analysts aren’t calling this a tipping point. They believe average house prices will continue to slowly decline by some 10% over the next few years.

I’d say they’re erring on the side of optimism here.

Renowned US economist and futurist Harry Dent would surely amend that to ‘wildly optimistic’.

In his bestselling new book, Zero Hour, he explains why you should prepare yourself for a rapid 50% fall in Aussie property prices. And he offers some invaluable advice on just how you can do so.

You can get all the details straight from Harry Dent himself, right here.

Now to leave you on an upbeat note…

An important reminder

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Finally, here’s the latest from The Australian Tribune:

‘Is The New York Times a “Deep State” Puppet?’

Having failed to rattle US President Donald Trump’s strong support base with lurid front-page editorials suggesting anything from sexual misconduct to possible treason, it would seem The New York Times is getting desperate.

The decidedly anti-Trump newspaper has been forced to reach back decades in a feeble effort to dig up more dirt. Even if the allegations in its latest…’

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