Maybe we’re already running out of time…

Tuesday, 19 March 2019
Adelaide, Australia
By Bernd Struben

  • Record-breaking bad?
  • ‘Would More Guns Make New Zealand Safer?’

Australia’s “Potemkin” economy is crumbling. Maybe it’ll take months…maybe years…or maybe we’re already running out of time.’

Selva Freigedo

You’re probably familiar with our international analyst Selva Freigedo, quoted above.

She’s the editor for our free e-letter, Markets & Money. And she runs the paid investment advisory service, Global Investor.

I pulled that quote from her new research report, ‘Australia’s “Potemkin” Complex’, published just a few hours ago.

So, what does Selva mean when she says Australia suffers from a ‘Potemkin’ economy?

You’ll have to read the report for her full insightful analogy. And it’s ramifications.

But it all ties into the thin veneer of Australia’s so-called miracle economy. Sure, we hold a world record-breaking recession-free run…28 years now. But that record comes with a cost.

That cost includes debt. Heaps of government, corporate and household debt.

The Australian Debt Clock puts total government debt at an eye-popping $857 billion. Business debt is $943 billion. And household debt comes in at a staggering $1.99 trillion.

Yes, trillion.

In fact, household debt now exceeds 189% of average annual income. Meaning even if these debts were interest-free — they’re not — and people could devote their entire income into paying it off — they can’t — they’d still be underwater for 23 months.

Now that doesn’t paint a pretty picture for households’ financial outlook as it is. But here’s the kicker.

Years of record low interest rates and soaring property values enticed millions of Australians to pay exorbitant prices for their homes.

Just have a look at the graph below:

chart image

Source: RP Data CoreLogic / Business Insider
Click to enlarge

As you can see, house prices in Sydney and Melbourne really took off in 2012.

That — not coincidentally — was the year the Reserve Bank of Australia (RBA) began a rapid series of interest rate cuts. Rates fell from 4.25% at the start of 2012 to 3.0% by the end of the year. By August 2016, rates had fallen to their current 1.5% record lows.

Encouraged by cheap rates and soaring real estate prices, Australians piled in.

In fact, 93% ($1.85 trillion) of household debt is housing debt. Breaking that down further, $607 billion of that is investor housing debt. The rest is owed by owner-occupiers.

Now that’s an alarming amount of debt in any scenario. But in a rising property market, it’s manageable. So long as the values of these highly leveraged homes are going up investors can always sell for more than they bought, pay off their debts, and pocket the difference.

But when the values of their properties begin to slide, the picture gets a whole lot darker.

It’s with this darkening picture in mind that Selva writes, ‘I want you to be adequately equipped to weather this storm, whenever it arrives.’

And over at Global Investor, Selva isn’t on her own in helping to equip you for the coming storm.

She has direct access to the latest insights from 165 experts based all over the world.

Many of these experts have lived through similar property bubbles in their own countries. And what they learned from those experiences could make all the difference to your own financial future.

You can get all of the details in Selva’s just released report, ‘Australia’s “Potemkin” Complex’.

More, after the markets…


Overnight, the Dow Jones Industrial Average closed up 65.23 points, or 0.25%.

The S&P 500 gained 10.46 points, or 0.37%.

In Europe, the Euro Stoxx 50 index finished up 1.86 points, or 0.05%. Meanwhile, the FTSE 100 gained 0.98% Germany’s DAX closed down 28.63 points, or 0.25%.

In Asian markets, Japan’s Nikkei 225 is down 36.77 points, or 0.17%. China’s CSI 300 is down 0.37%.

In Australia, the S&P/ASX 200 is down 2.23 points, or 0.04%.

On the commodities markets, West Texas Intermediate crude oil is US$59.06 per barrel. Brent crude is US$67.54 per barrel.

Turning to gold, the yellow metal is trading for US$1,303.95 (AU$1,837.33) per troy ounce. Silver is US$15.34 (AU$21.62) per troy ounce.

One bitcoin is worth US$3,974.38.

And the Aussie dollar is worth 70.97 US cents.

Record-breaking bad?

So, just how bad is Australia’s real estate market looking?

In Sydney and Melbourne, it could be record-breaking bad.

This headline comes from the Australian Financial Review (AFR), ‘Sydney and Melbourne house price fall sharpest in five downturns since 1965’. The article continues:

The fall in Sydney real house prices is close to hitting its average downturn decline at only halfway through the average downturn cycle, setting it up for the sharpest drop for the city since 1965, a BIS Oxford Economics study shows.’

Good news on skyrocketing property values fed on itself for almost seven years leading to the old FOMO (fear of missing out) syndrome.

My wife had a bad case of FOMO herself when we moved to Melbourne from Adelaide in 2013. While I stoically — or stubbornly — stuck to my guns and kept us off the rising property ladder.

Over the next four years we watched the value of our rental property in the Bayside suburbs climb from around $950,000 to over $1.4 million.

Then the party began to fizzle out.

I’m not sure what that particular house is valued at today. But Melbourne homes have lost an average of 9.1% over the past year. Assuming our rental property lost the average, it would now sell for $1.26 million, or a one-year loss of $140,000.

With these kinds of loss making figures now hitting the headlines, you can see how FOMO is being overrun by FONGO (fear of not getting out). And panic selling could lead to far larger and more rapid falls in house prices than most Aussies expect.

As the AFR reports:

According to a Reserve Bank sensitivity analysis in a discussion paper last week, if home owners adjusted their 10-year expected real house price gain from 2.5 per cent per year to zero then real house prices could fall by a third over five years.

Such an alarming scenario has economists such as AMP Capital’s chief economist Shane Oliver worried that a selling spree could ensue.

“The sensitivity analysis highlights the risk of FONGO taking hold.”

“Net rental yields of just 1 or 2 per cent may be okay for investors when property prices are expected to rise at a decent rate, but they are not okay if investors revise down their capital growth expectations in response to now falling prices.”

Now some mainstream analysts are hoping further rate cuts from the RBA could reverse this slide. And indeed, rate cuts are likely in the cards this year.

According to the AFR, 70% of surveyed economists believe the RBA will cut rates by 0.25% twice this year. While I prefer not to run with the herd, I’d say that’s quite likely.

Two incremental cuts would bring the official cash rate down to 1.0%, lower than ever before in Australia’s history.

This could have a temporary, and minor, soothing effect on the housing market — and likely see stocks move higher on the news. But it is highly unlikely to put this slow motion train wreck back onto its tracks.

To stretch that analogy further, a 0.5% rate cut simply won’t be enough to get the property gravy train steaming back up the hill.

As I mentioned above, in 2012 the RBA cut rates by 1.25%. And over the following three years it lopped another 1.5% from rates. Today the central bank is perilously low on fire power.

When that reality sinks in with the mainstream, I expect we’ll see more investors come down with FONGO and attempt to exit the market en masse.

And if you were thinking that rising income levels might come to the rescue, think again.

According to the International Monetary Fund (IMF), long-term Aussie income growth averaged 1.8% since 1960. But over the past decade that growth has virtually ground to a halt.

The IMF now forecasts real income growth of only 0.3% over the next five years.

Hardly enough to reflate the property bubble.

So what to do if the housing market and wider economy move from bad to worse?

I’ll leave you with these final words from Selva Freigedo:

As we move further into this period of instability and uncertainty, I want you to have every possible chance to thrive. Not just survive.

Which is why this survival kit isn’t just about giving you ideas to help safeguard your wealth. While our main priority in a sticky market is to help you maintain your wealth, there are always new growth opportunities.’

You can get all the details on Selva’s survival kit right here.

Finally, don’t forget to check out the latest in politics from The Australian Tribune:

‘Would More Guns Make New Zealand Safer?’

Well that didn’t take long.

Just three days after the horrendous massacre at two mosques in Christchurch left 50 people dead, Prime Minister Jacinda Ardern has confirmed New Zealand will toughen its gun laws.

That move won’t bring any of the innocent victims of the white supremacist terrorist attack back. And it arguably would not have…’

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.

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