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The Impending Black Hole In OZ unReal Estate

19 July 2009  |  2470 views  |  0

I live in a land of delusion.

I like to think that I have a small grasp on economics. I don't claim to be an economist and when writing about it I often do so as the 'noneconomist'.

I am concerned at the mass delusion gripping Australians. The price of real estate is unreal. We are seriously in danger of undermining the old rule of 'safe as houses'. Perhaps not undermining it, seeing it disappear into the same black hole a lot of that money invested in real estate will disappear to.

Spare me from the government grant to home buyers. All it did was artificially hold some sector housing prices at their surreal levels. A $200+ million investment in mass delusion, actually adding billions to the real cost of the fairytale.

I find that simplifying things often helps understand them. I like old-fashioned proven ratio's which have stood the test of time and outlived the various propaganda efforts to artificially inflate them and always returned to the same range. There are lessons there.

A stand out is the price-to-rent ratio.

Unheard of in Australian real estate investment. Totally unknown.

For the Aussie bankers reading, it's the ratio of the number of years rental for a property to the price of the property. Historically it has hovered around 12 to 14 for the average home in the average western country. Perhaps a bit wider in some places.

Luxury, unique, very special properties which are subject to fashion and booms fall outside this range, but the average home will be found there.

That is until the last couple of decades. In Australia, it is hard to describe the average house, but if we take the middle 50% we must have it covered and won't be stepping into exotic territory.

Do the numbers. The price-to-rent ratio on these houses is more like 30 to 40, certainly for the upper 50% in our average group.

Even the low-cost, high maintenance, short lifespan urban sprawl is way above any sane ratio. As an investor, remember these houses are generally poorly constructed and require significant work every decade, unlike the older well maintained homes.

There are masses of homes in Sydney carrying $1.5 million price tags. Is it realistic to think there is a market for renting them all out at $10,000 per month?

Mass delusion.

I can't see any fantastic economic booms suddenly materializing from the ether, but then I haven't had my head in the jar like the average Sydney real estate agent. If you're an average Sydney real estate agent and disagree, drop me a line, I'm happy to debate you on TV.

Unlikely, because there are none, they're all exceptional, just like all those homeowners think that their property is so exceptional as to defy all the bounds of reason and history in it's pricing.

Looking at the income-to-rent ratio required from tenants takes us into the stratosphere of almost hallucinogenic delusion.

Looking at the Affordability Index or income-to-mortgage ratio and any doctor would probably commit the average Australian real estate investor just for looking at the for sale ads.

Won't this have some flow-on effect to banks? Eventually catch up with us? Is it all in aid of keeping up appearances (healthy banks=healthy economy) so prop them up at any cost, rather than do the unspeakable or face the distasteful reality that we're not all instant millionaires like we thought?

It seems the only solution is to swap all our iron and uranium and whatever else we can dig up and load on a ship tio pay for a few more years of delusion.

Truth doesn't pay for newsprint or TV broadcastss, advertising does.

What is coming to the shores of OZ makes the effects of the global financial crash so far, for Australia, look like a pleasant walk in the park harrassed by noisy minors but it won't be long till they transform into magpies and swoop in for their piece of flesh.

I'm happy to hear from anyone who can show how it'll be different, but spare me the fairytales.

 

 

ps.

Coincidentally the Australian government is signalling an eventual legislative impediment to the very shonky auction practices of some real estate agents.

The toxic problem hanging around like radioactive waste is that the agents make money whether the person is buying or having their house repossessed and sold, and the banks' profits are dependent on how much they can get the next fool to borrow. Partners in disaster.

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