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Pizza delivery boy with 10 investment properties is canary in the coalmine for Aussie housing bubble; Credit Crunch Looming. Goldman Sachs says Australian housing is 36% overvalued.
Topic Started: 9 Aug 2015, 07:36 PM (4,788 Views)
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Goldman Sachs says housing is 36 per cent overvalued in lower-growth economy

by Christopher Joye, Aug 7 2015

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Will we eventually look back and conclude that the Sydney pizza delivery boy with 10 investment properties was the canary in the coalmine for the great Aussie housing bubble was the canary in the coalmine for the great Aussie housing bubble, which continues to inflate at an unsustainable pace to this day?

The Daily Telegraph reported that the secret to Tony Fleming's success is leveraging up on the assumption of speculative capital gains. "I only buy in areas I think are undervalued, but will see price growth soon," says Fleming, a Western Sydney native who has worked in the same Domino's pizza outlet for the last seven years. "After the value of my properties grows, I take out the equity to purchase more." It's pure Ponzi: price rises beget more leverage and more capital gains.

One problem for Australia's pre-eminent pizza boy-cum-property baron is that the masters of the financial universe, Goldman Sachs, are calling his bluff. Goldman's widely-respected chief economist Tim Toohey revealed on Wednesday that his analysis indicates "Australian house prices are currently 20 per cent above 'fair value' – the most expensive since December 2007".

And if Australia's "new-normal" trend economic growth rate is weaker than the 3-3.25 per cent previously proposed by most boffins (as we've argued here) on the back of slower population growth, Goldman believes its "estimated 20 per cent overvaluation for Australian housing rises to a 36 per cent overvaluation".

Questioning the trend growth rate has become fashionable since Australia's monetary policy mandarin Glenn Stevens flagged that there may be reasons to believe it could be lower in the future. If this proves correct, it has serious ramifications for all investors. Beyond the impact on house prices, Goldman says that if the Reserve Bank of Australia were to lower its "potential economic growth assumption [from 3.25 per cent to 2.5 per cent] ... Australian equities [values] would [theoretically] decline by 11.5 per cent".

Interestingly, Goldman argues that its housing valuation findings only apply to domestic buyers. For foreign purchasers that "are not dependent on the cost of finance from the Australian banking system", our bricks and mortar are actually "cheap in Australian dollar terms, and even cheaper in US dollar terms post the [exchange rate's recent] decline". Compared to three-bedroom apartments in Sydney's CBD on a price per square metre basis, real estate is much more expensive in Hong Kong (256 per cent dearer), London (120 per cent), New York (111 per cent), Singapore (77 per cent), and Paris (29 per cent) in Aussie dollar terms.

No wonder Chinese-Australian billionaire Chau Chak Wing was willing to shell out $70 million for James Packer's 3,300 square metre pad a week ago. (Packer paid $30 million for his land and reportedly spent $30 million building the palace, so he's probably only square after stamp duty and agents' fees.)

The next Australian recession

This brings me to the next Australian recession. While nobody knows when it might arrive, it will happen eventually. And now is the time to think about triggers and business models that might thrive in an adverse climate.

Read more: http://www.afr.com/real-estate/goldman-sachs-says-housing-is-36-per-cent-overvalued-in-lowergrowth-economy-20150803-giqfgd
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Alex Barton
9 Aug 2015, 07:36 PM
"Australian house prices are currently 20 per cent above 'fair value' – the most expensive since December 2007"
So what happened to 40% above fair value, 30% above fair value and all the other calculations that have been published over the past decade?

Personally, I think they're guesses at best.
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While it's true that those who win never quit, and those who quit never win, those who never win and never quit are idiots.

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The threat of a housing downturn is rising
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John F. Kennedy
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Its a bit scant on the 'credit crunch looming' detail. While I'm certainly expecting a cyclic crunch sometime, it would be good to know the exact day.
Alex Barton
9 Aug 2015, 07:46 PM
Requires subscription to read Sir Pickering's gloomer.
Edited by John F. Kennedy, 9 Aug 2015, 07:55 PM.
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Governor Stevens will just have to drop his interest rate a bit more to ensure the happy times keep rolling for Mr Fleming our favourite Domino's pizza delivery boy (and property entrepreneur) and for the economy in general ... :)
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We must save Mr Fleming.....at all costs!
WHAT WOULD EDDIE DO? MAAAATE!
Share a cot with Milton?
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9 Aug 2015, 10:33 PM
Governor Stevens will just have to drop his interest rate a bit more to ensure the happy times keep rolling for Mr Fleming our favourite Domino's pizza delivery boy (and property entrepreneur) and for the economy in general ... :)
Rates are already at record lows and prices are dropping in many places already, clearance rates dropping below last year. Lower interest rates detroys retirement savings and wealth, destroying jobs and wages as these people now have less to spend. Your obviuosly not diversified and hoping for a rise in just one area. A lot of people in that boat, when the scales tip, a lot to jump out too.

We may as well be at zero, wont make much difference from here.

http://www.afr.com/real-estate/residential/low-interest-rates-crucial-for-bridging-offtheplan-apartment-finance-20150803-giqgjs

.http://www.afr.com/business/flood-of-houses-and-apartments-for-sale-worries-experts-20150807-gitzxk

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9 Aug 2015, 10:33 PM
Governor Stevens will just have to drop his interest rate a bit more to ensure the happy times keep rolling for Mr Fleming our favourite Domino's pizza delivery boy (and property entrepreneur) and for the economy in general ... :)
Might be too late for that.

Some VERY interesting reading here.

http://www.afr.com/real-estate/residential/low-interest-rates-crucial-for-bridging-offtheplan-apartment-finance-20150803-giqgjs

http://www.afr.com/business/flood-of-houses-and-apartments-for-sale-worries-experts-20150807-gitzxk

Buts wait...theres more.... How about the steak knifes.

https://www.google.com.au/url?sa=t&source=web&rct=j&url=http://www.afr.com/personal-finance/plunging-rents-a-worry-for-property-investors-20150306-13xkbj&ved=0CDgQFjACahUKEwjr7M7u_5zHAhUkqqYKHVAYAQg&usg=AFQjCNFsXeTMKBmpMotTf0PDeIcWotpJhQ
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10 Aug 2015, 08:06 AM
... Your obviuosly not diversified and hoping for a rise in just one area ...

We may as well be at zero, wont make much difference from here.
I'm debt free and intend to hold until I die.

So don't care too much at all about prices for myself.

But I DO care about the rents ... :)


In fact it would still suit me fine if prices did drop a bit.

As it would make it easier to help younger family members into housing.

And being able to pick up another IP for cash for myself would be nice as well.


But I'm not sensing price drops in the immediate future for SEQ anyway.

More like more increases.

Though inner city apartments could be a different story in the not too distant future.

And eventually houses will take some sort of a hit of course.


As to your second comment:

"Pig's arse!"

You try being retired and living on your bank interest when ZIRP hits.

Gotta feel a bit sorry for all those other poor old bastards in all those other countries that ARE at zero.



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10 Aug 2015, 09:05 AM
I thought this part was rather concerning.


Many investors are finding loans are becoming more expensive and harder to get when they seek financing for the balance of the apartment at settlement, particularly when the apartments are revalued.

A real-life example has been provided by Beller, a diversified property group with offices in Australia and China. The owner's name and address of the property have been withheld.

An off-the-plan apartment was purchased for $485,000 on a 10 per cent deposit ($48,500), which meant 90 per cent, or $400,000, equity was required.

The bank valuation at completion of the apartment was $400,000, a 17.5 per cent discount on the purchase price. In addition, bank borrowing has been reduced to 80 per cent of the valuation, which is 80 per cent of $400,000 ($320,000).

That means the purchaser has to come up with an extra $116,500.

The expected rent for the apartment at the time of sale was $460 a week, which is a net gross rental return of about 5 per cent on the original $485,000 purchase price.

The actual rent is $360 a week – that's a return of 3.85, which is 21 per cent discount on the original estimates.
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