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Australia's Favourite Speculative 'Hobby' Has Economists Clutching Their Calculators

The roaring 20s all over again?

Have you ever wondered why Australians lose their minds over property prices – and can spend hours debating the topic – but are substantially less vocal about the stock market?

You’re not the only one. A confused Australian Redditor recently took to the r/AusFinance Reddit community to ask that exact question.

“ASX 200 closes above 7300 for the first time and nobody bats an eye,” the user, u/MikeAlphaGolf, wrote on Friday the 11th of June.

“Property is at record highs and everyone loses their minds.”

“How do you rationalise that the current share market is sensible and justified, but the property market is overheated?” Mike asks.

“It seems that the sentiment on this sub is buy buy buy when it comes to ETFs, but property is an unsustainable bubble. To my eye, the same inflationary forces are pumping up both.”

“In times where the economy is only propped up by more and more government cash. Tightening is inevitable at some point. Why the difference?”

Reddit was quick to answer.

“I think people get more emotional about property due to the tangible impact on their lives,” the top comment reads.

“If shares go up 20%, they can still buy their desired dollar amount of a target share, but it just means less units. But when their target house goes up by 20%, they have to go further away or buy a unit.”

Another user, thatshowitisisit, responded to the top comments, writing: “Good answer. To add to that. Not everybody cares about shares, or feels like they need to invest in them.”

“When it comes to property, everybody at least needs a place to live, and not all, but most, want to buy a place to live. Bringing it out of reach affects their life directly.”

Other users, like R_W0bz, had flashes of self-awareness.

“Mannnn, I had a realisation in another post about how f*cked some people got last year. Sure my office job was able to work from home and I saved bucket loads of money on not going anywhere for 9-10 months.”

“But all those jobs you physically need to be at that got cut, which also are generally lower income jobs, made me realise how lucky I am but also what a kick in the guts it must be seeing these house prices rocket while they are most likely trying to recoup the losses from last year still.”

Another user added another theory as to why Australians are louder about property than stocks – property price fluctuations typically (if you are an average homeowner) affect your net worth more than stock market fluctuations (unless you have a lot of investments)

Another user was more succinct. They wrote: “People don’t live in the ASX 200.”

This trust we have that the housing market ‘only goes up!’ has come under scrutiny of late from more than just anonymous Reddit commenters.

As the ABC reported in April, “Some analysts are warning that Australia’s multi-decade property boom may be about to end, but most agree that will not happen this year with double-digit house price growth widely expected in 2021.”

AMP Capital chief economist Shane Oliver told the ABC last year we’re living in a “super cycle of debt,” comparing the early 1990s recession with now, showing how our level of household debt has increased over the last thirty years.

“During the early 1990s recession, the level of household debt in Australia was around 40 per cent of income, whereas now it is close to 200 per cent — one of the highest levels in the world,” (ABC).

“Each time there’s a downturn people get worried about debt and pay some of it back, but before things go too far [into the positive], the Reserve Bank cuts rates and people start borrowing again — we go back to a new level of debt and it starts the cycle again.”

Digital Finance Analytics (DFA) principal Martin North told the ABC a lack of migration and lower population growth are two factors that could trigger the bubble to pop.

He also said selling pressure will come “from mortgage stress plus investors seeking to exit.”

What will determine prices then, is an arm wrestle between all these factors and the government stimuli introduced to offset them (and, to a degree, Australia’s ‘must buy’ housing culture, where we treat property like a form of speculation).

But is it really a problem that property market speculation is Australia’s favourite new hobby? What’s to stop it going on forever?

DMARGE spoke to James Whelan, Investment Manager at VFS Group in Sydney, about this earlier this year.

Mr Whelan characterized it all as a house of cards… albeit one he couldn’t (when we spoke to him) imagine toppling.

Mr Whelan said people’s risk horizons have shifted as they still seek to get approximately 5-7% return on their investment portfolio (which should be varied), in a climate where interest rates are unusually low.

He told DMARGE we’ve had two generations of people get used to a certain risk vs. reward dynamic and now that has “come down from something that was very easy to invest in – 5-7% – where a part of your portfolio sits in that area [normally].”

“But because that’s now down to zero it means that your investments… everything needs to shift a bit to the right [imagining on the right-hand side we have our riskier investments] to get more because people still need to get their annual 5-7% return to be able to live and grow their portfolio.”

“So… people are taking more risks.”

What are the consequences of this? According to Mr Whelan: more risk-taking investment behaviour (plus government stimulus around the globe to combat the pandemic) means money is freer: “A whole lot of money has been pushed into the market – what that has done is pushed asset prices – up so it has inflated the stock and property markets.”

“It is easier for people to borrow at a lower interest rate.”

The question then, according to Mr Whelan, is: “Do you think that our financial regulators are doing enough to ensure people will be able to repay those loans should the underlying interest rates go up (which they inevitably have to do, as they are not normal right now)?”

“Just as 18% is not normal (when it’s up there it needs to come down), 0% is not normal either – it needs to go up.”

“If the answer to that question is, ‘no; we can’t afford to have that changed,’ then absolutely we are over-leveraged.”

On the other hand, the banks don’t want to foreclose “on an entire nation of people who can’t afford normal interest rates” either, Mr Whelan told us.

“No one has a really good answer for what happens if that happens.”

He also pointed out that there is a difference between the US housing finance system and the Australian one: “Right now usually what happens in a standard system – in America you can walk away, but in Australia the rest of your life is attatched to [this investment] – you can’t just walk away, that’s your entire life.”

“Knowing that and knowing that if there were some sort of calamity and knowing you couldn’t just let an entire nation of people suffer… it’s not the way we do things anymore – not since the GFC when they decided to bail the banks out (and they decided to fix a pandemic using the same solutions they did for the GFC) – they physically can’t let things fail any more.”

“By ‘they’ I mean every central bank and government in the world now especially if we’re all taking the lead from The Fed and the US government on these ones.”

“If we were at a stage when people physically couldn’t pay this mortgage on their place then… there are varying [ways that could play out].”

“I don’t think the people would be left footing the bill immediately but some future generation would be left footing the bill for it.”

“In short: yes we are over-leveraged to buying into this property market.”

“I would love to see a market and I think the economy would love to see a market that would be fundamentally ‘investible’ if more young people could buy their first home more easily and it was a place they wanted to stay. We don’t currently have that system in place and that’s a shame [both personally and as an investor].”

“It does really seem that it’s like a stack of cards but one that doesn’t seem like ever coming down.”

“That’s the problem. It would be nice (as an investor in things in this nation) to have young people buying a home and filling it with stuff – new stuff that they buy.” Instead, we have a lot of old people “buying investment properties at cheap money and renting them out.”

“Ownership of your own home is the fundamental requirement of a good strong economy.”

Australia’s housing market isn’t the only thing that has people clutching their calculators: some analysts are predicting a stock market crash too, after this period of ‘roaring 20s’ we’ve just seen. Though many of the most horrendous predictions are regarding the United States, you’d be naive to think if Wall Street goes down the ASX won’t be affected.

The notorious Big Short investor, who predicted the GFC of 2008, Michael Burry, recently warned of a massive bubble and epic market crash, before deleting his Twitter. He said crypto and ‘Wall Street bets’ type crazes, once they burn out, will hit the main street hard.

He described the market last week as: “Greatest Speculative Bubble of All Time in All Things” and wrote: “All hype/speculation is doing is drawing in retail before the mother of all crashes.”

He warned bitcoin was overpriced and called the Federal Reserve a “misguided monster” for focusing so much on preventing market declines.

He also cited supply shortages and hoarding as evidence of a growing inflation threat.

CNBC points out there are various similarities to where we find ourselves now as a society, and where we were 100 years ago.

In January CNBC reported: “There are a host of parallels between current global conditions and those prior to the Roaring 20s: the end of a pandemic, the proliferation of new technologies, a transport revolution, political polarization, emerging international rivalries and a soaring stock market.”

CNBC also reported a quote from HSBC Senior Economic Advisor Stephen King. According to CNBC, King said, in a research note, that while the Roaring 20s were great for the ‘real-life Gatsbys’ who made their fortunes, actual economic growth in the U.S. economy was distinctly ordinary.

“Many rural citizens were left behind. Meanwhile, an inexperienced Federal Reserve struggled to cope with a combination of low inflation and surging stock prices. When it all came crashing down, depression followed.”

Maybe we should throw that Gatsby party while we still can?

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