Australia's 'Money Is Cheap' Philosophy A Financial Iceberg In The Making

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

Australia's 'Money Is Cheap' Philosophy A Financial Iceberg In The Making

Image: Domain

Australia’s crazy expensive properties are the object of much spite. But as much as those who can’t afford them (read: us) throw barbs from our rented houses (characterising it all as a ridiculous bubble and hoping it pops), it seems determined, for now, to continue blazing into the sky.

Speaking of astronomic pricing, the most expensive apartment ever auctioned in Australia sold last weekend for $20 million dollars.

Situated in Notts Avenue, perched above the iconic Bondi Icebergs (with three car spots to boot) the place has doubled in price in about 5 years (it was previously sold for 9.8 million).

Though it is something of an outlier (we’re not all out there chucking $20 million at things)… This sale symbolises much of Australia’s attitude to property right now: money is cheap.

What does this mean? People have realised money in the bank is providing piddly returns and interest rates are very low. This is leading to the growing epiphany: if you’re not getting in on the stock or housing market you’re missing out.

16/16 Notts Avenue. Image: The Agency.

There are some dangers lurking behind this mindset though (beyond the usual ones of investing or buying houses unwisely). Going overboard with this ‘money is cheap’ philosophy could lead to people over-leveraging themselves to buy properties they can’t afford, which could have ramifications down the track (both for individuals and the economy). reported last week that “Australian house prices are forecast to see their sharpest rise since the 1980s.”

However, according to AMP Capital chief economist Shane Oliver, this might not be great. 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).

ANZ seems to have predicted the latter will win in 2021, last year forecasting house prices will rise 9%.

To seek another perspective on this ‘money is free’ issue, DMARGE spoke to James Whelan, Investment Manager at VFS Group in Sydney.

Mr Whelan characterized it all as a house of cards… albeit one he can’t 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 relates.

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

He also points 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.”

As for what the big-hitting Eastern Suburbs sales like the record-breaking one mentioned at the start of this piece will do to the market, if anything, one real estate agent has told DMARGE they should be seen more as one-offs, rather than something that will necessarily stimulate an increase in average prices.


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“It’s resetting the expectation for people to spend up and to set a tone which is great and exciting but also potentially scary as well because everyone might think their place is worth 21/20 million now – it’s a double-edged sword.”

The real estate agent also told us: “There’s a lot of money in that tech space coming into the market now and they are willing to spend up and buy once in a lifetime opportunities.”

“That’s why we’re seeing a huge intake in these double-digit sales taking place.”

“It’s relatively affordable to pay off 5 million dollars in interest. It only costs you roughly $100,000 dollars right now.”

What does this mean for you, practically, as a buyer?

DMARGE spoke to Edward Brown, director at Australia’s leading real estate provider Belle Property about this very topic last year. Brown was of the belief that there’s no reason not to buy in this climate – so long as you don’t over-leverage yourself.

“If you need to move, move. The housing crisis is only going to be caused if everyone sits back and does nothing.”

“The loans are very cheap. You can go and get interest rates for under 3%. That’s cheap money – you can go and get a million-dollar mortgage and they principle an interest for about $4,000.”

“So your rent and your mortgage on principal interest is about the same, potentially, if you’ve got the deposit to pay it now. Everybody focuses on property in the short term element – but what’s the long term?”

“I’m very much of the view at the moment that you want to be in and owning your own home if you can afford to.”

Another aspect to consider, when it comes to Sydney, is that, unlike New York and London, which are bigger, Sydney has a smaller number (read: a more limited supply) of ‘goldilocks suburbs’ which give residents the best of both worlds (access to city and the ultimate in lifestyle).

“It’s all about demand and supply – that have pushed prices to where they are today – they’ve seen a good appreciation in the value of homes over a long period of time.”

So even though $20 million for an apartment sounds crazy, it could be more sane than you think.

Image: Mathieson Architects.

The history-making $20 million Notts Avenue apartment sale mentioned at the beginning of this piece (which equates to roughly $83,000 dollars a square metre internally) illustrates this perfectly (if absurdly). As does Cameron Macdonald’s Mosman mansion (see: above), which recently sold for $21.5 million, after years listed on the market.

Though $83,000 per square metre sounds outlandish, given the limited supply of apartments like the Notts Avenue one, it isn’t maybe as insane as you think.

20 million well spent? You be the judge.

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