Quality, Consequences and the Construction Industrial Complex (part 182).
Canaries were taken into Victorian coal mines as an early warning for gas leaks. If the canary died you had to run like hell and get out. I am calling it, the Australian property market canary has died ( https://voiceofthemarkets.blogspot.com/2019/02/australia-real-estate-its-economy-is.html ) and other markets will follow.
The Australian property market is in steep decline. Its economy is based on pulling stuff out of the ground and shipping it to China. Chinas economy is opaque and falling, therefore Australia is struggling.
Canadas economy is based on pulling oil out of the ground and sending it to the USA plus it is a source of cheap manufacturing labour for the USA. Times have changed, the USA is an unreliable trading partner and Canadas property market canary is unwell.
In 2018 Canada there were only two cites, Vancouver and Toronto, where residential property capital gains above inflation could be made. However, Vancouver is now declining and Toronto is flat
I firmly believe that in my children’s life time, the thought of buying a house as an investment that only goes up in value will be laughable. Houses will revert to being a consumable like a car purchase. Think about what happened in Japan over the last 20 years!
We are so used to property values rising, we see them as retirement funds rather than speculation. If I asked people if they are comfortable trading options on margin, most would say no. However, most people are comfortable buying property “off plan” with borrowed money which is the same thing! IMHO, in the West, we are firmly in a delusional property mania.
In my working life two things have lead to high residential property returns:
1. Globalization i.e. hot international money flooding to international cities like London. Now being addressed via capital controls, taxes and legislation.
2. Demographics i.e. baby boomers bidding up residential house prices. This trend is now reversing.
I have come to believe that house prices have not necessarily gone up exponentially but the value of the currency they are valued in has dropped exponentially. However, that is an analysis for another time.
In the West, baby boomers are now retiring and looking to release capital from their over priced principal residences. This selling pressure plus poor economic conditions will create a buyers market, quality will win out and badly built houses and apartments will lose.
This brings me back to Australia and a recent “market top” event involving a high end apartment block having to be evacuated. The Opal Tower crisis (https://www.thefifthestate.com.au/innovation/residential-2/reflections-on-the-opal-tower-crisis-in-sydney/) is a market failure and the inevitable outcome of property market corruption, cronyism, lobbying, self certification, rampant speculation, moral hazard, poor governance and a lack of hard consequences for designers and builders.
Things will only change when we all stop buying poorly designed and constructed residential property. Reduced aggregate demand is effective consumer disobedience and the only thing that shifts markets. It is time to put shitty building designers and constructors on notice and not buy their sub-standard products.
As a young baby boomer I believe the best approach right now is to:
1. Sell any investment properties ASAP.
2. Sell your main residence and downsize ASAP before the market tanks.
3. If you really have to, buy investment property based on yield i.e. a net yield of at least 3% above the 10 year government bond rate.
I think the www.thefifthestate.com.au article on the Sydney Opal Tower summed things up best. “A final thought is that following the Opal Tower crisis, the loss of confidence in the viability of the speculative high-rise residential development model threatens to impact governments, regulators, developers and communities for years. The convergence of a property bust, a banking crisis, and loss of easy finance, with a loss of social licence will haunt the property development industry until significant and effective reforms are made in the industry”.
Be careful out there, the days of easy property returns are coming to an end.
Related posts & links:
#146 – Lemon Laws for Buildings ( https://bldwhisperer.com/lemon-laws-for-buildings/ )
#144 – Where is Elon Musk – Cars Vs Buildings ( https://bldwhisperer.com/where-is-elon-musk-cars-vs-buildings/ )
#163 – Amazons Housing Play ( https://bldwhisperer.com/amazons-housing-play/ )
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