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House of Cards
Last weekend, Kingsley and I watched this excellent documentary from CNBC called “House of Cards” from their special report “Boom, Bust and Blame – The Inside Story of America’s Economic Crisis“. If you can spare 90 mins, I would highly recommend that you watch it as it traces through how the housing bubble began in the US in 2001, why it boomed and finally busted in 2007. In the video, NBC correspondent David Faber investigates the origins of the global economic crisis, with first person accounts from home buyers, mortgage brokers, investment bankers and investors – most of whom let greed blind them, leading to the greatest financial collapse since the Great Depression. This video has haunted me, I really feel sorry for the home buyers (normally referred to in financial news reports as the sub-prime borrowers) who simply wanted a part of the American dream to own their own home. They thought it was a dream come true when their loans were approved. They lived that dream for a few years when they enjoyed living in their nice homes and watching their property continue to appreciate in value. But when home prices eventually collapsed, their dream became a nightmare as these homebuyers lost their home and all the money that they had put into buying this asset.
This video sparked a lively discussion between us on whether or not this could happen to Australia. Are we in the midst of a growing property bubble or is appreciation of property prices something we can count on to go on indefinitely? According to this report in Wikepidea, there is a property bubble in Australia. Between 1998 and 2008 inflation was about 36% yet property prices inflated by more than 300% in all capital cities except Melbourne (up 280%) and Sydney (up 180%). The average house price in the capital cities is now equivalent to over seven years of average earnings; up from three in the 1950s to the early 1980s. In order to afford a house, homebuyers have increased their borrowings. From 1994 to 2009 Australian private debt to GDP ratio grew from about 80% to 160%. How long can this bubble go on for? Quite a while I suspect with the help of interventions from governments. In 2008, it looked like the bubble was starting to burst when property prices started to fall. The goverment quickly put a stop to that by lowering interest rates and increasing the First Homebuyers grant. It did not hurt too to let in a few thousand cashed up immigrants to keep the demand for property up. Asset bubbles are like Ponzi schemes; as long as there are new people joining, prices can keep going up. We sort of concluded that for now, there is no danger of a property crash so we will hang on to our property investments but we will stay alert for any indicators that this may change.
One indicator that I have been monitoring closely is the Chinese economy as mentioned in my earlier post “Is China a leading indicator?” The main reason for watching China is because Australia’s fortunes are so closely tied to theirs. They are the biggest buyers of our country’s resources. Commodity prices and the Australian dollar have soared recently, thanks to China’s stockpiling of commodities. Their asset bubble may be coming to an end as the government has tightened credit for asset speculation since 27 July 09 (see this article in Financial Times “China warns banks over asset bubbles“). Chinese regulators have ordered banks to ensure new loans are channelled into the real economy and not diverted into equity or real estate markets where officials say fresh asset bubbles are forming. As easy and cheap credit is a pre-requisite for bubbles to continue, I guess it should not have been a big surprise that the Shanghai Composite Index fell 20% shortly after that announcement.
The good news from watching the video is that not everybody has to lose money. A young couple who built a home for $300,000 in 2002 sold it a few years later for a profit of quarter million dollars. A hedge fund manager made a 600% return in 18 months by betting on the inevitable collapse of America’s housing bubble. As greed and fear are part of human nature, booms and busts will continue to happen. We just need to actively monitor our investments and know when to take profit when the economic conditions change. I have embedded the video in the post of those who would like to see it. Enjoy!
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[...] However, what I see in Australia today reminds me of what I saw in the CNBC documentary “House of Cards“, of what it was like in the US in 2001 after the 9/11 terrorist attack. Interest rates were [...]