Last week for the first time the average house price in Sydney passed one million Aussie dollars. This is big news for us because the majority of the Irish people who have moved to Australia are employed in offshoots of the property industry. When property markets rise, there is an attendant rise in demand for almost everything. When credit fuels the property party, the demand for employment rises, so too do wages and the cost of living. Perhaps it’s not surprising that friends in Australia have horror stories about the price of almost everything.
But excessive house prices, although trumpeted by some as a sign of economic strength are usually the very opposite; they are more typically a sign of dreadful economic mismanagement.
We know all about this, when a mania takes over a housing market and the banks get in on the act by lending “hand over fist” to gain market share – driving the bank’s share price yet higher.
The higher house prices, the more vulnerable the market is to a massive reversal. Sometimes this reversal can be triggered by events that seem far away but suddenly appear right on your doorstep.
For Australia, events in China could well be the trigger to make Aussies realise that while house prices may fluctuate, debt doesn’t. Debt is real and if a market that is being driven by excessive lending slumps, the post-crash society will be characterised by excessive debts.
The canary in the coalmine for the Aussie property market is the Aussie dollar, which has been falling precipitously. It is now at a six-year low against the US dollar. Typically, ahead of a market slump in a country, the most liquid asset associated with that country is sold. Australia’s most liquid asset is its currency.
Here’s where China comes in.
Australia is “China’s quarry”. It exports all sorts of commodities to feed China’s apparently insatiable demand for raw materials. This Chinese demand drove commodity prices facilitating a boom in the vast mining outback of Western Australia.
However, China is slowing down quite quickly and in addition, its stock market, which had risen rapidly, is now in free-fall. Over 90 million small accounts with stockbrokers have been opened in China in the past three years – that’s bigger than the population of Germany. Many of these people have been borrowing to chase the stock market higher. This type of leverage can make your gains look spectacular on the way up, but can be crippling on the way down and yet again, the debt remains for years after the share prices have gyrated up and down.
As China slows, the big challenge for the Politburo will be to keep the economy motoring sufficiently to absorb new workers and to re-engineer China away from being an export-driven, manufacturing hothouse to a more sedate, consumer-driven economy.
Up to now, the Politburo has been amazingly successful at orchestrating this enormous economy, but lots of outside observers are very worried.
Wages in China have risen significantly in recent years, and now its factory workers are the best paid in developing Asia.
The total annual cost of a Chinese manufacturing worker (including salary, benefits, social security payments and bonuses) is $8,204, compared to $4,481 in Indonesia, $3,618 in India, $2,989 in Vietnam, and $1,580 in Bangladesh.
The whole notion that China is the world’s most competitive place to produce is no longer the case. It is facing tough competition.
While rising wages are a good thing and are what you would expect, the fear is the Politburo can’t manage the transition from the cheapest workforce in the world to something more subtle.
However, economies rarely move in straight lines and there is a real risk that the Chinese growth rates stall from here, not least because fundamental demographics are moving against China.
China’s big challenge has always been whether it would get rich before it got old. The answer is no one is really too sure because although it is getting obviously richer, it is definitely getting older too.
China’s working-age population fell last year.
The population stood at 1.37 billion at the end of 2014, according to the National Bureau of Statistics. This is an increase of 7.1 million on the previous year.
But the working-age population, between 16 and 59, fell to 915.8 million last year – down 3.7 million from the end of 2013.
And the shrinking labour pool is driving up labour costs and eroding the manufacturing and export competitiveness that helped fuel China’s 30-year expansion.
The population aged 60 and over, by contrast, rose last year by more than 10 million to 212.4 million. This is 15.5pc of the total population.
China introduced its controversial family planning policies, which limit most couples to only one child, in the 1970s to rein in population growth. Now it doesn’t have enough young people.
And of these young people, nearly 116 boys were born for every 100 girls last year, while the gender ratio in the total population was 105 men to 100 women. So not only are they having too few children, they are having far too few girls.
Therefore China has a few deep issues to sort out. Up to now, most people saw the past 30 years’ economic miracle and concluded that China would find a way again. In recent months that view is being reassessed. This reassessment focuses of countries whose dependence is significant and of course, China’s quarry, Australia comes to mind.
Right now, the Aussie housing market looks to be madly overvalued.
Without commodity wealth, Australia looks like a large leveraged bubble.
But as we know in Ireland, these bubbles can inflate for a long time before they burst. However, timing in these matters is not actually everything, despite what the cliché says.
When it comes to the fallout from housing booms, Aussies would be well advised to heed the wisdom of John Stuart Mill, the 19th century English economist and philosopher, who said of market booms and busts that “the bust doesn’t destroy wealth, it merely reflects the extent to which wealth has already been destroyed by stupid investment decisions taken in the so-called boom”.
When we see average house prices hit one million dollars, we can’t say we weren’t warned.
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I liked the article – well researched and put in a wider geopolitical context. There is a nice flow between this article on the implication of China’s slowdown on Australia and your last article on the implications of UK’s growth on Ireland. Now the question is how does it translate into Ireland’s situation (macroeconomic and political). One consequence would be hordes of people coming back from Australia (or maybe not? – more than half of Poles left Ireland after the crash, but they did not necessarily go back to their own country – but rather to new destinations like Norway… Read more »
Heavy stuff. So David here’s what you can do for Australia, assuming you might know someone who knows someone. Write a letter giving a brief history of the Irish boom/bust up to the bailout say. Less than a page long, if possible, mainly bullet points. Then attach a copy of the transcripts of the Dail Bank Enquiry. Send this letter (via that someone you know) to the Prime Minister and Finance Minister of Australia. Firstly advise them to stop digging (foundations I mean). Were I you I would also advise them to start praying that they haven’t left it to… Read more »
Why can’t they just start selling iron ore to India, Thailand or Indonesia?? :)
Lots of products are more expensive in Ireland than Australia as well, just saying.
An Island that is a farm/quarry to service other economies,has low population densities relative to its land mass is experiencing a property bubble and ridiculous asset prices? I understand that there are places on both Islands where human life can’t prosper(the Simpson desert or Leitrim) and that people like to live near the coast. The parallels with Ireland are striking. The writing is on the wall. Send over the “how to f**k up a Country manual” in one easy lesson to the Aussies. It’ll save them some time. Fair dinkum.
Aussies are about to renew a relationship with a powerful concept.
“consequences”.
Don’t worry about China. China has spent a fortune making their internal transportation system more efficient. And the results are impressive. China will focus on other areas of productivity enhancement. They have the money and they have the manpower.
There is a speed bump coming up. And it is serious. There will probably not be another construction boom in China for a decade. China will focus it’s resources on other areas.
g’day DB4545. Didn’t the poulation of Leitrim already emigrate to Australia? Or was that Roscommon.
Last name: FLANAGAN
First name: LUKE
Full name: LUKE FLANAGAN
Sex: M
Imprisonment place: Roscommon
Document date: 00/00/1822
Crime desc: Highway Robbery
Sentence: Transportation 7 yrs
Petitioner: Convict and Robert Galvin
Document ref1: PPC 1679
Comment1: Robert Galvin , convicts brother in law was convicted for the same crime.
Comment2: Convict states that they were prosecuted out if revenge. Several character refe
Comment field number: rences including the minister for Kilkeevin, Co. Roscommon.
Source:National Archives
Peter
Prediction. Mankind will in the next 50 years reach a point where machines will be able to do everything more cheaply and more efficiently than man can do himself. As a result current economic models and ways of thinking are obsolete because it’s going to take a lot of planning and social engineering to prepare 10BN of mankind’s best for obolescence. 0% interest rates and almost no inflation are the harbingers of this future. So people put on your thinking caps especially those of you who under 40 years of age because you are going to see this evolution. What… Read more »
https://www.goldmoney.com/research/analysis/chinas-1929-moment?gmrefcode=gata
Maybe the 20,000 tonnes of gold that china is speculated to have stashed will play a part in their decision making. 20,000 tonnes got the US reserve currency status in 1944 at Bretton Woods.
http://www.gata.org/node/15603
Howling at the full moon.
[…] – Bloomberg Keep an eye on the rout in junk bonds – it could spread fast – MoneyWeek China’s crisis could be the pin to pop the property bubble in Australia – David […]
Tony you mentioned a DJ propaganda index in an earlier topic. I’d never heard of it but it’s an interesting concept. I use a BS radar based simply on watching (body language) and listening to guests etc on CNBC and Bloomberg. It’s totally subjective but after watching the same guests and presenters for a while you get a sense of how things are. I’d include Yellen and Draghi and such like in the people to watch BTW. My BS radar didn’t save me in 2008 but it certainly mitigated the damage incurred and other family members were grateful for the… Read more »
Grzegorz http://www.caseyresearch.com/articles/this-living-legend-just-called-the-bottom-in-commodities Half way down ” The crash of one commodity is hurting Canada most… Canadian stocks are falling. The S&P/TSX Composite, Canada’s main stock exchange, is down 3.5% in 2015. It’s declined 7.8% since hitting a yearly high in April. And it recently fell for seven straight days… its worst losing streak since 2011. Oil prices are 52% lower than they were a year ago. This is a big problem for Canada. Canada is the world’s fifth-largest oil producer. Crude oil is its biggest export. It makes up 27% of Canada’s total exports. The Financial Post explained, “(I)t has… Read more »
http://campaign.r20.constantcontact.com/render?ca=bd774219-0871-41b0-9f05-aaa6ae6edf5b&c=877a32b0-427b-11e3-ad08-d4ae52a45a09&ch=8905dbc0-427b-11e3-ad3c-d4ae52a45a09
The latest from Miles Franklin is provided for those prepared to read an hour and receive a good look at the real economy. The US is in a continuing downturn, The Fed will be unable to raise rates. China may be forced to liquidate US treasuries.
Who will buy them? To prevent a precipitous decline in the US dollar and a spike in interest rates the Fed will again buy Treasuries to maintain, a little longer, the illusion that all is well.
There is no place to hide. Be prepared. Protect yourself.
When are you going to get this message lodged in your brain and fully taken to heart.
No Sovereignty Without Control Over Currency and Credit–Ellen Brown
http://www.counterpunch.org/2015/07/31/the-greek-coup-liquidity-as-a-weapon-of-coercion/
It is amply clear that the Greek government has a duty to recover national and democratic sovereignty over all departments of state, and in particular those of the Finance Ministry. If it does not, it will continue to forfeit the instruments of policy making that voters expect it to utilise in pursuit of the mandate they bestowed upon it.–Yanis Varoufakis http://www.counterpunch.org/2015/07/31/the-greek-coup-liquidity-as-a-weapon-of-coercion/ He seems to be saying the same thing. Control of the finance ministry has to be the control of a national currency. That is currency issued by Treasury and not the central bank. Currency issued backed by national assets… Read more »
External bail-out monitors have not been in the ground in Athens since last year. Their presence – as decreed by creditors as part of a new rescue package – has been accompanied by a heavy security entourage. More than 250 police officers have been deployed to guard the central Athens Hilton hotel where bail-out officials are based.””
http://www.telegraph.co.uk/finance/economics/11769089/Yanis-Varoufakis-facing-criminal-prosecution-over-Plan-B-as-Troika-deny-allegations-they-control-Greek-tax-system.html
The troika are so popular that only 250 security guards are required and not 500!!
As Sydney house prices are hitting the 1 million average an Irish Australian businessman Seamus Walsh has recently bought Waterford Castle for 6 million Euro and is apparently on the hunt for other property plays in Ireland. It’s knowing when to hold them and knowing when to fold them. It might be time to fold them down under. Watch the wild geese return from Canada and Australia with hard earned cash and kick start another bubble to profit the usual suspects waiting in the long grass.
Vancouver RE market. Huffing and puffing by politicians who can suggest nothing other than to tax the “rich” to subsidize the poor. Nobody suggest changing the money system to produce equity.
http://www.huffingtonpost.ca/gregor-robertson/vancouver-housing-tax-mayor_b_7512556.html
http://investmentresearchdynamics.com/
Spend 3 hours on these two videos and the article and absorb. Then you begin to understand the manipulation and graft and corruption in place world wide.
You’ll know the dollar is about to die when rises, rises and rises some more, because it’s soon going to vanish…the dollar and Treasuries will suffer a vanishing act from global rejection because foreign nations are going to say we don’t want your stinking toilet paper called “Treasury Bills” – we want something better. – Jim Willie on Shadow of Truth
Just the facts, Ma’am, nothing but the facts.
http://www.gata.org/node/15608
I honestly don’t think that a country needs to have its own currency to prosper but assuming I’m wrong then it raises another issue.
Whither BITCOIN – Is this the Armageddon Currency?
TBH I don’t understand the concept and I don’t trust the technology it’s based on (Encrypted Something is the best I can come up with) and I can’t see any intrinsic value in it.
Whilst I do think Australian house prices are overvalued especially in Sydney and Melbourne I believe you need to be careful in just relying on broad statistics. You need to distinguish between Melbourne / Sydney and the rest of Australia In MEL/SYD you need to separate out high rise apartments from traditional 3/4 bed family homes. (Australian families don’t generally live in high rise apartments) Then look at the house prices of the middle ring / established suburbs and then compare like for like the prices with areas such as Clontarf, Raheny, Rathgar, Rathmines and once FX rates are taken… Read more »
Beijing is not looking kindly on Chinese citizens having “boltholes” in other countries.
I was told that by a committed member of the Chinese Communist Party, who does not hold official power, but who is of the belief that such behaviour is highly correlated to law breaking, corruption, and abuse of wealth within China.
In other words, the rank and file CCP membership are with the current Chinese Politburo, and want the regime to do more about this.
This is the internal dynamic in the CCP.
Interesting set of statistics.
Wells Fargo are worth almost as much in market capitalization as the combined stocks in the India Stock Market. That is crazy.
All the indications are that something dreadful is about to hit the main stock market in Wall Street.
apart from the overvaluations in the Nasdaq Composite Index.
The value to a country of having its’ own currency is diminishing IMHO. Look at the arguments people have put forward regarding gold. There is more gold traded than exists (If I have understood people correctly). So sure the Chinese hold a lot of the real stuff but what good will it do them if the US and/or Europe economies go belly up. They may well be playing a long game but there’s going to be plenty of hardship in there for everyone. And as I see it the bottom line is going to result in some serious public unrest.… Read more »
In the not too distant past I have talked of the Real Bills Doctrine as a method of conducting business when there is little credit or money available. It is the essence of conducting business and trade over a 91 day period that is self liquidating by payment in cash of the consumer to buy the finished product.
Please read this explanation by Hugo Salinas Price. Also available is a reference to Antal Fekete an expert on this issue.
http://www.plata.com.mx/mplata/articulos/articlesFilt.asp?fiidarticulo=263
A country with its own asset based non debt currency can employ the Real Bills Doctrine and be prosperous.
Grzegorz,
Thanks for the link on the Danish Philosopher Kirkegaard. Rather interesting perspective on the centralization of cultural and intellectual control, and the real battle in each individual.
It also gave a series of useful links to other philosophers.
On the whole currency thing, sovereignty and control. It might have been true once but now you have spread betting, shorting, CFDs, highly leveraged trading and internet access to trade your currency from all over the world more or less instantly. So you’ve already lost most of the sovereignty your currency gives you. Why else are the UK’s, ECBs and FED’s interests so similar? Real sovereignty comes from having a well managed economy. Those countries whose economies are in bad shape are that way because of the way their politicians have managed those economies. CBs can, as Mr Draghi has… Read more »
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