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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