It’s crazy and sad.
Most Australian real estate investors are completely ignorant, uneducated to the opportunity of investing in a massive cashflow market which at the moment has very little risk attached to it.
Don’t be one of them.
Here’s my rant for the day…
Whenever I talk about the emerging boom in US property, many people say, “Well, you know what happened last time.”
I know what happened last time. I made a lot of money. But I don’t think that’s their point.
The point I think they’re trying to make is that the US market crashed after it boomed last time, and so that’s what will happen again.
Sure the US might be on the up and up now, but the model is broken, and it will all come crashing down again, sooner or later.
I don’t want to seem unfair, but these people are idiots.
And look, the premise is reasonable. If you see the same stuff playing out again, then you should expect the same results. That’s the definition of sanity.
But what is happening in the US might be similar at some levels (prices are going up) but that hides what’s really going on, on the ground.
And the fundamentals of the current boom are very different.
And look, the real thing to remember about the GFC was that it was a sub-prime mortgage crisis. It wasn’t because prices got too high – it was because they were some dodgy (and in many cases illegal) lending practices. That’s what brought it all undone. So far, I haven’t heard of anything like that going on…
Anyway, the Philadelphia Fed has done some interesting work explaining why, this time it’s different.
(The phrase “this time it’s different” should always be a B.S trigger warning, so I encourage you to take an extremely critical eye on what I’m about to say.)
Anyway, the Phillie Fed starts with an overview of what has happened since the GFC. They note that, peak-to-trough, house prices fell 30%.
Over the same period, housing construction employment also fell by 30%, while new housing starts plummeted 80%.
So far though, the recoveries in house prices and construction have followed different courses.
Median house prices nationally have come back to be just 8% below their peak (which also gives you some idea of potential upside).
However, housing starts are still 50% lower than prior to the GFC.
The Phillie Fed says that this is because home-builders still have cold-feet. Many got burnt by the GFC. Many went out of business. And so the supply response has been muted.
And they reckon we’ll need to see more action on the price side before homebuilders come back into the water. That means the supply response that normally takes the heat out of the market, will take longer to kick in this time. That gives us more upside potential for capital growth.
The other key area of difference between this boom and the previous one is where households are placed. American households were leveraged to the eyeballs last time. This time, they’re being much more cautious.
If you look at the mortgage debt to income ratio, the blue line here, we can see that Americans are continuing to ‘deleverage’…
According to the Phillie Fed, the decline in the debt-income ratio reflects,
a return of prudent lending practices, more vigilant regulatory oversight, and efforts by consumers to repair their balance sheets. The “red flags” are not evident in the current housing recovery. These observations help allay concerns about another credit-fueled bubble…
The other interesting thing to note in this chart is the way that the house price to rent ratio, and the debt to income ratio are no longer moving together. In recent years, house prices have started rising, but so too have rental prices, and many people in the US are talking about a rental crisis as the downturn in construction creates a housing shortage.
The point the Phillie Fed want to make with this is that in the previous boom, debt was in large part responsible for the run up in prices. It created a bit of a feedback loop, where higher prices created more debt, which created higher prices.
This time, however, it’s different. Higher prices have not been driven by debt. Rather, they’ve been driven by a pick-up in rents.
This is how most asset classes work. As the returns on an asset improve, the price of the asset goes up.
And so we’re looking at a more ‘normal’ housing market. In the Fed’s eyes, the recent increases in rent provide some “fundamental justification” for the recent increases in prices we’ve seen, and are likely to see over the coming years.
And so the up-shot is that the US market is performing more ‘normally’, and the dynamics that created the pre-GFC bubble are not in play.
It’s a process of creative destruction. Recessions and crashes often weed-out the worst practices in an economy. It’s a process of evolution.
But as investors, it means the game has changed.
We’re not looking at a re-run of the GFC. Rather, we’re looking at a whole other ball-game.
And the new rules are pretty simple:
- Prices fell a long way, and have a long way to come back. There’s plenty of upside;
- Home-builders got burnt, and are still scared, creating a housing shortage;
- Rents and returns are rising; and
- Household’s continue to de-leverage, giving the housing market firmer foundations.
That all looks pretty good to me…
And so what’s old is new again. This is an old-school boom. I know what I’m working with. I know how to make money in a market like this.
And from my point of view – the more people who are scared of a GFC re-run the better.
Get out of my way idiots.
Here’s a slightly different question…
You can get 15-20% cashflow in the US… and you only have to spend $50,000 – $75,000 to buy the property outright.
Why do you persist with the Australian market?
What’s holding you back?