I've had enough!
In fact, many subscribers have sent me emails challenging me on my thoughts and ideas and investment philosophy.
The biggest bubble in real estate is not the prices, it's the B.S. of journalistic opinion about “the imminent real estate crash.”
It's getting to the stage where we might even see a headline that reads, “Expert Says Sell Your Real Estate Now Before You Lose Millions!”
That expert of course is probably someone who doesn't own any real estate, never has and never will.
The contrarians, who have been saying for a long time the Australian market will crash are at it again. Now the predictions are anything from 40% to 62%.
Crazy, crazy stuff I think…
You are probably wondering who has been pedalling this dooms day scenario… Well apart from the usual suspects in the press, the guy who seems to have the biggest voice here is US investment legend, Jeremy Grantham.
His views are that the Australian housing market is a time-bomb, seriously over-priced and on the verge of collapse.
His research to formulate his view seems to based on one idea – and that is that Australian house prices are 7.5 times the family income. Supposedly twice what they should be.
Now, it's an important point that I've just mentioned.
“Twice what they should be.”
Stick with me here, I will explain…
The other group of doom-sayers are surprise, surprise… All involved in some form of stock market promotion. Whether it's newsletters or transactional, it doesn't matter. They've all jumped on to this, not because they're concerned about the real estate market – but because it's a great story to get clients out of real estate and into stocks.
Hmmm… Interesting.
So I thought I'd drill a little bit deeper and get some facts.
You don't have to be Einstein to figure out that the real estate market has slowed and with clearance rates averages at 60%, the tide has turned from a sellers market to a buyers market.
But should you be buying?
Based on the media's view – absolutely not!
Professionals don't use the media as their motivation for investment, in fact I learnt a long time ago to do the exact opposite direction of media consensus.
But I digress.
Now back to the facts…
I searched around to find information on exactly what is the Australian home-price to disposable income ratio. A useful fact, but in isolation not much good to you. However, seeing that Jeremy's premise is based on that fact, let's see if I can come up with a factual, logical counter-view.
Here's what I found…
Utilising the latest ABS national account data, combined with Australia's most comprehensive residential sales database, RP Data (which captured 100% of all home sales), the home-price to disposable income ratio is now…
Only 4.6 times as at June 2010.
That's 40% less that Grantham's claim and only marginally above what it should be based on his view as to what is normal.
But could we in fact have a normal real estate market or are we about to see an all mighty crash?
Now to see a crash in the real estate market, a lot of factors have to come into play. I can't deal with all of them right now, but one of the main things that needs to happen is for people to stop buying (unlikely) or banks to stop lending. This is what happened in the States.
The fear of most commentators is that the Australian banks are top-heavy to the mortgage industry and are simply lending on high loan to deposit ratios.
Three years ago this may have been the case, when they were lending at 95%. Today, they've gone conservative and are back at 85%.
However most commentators fail to recognise that in the eye of the storm of the recent GFC, the government came in swiftly and by and large, guaranteed our major banks funds in the unlikely event of a rush for liquidity.
Considering that most people who own their own home are not investors, and therefor have no need to panic and sell, it's unlikely that our market will see a free-fall of prices that some US experts predict.
I'd love to show you a chart here, but unfortunately I cant, which tracks that relationship between national median dwelling prices and national disposable household incomes from March 1993 – 2010.
…But maybe I can paint a picture for you.
There has only ever been a brief period where Australian house prices have out-paced disposable incomes and that was between 2000 and 2003. …and we saw a cycle-peak in 2000 as well as another cycle-peak around 2004.
After that, a lull and a sideways period and then prices continued to increase again.
The bottom line is, our incomes are growing in par with our real estate prices and there is no major blowout in that department.
Now it's important to note and illustrate where some of the data has come together to base my opinion.
Now remember, we based out information on all sales, houses, terraces, units, etc, etc, etc.
The average price Australia-wide was $413,000.
The median on the same data was slightly higher at $441,848.
It's important to note that we went across all transactions in Australia, not just the major metro.
Ok, that deals with price. Now income.
I'm drawing from HIA data. There are 8.57 million households in Australia and pulling the rate of ABS national account figures, the average disposable income is $95,089 per household.
Maybe, just maybe Jeremy (our US legendary investor) should have a look at these numbers again and get a bit more of an accurate picture into exactly what is happening in a foreign country with a foreign concept to him of strong household income, a strong banking system and strong residential market.
…Like I said, a foreign concept to most US experts considering the last 3 years of shenanigans in their country.
If you wanted to drill down even further, what you would need to do is get the data on the average or median price for metro areas and the average disposable income for those areas.
…and what you'd find is that a high average price and a higher average of household incomes.
I bet you that whichever way you look at the data, it wont come to a 7.5 times ratio.
Now what I'm saying is, do your own homework, don't believe the headlines that appear in newspapers and statistics are not always valid.
Ok, it begs the question – is it a good time to buy?
Well, I did say earlier that it's a buyers market, and the bottom line is if you are well-researched, understand the segment you're in and you can find value, YES, absolutely. Buy it! i have no problems with that.
There are always bargains in the real estate market – regardless of where prices are. It just happens that some times are better than others.
You make up your own mind… I've made up mine.
They're my thoughts.
What are yours? Post your comments below.
Signed with Success,
Jon Giaan
Knowledge Source
P.S. Have to let you in on a secret… A lot of the research here I compiled with the help of keeping up to date with many publications. In particular, Rismark and Chris Joye.
P.P.S. Now, I'm not saying that real estate prices will again accelerate. Good Lord, we've had an incredible run in the last 3 years, But if it comes back 10% and you had gains of up to 30 and 40% – it's still good isn't it?
Robert Smith says
I think your comments are spot on, in the current economic climate. BUT I fear that a meltdown in the economies of the USA and Europe will drag us down with them. The problems in Europe are well documented and the USA’s printing more money will see the value of the USD significantly diminish and, therefore, inflation will significantly increase there. This increase in inflation will then be exported to China (via higher prices in the USA) and thus force the Yuan to be revalued upwards (as the USA wants and has been trying to achieve for years now).
The end result of all of this may see the USA default on its debts and their economy collapse under a seriously eroded value of the USD, thus pushing their inflation even much higher again. This will impact on the Chinese to the point that it will see them importing far far fewer commodities, as their export markets collapse under much higher prices.
This then will impact on Australia, in that we will have far fewer exports for our only exportable markets (raw materials), meaning fewer jobs,lower incomes, lower demand for real estate etc. etc.
I don’t want to seem too negative and pessimistic but I fear that the writing is on the wall and what we are seeing in the USA and Europe will eventually see the collapse of the worlds major economies and drag us into the mire with them, resulting in lower housing prices here.
Andrew says
That’s assuming there are 2 incomes in a household. If there’s only one income you will need to pay 7x which is insane.
Romano says
Correct me if I’m wrong but traditionally hasn’t housing affordability been related to median income per person NOT household income.
Garry Peck says
I have to agree with you Jon. I can’t see any evidence in the Australian economic situation that points to a real estate crash. As we all know there are ebbs and flows and I think we may be in for a period of slowing in the real estate market, but a crash. Not likely! The demand for housing in most of the populated centres of Australia is still on par or higher than the supply, so that in itself means prices will remain firm or rise. The fact that investors still have $4bn to invest in an IPO of a Qld State asset shows that the economy is still strong overall. So why the heck would anyone be worried about the state of the Australian economy or the real estate market. Just because we’re a US ally, doesn’t mean we follow their economy or markets into the toilet. Enough said……
Irene says
Excellent advise! But, I am still not convinced that that housing market will remain in the same average price range. I have a feeling that it will have to come down further so as to allow those that have not started to be able to afford it.
My sister lives in California and has two properties. To-date the value of both her properties are 50% of what she paid for it? Maybe, I am looking to far into it. Being a conservative invester, I am still not comfortable at this stage purchasing another investment property.
Am I being unreasonable?
Ta
Irene
Robert Brentnall says
As some one who buy,s and sells property regularly I think at the moment there is a slump and I am not selling anything. Now is a good time to consolidate. I am retraining at the moment not much disposable income but for people that have the income it is a very good time to find a good buy they are out there as soon as I gain some stable employment I will be buying again.
Joe Titulaer says
As most vacancy rates for rentals are below 3% and less in some areas such as 1.2% in Sydney(some specific areas). The demand for housing is stilll very strong.
Without even factoring in a shortfall of approximately 20,000 dwellings this year alone. It can’t crash.
Gil Elliott says
HI,
you are talking household income , most comparisons are average wage compared to house prices. I have a friend in japan who owns his house in a medium sized town and he can not afford to buy in Sydney . Who would have thought that 10 years ago ?
I have over 10 properties both commercial and residential and am in the market again but this sort of press makes it hard to get excited
Ross Strachan says
could you tell me what evidence you have to say that the average income is growing in par with realestate prices? for example over the last 10 years….im very interested. i am a realestate investor in australia and dont believe we will have a crash due to supply and demand. but at the same time i feel realestate is overpriced and out of reach for alot of low income earners, and single income house holds. these households face realestate at 7 times there income from the statistics i have seen.
Kerry says
Must say I am very confused about all this. We have a great property on the market in Applecross WA. It is less than one minute walk to the Swan river, eventhough it is a Townhouse, it has no common walls, no strata fees. Front and back courtyards, new kitchen. It was valued by the bank at $950,000 (not a realestate agent) two years ago. We have reduced the price to $800,000 and have not had one offer in 7 months.
Something is going on……….
Richard says
just a question on were you came up with average disposable income figure because figures i find show a large split between high and low income and an average of 65k disposable and that is disposable after normal living expenses
George says
It is an interesting period that we are experiencing and how market pressures affect our buying habits.I don’t think people wake up one day and say today is a good day to sell our house usually there is an underlying factor for this usually family or financial the same principal can be applied to commercial property
Todd says
Housing prices are absolutely ridiculous and wayy overpriced.
My wife and I earn about 70k a year (household) and will be probably renting for the rest of our lives.
Foreign investors are allowed to come here and buy up all the houses and that creates a demand, so prices go through the roof and make it hard to even buy a house now.
Also, Jon.. Housing prices are over inflated. I don’t care what you say.
My father bought his house for $7000 in the 70’s and that was equivelant to 1 person’s wages for 1 year. Now it is 5 to 7 years wages. This will only get worse. soon it will be 10 years wages.
How the hell can the average Aussie keep up with this??
I hope like hell that the property market crashes and it brings the housing market down to a reasonable level for people who are saving right now… just hoping for it to crash.. so they can be thrown a bone and at least have a damn chance.
Doc says
I agree with your take on the huge differences between the Australian and US property markets. I also agree that Grantham is full of it. But the thing that could hurt us in the medium term is the Aussie dollar. At near parity with the US, fluctuations downwards will have an unfortunate knock-on effect for many home-owners and potential investors. If the RBA sees fit to put rates up again to slow things down, the result will have to be even less money available for investment. The problem is so many are living well but on small margins. A few grand more in interest when you’re over 90% committed can spell penury or worse!
On the grand scale, the US property market will eventually recover but it will take a while and most pundits say there is much pain to go through yet. Likewise economic recovery in Europe and the same (at least) can be said for Japan. Little Australia will be buffeted again by these winds of change BUT although they may be perceived as greedy bastards (what banks aren’t?) the banking sector in Australia is one of the best run in the world, and their ‘greed’ is nothing compared to their US counterparts who set the whole thing off with the sub-prime loans fiasco.
Things are not looking too bad. I take your message is the imminently sensible one of prudent investment and if you’re sensible, property in Australia is still one of the best investments you can make.
Urvine Slyvonavitch says
Our household is currently running at a house price to disposable income of about 15.
That is a $1,500,000 house to a $100,000 disposable income (ie after tax).
However, I don’t agree that property prices are significantly overpriced on the basis that to rebuild our 350sqm 5 bedroom 4 bathroom fully refurbished house in Sydney would cost upwards of $800,000.
That would mean that the land (level east side walk to rail Upper North Shore) is only currently only worth $700,000 when in reality a buyer would pay $1,000,000 for the land tomorrow.
Eric says
Well I remember some 20 odd years ago reading something about the average house price in Melbourne (it may have been the median price) being 10 times the average wage. This probably still holds true today.
Paul says
There will be no property crash in Australia.We are exremely fortunate not to have suffered the the full effects of the GFC.
Why? Because we no longer depend on the US economy as we have done in the past.We are now closely linked to the emerging economies of Chindia (China and India).Our commodties are booming.We still are the lucky country.
Conversely, the once dominant US and Euro economies are floundering and will continue to do so in the short term.Take a look at all the bad news taking place
in the US and the Euro nations.
When China coughs the whole world will sneeze.
Roger says
Could not agree more
these commentators only take one part of the story
PAUL says
I don’t know how the average person gets into the market. In brisbane in 2001 we struggled to get a 125000 for a three bedroom house in brisbane before the boom. We sold prior to the boom and laid dormant with a view to rebuy in 24 months. What happen!!!!! well the prices of realestate went up three to four times and we got priced out and what I don’t understand is how nobody excepts that wages did not go up in comparison. So someone tell me that how realestate is not overpriced as everyone I know are on the edge of there pants or cannot buy into the market,
Margaret says
hi Jon,
Thanks for that sensible response to all the hype. It helps to hear more positive comments as I think too much sensationalism can affect how people think and act and bring about the very thing they are worried about. I think with the Government relaxing granny flat laws and creating infill development, gives credence to the fact that there is not enough residential accommodation to go around and should point to more development, more jobs and therefore higher income figures as this shortfall is addressed.
Certainly, a period of stability in the housing market would be a good thing to enable those on lower incomes more chance of getting into the market but a so-called crash seems to me to go against what is actually happening as evidenced by your well-researched figures.
marion says
i converted part of my house (a quarter) into a self contained unit 3 years ago. the rent pays my loan. i am a single woman on a low income and partly disabled. i just do not need so much space, and it was a brilliant investment. if things get tougher then i can live in the unit and rent the house. aussies probably have the biggest houses on the planet. sharing, subdividing, making units,living in a caravan in your garden and taking in foreign students are all options for making income from your investment that work. i know people doing all these things. times have changed, some creative thinking, bullet biting and a bit of ‘make do and mend’ has kept me in my beautiful, spacious home even tho, according to certain ways of thinking i cannot afford to live here. never give up!!!
Laura says
The property market is deflating, has been for at least 6-12 mths, anyone who studies the market can see that, particularly at the top end. But I think a “crash” is a bit melodramatic.
The fact is that there are a lot of cashed-up people (eg: with self-managed super funds) just waiting for a correction in prices and they will pounce as soon as they feel they can get a bargain, which will push prices back up to current levels.
The property market has always been cyclical and we are merely in a lull. Just as stocks went through a correction in 2008 and have almost recovered. This is why financial advisors tell us “dont put all your eggs in one basket” – there is a reason why this is a cliche!
andrew says
Some interesting comments here. Firstly, if some ”informed” economist from some other country wants to do some scaremongering, let him go right ahead. It will mean there will be some bargains to snap up. I think there will be a bit of a slow down in the market and maybe the top end and the holiday home market might drop a little but generally there are still people who need a roof over their heads, be it their own home or a rental. If it wasnt for investors having homes to rent the rental situation would be much worse. In some areas of the country vacancy rates are less than 1% and have been for some years now. Maybe it is not that housing is overpriced but wages are underpriced?
Don says
Interesting article Jon, I hope you are right, although that means the young ones getting started will be finding it more difficult then ever.
I must admit, however, I wonder about statistics & how real they are & I am talking about median house prices & in particular household income. While the median house price nationally may be inflated to some degree by many waterfront mansions, at $440K odd it is not unrealistically high. I would say about $100K above the average battler. I wonder at the $95K per household income also being inflated by the Packers Billions etc. Again this figure is not in the battlers area. Remember the battlers probably make a majority of this country, so really how expensive are houses ????
Harold says
Another interesting comparision is to use comparitve values. When we bought our first block of land in Brisbane back in the 70’s it cost us $9,400 – around the same price as a new Holden Kingswood. Can you imagine having to pay $320,000 today for a new Holden?
And the average salary in Australia is probably about what mine is. $58,000 as a High School teacher. Times 7.5 = $435,000 – so yes, I think property (including my own) is way over priced.
dean says
Lies, damned lies, and statistics” is a phrase describing the persuasive power of numbers, particularly the use of statistics to bolster weak arguments…..änd sadly they can be used by both parties jon…
I think..on the ground..the real people..are hurting…
there is a certain psychology of spending…and certainly..the 80% 80 k loan i took to buy my home 15 years ago seemed big enough…but the same 80% loan…circa 500k nowadays must seem a daunting task…btw..15 years ago i had a rather lush academic job..and was taking home a grand a week gross…now im in town for a summer season..have taken a ok paying, but manual labour job..and take home for 40 hrs 1200 gross…..if i had a bank loan of 500k at 7% wouldnt that mean id need 35k… circa 650 bucks a week ..to service just the interest component of my loan..if of course id managed to save the 100k deposit…
Yes..household incomes you quote are nowadays reflecting the sad fact that for “normal”people, both parties are forced into labour and away from the home and children they are enticed to aspire to.
we are not in a bubble..contrary to what many want to believe..australia is just a minuatie resource supplying country that is nowhere as important nor influential in the global scale of things and our reliance upon for example china who is reliant on the US and Europe for its exports means we are intrinsically linked, and ultimatly vulnerable to the machinations and manipulations of those bloody foreigners.
Im thinking there wont be great gains in the housing market for many years to come…and rental returns will as a % remain dismal relative to holding costs of overpriced and expensive to hold real estate.
Andy says
Hey Jon,
As long as we have easy access to credit, as we have for well over a decade now, the property market will hold up. Property “investors” owe 99% of their success to this alone – the other 1% was optimisation and/or luck.
Andy
Manuel says
Hi Jon,
Agree with all your previous posts – except this one. In Sydney, the median is $660k based on recent data (APM etc) and having been at auctions recently, your looking at $700k. Im on over $100k, do not excessive habits/luxuries, have an IP and 20% deposit – I still find the maths doesnt add up – unless I want to be a hermit and plough all my income into a home and live like a jail inmate (and at a median price, a junk home at that, which Im willing to accept). At 6% interest, my money is earning more in the bank, unless I do a “reno job” and find someone who is willing/stupid to fork out even more than me. Prices have gone up 20% in 12 months – we have peaks/troughs and last year was a peak! At current ratios its over 7:1. I was looking for a PPOR last year, I’ll now sit it out. All around me, my mates on good incomes are struggling with mortage payments, living like backpackers. One day these boomers will need to sell (to fund retirement) – yes we have supply issues, agree. But if the only house is $900k and the only buyers have $600k, well we know what will happen. In addition, I find it quite depressing to see people live like guinea pigs – rent out roof space, rent half a house to students – not normal. I seriously dont know what ppl on under $100k do? (not being snobby at all, ppl must be hurtn) Unfortunetly, I see a 2 tier market developing, close to city, will continue to creep very slowly with CPI at best (after a 5-10% correction), rest buyers market, take your pick. Fundamentals are great, agree, but if ppl cant do it, wont do it, well sellers need to meet market eventually. I’ll wait for dip before getting in, media/IRs got us up, media/IRs will get us down – be patient FHOs, boomers will also start to retire in numbers in 2011/12 and increase stock. Banks will not repeat record results and IRs will continue to rise. We have major inflation coming, but given debt levels and lower wage growth I cant see this translating to cap growth. By the way, keep up the great posts, agree with 99%, great info.
Simon says
Some points I would like to bring up:
1) (main point) $95,089 per household, assume this is supported by 2 ppl, $47000 each, but, dont forget, each of them need to pay TAX, After Tax is $38000×2=$76000, which left is Actually in their pocket. ppl always forget this… Moreover, these 2 ppl can only use half of their wages to repay the loan to the bank. you cannot borrow more….
2) (logical point) for the price of the houses, maybe, ”’average price ”Australia-wide” was $413,000”’, however, who is willing to live in >50KM away from the City of each state, IF ppl are working in the City. either the $413k dont reflect the reality in Closer-City house, or the ppl dont have such level of earning compare to ppl work in City.
3) (lucky point) do you know how many Lucky Lotto Winner(s) appear every week, average 4 to 5 winners in Saturday’s lotto, (or maybe more), each win over $600k-$1M, If every winner use their price to buy a house each, how many houses would be left after 6 months on the market?!
4) (fact) price of house rise 10% a year… (may be not high enough); What is our wages increasement in % a year? 3%??
5) (live experience) a 50sq 1-bed and a 65sq 2-bed Apartment in Melbourne and Sydney Metro are $450K and $600K, 1 car park plus $45k! who is the victim? overseas student. who is the winner? no real winner, as the return for the investor is no longer higher than 5.5% now.
dale says
Jon, All the comments indicate you are all playing the game with passion and energy. I have just read a free book by MARY ELIZABETH: CROFT called ‘ How I clobbered every bureaucratic cash-confiscatory agency known to man’. If you read it, you may have another perspective to discuss. If you dont you will never know. cheers
David says
I dont think real estate is over priced, but………..
I am fortunate enough to have a few properties under my belt, then divorce. 2003 Boom hit and I was able to buy an entry level (first home buyers size) house. With sweat equity it financed my second property.
Here is where I see a few problems.
When I was 19 (38 now) my mortgage was just over $650 a month. (and it nearly killed me. Fast forward (that entry level 3 x 1 x1 fibro) $1000 a month (round figures)
Now the next house is $560 a week.
Thats getting a little bit big. Now lets go Metro. 450K to build an entry level house within 1/2 hr from CBD. (perth) rental return will be about 420 -450pw. To me its now working….. The only reason I keep my houses is because I can afford them. I know there are ways to manipulate the system, but with my 70 hr weeks, I am unable to attens seminars. Wholesale property??? Where, how do you get into the inner circles? Where is this informantion?
Jody says
Jon, lets face facts here. You are in ‘the real estate and property development and investment business’ 1000%. It’s your life and livelihood, and the same goes for much of your readership and associates (eg Dymphna). Of course you are not going to support or promote any sort of market lowering or market crash theory, and nor will the majority of your readers for the same reason – whether you believe it is possible or probable or not. You have no choice but to deny it. You can’t ‘sell’ the property development and real estate story on one hand and then turn around and support a possible market downtrend story (or worse, a crash) on the other hand.
At the height of Japans property boom 20 years ago, no one thought that they could or would fall either. But they did. An 80% drop. And in the 20 years since, the property prices haven’t risen from that level of 20% of peak prices.
Only 3 years ago no one thought that Americas property prices would drop like they did. Now there are entire streets of foreclosed houses. I know of one Australian that bought a usd$220,000. house for $11,000. It is now worth less than that. Others are – so I have heard – purchasing homes with their credit cards.
I won’t join the will it – won’t it – or to what degree debate here. And the market will do what it will do regardless of readers opinions here, so we will just have to wait and see. But those that say that it cannot happen or will not happen or is absolutely not happening, are showing ignorance and pigheadedness – which is precisely the wrong frame of mind to employ under ANY circumstances let alone the current ones. Real estate developers and investors might do well to get outside of their own little closed in ‘world of investing’ and take a look around and ask questions rather than presume to have all the pre-fabricated answers.
Some excerpts from TODAYS Perth News:
…”REAL estate agents have a huge stockpile of unsold properties as potential buyers lose confidence. … In Perth, there are 17,500 properties on the market – 50 per cent above normal.”
…”Sixty-one properties were withdrawn in Sydney, where 198 houses sold at auction – down from 247 last week. In Melbourne 160 homes sold under the hammer, 100 fewer than the week before and far fewer than the 426 sold a fortnight ago.”
Full link below:
http://www.perthnow.com.au/business/rising-interest-rates-add-to-homes-stockpile/story-e6frg2qc-1225958266143?referrer=email&source=PN_Bus_email_nl&emcmp=PNBus&emchn=Newsletter&emlist=Member
Peter says
There is most definitely a housing bubble and it will certainly burst with devastating consequences for this nation. Many in Australia seem to think that the undersupply of housing in our capital cities will keep prices stable. I would like to remind these people that the UK suffered a housing bubble due to a shortage of supply and prices have since plummeted by 30 to 40%. The Australian economy is driven by our resources boom in Western Australia, as the world economy picks up next year we will see increased demand for our resources, this scenario will produce what is known as demand pull inflation, with rising prices and a labour shortage the Reserve bank will have no option but to lift interest rates to slow the level of inflation to within it’s stated band of 2 to 3%. We are entering a period of prolonged interest rate hikes. One possible scenario is that the eastern states of Australia could be pushed into recession by rising interest rates as their economies are not experiencing an economic boom driven by resources in fact they are experiencing quite the opposite with the strong Aussie dollar reducing exports, the education market is battling to attract overseas students and our tourist industry is struggling to survive. You don’t have to be Einstein to work out the possible devastating impact that these variables could have on the housing market in the eastern states. Think long and hard before committing yourself to property.
Mike Tummon says
heres some historical facts on a personal level. I paid $21000 for a house in Rockhampton Qld in 1978 and I grossed $8000 that year. Same house now is $300,000+ same job pays $40,000 . Dont you think there is a large difference.Thats 2.6 times as compared to 7.5.
No good comparing from 1993 go back a few generations. Thats the only way to see the final outcome of purchase to owning. Who will ever own at the prices now being paid , its all very nice to see equity grow but previous generations were able to put the mortgage behind them and have money to live .
Mike Tummon says
One commentator used the Holden kingswood (commodore today ) as a comparative tool. I like to use that all the time in comparing prices now and the past. I agree totally with Harold who commented that a block of ground in Brisbane was the same price as a commodore all thru the 1970 s .
Mary says
Marion – So good to read your comments about “making do” with what you already have – or indeed not just making do, but creating value. I think it’s a great idea to convert some of these big old houses into multiple dwellings – many of them are in gorgeous gardens and have lovely big spacious rooms compared with the tiny rooms and low ceilings of many modern houses. As you point out it’s a great way to survive on a low income.
I’m currently trying to do just that – create a flat downstairs out of my two storey house – but the planning and council regulations are making it very expensive and quite a challenge! However I’m sure that it will be worth it in the end.
I can’t see any alternative but for rents to go up and vacancy rates to come down with the credit squeeze that has been going on impacting on the number of developments around, and combined with the increasing population (partly from immigration rates) plus the push from overseas buyers – these are all some of the factors making for reduced supply and increased demand.
The interest rates are still not that bad yet – they’ve just come off a very low base – the real problem is that many of us have extended ourselves more than in the past with property or investments, so we feel these interest rises much more than in the past. Before the days of the super “superannuation” phobia we were content with lower expectations, but now we all want so much more that we are more heavily geared – and hence the small movements in interest are much more significant.
So yes I do see that rising interest rates will impact on demand for properties, but if the overseas economies don’t crash and burn (no guarantee they won’t!) it shouldn’t translate into a crash – more a correction or a plateau period where good buying opportunities will abound for those lucky enough to be able to take advantage of them.
Lex says
I agree….media B.S.
david standen says
Having just purchased a second property outside of the metropolitan districts of our major centres gives me a small insight to what’s happening in the country. The big cities seem to figure in everybodies buying strategies, i suppose everybody is going for the quick buck, but the coastal villages and country towns can still give a very good return on investment if you buy right. this i found was the only way to become a multiple property owner as the cities were just too expensive and didn’t offer anywhere near the same return for the money expended. So please people try outside the cities if you want to get into the property market, you don’t have to live in your purchase as the same rental squeeze is happening up and down the coast of NSW but it will give you the chance to build some equity and maybe move into the city markets in the short time rather than the longer time frame people are currently experiencing. ps: Love the posts and the replies because they’re full of good common sense advise that even people like me can understand.
Graham Taylor says
Ok, lets hear it from the managing director of an independent agency – also involved in selling commercial as well as residential property on the Northern region of Sydney. Journalists are paid an average wage to fill space in the paper – I used to be involved in the media so I know how it works.
We have experienced some good % gains over the last 2 years in most markets – you must remember that each region of a city is different in performance to others elsewhere – but the fundamentals are that we are in an accute rental crisis with a shortage of property – especially in Sydney. when you see 48 groups trying to rent an average 2 bed unit in a pretty average street – on day one – with 2 couples in tears and applications pushed under our door late at night – with an increase in rent paid – this is the norm here on the Northern Beaches.
Of course this would probably be occurring in other regions of Sydney – remember also that there are always people with money from downsizing out of the more ‘monied’ locations.
However, without a doubt, there is about 15% more stock on the market currently – the $2 million plus market has been badly hit and has stalled in some vital areas – vendors are getting bullish re pricing. More stock leads to more competition which will lead to flat pricing levels – but remember to look at the situation as a staggered rising stepped approach graphically rather than a ‘curve’. It is similar to a staircase going up over time. Up, flat, up flat, etc.
As agents, we do not want to talk up prices – if you hear that – ask the agent how long has he been in business. We offer comparisons nearby – using the RP sales data (all agents use this). Our aim is to achieve for our client vendor the best possible price that the market will pay.
Real estate is just supply and demand – yes, newspapers can affect perception with buyers. As has been said – always ask someone in the market “How many homes have you personally owned and sold – what are your qulaifications?”.
Remember that different areas and cities will perform differently – Sydney is land locked – Brisbane is not for example – but all capital cities have experienced some great growth recently.
As a tip, get to know your local agent or agency – treat agents at Open Houses as you would like to be treated in business – they have a wealth of knowledge and can point you in correct directions if need be. Act smart with them and no doubt the same will come back from some agents – but most are professional in their approach – often doing a difficult job under intense pressure.
Just to leave you with a thought: If your home is worth $700K now, do you ever believe it will be worth $1.5million say, in years to come? Many people will say no (of course this is partially area dependant) – what about people who bought their homes for $120K in Sydney? Many years ago but you can see the point.
Do your own research – USA market space is totally different – buyers there were allowed to default and walk away from loans with little or no penalty – the law does not allow that here.
Be informed and spend hours researching – obtain that finance approval – do not move with the ‘herd’ of opinion – speak to more agents – walk the streets – look at how business is performing nearby – interview neighbours – door knock a few homes in the area – oh, and never, ever listen to somebody writing about property markets who is based out of Canberra!
Mark Alcorn says
Interesting article and it’s typical scaremongering journalism. However the ‘average disposable income of $95,089 per household’ concerns me. Does this include the multi-million salaries of CEO’s? I don’t think this gives a fair & proper reading of the ‘reality’ that is out there. Ask some FHB’s how they are coping!
Anyway it always comes down to supply & demand, and simply there are not enough dwellings being built to accommodate the demand.
Wayne Shepard says
Understand your reasoning but I still think it is flawed. Back in the ’50’s a factory worker whose wife was at home bringing up 3-4 kids was able to purchase a home and pay it off over the years on one income. Price of home was around 3 times income.
Even when I bought my first 3 bedroom, two bathroom home with swimming pool back in 1978, I paid 3.5 times my own personal annual income for the home. Your reasoning is based on “household income” – two incomes not one. By my reasoning, house prices based on income are double what they used to be – people used to be able to provide housing for their family on one income. That is no longer the case and your comparison of “household income” distorts the truth.
John Howard said we’ve never had it so good. What a load of bollocks. The housing market is manupilated by Government grants, stamp duty concessions, govt land sales at massive prices, FHOG, RBA interest rate manipulation etc etc. It is true that people buy McMansions today but more fool them. The banksters have them where they want them.
Peter says
Exactly Jon. Media BS. I,m sick and tired of gurus predicting disaster when they really don’t know what they’re on about. WA is a completely different market to the Eastern States ,yet we frequently get lumped in with it. What bothers me is, how do we get this info into the newspapers and on TV. It’s well past time that someone pointed out that if you dwell on negatives you end up depressed, broke and a general pain in the rear to everybody around you and nobody wants to listen to your whining. Hopefully this is what will happen to the media and maybe then they’ll get the message.
It’s perhaps interesting to note that during the Asian financial crisis in the nineties, John Howard and his ministers frequently showed up to remind Australia not to panic.
This current government however often makes the comment ‘OOOOH, were not out of the woods yet” . Again, it’s scary to remember that what you say is what you get.
Victor says
One thing to consider about the avaerage household incomes and avaerage property prices, is that avaerage incomes and avaerage house prices for different regions (or suburbs) should be considered, and not national averages. It is no use comparing avaerage incomes in Penrith NSW (working class suburb) with average house prices in Palm Beach NSW (upper class beach suburb). You should be comparing incomes in Penrith to property prices in Penrith (and how they have changed over the years) and likewise incomes in Palm Beach to property prices in Palm Beach !
Kerry says
Must say statistics is a lot of hogwash most of the time. Just by looking at some figures one can only come to one conclusion. All these theories about house prices having to be not more than three time the income in the area is just nonsense.
For example, Applecross in Perth had a average income of about $75,000 PA and medium house prices over $1m. If one takes that as a guide, then Applecross would be HIGHLY overpriced. But now comes the variables.
• Looking at the population in Applecross you note they are all elderly, that is reflected in the ave income, they are on pension or live off super. So that figure really means nothing
• People living in Applecross are proberly not going to be your buyers, again discounting them and their income
• People outside of Applecross will be your most likely buyer, but the question is where will they come from and how are you going to gauge their income.
• Based on the stats, if they wanted to buy a house in Applecrross for say $800,000, then the purcheser will have to be in the $200,000 PA income bracket
• Now here comes another variable that proberly is more likely. They will already own a home and have about $300,000 to $500,000 equity. Which means they will only need to be in the $90,000 to $100,000 PA income bracket.
The bottom line is, from all that statistical nonsense in the articles, one really only need to find PEOPLE IN THE $90,000 to $100,000 income bracket that now have equity in their home, they are your REAL prospects. Where they come from is of no consequence
Hope you find this bit of useless information at least amusing
Daryl says
I’ve only just started to look at property development as a means to enhance my impending retirement. Isn’t the property market like anything else – dependant on supply and demand? If the demand remains strong then so will the prices. It seems to me that so long as greed is held in check and one is sensible about not overcommitting and doing their due diligence, then there is little to worry about.
babu says
Ten years selling Real estate, land , established houses , house and land as well as apartments has taught me one thing, property makes more millioniares than any other means. Unless your old man left you a fortune your best bet is property and will the shortage of property we have in Australia i do not see the property market having a crash anytime soon. if someone can magically produce a 100,000 homes in the next six months your money is safe in property.
Mel Smith says
The bottom line in media, as always, is that negative headlines sell better than positive ones! “Bubble”, “Crisis”, “Crash” = hot sellers…
Also, people with vested interests in different areas of investing do enjoy bagging “the other side”, rather than looking at the far bigger picture of combined strategies for long term wealth creation, taking advantage of the (inevitable) ebb and flow of ALL markets.
I for one have no fear of investing in property over the coming years. While there may be a chance of Australia “hitting the skids” economically, as part of any flow-on effects from overseas, overall we are in far better shape than most of our counterparts, to weather any potential downturns.
Housing affordability is a contentious issue though. I know my parents bought their first house in Sydney’s west in 1973, for $18,500, on my Dad’s wage of $6500 (2.8 times pa wage). In 2010, if it were just my wage of $30,000 trying to buy a $400,000 home 40km from Brisbane, that’s 13.3 times wages and an emphatic “NO!” from the bank! (They would likely roll on the floor with laughter actually!! 😉 )
It takes at least two “average” incomes now to even qualify, unlike the single incomes of our folks in the past. So including my partner we average $80,000 pa household GROSS income. We would still be at around 5.5 times wages as first timers. Not as devastating as 7.5, but of course the ratio would depend on the purchase area.
Thankfully there are still cheaper housing/investment options available though – if people don’t get sucked into the McMansion BS! As an extended family we are happy to get creative with deals utilising a block of land and regional property (as opposed to city/surrounds) to help extend our affordability, adding value to achieve growth and/or cashflow, which will give us more flexibility in future – even on average incomes at the lower-end of the scale!…
Yes, I have read and learnt well from the many entrepreneurs you’ve featured, like Dymphna Boholt, Carly Crutchfield, Rick Otton, Mark Rolton, etc! 🙂
Thanks Jon, always enjoy the newsletters!
Cheers, Mel
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Greg says
Intresting have property in north west of melbourne and some in east have been trying to sell one on each side for months. Have’nt had much intrest.
Also trying to lease and nothing. On top of that i’m seeing a lot of for sale / lease signs all over the place. So are we under suppied or over suppied?
Know for a fact that a few Major Builders and developers are seeking investers from asia and selling house land packages. as the locals are’nt active.
CC says
Jon,
Thanks for your entertaining and informative newsletter. I enjoy receiving and reading them.
But …
I am afraid your view (advice?) on “To buy or NOT to buy”, “Buy NOW or buy later” does NOT address the deep-seated worry and dilemma of the prospective home/property purchaser: You are dwelling on your own opinion/conviction that Property Value Will NOT Crush and this in the final analysis is but speculation.
My own experience with buying (owning) and selling property since 1996 – or a bit earlier in 1994 – has landed in me PROFOUND wisdom in the proper mindset/attitude and financial strategies to adopt for a worry-free and beneficial property ownership.
First, the mindset – the ONLY important question to ask of oneself before plunging in the property market is: “Would I be able to sleep my nights soundly after purchasing my dream home, or dream investment – regardless of fluctuations in economic factors that are out of my control? Such as: interest rate movements, credit squeeze/freeze, inflation, exchange rate fluctuations, share market crush, and/or the GFC (Global Financial Crisis) and last but NOT least, fluctuations – both UP and DOWN – in property prices.
If you could answer “Yes”, then go ahead NOW – you don’t really need to time the market – remember that property is for the long term and price changes are gradual – the certainly of your ability to service the loan – able to sleep nights soundly – is sufficient.
What then if you could NOT answer “Yes”? I know you’ll go ahead anyway, you’ll say, “I just cannot afford NOT to take the risk – traded in exchange for peace of mind”.
I’d day, “Your friend who went ahead with property was taking no less an amount of risk as you do, but he was also able to sleep soundly because he has the right strategies to tackle those beyond control factors,render them harmless, indeed, turn them into great advantage”.
I offer to teach anybody those profoundly simple to implement, but extremely powerful when executed strategies for the price if a cheap lunch $US19.00, or effectively for free as a bonus for subscription, also for $US19.00, as an inaugural member of the GOLDEN ABACUS CLUB *** (*** tentative name only, subject to change) which offers much wider benefits: “Transform your lives: Physical, Spiritual, and Financial lives – for the price of a cheap lunch!!! No kidding!!!”. Watch out for launch in January 2011..
Clint says
Hi Jon, couldn’t agree more.
I bought my first property in Melbourne in 1982 and back then I heard a lot of the same guff about housing affordability. Prices couldn’t be maintained, blah, blah, blah. That house was a brand new 3 bed, 2 bath brick veneer in Templestowe that I paid $62,000 for! Ridiculous prices was what I recall in the media. How much would that house be worth today?
James says
The work to house price ratio has increased. That is, people are paying more income for houses. This means that prices are much more sensitive to work, and so any change in employment would leverage through much more dramatically into house prices than in previous decades. The mining boom is interesting because it does not employ a lot of people but it’s captal investment returns a lot. People think the mining boom is good for incomes of people in the country. The problem is the capital being pushed at the mining boom has a foreign source. So I agree incomes buy houses. I am not so sure their is more upside for incomes to house price ratios.
Georrge Finch says
Jol I’m a little confused I have a top end property brought it in 2001 the price has been up and down fluctuating between 2-3% and now it’s on the way down will this downward trend continue I’m thinking of selling and downsizing, what do you guys recon?
Tom says
– Baby Boomers are going to retire and they are the main spenders in the market, and they will be moving from a spending to saving mode.
– Money is becoming tighter and people can’t afford as much, and banks are being forced to push rates up.
– Delevereging of debt is happening, and will continue to happen as our population ages.
– Mining is driving the economy, which is forcing the RBA to push rates up, which will in turn effect property prices.
– Investors are not seeing the same gains that they were and people are talking about bubbles and crashes and all these terms no one mentioned a few years ago before the GFC.
It won’t happen quickly, it will happen slowly over the next 10 years.
Party’s over people.
David says
If people are worried about the price of houses (particulary for investement purposes) look at the regional centers like, Albury, Wagga. I have seen houses on the market for 180k for a 3×1 fibro rents for $200pw, 230k buys a 3×1 brick rents for $250pw. This is just the entry level houses. $280k returns $335pw.
Maybe sell out of the metro market (even one house) and buy 2 or three in the country.
I have two houses, one 3×1 fibro and one just over $300k. With what I have spent, I would be lucky to buy a 1 bed apartment in any metro area. In Perth it would buy me a 3×2 on a 350m cottage block in the back woods, returning 400pw, whereas in Albury I am getting $535pw. (440k invested)
Bhavik says
This is an interesting opposing viewpoint with lots of stats:
http://seekingalpha.com/article/227083-the-great-australian-housing-bubble
Carolyn says
I bought a book about predicting cycles by an american writer who predicted the last stock market crash whose initial job involved forcasting what why priices would go when the lastest style of tyres were released on the market.Anyhow it said in that book that australian property prices should increase all the way through to 2034.I will attempt to put the name of the book on here for you to have the source for later but if you also just think about fear and human nature people are also going to be more likely to trend towards houses which they can also rent out if times get tough versus investing in the stock/share market where they can’t see anything but a report on the company and a share price considering many of the owners of super funds based on the sharemarket just took such massive slugs in the last drop.Sorry if I don’t sound all technical or anything but I think you can see the sense in what I am saying.Also with more and more people coming in from overseas where prices in some places are ridiculous for how much house or land they buy you
Australia is still really affordable to those buyers.
Shane says
I would like to know more relevant data, such as what % of the 8.57M households have property that fits into the price range less than $1.2M – there are too many outliers in data if you take into account the smaller amount of extreme high end of prices – this distorts the results if you find that the majority of households are in a similar price range. Only then can we really see what house prices to disposable income ratios exist amongst the majority of Australians. I think you will find that 4.5 times is a little underdone – I myself will be waiting for another 2 years and then I will find myself some good bargains. Already, I see that the supply of homes for sale have increased close to 20% since 12 months ago – bargain hunters be patient – there are much more to come.
Barry Norman says
I have been travelling around Australia alot lately, I see more and more properties on the market, still at hugely inflated prices, but not many selling (yes, I have been watching them closely). I know of quite a few investors who are trying to sell ASAP as they are seeing this as the peak of the bubble and they have made big gains but now are seeking to avoid the fall. I for one have had 3 investment properties on the market for 3 months apiece with no takers. My agent says to knock 10% off the price of each to stimulate interest (although it was he who valued them initially). I’m just keeping my fingers crossed they sell as I bought 2006-7 and need to release any profit (minimal) to help with the bills. Good luck all in getting out before it tumbles down!
Cheers, best wishes, Barry
Heuchera says
My local TV station reported this morning that, as a result of financial difficulties, more and more people are planting vegetable gardens. Do you think that many families are really growing their own food?
Steve says
Re Carolyn posted above: As for foreigners comming to Australia, no they dont see the prices here as good, nor see them as reasonable, they see them as extermely expensive by any measure. Aus$$ has gone up against many currencies and house prices have defied gravity by increasing wheras back in their old countries prices have dropped. My wife and I sold our place in London and if we bought the money over now we would have to seriously compromise our quality of life by moving out to the boondocks rather than the middle suburbs that we originaly could afford. dito back in London we were within 12 kms of central London with lots of amenity to the area. The days of cashed up foreigners are gone and if things dont change here or the Aus$ doesnt drop I guess we will have to go back as we certainly wont be paying some retiring boomer a massive ransome while indebting ourselves to a financial life sentance. (ps we are Aussies returning not imigrants as such, however have been out of Aus since the last recession here left us both unemployed)
Tim Stevens says
Australian property is vastly overpriced (notice I didn’t use the term ‘valued’ as that infers some form of rational cost basis where there is evidently none). I mean, if Australia had excellent ameneties; well surfaced roads, good public transport infrastructure, well constructed housing (I mean, they’re made of wood, plasterboard, sigle glazed and someone forgot to install insulation in most of them) just maybe ‘value’ could be in some way justified, but from what I can see, any poor souls taking the plunge on a non-self-financed house purchase about now is saddling themselves with a financial burden that is simply not justified by the product supplied. To say the leat, the economy is looking shaky on the back of the reduction in sales of (mined) construction materials to China as construction there slows due to their own rapidly emerging property bubble. All this land and still extortianate prices for a 400 sq m block! Come on Australia… whatever happened to the ‘fair go’?
What will happen? We’ll all have to wait and see I guess!
Good luck all and thanks for an enjoyable read!
Cheers, Tim
Fried or ... says
hi Jon
Are you not sending out your email newsletters? Missed getting them from you as I always read everything you send with interest!
Regards FP
Johnno says
Scare mongers everywhere. I bet your renters. Housing has always been expensive no matter when you look at it. No investment goes up in a straight line. yes pricing will cool or go down a little but if your waiting for a crash…i wouldn’t hold your breath, & if your renting, investors will cover their losses with higher rent. You have to live somewhere champs!!
Sane says
The Americans were dreaming the same things up to a month or so before there collapse… Sure you may be OK but the others you are advising may not fare so well
Paul says
You say “average disposable income is $95,089 per household” are you sure about that?
according to ABS “in real terms, average equivalised disposable household income did not show any significant change between 2007-08 ($859) and 2009-10 ($848) “
Sean says
Enjoyed reading the comments, re house prices in Australia, I have lived in Australia for >30 yrs and I own three good investment properties. I have recently been checking out house prices in Ireland and in the UK and they have hit rock bottom. However I can recall an interview with Warren Buffett when he stated that we should buy shares when they hit rock bottom and sell when they are high. I believe this may be a good rule of thumb with respect to investing in property and was looking at buying property in the UK and in Ireland while the prpoerty prices are at rock bottom and selling when property prices rise.
Dave says
Whatever happened to the Basic Economics rule of supply and demand, when determining price movements. The population of Australia is increasing e.g., Melbourne’s supposed growth is said to be 30% in 20 years! Sure , Melbourne houses are now hugely expensive compared to other places in the world but why is that going to cause a crash, Melbournians aren’t going to sell up on mass and move to Europe, the US or Asia. As the population rises there will be more demand , particually on Inner City areas, as the city widens and commuting times increase. Rents also are forecasted to rise significantly making property a more attractive investment,so why will prices dive. What alternative investments are there anyway, shares are very uncertain and holding on to cash is clearly sending you backwards, the CPI increase is about 6 % and your cash earns about 4% after tax, the equity never increases, so bank savings are not an option either. I am the first to be horrified at the cost of housing here ( I spend much time abroad) but I can’t see this factor is that relevant. (Second hand cars are rediculously expensive here too compared to Europe or the US but that’s not going to change. I’m afraid to say , house prices will rise even if an element of fear causes a momentary stall. It’s all driven by supply and demand and in the inner city there’s only a limited amount of quality housing.
joel says
My cats breath smells like cat food. China suks vagina, where fuked
Matt says
This is a sensitive topic to discuss as readers will automatically be polarised as to whether they are owners or renters and it’s very hard to be completely objective and put your emotions to the side when you have so much riding on whether Camp A or Camp B is correct. Therefore I apologise in advance to those whose view I oppose.
Before I present my point of view (focused on where I think the issue lies – Australian capital cities), let me declare my position. I’m a current property owner however, I’ve reduced my portfolio from 3 properties to 1 over the past 3 years – now only the family home – and that is also on the market. My intention is to invest the capital in a different asset class and rent for the near future. I also work for a leading property hedge fund in Sydney although that probably doesn’t count for much!
I’m sorry, but I’m certainly of the view that Australian capital cities WILL experience a significant property price correction. Government intervention can delay this, but I believe once the momentum builds, the govt won’t have the budgetary firepower to prevent the correction from taking place. I won’t go into metrics, as they’re generally accepted and understood by both sides of the fence. So why isn’t Bazza who bought his townhouse in Inner West Sydney in 2010 worried by these metrics?? How doesn’t a glance at the extreme divergence between rental yields and house prices over the past 5 years cause concern??
The only contrarian argument I can find with that aligns with fundamental economics is population growth exceeding housing supply growth. However I think reliance on this is flawed. It’s widely known that Australia’s birth rate is broadly on par with the death rate. If we were to examine population growth for this country over the past decade or century even, we’d quickly see it’s been, in large, fuelled by immigration from Asia and Europe. The key factor that has influenced the decision of Asians and Europeans to migrate here has been Australia’s relative affordability when compared to ‘alternatives’ – traditionally NZ, USA, Canada. Traditionally, we’ve been relatively affordable! Compare property prices at current levels in Australia against the alternatives – especially the USA and to a much lesser extent Canada post GFC, and suddenly Australia is not such a wise choice of destination. Chuck in a strong Aussie Dollar and it gets worse. Some may say that people want the “Australian way of life” i.e. sun, surf, sand, safety, and relative affordability will play second fiddle, well maybe for some privileged few, but not for most. Quality of life is hugely reliant upon disposable income and how far that income will get you and everyone wants the best for their family. Based on this rationale, if you allow yourself to accept the possibility that PERHAPS most of our population growth in the near term will be organic, suddenly the other metrics (price to rent, price to income) become extremely relevant.
Couple these metrics with the wider macroeconomic issues such as the EU shockwaves and China preparing to slowly pull the rug from under our feet (albeit, should result in a weakening in the AUD) and you can see where the problem will come from – rising unemployment. Our housing prices have a long way to fall according to any accepted metric, and once the trend becomes more obvious to the market I expect we will see somewhat of a rush for the exit. You won’t want to be the last one out (post 2008 buyers) and still holding when this thing unravels. It has the ingredients to be substantially worse than what the US went through and we all know that wasn’t pretty.