The media obsession with property
05 May, 2015
You have been in Sydney last weekend and you witnessed the media obsession with property.
Indeed. I didn't go over to Australia looking at property, but I was just taken by — I think it is a media frenzy — in that there was a much focus on property and a potential property bubble in Sydney as there has been in Auckland.
I don't know if you're like me, but I'm over reading all about Auckland property in every paper and hearing it in the news, and so on. It is every day. In fact, just yesterday there was even a reference to Auckland's property being a Ponzi scheme — that worried me a little bit as I thought, now we're getting really emotive.
For me, a Ponzi scheme is different to just a hot market — a Ponzi scheme generally collapses because it requires new buyers to keep on propping up the old buyers. There's nothing to suggest that new buyers won't keep coming into Auckland's property market and propping it up, but I just thought, it's a warning sign when we start getting emotive terms like that in Auckland.
As I say, I noticed the same scenario in Sydney. I looked at one newspaper and literally a third of it was taken up by property articles, so things like a $700,000 house that was bought for $3,000 decades ago and it's overpriced, and so on. There were two articles in this paper that attracted my attention. One was about the IMF, or the International Monetary Fund, who were sending a delegation to Australia to review their property market and decide whether a bubble is forming. The second one was about trophy houses, which are $100mil houses, which I'll talk about in a minute.
First of all, this IMF visit, the reason this article interested me was that I thought, gosh if the IMF feel they have to come and have a look at your property market for themselves, you might very well have a bubble on your hands. I was quite relieved the IMF hadn't shown any interest in coming to Auckland yet. But the IMF have said that they're sending a team of five to Australia to examine the risks that property speculation and record high household debt might pose to the broader Australian economy.
The chief of this mission said that his first impression from 30,000 feet is that Australian house prices have gone up a lot, and whether you took the view that house prices were just frothy or whether indeed they were overvalued, the IMF would be interested in Australia's policy response because it's concerned that their 24-year economic expansion doesn't come to a grinding halt.
They're looking at that policy response now, aren't they? What to do about it?
Yes they are, they're going to come down and talk to the Australian government, reserve bank, regulators and representatives of the banking sector, as well as people actually in the property market — so I'm assuming agents and buyers. The chief said he is particularly interested in home buyers taking on large loans and has noted that the Australian household debt-to-income ratio has risen to an all-time high of 153%, making Australians among the most leveraged people in the word, behind only Denmark, the Netherlands, Ireland and Switzerland. But a word of caution for us actually is that New Zealand is rising rapidly up the ranks too, so we shouldn't be too smug.
I think the IMF might be more interested in Australia than New Zealand because of the peculiar set of circumstances that exists there. Interest rates are historically low, just as they are here, but of course in Australia the commodity prices are falling — so they've got a sluggish economy, rising unemployment and a lack of confidence among businesses and consumers. With that sort of sluggish backdrop, you wouldn't expect a housing price bubble and yet it's happening, and therefore it's perhaps more worrying than if it occurred in an otherwise buoyant economy. So it will be interesting to hear what they have to say.
What about the trophy properties?
This article caught my eye and I thought, gosh this is obscene. It wasn't in Australia — it was an article from Christie's International Real Estate and they talked about how there have been more of these trophy properties sold in the last year than ever before. I saw that and I thought, if the average Sydney house price of $700,000 gives rise to an IMF investigation, you've got to wonder what to make of record sales of houses in the $100mil range.
Five homes sold for more than $100mil last year around the world, with at least 20 more currently on the market with nine-figure asking prices. It said that demand is growing among affluent Americans and Europeans; billionaires from unstable economies, like Russia and Middle Eastern countries; and all the buyers from mainland China, who were not previously allowed to invest overseas and have since snapped up houses in cities such as Hong Kong, Los Angeles, New York and London.
These trophies are not valued on the basis of their square meterage or the number of bedrooms, but rather on some unique elements that make them trophy homes. It seems that the very wealthy are choosing trophy homes as an alternative to collecting cars and artwork.
The most expensive homes generally have two defining characteristics, apparently — they are absolutely distinctive and there is a limited pool of potential owners around the world who can afford to acquire and maintain them. So basically, if your house is expensive enough, your house becomes a trophy home as nobody can afford to acquire it.
These properties are so scarce and unique that they have become quite a prized asset for those who can afford them, leading to increasing prices and more transactions than ever before. They vary from ultra-modern penthouses in the world's top cities, to historic estates with vast acreages, and so on.
Residences currently on the market with asking prices at that level include a $400mil Monaco penthouse, a $365mil London manor and a $200mil estate in Beverly Hills. So, maybe not a bubble in the traditional sense, but you'd have to say these prices make Sydney and Auckland houses look relatively cheap.