Australian Real Estate Follows American

By Michael Douville

Real Estate in many global neighborhoods is adjusting to the imbalances of supply and demand as well as the end of loose money. The correction in the property market that America is currently experiencing is and will be felt elsewhere as well. Maintaining current prices will be difficult in the face of higher interest rates, more stringent loan requirements, and a slowing in the business cycle. Appreciation is sure to slow dramatically. In fact, prices may fall like in the States.

In Australia, the process of topping is underway. First there was the mania and rush to accumulate property, knowing of course that today's price is much lower than tomorrow's. Easy money and rapid appreciation were at hand!

Then came the rise in rates (9.6% today) and slowing of demand. This brought the realization that prices are not continuing their ascent, and that negative cash flows can far exceed expected capital gains. As a result, discretionary cash is at first diverted to pay negative cash flows; then savings are used; then loans are renegotiated; and then finally losses are taken to end the bleeding either by the owner or the lender.

This phase is typified by the accumulation of homes for sale and an increasing length of time they spend on the market... the threshold of demand destruction. Real Estate Brokers are complaining that inquiry calls are down over 50% and buyers are not committing. Currently homes are beginning to accumulate with some neighborhoods having multiple signs on every block. Some communities are experiencing slight deterioration of price, down 3% to 5%, another confirmation of topping.

Affordability is a huge problem. While visiting Australia, I have observed California pricing without California wages. Values can be sustained only if a buyer can qualify for a loan and make the payments, as often times, it is not "how much" that matters, but how much a month...

Loan rates and values will need to be adjusted; today's market buyer cannot sustain current prices. Australia, like the U.S., has enjoyed an unprecedented period of growth and many business people have never experienced a downturn. The economy is very good and the resource sector is booming.

When the global downturn reaches Australia, the commodity bubble should implode. The Australian dollar which is almost at par with the US Dollar would likely then experience a sharp decline. The Australian Real Estate market should follow.

I believe the strategy to employ now is to sell Australian property holdings and purchase properties in the US that have already experienced the correction. The U.S. target properties should be discounted and probably lender owned. I would purchase with strong Australian dollars, leverage with fixed rates, and plan to sell in 5 years depending on circumstances at that time. This strategy is geared to capture good gains in Australia; use strong AUS dollars to buy discounted U.S. properties; wait for the recovery in the US and the resulting strength in US dollars; sell and start the cycle over again in Australia.

The Australian consumer is stretched: food prices are up 20%; fuel is $6-7 a gallon; mortgage rates are 9-9.6%; and home prices are near historical highs. It is difficult to imagine further price appreciation in the Australian property market. Thus, downside risk to this investment paring, involving going long U.S. distressed property and selling the still rich Australian real estate market, should be limited.

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