A recent Wall Street Journal podcast “It’s On Fire: Why The (US) Housing Market Is Booming” could be instructional for those concerned about a similar fire burning in Australia. The podcast describes the travails of a first timer buyer in Boise, Idaho (population 455,000, tiny in a US context but would be Australia’s 6th largest city) reaching with difficulty for the bottom rung of the housing ladder which keeps running away from her. Although we shouldn’t of course overdo the analogy, some of the trends described will sound familiar – a shortage of supply (in Boise’s case caused by a developer hangover from the GFC); cashed up city tech industry workers ever more freed to work remotely and spend their city dollars to buy regional assets and so crowding out the locals; millennial generation buyers scrabbling for maximum leverage from a sharkpit of bank and non-bank lenders.
Those curious as to what could put the residential real estate fire out, in the natural scheme of things, first in the US and then in the lucky country, might first be interested in the butterfly effect. “It used to be thought that the events that changed the world were things like big bombs, maniac politicians, huge earthquakes, or vast population movements, but it has now been realized that this is a very old-fashioned view held by people totally out of touch with modern thought. The things that change the world, according to Chaos theory, are the tiny things. A butterfly flaps its wings in the Amazonian jungle, and subsequently a storm ravages half of Europe.”1 So where might the residential real estate butterfly wings be flapping?
Perhaps the tech industry growth juggernaut has created businesses driven by their venture capital / Nasdaq/ ASX valuations rather than real sales and profits. Sooner or later the market may begin to wonder, for example, whether Amazon, while undeniably an iconic global business with enviable revenues and profit, nevertheless warrants a 63 PE (10 May 2021)? To mix metaphors, it won’t take much more than a butterfly wing to start those dominos falling and when they do there will be an inevitable pullback affecting employment and wages in Silicon Valley and the pretenders to its throne. The indiscriminate flow of money to residential real estate by those benefiting from the growth company halo effect may then be choked off. Simultaneously, inevitably, some form of tightened liquidity despite the best efforts of the central banks to keep the party going, will cause the banks to head for one of their normal cyclical pull backs, while many non-bank lenders may not survive depending on the severity of the liquidity squeeze.
There are too many plausible butterfly wing scenarios out there now for us to find value in Australian residential real estate. We will continue to seek value elsewhere.