Monday 22 January 2018

Australia's economic bubble: Irish expats believe it's about to burst

Brian whelan and wife zarrin
Brian whelan and wife zarrin
Melia Moore, Irish in Australia
The average price of a house in Sydney now stands at AUS$1m, according to Dubliner Brian Whelan, who’s now an estate agent in Australia
Ailish O'Hora

Ailish O'Hora

DUBLINER Mella Moore arrived at her sister's door in Sydney 10 years ago after embarking on an international diving tour and hasn't looked back since.

But more recently she took a plunge of a different kind and bought a two-bedroom apartment in the city's sought-after Bondi beach region.

Moore, who comes from a marketing background and is country manager for communities website, is relatively upbeat about the Australian economy despite a nervousness about her recent purchase which she said was "expensive".

"I am keeping my fingers crossed in relation to the Australian economy," Moore (45) said.

"I felt like I had to get on the ladder but I also think the Australian economy is more robust despite the concerns about property prices and commodities.

"There might be some parallels but I think the Australians are more careful here than at home, they are very conscious of cost.

"There might be a correction but not a crash," she added.

Still, many are very concerned that what Australia is currently experiencing is a credit-fuelled property bubble set against the backdrop of a collapsed mining sector.

What's more, some also see distinct parallels between the Irish property bubble and what has happened in Australia in its recent housing history.

Record low interest rates as well as foreign buyers have fuelled the bubble.

And earlier this summer the International Monetary Fund sent in an economic team to Australia to analyse the danger posed to the country's 24-year expansion with the real estate market top of its list of concerns.

Lindsay David is the author of 'Australia: Boom to Bust' and 'Print:' and more recently 'The Central Bankers Bubble'. He also founded LF Economics.

And he's very worried.

"This is a $1.6 trillion economy with over $1.9 trillion in household debt.

"I'm the big bear here and I hope I'm wrong. But there's too much evidence and I feel the damage is already done and is irrevocable - we're heading for a big shock to the system."

David Holohan, head of research at Merrion Stockbrokers, said: "It's a country that has experienced a rapid rise in property but also household debt just like we did.

"They're not building like crazy like we did but they do have significant exposure to a single element of the economy, commodities, whereas for us it was property."

According to recent figures, the household debt-to-income ratio has risen to an all-time high of 153.8pc, making the Aussies among the most leveraged people on the planet behind only Ireland (of course), Switzerland and Denmark.

In addition, the underlying economic conditions are subdued.

Brian Whelan, a Perth-based estate agent, believes the Australian property market is an accident waiting to happen.

Originally from Beaumont, Dublin, Whelan (30), gave up his job as a financial consultant in 2011 and moved to the southern hemisphere with his wife Zarrin.

"The average house price is now AUS$1m in Sydney and Melbourne is also too hot. There are tonnes of apartments on the market in Perth. There are warning signs everywhere," he said.

"The cost of living is also high while unemployment levels are also growing.

"I predict that the Australian property market will crash next year or in 2017 and I will be ready to buy property when it does," he added.

Property issues aside, then there's the commodities market. With Australia at the end of a 24-year growth cycle, some investors believe recession is inevitable given the cyclical nature of economies.

In fact, it is also generally accepted that commodity collapses predate recessions.

Lay-offs and redundancies are now common in the mining industry - the bottom has fallen out of the iron ore market, for example.

Mining giants like BHP Billiton and Rio Tinto have basically completed their expansion plans and are seeking redundancies in a bid to lower costs in response to lower prices.

The same dynamic is at work in the coal industry and now there are question marks over whether big projects in the Galilee Basin in Queensland.

According to the most recent Australian census in 2011, there were just shy of 70,000 Irish living in Australia.

Even if many of them have already left, that's quite a few Irish depending on the Australian economy.

This fallout from the mining industry is something that Whelan has also seen in Perth.

"A lot of Irish guys were lured here by big wages in the mining industry but now many of them have lost their jobs."

Alex Coffey (25), from Bray, Co Wicklow, returned from Sydney four years ago, having worked in pharmaceutical marketing.

He is now studying a B Comm in UCD and has set up his own business in Dublin - recruitment firm Top Staff.

He cites the high wages in Australia, even for unskilled workers, as another parallel with Ireland which he also says have caused damaged.

"The average wage was between $50,000 and $55,000 a year.

"I knew a barman (21) who was on a three-figure salary and he got a $12,000 commission cheque too. Some of these guys were clearing $3,000 a week, its madness. It's like a micro economy, it doesn't reflect the rest of world.

"The main thing is that I don't think it's sustainable, it is no longer cost competitive."

Those wages have tapered off now but household debt levels haven't.

While no one is suggesting Australia is the new Greece - it has relatively low debt levels and a floating currency - but the IMF is already ready making plans to arrest economic slide.

It is forecasting that the Australian economy will grow by 2.8pc this year and that unemployment will peak at 6.4pc, while it is also planning to urge the government to embark on a number of new policies including tax reform.

But how will that fare, heading into an election year? Then there's the dependence on China - the IMF isn't just worried about the property bubble.

In a recent report it warned that China's growth rate would be 6.8pc this year and 6.3pc in 2016 - a share drop on the 7.4pc recorded in 2014 which is already the slowest pace in 20 years.

"The downturn in the global commodity cycle is continuing to hit Australia's economy, exacerbating the long-anticipated decline in resource-related investment," the report said.

"Exporters of commodities (Australia, Indonesia, Malaysia, New Zealand) will see a drop in foreign earnings and a drag on growth, although currency depreciation will offer some cushion."

The question really is, where will it all end? David is hearing the alarm bells but he believes the authorities, including the likes of the Central Bank and regulators, aren't calling a halt - again similar to what happened here.

"We can't afford to keep doing what we're doing," David added.

Again, uncannily like the situation was here, he added that the unfortunate victims of the "wealth creation" strategy are young house buyers and middle-income earners who are either priced out of the market or are leveraged through the roof.

"What we were basically doing (in Australia) was copying the Irish wealth creation model and calling it a different name," he added.

On Friday, David will address the Australian economic committee - the equivalent of our Dail Finance Committee - he is addressing the Home Ownership Inquiry.

Sound familiar?


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