Should have seen it coming…

When he’s not abusing Sydney’s nouvelles riches ladies of leisure and snapping photos of Sydney’s sartorial disasters, The New Australian is fond of pointing out two things:

1. Like Brits, Australians have bought into the idea that property is a guaranteed, one-way bet to wealth; and

2. Australia has not experienced a recession in the last two generations, and is therefore going to get a colossal shock when the reality of the current downturn starts to bite.

In support of these positions is a telling article from the BBC:

After 23 years of growth, including one of the biggest mining booms in the nation’s history, tumbling iron ore and coal prices have put a brake on Australia’s economy – and mining towns are paying the price.

Peter Windle is a casualty of the mining slowdown. The New South Wales mining employee has lost a well-paid job, a company car and an annual bonus that in some years was as high as A$60,000 ($48,800; £31,300).

A termination package from the mining company he used to work for has helped soften the blow. But Mr Windle still had to sell his investment property to keep his head above water.

It’s not difficult to see what’s happened here.  Mr Windle failed to recognise that the recent period of high salaries and plenty of work was an anomaly and would not last forever, and so leveraged himself to the hilt buying a property which, in ordinary times, he couldn’t afford.  You can, well, put your house on the “investment property” that he bought was wildly overpriced and unlikely to break even unless the resource boom continued for another decade.  A quote from the article hints at this:

“It’s the worst I’ve seen it in 28 years in the mining industry,” says Mr Windle. “Everyone is getting out. Three hundred houses are for sale in my town, three in my street, and rental prices have collapsed on older weatherboard houses from A$1,000 a week to A$200,” he says.

Ah.  So what’s the betting Mr Windle has bought an “older weatherboard house” for a staggering sum of money and was relying on A$1,000 per week in rent for the next 10 years in order to pay if off?

If he’s been 28 years in the mining industry, he should have known better.  I am incredibly fortunate to have hit mid-career in the oil and gas industry in a period of unprecedented oil prices and salaries.  Several of the industry’s old hands have told me of the lean periods in the 1990s when there was no work, and one of them told me he worked a job for a year which paid less than he was spending: but at least it slowed the debt accumulation.  I remember in Sakhalin some of these same old hands telling us young pups that we should count our lucky stars and invest the money wisely, and know that this might not continue forever.  Few of my generation (and younger) missed this lesson.

Most of us knew that the good times would come to an end, which they did in 2008-9 but thankfully picked up again fairly quickly.  Everyone used the cash to buy property, which makes a sound investment if geographically diverse, a future permanent home, and/or is part of a portfolio of other investments.  But other than perhaps a few weeks after the initial purchase, few were daft enough to mortgage themselves to the point they’d be forced to sell if the prevailing boom came to an end.  For a short time I was a day-rate contractor, and the lesson dinned into me then was always have 6-12 months of salary stashed away in cash.  So if you lose your job, you have a cushion.  It’s a habit I still haven’t gotten out of even as a staff employee, keeping at least one, preferably two, year’s mortgage payments and living expenses in cash should the worst happen.

Obviously this isn’t feasible for most people working PAYE in civilisation in normal jobs, but for those of us who rode the oil and gas wave over the last 5 years or so, we were making hay while the sun shone.  I considered myself (and still do) extraordinarily lucky and privileged to have been able to benefit from it, but not a day goes by without having an eye on the oil price and the appreciation that in 3 months time I could be out of a job with a mortgage to pay, a wife to feed, and no home back in the UK.  I am grateful to those old hands I met in Sakhalin and Nigeria who told me not to squander the money made in the good times and be very aware that someday it will end: I learned to treat it as a bonus, not business as usual.

It appears there were not so many wise heads in the Australian mining sector:

It is poor consolation for Mr Windle, who is now contemplating looking for a job in another state.

“I’m 54 now, and I’ve had a hip replacement. I might get a job at an outback mine in the far north of Queensland but I’d hate to spend another year working away from home. And suppose they lay off workers too?” he asks.

It’s a shame for Mr Windle and others like him, but he should have factored all of this in when he bought his “investment property” and worked out his monthly cashflow.  Tough times, and it’s going to get worse.

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11 thoughts on “Should have seen it coming…

  1. If you cut the typical Aussie in half, he’d have “property investment” written through him like a stick of Blackpool rock. I know of people in Perth doing similar crazy things, e.g. buying shacks in Karratha that rent for $1000/week now, when there’s maybe 18 months until the twin LNG & mining construction booms fizzle out there, and I’d guess at least 10k itinerants will no longer be renting in Karratha – what do the investors / speculators think will happen to rents and property values then?
    I’ve debated it with many people in Perth and Melbourne in the nearly 20 years I’ve lived here. What I underestimated was the willingness of the authorities, in collusion with the property lobby, to do whatever it takes to keep the bubble inflated. It certainly worked from 2007 until quite recently, but we should really have taken our medicine then. Where guys like Steve Keen et al are mistaken is in discounting the ability of government intervention to prolong the bubble.
    I do believe we are in for the mother of all asset price collapses in Australia (though not necessarily in nominal dollars), the question is when – apparently there has been a 70 year property bubble in the Netherlands previously, so bubble pricing lasting a lifetime is not without precedent. In some ways a collapse is required, to allow us to regain some international competitiveness, however the devastation that will be wrought on the average investor / speculator’s balance is likely to cause as many problems as it solves.

  2. What I underestimated was the willingness of the authorities, in collusion with the property lobby, to do whatever it takes to keep the bubble inflated.

    That’s precisely what’s happened in the UK: interest rates should have risen in 2008, but the government (with the wholesale backing of the propery-owning middle classes) didn’t want to shatter the illusion that everyone is wealthy despite having meagre salaries and high living costs. We are now at the point where the UK would go to war before it would see house prices fall.

  3. Ah, Steve Keen…..

    He reminds me of a flawed version of the Greek legend of Cassandra; could see the future but was never believed. In his case he could only partly see the future but missed the mildly significant fact that it doesn’t reward a politician to do a difficult but correct thing. In many ways I feel sorry for his academic excellence but real life ineptness.

    There are some interesting times ahead in Australia and most people haven’t spotted it yet. However, given that roughly 50% of the search terms entered to reach my blog have the words “Australia” and “recession”, a fair few are starting to realise.

  4. Never been subjected to bogus arguments then in Australia. They have the concept of negative gearing where you are allowed to deduct a loss from your income i.e. Taxman picks up part of the loss. What they forget that it is still a LOSS.
    it will be compounded with capital losses.

  5. Hi Roger,

    Indeed, being able to offset interest payments on a loss-making investment is a particularly daft policy seemingly unique to Australia, and does nothing to help cool down the property bubble.

  6. I remember my incredulity when negative gearing was first explained to me soon after I arrived in Australia – “so what you’re telling me is, I should lose money so I get half of it back from the ATO? I’ll get right on that…” The thing is, history suggests I should have backed up the truck & filled it with negatively geared property when I became eligible to buy here in 1998. It’s hard to explain to your significant other why her friends all have nice things based on property flipping and “Equity maaate!” while you’ve been working, saving, and staying away from investment property that doesn’t cover its costs & requires huge capital gains in the unknown future to cover its risk-adjusted costs.

  7. In my all too brief 27 years in oil related services industries I must have struggled through five industry specific depressions, during which time many of my colleagues threw the towel in and moved on. It was a roller coaster ride of bonuses one year and pay cuts the next. A fair number of current incumbents – given the last decade – are in for something of a shock.

  8. Australians make British Daily Mail readers appear uninterested in the value of their houses. British people don’t often believe me when I tell them this.

  9. Tim, arguably the UK did, in fact, go to war rather than see house prices fall.

  10. Tim

    I am not sure that this BBC article is particularly telling when it comes to the details of his investment property. Some detail about where it is located, how much he paid for it, when he purchased it and how tiny that market is would at least provide the minimum information required to allow a cursory assessment. We can see that is was one of those massive speculations on high rental yield given the rental figures. Other than mining towns, rents are still and always have increased throughout Australia since record have been kept.

    Most investors steer clear well of one horse mining towns, they have to anyway as the number of houses in them is two fifths of fuck all.

    And its one not two generations since our last recession.

    Yes the oil and gas and mining boys are struggling at the moment, I don’t mind exploiting those markets when they are strong either, although I wouldn’t for a moment put all my eggs in either of those baskets, far from it.

  11. @Bardon,

    Most investors steer clear well of one horse mining towns, they have to anyway as the number of houses in them is two fifths of fuck all.

    But this illustrates the problem: he wasn’t an “investor”, he was somebody with cash who had bought into the bullshit. Remember the story of Joe Kennedy (I think) knowing it was time to sell up before the Great Depression when the shoeshine boy was giving stock tips. Meaning, if the shoeshine boy is investing, then the game is up. Similarly, I recall a story – I can’t remember from where – of a Tesco checkout girl in the UK talking about her buy-to-let investment. My brother is in the property business, and before the crash he spotted that one of the UK’s biggest property developers, who had made umpteen millions, had sold up and retired: perhaps he had heard the checkout girl story. I suspect there are a lot of Aussies who are in a similar position now.

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