Thought Starters

Is Australia’s housing market the second riskiest in the world?

A recent report from the International Monetary Fund has been doing the rounds in Australian financial media because of its stark conclusion: Australia’s housing market is the second riskiest of the 27 countries it analysed.

The IMF looked at 5 metrics and gave each country a score between 0 (least risky) and 4 (most risky). Here’s how Australia went:

1. Level of household debt as a percentage of disposable income: 4

2. Share of debt outstanding on a variable interest rate: 3

3. Share of households that own a home with a mortgage: 2

4. Cumulative house price growth from 2020 to 2022: 4

5. Cumulative interest rate policy changes: 4

Add up those 5 scores and the IMF concluded that the only housing market more at risk than Australia’s was Canada.

Reading this you can’t help but be worried. And homeowners have had a tough year. According to Core Logic’s home value index, Australian house prices are down 8% over the past 12 months.

But it is important to also keep predictions of Australia’s housing market collapse in perspective. Because we haven’t been in the markets as long as most, but even we’re getting deja vu hearing more predictions of Australian housing collapse. In the past 15 years a few of the biggest predictions that stand out:

• 2008: Economist Steve Keen predicts Australian house prices will fall 40%

• 2010: Jeremy Grantham calls a collapse in Australian house prices a “near certainty”

• 2011: Steve Keen doubled down on his prediction of an Australian property bubble bursting

• 2014: Christopher Joye calls a fall between 8-17% for Aussie house prices

• 2016: John Hempton and Jonathan Tepper call Australia’s housing bubble

• 2021: Christopher Joye predicts a 20% fall when interest rates start rising

This isn’t to say this analysis has been wrong (in fact, Chris Joye’s 2021 prediction is looking very prescient). Markets can stay irrational for a long time. But it is a reminder that Australia’s housing market has defied conventional economic analysis for a long time.

At some point house prices will fall, that is a natural part of any market moving up and down over time. Just don’t believe anyone who can guarantee you a timeline.

Listen to us unpack the IMF report on today’s episode of The Dive (Apple | Spotify | Website)

Chile plans to nationalise its vast lithium industry

After Australia, Chile is the world’s second largest producer of lithium. And an announcement last week by President Gabriel Boric indicates there are major changes coming for Chile’s lithium industry. Boric plans to nationalise the industry and transfer the assets of lithium giants SQM and Albemarle to a new, state-owned company.

While Chile may be the second largest producer of lithium, it has the world’s largest known reserves of the metal. And electric vehicle makers and renewable energy generators were hoping Chilean miners would be finding ways to extract more of the metal to keep up with demand. Now that will be up to Chile’s new state-owned company.

This isn’t new for Chile. The country already operates the world’s largest copper producer, state-owned Codelco. Meanwhile, analysts expect this move may benefit countries like Australia, as private investment that was earmarked for Chile will be moved to other countries.

Howard Marks: Lessons from Silicon Valley Bank

“This isn’t going to be another history of the meltdown of Silicon Valley Bank. Dozens of those have appeared in my inbox over the past month, as I’m sure they have in yours. Thus, rather than merely recount the developments, I’m going to discuss their significance.”

That is how Oaktree co-founder Howard Marks opens his latest memo. Thankfully his memo lives up to that opening paragraph because I think we’ve all read enough about Silicon Valley Bank’s collapse.

There have been a number of comparisons made to the Global Financial Crisis in 2008, that saw bank failures lead to a risk of a larger collapse of the whole financial system. Marks doesn’t believe we’re in a similar situation. “I think the similarities between 2008 and 2023 are limited to the mere fact that, in both instances, problems existed at a few financial institutions. I find the common elements mostly superficial.”

While Marks doesn’t think we’re at the start of a financial crisis, that doesn’t mean he isn’t concerned. And he is particularly concerned about the commercial real estate market and the banks that lend to it. With the work from home shift, higher interest rates and the possibility of businesses failing during a recession (and then vacating their leases), there are a lot of factors adding up to risk for office buildings. For Marks, the banks that lend to commercial real estate projects are the ones to watch.

The myth of the Broke Millennial

Recent data suggests we’re doing alright. So why doesn’t it feel that way?

The financial story of Millennials told over the past few years has been pretty stark. Millennials were going to be the first generation to do worse than their parents financially. Millennials were under more debt than previous generations and as a result were delaying family formation and home ownership (too much avocado toast…). Millennials had a smaller share of wealth than previous generations did at their same age. Overall the story hasn’t been positive.

So we were intrigued by this headline from The Atlantic. And it turns out some of this story is starting to turn, Millennials (at least in the United States) are starting to do better:

• Households headed by Millennials are making considerably more than those headed by Silent Generation, Boomers and Gen Xers were at the same age (even after adjusting for inflation)

• Fewer Millennials were in poverty in 2019 than were Boomers and Gen Xers at similar ages

• Millennial home ownership rates in 2020 were only slightly behind Boombers and Gen Xers at the same age: 50% of Boomers owned their home as 25-to-39 year olds, compared with 48% for Millennials

As this article summarises:

Netflix: Relentless focus on two religions

Netflix has been on a real journey over the past few years. The streaming giant’s share price is about 1% higher than where it started 2020. But in these last few Covid-affected years it has been an absolute rollercoaster. Up more than 100%, then down more than 70% and then up 80% to end up right where it started.

This article is a deep dive on Netflix the business. The streaming giant is facing more and more competition just as consumers are starting to reduce their number of streaming services subscriptions.

One thing Netflix has going for it, unlike many of its other competitors, is that it is turning a profit on streaming. As this article explains, “In 2022 Netflix turned an operating income profit of ~$5.6B, Disney, Warner Bros, Peacock, and Paramount together lost a total of ~ $14B."

The challenge for Netflix is that many of its biggest competitors are not just streamers. Amazon has a web services and retail business, Disney has parks and traditional entertainment, Apple is, well, Apple. For Netflix to continue to lead the streaming industry is has to find a way to continue outcompeting their deep pocketed rivals.

_{Disclaimer
All information contained at EquityMates.com and in any content produced by Equity Mates Media is for education and entertainment purposes only. Any advice is general advice only, and has not taken into account your personal financial circumstances, needs or objectives. It is not intended as a substitute for professional financial, legal or tax advice.}

_{Before making any financial decisions you should read the Product Disclosure Statement (PDS) and, if you are unsure, consult a licensed financial professional.}

<sub>Equity Mates Media operates under Australian Financial Services Licence 540697.

Equity Mates respects your privacy. All personal information collected is protected in line with Equity Mates' Privacy Policy.</sub>

_{Copyright © 2023 Equity Mates Investing Podcast, All rights reserved.}