The Housing Bubble You Haven’t Heard of (Yet)

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My father recently went to Australia and met with one of his old friends who had been living in Australia for a couple of decades. His old friend, let’s call him Mr. Chen, in his late fifties, runs a restaurant seven days a week. While Mr. Chen admits it is an extremely unbalanced work life, he nevertheless finds his Zen when he counts the cold, hard cash that comes in at the end of every night.

Mr. Chen decides to invest in real estate as a result of his economic situation steadily improving. Mind you, he is not making money like Gordon Ramsey (otherwise he would not be working seven days a week). However, he recently bought a 2 bedroom apartment in Canberra for A$500,000 and bought a piece of land to build a 300 sq. meter (that’s right, this is international talk, go make the conversion) house for him and his family that will ultimately cost A$900,000.

He just invested A$1.4 million (at this point Australian dollar is actually stronger than the dollar, but for practical purposes, let’s just say $1 to A$1) in real estate and will only have two properties show for it!

The 2 bedroom apartment, his investment property, can only be rented out for A$500 per week, getting him only about A$2,000 a month. A gross return of 4.8% that will be more like less than 3% after expenses. His old house, which I believe is now free and clear, probably rents for about the same.

How Does Cashflow Look?

So with A$4,000 a month, will that amount allow him to service his debt?

Briefly looking into the Australian mortgage market, I would say he is probably paying 6.5% over 25 years. Assuming that he put 20% down in the A$1,400,000, his principal and interest will cost him A$7,562 a month!

That’s more than A$3,500 out of pocket every month! That’s a pretty dangerous operating level (believe me, I get enough flak from the BP community about investing in properties that break even in cash flow every month)! Yet, Mr. Chen is quite happy that owns several pieces of real estate and talks grandly about how fantastic his new house is going to be. Also from what I hear the bankers have enticed Mr. Chen to borrow more than he originally had intended to borrow.

The grease that pushed America home prices up seems to have shown up in Australia as well. Yet Australians are continuing to buy houses despite the exorbitant price levels. Home constructions are still booming. Every few years I return I see new subdivisions popping up here and there.

But why does it make sense to buy now? Is it the fear that homes will continue to get more expensive if you wait? Australia has gone a couple of decades without a housing crash. Is it the golden child?

The Problem for Australia

I fear that Australians do not believe that they are living in a housing bubble. Perhaps they do not think real estate collapses in America, Great Britain, Spain, and etc will apply them. I do not see the economic justification for Mr. Chen, who works like a dog seven days a week, to borrow so much money to buy so little. Although his business has been going well, can he be sure that he will have enough savings to pay out A$3,500 a month if business begins to suffer?

With that being said, Mr. Chen’s case is just one of many cases happening all over Australia. Keep in mind that the median household income for Australia is only about A$65,000 a year. So for the average Australian, buying a home at half a million Australian dollars or above is not something that is easily affordable. Since the country’s economy is extremely dependent on China and commodity pricing, the oncoming slowdown can really decimate Australians’ ability to keep up with expensive house payments.

What’s the moral to all this? If I were an Australian I would’ve looked at what happened in America and say, “you know what? This is starting to get a little crazy. I think I should get out of the market.” Since I love Australia, I will be sitting here in America looking across the moon and waiting for Australia’s real estate market to collapse. I would love to get into the market at that point. You never know. You have to keep your eyes out there.Opportunitiescan appear at any moment.

I hope Mr. Chen will be okay.

Photo: paul bica

About Author

Leon Yang

Leon Yang is an active real estate investor in Las Vegas. He is a buy and hold guy who also likes to flip from time to time. His main passion is to traveling to the less traveled places and inspiring others to become financially independent through real estate.


  1. I am looking to purchase here in california myself. The metric that I use to determine whether a bubble is occurring is to see if the mortgage payment for a 20% down loan is more than the rental income of the property. As soon as the mortgage payment is within 90% of the rental income thats the danger zone. DO NOT BUY unless you truly feel that the house maintains a strong capital appreciation.

    • The problem with that theory is that if you’re in a bubble, there WILL be appreciation…shortly before it all gets wiped out. I’d maybe just strike your last sentence.

    • Leon Yang

      I think the idea is not to buy unless you can reasonably afford it. If it is truly affordable, then you wouldn’t be too worried about market collapsing. I wouldn’t base my entire investment on banking appreciation unless there was a big crash beforehand.

  2. I spent a couple of weeks in Australia in 2010 and on my flight over I sat across the aisle from a home developer from Sydney. Since I’m a Realtor it was natural to start talking about our markets. He pitied us and told me how strong the Australian market was. From what he was telling me, I told him it sounded like they were headed for a bubble also. He claimed that was impossible because their economy was so strong.

    After arriving in Sydney, I met up with an old friend who had sold real estate for a few years. She boasted about the market, the high prices, multiple offers, etc. She, too said a bubble will never happen in Australia. Her claim was that as long as China keeps buying minerals from Australia, housing prices would remain solid. As we walked around the city I was checking out the prices and they were incredibly high–like Manhattan NYC high! And I’m from LA so I have a pretty high tolerance to high prices. I just couldn’t imagine it would keep going up. It will be interesting to see what happens there, and I’m a bit surprised it already hasn’t imploded.

    • Leon Yang

      That is the scary thing – the fact that everyone do not acknowledge the possibility that there is a property bubble. I’m thinking that is probably the same mentality that went through people’s heads in the US back several years ago.

      Even if the market doesn’t crash, how much higher can it go?

  3. Robert Steele on

    Oh don’t get me going on about Australian property market!! I am an Aussie ex-pat and I’ve been watching this for years through the eyes of friends and relatives back home.

    A lot of people there believe it is a bubble. But despite that it is the bubble that keeps on giving. The problem is that the government refuses to release enough land for development. I don’t know why and I suspect that is not the whole story but it is one that the bubble deniers like to fall back on.

    A friend of the family bought a $1M, 3 bedroom 2000 sq. ft. house way out in the burbs away from mostly everything a couple years ago. They thought they got a great deal cause they managed to get it for $20K less than asking price. Okay…. So she is a regular white collar office worker and he is a landscaper. I have no idea how they afford the mortgage which I calculated at around the $7K/month mark.

    Also keep in mind that in Australia these are FULL RECOURSE loans. Also keep in mind that in Australia mortgages are only fixed for the first 3/5/7 years then they are ADJUSTABLE mortgages. That would be enough to scare me into renting forever.

    They also have this other quirk. “Negative gearing”. It’s all the rage. Basically you buy a property, rent it out, make a loss (I calculated in my old home town that if I tried to do what I do here I’d lose $2K a month on a property) and then get a tax write-off for it. They tout it as being smart because the tax man is paying down your mortgage. I’d much rather make money and get a tax write off.

    Anyway, I suspect the madness will not end until China slows down and quits buying up commodities like their is no tomorrow.

    • Leon Yang

      Thanks Robert for more information! I was trying to find fixed mortgages on the Australian banks but had no luck. I don’t like the idea of buying adjustable rate mortgages but at least rates in Australia are not low enough for a big jump in the future.

      The tax write off is good given the high taxes, but still, at some point you are supposed to earn money.

      Commodities might slow down. I’m already seeing China slowing down a lot already.

  4. It is unfortunate if there is a bubble brewing there and they have not learned anything from us. However, we didn’t learn anything from the Japanese and their bubble (and a lot of them were taking their ill-gotten gains and buying our real estate!) so I guess history is destined to repeat itself again and again.

  5. Fascinating article – every word of it true in my opinion. My own personal experience, I’ve recently sold the old family home in Melbourne – it was making 3.8% pre-tax in cashflow based on its value, which has remained all but flat in the last half-decade or so. Put that into 20 or so Japanese properties yielding 10-15%, with 20 or so times the diversity and hedge (they tell me capital growth is coming back to Japan too, but I’m more than happy with the rental returns alone).

    Hope to buy back into Australia when this bubble pops – and pop it must, particularly with the mining industry, Australia’s one-trick pony showstar, also at the top of a slippery slope as China imports grind to a halt. Interesting times ahead in the Asian century, I’d wager.

    • Leon Yang

      Thanks Ziv! Yes I agree the returns are too low to be worthwhile. I am expecting to a big fall in the East someday. Not sure when yet, but I’ll sit tight and wait for it. If I have capital in Asia I’d bring it all to the US and buy up everything now. Then wait for Asia to crash and bring it all back over there.

      Although I have to say I am pretty interested in Greece and Cyprus right now. I see potential there in a couple of years.

      • Same here- positioning ourselves in Japan, USA, and closely monitoring Italy – they’ve already dropped, but bound to drop a bit more, I’d wager. Cyprus and Greece have too much of a risk factor for my blood. 🙂

  6. karen rittenhouse

    My sister and her husband live in Sydney and have been in Australia for about 25 years. They own three free-and-clear properties in Sydney – each about 1400 sq.ft. (keeping it clean with U.S. dimensions) and each worth about $1 million. They both retired mid-40’s off the income generated from their two rental properties while living in the third property. Unbelievable. I compare it to owning real estate in Manhattan.

    I’ve always questioned the values there but, when compared to New York City, the prices may make sense. Will be interesting to see if they have a bubble burst. The Aussies I know would be totally caught off guard – they are VERY confident in their economy.

    Thanks for the post.

    • Leon Yang

      Thanks Karen! Glad to hear your sister and husband are living the good life in Sydney! It is definitely good to get in there early. But sheesh, living in Australia has gotten so expensive! I miss the days when an Australian dollar was only worth fifty cents!

  7. Interesting article.
    But can i add… it is well known that the prices of property is generally determined by demand vs what people can afford.
    Yes the average is 65k per year. but in Sydney especially the inner suburbs of Sydney earnings of 100k+ is not unusual. 2x people working earning this amount is also not unusual. Therefore i would argue, based on income alone, people can afford that $500-900k house. (the median in sydney is over $650k, but honestly, in inner sydney i suspect that number moves to over a million).
    Your stating that Mr Chen is out of pocket by $3500 per month. that’s not that much cash in Australia! especially considering MINIMUM wage is around $35k.

    There are alot of differences between the american economy and australian economy, one of them especially being the level of debt both countries are currently owing, esp since australias debt to GDP is around 20% where americans are @ 80%. Yes the australian economy is dependent on factors (such as china), but there are obviously factors in the american economy which are far more fragile at the moment

    Secondly there isn’t enough physical housing to meet demand, making rental prices soar. (think $500+ a week for a 2 bedroom apartment), therefore prices stay high because of the perceived return on investment.

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