I couldn’t help but think of the 1997 movie “Boogie Nights” recently. When I went to IMDB to look it up, I was surprised to find out that it originally opened on just two screens in the United States. After strong reviews and positive word of mouth, it was available on nearly 1,000 screens in a few weeks.
Featuring an ensemble cast made up of up and comers and has beens but not a single actor who was a star at the time, I had little interest in seeing it. I thought of Burt Reynolds as the guy from “Smokey and the Bandit”. Mark Wahlberg was associated with Mark E. Mark and the Funky Bunch and really bad music to me. I had never heard of William H. Macy, Don Cheadle, or Julianne Moore. Yet as the weeks went by, I kept hearing more and more about the movie to the point where I broke down and finally saw it.
The movie was truly divided into two parts - the rise of Mark Wahlberg’s character, Dirk Diggler, and his eventual fall. Although the subject matter was about the adult entertainment industry, the first part of the movie was light hearted and fun. Dirk found success, fame, and a surrogate family who truly cared about him. I remember genuinely enjoying this first half of the movie and laughing out loud at parts even if some of the material was a bit over the top. The second half took a decidedly different tone.
As Dirk descended into a nightmare of his own making fueled by cocaine and meth, his actions became increasingly desperate. He found himself in bad situations of his own making, finally forced to go back to his mentor and beg for his old job back. While the ride up to his pinnacle of fame and success was entertaining and fun, the descent into madness was borderline painful to watch. Coming out of the theater, I felt a bit overwhelmed. I thought about it for a few days and decided that I liked the movie. A lot. I understood the well earned buzz the movie received.
Months later, I rented the movie for a rare second viewing. However, the experience was different watching the movie the second time around. It was harder to enjoy the light hearted humor at the beginning of the movie knowing how the movie would end.
Here I am, fifteen years later, in the midst of a housing bubble far worse than the one that devastated the United States and I can’t help but think to myself, “I know how this movie ends.” House values are starting to decline, and Australia’s central bank, the Royal Bank of Australia (RBA), is continuing to drop interest rates. Rates have already dropped from 4.75% when I arrived in May to 4.25%. Rates in the States are near 0% and it doesn’t matter as housing prices there are still sinking.
The signs are all around. The average income of my suburb, Port Melbourne, is $85k per year. The average home sells for $950k. My first week in Oz, I looked at a condominium to rent that sold for $1.8 million. The rent on the unit was $6,000 per month. The cost of paying mortgage, home owner fees, and property taxes would be well over double that amount. The “investor” (using the term very loosely) would be losing over $70,000 per year. It made absolutely no sense to me. I was assured by various people that, “this is how it is here” or, my favorite, “Australia is different.” It’s not. It just took me a little while to figure it out.
I messed around with a rent versus own calculator before we moved to the new house. There are the standard questions in the form: how much do you spend on rent, what is the purchase price of the theoretical house, how much will rent increase, and how much will the property appreciate?
The default value for property appreciation was EIGHT PER CENT ANNUALLY! Keep in mind that the inflation rate has been fairly stable at below four per cent, so the calculator assumed that property will continue to appreciate forever at double the rate of inflation (see my previous post about Ponzi Schemes, the Greater Fool Theory, and the Extrapolation Error). For an “investor” who purchased a home at $1.8 million, lost $70k in the difference between income collected for rent and paid out in mortgage, and experience a gain in property value of 8%; they will have wound up making about $80k over the course of the year. It is a rational choice, so long as property prices keep increasing.
Unfortunately, like a game of musical chairs, the moment the music stops, the person who does not find a chair is in deep trouble. We heard it all in the States before our property bubble burst. Renting is “throwing money away”. Homes always appreciate. You can’t go wrong in real estate. All of it was true, so long as a greater fool came along and paid more for the property. The moment the music stopped, it got ugly. Home values are now about 40% lower than their bubble heights.
For the “investor” who sank $1.8 million into a new condo depending on capital appreciation to make it a good investment, they can easily see a 40% or greater drop in property value and lose everything. $800k can go up in smoke on a property that cannot pay for itself through rental income. This is not an isolated example, it is the standard.
Australia was fortunate enough to not experience the pain of the Recession (they refer to it as the GFC or Global Financial Crisis). There is a feeling that Australia is special and unique. I agree, this country is spectacular. However, the laws of economics, just like the laws of physics, still apply.
I enjoy being here. I love the sunshine, the scenery, the people, and the experience. Being in a country that has an unemployment rate about half of the United States is a great opportunity. However, just like the second time I watched “Boogie Nights”, I keep thinking to myself that I know how this movie ends...
Featuring an ensemble cast made up of up and comers and has beens but not a single actor who was a star at the time, I had little interest in seeing it. I thought of Burt Reynolds as the guy from “Smokey and the Bandit”. Mark Wahlberg was associated with Mark E. Mark and the Funky Bunch and really bad music to me. I had never heard of William H. Macy, Don Cheadle, or Julianne Moore. Yet as the weeks went by, I kept hearing more and more about the movie to the point where I broke down and finally saw it.
The movie was truly divided into two parts - the rise of Mark Wahlberg’s character, Dirk Diggler, and his eventual fall. Although the subject matter was about the adult entertainment industry, the first part of the movie was light hearted and fun. Dirk found success, fame, and a surrogate family who truly cared about him. I remember genuinely enjoying this first half of the movie and laughing out loud at parts even if some of the material was a bit over the top. The second half took a decidedly different tone.
As Dirk descended into a nightmare of his own making fueled by cocaine and meth, his actions became increasingly desperate. He found himself in bad situations of his own making, finally forced to go back to his mentor and beg for his old job back. While the ride up to his pinnacle of fame and success was entertaining and fun, the descent into madness was borderline painful to watch. Coming out of the theater, I felt a bit overwhelmed. I thought about it for a few days and decided that I liked the movie. A lot. I understood the well earned buzz the movie received.
Months later, I rented the movie for a rare second viewing. However, the experience was different watching the movie the second time around. It was harder to enjoy the light hearted humor at the beginning of the movie knowing how the movie would end.
Here I am, fifteen years later, in the midst of a housing bubble far worse than the one that devastated the United States and I can’t help but think to myself, “I know how this movie ends.” House values are starting to decline, and Australia’s central bank, the Royal Bank of Australia (RBA), is continuing to drop interest rates. Rates have already dropped from 4.75% when I arrived in May to 4.25%. Rates in the States are near 0% and it doesn’t matter as housing prices there are still sinking.
The signs are all around. The average income of my suburb, Port Melbourne, is $85k per year. The average home sells for $950k. My first week in Oz, I looked at a condominium to rent that sold for $1.8 million. The rent on the unit was $6,000 per month. The cost of paying mortgage, home owner fees, and property taxes would be well over double that amount. The “investor” (using the term very loosely) would be losing over $70,000 per year. It made absolutely no sense to me. I was assured by various people that, “this is how it is here” or, my favorite, “Australia is different.” It’s not. It just took me a little while to figure it out.
I messed around with a rent versus own calculator before we moved to the new house. There are the standard questions in the form: how much do you spend on rent, what is the purchase price of the theoretical house, how much will rent increase, and how much will the property appreciate?
The default value for property appreciation was EIGHT PER CENT ANNUALLY! Keep in mind that the inflation rate has been fairly stable at below four per cent, so the calculator assumed that property will continue to appreciate forever at double the rate of inflation (see my previous post about Ponzi Schemes, the Greater Fool Theory, and the Extrapolation Error). For an “investor” who purchased a home at $1.8 million, lost $70k in the difference between income collected for rent and paid out in mortgage, and experience a gain in property value of 8%; they will have wound up making about $80k over the course of the year. It is a rational choice, so long as property prices keep increasing.
Unfortunately, like a game of musical chairs, the moment the music stops, the person who does not find a chair is in deep trouble. We heard it all in the States before our property bubble burst. Renting is “throwing money away”. Homes always appreciate. You can’t go wrong in real estate. All of it was true, so long as a greater fool came along and paid more for the property. The moment the music stopped, it got ugly. Home values are now about 40% lower than their bubble heights.
For the “investor” who sank $1.8 million into a new condo depending on capital appreciation to make it a good investment, they can easily see a 40% or greater drop in property value and lose everything. $800k can go up in smoke on a property that cannot pay for itself through rental income. This is not an isolated example, it is the standard.
Australia was fortunate enough to not experience the pain of the Recession (they refer to it as the GFC or Global Financial Crisis). There is a feeling that Australia is special and unique. I agree, this country is spectacular. However, the laws of economics, just like the laws of physics, still apply.
I enjoy being here. I love the sunshine, the scenery, the people, and the experience. Being in a country that has an unemployment rate about half of the United States is a great opportunity. However, just like the second time I watched “Boogie Nights”, I keep thinking to myself that I know how this movie ends...
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