Eighty-Five Australian Building and Construction Firms Go Under in a Month; Crazy to Buy a House in Australia Now

The implosion in Australian housing is now in full swing as Eighty-five building and construction firms go under in a month.

The building and construction industry seems to be bearing the brunt of the brittle Australian economy, with more than 85 companies either entering administration, liquidation or being hit by a winding up notice over the past month in Victoria and New South Wales alone.

Over the past fortnight, Safi Brothers Constructions, Port Melbourne Building Supplies, Coastline Bricklaying and Blue Hills Bricklaying have entered administration. Others to have collapsed of late include plumbers, plasterers and landscape gardeners.

Registered company liquidator, Cliff Sanderson of Dissolve Pty Ltd, says while the building sector always features pretty heavily in the collapse lists, the numbers have increased over the past three to five months.

The reasons, according to Sanderson, are the relatively recent downturn and increased aggression from the Australian Taxation Office.

"An awful lot of tradies couldn't pay their bills during the GFC, and now the ATO is coming to get them," Sanderson says.

"Whereas other industries might continue to limp on, small tradies might not have the ability."

Master Builders Australia chief economist Peter Jones says uncertainty over where the economy is headed is not helping the sector, which has a higher number of SMEs than other sectors.

"Uncertainty over interest rates and lingering debt issues in the US and Europe are also playing a role," Jones says.

Uncertainty? What Uncertainty?

Peter Jones at Master Builders Australia is blaming "uncertainty". The irony is that it would make far more sense to blame "certainty".

It is quite certain that Australia's housing bubble is now in crash mode. It is equally certain there is not a damn thing the Reserve Bank of Australia or any of the home builders can do about it.

Crazy to Buy a House in Australia Now

If you live in Australia and are thinking about buying a home, here is everything you need to know in a single sentence: It's still a crazy idea to buy a house in Australia at the current prices.

• By all measures of value, house prices in Australia are at or near the highest levels they have ever been.
• Recent tiny house price falls are meaningless in the most overpriced housing market in the world - long term housing slumps can take years, or even decades.
• Recent short term interest rate falls are also meaningless. Buying a house is for the long term, so it is the long term average real (inflation adjusted) interest rate that matters.
• A typical Sydney house costs $400-500 per week to rent, or $ 1200-1500 to own. Buying at the current prices, you would have to have real capital gains of $800-1000 per week (or around 5% of the purchase price per year) just to not lose money. It may well be worth paying something for the pride of home ownership, but three times the price of renting? You can buy an awful lot of nice decorations for your rental property with a small proportion of the cost difference between renting and owning.
• Think it through. Even if house prices do not fall, rents have to at least triple for renting a normal house in an Australian city to cost the same as owning one. Half of renters already pay more than a third of their income in rent. Rents tripling simply cannot happen without large increases in wages, which implies high inflation and thus high interest rates over a prolonged period of time. Without their fantasy rent rises, or their fantasy price rises, long term ongoing losses will crush real estate speculators.

There are many more excellent bullet points in the article. Those who step in here "buying the dip" will regret it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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