Australians have been obsessed by the prospects of capital gain since the first European settlement,.
During the first period of pastoral expansion, this came from stock. Outside the barriers to settlement, the boundaries beyond which people were not meant to stray, land was free. You could occupy it, but not own it. The really big returns could not come from increases in the value of the land, nor did they come primarily from the annual wool cheque. Rather, they came from the natural increase in stock numbers that then had an increasing value as more people wishing to occupy land bid for available animals.
Naturally enough, new financing mechanisms emerged to channel surplus domestic and especially British savings into the growing pastoral industry. Conversations in the pubs and clubs of Sydney and Melbourne were dominated by the price of sheep and horses, of fortunes made and lost. There were inevitable boom bust cycles.
Naturally enough, the squatters fought for property rights over the occupied land. There progressive grant created value in land. The growing towns also created value in land. Mining accelerated the process by attracting people and adding to surplus local funds.The focus of conversation shifted from stock to real estate.
Naturally enough, new financing mechanisms emerged to channel surplus funds into real estate. A long property boom began that ended in depression as the real estate bubbles in Sydney and especially Melbourne collapsed.
I mention all this because I have been fascinated by the latest manifestation of the Australian love for real estate, US housing.
A week or so back, I can't give the link because the story is not online, the Armidale Express carried a front page story on US real estate investment. Then at a group dinner on Friday night here in Sydney, the opportunities offered by US real estate was a significant topic of conversation.
You might find all this a little strange. The US economy is not doing well, while the US housing market is quite sick. Why, then, the Australian fascination with US real estate? Is it just that house prices are so low? Well, no. It's more than that. it's really the story of two markets.
Australian house prices are very high by world standards. Rents are high too, but the gross yield from rents is actually quite low. This means that returns have come more from capital appreciation, less from rental streams although those increase with time. Now house prices in many places have fallen, not catastrophically, but enough to make capital gains quite uncertain. Australian banks have plenty of money and are willing to lend on housing, but people are reluctant to borrow.
The problem then becomes just what do people do with the increasing pool of domestic savings. Interest rates, while high by world standards, don't offer a very good return, while the stock market is uncertain.
In the US, by contrast, banks are reluctant to lend on housing. US laws that limit bank recourse to the value of the house make real estate an unattractive investment. House prices have fallen.
The US is a large and complicated real estate market. In some cases like Detroit, houses cannot be given away, nor are there people to rent. In other areas with active rental markets, low house prices have created very high rental yields, staggeringly high to Australian eyes, yet US investors are both reluctant to invest and find difficulty to get funding. Australians are moving in.
One dinner party conversation went this way.
I am getting a rental yield as high as 25 per cent, said one Australian investor. The areas I am buying in have reasonably good long term prospects, so I'm unlikely to lose money, more likely to make capital gains.
As has happened before, channels are opening to facilitate this investment. As has happened before, there is going to be pain as well as gain. Still, I find the way in which the flow is being driven by the combination of imperfections in two very different real estate markets interesting.