The unfortunate 'Double Irish'

Strolling around downtown Sydney these days it's practically impossible to walk too many steps without spotting the tell tale signs of a recently relocated Irish immigrant; a pasty whiteness on the upper arms and legs coupled with a sunburnt face, forearms and shins (or as we call it in Ireland "A grand tan!"). Yes Australia has been the recipient of a large chunk of Ireland's latest diaspora since the Celtic Tiger collapsed in 2010 and despite thinking they had found paradise down under, these unfortunates are about to experience their second major economic collapse in the space of seven years!

The story is well told by this stage, Ireland's Celtic Tiger economy which had begun in a very healthy, export driven way, soon gave way to excesses which could no longer be supported by natural, organic growth and therefore the need for a bubble emerged and in Ireland's case it was in property. At the height of the bubble conservative estimates put over 17% of the entire Irish workforce being employed in the construction industry! It was clear as a bell that this was not going to end well for the country in general and those construction workers in particular; sadly this is exactly what ended up happening. Of the nearly 10% of Ireland's young people who emigrated after the collapse, a disproportionate number were people who had worked in the construction industry. 

Australia was an ideal relocation spot for these émigrés, a global commodities boom and a burgeoning property market meant that these architects, builders and surveyors would have ample work and they could leave behind them the negative equity and dole queues for a brighter future. For the past four or five years things have gone according to plan. In areas such as Sydney and Melbourne a shortage of supply and soaring property values meant that the demand for new homes was increasing year on year and Australia's status as a mining powerhouse would ensure a constant influx of new immigration to support the housing market. Four words were bandied around in Australian financial and political circles that should have sent chills down the spines of any Celtic Tiger survivor... "The fundamentals are sound".

In 2011 I began writing about how those leaving Ireland's shores for financial salvation down under might discover that Oz's wonderful wizard may turn out to be the same type of inept politicians behind the curtain that reigned over the Celtic Tiger. The fundamental strengths that underpinned the Australian economy were tied up in two symbiotic industries and a correction in one would not only topple the other but bring down the entire economy. It was a 50/50 bet whether it would be mining or housing that corrected first BUT there was probably no surer payoff in the global market for this decade. A review of how Australia ranks in terms of exposure to commodities as a percentage of GDP shows how dependent the country has been on mining to prop up the overall economy:




In the end it appears that as is usually the case with bubbles, Australia's boom will not come to an end thanks to a domestic event but thanks to outside forces. The global deflationary tsunami which has hammered commodity prices from Precious Metals to Crude Oil has popped Australia's mining boom and China's "Great Fall" has only exacerbated the problem. Australia's dependence of China to sustain its mining industry and therefore its housing bubble becomes evident from the two following charts:



As you can deduce from the chart above Australia is set to be THE country most negatively impacted by China's major correction, but even if China's correction were short lived Australia is now THE most exposed country in the world to the deflationary forces sweeping the world's commodities markets. While it trails behind Russia, Venezuela and Chile (all of whom have suffered major corrections over the last 18 months) Australia's exposure to non oil commodities (minerals such as Gold, Copper, Iron ore) is second only to Chile in the developed world. In other words not only is Australia heavily reliant upon an economy which has contracted more swiftly than any other major economy over the last 18 months (China), it is extremely over exposed to an industry that is now generally accepted world wide to be in the midst of a major correction.

So how is this impacting the domestic economy in Australia? Well for a start the collapse of the mining industry (http://www.bbc.co.uk/news/world-australia-30584123) has put a halt to the rapid growth in the size of the workforce and this is putting pressure on GDP growth forecasts. The collapse of Australia's healthy growth has introduced the temptation to rely on artificial growth in areas of consumption and debt (http://www.abc.net.au/news/2015-11-24/treasury-cuts-economic-growth-forecasts-decreasing-workforce/6970456). The Reserve Bank of Australia has already declared its intentions to keep inflating the housing market by maintaining a record low rate of 2% instead of letting the slow down in the economy cool the property market by allowing rates to rise to an appropriate level. Remember Ireland's shift from export growth to housing bubble?

The Australian Dollar has dropped over 36% since 2011 which would be good news if it spurred growth in the exports market but as outlined above Australia's exports (and the potential for future exports) are not looking very healthy. 

So where does this leave our sunburned paddy down under? Sadly in all too familiar circumstances. The decrease in Australia's labour force (especially in its high paid mining industry) combined with the imminent collapse of Australia's export market is sadly far too much downward pressure on the all too bubbly Australian housing market. Where as Ireland's Celtic Tiger housing boom came to a screeching halt due to the worldwide credit crunch post 2008 Australia's housing bubble will collapse due to a sudden shock drop off in demand. While this very weekend auctions of homes in Australia will hit a record high in both Sydney and Melbourne the key fundamentals indicate that what we're seeing is the peak of the market and we are on the verge of seeing a MASSIVE collapse in Australian real estate values! Australians are leveraged to the hilt and record low interest rates coupled with stagnating wages mean that while a temporary flight of Chinese investors into Australian property could prop up prices for a couple more years we're looking at a matter of time before demand for housing drops off a cliff. 

It appears for many of Ireland's Celtic Tiger victims, their escape from one nightmare of over priced housing, negative equity, consumer debt and unemployment could have landed them right smack dab in the middle of another! To my fellow Irish down under, you've been here before, you know the warning signs are staring you right in the face. Don't ignore your gut this time! It's time to liquidate your overpriced properties and wait for this storm to pass. Wait for the opportunity to buy low!


About the Author

Karl Gray

Author & Editor

Karl has been investing in financial markets all over the world for the last 10 years. Forecasting both the commodities bull markets of the naughties and the rise of crypto currencies, Karl has a proven track record in identifying global trends.

1 comments:

  1. Great article Karl. David McWilliams wrote a similar article on the subject some time ago:
    http://www.davidmcwilliams.ie/2012/01/11/tremors-from-australias-crash-will-reach-our-shores

    ReplyDelete

 
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