L2 Capital Podcast #04: Chat with Martin North - Housing market in Australia

In this episode, Marcelo talks to Martin North, from Digital Finance Analytics (DFA). DFA is a boutique research, analysis and consulting firm providing advisory services to clients in Australia and beyond.

Martin starts by explaining how his company, DFA, conducts the research and consulting work. DFA follows a philosophy of its own and looks at different perspectives, with a wealth of detail.

Following on, North talks about the downward trajectory of real estate prices in Australia in 2018, which he had already anticipated, after several years of expressive appreciation. He explains why prices have risen so robustly over the last few decades and shares his point of view for the near future.

Asked about credit expansion and the granting of real estate loans, Martin presents recent numbers and market trends and highlights the strong influence of investors, including foreigners, in this sector. He further clarifies how rising property prices have led to a change in household indebtedness and composition of the budget - and the consequences for the economy as a whole.

Martin, when asked about the report published by the Banking Royal Commission on February 4, highlights the main points of the document and analyzes the problems with the banking system and the country's indebtedness and how they constitute a potential problem for the national economy. He also compares the situation in Australia with the 2007-2008 Global Financial Crisis in the US.

Marcelo comments on the fact that a significant portion of households have negative equity and asks about the upcoming decisions of the Australian central bank, the Royal Bank of Australia, regarding interest rates and the impacts of this for the real estate sector. Martin comments on what he thinks will be the decision of the monetary authority in the face of the economic situation and still points particularities of different regions of the country and how they can be determining factors in the way that real estate prices will behave.

An important and interesting risk is questioned by Marcelo regarding the quality and construction standards adopted in the country and Martin, besides explaining the reason for this risk, reiterates his point of view that many properties may turn into chanty towns in the future and highlights the turn from excess demand to excess supply.

Are there more risks that people are not paying attention to? Martin North highlights Australia's strong link with China, rising funding costs, and political risk: elections in the country can lead to the termination of negative gearing. In addition to these, North believes there are many other risks that lead him to believe that the downside far outweighs the upside.

Finally, Martin explains why Australia is heading for a complicated period for the next 5 years, and why 2019 will probably be what 2006 was for the United States in relation to the financial crisis.