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The Obvious Trade In Australia

By Dr. Steve Sjuggerud
Tuesday, January 24, 2006

The good trades are often obvious...

They’re particularly obvious when you’re an outsider... when you’re one of the few who can step back and see the forest for the trees. You make the most money when you find yourself in this position.

As an example, my recommendation of rare gold coins a few years ago couldn’t have been more obvious. I walked in as an outsider, and saw what those inside the market could no longer see. The mood at my first coin show was similar to a funeral procession... that kind of gloom means things are dirt cheap. My recommended coins are up over 50% since then.

Right now, I’m in Sydney Australia, staying in the Northern Beaches area (median home price A$800,000+). And what I see is obvious – the Aussies are in denial about real estate.

There are all kinds of excuses from the Aussies... but there are a few brutal facts that you just can’t get around. In the most basic terms:

“In terms of average income to housing prices ratiothis country has the most expensive housing market for an industrial country in the world. Strange phenomena given that we also have the lowest population density of any country in the world.”

That’s according to the latest issue of Your Mortgagemagazine, which calls itself“Australia's leading magazine dedicated to residential and investment property...”

This claim must be true, as the magazine was nestled between Forbes and The Economist at the newsstand here. The fact that such a prominent magazine even exists on the topic of real estate investment is a sign in itself of how the nation has gone overboard.

The magazine is trying to tell people how to succeed in real estate. And it’s a nice magazine. But once again, the facts overwhelm the hope. Here’s another quote from the magazine: “Rental housing is now yielding around 3% gross [before expenses], wheras the yields were more than 8% ten years ago.”

Said another way... even if you paid cash for a rental house - with no mortgage costs - the chances are the rent doesn’t even cover the annual expenses of owning the house.

The Organisation for Economic Co-operation and Development recently tried to come up with a measure for the housing market like the popular price-to-earnings ratio used in the stock market. They compared home prices to rents. The Economist magazine updated their study last month... and found Australian real estate to be nearly 50% overvalued.

I should end today’s column now... but I can’t go without telling you about my favorite feature from the magazine, called “Cabbie Picks for 2006.” While taxi drivers may be the best folks to ask for the quickest way around town, getting real estate advice from them is akin to getting stock picks from the shoeshine boy.

Three cab drivers were interviewed in different parts of the country. All three said essentially the same thing. Naseer, a cab driver in Sydney, gave my favorite quote:

There is no chance they [Sydney home prices] will go down.”

Contrary to Naseer’s optimism, real estate prices are down in Sydney from the highs two years ago.

While there’s no simple way to play it, whether you’re a local or a foreigner,the right “trade” right now is to rent in Sydney, not to own. And that’s exactly what I’m doing.

My wife and I can’t believe how beautiful this place is. It’s like San Francisco... or the Caribbean. We like living here... as renters now, of course.

If you have the opportunity to do the same, even just for a few weeks, you ought to do it. You’ll be glad you did.

Good investing,


P.S. Blokes... dunnies... gazumping... it’s going to take us a while to get used to the Australian slang.

So far, my favorite is from Your Mortgage magazine, giving new homebuyers tips to watch out for: “In a private treaty sale, buyers need to be wary of gazumping.”

I’ll be on the lookout... I wouldn’t want to get gazumped unexpectedly.

If you’re curious, gazumping is when you have a verbal deal with the seller to buy a house, but someone cuts in front of you in line with a signed contract. If that happens to you in Australia, you’ve been gazumped...

We’re getting a real kick out of the language difference.

Market Notes


Owners of Yahoo! (YHOO) are finding out how painful it can be when an overloved and overpriced stock doesn’t meet the market’s expectations.

With the general market struggling and an earnings disappointment last week, Yahoo! has fallen 21% from its 2006 high, including a massive 12% drop on Wednesday.

After the plunge, Yahoo! is now trading at 48 times expected earnings and 9 times sales.

Below is a one year chart showing the obliteration of Yahoo!:

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