Latest / Money Grows on Trees / #325 - The Last Time Property Did This, It took 70 Years to Recover

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#325 - The Last Time Property Did This, It took 70 Years to Recover · Money Grows on Trees

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  The Australian property market has crashed before and it took 70 years
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  to recover. Most people think the property in this country only goes up, but
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  the reality is, in the 1890s, Melbourne was the
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  wealthiest city on earth. People borrowed heavily, speculated on
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  land, and believed prices could never fall. Sound familiar?
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  When the bubble burst, investors lost everything and the exact conditions
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  are happening again now. My name is Lloyd Ross, multiple
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  seven figure investor entrepreneur, and I've helped thousands of everyday Aussies get out of debt, make
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  money, multiply money and invest to build real wealth. And in this video, I'm going to
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  show you what caused that crash. why history is
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  rhyming right now and what it means for your money. So let's go
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  back to 1870 to 1888 in Australia, especially Melbourne,
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  which was at the time one of the richest cities in the world. Money
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  was flooding in from Britain where people believe that land prices
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  would only rise forever, right? So
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  here's what drove that boom. One, banks
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  were lending aggressively, so easy access to credit. Land
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  speculation became a national obsession. A
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  cult, if you will. People were buying land they never
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  intended to use, but they wanted to flip it. There
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  was massive infrastructure growth around railways, port cities, and
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  so forth. There was a lot of spending going on
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  as well. In fact, it was so prevalent
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  in Melbourne that they nicknamed the city Marvelous Melbourne. because
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  of the wealth and construction boom. Needless to say, I don't think Melbourne's marvelous
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  anymore. However, this is what causes
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  booms. You can see this similar thing happening currently where I
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  live on the Gold Coast. It's almost got the Midas touch
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  right now with property. The peak in the late 1880s,
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  it actually peaked. Prices became completely detached from reality.
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  If you look at some parts of Western Sydney, over inner parts
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  of Sydney, it's like people just throwing around numbers now. It's like 150 million,
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  that's like what? It's like what?
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  What's interesting about that is that where is the return on the capital?
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  Does that make sense? When you deploy capital, you want to get a productive return
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  from that capital. So I can understand if you put $100 million into
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  a cattle station, you're generating either crop or
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  cattle production from that. So there's a production process
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  from it. But shelter, shelter, shelter. A
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  roof is a roof just about like, you know, within reason. Um, so it's
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  like we, in Australia, we have a lot of capital being held
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  in shelter. That's not
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  very productive, certainly in the luxury end of the market. Right.
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  But going back to Melbourne, that's what happened. It was detached from reality. So
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  the land value started to skyrocket and developers started to subdivide land
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  endlessly. And this whole notion of get rich through property
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  was like the dominant narrative at the time. Kind
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  of like now. And so in 1890 to 1893, so over
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  a three-year period, boom, everything reversed.
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  Things started to change because trees don't grow to the sky and
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  properties just don't grow to 10, 20, 30, 40, 50 million in
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  the western suburbs. It just doesn't. It just will not
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  compound at 12% every year for the rest of your life. It just won't. It
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  just won't. Now, when will I know it's going to run? I don't know.
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  But I just know that no asset in the history of mankind, no sector asset
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  in history has compounded on average every
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  year at 12% every single year without interruption.
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  It just hasn't. There are years where it fell. There were years when it went sideways. But
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  right now, I think people are locked in this whole notion that it's just going to
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  go up progressively forever and it's never going to have a correction. That's the narrative.
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  So in 1890, Here's what triggered the
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  change in the collapse. One,
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  British investors pulled capital out. So there's a lot of outside
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  money coming in, so a lot of capital out in the market. Now, I'm not suggesting
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  that there's a lot of international money in Australia, although I think there is. but
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  there is a lot of capital from all
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  parts of the country tied in real estate. It's just tons, trillions,
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  right? And it's not producing great things
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  for the country. That's what has caused low
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  productivity and low GDP per capita growth in this country because
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  all the capital we're using is either thrown off as welfare or
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  we're putting into shelter and that's why we're struggling away. Now,
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  the other thing that happened in 1890s, check it out, interest
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  rates rose which
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  is what's happening right now. Whoops, I thought interest rate
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  is going to be zero forever. No, now they are 7%. What
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  if they got eight, nine, right? So interest rates went up. Banks started failing.
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  Now, do I think that Australian banks are going to fail? No. Do
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  I think that there are going to be bad and doubtful debts as rates go up and there's foreclosures
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  and some shifts happening in the economy from high oil prices and so forth and unemployment? Yes.
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  I think they're exposed. Confident, next thing that happened, confidence
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  collapse. So this is really the two big things from
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  this list that we're experiencing now are
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  one, interest rates are going up. Two, confidence
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  will then collapse. It will start to taper
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  off. And when confidence starts to leave an asset class and
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  prices are falling, it's a race to get out of the hot
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  potato. It's like, I need to get out of this fast and let the next person take this
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  over. And once you shift it down that way, it takes a long
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  while to shift it back again. And in that point in time, you've either got
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  negative equity or you can't hold it, you foreclose, like some bad things
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  happen, right? It's not the first time and it won't be the last time. In
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  Melbourne or in Australia in 1890, prices collapsed 50% in
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  real estate, 50%. Now, you
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  might ask, where does that happen in the world? Well, right now in Dubai, where
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  only a few months ago, you would never in your wildest dreams thought
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  that the property market in Dubai would ever collapse by 50% in three months.
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  But guess what's happened? It has collapsed 50% in three months. I
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  used to live in Dubai, right? Incredibly dynamic city. But
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  had you have invested that, the
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  chance would be so remote. But that's what's happening. So
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  here's the thing. You don't know what's going to pop the bubble. You don't
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  know what's around the corner. It could be anything. Right now in Dubai, it's like, holy shit, we
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  just never thought this was going to happen. And here it is. So in Australia, you
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  don't even know what's going to cause it. You have no idea. Four
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  months ago, you thought we had plenty of diesel. Wrong. Wrong. We
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  just don't know these things. All of a sudden, you're like, holy crap, the last thing on my bingo
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  card for what would cause a derailment of the property bubble in Australia would
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  be high-priced oil from diesel. This wasn't on my card. So
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  I don't know what's going to cause it. No one does. But what I do know for sure is
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  when you've got an overpriced market in an area that's nonproductive in
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  a place that's being caused by artificial demand
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  through immigration and poor regulation on supply, that
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  has a finite life. It's not going to go on forever. It
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  just won't. And the longer it goes on, the worse it gets, right? So
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  here's what happened when prices dropped 50%. No one wanted to touch it. And
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  then the bank started not want to touch it. Then credit dried up. I ain't
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  going to flip and lend you money on properties going down in value, man. Right.
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  But like, Oh, leverage, leverage works backwards too when the, when the market
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  falls. So there was forced sales. Now this is when
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  things change. Cause all of a sudden you've got then people that don't want to touch it. And
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  that also catches on like a narrative. People pick it up like a
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  virus, like, Hey, I ain't touching it. And then all of a sudden you have a
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  massive fall in price. Right. And so. It
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  really, whilst it was a property crash, it really became a
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  bit of an economic depression for Australia. Just because so
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  much of the capital was tied into land, which is what's happening now. So
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  much of our whole culture in this country is buy a house. I
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  think the government even let 48,000 people recently who are non-citizens, they
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  funded their deposit to get into, it's crazy what's happening here
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  in property. So that's happening, right? And so when that
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  happened, and you have an economic depression, unemployment skyrocketed. Now,
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  if you couple what's happening, what happened there, now if you add
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  in like, okay, by the way, AI is going to come and take a lot of jobs now, you've got
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  unemployment rising from AI, you've got higher prices
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  at the petrol pump, so inflation in goods and services, you've got inflation going
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  up, you've got the RBI increasing rates. and you've got extremely high
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  priced property and you've got people that can't afford it. We're seeing
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  the elements of the eventual cause
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  of not necessarily a crash, but I don't see
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  how it can grow. All of the all
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  of the odds are basically against a
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  12% compound annual return effectively, right? So when unemployment
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  goes up, and you might see this, for example, let's say we
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  don't know that the Iran war goes on for longer than we anticipate. And
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  let's say that oil goes to $200 on an inflation adjustment basis,
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  which it probably is now. Let's just say those things, right? Let's just
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  say that. And that's now likely. So now
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  let's understand that if that happens, well, all of a sudden planes don't
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  fly as much because of fuel prices or people don't book flights as much because it hurts
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  their pocket and the fuel prices. So travels fall. So all of a sudden you've got
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  this air hostess that would normally go and get her nails done at the salon and get her hair
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  done. Now she doesn't have a job. So now she doesn't go to the salon. Now
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  the salon doesn't have as many people getting their nails done and their income falls.
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  Now they go, shit, I was able to organize and pay my mortgage last month,
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  but because of that, and that, and that, and that, now I can't. That's
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  the difference. That's how macro events
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  can shock a local economy into shifts in unemployment. So
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  then businesses do start to collapse. And in fact, there's been an increase in business
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  collapsing in this country over the last six months. Then
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  construction stops because then people aren't investing in houses. Then you have
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  construction jobs fall. And there's a cascade process that happens
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  where entire suburbs then in buildings. And I saw this in
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  2009 in this city where there was half built buildings. A
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  developer, two, three developers who I know personally went bankrupt,
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  done. Went on big ones, right? And they
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  came back, you know, but they, well, one of them did, but I've
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  seen, this is not like, you know, Chris,
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  I've seen this, this actually happens. And if you're perhaps
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  under the age of 35, you've never seen it. So you don't know what happens, but it does. And
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  people in Dubai are getting a hard lesson in, oh shivers, things actually do change in the world.
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  Just quickly, if you're ready to take control of your finances, but feel stuck on
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  where to start, I have a solution. My book, Money Buys Happiness,
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  simplifies investing and wealth building with practical steps to help
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  you achieve financial peace. Get your copy via the
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  link in the show notes and let's get your money working for you. Now back
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  to the episode, the big lessons here. still relevant today
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  from the 1890 crash. You've got to understand this. When it crashed in
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  1890, for some of the reasons that are happening now too, listen very closely. It
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  didn't recover for not seven, 70, 70 years. which
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  means not just one, but two generations did
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  not get gains in real estate. So don't you for a second sit here
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  on the other side of this channel or wherever you are and tell me
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  that real estate just goes up forever. Okay. Now, if we have
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  a long enough time horizon, then yes, I would agree with
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  you. Obviously over time that longer, of course it's going
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  to go up, right? It's more valuable if the population increases, but
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  what if the population falls? It's
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  happening in South Korea, it's happening currently now in the United States.
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  You've got less net migration than ever.
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  What if, for a second, and just think about this, what
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  if One Nation gets a
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  good amount of seats in the next federal election? Now, the odds
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  of them taking ownership of the Senate is very remote, and Pauline
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  won't become prime minister, but let's say that they just have enough
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  sway. And let's say they put through some legislation
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  that prevents any more immigration. Just
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  throw it out there, because that's exactly what they're polling for. That's what their policy
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  says. Now, let's say you take the 600,000 people coming
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  here every year, whatever the number might be, 4,000 to 600,000. They're just recent numbers,
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  by the way. Let's say that stops. Then
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  let's say that there's no people coming here. Then what? Does
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  land become more valuable? No. It becomes less valuable. And
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  let's say interest rates stay high. Let's say petrol prices do
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  change unemployment. Let's say AI does take a lot of jobs. Now
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  what are you going to do? Like, I'm not suggesting it's going
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  to be 70 years, but it's a real possibility that
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  we don't see growth in this sector for 10 to 20 years.
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  It's just very possible. There
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  seems to be more reasons than not for that to happen. Okay. So
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  credit drives property markets and credit can
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  only be issued when there's strong employment. So
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  lending is easy when there's jobs, lending ain't so easy when there's not, okay? And
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  when lending tightens, everything reverses. Speculation is
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  dangerous when people buy for capital gains only to flip, not income, it
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  creates a fragile system. That's what's happening, right? And
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  the third thing is external money matters. So if there's any outside
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  capital that's coming in and it stops, that changes things or migration, which
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  changes things, yeah? So the narrative at
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  the peak is typically property always goes up, right? That
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  was common back then and it's very similar now. You
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  see the similarities? So they thought they were
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  in a new era. They thought it was different, but it wasn't. And
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  it's no different today. So you've just got to take a step back. What's
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  interesting is I wrote this new book called House Poor. It's floating
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  around if you want to grab it. In
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  the book, I say, look, my whole background, I'm
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  a property lawyer, a fully licensed
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  agent, still have the license. And
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  I was in work for the largest developer in the world, Middle East, like, you know, I
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  understand prop, I get it. It's just that, and I don't hate the industry.
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  I don't hate the sector. What I dislike is buying overpriced
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  assets that don't generate good quality returns with certainty
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  over time. I just don't like it. I don't like buying expensive things in
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  general. I like to get value. And I just don't see any in the real
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  estate market, in the general real estate market, okay? Can
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  you still pick the eyes out of some deals in Australia? For sure you can. I'm sure
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  that there's some deals. But just as a general sector
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  where people are just buying, buying, like they're FOMOing into
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  this stuff still to this day. It's like part of rite of passage. It's
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  just important for you to understand some history as to what has happened
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  in the past with the Australian property market. So you know that,
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  history doesn't repeat, but it certainly rhymes. So that you have
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  some idea that maybe it won't rise by 12% compounded
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  annually for the next 20 years. So that when you put a deposit down and you're
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  going to get your mortgage, you do it in such a way that you can do it for the
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  next 20, 30 years, even if rates go up, even if oil
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  goes up, even if unemployment goes up, you must be
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  investing for all seasons so that you don't shoot yourself in the foot and have to foreclose and
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  destroy yourself for a generation. This is what I want for you. I just want you to
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  be intelligent. Know where you're going to die so you
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  don't flip and go there. That's all I want to do. I don't want to beat up real estate. Wonderful
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  asset when done correctly. It's just that most people aren't doing it correctly. They're just
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  doing it. And this is the challenge. So I think it's
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  important to impart this financial history lesson to you
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  because I do feel that a lot of what we're experiencing today was experienced before.
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  Not to the same extent, but a lot of it. And that would
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  tell me this is why, this is underpinning why
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  I'm not touching the sector. It's just underpinning it. I just don't have to swing
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  at this. I don't have to. So I don't. People are like,
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  Lloyd, I don't know. No. I don't care. If
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  things change drastically, I may change tune on that.
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  I would love nothing more than coming to an episode and say, hey guys, guess what? Property
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  market is so cheap now, you can buy houses for three times earnings. It's ridiculous. I bought that. It's
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  got like a 14% cash return. That's that. That's that. It's awesome. Leverage up. Let's
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  go. I will because I'm an objective financial educator.
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  I have no alignment to anything. Nothing
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  except for my books. Right? And even
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  then, that's an option to buy. People are like, which one of Flocky's book? Which author
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  doesn't try and sell their book? Like,
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  of course, but you don't have to. I'm just here to give you
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  a very objective view on all these things, whether it be
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  IPOs, shares, macro markets, real estate markets, crypto
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  market, all of this stuff. I just want to impart to you what I'm thinking about at
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  the time, because there's part of all those things that I've done that have created a
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  life of financial independence for me, and I want that for you. Does that make sense? So
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  I just want to clear that up. I'm not here just to beat property up. I'm here to give you as
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  to why I ain't touching it, and maybe what you
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  ought to do before you go into it. Devil's in the detail. Make
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  sure you know what you own and why you own it, and you can do it through all seasons. Because I don't
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  know what's coming, but I don't think it looks pretty. So just be ready. Make
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  sense? Pop some questions in the comments below. Hit the subscribe button if you want more of
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  this type of education, and I'll come and respond