I bet you're confused about what's happening in the economy right now.
I certainly am.
Reading all the headlines, you'd think we're on the cusp of a property crash and diving into another global crisis via a double-dip recession. Run for the hills!!
Add an election to the mix and you've got a recipe for massive procrastination.
So what can we make of it all?
Let's see if I can help…
I think the Reserve Bank of Australia went way over the top with its interest rate hikes. We went from a 3% cash rate to 4.5% in just 6 months.
This was a massive 50% increase and the most aggressive in the western world.
So why did Glen go so hard?
He had eyes only for the property market and the only way he could stop it was by using interest rates as his evil weapon against his perceived property boom.
He's thinking was… Slow down the property boom and we've got a chance at improving the housing affordability of everyday Australians.
Since his crusade 6 months ago, he succeeded in putting a pause on property prices, but only after 6 months of solid real estate gains in most markets.
…and this week, we receive evidence that is he has also killed affordability with the following headline, “New Home-Starts Fall a Further 5.2% in June”
Some uneducated investors see those type of headlines and think we've got a serious problem.
Here's what I think…
The down-turn in new home sales is by and large the product of the end of the government stimulus for first home buyers and the increase of interest rates, which has led to the following problems…
The lack of available land… Chronic lack of development finance leading to a lack of development activity… Council planning regulations taking far too long to release projects… Infrastructure delays in new development areas.
All of this will mean one thing.
That the housing shortage will continue to increase and prices will continue to push upwards… and the people most disadvantaged from this are the ones that the RBA boss, Glen Stevens is trying to help… those who are trying to buy their first home.
So all the shenanigans going on right now will push the expanding population into the rental market.
What does that mean?
Rents will significantly go up in the next 12-24 months.
Great if you're a property investor, not much good if you're a tenant.
So what I'm saying here is that there will be no property crash – full stop.
What we'll see over the next several years is single-digit growth across many markets and if you're smart and savvy within certain markets, you'll be able to achieve much better than that.
You see, when most of the stats are quoted, they're typically an average of all markets. So if we see 6% growth on average, it would not be unusual to have certain areas within property that have grown by 25%…
On the flip-side, some areas may fall by 10%.
That's why I think you need to stay on top of your game, stay invested in areas that are likely to grow faster than others.
…research, research, research…
On another subject, and that is clearance rates, I often have a lot of fun with this sort of data… But here's something you probably don't know.
The clearance rates that the average investor seems to hang off every Monday morning reports only 20% of property transaction nationally.
That's right, just 20%.
So does it really mean anything?
N.O.
Here's something else that you need to know – all it really shows is people selling and buying.
12 months ago, we might have had a clearance rate of 55% with 400 properties on the market. In the current climate, we've got clearance rates of 67% with 900 properties on the market.
All this stuff is just noise to fill up newspapers and get your attention.
The macro picture (long term) is still so strong for property in this country that you'll kick yourself if you sit on the fence again.
Interestingly, I was listening to professor Keen the other day and he is still ranting and raving about the 40% drop in real estate. The guy doesn't give up.
He said that his initial prediction of a 40% drop was over a 10-15 year period… Not 2 years after the GFC hit. He was misquoted.
He also said that the fall would be from peak to trough.
What that means is, let's say real estate has gone up 30% in the last 3 years since his prediction and it falls down by 30%, then Mr. Keen is right… Because real estate has fallen overall by 30% and it's created a new peak and trough. (Economists are never wrong – they'll find a way).
Confused, aren't you?
It's just more shenanigans by economists who are perhaps too close to the data for their own good.
My last point for today… What about a double-dip recession?
Here's all I have to say about that…
It seems to me that everybody has almost guaranteed themselves that this is going to happen. From my experience, when the mainstream press and the man in the street are talking about a double-dip recession, then it's likely not to happen and in fact go the other way.
Now of course in Australia, we never went into recession. And considering that I don't think the global economies are going to go into a double-dip recession – I think it puts us in a good position going forward.
Just think contrarian (always go the opposite direction of the herd – most people are generally wrong).
They're my thoughts.
Probably needs to be said, I failed high school, never did economics, wasn't very good with maths, have absolutely no financial planning background – so everything I say here is basically my opinion based on my results (8-figure real estate portfolio, 7-figure stock market portfolio, 8-figure business).
…so please, before investing see a certified financial planner or follow the smart money.
That's all for today.
Signed with Success,
Jon Giaan
Knowledge Source
P.S. So what do you think? Jump on your soapbox and let the rest of the Knowledge Source people hear your views below.
Sue says
Nicely summed up Jon, thanks for that!! Stick with your crystal ball and gut instincts. They have served you well so far!!!
Hugh says
I don’t get how raising rates makes homes more affordable.
Even if prices go down, with higher rates repayments will increase.
Hence, people will be paying more repayments for a cheaper house.
What makes house prices more affordable then? Simple. More houses. House prices are set by the people with the money for them. Less houses for sale means only the few people with the money can afford them. Therefore the prices will be set high by those with money.
It’s simple supply and demand, a concept which people like Steven Keen ignores at his peril. Why he needs a complex model when a simple one is superior is beyond me.
Of course, if prices DID drop then developers would not be profitable so would stop development. Supply would drop and prices would rise again. This itself encorces a floor to prices, stopping them falling far.
And since state governments are hopelessly incompetent in encouraging development prices will keep rising for a long time.
Bruce says
Always respect your opinions Jon, and this is a difficult one to predict. You seem to discount the experts opinions and statistics predicting a downward motion, but seem to accept the “chronic shortage” statistics. Is there really this chronic shortage, or is it all a hype to support the over priced housing market. My only thinking is that something has to give or stall, as house prices are so out of wack with earnings. Even if the demand is there, many people simply can’t pay the price, or even obtain finance. Also interesting to see banks now require a 20% deposit. What is the main reason for this ? If they believe house prices will continue to grow albeit at a slower pace, surely they would feel secure with say a 10% deposit. The required 20% gives me the feeling they feel a bit uneasy. Just the other day I saw a guy who lives out of his car … something I had never witnessed (besides on TV). I believe we will see more of these signs until some form of correction takes place. Possibly a stall in house prices until wages catch up to a more affordable level. Who knows, will have to wait and see.
Kerry Erasmus says
Hi Jon, I agree with you, people are strange. I have a Town house for Sale in Applecross WA, to be precise 12 Moreau Mews Applecross. It is not only unique in that it does not have any common walls, it sits on a site that is going to be rezoned upward of 9 stories. There is only 3 Units in the group and one guy owns two. He is playing silly buggers with me as he wants to buy mine and then he can develope the whole site. But allas, he can’t get access to the funds now. Anyone with a half a brain would say, this is a great opportunity, buy my Town house, sit on it for a years or so, then the guy next door will just have to pay the going rate. But not one person has come to the party. Unfortunately I have to sell because I now live in Adelaide and have bought a new home. Maybe everyone out there is waiting for the prices to go up before they buy. By the way, the bank valued the property at $950,000 two years ago, I am letting it go for $899,000.
Dave says
Can some one please explain to me why does anybody listen to the RBA? its a private company and a bank!!!! it has no I repeat it has NO connection or has anything to do with a dually elected Government what so ever, its a PRIVATE COMPANY, the governor (clever name that, sounds like he works for the government) really just like any other CEO, so who or what gives them the right to dictate to us what and how much we should pay in interest payments.
And dont forget they are a BANK with a board not elected by the people.
Graham says
Hi Jon,
Your thinking is logical and rational because you practice what you preach.
As for the other “eggspurts” …well, they never do anything about anything in their lives
so they get disgruntled and lash out and criticise everybody else.
BTW…Jon, …I’ve sorta “Fallen on my own sword” …maybe you can help…please contact me on my email….
Thanx
G
nick says
Hi Jon
love your reasononing and I always like to see what your thoughts are.
On you contrarian views, my experience may suggest a different outcome and that is if media+experts+etc all think where about to have a recession, then it becomes a self fulfilling prohecy as consumers, business,etc take action to get ready for such an event only by such actions end up starting this recession.
I’ve seen it in past doom and gloom moments and reckon it is very possible to happen again.
Investor Dan says
Bad news?! No, it’s GREAT NEWS for investors!!
As Jon mentioned the hurd create opportunities, while everyone is thinking doom and gloom and waiting for the perceived market to improve experienced investors are capitalising. Think about it, do you buy at the top or the bottom of the market? The economy is cyclic and right now i would suggest we are just coming off the bottom, albeit not a bad bottom when we compare globally; Australia was one of the only economies in the developed world that performed throughout the GFC regardless of the chaos overseas, meanwhile many self proclaimed experts like “Keen” have been wrongly trying to make comparisons between our economy and every other, I can’t determine if this is plain ignorance or is it possible they have an agenda? hmm maybe have a think about that. Some key OZ differences; we have an increasing demand; a peak 451,000 new people last year, we have a massive under supply of property in key areas; SE Queensland, some of NSW and WA, we have constraints on supply because of development regulations, planning etc, we have constraints on finance due to a national regulatory system resulting in the lowest mortgage delinquency rates in the developed world, we have one of the largest resource supplies in the world and a few neighbours that can’t get enough; like a little country called China, housing is no more or less affordable than any other developed country; take into account living standards, property size and wages, don’t get me started on population problems we are not even close to a big population; while China has 137 people per km2 we have just 2.8 people per km2 and historical data shows China had the 40 mil we are worried about way back an 1000AD with none of the modern infrastructure we have today. Now here is the crazy thing, when the media starts reporting “Markets are Booming” and “Property Prices through the roof” we are actually past the peak of the cycle as they report on the data that filters through without taking into account a lag and while most likely you will still come out ok as i agree with Jon long periods of moderate growth, what if you had of started when everyone was talking it down?
roman m says
just lovn it mate. keep up the good work.
PETER NICHOLLS says
Bruce: I think your “crystal ball” needs cleaning. You mention no compensation for
our major trading partner, CHINA, going belly up in 2010-11. Our mineral wealth will
be no good to us if no one is buying. Australia had a light recession because the Coalition left a legacy of a $27 billion surplus. The Labour Party hiked it up to a
record $57 billion deficit, and is currently borrowing $100 million a day. We are living way beyond our means. And our caretaker Prime Minister who was NOT elected by the Australian people is constantly saying she is “leading Australia forward” – but where is “forward?” Like Bob Hawke she is a long terrn member of the Fabian Socialists, whose emblem is “a wolf in sheeps clothing.” Do we really want to become a socialist country like the USA under Obama??? No way! A Socialist Labour Party will destoy Australia. After a mining boom that saved Australia from a full recession (not Government) they have the hide to suggest a 40% profit tax on mining. It puts a whole new slant on “biting the hand that feeds you.” We have a spinster caretaker PM who is going to shack up with her boyfriend in The Lodge; doesn’t believe in God (a self professed athiest )- yet “prays” for Kevin Rudd’s complete recovery, after “stabbing him in the back” with premeditation and lack of loyalty. And she is an avid supporter of “Abortion on Demand!” She is far too dangerous to be given the top political job in the country. What sort of message does her poor role model present to the children of this wonderful country?
As for financial advice, there is only one sound investment left when the Chinese Communist/Capitalistic experiment fails later this year: GOLD! GOLD! and more GOLD. Do not delay! See websites for Jaggards and Gold Made Simple…..
BEWARE “THE WOLF IN SHEEP’S CLOTHING ” – HER NAME IS GILLARD……
Seth Higson says
Got to love all the media, one minute up, next down – always makes me wonder about which magnate owns that particular form of media and then look further at what they are trying to achieve personally 🙂
All I know is that there are plenty of positively geared properties out there with good growth (potential) as well – its a no brainer…I only wish I could afford even more of them – lol.
Dave – same goes for ASX, MFAA, etc etc…….
Peter Nicholls – don’t forget Silver 😉
Kerry Erasmus – if you like give me a call & maybe I can help with the getting ‘him’ over the line with funds – its what I do.
Cheers
FB Lic 4580
0414 420 710
ADRIAN says
G,DAY JON THIS BUSINESS OF PROPERTY PRICES GOING DOWN IS A LOAD OF BS. IN GOOD AREAS PRICES NEVER GO DOWN THEY MIGHT STABILIZE FOR A SHORT PERIOD OF TIME BUT THEY NEVER GO DOWN.ALSO I HAVE FOUND THAT IN GOOD AREAS EVEN WHEN A PRORERTY HAS PASSED IN AT AUCTION THEY ARE OFTEN SOLD NOT LONG AFTER AT OR ABOVE THE ASKING PRICE
steve stavrou says
It’s all well and good when we make political statements about the state of the country and the economy but in the future all this is a memory.We should not lose sight of the fact that we have to make the best of what is put in front of us.All of that aside ,there is no wrong time to buy property,you just have to see past the price no matter where the property is.
You have to be able to build value into the property that you buy.
Even if what you buy doesn’t increase exponentially ,if it pays for itself and makes a small profit does it matter?
If you can afford to buy and the banks can give you the money ,what does it matter?
You are either an individual or a crowd follower,which one are you?
peter says
The funniest thing to me is the whole local government and their building approvals fiasko that goes on. All the DA means is a lot of time wasting money lining fat cat pockets while squeezing the life out of the investor who is trying to help themselves while helping others. Then they cry shortage of properties. Well i’m glad the NSW government made it easier to build granny flats but which also comes with a string where the land needs to be over 450sqm. If anyone knows Sydney pretty much all the inner city land lots are way under 450sqm, so therefore causing people to live away from the city causing more and more traffic which in turn increases inner city prices because people are sick of 2 hours a day to get to work. This is the most leanient state on granny flats in the whole country mind you. Development in Australia has to be the worst thing you can ever be a part of i think anyhow.
Anyone disagree? please tell me why.
Terese says
As a small property developer, I can’t see that raising the interest rates is going to do anyone any good. We have certainly had the devaluing of all of our properties by the banks as well as rate rises.dragging the prices down, leaving us no choice but to sell because the holding costs outweigh the income. Even though the rents are geting higher, the costs in holding properties are also getting higher, now Qld has a landlords license fee that you have to pay through your rates, rates are also higher, requirements to have landscaping etc through the councils add more the build, every department want their chop, and not just a few dollars either. Then we get to the constant delays caused by these departments in processing the approval or certifications. We have just come back from the US and believe me that word service just does not exist in Australia. The departments that we dealt with in the US could not do enought for you, processed docs in a matter of sometimes hours, not weeks or months. We needed help filling out some of the docs, they couldn’t do enough to assist us.
I have just recently lodged docs to Lands Title Office, through unfortunate circumstances, my solicitor was not able to complet the lodgement, so I was thrown in the deep-end, never had the priviledge of dealing with the office. I rang the titles office to ask for some help and was told it was not their position to help with the lodgement form. I had two requisitions from the office, stupid little things that just didn’t need to happen if they had given a little. Same with town planning, docs that were supposed to be approved in 5-7 working day took over a month, no reason, they just didn’t do it. We had asked on several occasions before lodging if we could get a fast track and was told that it would happen.
It seems that the people who are willing to put their neck on the line and the ones that pay the price. I know several large developers that either have gone broke and cannot sustain the builds that they have started. Why are banks making it so hard for these people, devaluing their projects, who gives them the right to devalue property.
Doesn’t this government get the fact that if they don’t support these developers, all of the people working for them no longer have jobs!!
Sticking it to the mining companies is also insane, these companies contribute huge amounts of money to the community over and above the people they employ. All they have to do is stop their projects, sack all of the people and go overseas for labour and sales. Who is going to pay to support all of these people that the government has so cleverly made unemployed.
When are we going to get some truly professional people to run this country, maybe if we paid a serious wage to the Prime Minister we might get someone who knows what they are doing, instead of imposters posing as leaders. Who in their right mind would work seven days a week, 24 hours a day in the most responsible job in the world for a couple of hundred thousand a year. Anyone worth their salt would work in the private sector, earn $600,000- $1K per annum and a vey healthy super to boot. So we end up with would be’s running the country.
Gary says
Jon,
Very good article, as a person who works in the land development industry based in Victoria. Can’t see any problems with the market at the moment. We have not been as busy as anytime in the last 16 years that and we have picked some very major commercial and residential developments across the state.
Keep up the good work.
Ken. says
Peter Nicholls, 27 billion was for our last fascist government’s super. that’s why Costello would never be Prime Minister. look past your nose and see the facts or keep your comments out of Jon’s web. Also China was our saviour. Russia saved our arses in the 40’s, where your dictator and nazi mates failed. Apart from the crap of politics, I was appalled to see a coment in the local paper that property does not double every 7 to 10 years. Is that why a house in Brisbane in 1971 cost $8,350 and now it costs $350,000.
Markus Seitz says
Jon
I think it’s a little narrow-minded and perhaps a little arrogant to assert that the RBA shapes its policy around residential property. There’s more to the economy than property.
Robert Sherlock says
Example
Texas has had higher population growth that whole of Australia, Higher GDP Higher Average Income. No bubble, no Burst. Bigger and stronger economy than Australia, low taxes, low interest rates, everything is positive geared.
Please note all of the cities in the USA with property shortages went down (California) the open markets (Texas) did not get affected!!!!
The bigger the up the bigger the down.
Perth dropped 2% in May and dropped 1.5% in June. Average that at 1.75% and that is 21% drop over a year. It has started, how long will it take for everyone to catch on
I live in a suburb in Texas that has a one of the highest average incomes in the USA it would be in Australia’s Top 10. With the low income taxes disposable incomes would exceed all Australian suburbs average incomes after tax. There are 135 holes of golf, waterways and parks. It has not been affected by the economic crisis, as wealthy international buyer are moving to suburb in droves.
“The Woodlands was named in Money magazine’s Best Places to Live as the 11th top-earning town in the U.S. among cities with populations of 50,000 to 300,000 people, boasting a median household income of $124,939. Making the master-planned community even more attractive is the fact that its median home price of $214,593 is the lowest of the 25 top-earning towns on the list.”
Image paying $200,000 for a nice home in one of the top average income suburbs in Australia. Maybe in a year or two
Colin says
With the USA having 48 states on the brink of bankrupcy and the worst one being California, I don,t think everything is going to be so great in the world for many years.
We are only a tiny country and will be badly affected if the sh… hits the fan in a big way with Europe + USA.
Investors won,t go on funding a bankrupt Usa indefinitely and they can,t keep printing money without ramifications.
Just my thoughts that these things can,t be swept under the carpet!
Nessa says
Dear Jon,
Fantastic Comment on our Australian situaltion. Thankyou. I agree completly, and i’m comforted to know that i’m not the only one thinking the same thoughts on the subject.
Mark says
Jon, I wonder how the folks in America and other nations feel about housing prices? I see the local (real estate) efforts as nothing more than advanced protectionism be it, interest rates, grants, rental gouging, inadequate tax rules, govt bank guarantees, even the so called ownership rules for non citizens – who do not live here.. There is plenty of land to be developed – this too is just another component of the game – controlled of course, by the govt..
I remember the late 80’s when hard property lessons where learned in Australia
Other countries know now that property will not always rise in value
Are we really simply relying on disguised industry subsidies and hype? After all, the true value of home prices really is a direct result of govt actions – moreso than supply and demand, which cascades from it.
To me – it looks like a bubble that eventually has to burst – unfortunately perhaps, for the greater good, and not simply for those who treat homes as businesses first. Perhaps it’s time for the ‘correction’ we had to have?
Perhaps, it more about the great Australian dream turning into the great Australian business? We all know about share market corrections – so why should / is housing immune?
Winmeek says
I agree with almost all the previous commenter has to say…except for….After all, the true value of home prices really is a direct result of govt actions – more so than supply and demand, which cascades from it. Home prices are not a direct result of govt actions they are a result of the health of the Australian economy of which the govt influences and has a degree of control. Fundamentally house prices come down to incomes, the laws of supply and demand and what people are prepared to go into debt to finance. If you look at the fundamentals of the Australian economy especially incomes, they do not correlate with the current prices being achieved in the residential property market. Property prices are unsustainable and just like every other developed country in the world they will fall in real terms over the next few years. The govt has done an excellent job in propping them up in order to keep confidence stable but in the long term are happy for the RBA to try to deflate the bubble before it bursts.
mark says
pretty much on the ball, i work with different builders and for the past 6 months words got around about councils holding up estates trying to get more money from the developers as they cant up the rates to the residents, so its a catch 22.either way little stock spells higher prices, although i do question this b/s about rents spiralling up. if wages are hardly moving and food, electricity, gas, water are all going up at a ridiculous rate, then there,s no money out there for higher rents. johnny howard made us more competetive on the worlds markets, which was a good thing, but when are the benefits going to flow down the the line, putting extra money in peoples pockets gets investors/ businesses moving again.BRING BACK ROLF HARRIS ?
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