***Warning: Absolutely nothing to do with the election!***
So the election has come and gone. I told you last week what I thought an Abbott victory would mean. And I won’t bore you with it again.
And I won’t bore you with another take on what the election means for the country. It’s time to get on with things. It’s time to put the election aside and focus on the things that really matter.
… like footy.
But today I thought we’d take a mental holiday from this magical continent of ours, and head over to the US of A.
If you’ve been following these blogs, you’ll know I’m taking a very active interest in the US right now. There’s two reasons for this.
The first is (as I’ve been saying for a while) that America has been, and still is, hiding some incredible opportunities. Initially it was all about cash flow, but lately, with house prices surging ahead in recent months, those cash cows have also started delivering on capital growth.
The second reason is that I think America still gives you a good feel for where Australia is headed.
The downturn in American property was on a whole other scale to Australia’s (everything is bigger in the US – cars, burgers, pants…). However, some of the key dynamics were the same.
That is, there were some fundamental factors that set prices on a southward course. In the US it was the sub-prime mortgage fiasco. In Australia, we just saw the rest of the world headed that way and thought we’d join in too.
But that fundamental turn was followed but an over exaggerated collapse in confidence – which in turn caused an over-correction in prices. In Australia, as in the US, we’re still in the process of unwinding that over-correction. There’s still a little way to go before we return to trend.
But the interesting thing to note is that while the confidence collapse isn’t a ‘real world’ thing (it’s just in people’s heads), it has real world effects. And it means that when confidence returns and the effects are unwound, there can be a very big bounce back in prices.
To understand why, we need to look at the supply side of the market.
Essentially the collapse in the US housing market had a big impact on supply, not just demand. When people stop buying, people stop building.
That’s easy enough to understand. But while buyers can hold off for a while, and then jump back in at a moments notice, builders don’t have that flexibility.
They have bills to pay, staff to employ, contracts to make good on. So if the buying freeze goes on long enough, those builders can go to the wall, and shut up shop.
And that’s a double whammy for the supply side of the market. There’s no new supply during the downturn. But when buyers come back, all the builders have gone bust, and supply can’t respond.
That means the market gets very tight, and prices start rising very quickly. And as prices rise, more buyers come back to the market, and prices start rocketing.
And that’s what we’re seeing right now in the US.
Take a look at this chart. This shows new housing starts in the US over the past ten years.
You can see that housing starts tanked to record lows during the GFC, and have recovered only a little since then. And current rates of around 800,000 a year are way down on the long-run average rate of around 1.3 million homes a year, or the 2 million a year rate seen during the boom.
Supply remains totally constrained. As I said in March this year, noting that all the people who moved back in with their parents were starting to set out on their own, increasing household formation and therefore housing demand:
“This is the story of the US housing market right now. A rebound in household formation has caused a spike in demand, but supply has been slow to respond. Rapid prices increases are now only a matter time.”
And what have we had?
Yup. Rapid price increases.
American house prices rose 12 percent in the year to April. That’s the fastest year on year increase in seven years.
In some states, particularly those who were really hammered during the GFC, prices are bounding back. House prices are growing at over 20 percent a year in San Francisco, Las Vegas and Phoenix.
But prices are rising across the board. According to the National Association of Realtors, house prices are rising in 87 percent of US cities. That’s up from 75 percent a year ago.
What’s more, sales volumes are also up 15 percent year on year. Such healthy activity levels means that there is strong momentum behind prices right now.
And eventually as more and more buyers pour back into the market, and prices keep on rising, builders will get building again. But it won’t happen overnight. And until it does, rapid price increases are the order of the day.
This is the dominant dynamic in the US market. And it’s the dynamic that big investors have tuned into and are going all out to take advantage of.
Like Blackstone Capital.
Blackstone are one of the biggest fund managers in the world. A few weeks ago they announced an agreement to buy 80 apartment towers from General Electric, valued at close to $3 billion.
Blackstone has taken on a huge exposure to property in recent years, and have apparently spent more than US$5.5 billion on houses to rent now and sell later.
And they’ve got their eye on Australia too. They’re looking to buy $300 million worth of Aussie offices from GE, potentially to turn into apartment towers.
Because exactly the same dynamic is at play here. A sustained downturned has crimped supply. Buyer demand will come back quicker than supply can handle, and price rises are guaranteed.
Man, if I had pockets as deep as Blackstone’s, I’d be doing exactly the same thing.
So that’s what’s going on in the US, and to a less intense degree, right here.
But if we want to take advantage of it, an interesting question then is where in the US should we be setting our sights?
More on that later in the week.