Jon Giaan

More money for doing nothing…

August 12, 2015 by Jon Giaan

So I was talking to my friend the other day. She’s a graphic designer.

“How’s business?”

“Yeah, great. Money’s rolling in at the moment.”

“You taking on more work.”

“Less actually. Mr Market’s given me a pay rise. He’s very generous.”

See, she’s a freelancer and half of her clients are based in the US. A good chunk of her pay comes in US dollars.

And so with the recent falls in the Aussie dollar, she’s effectively gotten a pay rise.

The Aussie dollar’s fallen about 25% from it’s peak. That means that the US dollars she’s earning are now worth 25% more once you bring them back home.

That’s a substantial step up. Not bad for doing nothing.

And look, I’m in the same boat. My investments in the US are generating US dollar returns. So I’ve just seen a 25% pick up in my net profit.

That will do nicely, thank you very much.

They’re cashflow plays and they’re all working a bit harder – popping a bit more in the account at the end of the month.

And a few of us got in when the getting was good. Remember when the Aussie dollar was above parity. Remember when it was $1.10?

None of us thought it would last. And we looked at it and thought it was the buying opportunity of a life time. The Aussie dollar was incredibly strong, the US market was at the very bottom of the cycle. As an Aussie investor you couldn’t ask for more.

And so I’m looking at 8% capital growth p.a, just on exchange rate movements alone! That’s before we account for any growth we’ve actually seen on the ground.

But I won’t be booking any of those profits.

Hey? Hang on Jon. What’s wrong with you? You dodging the tax man or something?

Nothing like that. I’m just not that kind of investor. I’m not a short-term hold, early exit kinda guy.

I buy for the long run. I buy well. I buy properties that are performing, and then just sit back and let them perform.

So why would I sell out my US position?

Because I’m talking double-digit rental returns here. A few of them are cashflow superstars.

And a lot of people will tell you that exchange rate risk is one of the big dangers when you’re investing overseas. But when you’re holding for the long run, exchange rate movements don’t faze you too much.

And so the Aussie goes up, it goes down. It’s always doing something. But you only care about two exchange rates: The rate at the time of purchase; and the rate at the time of sale.

But if you’re not selling, or can be flexible with when you choose to sell, then the downside risks are pretty limited.

But look, it is worth being mindful of the exchange rate. And people are asking me if they’ve missed the boat. They’re kicking themselves that they didn’t get in when the Aussie was up around $1.10.

Sure, buying at $1.10 would have been a smart move if you knew that today the Aussie dollar today would be 73 cents… But buying today at 73 cents, and the dollar hits 60 cents is also a smart move.

And look, who knows where the exchange rate’s going. If you could predict that with any accuracy you’d be very rich.

But take a look at the long-run chart of the AUD/USD:

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So you can see it’s come off a long way from it’s recent peak, but where is it now?

Still hovering above its long run average. And since the float, I kind of think about 70c being the centre of gravity.

We get a lot of swings around that point, but that’s where it seems to balance out.

And the Aussie dollar (like most currencies) tends to get a run on when it’s moving, and so it has a tendency to overshoot.

And so looking at it from where we are now, you’d have to think that momentum alone is going to take the Aussie dollar down even further.

A lot of people think it won’t be long before we see a number with a 6 in front of it.

And there are very few voices talking about a push higher from here.

Because remember what took the Aussie dollar soaring over parity. On our side it was the once in a century mining boom. On their side it was massive money printing.

Both of those factors are still in the process of reversing. Both have turned into weights around the Aussie and there’s nothing taking their place to pull the Aussie higher.

So you’d have to think that this is still a very favourable time to be looking at US assets.

You buy now at 75c, and the Aussie heads towards 60c, and you make like 10% just on exchange rate movements. So yes, buying today is a smart move if the Aussie dollar goes to 60 cents. But again, all things relative. If you’re a long term investor it’s the time that you decide to sell that matters most. Not in 6 months or a year’s time.

But you’re not going to want to sell. Because your property (which is cashflow positive because you’re awesome and you did your homework before you went blundering into the US market with your pants down) is now sending home 10% more each month.

Mr Market just gave you a pay rise.

Thank you very much.

But look, all this is based on you doing your homework, and setting up structures that work, and sourcing deals that perform. That’s not as easy as people will tell you.

There are a lot of things you need to get yourself across.

But for now, exchange rate movements aren’t top of the list.

Why aren’t you investing in the US? What’s holding you back?

NO B.S. FRIDAY: Disgrace! Ambos and burger flippers punch-up!

August 7, 2015 by Jon Giaan

An interesting thing came up in my news feed today.

And I say ‘news’ in the modern sense of the word:

News (n.) – anything we think is interesting enough to make you want to click on our website, including but not limited to cats and ageing celebrities.

And the item on my ‘news’ feed was about something some guy put on his facebook page, and a bunch of people liked it.

(What do they teach people at journalism school these days?)

Anyway, it caught my eye because it was an American paramedic responding the recent wage case in New York that awarded fast-food workers a minimum wage of $15/hr.

And I’m thinking, that sounds about right. That’s what I’d expect an unskilled uni student at McDonalds to earn.

But then I find out that that’s exactly what an ambulance driver in New York earns.

And so this guy has a rant about what it means for paramedics and burger flippers to be earning the same amount.

“Fast food workers in NY just won a $15/hr wage.

I'm a paramedic. My job requires a broad set of skills: interpersonal, medical, and technical skills, as well as the crucial skill of performing under pressure. I often make decisions on my own, in seconds, under chaotic circumstances, that impact people's health and lives. I make $15/hr.

And these burger flippers think they deserve as much as me?

Good for them.

Look, if any job is going to take up someone's life, it deserves a living wage. If a job exists and you have to hire someone to do it, they deserve a living wage. End of story. There's a lot of talk going around my workplace along the lines of, “These guys with no education and no skills think they deserve as much as us? Screw those guys.” And elsewhere on FB: “I'm a licensed electrician, I make $13/hr, screw these burger flippers.”

And that's exactly what the bosses want! They want us fighting over who has the bigger pile of crumbs so we don't realize they made off with almost the whole damn cake. Why are you angry about fast food workers making two bucks more an hour when your CEO makes four hundred TIMES what you do? It's in the bosses' interests to keep your anger directed downward, at the poor people who are just trying to get by, like you, rather than at the rich assholes who consume almost everything we produce and give next to nothing for it.

My company, as they're so fond of telling us in boosterist emails, cleared $1.3 billion dollars last year. They expect guys supporting families on 26-27k/year to applaud that. And that's to say nothing of the techs and janitors and cashiers and bed pushers who make even less than us, but they are as absolutely crucial to making a hospital work as the damn CEO or the neurosurgeons. Can they pay us more? Absolutely. But why would they? No one's making them.

The workers in NY *made* them. They fought for and won a living wage. So how incredibly petty and counterproductive is it to fuss that their pile of crumbs is bigger than ours? Put that energy elsewhere. Organize. Fight. Win.

Off to Bolivia to join the revolutionaries!

Look, I get where this guy’s coming from. And it’s great that he can lift his eyes from his own narrow sphere of self-interest and take a look at the bigger picture.

And I think there is a real problem, in America and also here. And that’s a sense that executive salaries have disconnected from reality. I don’t think people mind people at the helm getting paid more, but when you hear about people earning $8,000/hour, it does start to sound like they’re taking the piss.

And when someone on $22m a year tells their workers they can’t afford a minimum wage, it sticks in the throat. Our ‘Fair Go’ button starts flashing red.

But there needs to be some difference in wages or they lose their motivating power (until humans become less selfish, and I don’t see that happening anytime soon.)

Take what happened to Dan Price – CEO of Gravity Payments.

Three months ago he became the poster-boy of the do-gooder movement when he announced a minimum wage for his company of $70K, slashing his own $1m pay check to pay for it.

He was celebrated as a new model of egalitarian CEO.

But it didn’t work out so well. The New York times reports that Dan’s so hard on his luck now that he’s renting out one of his rooms to help make ends meet. And two of his best employees left.

They say that newer employees, with less skill and making less of a contribution to the company, we’re earning as much as experienced and valuable employees. And they complained that the system “shackled high-performers to less motivated team members.”

They lost their motivation.

What’s the point of working hard if everyone gets the same amount anyway?

(The soviet states learnt this lesson the hard way.)

And so any wage system deal with the motivating drive of wage differentials, not squash it.

And rather than focus our energy at the bottom, why not look at the top? Why not have pay caps for CEOs? If you want to get heavy handed with the market…

Anyway, this is all by the by. But the thing that jumped out at me is that ambo’s in America earn $13-15/hr.

That’s cheap right? The average wage in Australia is $28.75/hr.

And so what’s the take-home? Australia is just an expensive country. Not just wages. Everything.

I don’t think we’d noticed how far ahead we’ve run of the rest of the world.

And this is why I’m looking abroad right now. If you take some of the wealth generated from your properties here, it can go a long, long way in a country like America – where property prices are just a fraction of what they are here.

What’s more the yields are awesome. It’s a fantastic cashflow play.

America is still a crazy place – where ambo’s earn as much as burger-flippers – but it’s still a first world country with a strong rule of law.

It’s still got a lot going for it.

Should ambo’s be paid more, or burger flippers less? What about CEOs?

What I’m buying next… and why.

August 5, 2015 by Jon Giaan

I was writing the other day about some of the challenges facing Aussie property. Just to be clear, I’m not worried about a ‘crash’ or the ‘bubble bursting’, or any of that rubbish. I just think there are a few factors that could put a cap on the current cycle.

And that’s the thing to be mindful of. Markets move in cycles. And after several years of strong price growth, the chances of slower growth outcomes increases with every passing year.

It’s just a reality.

And as the cycle gets long in the tooth, the opportunities to benefit from immediate market growth get harder to come by. That’s why right now I’m working my existing properties harder, and looking further afield for my next buying opportunities.

And when you think about it in this light, the US market starts to look pretty interesting.

Because the cycle is still young in America. The economy has taken its sweet time to gain traction, and the housing market has dawdled along with it.

But now, that seems to be turning.

And the clearest read on that is in the rental market. Rents are rising quickly (much more quickly than incomes) and now people are worried about an affordability crisis.

The Wall St Journal was running the story:

“Much of the problem is attributable to simple supply and demand. The job market has improved and millennials are entering the labor pool in force, boosting household formation. But in a structural shift for the real-estate market, new households are much more likely to be renters than buyers.

In the first quarter of 2015, the number of U.S. households was up by almost 1.5 million from a year earlier… but the net increase was entirely due to renters, while the number of owner-occupied households fell slightly. That’s broadly been the case since the housing bust, with new household formation consistently coming from renters rather than buyers. The homeownership rate hit a 48-year low, according to estimates published Tuesday by the Commerce Department…”

So there’s a few things I take from this.

The first is that this seems to be what you would expect. At this early stage of the cycle, you’d expect household formation to come from renters.

So when the GFC hit a lot of people moved back in with their parents, or back into share-houses. And young kids who were thinking about moving out decided they’d be much better off staying put.

So for a few years there, household formation went into reverse. The number of US households actually shrunk.

But now that the economy is gaining traction, the younglings finally have the courage to go it alone.

(Or their parents finally have the courage to turf them out of the nest.)

And so the number of households is growing again. Starting with renters. After the renting pool grows, people will get back into buying and the owner-occupier class will rise.

But in the meantime, as all these new people compete for rentals, the rental market gets tighter and tighter. And vacancy rates have fallen to a 30-year low.

And as the rental market tightens, rents start to rise.

And across the country, rents are now 3.5% higher than a year ago. That might not sound like much, but it’s decent in a country where inflation is minimal. And it’s accelerating.

And in some states, it’s much higher. Like in the booming tech states and cities, like San Francisco, San Jose and Denver. Rents in those cities are growing between 5 and 8%.

This is classic cycle stuff.

Because as rents start to rise, two things happen. First, the cost of renting vs the cost of buying starts to even out. And so the people with a deposit do the sums and decide they’re better off buying.

Housing demand grows.

And the increase in rents means that rental yields start to rise.

At the margin, properties become more attractive to investors. They’re willing to pay a little more.

And so housing demand gets a lift from two sources.

And that, of course, translates into higher prices.

And so we’re looking at a resurgence in American house prices in some areas. It will be patchy at first, but as the economy strengthens, and the rest of the country comes online, we should see broad-based increases in house prices.

And so there’s an ‘early-buyer’ opportunity here.

House prices are lifting in some areas. Make no mistake about that. But there’s still plenty of bargains to be found.

And that’s the amazing thing about the US right now. In America you can pick properties up for $50K.

I’m not talking deposit. I’m talking in total. $50K!

And with a tighter rental market you’re looking at cashflow of $10K a year.

Do the maths. That’s a 20% yield.

I love Australia, but show me anywhere in the country where you can get those numbers.

So with the Aussie market facing some headwinds, I’m taking the time to do a bit more gold digging in the US.

You just can’t argue with those numbers.

Anyone done well in the US in recent years?

The triple threat to Aussie property

August 4, 2015 by Jon Giaan

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‘May you live in interesting times.” – Chinese curse.

These are definitely interesting times.

I thought I’d spend today thinking about some of the down-side risks to Aussie property right now.

And look, I’m no chicken little. I’m not one to start panicking at the first falling nut job in the press.

But I also know that markets move in cycles. And so 2 to 3 years into the current boom phase, it’s probably worth taking stock of where things are at.

And right now, I guess I’m seeing enough factors to make me pause a bit and take a wait-and-see approach.

I don’t think that any one factor will be enough to take the wind out of our sails. The only danger is that the factors combine, joining rings, and summoning a power far greater than their combined individual strength.

In short, Australia faces a triple threat.

Each of these factors on their own wouldn’t faze me much normally. But if they all bit at the same time… that could be a different story.

So let me step through it:

Threat 1: credit rationing

This process is already under-way. APRA has been coming down hard on the banks in recent months to get their investor mortgage books under control. It started with increases in LVRs, and reweighting rental income in the eligibility calculations. But it went next level a couple of weeks ago when APRA announced extra capital requirements, which forced the big banks to raise rates for investors.

Now, other banks and even a few non-bank lenders have followed suit. So far we’re looking at about 25 basis points of hikes, with potentially 60-80 bps on the cards.

And there’s reports it’s getting into SMSF lending as well…

Will it have an impact on mortgage lending? How could it not? The question though it, how much?

It’s way too early to tell in the data yet, but the CoreLogic RPData Mortgage activity index, which is an early warning barometer, had a tick down in the latest month…

Screen Shot 2015-08-04 at 9.49.13 am

Remember this is all about taking investor lending, which was running hot, and putting a cool towel to its forehead. So in that sense I wouldn’t expect it to be a major market mover.

But combine it with a couple of other factors…

Threat 2: Over-supplied markets
Construction is booming.

While that’s great news for the economy and all the unemployed tradies coming back from the mines, it raises the prospect of some over-supplied markets.

It’s tricky to untangle how this will play out. Because we’re not talking nationally. We’re talking individual cities, even individual segments.

Like Melbourne apartment construction. Melbourne has been building high-rise apartments like there’s no tomorrow, and there’s massive supply already on train and due to hit the market over the next three years.

The reason that this segment worries me, as I’ve written before, is that a lot of it seems targeted at foreign investors, who don’t seem to get what Aussie standards are.

(Most Aussies aren’t inclined to live in tiny shoeboxes. Even our students are fussy.)

So I’m not sure we’ll see a direct impact on prices across the city. But if there’s a glut in rentals, and some people take them up, that could suppress rental prices. That in turn, will compress yields (already tiny), and make housing less attractive to investors at the margin.

Again, probably not a huge effect on its own…

And if you look around the country, Perth has got to catch your eye. The median price for houses and units fell a thudding $20K in the June quarter.

A lot of this is demand driven, as interstate migration flows reverse with the unwinding of the mining boom. And with the collapse in commodity prices, State Final Demand has fallen for 10 consecutive quarters (hat tip to MB), and so everyone’s going to be feeling the pinch.

Screen Shot 2015-08-04 at 9.49.20 am

Trouble is that this collapsing demand comes at exactly the same time as the fruits of a mini construction boom are coming on line. Perth is starting to look over-supplied, and has got to be looking at some of the softest market conditions in a while.

The question is going to be how contagious any shakeout in Perth or Melbourne might be. How many investors headed west with the mining boom? How many local investors bought into high-rises?

I wouldn’t normally be worried, but you can’t take anything in isolation right now.

Threat 3: Chinese Buyer Exodus
The final threat is a turn around in Chinese money. There’s been a lot of ambiguity around just how much Chinese buyers are spending in Australia, and a lot of public angst.

That finally led the government getting off its bum and doing something about it, and that doing something involves enforcing the rule that foreign nationals can’t purchase existing property.

That’s a good thing. Rules are rules and markets work when people have faith in the system.

But let’s say the government completely eliminates foreign national purchases of existing property. Will that have a big impact?

Well, Maybe. But we don’t know because we don’t know how much they were buying in the first place.

And could it discourage Chinese investors all together?

So many questions…

The Triple Threat
As I said, any factor in isolation wouldn’t faze me much, but if they all kick into gear at exactly the same time, it will be enough to consolidate a peak in the current cycle.

In that sense, I’m attacking the market from a few different angles right now. This isn’t a time just to buy anything you can get your hands on.

So I’m looking to add value to my existing properties, with renovations, DA’s that sort of thing. I’ve also got about $15m worth of developments in the pipeline at various stages of completion. I plan to keep about 80% of them anyway, so I’m not too fussed about the market stalling.

And of course I’ve got my eye on other markets. I’m very fussy in Melbourne, but Brisbane still has potential. I’m also taking extra interest in the US.

So still busy, still investing. I’m just putting the wallet away for a bit. See what happens.

They're my thoughts. What do people reckon? Am I being a bit too ‘glass half empty’?

NO B.S. FRIDAY: If the system ain’t broke… It’s probably dead!

July 31, 2015 by Jon Giaan

There’s an ugly secret hiding in the dark heart of capitalism… and it’s us.

“Capitalism is dead.”

You might not have noticed. I hadn’t. Last time I looked it was still doing yoga-lates in the park.

But that’s the word on the street. Capitalism is dead. Now we’re just waiting for everyone to catch on.

Personally, I’m going to miss capitalism. He was always good for a laugh. And his tireless charity work went largely un-noticed. Sure, he ate a few babies in his time, but you can’t judge the older generations by the standards of today.

But walk down Brunswick street, and there are lines of hipsters with shovels, just looking for somewhere to dig capitalism’s grave.

(Finally the whole long beard / lumberjack jacket thing makes sense. They were just itching to get into a bit of physical labour.)

And this is Naomi Klein’s thesis. Capitalism may have worked wonders, but it’s destroying the planet and creating a massive schism between the 1% and the 99%. We’ve got droughts in California, obese kids in Australia, and more mobile phones than we have places to bury them.

And so now humanity faces a choice. It’s either capitalism or the planet. The free-market, or extinction.

But hang on to your shovels young hipsters. Let’s just wait a second. Is that really the choice we’re facing?

Now I don’t want to be a suffering denialist. I’m not out there saying everything’s perfect and reports of starving children in Africa are nothing but a UN-coordinated conspiracy.

Sure. The world’s F’d up. But it always has been. And it helps me sleep at night remembering that it’s a lot less F’d up than it used to be.

But there’s a logical pirouette there that says that the world is F’d up, therefore capitalism is the problem. My old mind doesn’t have the ankles for moves like that anymore.

Because there’s a test I like to call Giaan’s Rusty Razor. The Rusty Razor goes:

“The simplest solution is often that people are idiots.”

It’s an amazingly powerful idea. Many of the problems that have baffled philosophers through the centuries, simply come down to the fact that people are idiots.

Wars, famines, pop music – many of these things can be explained by garden-variety idiocy.

And so before we going pointing the finger at the abstract notion of ‘capitalism’, we need to rule out that the world isn’t F’d up simply because people are idiots.

And to me, it’s not clear that we can. Idiocy creates a lot of problems.

And I think the mistake here is to give a “system” too much agency. We tend to personify it. Capitalism is evil. Capitalism doesn’t value the planet. Capitalism secretly desires to sell your children into slavery and make you pay for doctors visits.

I see people do it with politics all the time. We complain that we have sound-byte politicians focused on short-term political cycles. But then we only pay attention to sound-bytes and have incredibly short memories, and no patience for long-term policies.

So our ‘leaders’ aren’t the problem here. We are.

“People will get the leaders they deserve.”

And so when I hear people complaining about the “excesses of capitalism”, I really hear people complaining about other people.

Our t-shirts are made in Asian sweat-shops because we don’t care where they’re made. We only care about price. Our corporations pollute the environment because the people running those corporations are greedy idiots… just like the rest of us. And we have a world that sifts the 1% from the 99% because we value the potential to get one-up on our neighbour more than we value equality.

We are idiots. Vain, selfish, jealous idiots.

Of course we can rise above our idiocy and into more refined expressions of humanity. But that takes work.

Oh, did I mention we’re lazy?

The way I see it, this is our fundamental nature. It doesn’t limit our potential to be awesome, but we also need to be realistic about what we’re working with.

And so when people are complaining about capitalism, it really seems to me that they’re complaining that capitalism hasn’t been able to contain the worst expressions of human nature.

And that might be true. But is it the role of an economic system to do that? If we’re writing up the job description for our economic system, are we saying:

Must be able to:

Allocate resources relatively efficiently, provide for material improvements in the standard of living, eliminate famines; and
Stop people from being greedy and selfish idiots, and help them live virtuous and fulfilling lives, full of volunteering and bake-sales.

I just don’t think it’s a reasonable thing to ask. Question 1 is incredibly difficult as it is, and we’ve been pretty lucky to stumble onto a system that’s gotten us this far, I reckon.

And number 2 is really a question about morality. And moral codes don’t come from economists. They definitely shouldn’t come from economists.

Morality comes from religion or philosophy.

And so when I look at the F’d up stuff going on in the world, I think these idiots need some morality. I don’t think they need a better economic system.

“It’s not his fault your honour. He was raised in a modern capitalist economy.”

If anything, capitalism is too effective. It seems like a problem because it’s awfully effective at helping greedy and selfish people express their greed and selfishness.

But the problem is with the people. It’s with us. And it’s about how we refine our expressions, and draw out our generosity, our charity and our caring natures.

But this requires taking a good look at our dark hearts. And it requires a fair amount of work.

And maybe that’s why nobody’s talking about it.

Much easier to shout angry slogans at abstract concepts.

Is capitalism the problem or is there something else that is stuffed?

Is greed good or have we lost our moral compass?

Your thoughts..?

Banks say ‘f-you RBA’

July 28, 2015 by Jon Giaan

Weird shenanigans are going on right now. Last week the RBA sent a clear message to Abbott. This week, the banks take control and send a clear message to Glenn Stevens.

Banks have started raising rates, bringing in one of the toughest credit environments in recent years and basically telling the RBA,

‘F-you! If you want to put restrictions on lending to investors and make it tough for us, then you leave us no choice… We have to do your job for you.’

The ANZ and CBA have raised rates.

And I’m pretty sure the other banks will be joining them in the next couple of days…

And so we find ourselves at a unique point in history. Very unique. The banks are raising rates while the RBA still has an easing bias.

I’m not sure when the last time that happened was.

Just to be clear, so far we’re only looking at loans to investors. ANZ led the way late last week with a 0.27% increase to variable investor mortgages, and a 0.30% increase to new fixed investor mortgages.

The CBA was quick to follow suit.

And my bet is that the other banks will be close behind. Not that they wouldn’t want to, but they also don’t really have a choice.

And as a result, we’re looking at one of the tightest credit environments in recent years.

Because these rate increases come on the back of a number of other measures aimed at making it tougher for investors to secure finance. Like Westpac’s policy a few months ago of requiring all investors to front a minimum 20% deposit.

All this is coming on the back of two big drives from APRA. The first is the directive that banks should get the growth of their investor mortgage book under 10% a year.

That call came out at the end of last year, but the banks were a bit slow coming to the party.

They’re scrambling now.

The second push was the announcement last week that APRA was increasing the required risk weighting on mortgage lending.

We also knew this was coming, and this isn’t really about slowing investor lending as it is about bringing Australian banking practices into line with world’s best practice.

And what the risk weighting means is that banks have to effectively hold more capital reserves to cover their mortgages.

Previously, banks had to hold $1.28 in their vaults for every $100 of mortgages. That’s now risen to $2 for every $100.

That may still seem like nothing (banking is a good business!), and a small change, but it’s substantial.

Think about it this way. $1.28 used to support $100 worth of mortgages. Now that same $1.28 only supports $64 worth of mortgages.

So banking just got a lot less profitable.

And so banks are passing that cost on to us. (Who saw that coming?)

And the ‘investor bubble’ is just a convenient cover story…

But we may not have seen the end of it. Some analysts are saying that banks will need to increase rates by 0.5-0.6% to offset the cost of the new capital rules.

Looks like the banks will phase it in to stop people freaking out too much.

But wait, there’s more. Seems it’s not just LVRs and interest rates. It also extends in to serviceability measures. You might now need a lot more cash-flow or cash on hand than you previously did.

For example, CBA and Westpac have reduced the weight rental income has on its loan calculations by 40 per cent, while ANZ no longer counts negative gearing towards lenders’ ability to repay their loans.

I’ve seen some modelling that shows that an investor with a $500,000 loan could be asked to hold an extra $10 – 12,000.

That is, with a loan for $500K and 20% deposit, an investor would have been expected to prove cash flow of about $8,600. That now jumps up to $21,000.

For a $1 million loan, we’re talking a jump from $14,700 to $36,870.

Have you got a spare $10-20K lying around?

And what’s been interesting is just how quietly the new regime has come in. I haven’t heard much comment in the news.

Where’s the bank bashing? Where’s the railing against our greedy overlords? Where’s Wayne Swan when you need him?

But nothing. I think the pollies know that the banks hands have been forced. APRA (i.e the government) moved first. Criticising the banks would just be criticising government policy.

And what about Glenn Stevens over at the RBA? Is he pissed at the banks stepping on his turf?

Hardly.

In fact on Wednesday, he gave them the green light. He said in a bit of Q&A about the new measures:

I imagine it will result in some rise in mortgage rates from the major banks. It is supposed to – that's the point.

So what do we make of it?

I guess you’d say that if it increases the stability of the financial sector, then that’s a good thing.

No one wants a housing bubble and no one wants a banking collapse.

But the thing about government policy is that it always tends to be behind the curve. The time for these measures would have been 18 months ago, when the current housing boom was ramping up.

But now we’ve got them kicking in at a time where it already looks like the cycle is maturing.

And there’s even the prospect of gluts building in some markets (I’ll write more about that later.)

And so rather than moderating the upswing, all this might just accelerate the downswing.

Things are moving quickly in the housing market right now. It’s a windy old road with a lot of bumps.

Maybe we’ll be sweet. Maybe we’ll sail through. But you never know. You need to watch a market like this closely.

I’m holding out of the market for now. I think these measures will help consolidate a peak in the current cycle.

I think I’ll just take a wait and see for a few months, and take stock from there. Maybe look to score some discount bargains a little further down the track.

I’ll keep you posted.

What is everyone’s take on the credit environment? Is it getting tougher on the ground?

NO B.S. FRIDAY: China takes nuclear option in ‘war on stocks’

July 24, 2015 by Jon Giaan

China is a case study in how, apart from a handful of theoretical economists, no one really believes in a free market

Has anyone else ben tuning into the bemusing spectacle that is the Chinese stock market implosion?

It seems that the Chinese government has effectively nationalised its stock market. People thought shares were disconnected from reality before. Now that disconnect seems permanent.

And China will dodge some short term pain here, but only by throwing credibility and it’s dreams of becoming a first-world financial centre on top of the grenade.

And so it’s just not clear what all this means. It certainly makes you stop and wonder about the shape of the Asian Century. China will continue to dominate affairs in the region, just through sheer size, but China’s economy looks more and more like a derailed freight train.

Still moving, and a force to be reckoned with, but who knows where it’s going to end up.

Over the past year, the Chinese stock market has been a classic suckers game. The boom was on. Every man and their shoe-shine boy was piling everything they had into the stock market. And the government was more than happy to leave the money taps on to – to try and generate a bit of pop in the consumption numbers.

As a result, the Chinese stock market went stratospheric. Share prices tripled in just 12 months. At the peak, half the companies listed on the Shanghai and Shenzhen exchanges were priced above an indecent 85-times earnings!

The smart money started bailing out. As it always goes in these things, it’s the shoe-shine boys, the farmers and office clerks left holding the baby.

With the institutional investors heading for the exits, prices started to teeter. The Chinese government freaked, and the central bank tried to juice the market even further by cutting rates and relaxing bank reserve requirements.

(That’s right, just as the financial system was coming under attack, the government dropped reserves. Banks don’t need all of those safety measures. They just get in the way.)

Rate cuts had always worked in the past, but the run was on, and prices were still falling.

So the government got it’s own hands dirty. It rallied the major brokerages to form a $19 billion fund to buy shares and waded directly into the market, on a massive buying spree.

But that’s the thing about panic moves like this. Once the people saw the government in panic mode, they wondered what the government was scared of.

And so now it wasn’t just the institutional investors. The mums and dads were heading for the exits as well. Prices were heading south fast.

And when the tide goes out you get to see who’s swimming naked.

And the feedback loop came through margin lending. Chinese punters were borrowing in large amounts, from both brokerages and more shadowy sources — like “umbrella trusts” and peer-to-peer lending websites — to buy shares, with the shares themselves as collateral.

(According to Goldman Sachs, at the peak, formal margin lending alone accounted for 12%of the market float and 3.5% of China’s GDP, “easily the highest in the history of global equity markets.”)

Margin loans were a booster rocket on the way up, but a massive stone around the neck on the way down. As prices fell, borrowers started getting ‘margin calls’ that forced them to sell into a falling market, sending prices into free-fall.

Amazingly, Chinese regulators who had been trying to rein in margin lending did a full 180. They waved rules requiring brokerages to ask for more collateral when stock prices fell and allowed them to accept any kind of asset – including people’s homes – as collateral for stock-buying loans.

They also encouraged brokerages to securitize and sell their margin-lending portfolios to the public so that they could go out and make even more loans. All these steps knowingly exposed major financial institutions, and their customers, to much greater risk.

So in the face of a major market melt-down, the government is actively encouraging people to take on more risk!

But wait, that’s not all!

China launched a ‘war on stocks’ and took that war nuclear. They closed down the market and outlawed selling. About half of China’s 2,800 listed companies filed to suspend trading. Chinese regulators also banned major shareholders from selling any shares for the next six months. They then directed companies to start buying back their own shares and instructed state-run banks to provide whatever financing was needed.

Then in came China’s Ministry of Public Security – the thugs usually responsible for crushing political dissent. They announced that they would arrest what it called “malicious” short-sellers. But it was clear that this meant anyone whose selling (not just “short” selling) interfered with the government’s efforts to boost prices.

The market stopped dead in its tracks. Chinese brokers refused to accept sell orders for fear of angering the authorities.

Ultimately the government won. The stock market ‘stabilised’.

But it’s only a ‘market’ in a pretty loose sense of the word now.

It’s wild stuff.

And China’s commitment to ‘market forces’ has been show to be pretty weak.

Part of me thinks that this all puts China back 20 years. It’s like the saying goes, market forces are the worst possible way to allocate resources – apart from all the other options ever experimented with in human history.

The Chinese economy is huge, but it needs to get even bigger. It’s still very early days in China’s development. Chinese citizens are still a long way from enjoying first-world life styles.

But it gets harder and harder to centrally manage an economy at these proportions. It’s hard enough to know what your economy and people need, let alone navigate the rat swarms of vested interests to get those things done.

But let’s not get too holier-than-thou. Governments, banks, big business – everyone’s got their finger in the pie, in every country.

It’s just in China, no one’s pretending otherwise.

Crazy days.

Where to for China from here? What does it mean for us?

RBA says ‘f-you Abbott’

July 21, 2015 by Jon Giaan

I reckon the RBA’s dig at negative gearing opens up new chapter. Is it the beginning of the end?

The RBA dropped bombs last week. Everyone’s all excited about what they said, but take a step back here and look at what they’re doing. This is a new game.

And until last week I thought negative gearing was part of the furniture. Now I’m not so sure. It will survive this government. But the next? Suddenly it’s looking like its neck’s on the chopping block.

And suddenly, the RBA’s got balls.

And so there’s two things that are interesting. First is that in their submission to the government’s Housing Ownership inquiry, which follows hot on the heels of the previous government’s Housing Affordability inquiry, and which nobody thought would produce anything of interest because that was the point, the RBA has decided to single out negative gearing.

They reckon it’s time we had a good hard look at it.

Why now? Negative gearing’s been around for 25 years. It’s partner in crime, the capital gains tax concession has been around since 1999… what do we know now that we didn’t know 18 months ago?

For some reason, they decided now was a good time to give it a kick.

And when you take a look at what they say, a lot of it directly contradicts some very public comments the PM and the Treasurer have been making. Who uses it. What affect it has. How much it costs.

And normally, the RBA is very careful to stay the hell out of political minefields like this. But not now.

Why?

I imagine Abbott’s pissed. He doesn’t need the RBA dropping bombs like this. He doesn’t need the RBA’s economic credibility trampling all over his public statements. If this was China, someone at the RBA would be shot. Probably several people.

And so if anyone doubted the independence of the RBA, this is the proof you need. In the government’s eyes the RBA is way off message. In the RBAs eyes, politicians are deceitful idiots who deserve to be spanked from time to time.

And it makes you wonder about Abbott’s relationship with his public service, or how long people think he’ll be sticking around. It’s not often you see the organs of government hang the PM out to dry like this.

Anyway, here’s what the RBA actually said about negative gearing, with my comments.

Australia’s taxation system is… relatively generous to small investors in buy-to-let property compared with some other countries, because investors can deduct losses from their investments against wage income as well as other property income, and because capital gains are taxed at concessional rates…

I’m not sure about that. In the US you can claim mortgage expenses on you PPR. So who are we comparing ourselves with? Anyway, let’s move on…

Tax data show that the share of the population aged 15 years and over with an investment property grew steadily through the 1990s and early 2000s, before broadly stabilising in the late 2000s at around 10 per cent. Over the same period, the share of these investments that were geared increased steadily before levelling off at a little over 80 per cent. The share of investors that declared a net rental loss was just under two thirds in 2012/13, having increased from around half in the late 1990s…

I find this one kind of interesting. I think what it shows is how the deregulation of the finance sector allowed more and more people to borrow, and to borrow and invest in property. But this was kind of a one off thing. Once the changes were made, the ratios levelled out…

Since the early 2000s there have been some notable changes in the distribution of investment and gearing across age groups. In particular, the share of property investors that are aged 60 years and over has increased significantly

No surprises here. Property investment is an older person’s game. Because the longer you’ve been here the more time you’ve had to accumulate wealth. It’s only a problem if we think that young people are locked out, and I don’t reckon that’s true, personally.

Tax data also show that the incidence of property investment and the incidence of geared property investment both increase with income (Graph 27)…

While the incidence of property investment increases with the level of income, the Household, Income and Labour Dynamics in Australia (HILDA) Survey also suggests that most investor households are in the top two income quintiles. These households hold nearly 80 per cent of all investor housing debt (Graph 28)…

So the top 40% of income earners hold 80% of housing debt. This is really going to smack Abbott in the gooleys. He and Hockey have been going out of their way to paint negative gearing as a common tool of folk finance. That it’s a game for policemen and hair-dressers and so on.

The implications of this chart are awkward. If it’s mostly for middle-income earners, then that can only be true if the great majority of them negative gear. But it seems unlikely. Given higher income earners hold the most mortgage debt, they’re much more likely to be negatively geared.

And so for the Bank, that raises the question, ‘is it just a tax-dodge for the rich?’

The Bank believes that there is a case for reviewing negative gearing, but not in isolation. Its interaction with other aspects of the tax system should be taken into account. The ability to deduct legitimate expenses incurred in the course of earning income is an important principle in Australia’s taxation system, and interest payments are no exception to this. To the extent that negative gearing induces landlords to accept a lower rental yield than otherwise (at least while continued capital gains are expected), it may be helpful for housing affordability for tenants.

The RBA gives some important ground here, acknowledging that if we’re helping landlords deduct their expenses, then that can encourage them to provide more housing. That’s a good thing… However…

…the switch in 1999 from calculating CGT at the full marginal rate on the real gain to calculating it as half the taxpayer’s marginal rate on the nominal gain resulted in capital gain-producing assets being more attractive than income-producing assets for some combinations of tax rates, gross returns and inflation. This effect is amplified if the asset can be purchased with leverage, because the interest deductions are calculated at the full marginal rate while the subsequent capital gains are taxed at half the marginal rate.

That is, some people are using the negative gearing / capital gains discount tango as a tax doge.

And if that’s true, in an era of budget emergencies, then it must be time to take a look at it.

Abbott must be fuming.

Has the game changed? Reckon negative gearing can survive?

NO B.S. FRIDAY: First impression, last impression

July 17, 2015 by Jon Giaan

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First impressions are powerful, but there’s at least three limits.

I’m a believer in first impressions.

When it comes to meeting people, I’m more than happy to go with my gut.

There’s a lot of wisdom (and pies) in my gut.

And I think we tend to undersell this ‘supernatural’ side of ourselves. We dismiss it in others as being ‘judgemental’ and we don’t trust it in ourselves.

I think it’s because we can’t really explain it and we live in an age where we look down at things that can’t be explained by science.

But I don’t really understand how electricity works, but that’s not going to stop me using it.

And I’m old enough now, I’ve been around the block a few times, to know that it works. I don’t really feel like my first impressions have ever led me up the garden path. I’ve done a lot of deals with a lot of people. I think I know pretty quickly how they’re going to play out.

And my bank balance bears the scars from when I haven’t listened to that nagging voice in my gut.

And the science actually backs me up on this one. The first impressions we get, in the first milli-seconds of meeting someone tend to be pretty accurate. That is, after hanging out with someone for a couple of hours, our later impressions match pretty closely with our first impressions.

And my faith in first impressions is based on two things:

1. We’re hard-wired for it. Apparently we size up likability and friendliness before anything else – gender, hair colour, anything. Why? Because once upon a time a lightning quick ability to tell friends from foe would have saved your life.

And so we have some of the most central circuitry in our brain devoted entirely to understanding people quickly. Brains are powerful things. They often make mistakes, but there’s a lot of energy devoted to helping you size someone up quickly.

2. You can’t fake it. Well, not easily. You can practice a broad smile and a power hand-shake, but there are just too many windows into the soul to control them easily or for long.

That little look in the eye. The slight waver in the voice. The slight hunch in the shoulders. That particular choice of words. All of these things give you an insight into someone’s fundamental character.

And there’s a part of your brain going over them with a fine tooth comb.

Of course, like anything, there’s limits to this idea. I know it in myself… I can get a sense of when my first impressions are going to give me a false flag.

Like pretty girls. I’m a sucker for a pretty face. And I know that someone’s a little easy on the eye, I tend to over-state their competence and trustworthiness etc.

That’s just some hardwired baggage I have to deal with. But I’m on to it. I can catch myself and make sure I’m making a good decision.

And I know the limits of first impressions. I think they’re a good gauge of wether I’m going to get along with someone, and whether they’re going to be trustworthy or a good worker. But I know impressions don’t extend into technical skills. I’ve got no idea if someone’s going to be a competent programmer or flashy designer just by meeting them.

I know the limits.

The other trap that’s interesting I think is when there’s a disconnect between someone’s experience of themselves, and reality.

I mean, I once hired a guy who really seemed like the bees-knees. He sold himself as a top-notch salesman. He had all the skills, all the experience, and my gut was telling me he was going to be awesome.

I almost gave him a raise on the spot.

But he wasn’t. In fact, he was kind of useless. Sometimes he was great, but he was all over the place. When he was on he was on, but when he was off he was way off.

And he was off more than he was on.

But the thing was, he didn’t see it. In his mind, he was awesome, and he was consistently delivering outstanding results. If I tried to pull him up on it, then I didn’t understand his process, or I didn’t value independent thought, or I was jealous of his skills.

And when I’d point to concrete examples of where he’d dropped the ball, then there were all sorts of beautiful excuses. Each failure had an easy explanation – all of which had nothing to do with him.

He just couldn’t (or refused to) see that the common denominator in failure was him.

And so he made a good impression. Because he genuinely believed that he was awesome – and it came through in the way he held himself.

Of course there were warning signs in hindsight (13 jobs in 7 years) – but none of these showed up in the first impressions.

And so when I read all this stuff about how to make a good impression, I just think, what’s the point? Unless you’re a phenomenal actor, you’ll never pull the wool over people’s eyes.

So my advice is just be a good person. If you put the work into the fundamental character, then that’s what will shine through. And if you’re loving and accepting of yourself, then it will show that you’ve got nothing to hide.

And if you drop all these ‘strategies’ for getting people to like you, you’ll be relaxed, open and friendly – and, ironically, very likeable.

So relax. Enjoy yourself.

There’s some advice you can live by, hey?

Do you trust your first impressions?

Flags on a naked elephant

July 16, 2015 by Jon Giaan

So our Federal politicians spent over half a million dollars on flags last year.

Oop. Sorry not year. Last 6 months.

In the last 6 months of 2014, MPs spent half a million dollars on flags.

According to the AFR, Liberal MP and former Australian tennis hero John Alexander topped the flag spending at $17,949, followed by independent MP Bob Katter on $13,320 and National MP Bruce Scott on $12,236.

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Katter said: “I'm utterly ashamed of myself that I was number two. I have a lot of work to do.”

Bless him.

But now Treasury has decided it needs to nip this outrageous patriotism in the bud, and effective this financial year, the flag budget will be limited.

Katter, of course, was outraged. “It shows monumental stupidity and a total lack of Australianness in the government.”

Now I love a good flag as much as the next person. I’ve got one in the office. But 20 grand in six months on flags is a little excessive isn’t?

And half-a-million dollars worth all up? That’s pretty extreme. Wasn’t there a budget emergency?

(Oh, no. That’s so budget 2014. Everything’s fine now.)

Apparently the flag budget is there to allow MPs to doll out flags as gifts to worthy individuals and organisations. Gifts. That’s nice. Couldn’t they just send some flowers? Maybe a nice card?

And maybe the flags are being used to build national pride, in which case you could argue that it’s public money well spent. But I doubt it. It sounds to me like just another PR campaign dressed as policy.

Anyway, I’m not going to go on about the stupid things governments spend money on. I’ve only got two blogs a week.

But let me ask you this: How much ownership do you feel over the amount of money our government spends on flags?

I mean, does the will of the government in regards to flags reflect your will?

What about the statement “Aussies spend an excessive amount on flags.” Would you agree with that? I’ve got a statistic that says it’s true…

Chances are you’ve never thought about it, and it’s one of the millions of things that government’s do that the public has no idea about.

And this, in my mind, is one of the big flaws of what we call ‘democracy’. We get one vote every few years, and on the basis of that one expressed preference, a whole suite of policies are implemented. From child-care to the economy to the environment to flag supply.

And the idea is that your representative ‘represents’ you. But there’s 100,000 voters in each electorate. The idea that anyone could represent the diverse interests and values of 100,000 people is ridiculous.

Our parliamentary system is set up to create the illusion of ‘people-power’ while doing absolutely nothing to facilitate it.

(Or maybe I’m just bitter cos no one gave me a flag.)

Anyway, it’s a crap system, but I’m willing to admit, that for now, it’s the best we’ve got.

But now put yourself in the shoes of the average Greek person. After the GFC, they wake up to find that their government had gone and spent a whole bunch of money they didn’t have (mostly on flags and ouzo I think), and now there were a lot of angry German bankers on their doorstep.

And now the Greek people are being told that they have to pay up (give up benefits and sell off public assets) because it was “their” debt and “they” were responsible for it.

(C’mon mate. You’ve had your fun with your flags. Time to pay up.)

And at the same time, everyone’s making holier-than-thou comments about the national character.

Imagine the Kiwis looking down their noses at us and saying, “Oh those Aussies. They partied hard, blew all the money on flags, and now they’re too lazy and irresponsible to do anything about it.”

And if you think it couldn’t happen here, think again. All governments live beyond their means. They can’t help it. The ‘democratic’ contest practically locks it in. The aim of the game is votes, and the easiest way to get votes is to buy them.

And look at us. 20 odd years without recession, a once in a century mining boom, and still we’ve got a ‘budget emergency’ and deficits as far as the eye can see.

Governments, no matter what stripe, will always spend whatever money is available to them.

(Which is why I’m a fan of lower taxes, but that’s another story.)

And this is where Greece got into trouble – because there was simply too much money available to them.

Once they joined the Euro, the banks were happy to lend them way more money than they were good for.

And they were happy to extend the government credit they knew they couldn’t repay, because they knew whatever happened, they’d be sweet. The banks wouldn’t be picking up the bill.

Either Frankfurt and the EU would, or the Greek people would to avoid losing EU membership.

Either way, the banks were sorted. Bonuses for everybody.

(And it was exactly this kind of implicit guarantee that gave us the sub-prime mortgage crisis in the US.)

And maybe you could say the people should have stepped in at this point and stopped the government from taking on too much debt, but the books were cooked (thank you Goldman Sachs). No one knew what was going on.

The more I look at it, the more I think the failure here is in the disconnect between the concept of government, and the people they claim to represent.

Big government doesn’t represent anybody. It’s just an expression of well-resourced interests and lobby groups. How do you hold a people accountable for the sins of a government that was only out to screw them over as well?

And this is the elephant in the room in the whole Grexit drama. Democracy, as we know it, is a joke.

The emperor has no clothes.

Anyway, that’s the results of my fact-finding mission. And it seems the EU has found another agreement (at least for now). My work here is done. I’ll be back home later this week.

Best of luck, Greece. You’re going to need it.