What is a house? (asking for a friend)

August 9, 2017 by Jon Giaan

Housing isn’t the concept that we thought it was… have you caught up?

What is a house?

If like most people you said something like, “a place where people live”, then you’d be right, but you’re missing a big part of the story.

Even if you put on your investor hat and said, “a place where people live, that you can also own and earn a rental income from,” again, you’d be technically right. Full marks from Investopedia for you.

But again, this is only part of the story.

Housing, as a concept, is changing.

And if you’re not watching this space, then you’re going to miss the biggest opportunities on offer over the next twenty years.

For a long while, you’re “a place where people live” definition would have served you well. Up until about the late 1980s, that was pretty much right.

But then ordinary Australians started cottoning on to the investment potential in property. They realised that housing was a place where people lived, but it was also something you could invest in.

The game changed, and a big part of the story behind the ongoing boom we’re living through is that more and more people are making property part of their portfolio.

But now the game is changing again.

Some of those changes are easy to identify.

Take the evolution of AirBnB for example. That has surged in recent years, and it’s a whole new way of thinking about housing.

Now a house is somewhere that people live, that can be invested in, and can give you access to the Tourism dollar if you fancy being a hotelier.

The latest stats show there are 115,000 listings on Air BnB right now.

And a study from the University of New South Wales shows that in Sydney, 60% of Sydney’s 20,000 listings are for entire homes.

That means there are 12,000 homes in Sydney, that used to just be a place where people lived, but are now a sort of quasi-hotel.

And if we extend Sydney’s experience around the country, that means we’re talking about something like 60,0000 to 70,000 homes, across the country, now dedicated solely to the short-term accommodation market.

This is a real shift.

I mean, we’re talking about almost a full year’s worth of housing supply, just never making it to market. That’s got to have an impact on prices.

Or take the way housing has become a ‘store of wealth’ for rich globalists.

Rich people (even aspiring rich people!) from China to the US, from the UK to Russia, are looking to Australian property, not because it earns an investment return, but because it gives them a way of storing their wealth…

(… and possibly hiding it from the authorities back home.)

There were almost a million empty homes on Census night. We don’t know how many are due to investors deciding that they’re better off leaving their investment empty, but we hear stories of entire apartment blocks in inner-city Melbourne and Sydney being used for just this purpose.

Again, this has got to have an impact on the market.

And again, we need a new framework for thinking about housing. This isn’t just “a place to live” or a place to invest in.

This is something different.

So what is it?

This is important. The people who made money in the early days of the internet were the ones who saw what the paradigm shift was really about. It wasn’t just a way to connect a bunch of boffins at elite universities.

(It was an unprecedented vehicle for porn!)

Same story with the blockchain technologies. The ones to make money will be the ones who see the full promise of the technology on offer – a promise that may take years to realise.

So how should we think about housing?

Well, at the risk of drifting off into abstract space, I would say this:

Property is the gateway between the real and the unreal worlds.

I don’t mean that if you set up your Ouija board in the right way, property becomes a portal for communicating with the dead.

I mean that there are fundamentally two types of economic activity. There’s real world activity – making cars, growing fruit, building stuff. And there’s unreal economic activity – writing blogs, marketing, mining for bitcoins.

No one is any better than the other, but at some point, all economic activity needs to be made real. We work so that we can ultimately buy real things – food, housing, clothing etc. You can’t live on blogs.

And while you can have a real economy without any unreal elements, you can’t have an unreal economy without any real elements.

So the unreal rests upon the real.

Property – and land in particular – are unique then because all real activity must be grounded in the earth. The minerals that make up your IPhone have to come from somewhere. Your factory has to be located somewhere. Your zucchinis have to be grown somewhere.

And so property is the place where all the unreal economic activity – the vast billions and billions of dollars that rush about producing nothing anyone can touch or see – it is the place where all this activity grounds.

It’s the way that lightning needs to ground to exist. A lot like that.

The great colossus of human economy must at some point pass through the gates of property.

And the bigger the economy becomes, the bigger those gates have to be. The more value they hold.

And so as our economies continue to expand rapidly, and as the balance continues to shift from the real to unreal, as it has done for the past 50 years, the relative value of property increases.

And so we digitised hotels – that revolution grounds out in property values. We digitalised taxi’s. Now everyday parking spaces are factor of production.

China produces a thousand billionaires. They want to ground their wealth into something real before it is taken away from them.

So this is what I’m suggesting. Over the long, long run, I’m thinking about property this way – it is the gateway between the unreal and the real worlds.

No modern economy can do with out it.

And once you have that level of necessity, its potential long run value becomes limitless.

What’s your framework for thinking about property?

Whispers of the next boom

August 2, 2017 by Jon Giaan

Warning – the economy might actually be a whole lot stronger than we thought.

Okay, little bit of a news flash.

You know that “moderation” in house prices we’ve been waiting for? That little bit of a pause we were expecting to let reality catch up? That softening, that slow-down, that plateauing?

Might not be coming.

In fact, in as much as there was a slow down / pause / time-out in the naughty corner, it might already be behind us.

And the next boom might only be a few months away.

How do I know this?

Well, I don’t. Not for sure. Some economists will tell you they have a crystal ball, but sooner or later the market comes along and gives them a swift kick to the crystal balls and their reputations shatter.

But, you’re always operating with less than perfect information.

And the thing that really jumped out at me was this report from the economists at CBA.

They were taking a look at the labour market data, and I was shocked at how strong recent months had been.

In my mind I’m still assuming that the labour market is still softening, wages growth is weak, and there’s little fire coming from that sector of the economy.

But that’s not what the data says at all.

In fact, if you believe the last four months, the economy is gearing up for another bull run.

And I know a lot of my readers are a canny bunch, and don’t put too much stock in the “official” numbers. And they’re right to be sceptical. So when they say the unemployment rate is 6%, you have to take that with a large grain of salt.

That said, the trends are useful. If the unemployment rate is going down, from whatever number it is, then house prices are normally growing.

So even if I don’t believe (or care about) the exact levels, I am watching trends.

And as I said, right now, the trends are actually pretty promising.

The take home chart from the CBA report is this one. It compares employment growth with GDP:

You can see that they tend to move together – which makes sense: you need to employ people to make stuff.

But right now a gap has opened up. Employment growth is heading north. We’ll have to wait and see what GDP does.

So the gap will probably close pretty soon, based on past experience. But which way? Will employment correct, or will the economy bounce?

Again, hard to say for sure, but the employment data is looking pretty solid.

Because when you break it down, all the signs are good.

Like the split between part time and full-time employment growth. We’ve actually seen a switch-out, with full-time employment growth picking up, at the expense of part time employment growth.

That’s a good thing. Firms tend to employ people part time when things are tentatively picking up, and when the future seems more certain, start employing people on a full time basis.

And when you break it down by state, it’s also looking strong across the board.

Victoria continues to lead the way (“spectacular” was the word CBA used), but growth is also holding up in NSW, and there’s been a quick bounce back in Queensland.

And even in the smaller states, and even in WA, we’ve seen employment growth pick up strongly in the past four months.

This is especially good news for WA. I can hear the pollies across the Nullarbor breathing a huge sigh of relief. Employment growth has picked up, and the unemployment rate has dropped significantly.

Perhaps WA has turned the corner?

So it’s all looking pretty solid.

Surprisingly solid even.

But look, I don’t want to lay my crystal balls on the line here. These are early days, and you can’t be too certain about which way trends are going until they’ve had time to properly establish themselves.

But by then, everyone knows about them.

So the scenario I want to flag is that the economy has actually got more traction than we thought. That’s going to keep feeding through to employment growth, and that in turn will help drive property demand and property prices.

Property price growth moderated over the first half of this year (though Sydney and Melbourne are still pushing at double digits), but maybe that’s all we get. Maybe once the rubber hits the road and the economy really gets going, we’ll start pushing back towards 10, 12 percent growth.

And when you look at the population growth data, that’s not so far fetched.

Of course, it could all still get derailed by something. Trump could bomb someone or China could get the wobbles. But in the absence of any sort of shock, you’d have to think that the most likely scenario is continued growth from here.

Economies do move in cycles after all.

We might not be quite ready to lock it in, but we need to start thinking and planning for it.

So watch out! Good times ahead.

What’s the feeling in your crystal balls?

NO B.S. FRIDAY: Revolution delayed until further notice

July 28, 2017 by Jon Giaan

The dream of a golden crypto-currency future copped a serious blow this week.

Around 2004 I was presented with an opportunity.

It was a special ‘insider’ offering into a plucky American start up. They had a radical idea – to create a site where people could upload and share videos with each other, over the internet.

I turned it down.

I don’t really remember why. It all seemed a bit risky. The technology was new. They didn’t have a clear direction for how they were going to monetise the service. So I knocked it back.

Was it a mistake?

Hardly. The company went belly up after about 18 months. I would have lost everything.

This company wasn’t YouTube. It was one of about a hundred companies aspiring to be YouTube at the time.

YouTube just won the race. I don’t even think they were the first to get their product to market. But with three of PayPal’s exec’s at the helm, they were able to scale rapidly, until they became the dominant player in an ecosystem that was only ever going to support one player.

It’s one thing to have a million dollar idea. It’s another to have a million dollar business.

And so when I was presented with that investment opportunity back in 2004 or whatever it was, I had no way of knowing if they had a good business. They had a good idea, sure, but beyond that, I just didn’t have enough info to tell.

And I don’t like to take risks with my money. So I knocked it back.

It’s the same story with all the crypto-currency stuff.

Someone asked me my opinion about it the other day. Sure, I get the power of block-chain. I get the revolution it has the potential capacity to deliver. It could be a whole new ball game.

But what is it going to be? Which “coins” are going to dominate the market? We hear a lot about Bitcoin and Ethereum, but there are hundreds of crypto-currencies out there.

Like, did you know there’s a thing called ‘Potato Coin’? This one aims to become a unit of currency for poor African farmers (a noble aim).

Or what about ‘Wankcoin’? (Seriously, I’m not making this up.) This is designed to help porn-enthusiasts support their industry.

Someone has even launched ‘Ponzicoin’ – and people are actually buying it.

The whole alt-currency world is very weird. And as far as I can tell there isn’t a way to buy an exposure to block-chain currencies at a concept – you have to invest in individual coins.

It’s like in back in 2004 – if I could have invested in the concept of video-sharing over the internet, it would have been a no brainer. The need was obvious, and technology was certainly heading that way.

And you would have made a motza.

But you can’t invest in concepts. You can only invest in companies.

And that introduces a whole lot of complexity and uncertainty.

And they’re concepts I just don’t like to see attached to my investments. I’m a simple guy at heart.

Anyway, there was some other news this week that has made me rethink the whole crypto currency proposition.

What news?

Yep, one of the largest investment banks in the world, and depending on what conspiracy theory blog you subscribe to, is responsible for AIDS and faking the moon-landing. They’ve just brought out their own currency.

They’re calling it SETLcoin, and it aims to help parties settle share transactions. There’s a niche here. Currently it can take up to three days to settle a share trade. SETLcoin will make it instantaneous.

I was excited about crypto-currencies when I thought they were being built by 14-year old Japanese boys in their bedroom on retro-fitted Sega-64. But if we’re talking about one of the wealthies banks in the world?!?

That’s an entirely different story.

But I guess when you step back and look at it, it was always going to go this way wasn’t it? Money is power, and the powerful aren’t just about to let money get ‘democratised’ out of their control are they?

To be honest, I’m feeling a little deflated today.

I feel like it’s similar the revolution going on in the media. Traditional newspapers are dying. Their readership is too broad, their business models obsolete.

But rather than getting agenda and vested-interest free micro media – media created by the people for the people – we’re getting fake news. We’re just getting BS.

Apparently a bunch of those fake news sites in the last US election were just built by bored kids in Serbia, just looking to make a buck.

And crypto-currency, rather than democratising money, could just be about to concentrate it in hands even less accountable than our governments (low bar I know).

That’s not going to be an improvement.

And as strange as it is to say, I think I prefer a government controlled money to money controlled by Goldman-Sachs, or whatever global financial powerhouse it ends up being.

Suddenly, I’m pro-government?!?

Oh dear, oh dear.

Turns out that revolution I was waiting for… well, looks like it’s going to be a little further off than I thought.

It’s enough to drive a man to drink.

What does the crypto-currency future look like to you?

What game theory says banks will do next…

May 18, 2017 by Jon Giaan

Are the banks going to blow the whole thing up? Do they even have a choice?

I was talking about this Bank Levy business with a good friend of mine. He’s a smart man – has a PhD in mathematics and game theory. His take on the whole bank levy thing has really got me thinking… and a little bit scared.

On the face of it, I like the levy. The too-big-to-fail banks enjoy an implicit government guarantee. That means that if sh!t hits, the fan, the government (i.e taxpayers) has their back.

The markets recognise this situation, and so are willing to lend them money more cheaply. As a result, Aussie banks are some of the most profitable in the world:

Killing it.

Christopher Joye at the AFR reckons the government guarantee saves them about 0.18bps on their funding costs. So a levy that slaps them with 0.06% on their liabilities, only claws about a third of it back.

So it’s only fair. And it many ways it helps level the playing field with smaller banks who don’t have a government guarantee.

But as my friend pointed out, the problem is that this isn’t directly tied to their funding guarantee. It’s just a levy. Just a tax. Just because ScoMo said so.

And this makes it dangerous. The UK introduced a bank levy a few years back, and guess what happened? Since then they’ve jacked it up 9 times.

9 times! And why wouldn’t they? It raises a lot of revenue, and everyone hates the banks. It’s like free money. Whee.

And since our Bank Levy isn’t tied to anything either, what do you think the chances are that it will stay at just 0.06bps?

Would sod-all be a fair estimate? (That’s what my mate reckons it is.)

So think about this from the bank’s perspective for a sec. This is not just a one off cost that they somehow have to manage. Who knows where it’s going to end up?

Letting the government tax you now is like letting Dracula set up a catheter in your jugular and trusting him to only take as much as he needs.

(Just a couple of drops to tide me over to pay day…)

So there’s a lot more at stake here than the initial estimate of $1.5bn a year. It’s a liability that could quickly grow to $3bn or $6bn or $12bn!

So the stakes are high – much higher than I thought.

The question now is how are than banks going to play it?

So far, their response has been fairly predictable. And that’s because somehow the government did a good job of keeping it secret. The banks genuinely seemed to be caught off-guard.

And so their response has been pretty lame. It’s “tax by stealth”. It’s going to be passed on to consumers, or maybe shareholders. Jobs are at risk. It’s “playing fast and loose”. It’s poorly thought out and light on detail.

The banks seemed to be throwing up a bunch of muck and seeing what stuck. But all it did was just create noise, and by the time the banks had figured out their story, the front pages had moved on.

The PR battle has been fought and won.

And this is what makes me nervous. If the PR battle is won, what happens next? If you back a grizzly bear into a corner, what happens next?

As my mate says, the banks can’t afford to roll over on this one. If they cop it sweet, and spread the cost out across their consumers, shareholders and staff, all it says to the government is that cookie jar is open.

Next time you need the money, just dip in here first.

My mate says that the banks have to go hard and they have to go now. They don’t have a choice. Even if they lose this particular battle, they have to leave the government with enough scars to make any future government think twice about tapping the Bank Levy cookie jar.

If they don’t it will cost them another $6bn… at least!

So how would they do that?

Well, what does a banking sector on the offensive look like?

I don’t know what you reckon (I’m genuinely curious, let me know your thoughts), but I think whatever counter-offensive we see, it’s going to involve rate hikes.

A lot of rate hikes.

My friend reckons the dominant strategy for the banks is to hike rates so hard that they almost put the economy on the floor. … almost.

And I think they could do that. They could say, we’ve got the bank levy to deal with. We’ve also got APRA on our backs about shoring up our capital bases. Fine. You want us to be “unquestionably strong”? Here it is.

100 bps.

Bam.

(I’m in a pretty sweet position but even I would notice a full extra percent on my interest payments.)

And if they really wanted to stick the knife in, they could focus hikes on investors (since negative gearing would mean the government would actually get less revenue) while giving first home-buyers a discount to try and sway public sentiment.

They could also go hard on foreigners purchasing apartments to try and push the (already-shaky) apartment segment over.

100bps, overnight, would hurt. A lot. It could be enough to break sentiment in the property market and in the broader economy altogether.

It could be enough to bring on a recession, which would be enough to ensure the government was turfed from office.

And that, maybe, would make any future government think twice about tapping the cookie jar.

And ScoMo says he’ll be watching the banks closely, but it doesn’t matter. Even if the ACCC forced them to reverse course at some point down the track, you only need high rates for a short time to snap the neck of sentiment. A month would probably do it.

If my mate is right, it’s a dangerous situation because the banks’ strongest play seems to be to take the economy to the brink of collapse, if not over it altogether.

It’s killing me imagining what’s going on behind the scenes right now. It’s going to make a fantastic book one day.

If we make it through.

What do you think? Is my friend making a mountain of a mole-hill?

Chinification

January 24, 2017 by Jon Giaan

The Chinese economic model – built on debt and secrecy – has found a new outlet store: Australia.

You know, I kinda like China’s gumption. Through an era where the anglo way was the only way as far as economic development was concerned, China remained sceptical.

And while they were being lectured by the West about free-trade and capital flows, I think they saw it for the smoke screen that it was.

“It was low tariffs and free flows of capital that made you rich, was it? It wasn’t slavery, military conquest and the covert over-throw of democratically elected opponents then… No? Really?”

And so they have steadily developed their own way of doing things.

What that way exactly is, is a bit of a mystery. So much so that you wonder if even anyone in China really knows what’s going on.

And China has long since passed the point where most ‘free’ economies would have collapsed in on themselves.

Like Japan. Japan got too high on the debt-juice, and is still wrestling with the hangover twenty years later.

But it hasn’t quite played out that way in China. And partly that’s because the Chinese authorities still have some control over everything.

So say developers borrow too much to build a bunch of buildings nobody wants. In Australia that could bring the banking system to its knees. But not in China. You just order the local governments to buy up the buildings, and the banks to go easy on the debt repayment schedules.

Problem sorted.

And so the Chinese economy looks kind of bananas, but then it’s doing it own thing so who knows how it’s going to play out.

And if the truth be told, even the Australian economy, with a monetary system disconnected from anything real and sky-rocking household debt looks pretty bananas too.

But that’s the modern world. Everything is bananas. What’s a monkey to do?

But then things got a little weird over the weekend, with two data-publishers in China ‘going dark’.

Reuters was running the story:

At least two major Chinese private providers of home price data have stopped publishing the figures, at a time when economists are split whether the red-hot property market will remain a driver of the economy in 2017.

The China Index Academy, a unit of U.S.-listed Fang Holdings, has stopped distributing monthly housing price index data for 100 cities that it usually issued at the start of the month.

The academy told Reuters on Friday it had suspended distribution indefinitely, without giving a reason for the suspension.

“I don’t know who exactly is making the order, and it’s not mandatory,” said a source with knowledge of the matter, who declined to be identified as the topic is a sensitive one.

E-house China, another influential private real estate consultancy, has also indefinitely suspended its monthly housing price index for 288 cities.

“Judged by current conditions, we won’t publish it in the future… Housing prices are an extremely sensitive matter right now,” a source with knowledge of the matter said on condition of anonymity.

The Chinese property bubble has been drawing ohhhs and ahhhs from the kiddies for ages, so now what? The Chinese government bans the data because it doesn’t like what the data is saying?

“I fixed it. I’m a fixer.”

So normally this would be a “not my circus, not my monkeys” type thing, but I think Australia could well be inside the fallout zone.

And the thing I keep thinking about is all these Chinese developers, who have developed their business model under the firm and protective hand of the Chinese state, coming and setting up shop here.

I mean, you look at the coming apartment glut, which is as obvious as the nose on my face, and you think, what are these developers thinking?

And maybe they’re not thinking. Maybe they just don’t even care about supply and demand projections.

Maybe they just happily build, safe in the knowledge that someone will buy it. If it isn’t the public, then the state will always step in.

Chinese developers have totally changed our urban landscape, and they’re still coming. From the AFR:

Chinese developers roared back into Melbourne in the final five months of 2016, snapping up three-quarters of development sites as they shrugged off concerns about apartment oversupply, tougher planning rules and higher property taxes.

Real estate agent CBRE said 75 per cent of the 45 Melbourne development sites they transacted between August and December were sold to mainland Chinese buyers.

“We’ve sold more properties to Chinese buyers in the past five months than in any other five-month period since 2009,” said CBRE national director Mark Wizel…

Bananas.

I don’t really worry about what impact its going to have on the Australian financial system. Aussie banks stopped lending to these things three quarters of a year ago.

But I do worry that Australian cities have become an outlet store for the Chinese development model. Chinese money is funding Chinese developers to build apartments to sell to Chinese buyers.

Who the hell signed up for that?

And how far can we trust a state that is willing to flip the switch on it’s own data providers? And how closely do we want to be tied to an economic model that’s only sustainable so long as everyone is kept in the dark?

These are big questions. Huge.

Why are we still not talking about it?

What do you think China’s up to?

Robots will use us as furniture

September 19, 2016 by Jon Giaan

The future for humanity looks a little grim from the continent…

Since I’ve landed in Greece, I’ve been taking the time to listen to what the rest of the world is saying about the global economy. I tend to sift through the same sources at home, but I’ve had some access to some fresh, more European perspectives over here.

My God it’s depressing.

They don’t see their problems as particularly European. It’s more a ‘Capitalism in the 21st century’ type thing. And when you ask people about Australia (No, Lord of the Rings was New Zealand) they just think we’re ten years behind the curve.

That is, the dynamics of global capitalism soured with the dot-com bust. Australia dodged the bullet thanks to high immigration and a China-driven mining boom, but really, we only just bought ourselves a bit of extra time.

In ten years, we’ll be exactly where Europe is – with depressing demographics, failing labour markets, and thin-pickings for investment opportunities.

And that picture isn’t pretty. We all know about the economic bloodbath that Greece has become, but youth unemployment across Europe is truly scary.

And what went wrong?

Robots.

Well, you hear this line a lot – that robots have ruined capitalism, but its really just a way to make the problem sound sexier than it actually is.

Exponential technology is to blame.

That is, technology advances at an exponential rate – faster and faster. Humans advance linearly (if at all!). We’re simply getting left behind.

The dream of technology was that it would make humans more productive. Give a primitive human a club, and he becomes a more efficient hunter. He doesn’t have to rely on his soft, hairy hands. He has hunting technology now.

And so he becomes more productive. He can either kill more things with the same amount of time and effort, or he can kill the same amount of things with less time and effort, and switch the surplus time into leisure, or mating or crafts.

The club is human-augmenting technology. It makes the human more productive.

And for most of history, technology has been human-augmenting. Clubs, wheels, iron, steam engines, word-processors.

The trouble is, we’ve kind of tapped out the human potential (with respect to economic output.) Adding more technology to the average human only makes us marginally more productive.

There’s only so much technology a human can manage and engage with.

And at some point we become overwhelmed and distracted and hang on, I just got a message.

So rather than having human-augmenting technology, we have technology-augmenting technology. Productivity gains now only happen when we marry technologies up together. Design software and 3D printers. Big data algorithms and robo-traders. Computers designing other computers.

Robots improving themselves.

There’s no place for humans in this story. Technology marries up and looks back at us and thinks, “Ugh. I can’t believe we used to go out. What was I thinking? He’s just a dense slab of meat. And what’s that whole ‘sleep’ thing about anyway. Lol. Have some coffee and a Snickers, meat brain.”

So we’ve gone from human-augmenting to human-replacing. We’re being cut out of the dance. More and more jobs are in the robot firing line – even actors have a 40% chance of being replaced by robots in the next 20 years!

(That said, you could probably already replace Matt Damon with a toaster.)

Few jobs are safe. That’s why I’m planning to minister religious sermons to athletics teams.

These things are hard to predict, so I don’t place too much weight on the above probabilities, but the trend is clear. It is getting harder and harder to justify the human’s role in economic output.

Sure, new jobs will open up, but how long until technology swallows them up as well? And that’s the thing about exponential tech. It’s just gets faster and faster. The time lag between a job opening up and being replaced by a robot will get smaller and smaller.

You’ll start a job in the morning and be working on your resume in the afternoon.

But even if we’re not talking about a massive jobs cull, what happens to wages in this story? Wage gains are tied to productivity growth. The more your workers produce, the more fat there is to share around.

And in the human-augmenting phase, you could justify wage gains because each worker was producing more for the company.

But from here on, productivity gains will come from combining technologies. Humans are just getting in the way.

From the firm’s perspective, it’s easy to justify giving the technology a pay rise (investing more in it). It’s much harder to justify paying the humans more.

Wages growth has already fallen to record lows. I just see it going lower (as it’s done in Europe.) Pretty soon, falling wages will be the new normal. Only the pace of decline will be interesting.

But once wages start falling, consumption follows suit, and the whole fabric of growth-driven economics starts to unravel (which is what we’re seeing in Europe.)

But this is where the medium term gets interesting. Until we can totally rethink the way our economies work, we’ve got a massive political problem.

And what do politicians do with political problems?

Throw money at them.

So we’ll see more money-printing and more public spending. Soon, the public sector will dominate the economy, labour market and wages.

(And we’re already seeing that with the rise of the Health sector in Australia).

And who knows what happens after that. Maybe the whole can goes up in flames. Maybe we just shuffle on for a few centuries until the robots enslave us.

But the short-term implications are clear. If the government is going to start throwing money around, we need to get in the way of some of it.

Assets in fixed supply are the natural go-to: gold, silver and of course property.

But in the long run, just think about how you can make yourself useful to the robots.

Are things as grim as the Europeans think?

The catch-up rate cut we deserved

May 4, 2016 by Jon Giaan

Yesterday’s rate cut really just unwinds the tightening of financial conditions we’ve seen over the past 6 months. We’re playing catch-up.

The RBA surprised a few folks with their rate cut yesterday. As I’ve written before I thought rate cuts were coming, but I didn’t think we’d see them quite so soon.

But it seems Glenn Stevens hand got forced by the unfolding political cycle. If he didn’t cut now, his next chance would have been just a few weeks before the election – and the Governor is not in the habit of dropping bombs.

After that, it’s out to August. 3 months can be a long time in economic cycles, so the RBA decided to get out on the front foot. Bravo. Lovely shot, sir.

In my mind this rate cut is backward looking. That is, the RBA’s hand has been forced by the way economic conditions have panned out. It doesn’t say so much about where we’re going, as where we are now.

And it’s a rate cut we deserve.

First up there is the inflation data. The last inflation read a few weeks ago was a bit of a shocker. It was lower than everyone was expecting, and has inflation dropping below the RBA’s target band.

And that means the RBA is missing their target. If they didn’t act, it would have raised questions about how committed they were to their target.

How’s your ticker, Glenn?

And economic data can be choppy, but deflation in the March quarter, and slower inflation over the year was broad based. You couldn’t just fob it off as some unseasonably low twinkie prices. Deflation was everywhere. It demanded action.

But really the low inflation number probably just gives Glenn the cover he needs to deliver the rate cuts he wants.

Because the reality is that financial conditions have become tougher over the past year. And its starting to put a drag on things.

Tighter financial conditions are coming from two places. First, offshore funding costs are rising. This is where the banks get a lot of their money, so the banks money is getting more expensive.

That means they either pass the costs on to us, or take a hit to profits (guess which they prefer.)

So far they’ve absorbed a fair bit of it, but some have raised rates slightly, and the smaller banks are letting it be known that funding costs are squeezing their bottom line.

It’s likely we would have seen rates keep drifting upwards through the rest of this year.

And it’s the reason why ANZ decided not to pass yesterday’s rate cut on in full. Listen to Group Executive Fred Ohlsson:

The background is that wholesale funding costs have again been rising in recent months. While we’ve absorbed this for some time and taken steps to reduce costs in our own business, higher funding costs mean we are only in a position to pass on a portion of the reduction in the cash rate to our customers.”

At the same time, the APRA restrictions that kicked in around the middle of last year have put a brake on bank lending, most pointedly on mortgage lending.

We are seeing credit growth slowing, and with that, a temporary cooling in the property market. (Temporary so long as we don’t see more restrictions.)

That also gives Glenn a bit of cover. The most common criticism you hear when the RBA cuts rate is that it’s pouring fuel on the property bubble. (Ugly metaphor I know).

Right now, with growth slowing in every capital city, and the APRA restrictions seemingly doing their job, this criticism will have less weight.

So the point is, that with increasing offshore funding costs and the APRA restrictions, we’ve actually been living in one of the tightest credit environments in recent times.

Putting them together, which is what this chart from Goldman Sachs does, we can see that financial conditions are tighter now than at any time in the past four years, including the last four rate cuts.

(This hasn’t been updated for yesterday’s cut.)

So really, the question would have been, ‘why not now?’

The RBA is just playing catch up. Yesterday’s rate cut just alleviates the tighter conditions we’ve been experiencing in recent times.

In that sense, it’s a rate cut we deserve.

My feeling is that this should help the property market in particular. The APRA restrictions have been noticeable, and they’ve shaken confidence a bit. But this rate cut will bring mortgage rates down to incredibly low levels. It should give things a spark.

However, the Aussie dollar didn’t seem to move much over night, and it’s pretty clear that the RBA would like to see a lower dollar. The dollar is one of the things making it a bit tough for the Aussie economy right now.

So I think we’ll see another rate cut. I wouldn’t expect to see it before the election, but I’ll certainly have my eye on the August meeting.

What do you think? More rate cuts on the way?

Should Turnbull increase the GST?

November 10, 2015 by Jon Giaan

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With everything back on the table, what impact would a GST hike have on property?

I’ve been wondering what would happen if the government hiked the GST. Specifically, what impact would it have on the property market?

The new Turnbull government has set their sights on tax reform, and put everything back “on the table” (must be a big table) including raising the GST.

It’d be a gutsy move, but maybe it could be done. But what would it do to property prices?

Instinctively, you’d think it wouldn’t be great. There’s enough head-winds facing property at the moment. A tax-hike is the last thing we need.

But the truth is probably more complicated than that, and it’s true that a lot probably depends on what adjustment packages they bring in to help manage the transition.

I mean a tax hike on it’s own would hit households right in the back pocket, and that’d obviously take a bit of steam out of the housing market. But you can almost guarantee that a GST hike would be balanced out by income tax cuts or something else or the other, so the impact there isn’t entirely clear.

To my mind, the most likely channel of influence is through new house prices. New houses are liable for GST, so a GST hike goes straight to the price.

If we assume the cost of a constructed detached home is something like $300K (excluding land), then a 5% increase in the GST (from 10% to 15%) would add about $15K to construction costs.

That’s not nothing.

If we assume land costs $200K, then we’re looking at a 3% increase in the final price of bringing a new home to market.

This is kind of where it gets interesting though. Because the GST doesn’t apply to existing housing.

So while new housing has gone up by about 3% due to the GST, existing housing hasn’t.

But new housing and existing housing live in the same market. They are substitutes, more or less. You can live pretty much just as well in an old house as a new house.

And so I would say that the cost of new housing is one of the main factors influencing the price of existing housing.

And part of the reason why we’ve seen such strong price gains in existing housing over the past twenty years or so is that new housing supply has been held back.

We haven’t been building enough new houses – mostly because planning restrictions have tied up land, which has pushed land costs up.

And with a shortage of new housing coming to market, the housing market overall has been held in shortage, and the competitive pressures that this has created have bid up prices.

Price gains in the major cities have been in large part driven by a shortage of cheaper new housing coming to market.

And so if the GST goes up, the most likely scenario is that as the price of new housing goes up, more people will be attracted to existing housing.

Existing housing gets bid up, probably by a similar degree to new housing.

And so the most likely scenario is that a GST hike will increase existing house prices by 3%.

This will happen even though existing homes and existing home owners have not been directly affected by the GST.

For an existing home owner, it’s a windfall benefit. You will get all the compensation and adjustment perks that come with the GST hike, plus you’ll see 3% capital gain in your house.

You can’t quite lock that in though, because markets are complicated, and influences get messy over time.

Say for example house prices have started cooling, thanks to a tighter credit environment. If developers don’t think that the market will wear an increase in new house prices, they might decide they just have to absorb the GST hike themselves.

A GST hike in a market that is clearly cooling would be tough for developers. It’d hurt their margins.

That said, given we’re likely to be given plenty of warning about the hike coming in, they may get a big lift in the short term.

When the GST was originally introduced on 1 July 2000, people had plenty of warning that prices were about to go up by 10%. In anticipation we saw a lot of pull-forward of construction activity in the 12-months prior.

Dwelling commencements in the 99/00 financial year increased by 15% to 172K, before falling to a record low of 115K in 00/01. The year after, in 01/02, commencements rebounded back up to 165K.

So despite the chopping and changing, the commencement average over those three years was 150K, which was in line with the long-term averages.

From this it really looks like the GST didn’t affect overall activity as such, but had a big impact on the timing of that activity.

However, following the crash in 00/01, the Howard government introduced the first home owners grant to juice the construction market, and the rest is history.

Have the governments since Howard learnt that lesson? It wouldn’t surprise me if they hadn’t.

And so it wouldn’t surprise me if we saw something similar – some kind of concessions or grants on the demand side to kick things along a bit.

And so if there hasn’t been long-term damage to construction, it would just be a bonus for the new housing market – especially developers.

Anyway, this is all just a thought bubble until we know what is on the table, and we have a better sense of where the market is at.

And without taking a view as to whether the government should increase the GST, there are at least a couple of scenarios I can see where an increase in the GST ends up being a positive for property.

Should Turnbull increase the GST? What would it do to the housing market?

Deposits out of thin air…

September 29, 2015 by Jon Giaan

Chinese buying is changing, but not letting up…

Today’s blog is brought to you by the number 24.

That’s how much the Aussie dollar has depreciated against the Yuan over the past 18 months, in percentage terms.

Why does a 24% fall in the Aussie matter? Let me show you.

Using some round numbers just to make it easier (on my head)…

Let’s imagine you’re a Chinese investor and you bought a Melbourne apartment, off the plan, back in April 2014. Let’s say the apartment cost $444K.

You put down your 10% deposit, leaving the rest til settlement.

Back in April 2014, the exchange rate was 5.86CNY to the dollar. So you’re 44 grand deposit costs you CY$257,840, and you’ve got CY$2,344,000 outstanding.

Now back then a lot of developers were offering extended settlements. Some as long as 18 months!

So you’re in no rush to settle. And you see that the Aussie dollar is falling against the Yuan, which means your liability is falling. And so you let it run, to see how far it goes.

Fast forward 18 months to today and the exchange rate has fallen from 5.86 to 4.47 – a 24% fall.

You can’t delay settlement any longer, so you settle up the remaining $400K. But now that costs you just CY$1,788,000.

And you’ve just found that you’ve saved yourself CY$556,000.

How much is that? Well, a new car costs you about $CY150,000, so it’s about 4 new cars.

Not bad right?

Or put it another way, swing it back into AUD and you’ve got about A$124K.

About three deposits worth…

See where I’m going with this?

Now of course we don’t know where the Chinese are going to put the money they save. But let’s have a look at their options. There’s Chinese real estate, which seems to be one of the strangest bubbles in history with ghost-cities all over the place. Or there’s the Chinese stock market, which is the second strangest bubble in history, now seemingly being propped up by the government itself.

So neither of those seem like great options.

So then there’s off-shore markets. We know Aussie real estate is popular, but what about equities. So far, we haven’t seen a lot of Chinese demand for foreign equities. Chinese households don’t seem to be that sophisticated. (How many Aussies households take an active interest in off-shore markets?) But Chinese households ‘get’ property. And there’s no shortage of agencies helping them into the market.

And for the Chinese, property has a distinct advantage. It is seen, rightly or wrongly, as being a step towards Australian citizenship (especially if you’re putting your child through university.)

It also seems that Chinese investment isn’t so much about “getting into” anything as it is about “getting out of” China. It seems that Chinese money is on the move because they don’t trust where the economy or the Yuan is going in the long-term. Or they don’t trust the government that might just decided to nationalise their wealth. Or they fear that their wealth is going to get caught up in a serious corruption crackdown that’s been in effect since 2012.

Whatever the case, if it’s a “getting out of” story, then you don’t really care what the price is. You’ve got a set amount you need to get out of the country. If the price falls, you just buy more.

You hearing me? You just buy more.

And so that’s why I think we just haven’t heard the end of the Chinese story, or the influence it’s had on the Australian market.

That said, it’s not entirely a one-way street. The 18-month settlement contracts seem to be a thing of the past. I’m now hearing stories of 30-day settlements, as things look a little shakier back home.

The recent government crack-down on illegal foreign purchases of existing property might also put a bit of a brake on things.

There are currently over 500 cases under review, and there’s an amnesty in effect until November.

I suspect that most of these people had no idea they were breaking the law. They were probably just following the advice of their investment advisers. My bet is that they’ll pull themselves into line, but the demand will remain. Perhaps we might see more switching from existing to new property.

And that won’t be a bad thing.

The Chinese government also seems to be cranking up their anti-corruption drive, and that might slow the flow of funds out of China a little.

But I suspect that if you’re high enough up the tree to seriously game the political system in your favour, you’re probably more a trophy-mansion type buyer than a neat-little 3-bedder buyer. So the impact there might be contained to the high-end of town.

Finally, the falling Yuan does mean that some buyers will be sitting on paper loses right now. If you settled back in April 2014, then you’re down 24% on the exchange rate, up 10-20% on capital gains, so probably down about 10% over-all.

I guess some Chinese buyers won’t be loving that.

But I also reckon many of them wouldn’t care. As I said, the point was to get money out, and they’ve done that. And if they’re investing for the long term, and they can be flexible about when (or even if) they need to exit, then they can just wait for a favourable exchange rate and cash out then.

I don’t think it’s going to put too many Chinese buyers off.

So on balance, I think Chinese money is still a strong net-positive for Aussie property, though it will be interesting to watch how political movements here and in China shape the flow and segment-destination of that money.

What do you reckon?

Will the Chinese buyer underpin the Australian property market for a while?

How do you think you can profit from this once-in-a-century Chinese buying trend?

Towering Infernos of Death

June 2, 2015 by Jon Giaan

Looks like some dodgy practices have left some high-rise buildings prone to fire. Investors aren’t the only ones about to get burnt.

I’ve been flying some red flags over the inner-city apartment market for a while. My gripe has been that this whole segment has been driven by a market (mostly Asian investors) who have little understanding of the realities of Australian real estate.

As a result, many of these units are tiny by Australian standards, and you’ve got to wonder what the resale value really is. Add to that the growing risk of a glut and it’s a big red flag to investors.

But the story just got a whole lot worse, with claims emerging that potentially hundreds of high-rise buildings across Australia might be highly flammable.

That’s right. Highly flammable.

But let’s get to that in sec. Because it’s not the only reason for investors to be cautious.

It starts with the surge in multi-unit construction and sales.

If you look at new home sales right now, detached dwellings are flat, and all the action is in multi-units.

High-rise sales increased by 23.5 per cent over the three months to April 2015, to be up by whopping 57.7% on the same three month period a year earlier.

That’s phenomenal growth that isn’t showing any signs of slowing up.

And it’s no news that these sales have been driven by overseas investors. In Melbourne, one in three new property sales go to Chinese investors.

Yep, Chinese buyers are a full third of the market.

In Brisbane CBD only one in ten unit sales go to owner-occupiers – many of them from interstate or overseas.

So it’s investor driven and it’s foreigner driven. That’s got to give any serious investor pause for thought.

And all this appetite has sparked a surge in unit construction. Apartment approvals are booming and at record highs in Sydney, Melbourne and Brisbane.

Quantity surveyors Rider Levett Bucknall have been counting the number of cranes on our cities skylines. Last count in Sydney showed there were 123 cranes…

… almost twice as many as six months ago!

They reckon there are now 426 cranes at work across Australia’s capital cities, a number that’s up 31% in six months. Three quarters of those cranes are working on residential projects.

So that points to massive supply already in stream, though much of it won’t be realised in the market for two or three years.

Now that might all be one thing if these were quality dwellings. You could just balance supply and demand and see how things are looking.

But they’re not. It seems that many of them are shoeboxes, sold to Asian buyers working with Asian expectations of what a reasonable dwelling size is.

And now there’s claims that many have been built using dodgy materials that aren’t up to Australian standards.

Like the cheap cladding that was responsible for the fire at the Lacrosse Building in Melbourne last year.

High-rise cladding is meant to be resistant to fire. But this wasn’t. It was the cheap stuff. And it burns like matches.

The ABC’s 7:30 Report was running the story last week:

MADELEINE MORRIS, REPORTER: When the Lacrosse Building in Melbourne’s Docklands district caught fire last November, it exposed a sleeping danger in Australia’s booming construction scene: cheap cladding imported from China that is highly combustible and covering an unknown number of buildings in Australia…

This fire brigade animation shows how the fire, lit by a smouldering cigarette on the eighth floor of the Lacrosse Building, swept up 13 stories in as many minutes. It’s running up the cheap, plastic-filled cladding.

MICHAEL O’CONNOR, CFMEU: This product is rife. It’s used in buildings throughout Australia. All the information we’re receiving, Brisbane, Perth, Melbourne, every capital city, we believe this product is used in many buildings and particularly in high rise buildings…

MADELEINE MORRIS: It shouldn’t be. Building regulations prohibit the use of Alucobest cladding on high rise buildings. It is allowed on low rise buildings and that’s why it’s imported into Australia and easy to buy.

MICHAEL O’CONNOR: The material that’s fire-resistant is a lot more expensive than the material that isn’t, so if you’re a builder and you see two different products, one’s a lot cheaper and you get told that it meets Australian standard, you can’t blame the builder for going for that product…

MADELEINE MORRIS: The problem is, surveyors may not know if builders have illegally used the flammable cladding on skyscrapers…

And proper documentation about the materials used on buildings is frequently absent.

In 2011 the Victorian Auditor-General discovered 96 per cent of building permits issued by surveyors didn’t have proper documentation, leaving “little assurance” surveyors were “adequately enforcing building and safety requirements”…

The construction workers union says these checks and balances aren’t being met…

MICHAEL O’CONNOR: When it comes to building materials and particularly imported building materials, it looks like no-one’s in charge. So we have a flood of building materials being brought into this country, some claiming to meet Australian standards and we know they don’t, some not even bothering to make a claim of meeting Australian standards. And when you go to the different authorities, whether it’s the ACCC, whether it’s the building code authorities, everybody’s trying to say it’s somebody else’s problem.

This is scary stuff.

This is what happens when a market runs hot. There’s so much money moving so quickly that it’s hard to keep on top of.

And this is where dangers to the market come from. It’s the kind of thing that can over-supply a market – flooding it with cheap, poor quality and potentially dangerous products.

It doesn’t do anybody any good. (Except perhaps foreign developers.)

For the good of Australia, and those people with a legitimate interest in the property market, we need to get on top of this.

Before someone gets killed.

What do you see when you look at our capital inner-city unit markets?

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