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Is the credit crunch already over?

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The data says that APRA’s restrictions have done their job. Time to let the market run free again.

It’s looking to me like the credit crunch might be about to ease up.

Let’s remember how we got here. Right now, the national property market is in the midst of an orderly and mild consolidation.

And consolidations are expected. The property market moves in cycles, up and down.

Most times that’s driven by dynamics in the cycle itself. Left to it’s own devices, the property market, just like the broader economy, will run hot, then cool and then run hot again.

But that’s the thing. The property market wasn’t left to its own devices. Since 2016, APRA has been getting involved, creating limits, particularly on investor lending. It started with making sure lending to investors wasn’t growing too quickly, and then became about cutting back the pace of Interest Only (IO) lending.

This clamp down on IO lending was across the market, but was particularly focused on investors.

Predictably, as the credit taps were squeezed, price growth began to stall, and over the past year or so, prices actually started to come-off, little by little.

And that’s where we are today.

So obviously if we’re interested in finding out when the market is going to start growing again, then the first question is really, ‘when will APRA back off?’

This is a little hard to predict. One of the things that came out of the Royal Commission was that APRA – who is responsible for regulating the banks – seems to have been a bit asleep at the wheel.

Given the huge list of crimes, misdemeanours and affronts to human decency that emerged from the Royal Commission, you do really have to wonder what APRA were doing.

APRA has been made to look a little silly. But what worries me now is that they might over-compensate – try to play the tough wild west sheriff. And that might mean that conditions remain tougher for longer than they need to.

And the truth of it is that right now, I’m seeing a case for letting up on the restrictions.

Take a look at this chart here from the RBA. It shows what has happened to IO lending since the restrictions came in in 2016.

The orange lines – new lending – is the one to be watching here. As you can see, IO lending pretty much fell off a cliff when the restrictions came in, particularly to investors in the bottom panel there.

But what you see here is the banks very quickly bringing themselves into line.

And after the initial adjustment, things just sort of levelled out – the share of new lending has remained fairly constant in recent months.

If it remains constant, the share of outstanding lending – the blue line – will keep trending lower, and until it re-joins the orange line.

And the structural change in the market that APRA was looking to create, will be complete.

Mission accomplished.

The thing I would note is that once this transition has been made, then the normal cyclical dynamics should start to reassert themselves.

That is, even if the share of new lending remains at around 30%, after a year, that will be the new reality we’re working with – so our annual growth rates (which compare this month with the same month 12 months ago), there won’t be any impact left in there at all.

And so that should mean that we should see price growth should realign with the cyclical trend.

It is possible that these restrictions have caused the cycle to turn. There’s a good chance of that. So I don’t think we’ll see positive growth numbers this year or in the first half of next, but after that, I’d be looking for things to start moving again.

But I’d also be saying to APRA, since you’ve caused the cycle to turn, and you have done what you set out to do with IO lending, maybe it’s time to cut investors some slack.

We certainly don’t need any more restrictions. We don’t need no sheriff out there shooting from the hip.

Here’s hoping cool heads will prevail.

If Labor wins, buy this type of property

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I’m wondering what impact a Labor government might have on the market. I’m not the only one…

With Malcolm Turnbull actively campaigning against the Liberals in his old seat in Wentworth, and the coalition looking like it’s on the brink of implosion, I’ve been thinking about what a Labor government might mean for our property markets.

Turns out I’m not the only one – The annual Property Investment Professionals of Australia survey shows that a lot of investors are worried what impact Labor’s negative gearing and GCT reforms will have on the market:

Australian property investors are shrugging off finance issues, concerns about taxation policy changes, and the market slowdown in Sydney and Melbourne with a growing majority believing this year is a better time to invest than last, the 2018 Property Investment Professionals of Australia (PIPA) Property Investor Sentiment Survey has found.

The national survey, which gathered insights from 820 property investors, shows that more than 77% of respondents think now is a good time to invest in property, with 52% looking to purchase a property in the next six to 12 months.

However, more investors than last year (48% in 2018 versus 43% in 2017) say that changes to investor lending policies have impacted their ability to secure finance for an investment property.

Potential changes to negative gearing and Capital Gains Tax policies are also a growing concern, the survey found, with 45% of respondents indicating they would reconsider their future investment plans as a result of proposed changes.

While a majority of investors (64%) believe it’s unfair to charge investors higher interest rates compared to owner occupiers, most (61%) also indicate they will have no problem meeting higher interest rates when their loans switch to principal and interest repayments.

Even though the Sydney and Melbourne market slowdown has been widely reported, most investors appear unperturbed with almost 90% indicating that concerns about price falls in our two biggest capital cities will not slow down their investment plans.

Brisbane remains the hot favourite for investment, according to the survey, with 44% believing it was the capital city with the best investment prospects (up from 43% last year). About 26% picked Melbourne, down from 32% last year, while only 8% chose Sydney as having investment potential.

This all fits with one of the stylisations I have about the market – professional investors are generally well positioned to deal with rises in rates or anything like that. If anything, it’s amateur investors who are just blindly following the advice of their accountant – that’s who we need to worry about.

If you are self-identifying as a ‘professional investor’, then you are probably well covered.

The focus on Brisbane is interesting. Brisbane has been underperforming for a few years now, and I’m not convinced it’s about to dramatically turn all that around. So I’m perhaps not as bullish on Brisbane, but that might be because I’m not as bearish on Melbourne, or even Sydney.

There’s gems to be found wherever you look.

But it does seem clear that negative gearing reform is rearing its head as an issue.

So am I worried?

I would say I am ‘cautiously optimistic’.

I’m optimistic because I don’t see the reforms having a huge impact on the market, in and of themselves. But I’m cautious, because the market is facing a lot of headwinds at the moment, and a lot of them regulatory.

That’s the thing when you’re camel is fully laden. You just don’t know what’s going to be the straw that breaks its back.

I don’t think it will be negative gearing, but I also think Labor would be smart to wait and see what impact recent changes in the credit market have, before it goes and does anything it might regret.

The other thing to remember is that Labor’s proposal is to remove negative gearing on existing homes, but leave it in place for new builds.

That mean we might just simply see a shift in investor demand from existing to new construction.

Stockland CEO Mark Steinert sees the writing on the wall:

The Labor Party’s plan to limit negative gearing tax breaks to new housing would put a rocket under the business of residential developers because demand from investors would surge, Stockland chief executive Mark Steinert says…

“Our business will rip,” he said at the Property Council of Australia’s annual congress in Darwin.

“We’re all about new product. At the end of the day, half our buyers are first-time buyers, and 80 per cent of our buyers are owner-occupiers. If the investors are going to participate in the market like they have in the past, that means they’re all pointing at our product and other developers’ products”…

Good luck to him. He’s probably right.

And when you remember how busted our planning system is, you could see a surge in demand for new builds meet bottle-necked supply… and that means rising prices.

Hard to know how it will balance out, but it could mean that it could even be a net-positive!

I’m not sure. I’ll have to do a bit more thinking about how to balance those equations.

But I think that is how I’m thinking about it. Labor’s negative gearing reforms probably won’t have a huge impact on the market, with a reconstitution of demand price growth away from existing homes to new builds…

… provided Labor doesn’t fluff the timing.

We’ll see.

Trumps Hand In First Trillion Dollar Company

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Stock market valuations in the US and around the world have reached crazy levels. Does that mean we’re due for a crash, or could we actually go even higher?

I don’t know if you caught the news, but last month, Apple won the race to be the world’s first trillion dollar company.

Think about that for a sec. That’s a company worth 1,000 x 1,000 x a million dollars.

Serious cheese.

And it wasn’t like Apple was out on their own. There were a few companies in the peloton, and Amazon stuck a toe over the trillion dollar line itself earlier in the week.

Google, Microsoft, even Facebook seem like they’re within striking distance too.

The idea of a trillion dollar company is mind-blowing. That makes single companies, under the helm of single individuals more wealthy and more powerful than some entire continents.

(Antarctica, looking at you. You’re not pulling your weight.)

I mean, it makes Apple worth more than all but 15 countries.

But what’s going on here? Is this the sign of an economy on the ever upward on onward? Or is it just the next piece of evidence that the whole show is just bat-sh!t crazy?

What do you reckon?

It is true that the US share-market is on a bull-run. It’s having a good year when many major countries are not. Like China. Compare China and America’s stock markets since the start of the year:

America is pumping along. China is having a dog of a year. (Hey? Pun of the year, anyone? Anyone?)

That’s good news, right?

Well, yes, mostly. But some people worry that things are getting a little bubbly.

And there are some grounds for that concern. On a few measures, America is getting back to some previous-bubble highs.

Like, take the ratio of price to sales – the value of a company relative to its revenue, for example.

There’s two ways to look at it across the entire share market, (one straight, the other weighting companies by their capitalisation), but both are looking pretty bumper.

One has doubled since the GFC. The other is back to a peak not seen since the dot come bubble.

So… is that ominous? Or is it just what we would expect the market to be doing?

That’s a million dollar question right there. But for me, I think this is something that needs an explanation. If there’s not a good reason for it, then I think we should be worried. It might just look like the traders on Wall St were getting a little too high on the sugar otherwise.

But I think there is a good reason for it.

Trump.

Now hang on, hear me out. I’m not saying he’s a brilliant economic manager or anything like that.

But, what I am saying is that the policies he’s brought in – particularly the tax cuts and the tariffs on foreign production, are having real impact.

I don’t know if that’s an impact he was actually anticipating, but that doesn’t matter. It’s happening.

And what’s happening? This is:

That’s the amount of money being repatriated (brought back home) to America by American companies.

In just the first quarter of this year alone, American companies repatriated a massive $300 Billion.

That’s more money in a single quarter than in pretty much the previous seven years, COMBINED!

So money is rushing on home.

And what is going to happen to all that money? Some will go into share buy-backs probably, but much will be invested and turned into economic activity.

So this is some serious good news for the American stock market. And on that measure alone, not to mention a cyclical uplift that’s already so good that the Fed has raised rates seven times in the past couple of years – on that measure alone, I’d be expecting the stock market to be posting some very healthy results.

Which they are.

So I’m not seeing a bubble here… not yet.

And that probably means that the trillion dollar company is probably here to stay.

What a proud moment for humanity.

The value of a credible threat

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I was talking last week about how you’ve got to have a ‘credible threat’ in negotiations, otherwise you’re dead in the water.

If you’re in negotiation with someone, and you can’t create any realistic down-side, then you’re not really in negotiation. You’re in a position of asking… pretty please with a cherry on top.

You’re not in a position of power.

And so sometimes this means you’ve got to be a little tough – or at least play a bit tough.

But a threat alone isn’t enough. It has to be credible.

For example: “If you don’t come around and fix this bodgy plumbing job you did in my new bathroom, I’m going to open a portal from hell and set the hordes of darkness upon you.”

Threat: yes. Credible: No.

And so a lot of people balk at making threats because they don’t feel they can deliver one that is credible.

If you’re a total softy nice-guy, always bending over barrels to help people out, it’s difficult to turn around and deliver a threat that’s credible.

But there is always something available to you.

It reminds me of a story I love about a guy who was set upon by a bunch of thugs. It was late, there was no one around. There was 5 of them, just one of him. It was a hairy situation.

And this guy wasn’t Bruce Lee or Jean Claude Van Damn. A threat to open a can of whoop-ass was never going to be credible.

But he came up with a credible threat.

He picked out the guy who seemed to be the ring-leader – the top dog. Then he looked him square in the eye.

“There’s a lot of you and I’m not much of a fighter. I’m probably going to get hurt. I might even die. I’m ok with that. But I promise you this. If we fight, I swear I will tear your ear right off your head.”

Suddenly he had a threat that was credible. If you were in a brawl, and you didn’t care whether you lived or died, and you set yourself single-mindedly to nothing but tearing someone’s ear off, there’s a decent chance you would.

And suddenly, this gang had a downside. They would still win the fight. They always would. But now there was a reasonable chance that their top dog was going to lose an ear.

There aren’t many things in life worth sacrificing an ear for. Dutch post-impressionist painting maybe, but not much else.

And so the negotiation was flipped on its head. It was no longer this guy pleading for his life, relying on the humanity of the gang. Pretty please with a cherry on top.

Rather it was a threat to get beaten up vs. a threat to lose an ear.

The gang walked away.

But do you see what I mean? There is always a credible threat you can make.

Credibility in turn relies on your strength and weaknesses. It needs to be consistent with who you are as a person, and what you are and are not willing to do.

And you need to be willing to follow through. This guy really would have gone after that ear. The gang felt that.

But yeah, if you feel you’re lacking power in a negotiation, come back and look for your credible threat.

And go hard.

The giant awakens

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It was a strong GDP print last week… and the truth is even stronger.

I just wanted to pull out two things from last week’s GDP release.

First up, every quarter it rolls around, we’re reminded of our record-breaking run without a technical recession (two negative quarters in a row).

We’re now up to 26.5 years!

It’s pretty impressive.

Of course, to a lot of people, it means we’re doomed. The business cycle moves in… well… cycles. So what goes up must come down.

We’ve had it too good for too long. We’re due.

But this was a point Glenn Stevens made before he retired: just because we haven’t hit that arbitrary recession mark, it doesn’t mean that the business cycle is dead.

And if you look at the chart, we still get all the ups and downs of a regular economy. We just don’t stay negative for long.

And in part, that’s been about population growth, particularly through immigration. If you look at the per capita numbers, then we’ve had several recessions in the past twenty years.

So this whole “we’re due” argument… I’m not buying it.

The other thing that jumped out at me from the GDP release is the building pressure on wages.

One of the mysteries of recent years has been the wageless boom in profits – normally corporate profits and wages move hand in hand. Look at the chart below. The correlation is pretty tight.

But at the end of 2016, we saw company earnings pick up, while wages remained flat.

But now wages pressure is building. It looks like wages are catching up quickly, and they’re currently rising sharply.

Looks like we’re heading towards 5-6% per annum.

It could even be more since wages have been repressed for so long.

This could be just what Australia needs.

If you look at the last quarter of growth, it was driven by a surprising surge in exports, together with strong public spending.

Household consumption was unimpressive.

That’s been the theme for a while now.

The Australian economy needs to pass the baton over from the resources sector to the household sector. So far, households haven’t been willing to take it on.

But with more cash in their pocket, they just might be convinced.

The other thing, of course, is that higher wages will eventually feed through into higher rents.

Rental growth hasn’t been keeping pace with prices, and yields have been compressing.

Growing rents will reverse that compression, and once yields get back to normal – say around 4% nationally, then growing rents will feed through into growing prices.

And so as the household sector starts spending again, they will become the engine of house price growth.

And that’s not a moment too soon either. Largely, recent price growth has been driven by credit. But thanks to APRA and the Royal Commission, the credit channels seems to be running out of puff.

There’s a baton change needed there too.

So this is a story of a giant awakening. The Australian household sector is huge, and it’s too important to go on sitting on the sidelines.

It’s a good news story.

Bad News: Your money in the bank- gonski in 60 seconds.

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Another day, another banking attack on democracy.

Valentines Day will go down as a dark day in Australian history.

It was the day that the banks overturned one of the few protections that depositors had.

Ask anyone how safe their money in the bank is. I'd say 80% wouldn't have a clue. The banks are big. The money must be safe.

Another 20% are probably aware that Australia has a federally-funded deposit guarantee scheme.

So if a banks goes broke, and you had money in the bank, then the government will give you your money back, up to $250,000.

It's called the Financial Claims Scheme, or FCS.

(Not to be confused with the government's current public relations program, ‘ffs'.)

So all good, right? Your money's safe.

Well, turns out, it's not so safe. It turns out the FCS is underfunded, and not actually much of a guarantee at all.

In 2011, the international Financial Stability Board based in Basel, Switzerland, found that Australia's FCS contained about $20 billion for each bank in Australia.

Sounds like a lot right. Well, actually, no so much. Each of the four majors, who account for over 80% of all deposits, they each have something north of $400 billion in deposits.

So if one of the big four went under, the chances that there'd be enough in the kitty to cover it are pretty small.

Especially when you remember how concentrated the Australian banking sector is. It's hard to see a situation where a major goes under without taking some of the regional banks with them.

So not a lot to inspire confidence there.

But that's ok, the government could just go into debt or print money to make sure it hit its FCS obligations, right?

Well, maybe, maybe not.

And this is what happened on Valentines day.

The government sprung a sneaky move on the Senate, ramming legislation through while just 7 senators (of 76!) were in the room to vote on it.

(I guess the others were taking their chief of staffs out for a candle-lit dinner).

It was the APRA crisis resolution bill.

What's in the bill?

Well, a bunch of stuff, but the most alarming was the removal of the guarantee bit from the deposits guarantee scheme.

At this point I have to introduce you to Dr Wilson Sy. He was formerly the Head of Research at APRA, so knows what he's talking about.

As he says, “the evidence collected here strongly suggests that the Bill is designed to confiscate bank deposits to ‘bail in' insolvent banks to save the financial system.”

How?

“Or”.

There was key change to the APRA mandate. APRA is normally responsible for “protecting depositors AND ensuring the stability of the financial system.”

However, in the latest bill, APRA is allowed to make its decision in secret, if it is in “the interest of protecting depositors OR ensuring the stability of the financial system.”

See what they did there?

Now typically, protecting depositors is part and parcel of ensuring the stability of the financial system.

But in the middle of a crisis? When banks are going to the wall and the government is running out of money?

When it's facing the prospect of having to print billions and trash Australia's financial reputation?

It's not hard to imagine a scenario where protecting depositors is not the best way to ensure the stability of the financial system.

And since that decision will be made behind closed doors, it's also not hard to imagine a situation where government lackeys just decide to fleece donors and bail-out their banking mates, given the choice.

As Dr Sy points out, the new bill gives APRA and the government “discretion.”

But it's just not a guarantee if the body behind it has discretion.

It's like your insurer saying to you, yeah, your house and contents are totally insured… you know, unless something else comes up. Let's just see how it flows on the day.

And in the middle of a crisis, with a disaster to blame and their banking mates to protect, you can bet that the politicians will use their “discretion.”

And so that's what happened. On Valentine's Day, in the cold, heart of Canberra, the government quietly rushed through legislation designed to screw depositors over.

Thanks, mongrels.

I know the banking sector gives us things to be angry about on a daily basis, but if you're looking for a good outlet for that anger, the Citizen's Electoral Council is running a strong campaign on it. Check it out.

And time to rethink our definition of ‘defensive' assets.

Why the apartment crash is on hold

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Banks are running a closed shop

I've been warning my readers about the high-rise apartment sector for what… like 3 or 4 years now?

They're still standing… Is it time to admit that I'm wrong?

While I generally agree with the line that being wrong about the timing is the same as being wrong, I'm standing by what I said. In fact, if you followed my advice and steered clear of the high-rise sector in recent years, I expect a thank you card for Christmas.

And if things play out how they look like playing out, I expect you'll want to throw in a top-shelf bottle of whiskey to accompany that card.

So if things are as shaky as I've been saying, why haven't we seen more cracks starting to appear in the high-rise foundations? And apart from blacklisting a few suburbs here and there, why aren't banks back-pedaling harder on their exposure to the sector?

These are good questions. One of the old salty dogs of the Australian economic commentariat, Robert Gottliebsen had a crack at answering them the other day. I think the answers were interesting:

“Nowhere in Australia are there more danger signals than in inner city apartments. Most of the property commentaries look at average dwelling prices in particular cities, not at specific markets.

Broadly one and two bedroom apartments units sold on a “used” basis are down about 20 per cent in the three main markets – Sydney, Melbourne and Brisbane. Melbourne has a very serious problem in this market because a large number of the apartments have explosive high fire-risk cladding that must be replaced, which will either send builders and other industry players to the wall or will be paid for by owners who are risking their own or their tenants' personal safety each day. As this becomes understood the value of these apartments will fall by a lot more than 20 per cent.

Ok, hang on a sec. “Explosive” high fire-risk cladding? I've written about the cladding issue before, but I'm not aware of anyone saying that the cladding had the potential to “explode”. Maybe it was senior moment… Anyway:

Right now there are series of developers and apartment owners that in years gone by would have seen the bank heavies move in and take control.

But the banks are just sitting there watching the crisis unfold. Why? Here are five possible reasons and I give my rating out of 10 for each of the reasons.

Firstly the banks have changed their spots and are going to be soft in the future. Possible accuracy rated out of 10 – nil.

Secondly, the banks are scared about the impact on the total market if they pull the plugs. Rating – nine.

Thirdly, in Melbourne, taking control of fire risk apartments either by appointing receivers to builder/developers or taking control of individual apartments is extremely dangerous for banks. Stay low: Rating – nine

Fourth, the banks are worried about the royal commission and don't want bad headlines at this time. Rating – eight.

Finally, when interest rates are low banks are less likely to be vicious because the cost of allowing money to be frozen while the borrower tries to solve the problems is low. Rating, seven. But this will change if interest rates rise.

At some point the banks will have to confess their problems in this area and my guess is that the combination of higher global interest rates and the royal commission will force those confessions.

Maybe. I suspect to the only way to get the truth out of the banks is to pry it from their cold, dead hands.

However, on the idea that the banks are colluding to prop up a sector and to prevent the entire industry taking a bath… well, we've seen it before and it certainly wouldn't surprise me if that was the case.

I think the banks probably did get a little blind-sided by the king tide in foreign capital – a tide that came in quickly, and is quickly on the way out.

They don't want to be left holding the baby on that one, but they're stuck with it.

A managed unwind is actually probably the best we could hope for.

I think the next 12 months are going to be make-or-break. Developers and early buyers will be looking to off-load stock on a new generation of buyers.

But the only generation of buyers that's going to fall for that – or be dazzled by free i-pads, and interest free furniture packages – is a generation that is probably not going to be particularly savvy.

(They're not going to be readers of my blog, that's for sure.)

That also means that they're probably not going to be in a super-strong financial position. They're more likely to struggle with mortgage payments if the economy stumbles.

That is, the market is trying to hand-ball the baby on to a new bunch of suckers, and those suckers are the most likely to go down, fall hard, and go down en masse.

That wouldn't be fabulous for the economy.

So spread the word. Is grandma thinking of tipping her nest-egg into an off-the-plan apartment in inner-city Brisbane?

Get her to think twice.

The sleeper-cell in Aussie property

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This could be a total game-changer

I’m still not sure that people are awake to what a big deal this could be for Australian property. It’s lying like a sleeper-cell, but if it gets activated, oh boy, look out.

I’m talking about cladding.

The cladding that goes on the outside of apartment towers, and was responsible for the London Grenfell disaster earlier in the year.

Apparently, it’s a problem here too.

The thing is though, no one really knows how much of a problem.

And that’s because the dodgy, flammable cladding is indistinguishable from the code-compliant stuff.

So even builders who thought they were doing the right thing, maybe have been wrapping their buildings up in dodgy imports and turning them into a powder keg.

Apparently, there’s no way to know unless you actually try and set fire to them. Maybe we have to make that a clause in any new building development? Cladding has actually had to have had a blowtorch applied to it at some point.

Every silver lining has a cloud in the modern economy. And so while open borders and expanded trade routes have brought all manner of cheap goods into our homes, it also means that we don’t really know where things are coming from, and our compliance structures hinge of the integrity of authorising bodies in Chinese provincial back-waters.

Modern life.

And the scale of the problem is potentially huge. In Sydney, Melbourne, Perth and Brisbane we’ve been building apartments like it’s going out of style.

Most apartments have now been built post-GFC. And that means post the era where cheap imports started washing up on our shores.

So we’re talking huge.

The Victorian government’s task force hasn’t reported back yet, but they reckon there are more than 5,000 buildings in Victoria that are non-compliant, according to the ABC.

So no one seems to be arguing the toss that we’ve got a problem.

The only question is what we do about it?

And on that front, surely complete remediation is the only option right? Surely you can’t have dangerous, flammable cladding stuck to the sides of buildings that people actually live in.

So obviously the dangerous stuff will have to be replaced.

But let’s run through another scenario.

Let’s say the problem isn’t as dangerous as we fear. Of those 5,000 buildings in Victoria, only 20% are actually Grenfell-level dangerous.

The rest are just non-compliant in a slightly dangerous way.

But then what message does it send if we say, oh well, there’s a bunch of non-compliant buildings that we’ve uncovered, but we’ve decided to turn a blind eye in this case because it’s just going to cost too much money to bring them up to code…

Could they really do that?

What message does it send about the codes themselves?

“More like guidelines. Ideal if you can afford it, but if not, don’t worry.”

What’s the point in having codes at all?

And what does it say about enforcement?

“As long as you’re not using kerosene-soaked rags as drapes, you can pretty much get away with anything.”

Yeah, nah.

Neither of those options is viable in my mind. The whole integrity of the system is at stake here.

The government has to enforce the code and it has to order all faulty buildings to be remediated. I really don’t think it has a choice here.

I mean, imagine the PR disaster that would follow a human disaster if a building that was found to be non-compliant now, was not forced to refurbish, and then was involved in some sort of tragedy down the track.

And if we’re talking about refurbishment costs, who ends up footing the bill. The builder? The dodgy Chinese importer? The government? The property owners?

Right now, I feel for the 137 people who own units in Melbourne’s Lacrosse building, which caught fire in 2014 and was found to be using the same cladding as Grenfell. They’re now locked in a legal battle with the builder LU Simon.

They want to the builder to pick up the tab for the mandatory refurbishment costs. The builder is arguing that the panels they used were up to code at the time. It’s not their fault…

… or their responsibility.

Nothing but trouble once the lawyers get involved.

So this is all bad news, right?

Well, not exactly…

It’s bad news if you own one of these flammable shoe-boxes, that’s for sure.

But for the market overall, that’s a different story.

Basically, the only thing that’s kept a lid on prices in recent years, as the mining boom income works through the system, and we continue to support record numbers of immigration into our big cities, has been unit construction.

The phenomenal surge of apartment construction has helped us keep pace with population and income growth, and has helped keep a lid on prices.

(If you can call 50% in 5 years ‘a lid’).

And there has always been a qualitative difference between units and houses, but now we’re going to be looking at a markedly differentiated market.

There’ll be detached houses, with the little conveniences that come with having your own patch of turf.

And then there’ll be apartments, with a potentially hefty refurbishment bill hanging over their heads.

I mean, would you be buying into these things without being 1000% sure that the cladding was compliant?

(Hint: you shouldn’t.)

In my mind, there’s a massive TILT light going on, as demand tilts even further towards detached housing, and away from units.

And if this is as huge as it looks like it’s going to be, then we’re talking about huge price movements in the detached housing market.

Huge.

But we still don’t know for sure. The true extent of the problem is hidden from view.

The giant is still sleeping…

But look out if he wakes up.

Do you see this having a big impact on the market?

What is a house? (asking for a friend)

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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

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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?