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Why the big guns are buying NOW! 

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The cycle hasn’t turned yet. But the smart money is already buying.  

The old saying goes that you should be greedy when others are being fearful (and fearful when others are greedy.) 

Right now, if you had to take the pulse of the herd, you’d have to say that the general vibe is fearful.  

Interest rate hikes are still being digested, and there’s possibly more on the way. Property prices have fallen and are still falling in most places. Consumers are bunkering down and there’s a good chance we’re headed for recession.  

So yeah, spooky vibes.  

So is anyone being greedy? 

Well, how about Stockland, one of the largest property developers in the country? They’re betting big and buying big: 

Stockland picked the top of the housing cycle in 2021 and has kept its powder dry since. Now, with prices falling and buyers nervous, CEO Tarun Gupta is changing course. 

… Gupta says Stockland picked the top of the housing cycle in 2021 and has been cautious ever since; for example, it hasn’t acquired much in the way of new land for residential developments since September 2021. 

But in a classic contrarian move, Gupta is now putting his foot down. He’s planning to launch 15 master-planned communities over the next 18 months, and on Tuesday announced Stockland has extended its relationship with Mitsubishi Estate Asia, with the pair aiming to replenish Stockland’s pipeline of potential projects over the next couple of years. 

The theory here is that Stockland will look past the cyclical housing downturn and focus on the structural positives for the market. 

“We’re going into this cycle with chronic housing undersupply – we’ve got rents rising because of it. Net overseas migration is going to exponentially increase compared to the last three years, and we’ve got high employment levels, even though the employment market is softening a little bit,” Gupta says. 

It’s a big bet, and it will obviously be a while before the housing clouds clear. But the fact Gupta correctly picked the top of the cycle, and Stockland’s focus on the affordable end of the market, should provide investors with confidence the group can ride through the storm and into the sunshine. 

Exactly. Look at the structural factors he’s pointing to.  

This will be around for a long time after the mood in the market has turned, fickle thing that it is.  

Property’s fundamentals are sound. Amazing even.  

If had Gupta’s guns – if I had that much capital behind me – I’d be buying up big too.  

We can let go of the idea that property is in for any sort of crash. It didn’t happen. It’s not happening.  

And sure, maybe prices will run a little further south. If the RBA gives us another couple of rate hikes as expected, they almost certainly will.  

But on the other side of that, the clouds will clear, and we’ll al see that the outlook for property remains exceptionally solid.  

If it’s not time to be greedy, it’s definitely time to start thinking greedy. 

JG. 

Will Brissy property continue to dominate?

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Everywhere is still booming, but some booms are bigger than others…

Which city do you think is going to dominate 2022?

My guess is Brisbane, but I could be proven wrong.

One of the interesting things about the property market in 2021 was that everywhere was booming. It was pretty consistent.

It didn’t matter where you went – city to city, out bush. Every property market was going gang-busters.

That’s actually pretty unusual. You normally have a bit of variation from one locality to the next. But that wasn’t the case in 2021.

But that was last year and now it’s 2022. And it’s starting to look like we might see a bit of variation open up again.

Corelogic just released the price data for January, and it continues to point to a booming property market, although price growth is coming off the hectic boil we saw mid to late last year.

Nationally, prices are up a fairly monstrous 22% year on year.

But scroll down the leader board and there’s some pretty astounding results. 30% in regional Tasmania and NSW. 30% in Brisbane. 26% in Sydney.

They’re some big numbers.

When you zoom into the monthly data, you can see there’s a bit of a gap opening up between the leaders and the rest of the peloton.

The rolling three-month average shows that Brisbane and Adelaide are storming ahead, with some of the strongest growth numbers those cities have ever seen.

I’ve been waving a flag for Brisbane for a while now. Not only has Brisbane had a better Covid experience than most of the other capitals, but it is also relatively cheap.

When you plot Brisbane’s price relative to the other capitals, you can see it’s almost as cheap as it’s ever been.

That’s at the same time as Brisbane’s lifestyle advantages and relatively peaceful Covid experience will be exerting massive pulling power on people in the southern states.

With that going on, I just can’t see how property prices won’t keep growing, and growing strongly.

The other city to watch for on this basis is Perth. Perth is the cheapest its ever been by a long way.

For now I think WA’s closed borders will keep a bit of a lid on this, but once they open, I would expect prices to get a spurt on.

The other interesting divergence that’s opening up is between the capitals and the regions.

While capital city growth is starting to slow a little, regional growth is holding at what is (for the regions at least) stratospheric levels.

It seems that the lifestyle factor is still fully in play, and as Covid drags its heels into 2022, I would expect the regional exodus and the price gains it’s delivering to continue into 2022.

So they’re my picks for the year: Brisbane, Perth, and the regions.

Aren’t we just spoiled for choice.

JG.

No BS: How rich people define ‘work’

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No B.S Friday: Work doesn’t have to be a pain in the arse.

I was talking a little bit last week about how to think about how you’re going to make money in the world.

And that got me thinking about how most people think about ‘work’.

For most of us, we define work around how ‘unpleasant’ it is.

Work (n.) – the nasty stuff that no one would do unless they were being paid for it.

This is the way we’ve been taught to think about work. By it’s nature it’s unpleasant. And that’s the work contract. I’ll endure several hours of unpleasantness, and in return, you give me some money.

How many people are actually doing things that they enjoy – things they would still get up and do tomorrow if they won the lotto and didn’t need the money?

For sure, they exist, but I reckon they’d be pretty rare. 1% of the working population, absolute tops.

Even if you say you like your job, do you really like it? Would you still do it tomorrow if you didn’t need to? Or have you just become acclimatised to the unpleasantness, seduced by the little perks, and sold on the idea that everyone needs to work at something?

But if you marry work and money to unpleasantness, then you are putting some serious limitations on yourself.

If deep in your subconscious somewhere you’ve bought into the idea that work needs to be a pain in the arse – that money only comes when someone with more money than you is buying the right to give you a pain in the arse – then you’re probably going to struggle to break into the rare air of true financial freedom.

If you’ve built an identity and an understanding of the world around the idea that money is won through unpleasantness, then that pattern is going to be hard to break. You’re only going to be open to financial opportunities that ask you to make this trade-off, or they’ll be the only opportunities the universe will send your way.

You’ll be psychically tied to the hamster-wheel.

But we can choose a different definition of work.

Because there’s nothing that says that work has to be unpleasant.

I have another definition:

Work (n.) – the stuff I do that creates value for others.

There’s no place for suffering here. And what it says is that, rather than looking for ways to exchange suffering for cash, we should look for places where we can offer value to the world.

This opens the game right up. Last time I looked, the world wasn’t short on things that needed doing.

(I can think of a couple of hundred thousand things just around my house.)

There are any number of ways that you can offer value to the world. And it’s much more empowering to think of yourself as a value provider rather than a merchant of sorrow.

It may be just a shift in perspective, but it’s a powerful one. First of all, suffering is not a necessary component of the equation. I’m much more likely to enjoy my work if I don’t expect I’ll have to suffer at some point.

Secondly, suffering is fixed, but value is not. There is only so much suffering I am capable of enduring. There is only so much sorrow I can take to market.

However, a concept of value is unlimited. I could strap on my sequin undies and go and save the world from some evil mastermind. That’s an almost infinite amount of value I’ve just provided the world right there.

Your capacity to offer value to the world is unlimited.

Your capacity to receive value from the world in return is also unlimited.

And if there’s no upside limit to your income, there’s no upside limit to your wealth.

JG.

Can $5tn kill Trump?

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There’s a new world being built. These are exciting times.

So, have you clocked how much the world has changed in the last few months?

I know it’s hard to keep track of. 2020 was such a roller coaster that most of us came out of it with no idea which was up.

(Just follow house prices. They’re definitely heading up.)

Anyway, one of the things that the pandemic has done is totally overturn the global economic order of things.

I know that probably sounds dramatic, but it’s actually hard to over-state how massive the change has been.

And I think the key signpost for the new world order is this quote from the most powerful woman in the world.

No, not Beyonce. I’m talking about Janet Yellen.

Until recently she was the chair of the Federal Reserve. Now, she’s Biden’s new Treasury Secretary.

(It’s fair to say she’s the most powerful woman in the world, right? I can’t think of anyone else that even comes close.)

Anyway, she’s laying out a pretty ambitious agenda. It’s active, it’s progressive and it’s green.

In just one paragraph in a recent speech she lays out the mission that she and the Biden administration are on:

… over the years, new problems developed that were not properly addressed. In the push to grow our economies, we neglected our environment. As we embraced new technologies, we didn’t do enough to prepare our workers and our education systems for the changes underway. While we embraced trade as an engine for growth, we neglected those who did not benefit. And in the most recent period, when we might have adopted policies at home to face these issues and joined with our allies to address issues abroad, we isolated ourselves and retreated from the international order that we created.

Over the last four years, we have seen firsthand what happens when America steps back from the global stage. America first must never mean America alone.

Boom.

It is true that this is a political speech by a person in a political role. So there’s no surprises there that’s she’s sticking the boot into Trump’s “America First” version of isolationism.

So the last bit there is squarely aimed at Trump and his legacy within the Republican party.

But the rest of it is much broader, and is a criticism that could just as easily been levelled at Obama.

In fact, the anger that Trump rode into the White House precisely came from those that had been left behind by the rush to globalised trade.

Remember, in rust belt America, if you’re working class, your life expectancy has actually been falling in recent years.

The so-called “deaths of despair” – drug and alcohol abuse, opioid abuse, and suicide – were on the rise, as “off-shoring” hollowed out working class communities.

And as I said, working class life expectancy (those without a BA degree) has actually been falling:

That’s a terrible result in ‘the greatest nation on earth’. That’s a dismal failure.

But if working America was in pain, no one seemed to be listening. Democrats seemed to be off fighting for the rights of gay pandas in Tibet.

But then came Trump, and Trump seemed to get it. He wanted to make America great again, where great just meant that working class men weren’t dying lonely, broken deaths.

(It was a radical vision.)

But this totally blindsided the Democrats. They didn’t get that people were angry. They just thought that Trump’s supporters were neanderthal racists pining for the good ‘ol days of the KKK and lynch mobs.

They weren’t. They just didn’t want to see their loved ones cut down in the prime of life. They didn’t want to see their communities destroyed.

And they didn’t want to be called “deplorable” for wanting something so basic.

No wonder they were angry.

So Trump spoke to these people, and he channelled that anger and rode it straight into the White House.

But as George Bush famously said, “Fool me once, shame on you. Fool me twice and shame on… well you won’t do that again.”

The Democrats, at least on the face of it, have learnt the lesson. They’re listening now too.

Yellen’s statement here is that we now see the pain that was caused by neglecting America’s workers and neglecting those left behind by new trade orders.

And it’s time to do something about it.

Now, politicians’ promises normally aren’t worth the paper they’re written on, but when it comes to Janet Yellen, they’re actually written on about $5 trillion worth of new paper.

Fiscal spending is literally off the charts. It makes the response to the GFC look like a drop in the bucket.

Covid has given them the excuse they needed to open up the wallets and spend, but now they’re saying that it’s no longer good enough to just get the economy ‘back on track’ and back to ‘normal’.

There’s a new world to be build.

There’s a new world that that doesn’t destroy the environment. One that doesn’t leave working people behind. One that doesn’t see America retreating into isolationism.

There’s a new world to be built, and it’s going to cost a lot of money.

But Yellen’s got the money.

And she’s not afraid to use it.

This is nation-building stuff. Suddenly, and ironically, it’s the 1950s again, when the entire world had to be rebuilt out of the rubble of World War II.

And what followed then was a generational economic boom.

This is history repeating. This is America saying that we found the money to remake the economy in 1950. We can find it again now.

Let the generational boom begin.

If this doesn’t get you excited, you’re missing the point.

JG

A conspiracy theory worth $70K

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A shocking theory about what’s driving the new banking policy.

I was talking to a banking industry insider the other day about the irresponsible lending obligations, and I’ve got a bit of a conspiracy theory for you.

But first, let’s zoom out a little bit.

So I noted last week that the government has reversed the responsible lending obligations on banks, in an attempt to free up the flow of credit into the market.

While the policy details are still landing, it now seems that banks will no longer be on the hook if a borrower takes on more debt than they can handle.

That gives banks the power to take mortgage applications at face value, and to rely on spending benchmarks, rather than going through and calculating a borrower’s actual living expenses.

Now, obviously anything that gets the credit flowing more quickly is a boost for property prices.

In fact, one analyst reckons it could add $70K to the median house price in Australia.

The average buyer could expect to have an extra $70,000 to spend on a home after changes to responsible lending rules, one consumer expert says, in a move that could push up property prices.

Responsible lending laws are set to be wound back in a bid to allow banks to lend money to customers more easily, Federal Treasurer Josh Frydenberg announced last week.

Although the details of the change are not yet clear, customer expenses have been in the spotlight after banks clamped down on lending practices under scrutiny from the financial services royal commission, refusing to grant loans to borrowers who spent too much on Uber trips or takeaway.

If requirements to assess borrowers’ expenses ease, an average buyer may see a jump in their purchasing power by about $70,000, Canstar group executive of financial services Steve Mickenbecker says.

Based on an average income of about $80,000 and a 20 per cent deposit, he said a would-be buyer might have the amount they could borrow increase from $440,000 to about $510,000.

“I don’t have a crystal ball for this,” he said. “That’s a hypothetical number.

“The banks were grilled rather ferociously over their assessment of lending [during the financial services royal commission], in particular their assessment on people’s budgets.

“[They] will be likely to move some distance from that and return to formulaic thinking.”

I think that could be right. Remember when the APRA restrictions came in, prices fell about 10% over the next 18 months. So a 10% rebound is definitely within the realms of possibility.

But where is this coming from?

Remember, no one was talking about this a month ago. No one thought these changes coming.

But my mate has a theory.

He reckons that the big banks are worried about the borrowers they currently have on deferral. Remember about 20% of them are ghosting the banks – they’re not returning calls.

So the big banks are wanting to off-load these customers on to other banks, before the crap really hits the fan.

But there’s a problem. These borrowers are problematic by definition, and if a smaller lender looked too closely at their situation, they wouldn’t want to lend to them, and that would leave them stuck on the big bank’s books.

The solution?

Remove the requirement to look closely at their situation.

Remove the responsible lending obligations, let these borrowers mis-represent themselves to their new lender, and bon-voyage – it’s no longer a problem for the big banks.

Maybe, these changes are purely about helping the big banks offload their worst customers onto smaller, unsuspecting banks, and preserve their profit margins.

What do you think?

We’re in the realm of conspiracy theory here, but you know, I wouldn’t put it past them.

Banking profits are banking profits, after all.

Oh, did I mention there are space lizards involved?

JG

Aussies cop $24bn windfall

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When you look at how Aussie households are actually doing, you get a very surprising story…

Are Australian households actually building up a massive war-chest?

Are they about to unleash a surge of cash onto the asset markets?

Maybe.

WE’re getting pretty used to all the bad numbers. The scary numbers. The Australian Bureau of Statistics has numbers. Lots of numbers. Most of those numbers are scary.

Sad.

So sure, we’re hearing a lot about how stuffed the economy is.

But on the other side of that ledger sits the government.

And while Covid has torn a path of carnage through the economy, the government has also rushed in to try and patch that up with cash. Mountains and mountains of cash.

Happy.

And how is it all balancing out?

Pretty well actually. Australian households are actually in a better financial position than they were at the start of the crisis.

Wait, say what?

No seriously, that’s what the data says.

And look yes, some individual households are doing it tough. They’ve lost jobs or lost businesses, and they’re hurting. Absolutely no denying it.

But for every household that’s gone backwards, another has gone forward, and averaging it out over the entire population, you’ve got a net positive.

We’ve got a few data sources telling us this now.

First there’s analytics firm AlphaBeta:

Analysis of household cashflow by analytics firm AlphaBeta, a part of Accenture, shows the slump in wages suffered by households due to the pandemic (plus and the fall in unincorporated business income flowing to households) was more than offset by government payments, superannuation withdrawals and private sector hardship support between April and June.

It reveals a net increase in household cashflow of nearly $24 billion over that period.

Yep. You read that right. Aussie households have picked up a windfall $24 billion!

$24 billion! That’s not nothing. That’s a long way from nothing.

Happy.

The CBA are telling a similar story, based on the flows they’re monitoring into customer accounts. They reckon that on the back of government support programs and the early access to super, households are in a stronger financial position.

The income of the average household rose by 4.2% over the year to Q2 20, up from 2.4% over the previous year. Salaries have fallen due to coronavirus job losses. But investment income and government benefits have increased sharply. Investment income is capturing the early withdrawal of super which is part of the COVID-19 response

That investment income is a doozy, but remember it’s all about the super withdrawal.

Still, in aggregate and on average, households are substantially better off.

And at the same time, they’re spending less. Spending has fallen by around 9% over the year to Q2 2020.

So if they’re earning more and spending less, that must mean that households are saving more. That’s a good thing. That’s shoring up their long-term financial position.

So this is a story about households having more money.

It’s also a story about households putting that money aside for a rainy day.

But what if the rain never comes?

What if things get back to normal pretty quickly, and Aussie households just find themselves $24 billion better off?

Where does that money go then?

It goes into Jet skis obviously, and then into asset markets after that.

Boom.

JG

NO B.S. FRIDAY: Die with this regret… and you’ve won!

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I take a look at some of the guff written on regret. The results will surprise you.

Today, I’m going to give you a glimpse into your future life.

I’m going to show you what lies at the end of your road, and the one thing you will regret, when your number finally comes up.

… I mean, if you’re lucky. Most people die with a thousand regrets. But if you live your life well from this point on, follow my advice, you will take just one, beautiful regret to your grave.

And I know that because it is the same regret that I carry now.

So pay attention. I think this might be about to be the most important blog I’ve written.

(And oh, haven’t I written some doozies!)

Anyway, a lot has been written about regret. There was a story doing the rounds a few years ago about a nurse who worked at a retirement home, who did a study on the things that people regret on their death bed.

I don’t know why we focus so much on that death-bed moment. It’s just like any other really.

I mean, maybe I regret not playing professional ping pong in my twenties. That’s something I might regret on my deathbed. It’s definitely too late do anything about it then.

But it’s also too late to do anything about it now. The window has definitely closed on my professional ping pong career. That horse has well and truly bolted.

The really interesting questions should be what do people regret not doing last year or last month. Regrets fresh enough to actually do something about.

Anyway, contrived scenario aside, this nurse reckons that people always regret the stuff they didn’t do, rather than the stuff they did.

That sounds profound until you think about it.

The stuff we do – that just tends to dissolve into the history of our lives. It just becomes part of who we are.

So maybe you regret selling your Bitcoin in 2010. But then you meet your future wife at a ‘no-coiner’ support group, and so you think it was all for the best.

Life has a way of working out like that. Which is really to say, we have a natural tendency to make the most of things, get on with it, and celebrate what we have.

(There’s even cases of people who have lost limbs in motor accidents who say that they are glad it happened to them.)

The other part of it is that it is very easy to romanticise the road not travelled.

So you think back to that girl you knew when you were 17. You should have kissed her. Why didn’t you kiss her? You fool.

And then you imagine the life that might have been. You imagine yourself falling in love, madly and foreverly. You see yourselves in Paris, eating croissants by the river’s edge. You see yourselves as an old couple, in a motor-home, driving across the Nullarbor into the setting sun.

You see her crouched over your grave, her tears falling on to a single red rose, the sky darkening overhead.

Sigh. What could have been…

But of course this is the romantic version. You don’t imagine her, at 3a.m, feeding the baby, hair electrified, giving you death stares because “YOU ALWAYS WALK TOO LOUD!!” You don’t imagine her at 60, cocking her leg at the breakfast table and letting go with one of her signature farts. You don’t imagine her at 75, pawning all your stuff and moving in with Shane from the bowls club.

You don’t imagine any of this stuff, even though it’s just as likely.

We romanticise the lives we never lead.

And so of course we regret the things we never did. Those things were gateways to these romantic and fantastical lives – lives that are always going to be more magical, more colourful, more wonderful than the ones we are living now.

So of course we regret the stuff we never did.

To a point.

And this is where we start talking about the one regret that I have.

Because I’m someone who opened the door and had a look at what lay beyond all the gateways of regret.

I have lived a life of relative freedom. And I’ve done it all.

When I was a young man, I threw myself into soccer. I gave it everything. I had my tilt at professional sport, and the glory it promised. I did my best. I took my chance. I have no regrets.

As a young man, I also threw myself into the feminie like a box of Whitlam samplers. By the time I found my wife, I was certain there was no one else I wanted to be with. I had found the perfect one for me. And I haven’t regretted a single day of our marriage.

(I can’t vouch for her though – I think she’s already thinking about pawning my stuff).

And I also had my crack at business. I chose not to follow the road of the nine to five and strike out on my own. It was a gamble and it paid off. Some people die not knowing.

I know.

And with that success, I now have freedom that most people only dream about. I can travel the world. I can track down the relatives in Greece. I can take part in bizarre medicine ceremonies in the Congo. I can throw myself out of an airplane over the French Pyrenees.

I can do whatever I want.

And my bucket list is completely cleared out.

So, all good then, hey? No room for regrets right? I’ll die a happy and regret-less man, quietly smiling into my last glass of whiskey..?

Not quite.

Because this is the thing I’ve learnt about having opened every door, having tasted every fruit, having ticked every box I could find:

None of it matters.

Having done everything on my bucket list, I can say that the amount of happiness I drew from each item on that list, is actually kind of minimal.

I mean sky-diving was awesome. It totally was. But knowing what I know now, would I go back to a younger version of myself and say, “You totally have to do this before you die.”

Nah.

And the same goes for everything on there. It was all awesome. It was all good fun. But was any of it “must do before you die” worthy?

Not really.

I mean, I do enjoy knowing that I have done everything I ever wanted to. That’s a nice feeling of completion – a feeling of satisfaction. That’s nice.

But that feeling of completion could have come with any bucket list really. It could have been a shopping list. The individual experiences just didn’t matter.

More and more, my adventuring has brought home that simple truth – happiness is an inside job.

Doing everything on the most epic bucket list in the world won’t make you happy – not if you’re not already primed for happiness from the inside out.

And this is what I regret.

I regret the hunger I brought to everything when I was younger.

I regret those days where I always wanted more. Where I had a great job, but I wanted a better job. Where I had a great girlfriend but I wanted a better girlfriend. Where I had great friends but I wanted better friends.

I brought a hunger to every thing I did, and that hunger always kept my eyes on the horizon, on the hunt for bigger, and better, and more exciting.

And in doing so, I missed out on a lot of life. The life that happens in the moment. The happiness that comes when you are just present to what is, when you are just grateful for what is.

In hindsight, I can see that I lived through countless blessings, through a charmed life full of wonders and beauty, and I was a misery guts for most of it.

My hunger kept me blinded to what I actually had.

And so this is what I regret.

I regret that I spent so many years as a slave to this hunger. I regret that I let so many moments for potential ecstasy and bliss pass me by, simply because I thought bliss was always over the next hill.

And I regret that it took me so long to figure it out. That the energy and the passion and the hormone-driven stamina of youth was wasted on someone who just couldn’t see how good he had it.

This is what I regret. And I’ll carry this regret with me to the day I die.

Funny old thing, life.

And I hope that this regret is the only regret that plagues you on your death bed too. I hope that from this day on, you heed this wisdom, and become present to and grateful for the wonderful gifts you have already.

But I don’t really expect you to.

I mean, I wouldn’t have. I couldn’t have been told. I wouldn’t have listened.

I had to see for myself. I had to taste every fruit in the garden before I could know that fruit was not the key to happiness. No amount of grey-beard wisdom would have helped.

And so if you won’t take my advice, then I wish that this journey will find you too. That you will have the freedom and the resources to chase down every desire, live every dream –tick everything off your own epic bucket list. Leave no stone unturned until you are convinced that happiness is nowhere to be ‘found’.

Perhaps it is the only way.

But however you find it, I hope this one beautiful regret becomes yours too:

I only wish that I had found my freedom sooner.

(… he whispers to the nurse, as she pours him a final whiskey.)

JG

NO B.S. FRIDAY: Shock! House prices to fall 80%!

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I show you how the media industry actually works, so you can stop yourself from being sucked into their shenanigans.

80%?!?! That got your attention, right? All eyes on me.

(Look at me, look at me, look at me, Kimmy.)

This is exactly how the media industry works. Attention is the most valuable commodity there is. And there are all sorts of tricks out there to suck you in.

But I’m going to break it down, so you know exactly how it works, and how you can protect yourself from it.

But hang on… So that just a joke then – about house prices falling 80%?

Nah. That could totally happen. All it would take is for the Earth’s magnetic poles to reverse (it’s happened before, it will happen again!), unleashing a cataclysm of earthquakes, tidal waves and volcanoes.

Then, just as what’s left of humanity is picking up the pieces, bam, deadly Ebola virus outbreak.

In that scenario, I predict Australian house prices would fall 80%, perhaps even 85%.

Someone put me on the telly.

Ok, how are you feeling right now? Probably a little annoyed right? You read the title, wanted to find out more, and then realised that Jon was on another of his benders.

(Why wife calls it “Margarita Madness”).

I’ve taken time out of your busy day, and wasted it with some inane ramblings.

Just like 60 minutes did.

Last Sunday, Chanel 9's 60 Minutes program, did a terrifying piece on Australia’s looming house price crash. In it, they suggested house prices were about to fall a massive 40%, and they made it sound like that is what a lot of smart and important people were expecting.

Only they weren’t. The 40% figure came from Dr Martin North – a bonafide data nerd. He’s actually pretty good – I’ve used some of his statistics in this blog before.

The thing was, that wasn’t what North was actually saying was going to happen. What he actually said is that there was an outside chance that house prices could fall that much, If (and it’s a big IF) there was some kind of re-run of the global financial crisis.

Thing is though, 60 Minutes chose to edit all that out. You had to actually go to his blog (and how many people did that?) to get the complete picture:

… It is not my central scenario. My best call would be in the region of 15-20% from top, over 2-3 years, but with some risk of a worse outcome. Nine chose not to cover these alternatives, though I went through each in the recording…

So yeah, if there was another GFC, it’s conceivable house prices could fall 40% (for a time). And if the magnetic poles reverse, it’s conceivable house prices could fall 80%.

So what’s going on here?

Partly this is about that old saying that “good news never made a paper sell,” but it’s more than that.

As some one who works at the coal face of marketing, there’s some tried and tested marketing strategies at work here, and 60 Minutes gave us a text-book case in execution.

The term you need to know is ‘disturbance marketing’.

This is the idea that before you can sell someone anything, you need to get their attention.

Trouble is, getting someone’s attention is hard. People just tend to put their heads down and go about their lives, generally trying to ignore the gazillion sales pitches they get on any given day.

And so, as a marketer, one of your key challenges is to jolt them out of this slumber. You need to find a way to break up their routine so they actually start paying attention. You need to disturb them.

And so the prospect of a 40% fall in house prices, or that fact that “Australia’s debt bomb is about to explode”, would be very ‘disturbing’.

Job done. You have our attention.

The key thing that follows then is an emotional hook. You’ve stopped us in our tracks. You now need to grab us by the heart strings and hold our attention.

And to that end, 60 Minutes trotted out three ‘victims’ of the coming housing crash.

All three were struggling to make their mortgage repayments (OMG, imagine if that was us!). One was sick, one was unemployed, and one had just seen their interest only loans rolled over to principal and interest.

Now at this point, it all just struck me as pretty strange. I mean take the sick bloke and the unemployed bloke. Should it come as any surprise that they’re struggling to meet their mortgage repayments?

I mean, imagine the headline: “Shock: Man with no income struggles to pay his mortgage”.

It’s hardly news right?

And then there’s the guy who was just about to retire, but then the bank rolled the loans on his portfolio of investment properties over to principal and interest.

That’s right, he had a “portfolio” of investment properties. They didn’t say how many, but it looked like a few.

Also, he had to have known it was coming. All interest only loans roll over at some point (usually after 3 or 5 years). So it was hardly a shock that he had to start paying more.

“Shock: Banks make man follow payment schedule outlined in his mortgage application”.

But I’m looking at these three stories, and I’m wondering what they’ve got to do with anything.

But they’re not there as evidence. They’re there purely to make you go, OMG, imagine if that was me. Imagine if I was in those shoes.

You have my complete and undivided attention.

And at that point, your prospect is primed for your sales pitch. But hang on, 60 Minutes doesn’t have a sales pitch..? Oh, but that’s right. Their sponsors do.

Roll commercials.

And this is how the media industry works.

So long story short, 60 Minutes is scaring the good folks of Australia, because that’s how they sell advertising air time.

It is regrettable that such a trusted institution is playing this game, but that’s just how it is, and how it’s always been.

You might also wonder if 60 Minutes is the hard hitting news force it used to be.

Because what followed the housing story?

A story about a woman who worries that the people who said they would clone her dead dog for her, just went out and bought one from the pet shop.

Just saying.

JG

The true source of inequality in one surprising chart

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Growing wealth inequality is driven by one of three things – business income, labour income or housing income. Guess which one it is.

Okay, I know we’ve been spinning round the outer-reaches of the academic universe these last few weeks, but do you want an edge or not?

Do you want to see the trends that the big players see? Or do you want to keep taking your financial play book from the Sun Herald? See how far that gets you.

The whole point of these blogs is about helping you see a bigger picture. The higher up the mountain you go, the more you can see.

If you want gags and ramblings… well, that’s what Friday’s for.

So bear with me a little longer here. I’m building to something. I need more than a few blogs to do it. Nothing worth having is easy. But trust me, it will all come together soon and you’re going to be amaa-aazed.

Ok, so last week, I showed you how falling wages are driving property prices higher. You never thought that sentence could even make sense, but I think you got the point I’m making.

The economy is a bunch of relativities. Everything in relation to everything else. The usefulness of labour is falling, so the relative price of labour must fall. That’s another way of saying that the price of housing, relative to labour must rise.

And that’s what we’re seeing.

But let’s slap a little more nuance on this picture. Let me pop a little swan made of meringue on top here.

Ok, so typically economist divide the factors of production – the stuff that makes stuff – into three groups – Land, labour and capital (machinery, factories etc).

Since land is fixed, economists just tend to put it to one side and focus on labour and capital.

(I know, you’ve got to wonder what they’re thinking.)

And so Marx said all history is the history of class struggle, between labour and capital.

A few years ago, Thomas Picketty, that French economist wrote “Capital” – which argued that wealth inequality was getting worse because capital owners were able to capture more of the surplus, at the expense of their workers.

And in all of this, land is just the place where they grow cheese.

And you can kind of get why. Land is just dirt to most people. It kind of has no character, no personality. It’s not able to rise up against its oppressive overlords.

The battle between labour and capital on the other hand – oh boy is that a story. It’s a theatre for all the hopes and dreams of the working class, all the aspirations of our entrepreneurs and captains of industry.

Land just doesn’t care about any of that. And it will still be there once all the workers and managers and capital owners are dead.

So it gets written out of the story.

And so then you see charts like this one:

This is the share of total income going to workers and to capital owners (in the way of profits).

The argument that people make – people like Picketty – is that labour’s share is falling and that’s a bad thing. That means workers have less power. Businesses have more. And that’s one of the factors driving inequality.

And that might all be true, but it is missing a huge piece of the puzzle.

Land.

Recently I did come across one economist who tried to put land back in the picture. This chart comes from a young grad student at MIT. It breaks capital income (from the chart above) into capital AND land (rather than just lumping profits and land income in together.

Look at what happens:

This is for the developed world since 1948. You can see that since 1980 in particular, capital’s total income share has been growing. That’s Picketty’s story.

But look at why. It’s not that regular business profits have been growing – the non-housing share of capital income has been pretty much flat.

All of the growth since 1980 can be explained by the increase in housing income.

Let that sink in for a second. If the rich are getting richer, if income and wealth inequality are getting worse then it’s got nothing to do with businesses, it’s got everything to with housing, and the way the rich uses property as the number one way, to build, protect and transfer wealth across generations.

I know as a business owner it may sound like I’m talking my own book here, but a careful and measured analysis of the above, highlights that the balance of evidence suggests that, taken together, all you pinko-lefties should take your redistributive business taxes and shove them up your bum!

(Nah, just kidding. You’re great. I love ya.)

But the central idea is that this hasn’t been a golden age for capital. Technology hasn’t made it easier to exploit workers and earn super profits.

If anything, technology has made the game harder. Technology depreciates in value and usefulness incredibly quickly (anyone want to by my Iphone3?), and the digital market place has meant that disruption is coming at you from every which way.

No sooner do you have a great idea, than a dozen firms in China are ripping you off.

Think about what AirBnB did to the hotel industry, what Uber did to taxis, what Amazon is doing to retail.

This is no capitalist utopia.

So labour income is falling. Capital income is falling, or it’s on the way down. The relative price of these two must decline.

Relative to what?

Land.

(Gee, it’s like you’re not even listening sometimes.)

As I’ve said before, in an economy where everything is getting less and less real, where more and more activity is moving into the unlimited infinity of unrealness, the relative scarcity of real things, commodities and real estate, increases.

As their relative scarcity increases, so does their price.

We’re still in the middle of a commodity boom that continues to surprise, and the real estate boom…

Well, we’ve put some great runs on the board…

But the game is nowhere near over.

Will capital’s share of income start to fall?

Interest rates to go higher! (Here’s another reason why)

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S&P just downgraded the entire financial sector. The timing is suspicious, but I just can’t figure out who’s pulling the strings.

Ok, this is another story that really isn’t getting the air-time it deserves.

Effectively, S&P just downgraded the entire Australian financial sector. Yep. The entire Australian financial sector.

Effectively, they said that yes, actually, there is a property bubble. And that bubble is, in fact, dangerous. So much so that every Australian financial institution is more of a credit risk than they were before.

Yep. Every one.

Oh, but not the majors. No. The big four are too big too fail, the tax-payers have their back, so no worries there.

What’s more, the timing of this is really breath-taking. Just as the smaller banks were looking forward to a more even playing filed thanks to the big bank levy, bam, they’re hit with a ratings downgrade, making them even less competitive.

The Bank of Queensland CEO is pissed. Oh man.

And this almost certainly feeds through into the interest rates we’re looking at. For the 23 smaller banks affected, their cost of funds just got more expensive. What can they do? They’ve got to pass it on…

But the timing of all this really makes me think that there’s something going on behind the scenes that we just can’t see. I’m not sure what that is, but I have three theories.

But let’s recap in case you missed it because this story really isn’t getting the attention it deserves. So Standard and Poors (S&P) – a ratings agency which effectively tells people in the money market how credit-worthy other institutions are – has downgraded 23 financial intuitions in Australia.

They did it all in one go, effectively saying that an “increased risk of a sharp correction in property prices” was now a threat to the entire Australian financial system.

So we’re talking all our regional banks – BOQ, Bendigo, Adelaide Bank, BankWest…

The “big four” banks, however, managed to escape a downgrade because S&P believes they are likely to receive “timely financial support from the Australian Government” if something happens to the property market.

But then, after going on about the dangers of a “sharp correction in prices” and “economic imbalances” they do admit (so far towards the end of the press release that it’s practically a footnote), that actually, the “outlook for Australian banks remains relatively benign by global standards”.

So like, worry, but don’t worry too much.

It really is bizarre.

This isn’t about any institution in particular. Effectively they’re saying the entire Australian financial system is now a riskier prospect…

… because why?

What do we know now that we didn’t know at the beginning of the year?

They don’t point the finger at anything in particular. If something passed some sort of threshold to trigger a downgrade, they don’t say what it was.

And given everything else that’s going on in the past couple of weeks – with the bank levy and APRA’s second round of intervention, it just looks a little suspicious to me.

But I don’t know where to point the finger…

I’ve got three theories.

Theory One: It was the Big Banks

This is the most seductive theory. Effectively the big banks are so annoyed that the government turned around and stabbed them in the back with the Bank Levy, that they went out and had a quiet word to their mates/puppets at S&P.

As I said last week, I expected the big banks to come up with something big, and quickly. They have to hit back. They need to send a strong message, otherwise the Bank Levy could just go up and up and up.

Getting the entire financial system downgraded is a pretty strong message. Especially, when you get off scott-free yourself.

How do you like those apples, Morrison?

Theory Two: It was the government

At the same time though, this whole fiasco just focuses everyone’s attention on the reality that there’s one set of rules for the Big Four, and another for everyone else.

One of the best rationales for the Bank Levy was to claw back some of the funding advantages the Big Four got from their implicit government guarantee.

I don’t think most people understand just what a free kick this is.

So perhaps the government had a word to their mates/puppets at S&P and said, look, we need something that shows just how sweet the Big Four have it. If you wanted to downgrade all the minors, we won’t get in your way.

And so far the government has been surprisingly quiet. It is the kind of thing you’d normally expect to generate a lot of outrage.

S&P also downgraded China last week and the government there said that S&P had no idea how the Chinese economy actually worked.

But there’s nothing but crickets in Canberra.

Theory Three: It was the RBA and APRA

Another theory that holds as much weight in my mind is that it was the RBA and APRA.

So far this year there’s been a real shift in the tone of our regulators’ public statements. When it comes to housing, they’re suddenly talking tough.

Effectively, the RBA and APRA seem keen to “talk their way out of the problem”.

This is a classic play for the RBA. Remember 2003 when they started fretting about the “Sydney bubble”. A few warnings and a couple or rate hikes successfully took the heat out of that market, and things settled down.

We’re seeing the same strategy in action now. Rates are on the rise through APRA restrictions, and there’s a lot of jaw-boning going on. They’re successfully reshaping expectations.

The S&P downgrade fits perfectly into the narrative they’re trying to create. Economic imbalances have built up, and things need to be unwound in an orderly way.

So maybe the RBA and APRA had a word to their mates/puppets at S&P and said, look guys, a downgrade would really help us out right now – just a little one, just a little shot across the bows.

But which is it?

All of these scenarios seem plausible to me. But really, there’s no way to know. What do you think?

But at the end of the day, the least likely scenario in my mind, is that an independent ratings agency just decided to downgrade the entire financial system of an advanced economy, right in the middle of one of the most electrically charged political and economic climates in recent memory.

I’m not buying that for a second.

What do you reckon?