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Why I was right

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I flagged a pivot from commercial to residential property a few months ago. Looks like its taking shape.

At the start of the crisis I talked about a potential pivot from Commercial to Residential property.

Things seem to be playing out more or less as I expected, though it’s still early days.

The basic idea here is that commercial property is going to struggle with the Covid economy – much more than residential property will.

As comparative asset classes, that means residential will become relatively more attractive.

Now the flows here aren’t direct. The people who invest in high-rise office towers aren’t the mum and dads who invest in a two-bedroom bungalow in Geelong.

But everything in our crazy old, highly-financialised economy is connected. Residential property will benefit from capital outflows, lower interest rates, and higher prices as investors gear out of commercial.

And the first waves of that are emerging.

The AFR is reporting that retail vacancy rates have spiked to the highest level in 20 years:

The vacancy rate across the nation’s shopping malls is the highest in more than two decades as the coronavirus crisis accelerates a wave of store closures in a sector already under challenge.

The national average shopping centre vacancy rate rose to 5.1 per cent in June from 3.8 per cent six months earlier, according to a survey by JLL.

Factoring in both CBD shopping destinations, where the rate has soared past 10 per cent and the relatively more resilient large format retail hubs, the vacancy rate rose to 6.3 per cent from 4.8 per cent in the past six months.

The JLL survey excluded temporary store closures in its count.

That last point is very important. This doesn’t include stores that have temporarily closed. Now, how many of those are actually just going to stay closed?

My bet is that at least some will. And if any do, that pushes the vacancy rate even higher.

The RBA in its recent Financial Stability Review, has already flagged commercial property as a flash point.

Office space in particular is set to see considerable new supply come on-line in the next couple of years:

Conditions in office markets were previously strong, but these are also expected to deteriorate in the period ahead. Of note, an above-average volume of office supply is due to be delivered into the Sydney and Melbourne CBD markets this year and demand will be unlikely to keep pace with this stronger supply (Graph 2.12).

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So with an over-supply building in office-space, and record vacancy rates building in retail, the outlook for commercial property remains tough. Really tough.

But as I said, I expect residential to hold up much better over the longer term. Vacancy rates are edging higher, but so far it’s not too remarkable. And the supply/demand balance will remain tilted to under-supply.

Add record low interest rates to the mix, and residential property should perform well…

Well… it will perform better than commercial at least, and that might be all matters.

JG.

Property Planning Gone Mad

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A textbook case of politics driving house prices.

Ok, so I wanted to look at an amazing policy backflip in NSW planning this week, but first, I know a few of you are interested in the art of persuasion, so let’s start with this gem from Opposition Finance spokesman Jim Chalmers. He’s complaining about the way the CBA activated a bunch of kiddie accounts without telling them, in order to juice their sales stats.

“These are appalling revelations and unfortunately also the sort of behaviour Malcolm Turnbull wants to reward with a $17 billion tax handout.

Labor wants to see the victims compensated for the rorts and rip-offs which are being uncovered, the Liberals want to compensate the perpetrators. Banks shouldn’t be rewarded for fiddling with kids’ bank accounts, they should be punished for it.”

Yep, he really went there. “Perpetrators”. “Fiddling with Kids”. The subtle cues are not so subtle. Banks = child rapists.

You might have thought that subtly evoking people’s anger at paedophiles was a step too far over the line. You’re probably right. But welcome to politics in 2018.

But while it’s poor taste, it’s brutally effective persuasion. Banks = kiddy fiddlers. The government (and the tax cuts) are their enablers.

Ouch.

As I’ve said before, it’s going to take something special to get these tax cuts through in this environment.

Malcolm, Morrison, I’m looking at you.

(…but not holding my breath.)

But let’s leave Canberra now for the Capital of modest and sensible, Sydney.

You might remember a few weeks ago that the NSW state planning body gave itself power over certain local government decisions in Ryde.

(Effectively it turned certain higher-density modifications into ‘complying developments’, fast-tracking their approval.)

Called ‘The District Plans’ they were only released in March this year and they called for 7,600 new homes in Ryde over the next 5 years. They also championed the ‘missing middle’ approach to providing terrace houses and duplexes as a way to increase density that is compatible with detached houses.

The 7,600 extra homes sounds like a lot, but we’re still barely scratching the surface of what’s needed. Still, it was a recognition that Sydney is growing fast and the housing stock simply isn’t keeping up.

And this is a point that everyone accepts. Sydney needs more houses. The only problem is, no one knows where to put them.

And Ryde certainly wasn’t happy about being the sharp-tip of the spear in the agenda to density Sydney. Nor was Canterbury-Bankstown.

The Mayor of Ryde was complaining to the papers that there’d be developers and “bulldozers of every block”. The Canterbury-Bankstown Council discussed the proposed changes just over a month later under the agenda item: ‘THE MISSING MIDDLE – A TRAIN WRECK OF A POLICY TOTALLY MISSING THE POINT’.

(Hard to tell what they were really thinking there.)

The local governments rallied hard on their constituent’s behalf.

The state government, facing a tricky election, decided to do a backflip. Now the whole thing’s on hold.

It’s just so classic.

Sydney’s population is booming, thanks in large part to an immigration intake that’s set at the Federal level. The greenies don’t want the city sprawling outward into bush and farmland. Existing residents don’t want to see their leafy streets being built upward, and everyone wants to complain about affordability.

Can you see a way out of that one?

Nope, you can’t. Because there isn’t one.

Unless one of those policy levers is shifted, higher and higher prices are baked in.

It’s driven prices over the past twenty years. It will drive prices over the coming twenty.

And we’ll still be complaining about housing affordability in 2040.

Isn’t that hilarious?

The markets where investors are crapping themselves right now

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Just where is the high-rise glut happening?

Take a look at this chart here. This is the Halloween's Day special:

What it shows is sales of new apartment buildings (the grey bars) and approvals (the orange line). Right now, they're going in totally different directions, with approvals moving higher, and new sales falling off a cliff.

Keep in mind too that the reality is probably worse than this. The sales data only goes up to September last year. Since then, it seems that things have gotten worse.

How do I know that? Intuition. That and the fact that every day we here some crazy stories about developers tripling their sales incentives, throwing in luxury fittings for free, or even offering 5-year settlements!

That last one is interesting. You settle in 5 years, but you have to lease the apartment in the mean time. Effectively, the developer is offering rent-to-own.

So, it definitely doesn't look like the apartment market has bounced back in the new year. Sales have probably maintained their downward trajectory. Especially as the banks black-list some of the worst-affected areas.

And at the same time, we continue to build into the glut. The construction peak seems to have passed, but we're still adding a lot of stock.
And so with sales falling and more supply coming online and in the pipeline, it's very hard to see apartment prices holding ground.

Some areas will obviously be worse hit than others.

The AFR published a list of the ten riskiest suburbs – the suburbs where apartment construction is adding the most supply, relative to existing stock.

The brunt of it looks like it will be borne in NSW and Queensland, but this is a national phenomenon, with Perth and Adelaide CBDs also making the list.

Interestingly, only Southbank in Victoria is in the top ten. Melbourne was home to original high-rise anxiety, but largely it's sorted itself out, thanks to super-charged population growth into Melbourne in recent years.

The guys over at MacroBusiness have given us a more detailed look at this data. I've pulled out the supply coming on line over the next 24 months relative to existing stock, as I think this best captures the risk.

However, some of these suburbs are new and starting from a very low base, so this may overstate things a little.

Anyway, here's the picture for Sydney:

Cranebrook is massive, but really, all of those numbers are. To add 20% to the apartment stock in 24 months, after several years of solid building, is huge.

Over in Melbourne it looks like this:

That's a bit more balanced, but still, we're averaging around 15%. Not quite as cray-cray as Sydney, but still big.

Finally, let's have a quick look at Brisbane:

Holy smokes would you look at Woolloongabba! Epic.

Now this doesn't mean that prices in these areas will necessarily take a hit. For example, the Gabba is close to the city in Brisbane. It's going to be an attractive place to live.

But if there's a lot of supply going up there, then that's going to pull population from other centres.

So the real question is not just where is the most supply being built, but where is the inconveniently located supply? That's where I expect to see prices to fall first, and hardest.

So.. is this a problem for the broader market?

The general view of analysts seems to be, no. This isn't going to be contagious. We're going to see the apartment market struggle for a couple of years, but detached housing should remain isolated.

I'd probably agree.

But man, I'd be watching these markets closely.

And if you're tempted to take the bait of free Smeg appliances or 60-months interest fee, think again.

NO B.S. FRIDAY: How to win a room

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A trip to the local council reminded me of some basic persuasion techniques.

So this week I went along with a friend to his council’s community access session.

He wouldn’t appreciate me going in to all the specifics here, but basically, he needed to go and lobby the councillors directly to get them to delay considering his D.A.

He had gotten word that his D.A was going to get knocked back, because he had these koala friendly trees on his property that he wasn’t aware of when he first put his DA together.

“Koalas?” I said. “Don’t you live alongside and freeway?

“Yep, and there’s pitbulls to the north and 3 cockerspaniels to the south. We haven’t seen a koala in over 20 years.”

But that’s the way DAs work. You’ve just got to jump through the hoops.

Anyway, I went along with him – mostly for moral support – but also because I’ve been through this process more than a few times, and maybe I’d be able to answer any questions he couldn’t.

Anyway, we get there, and there’s two hours allocated to community access, and there’s about 40 people on the list to speak.

Oh my god. I’m looking around the room and already I’m sizing people up. There’s the ex-councilors who are very long in the tooth now, but miss the days when they had something meaningful to do.

Then there’s the obvious cranks. (Why do crazy guys always have crazy hair? Is it part of the job description?) They’ve obviously been working very hard on their presentations because they haven’t found the time to shave or find clean pants.

And then there’s a mish-mash of local business owners and residents, coming along for the first time, and generally looking like they’re out of their depth.

And then there’s the councillors themselves, gritting their teeth and bracing themselves for the onslaught that was obviously about to hit them.

And it was seriously on like donkey-kong once it started.

Crazy pants guy is first cab off the rank and he’s speaking to the plans for a new waste-water treatment. Well he wastes no time going straight to “dereliction of duty”, “abuse of trust” and “legacy of lies and deceits”.

And I couldn’t even tell if he was for or against what was on the table.

Next there was a local cafe owner who had been asked to move his tables of the public side-walk. From what I gathered the previous owner had told him that he was allowed to have tables on the sidewalk, but that just wasn’t the case. But now, this was council’s responsibility and if they were forcing him to move, then he was going straight to the land and environment court.

The there was an ex-councilor. I have no idea what he was talking about. He was reading a prepared statement off a piece of paper, and it was full of technical terms about this that and the other.

In fact, come to think about it, pretty much everyone was reading off a prepared statement.

Now I’m watching the councillors, and they genuinely looking like they’re doing their best to keep up, but it’s obviously wearing on them. Within an hour they’ve been called everything from incompetent to corrupt, and that’s just from the presentations you could actually follow.

They were getting that glazed look in their eye.

I lean over and ask my mate what he was planning to stay.

He shows me the statement he’s prepared. It’s two full A4 pages of size 12 font.

“What? You’re going to say all that? In 5 minutes?”

“Yeah, I’ll read quickly.”

I’m like, “Mate, no way. I’m telling you that’s not going to work. Do you mind if I speak for you?”

He was reluctant but he comes round.

So when our time comes I get up and take the mic, and I look the councillors in the eye and say:

“Look, we’re just here to ask for a delay on the decision for the development application relating to such and such a property.”

“We’ve been working closely with the council planners, and that’s been great, they’re all very professional, but it’s come to our attention that there are some issues with koala habitat that we weren’t aware of when we first put the DA together, so we’d just like a little extra time to make sure we’re doing everything right.

So yeah, if you could delay the decision on such and such a property, we’d really appreciate that.

Thanks very much.”

And then I sat down.

At that point, I had every councillors eyes on me. I had their attention.

Mostly I think they were amazed that someone had only used 40 seconds of their allocated 5 minutes. An hour and a half in to community access that would have felt like a gift from God.

But I was speaking to them as people. I was conversational, I was “off-script”. That made my message easy to hear.

(I actually can’t think of a situation where you’re better off reading a prepared statement… maybe in court. Or maybe when you’re fronting the media to explain why you’re entire first division side has failed their drug test. But generally, that paper locks you up, it makes you sound like a robot, and it makes your message very difficult to receive.)

The other thing I did is I brought myself inside the tent. I didn’t set it up as some sort of adversarial show-down. This comes from face to face marketing. If you have to argue the merits of your product, if you’re in an argument with your customer, you’ve lost the sale.

So I made it very clear that we were happy, we were friendly. We just wanted this little procedural thing to move things along. Easy easy.

Seriously, if you start off with, “I’d like to remind councillors of the oath they took when they took office, which they seem to have forgotten….” how far are you really going to get?

If you cast someone as the enemy, then they’re never going to agree to what you’re saying, no matter what it is.

I would have thought all this was obvious, but after this week’s meeting, I had to wonder.

Oh, and the other technique there is top and tailing. I said up front what we wanted, so everything that followed had a context. And I ended with it so it was left there in their minds.

Anyway, long story short, we got what we wanted. I don’t know how much help I actually was – it was a pretty reasonable request to begin with – but I’m fairly sure my mate’s 2 page epic wouldn’t have helped things.

And I just thought I’d share this. I thought these techniques of persuasion were pretty obvious, but after listening to a dozen accusation-filled rants, I did start to wonder.

Rule 1 – get on the right side of the fence.

Sometimes it’s as easy as being the only friendly (and sane) voice in a room.

Any tips for dealing with council? Or being more persuasive?

Damn! I was right… and that makes me so mad ?

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It’s perverse, but this disaster could create a mini-boom in property.

Almost two years ago to the day I warned about how many tower buildings across Australia are using highly flammable cladding and are simply disasters waiting to happen. As I said then:

“Building standards a not being followed, and a major incident is inevitable. Here’s hoping nobody dies.”

Well, people have died. The Greenfell tower disaster in London claimed more than 50 lives and piped dramatic images into homes across the country.

This should be the wake up call we need. I hope it’s the wake up call we need.

I wonder if people realise how close to home the Greenfell disaster is.

As the Brisbane Times reports:

“The London tower devastated by a vicious building fire may have been installed with flammable cladding during a recent renovation.

Online records indicate contractor Harley Facades Limited installed “over-cladding with ACM cassette rainscreen” at Grenfell Tower.

ACM stands for aluminium composite material, which is the same combustible product blamed for fuelling nearly a dozen major high-rise fires globally in the past decade, including in Melbourne in 2014…”

That incident in Melbourne they’re referring to was the fire at the Lacrosse Building. A single cigarette left burning on a balcony started a fire that leapt 13 stories in 13 minutes.

All the fire safety measures in the world – sprinkler systems and all that – they won’t save you when the fire is coming from the outside in. This is an entirely new kind of threat and one we’re not prepared for.

It’s hard to finger exactly where this is coming from. Engineers Australia reckons that the codes aren’t being followed, or enforced. “No one is inspecting this stuff.”

The Master Builders Association on the other hand says it’s not so much about the builders, as it is about dodgy, counterfeit building materials coming into the country – things arriving that are stamped with a certain fire rating, but that simply aren’t.

What a mess.

The thing that’s really scary though is that we’re not just talking about the odd high-rise here and there. We’re talking about a systemic problem that potentially affects thousands of buildings across the country.

Australian Society of Building Consultants NSW president Chris Dyce reckons there are 2700 buildings just in Sydney that use this aluminium composite cladding. Half of the high-rises build in Melbourne over the past ten years are non-compliant.

Engineers Australia reckons 85% of Sydney’s recent apartment stock is defective!

Even if it’s only half as bad as they reckon, it’s still a terrifying prospect.

Because that’s the nature of risk that I don’t think people get.

If you have one dodgy building, then the risk of a single disaster is the risk of one person being careless with one cigarette.

But when you’re talking about 1000s of buildings and thousands of people and thousands of cigarettes, then the risk of a single disaster multiplies exponentially.

That’s why Engineers Australia reckons a major fire in Sydney is “inevitable”.

As I said, Greenfell was a tragedy. Let’s hope it’s the wake up call we need.

But now let’s step back a bit and think about what this means for the market.

I’m not one to profit from other people’s misery, but I have been known to profit from other people’s incompetence.

So we can pretty safely say that at some point or another, all of these defects – or at least the most dangerous ones – will have to be fixed.

The best-case scenario is that the remediation happens now and we get on the front foot with it.

The worst case scenario is that we need our own Greenfell to spur people into action.

But either way, it’s going to happen at some point.

Individually, as buyers, I think this creates a new risk that we need to cover ourselves against. It’s quite likely that individual unit holders will have to come up with the money for remediation. You might be able to pass it on the builder if they were dodgy (and you can pin it to them!), but if they were following standards (which themselves weren’t tight enough) you might be left holding the baby.

And we’re talking serious coin. Imagine stripping the cladding off a 24 storey building and putting new cladding on. That’s big bucks.

And if it’s not clear whether it’s the code, or the builders, or the materials manufacturers that’s the problem, it can be hard to defend yourself against.

I wonder if you might be able to get insurance cover..?  A little extra in your premium to protect yourself against forced remediation costs. I’m not sure. Anyone got any ideas on that?

Whatever the case, as buyers in high-rises, an extra degree of caution wouldn’t go astray.

The other point I’d make is that if the government announces that all 2700 buildings in Sydney need to be remediated, all at once, then that’s going to spark an incredible building boom.

There’ll be incredible competition for builders and for new materials. That will affect the remediation costs as well as the costs facing new stock coming to market.

It will push the cost of new housing through the roof. And since existing housing keys of the price of new housing, the price of existing housing will surge as well.

And given Sydney is already struggling with a shortage dynamic, and needs to be bringing stock to market flat-chat just to keep pace with demand, this will create the conditions for a mini-boom.

I know, the modern economy is perverse like that. A cocktail of incompetence and corruption can be just what you need to see a boom in prices. Hate the game and all that…

And if you really want to double down on this dynamic, look at quality stock in areas where there are a lot of these buildings. Some of these buildings could become uninhabitable through the remediation. That might create a massive spike in rental prices in the immediate area as those displaced people look for a home.

I’m thinking quality town-houses in quality locations are set to do well.

Anyway, that’s what I see as the market impact, but let’s not loose sight of the fact that we’re talking about people’s lives here.

Here’s praying for a casualty free fix.

Any people in the insurance biz got any insight on this? Can you see any opportunities opening up?

Warning: Depreciation that costs you money?

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A Labor-lite budget gave us negative gearing lite, but the depreciation changes might be about to cost you money.

One of the most-interesting but least-talked about things to come out of the budget is the change to depreciation in negative gearing.

Most of the media seemed to have missed it. I kind of missed it too. I thought it was just some small-fry changes aimed at heading off any pressure to seriously reform negative gearing.

But now I’m not so sure.

And the truth is that if these changes are implemented full-stick, it could cost you thousands of dollars every year and/or make it harder to on-sell your property.

In case you missed it, the proposed change will limit plant and equipment depreciation deductions to only those expenses directly incurred by investors.

Basically, if you didn’t write the cheque yourself, you don’t get to depreciate it.

This has the potential to shave several thousand dollars a year off a property’s cash-flow stream.

Consider the following three examples (and I tip my hat here to Louis Christopher at SQM Research, who’s done some great work helping us get a grip on the changes):

On-selling a New Build

Say you purchase a unit off the plan. There’s significant plant and equipment depreciation benefits that come with newly-built dwellings. We could easily be talking about five or six thousand dollars in the first year on a median priced unit in most cities. It tapers away after that, but even 6 or 7 years down the track we could still be talking about a couple of thousand a year.

Over the life of the property, we’re talking about something like twenty grand.

But under these changes, now, when you sell the property, the incoming buyer no longer has access to that depreciation stream. It’s gone.

And say you’re circumstances change, and you have to sell after only one or two years. The incoming buyer has no capacity to claim a depreciation deduction, not just in the year they buy, but in all future years.

They could lose up to twenty grand’s worth of value.

Hard to say how much that will hurt you sale price, but it’s certainly not going to help.

One thing that’s not clear is what happens if you flip the property before completion. Have you paid for the plant and equipment, or has the new buyer? The government needs to clarify this one.

All New Builds?

The above example assumes that the first buyer is the one paying for the plant and equipment. However, in the strictest sense of the word, the developer is the one who pays for it. In that sense, only the developer has a right to claim depreciation.

This would be a pretty hardcore interpretation of the change – basically purchasers of off-the-plan developments wouldn’t be able to access any depreciation benefits.

Most people think that this isn’t what the government intends, but now that the media has moved on, they might be able to slip it through. We’ll have to see.

It also creates a bit of a grey area. If I do like a one into four townhouse build, and then sell each one individually, what do I need to do to make sure that the new purchaser is the one paying for the plant and equipment in the eyes of the law?

The Fresh Reno

Lastly, say I buy a nice little doer-upper and spend $200K on plant and equipment. If I now sell the property to you, even if the paint is still drying, you cannot depreciate any of the plant and equipment.

No need to get any clarification here. This is exactly what the government has in mind.

The Timing

There’s a bit of ambiguity here that needs to be clarified. That clarification will happen when the budget passes through parliament over the next couple of months.

However these changes are time-stamped with the budget on May 9. That means that these changes will affect any property bought and sold today, even though we still don’t quite know what the full ramifications are.

That’s not ideal. Realistically, if you’re buying, you’re going to have to assume the worst – even though the worst is pretty hard-core for off-the-plans.

If you’re selling, you’ll need to find a buyer that isn’t assuming the worst to get a premium price for your property.

The Up-shot

At the end of the day, investors have just lost a benefit that was worth potentially several thousand dollars a year.

As I said, that’s not going to help prices.

Louis Christopher reckons it will help cool investor demand in the short term. It will be interesting to see. Most investors I know are pretty savvy with their depreciation schedules, and factor it in to their offer prices – but I tend to move in a savvy crowd.

Will your average mum and dad investors care? They should, but will they?

This also gives us a look at negative-gearing lite. Labor wanted to end negative gearing. This is a small, partial step. If it doesn’t move the dial, it will open the way for further reforms.

If it does crimp investor demand and the market softens, the government will be vindicated in their softly softly approach. It will be interesting to see.

So yeah, still waiting for a few details, but something to be on top of here.

Will this affect you and your strategies?

Property future explained in 2 unusual transactions…

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The Port of Melbourne and a $45 billion spending spree show us just what the future looks like…

If you want to know what the future looks like, the were two events last week that gave us a very clear picture.

And it’s not that pretty.

These two events were kind of huge, but kind of a side-show to the ‘real’ news about something blah blah blah who cares.

The first is the sale of the lease on the Port of Melbourne.

The Victorian government managed to secure $9.7bn, with the first 15 years of licensing fees up front. This figure came in well above expectations, and is what is known in financial circles as “a shitcan of money.”

The really interesting story for me though is WHO bought it. It wasn’t a shipping and logistics company. Rather, it was a consortium of pension funds.

The consortium called itself the Lonsdsale Consortium. (I presume because they’d all go the gym and lift big weights together, bruh.) It was made up of the Future Fund, Queensland QIC, Global Infrastructure Partners and the Ontario Municipal Employees Retirement System.

What an odd bunch. How do you even put a consortium like that together?

But these pension funds are united in a common cause – or at least a common problem – long-tail liabilities.

Long-tail liabilities are like the long-tailed southern bilby, expect that they’re not a marsupial, and the long-tail refers to time. Pension funds have obligations to deliver payouts 30+ years down the track.

(Just like a bilby.)

The Port of Melbourne gives them a way to do that. Unless Melbourne collapses into the sea, the port will provide a steady and consistent income stream.

These days, deals like that are getting harder and harder to come by. Each time the world threatens to rehash the global financial crisis, pension and investment funds rush to the safest thing they can find.

So maybe that’s gold for a while. But there’s still that long-tailed liability nibbling at their socks. It’s not enough to simply sit on their money. They need to earn a return, otherwise their members are going to get pissy.

And so they’d buy up nice safe things like government bonds, but they’ve been buying so much of them lately that now governments don’t have to offer much of a return. Most don’t even keep pace with inflation.

So a port in a major city offering reliable, inflation beating returns is a God-send.

Which is why they were willing to pay through the nose for it. And they were willing to pay a price that no ordinary company would have. The hurdle rates involved would mean that no logistics or transport company (the kind of companies that used to own ports) couldn’t even get close to this kind of price.

Whatever it takes to keep the bilby from the door.

The other reason that they’re able to pay these kinds of rates is because, in line with falling returns, their real cost of capital has also fallen.

In fact, for the big players, money is almost free these days.

That brings me to the other piece of news that happened last week.

The ECB effectively just gave away 45 billion euros. Just like that.

From Bloomberg:

The European Central Bank handed 45.3 billion euros to euro-area lenders at a zero interest rate, in the second round of its program to boost credit to the real economy.

The take-up in the targeted longer-term refinancing operation, known as TLTRO-II, compares with a net 31 billion euros at the last operation in June, when Spanish and Italian banks were the biggest participants. The cost of the four-year loans could drop as low as the deposit rate of minus 0.4 percent if the banks expand credit supply, meaning the ECB would be paying financial institutions to take its cash.

The program, which allows banks to borrow according to the volume of loans they issue to companies and households, is part of the ECB’s push to boost euro-area lending and help spur economic growth and inflation

Just 30 billion here, 45 billion there. And paying the banks to take its money!?!? Are we for real?

It shows you just how far we’ve come that nobody blinks an eyelid at this anymore.

But this is what’s going on. The ECB pumps free money into he banks. The banks lend it out for fraction more than sweet F.A (another technical term). And then the big pensions and hedge funds buy ports and so on.

And the money goes round and round.

This is the way of the world now. And there’s two assumptions here. One, that the effective cost of capital is staying at zero, and two, there’s nothing much else worth investing in.

And by that I mean, the pension funds don’t think that they can rely on ‘economic growth’ anymore. In the past, as the economy grew, companies made money, and if you owned shares in a bunch of companies, then you made money.

But that’s not how the world works anymore. Now the money is free, there’s nothing really worth investing in, so companies sit on their hands and bid up their share-prices with share buy-backs.

As far as the pension funds are concerned, the systems broken. They can’t back the economy anymore, they’ve got to actually go out and buy income streams like the Port of Melbourne…

… at whatever the cost.

There’s a deep and dark pessimism at the heart of all this.

Are they too ‘glass half empty’?

The Brisbane Bump is coming

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Night_skyline_of_Brisbane,_Queensland,_Australia

If it’s going to hit the fan, Brisbane will be first.

Last week, I suggested that this was actually one of the quietest booms on record.

Part of the reason that we’re not hearing about it is the two-speed nature of the boom. So while some segments are pumping along, other segments are totally under the pump.

Take the high-rise apartment market. For a good 2 years now I’ve been warning about the growing over-supply in that segment – a call that has since been taken up by the major papers.

(Not that I’m saying they’re following my lead. The data can only slap you in the face for so long before you have to acknowledge it.)

But we’re quickly approaching crunch time.

And to be honest, when the high-rise crunch came, I was expecting we’d see it in Melbourne. Melbourne led Sydney into a major high-rise boom, and so I expected it would be the first city to feel the pain.

But it is actually looking like Brisbane might be the canary in the coal mine.

Brisbane hasn’t added the same volume of high-rise supply as Melbourne or Sydney, but only in terms of numbers.

In percentage terms (relative to the existing housing stock), and in terms of speed, it’s a good step or two ahead of the bigger capitals.

Take a look at the high-rise approvals chart.

Screen Shot 2016-08-23 at 10.26.29 AM

That’s off the hook, right? In 2013 it just launched, effectively adding about 6 years of normal supply in just 18 months.

It’s wild.

But the odd thing about it is that it has occurred exactly at the same time as population growth in Queensland began slowing – helped along by a cooling mining boom.

In this chart here, you can see that population growth and dwelling construction decoupled exactly at around the same time as the construction boom took off.

Screen Shot 2016-08-23 at 10.26.40 AM

This makes Brisbane vulnerable. Supply is still ramping up, even as fundamental demand is slowing.

But what’s supporting the market if the population isn’t there?

Foreign buyers.

Like Melbourne and Sydney, it was foreign buyers driving a good chunk of high-rise demand. Units were marketed straight off the plan directly to off-shore buyers.

So a lot of these projects only look viable so long as the foreign buyers are still in the game.

But we’re hearing more and more stories about Chinese buyers getting cold feet – or simply not getting the finance they need. Local banks are looking to contain their exposure to the sector, and Chinese authorities are clamping down on capital outflows: from the South China Morning Post:

Hundreds of suspected operators of underground banks have been arrested this year in a nationwide crackdown on the multibillion-yuan illegal cross-border money trade, China’s Ministry of Public Security said on Wednesday.

In all, 450 suspects from 192 illegal banks had been rounded up in relation to 200 billion yuan (HK$234 billion) in illicit transactions, the ministry’s newspaper, China Police Daily, reported.

The crackdown comes as the mainland faces strong capital outflow pressures, partly due to expectations of a weakening yuan. The country’s foreign exchange reserves have fallen by about US$450 billion in the last year despite signs of stabilisation in ­recent months.

So the high-rise sector is looking a lot less flush and liquid than people expected it would be – or it probably needs to be to avoid a wipe-out.

As a result, most property economists are expecting tough-times for the Brisbane apartment market, with forecasts ranging from gloomy to apocalyptic. From the AFR:

A senior Queensland academic says inner Brisbane apartment prices could fall as much as 25 per cent over the next 12 to 18 months as Asian buyers walk away from settlements.

Chris Eves, professor of property economics at the Queensland University of Technology, said overseas buyers who had purchased off-the-plan in the past six or seven months might not be able to settle final payments now that China has introduced measures to stem capital flow.

“Developers will have to put these apartments on the market and with the lack of demand they will have to discount their prices. Some developers will go out of business – this always happens in oversupply situations,” said Professor Eves who first warned of oversupply in March last year.

So there’s no question that there’s pain ahead.

The real question for me is how much collateral damage there is going to be.

As I said, we’ve got a two speed property market going on. Detached houses are marching to a totally different tune.

So while single-bedroom units tailored to overseas investors are in massive over-supply, detached family homes suited to actual residents remain in tight supply. A crash in one could have no bearing in the other.

The transmission though is going to be through the banks. If the banks get caught short by developers going under, and need to rein-in lending, those tighter credit conditions could affect the overall market (though to a much less dramatic degree).

We’ll have to wait and see. But the Brisbane bump is coming, and it will probably give us a good indication of what’s going to happen to the broader market. If there’s going to be carnage, Brisbane will be first.

Not that there’s much we can do about it at a policy level. The time to put the brakes on over-building was 18 months ago.

The sh!t’s already in the air. The only question now is whether it hits the fan or not.

How is Brisbane looking to you?

Kiwis showing the Aussies the way forward in property?

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Sheeps

The Greens have been pretty anti-development over the years, but it looks like that is about to change. Finally.

For a long time, The Greens seemed the most out of touch when it came to housing policy.

That’s not an endorsement of Labor or the Coalition. It’s just that where Labor and the Coalition diligently did nothing to rock the boat, The Greens just didn’t seem to get it. In fact, they seemed to be making things worse.

For starters, they fret a lot about housing affordability. Nothing wrong with that. We all do. I think we can all see that as a society, we’ve got a problem if younger or disadvantage folks can’t get a place of their own.

Housing is the first step to stability and genuine wealth creation. It needs to be an option for everyone.

But the question is what do we do about it?

Well, we could build more houses on the fringes of our cities.

But The Greens have been the most vocal critics of this kind of strategy, and the “urban sprawl” it implies. We need to limit the ‘footprint’ of our cities and protect the farms and bush land at the fringes.

Ok, fair enough. So can we build up the inner city then? Increase the density of our urban areas through town-houses and so forth.

Oh no no. The Greens want to preserve the ‘character’ of our cities. You just can’t put a price on the former slums that are now the stomping grounds of well-heeled hipsters. Development has to happen somewhere else.

So where do we build then?

The Greens: Eat more tofu.

This is what I mean when I say that I just don’t think they got it. There’s an impossible trinity here. You can’t have affordable housing, no development on the fringes and no development in the inner cities.

Something has to give.

If prices are high it’s because there’s more demand than supply. And this has been one of the characteristics of the Australian property market for years. We just don’t build enough houses.

So we either reduce demand by asking a few people to leave (I could give you a list of names), or we increase supply.

But supply has to happen somewhere. And really there’s only two options. Either it happens on fringe, greenfield sites. Or it’s infill development that increases the density of existing areas.

The first way has been blocked by people seeking to contain urban sprawl – and this move has given us the urban growth boundaries that have come and gone in Sydney and Melbourne over the years. Almost as soon as they’re set up, they get revised and pushed back.

The second way has been blocked by the NIMBY brigade and people looking to preserve the character of existing areas. Through their local councils, these groups have been able to exert considerable influence.

And look, I can see how any one of these ideals is attractive. It’s nice to have affordable homes. It’s nice to preserve farm and bushland. It’s nice to have streets full of quaint terrace houses.

But you can’t have them all. One of them has to give.

But it looks like this tide is shifting, and New Zealand is leading the way.

Across the Tasman, there’s a bipartisan consensus emerging that Auckland’s urban growth boundary (called the Metropolitan Urban Limit) has to go.

The National’s have been pushing the barrow for years, but now Labor has come to the table. Labour’s shadow minister for housing, Phil Twyford has called for the end of the MUL:

“Over 25 years the urban growth boundary hasn’t prevented sprawl, but it has driven land and housing costs through the roof. It has contributed to a housing crisis that has allowed speculators to feast off the misery of Generation Rent, and forced thousands of families to live in cars, garages and campgrounds.”

“Labour’s plan will free up the restrictive land use rules that stop the city growing up and out. It will stop land prices skyrocketing, and put the kibosh on land bankers and speculators.”

Sell it Phil, sell it. (I used to “feast off the misery of Generation Rent” but now I’m trying to lose weight. I’ll just have a salad of discontent with a side-serve of unnameable regret.)

But then, kind of amazingly, The NZ Greens have come on board as well.

Green Co-Leader and Housing Spokeswoman Metiria Turei said the Greens were also open to Labour’s package of relaxed city limits, relaxed density controls and new infrastructure financing, as long as it included integrated planning with public transport and protection of special land.

“On the face of it, it looks like something we could consider and support because it has all of the parts of the puzzle integrated. The devil is in the detail always, but we’re certainly interested in their (Labor’s) proposal.”

I think this is a seismic shift in the politics of land supply, and my bet is that it won’t be long before Australia follows in New Zealand’s footsteps. Urban Growth Boundaries are being seen for the failures they are, and that will make it easier for people to bring much-needed homes to the market.

When you look at it, it’s inevitable. Greens’ voters might have nice associations with terrace houses, but that love affair will be tested when they realise that it’s one of the factors that’s preventing them from getting into the housing market.

The NZ Greens are growing up. The Australian Greens don’t have a choice but to follow in their footsteps.

Ps – Before anyone starts pelting me with tempeh, I will say one thing for The Greens. They’ve had a long-standing ban on donations from big corporations. This month we saw revelations that Trade Minister Andrew Robb accepted $100,000 from a Chinese state propaganda unit on the very day the Chinese-Australia Free Trade Agreement was signed! How anyone can take money from China while supposedly representing Australia’s interests and not get sacked, let alone lynched, is beyond me…

Is the tide shifting? Is this the dawn of a more developer-friendly political era?

Looming crisis just around the corner…

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Melbourne_At_Night_from_Southbank_Bridge

Looks like things in the high-rise industry are tougher than we thought.

One of the odd things in economics and finance, is how long a market can be glaringly out of whack before the general public cottons on.

I’m thinking now about the emerging glut in high-rise apartment towers, and their dependence on foreign buyers.

I’ve been warning my readers about this market segment for almost two years now. Finally, it’s becoming common knowledge. Every week, we hear another warning about the coming shake-out. First it was in the financial papers. In recent weeks it’s gone main-stream.

It seemed that I was one of the first to pick up on it, but I didn’t have any special insider access or anything.  I just had a curiosity, some publicly available data and a street-gambler’s instincts for a bad deal.

What’s surprising then is that while this unshaven high-school drop out picked up on it, no one in the industry seemed to, and rather than the collective wisdom of the market spontaneously changing course and rectifying the imbalances, things actually got worse.

We actually saw more and more approvals enter the pipeline, and a greater dependence on Chinese and foreign buyers.

And this is how crises happen.

And if you want to get a sense this week of how bad things are getting, take a look at the panic taking hold of the big developers.

The AFR is reporting that last Thursday, about 60 of the city's most powerful residential developers gathered together in the swanky Westin Hotel on Collins Street in the Melbourne CBD

“Those who attended the meeting covered every sector and segment of the development community from big listed players like Lendlease and Mirvac to the major private developers including Central Equity, ISPT, Metro Property Development, Gurner, BPM, Salta, Salvo and Little Projects.

A big block of attendees were Asian developers led by Malaysian giants SP Setia (which recently paid a record $101 million for the Telstra development site in the CBD) and UEM Sunrise, state-owned Chinese developer Poly Real Estate and CEL Australia, the local arm of Singapore-listed Chip Eng Seng.

The main items on the agenda: The sudden pullback by the major banks from lending to foreign buyers and new taxes imposed on foreign buyers in Victoria from July 1, including a 7 per cent stamp duty surcharge.

Developers fear this could lead to a surge in settlement defaults and send apartment values plummeting.

Danni Addison, CEO of the Urban Development Institute of Australia, told the Australian Financial Review there was great concern about the impact of numerous policy decisions on the property development industry and the economy.

“The industry has come together as one voice to tell the government about the real economic impact their decisions are having on the ground,” Ms Addison said. She said the UDIA and the Property Council will seek meeting with the state government to voice these concerns.”

Australia has a proud tradition of shameless rent-seeking, and it’s heartening to hear our big developers are giving our Asian friends a lesson in Aussie values.

But it’s hard to feel sorry for a mob wrestling with a demon that they themselves created.

And it’s a simple story of over-supply.

Next year alone, 20,000 apartments will be completed across Melbourne. In 2004, when everyone was freaking out about the glut in Docklands, Melbourne added just 6,000.

So it’s this glut that’s hammering prices. It’s hard to know exactly, but there’s reports that resale prices have already fallen 25% – though developers are working hard to keep this fact covered up.

And that’s the rub of the problem. It’s not the fact that banks are blacklisting China, or the government has added an extra 7% to foreign buyer stamp duty.

It wouldn’t matter if the Chinese buy was drying up IF these developers had produced a reasonable amount of stock that was attractive to all buyer segments.

But this is exactly what they didn’t do.

They put all their eggs in one basket. They focused on the Chinese market – with all these one-bedroom dog boxes, and were banking on Chinese investors soaking up the glut.

Charter Keck Cramer’s director of researchers, Robert Papaleo, has claimed that nearly half of Melbourne’s off-the-plan apartments are being purchased by foreign investors.

Half!

But now the Chinese flows are being crimped (mainly by tighter capital controls in China), they need help to move an excess bunch of stock that no one in Australia wants.

And with each foreign buyer that fails or refuses to settle, the developer looks to lose about $100,000 (according to estimates by buyers agent, Paul Osborne) – even after they’ve kept the initial deposit.

En masse, that creates a systemic problem. The industry is in trouble. No wonder the banks have thrown the gears into reverse and are trying to cover their arses as quick as they can.

And no wonder the industry has started counting seats on the life-boats.

But it’s hard for me to feel sorry for them.

And it’s harder still for me to be convinced that I, or any Australian tax payer, should have to front the cash to bail them out of their hole.

But here’s another prediction for you. As this ship goes down in flames, they’ll have their hands out right to the very end.

It’s the Australian way.

Watch this space.

Should we be helping them out? How big is the crater going to be?