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The doomsday artist that made me millions (Now he’s totally wrong)

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Harry Dent is back. Who would have believed it?
This guy made me millions, now he’s got it totally wrong!

I'm going to let you in on how the doomsday PR game works.

But before I do that Harry made me millions: Back in 1995 I read his book called the ‘The Great Boom Ahead'. It sent a rocket up my backside and motivated me to get into real estate in a big way.

Back then he was predicting an almighty boom.

He got it absolutely spot-on. I invested in real estate in a big way and now I'm a multimillionaire. So I'm a Harry dent fanboy from way back.

So the fact that I can give you an objective opinion is based on a 20 year love affair. I'm not a hater, I just think he's now got it wrong, and being in the marketing game I think he's been managed by a PR department that has sold him on bad-news sells.

*Sidenote: You've really got to be careful as to who you take advice from. I know several people who absolutely hate Harry with a passion. Why? They subscribed to his thinking and narrative in 2011-12, bought into the ‘The Great Crash Ahead' and they sold all their real estate in Sydney, literally costing them millions of dollars in future profits – Ouch!

Now to the crux of the matter and how the doomsday market works.

Some people look at me a little sceptically when I say that the media is just a circus, and everyone is pushing a barrow.

“But Jon, you've got a property portfolio worth millions. You've got a barrow too.”

And sure. That's true. And I'm probably biased to property in ways that I don't even realise. But I'm not out there pissing on punters and telling them that it's raining.

Like Harry Dent is.

Who is Harry Dent?

He's an American ‘economist'. He's toured here a few times.

In 2011, he came and said Australian house prices were about to fall 50%.

In 2014, he came and said that Australian house prices were about to fall 60%, and that people should sell up.

In case you're new to the planet, those predictions never quite came true.

In fact, since 2014, house prices are up 46%, so that makes his prediction about 100% wrong.

Hellava track record.

But that's not stopping him. He's back, touting another book on another road show.

What's more, he's shamelessly glossing over his track record.

From his publicist:

“Mainstream media pundits are calling me crazy, an idiot, and a quack.

“But that’s nothing new…

“After all, I’ve been making predictions that people are sceptical of for decades… but one after another keeps coming true anyway!”

One after another? Seriously? I can think of two calls that were so far off the mark they weren’t ‘wide’, they were out of bounds on the full.

And if people had listened to you and sold up in 2014, they would have lost out on hundreds of thousands of dollars.

But this is the thing about the game – it doesn’t matter.

In a world where facts matter and truth rules, an analyst whose predictions were consistently in the wrong post-code would find themselves out of a job.

No one would care what Harry had to say.

But this isn’t the world we live in. We live in a world of hype and whatever sells.

In that world, the Harry Dents do well. It doesn’t matter how wrong they are. The only thing that matters is how ‘wow’ they are.

And predictions of a 60% fall in house prices is pretty wow.

And so what’s to stop economists like Dent making sensational and sensationally bad calls?

Nothing.

There’s no downside. The only thing that matters is what kind of media splash he gets.

Now, I’ve read Harry’s work. Mostly, it’s pretty good he knows his stuff. If you want a good introduction into how all the pieces of the global economic order fit together, this is as good a starting point as any.

And I’m not going to begrudge Harry for playing the game. He knows how the game works. He knows that if he came all the way to Australia and said that house prices might fall 2-3%, no ones going to listen to him.

And so he’s doing what he needs to do, to be the entertainer that he is.

And I don’t even hate the game all that much. It’s mostly entertaining, and if you can see through the fluff, it can give you a read on where trends are going.

But make no mistake. It’s a game.

If it’s not a game, how does an economist with two 100% wrong calls under his belt get taken seriously?

It’s a game. The media is full of hype and trouble and sensation.

If you don’t know this as a starting point, then you’re any one’s fool.

NO B.S. FRIDAY: It had to happen. You can now buy property in Bitcoin.

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Bitcoin and property are completely different assets, but that’s what makes it special.

The internet’s been all a chatter this week with some bloke who’s willing to accept Bitcoin as part payment for his house.

And now here I am giving his property in The Basin, Vic another plug. Check it out. Looks like some pretty sweet digs.

My first thought when I saw this was that it was bound to happen sooner or later. Crypto-currencies are here to stay. I’m still undecided about hitching my wagon to Bitcoin in particular, but crypto-currencies as a concept? Forget it. The genie is out of the bottle. They’re not going anywhere.

My second thought was that this guy is a marketing genius. With a vague promise to maybe possibly accept some bitcoins as part of his deal, he’s secured national TV coverage and wall to wall print.

…For free! I’ll take my hat off to that kind ROI any day of the week.

Domain was first to break the story:

“A vendor selling a family house in Melbourne’s outer east is willing to accept Bitcoin as payment, in what could be the first cryptocurrency property transaction in Australia.

… Rob, who did not want his surname printed, is an experienced builder who buys, renovates and flips houses. He first bought into Bitcoin earlier this year, but had watched the cryptocurrency market evolve over the past decade.

His latest project, 1411 Mountain Highway, The Basin, is up for sale, with its listing declaring the “owner is agreeable to accept part payment in Bitcoin”.

“I see cryptocurrency at the moment as like the early days of the internet dot com era,” Rob told Domain.

He believes marketing the property as Bitcoin-friendly could be the deciding factor in someone’s ability to purchase the house.

“If it came down to two or three people, and both had their maximum borrowing capacity at a certain amount, and one has bitcoin — because the banks don’t look at Bitcoin as an asset — that could be something that could get them across the line.”

If it happens, I’ll be curious to know how they manage settlement. Even over a short settlement like 30 days, the price of Bitcoin can vary a lot. Who carries the risk on that one?

But there’s a second leg to this story.

There was a bit of chatter about the deal on one of our forums and it turns out Rob is a student of Dymphna’s!

Classy play, Rob. You’re doing us proud.

I should have known Dymphna’s fingerprints would be on this one. At her Next 10 event she talked a lot about the disruptive power of crypto-currencies, and the impact the block chain would have on the property market.

If you missed the event, we’re in the process of compiling a bit of a best of. It’s no easy task condensing a full day packed full of info down into 50 minutes or something like that, but we’ll get there.

So stay tuned for that one.

So where to from here? Are we going to see a rush of properties on to the market, quoting prices in Bitcoin?

That’s not really where I see it going. I think there’s a bit of a mismatch of vibrations right now between cryptos and property. The crypto space is very dynamic. Prices are all over the shop.

Property on the other hand is steady and predictable. 10% in a year is a big move. Some days Bitcoin does that before morning tea time.

So their different vibrational natures – their frequencies – means there are challenges in marrying them up. Until the price of cryptos settles, and it will have to eventually, then they’re not natural bed-partners.

But that also means they can be playing different roles in your wealth strategy.

Property is a steady, long run play.

Cryptos however can be your fortune makers. The volatility means that if you’re ahead of the curve, you can make easy money timing your entry and exits… if, of course, you know what you’re doing.

(Or you’ve got someone in your ear who does.)

New entrants into the coin space can also offer huge asymmetric risks. They cost you peanuts to buy, but can deliver 1,000% 10,000% gains in an incredibly short time.

So this is something I’m starting to take a serious interest in. As Rob was saying, Bitcoin’s been on the scene for a while, but these are still very early days in the block chian revolution.

And I’m keen to take you all along for the ride with me. I’m involved in a high-end mastermind group, and I’ve got a couple of mates there who are crushing it right now. Like making insane returns. Serious bananas.

They’re not up for sharing all of their trade secrets, but I have convinced them to open the game up for us. Even just a fraction of their knowledge is going to put you miles ahead of the curve.

So put December the 13th into your diary. I’m going to get them in and run a crypto webinar. I’ll bed down the details soon, but for now, keep that Thursday night open.

And let’s all make some serious coin.

Can you see cryptos and property getting into bed together?

Are We (Property Investors) Evil?

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If investors are evil, explain this…

I know I’m pissing in the wind, but here’s what really happening in Australian property.

One of the interesting themes that does the rounds is that the reason that house prices have risen so much and therefore the reason why our poor children are sleeping in cardboard boxes under the railway tracks, is because of investors.

Greedy investors have destroyed the market, destroyed affordability and destroyed the Australian dream.

A lot of this goes unchallenged. I find that interesting. I think what it shows is that we still have a bit of cultural cringe around making money.

I think a lot of investors do feel a little bit guilty that they’ve made good money in recent years. That somehow, they must have done something at least a little bit naughty.

Nevermind that the CEO of any major Australian bank takes home a small African nation’s GDP worth of stock options each year, or that Paris Hilton gets paid millions of dollars to rock up to a party and do balloon animals.

No, I made 10% on a property I spent months researching. What a bad boy am I.

It is just one of those things, and as funny as it is, I’m still happy that we don’t live somewhere as money and status conscious and shameless as the US.

So it is what it is.

The thing that I find interesting about this stylised fact, is that there isn’t a whole lot of data to support it.

It is true that we saw the investor share of mortgage finance increase in recent years, especially in NSW and Victoria.

But when APRA started putting a brake on investor lending, we found out that the processes that gathered info on whether the loan was OO or investor were pretty loose.

It didn’t really matter, so the banks didn’t stress all that much about recording whether someone was an investor or a first home owner.

And there were some creative work-arounds that allowed first time buyers to stretch a little further if they said they were buying it as an investment property – by saying they expected $x rental income, and using the default bank assumptions about their own rental expenses, and squeezing out a couple of extra hundred dollars in servicing.

And so some chunk of investor borrowing might actually have been owner-occupier.

Of course, now it’s flipped the other way. Investor mortgages are attracting a premium, and so some investors are actually finding it better to declare as owner-occupier if they can.

So who knows what the truth of it is.

The best guess is probably the ABS survey of Household wealth. Corelogic did some interesting analysis on it the other day.

What they found is that yes, there has been an increasing in the number of households that are rental properties.

It’s up from around 26% of households in 1994, to about 30% in 2016.

That’s not a HUGE increase in 22 years, and note that it’s fallen in the most recent observation. So the narrative of investors ransacking our children’s future doesn’t really bear out here.

But what’s interesting is when they look at owner occupiers.

The percent of households that own outright has been on a steady downward trend – from 44% in 1996 to just over 30% in 2016.

That’s a much bigger fall than the rise we’ve seen in rental properties.

At the same time, the share of households with a mortgage has risen steadily, up from 27% in 1996 to 37% in 2016.

Again, making the rise in rentals seem small.

So the real story here is the fall in the number of properties in Australia owned outright.

Is that about evil investors buying all the properties? Hardly. It’s about more households having a mortgage, and presumably, for longer.

What’s driving that? Price rises. As prices rise, it takes longer to pay off a mortgage (since prices have risen much faster than wages).

What’s driving price gains? Record low interest rates, strong population growth, with a sprinkle of Chinese money.

So this isn’t a story about first home buyers doing it tougher. It’s about everyone doing it tougher. It’s about everybody having a mortgage and having it for longer.

“Evil” investors have nothing to do with it.

Not that I imagine that’s the last we’ll hear of it…

Why does the evil investor story have so much appeal?

NO B.S. FRIDAY: Want Free Money? Hit Up This Guy.

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The people who know are getting ready for ‘post-work’ society.

Do you love free money? Want to know where to get it?

Go and see this guy:

That’s Sam Altman. He’s the president of “prestigious start-up accelerator” Y Combinator.

If that image and that business name don’t scream tech guru I don’t know what does. He’s pretty much a poster-boy for Silicon Valley.

And now, the word is, he’s giving out free money.

Not just willy nilly unfortunately. Basically he’s funding his own UBI experiment.

I’ve covered UBI – Universal Basic Income – before, and it’s one of the main trends Dymphna’s identified for her Next 10 event. If you’re new on the scene, essentially everyone in the country gets income from the government. It’s not means tested. It’s not eligibility-based. It’s just free money.

It’s an idea that just 20 years ago seemed plain nuts, but now it’s one of the hottest topics in town.

Especially Silicon Valley town.

Should we be worried that Silicon Valley is all hot under the collar for UBI? Yes. Yes we should.

Why? Because these are the guys who probably have the best idea about the jobs carnage that’s coming.

They’re the ones who are making the robots that are going to put more than half of us out of a job.

And we’ve always had churn before. Horse and buggy drivers became cabbies became Uber drivers.

It’s just that now, things are getting exponential. Technology is expanding and improving at such a wild pace that we have no hope of keeping up with it.

And technology used to be labour-augmenting – the way a calculator helped an accountant do their job. Now it’s labour-replacing. You don’t need the accountant any more. There’s an app for that.

These two things combined mean that we’re potentially on the cusp of a jobs Armageddon. Jobs will be destroyed faster than the economy can create them.

The geniuses at Silicon Valley recognise this. They also recognise that if no one has a job, no one will buy their gadgets.

The solution? The government gives everyone money.

Ok, maybe I’m being a little cynical there.

The more idealistic proponents of UBI say that in a world with no work, we’re going to have to come up with some sort of system that enables people to live.

And in a world staring down the abyss of deflation (again, thanks technology. Way to make everything cheaper), then we can afford to do it.

The US was printing $80bn a month at some point there. Barely moved the dial on inflation. No reason why we can’t just give everyone enough to cover the basics.

And people can still work if they want to. If they want super nice things, they can earn the money to buy them.

That’s the basics of UBI, and we’ve seen a number of trials rolled out in different places, Finland, some part of Canada.

But what I find interesting here is that this is a private initiative. This isn’t some government backed pilot study. This is just some rich dude putting up his hand to run a trial.

Business Insider was running the story:

“Y Combinator, the largest and most prestigious startup accelerator in Silicon Valley, has announced new details of its upcoming experiment to give Americans free money.

YC will select 3,000 people across two states and divide them into two groups. The first group will include 1,000 people who will receive $US1,000 a month for up to five years. The second group of 2,000 people — which the study will consider its control group — will receive $US50 a month.

YC President Sam Altman announced on the company’s blog that he was interested in answering that question with a study of “universal basic income.”

Many of Altman’s techie peers have endorsed or expressed interest in UBI as a potential solution to the widespread automation of jobs that economists say the coming decades will bring.

Proponents also say UBI could lift people from poverty and raise the collective standard of living for everyone, generating greater prosperity. Sceptics, meanwhile, argue that UBI will sap people of their motivation to work if they already have money coming in.

There haven’t been any long-term studies to say either way, however. YC’s study will be one of the largest experiments in US history and should provide data never before seen in a developed country.

The new study will test a variety of factors to gauge UBI’s effectiveness, including “individuals’ time use and finances, indicators of mental and physical health, and effects on children and social networks,” the company wrote on its blog. The most important outcomes to watch will be whether people keep working and feel engaged in their communities, and whether the maths could work out to deliver UBI at all.

Kind of what I love about this story is that this is how the real world works.

In politics, you argue for a long time about the theory of an idea, and then you roll it out across the country.

Businesses that operated like this would never last long.

In business, you run small-scale trials. You develop a prototype. You test it out on a trial market. You refine the idea, you trial it again. Eventually, after enough iterations, you end up with an idea that works.

That’s what we’re seeing here. We’re seeing a small-scale trial – as a way to test the waters and see what works.

More public policy should be run this way.

And the results are going to be interesting. What happens when people don’t have to work for a living?

My bet is that people start doing things that are really meaningful. Sure, there’s probably a phase we’re people stay home and masturbate into a packet of Cheesles. But that gets old pretty quickly.

Soon enough, people will start to wonder how they can fill their days with meaning.

That’s my bet. Let’s see what happens.

Technology isn’t just shaping business. It’s promising to turn society on its head. Get along to Dymphna Boholt’s Next 10 event to get the full picture on where we’re going. It’s mind-blowing.

The boom-driver baton now goes to…

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Investors are sidelined. Who’s going to step into the breach?

It’s a tough credit environment at the moment.

I’ve seen tougher, but then I’ve been around for a long time. If you’re new to the game, you might be wondering what’s going on.

Two years ago, banks were falling over themselves to throw money at you. Now, they don’t want to know you.

People are a little freaked that this is going to cause the market to ‘collapse’, but I think this misses the point.

The credit restrictions, introduced into the system via APRA, are deliberate friction. They’re sand in the gears of the market.

But the market fundamentals haven’t changed. People want to borrow, banks want to lend.

And once the sand has worked through the system, those fundamentals will reassert themselves. We’ll pick up where we left off. Maybe with cooler heads perhaps, and that will be a good thing.

The other point I’d make is that so far, it seems that the restrictions are squarely aimed at investors.

Investors are getting the “It’s not you, it’s me” talk from their banks, and then going out the next day to see their bank walking hand in hand with some floozy owner-occupier.

“I really thought he could change!”

And it’s one of the hidden stories in all of this. While investor lending is slowing, first-home owner lending is actually booming.

In NSW, first home buyer finance commitments are up 80% year on year!

While in Victoria, FHB finance is up an also-thumping 45% year on year.

These are some seriously huge numbers.

(Of course you don’t hear APRA stressing about the irrational surge in first home buying – even though the data shows that FHBs tend to be in much more precarious financial situations than investors… but that’s another story.)

The point is, that while investor lending is slowing, owner-occupier lending, particularly to first home buyers, is picking up the slack.

In part, I think this has got a bit to do with simply how the data are recorded.

I mean, we know for example that in recent times, many first home buyers have entered the market, not with a house for themselves, but with an investment property.

Some data showed that in Sydney, for every first-time buyer, there was a first time investor.

So you can bet that these first home investors no longer have any incentive to label themselves as investors – not with APRA gunning for investors.

They’re going to come back across the line and say, actually, we’re owner-occupiers.

(And who knows what the actual truth is.)

So some of the boom in first home buying may just be column jumping.

But I’m willing to bet that a good chunk of it is real. Remember that we’ve had some pretty heft first home buyer bribes in NSW and Victoria come into effect this year.

In Victoria, they scrapped stamp duties on properties up to $600K.

And then this week, the Federal government introduced legislation that allows first home buyers to dip into their super. From the SBS:

The coalition used its numbers in parliament’s lower house to pass the measure – announced in the May budget – on Wednesday.

The legislation also allows older Australians to contribute the proceeds of the sale of their family home to their super.

Labor and the Greens are against the proposal, with the opposition claiming it will do nothing to address housing affordability.

Shadow treasurer Chris Bowen argues it will instead work to undermine the country’s superannuation system, labelling it a “sham”.

Assistant minister to the treasurer, Michael Sukkar, accused Labor of deliberately peddling misconceptions about the scheme…

“It’s quite shocking and surprising to see any political party take a view that a tax cut for first home buyers is something that they cannot support,” Mr Sukkar said.

I don’t imagine this is going to be huge. But add it to the bribes in Victoria and New South Wales, and it’s adding up to something substantial.

First home buyers are now a force to be reckoned with.

And as people wait for this energizer boom (it just keeps going and going) to run out of puff, the baton has passed from investors to first home buyers.

(For now. Investors will be back.)

If there’s a strategy here, it may be to look at entry-level properties. That will be the first market segment where these grants will be felt.

But money into the system is money into the system – regardless of where it lands. People selling out of entry-level properties buy into the tier above.

A rising tide lifts all boats.

The Australian property market is a beast with more than one engine. Back one off and another takes up the slack. That is how it seems to work.

Seen it before, see it again.

Noticing any impact in the entry-level segment?

NO B.S. FRIDAY: Great investors don’t learn from their mistakes

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Do you take the time to unpack your wins?

There’s an old adage investing that I really like:

“A good investor learns from their mistakes. A great investor learns from their successes.”

I think this is a really good one to remember.

In a way, it’s much easier to learn from our mistakes. When things go wrong, we’re much more interested in deconstructing what actually happened and what went wrong.

We’re primed to learn. We’re eager to avoid the embarrassment and setbacks that come with failure.

But when things go well… When a deal goes perfectly and we end up with a lot more cream than we were anticipating, we get on a high.

We’re full of juice and go. We just want to launch into another deal as soon as we can.

And the human biology is programmed to unquestioningly repeat successes. If eating those berries turned out well for us in the past, well then lets do it again.

But the modern world is more complex than our evolution ever imagined.

And there’s a real danger here if you’re not critically evaluating your successes.

I mean say you buy a site for development. You get a few months into planning and the numbers aren’t really adding up. But then the land gets rezoned, and you flip the site on to developers for a very tidy profit.

Win, right?

You made money because you made a smart buy.

But actually no. You made a mistake. You didn’t buy well. If you bought well, then the development numbers would have added up.

You made a mistake. But you got bailed out of your mistake by the re-zoning.

So this should be a big red stop sign saying, I need to take a look at my method here, because I’m buying lemons.

But that’s going to be hard to do if you just double or tripled your money. You’re going to be thinking. Let me at ‘em. I want to buy again.

In this situation, even with the best intentions and critical self-awareness, it is actually hard to hold your horses and take the time to analyse just how the deal went down.

And that’s when it’s actually fairly easy to unpack.

What about when you’re buying and developing in a market that’s got a run on?

How much of your profit margin is due to buying well and putting in a quality development? How much is just due to the market? How do you even know?

And right now, across Australia, there are 1,000s of property experts. People who’ve made lots of money and have sure-fire strategies for success.

At least they think they do. But the truth is most just got lucky. They bought at the right time and made their money off the market.

They just don’t realise it. In their minds, they’re geniuses. The results speak for themselves. If I wasn’t a genius I wouldn’t be making all this money, would I?

This is also one of the reasons why we see this bubble and bust dynamic play out in markets the world over.

On the way up, every one thinks they have the secret formula. They have some insight and strategy that 99% of people don’t have, and they’re turning that into coin.

They all do.

But at some point, the fundamentals bite, and the emperor realises that they’re naked. People realise that they’ve been buying junk, and there’s no way off a sinking ship.

Does this sound familiar? Dot-com bubble anyone?

Crypto-currency?

Now, I know I’ve been sitting on the fence a little bit over crypto’s, but now I’m calling bubble.

Why?

For exactly this reason. I’ve got all sorts of people in my ear about buying into crypto-currencies, and most have no idea what they’re talking about.

And we are well and truly into LaLa land.

Take “Fuck Token” (seriously, I’m not making that up.) That was up 370% in 24 hours last week.

I don’t even know where to start with that one. But it’s actually chump change compared to some of the numbers getting round…

There are now thousands of companies issuing coins. Rather than selling shares, they’re selling investors digital tokens (to people who mostly pay in Bitcoin or Ether).

So rather than IPOs we now have ICOs – Initial coin offering. It’s pretty much the same, just more ‘crypto’.

And some of the stories there are ridiculous.

There’s a token issued by Stratis that is up 101,168%. And that’s in a single year!

The NXT token is up 672,989%

They’re not typos. They’re actually results. In case your head isn’t spinning already, if you put $1 into a NXT token a year ago, you could now cash out $672,989.00.

(oh for a time machine.)

But what’s going on in the underlying business?

Maybe they’re doing great things, but is there any conceivable way that the business is 672,989% better than it was a year ago?

Short of discovering cold fusion, perpetual motion (or a time machine), there’s no conceivable way we can justify these results.

We’re in LaLa land.

And look, I know crypto has substance. There are multiple uses that have profound implications.

But then so did the internet in 1999. That didn’t mean that Pets.com was the billion dollar unicorn people thought it was.

Having a kernel of substance doesn’t protect you from hype and irrational exuberance.

But I am now being told to ‘get into cryptos’ by people who really don’t know what they’re doing.

I ask them what a crypto currency is and they say it’s like digital money. And I say, yeah, I’m aware of digital money. I do my banking in the 21st century.

“But it’s so easy, Jon.”

“Yeah, it’s easy until it isn’t.”

And look, that’s not to say there isn’t still money to be made. You might make another 670,000% before the whole thing topples over.

But if you’re going to do that, just be aware that you’re gambling now. The herd is on the stampede, and all the supposed ‘fundamentals’ in the world won’t save you when the herd turns.

There’s value in cryptos for sure, but now, more than ever, you need to know what you’re doing.

Don’t say I didn’t warn you.

What’s your shoe-shine boy telling you?

Hey China, you in or you out?

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Are Chinese buyers really abandoning Australia?

I’m wondering if this is all BS.

The talk recently has been that the Chinese are “abandoning Aussie property”.

Take this story from the AFR the other day:

Chinese real estate agents are reporting a sharp drop-off in Australian sales over the past six weeks as new property taxes take effect, while others report Beijing’s tighter capital controls are also hurting demand.

…David Wang, the vice-general manger of international sales at Chinese agency 5i5j, said sales of Australian property had dropped 80 per cent in July.

And he’s expecting an equally poor result or even worse figures in August.

“The main impact is from the introduction of new taxes in Australia,” he said.

Mr Wang said the Australian government may have “over-estimated the attractiveness of the market” for Chinese buyers.

I’ve seen variations of this story doing the rounds all over the place. Most haven’t questioned whether it’s true or not. They’ve just accepted that for some reason, China is just not that into us anymore.

“Have you found someone else?!?”

But you’ve got to remember that these Chinese real estate agents would love to see the recent sling of taxes aimed at foreign buyers removed. It’d mean more money for their clients, and more money for them.

So when they’re throwing numbers around like an 80% drop in sales, I tend to be a little sceptical.

The other thing to remember is that without Chinese and foreign buying, it’s difficult to square away what’s actually happening in the Australian property market right now.

The key chart here is this one. This tracks dwelling prices and mortgage finance.

You can see here that Housing Finance Commitments and Dwelling Price Growth normally move in lock step. That makes sense. It’s finance that buys houses after all.

But what’s interesting is that that relationship has broken down over the past couple of years.

Finance fell away, but dwelling values held up.

The other thing that’s interesting is that this is pretty much another one of those ‘just Sydney and Melbourne’ stories.

The break-away has been clear in Sydney…

…but most pronounced in Melbourne…

It’s not such a story in the other capitals.

So it begs the question: What’s with the disconnect? What’s caused it? Will it persist?

Of course, the most likely culprit is Chinese buyers. Why?

Because Transparency International (a corruption and money-laundering watch-dog) reckons that 70% of Chinese buyers buy with cash.

Cold hard cash.

So you’d have to imagine that that the Chinese would have to be a big part of the story. A large influx of buyers – the majority of who pay with cash – would certainly help explain why the relationship between finance and house prices is breaking down.

However it does suggest that the Chinese buy is bigger than we imagine.

Right now, the data we have isn’t saying that the Chinese buy is huge. The NAB survey reckons that foreign buyers account for 11.6% of new properties (trending upwards) and 5.6% of existing properties (trending downwards).

But remember this isn’t the official data. This is just some survey work from NAB. It might not be the full picture.

And the official data?

Well, that’s awkward. There doesn’t seem to be any.

(I’m sure it’s not that important.)

Fairfax did a little digging. (Interestingly, when I went to find this on The Age’s website, it’d been taken down. I had to go to the Illawarra Mercury for the link… Too hot to handle???)

Foreign purchasers are buying as much as 40 per cent of all new apartments in Melbourne, with new figures showing a surge in a tax raised from offshore investment.

Official data, released to The Age under freedom of information legislation, reveals that a tax on foreign buyers of residential property, introduced in mid-2015, has become a significant money-spinner for the Andrews government, with revenue almost doubling in a year.

The tax was levied on 4,000 transactions.

However, while the tax now generates substantial revenue of more than $133 million, it is not specifically itemised in state budget papers.

Property industry insiders and analysts believe this is because of the political sensitivity around foreign ownership and declining housing affordability.

The figures come as a separate analysis by leading property advisory firm Charter Keck Cramer found about four out of 10 of Melbourne’s new apartment purchases are to offshore buyers.

4,000 foreign transactions in a year in Victoria alone. The Chinese account for 40% of new apartments in Melbourne. 70% of Chinese buyers paying with cash. An ongoing disconnect between finance and prices….

Hmmm. I’m not a detective. But all these pieces of the duck are starting to look like a duck to me.

And that duck is not saying that the Chinese have “abandoned” Australian property. Far from it.

That duck is saying “Quack Qvaaaak Quvakk.” That loosely translates as the Chinese are here, they’re here to stay, and they’ll keep contributing to house price growth.

Some academics at Griffiths University said that between 2004 and 2014, a quarter of the price growth in Sydney and Melbourne as due to foreign buyers. And that was before finance and prices disconnected and the cash buyers landed.

Maybe it’s even more.

But that’s the problem with having world-class cities. They become world-class investment destinations.

That doesn’t change over-night.

So yeah, to me it all says, let the taxes stay. And take the self-interested whinging with a grain of salt.

What have you heard about the Chinese buy?

The fairy tale we tell young investors

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There’s a lot of stuff out there that is useful when you’re first starting out, but is actually BS.

If you’ve been reading my blogs for a while, I hope one thing is starting to jump out at you.

In many ways, ‘the cycle’ is the least interesting dynamic in property.

And that makes sense. Look at the ‘cycle’ in the broader economy – what does that give you? Maybe swings from negative 1 or 2 percent growth, up to 4 or 5 percent growth.

Not all that much to get excited about there. I wouldn’t get out of bed for a property deal that gave me 4%.

If we look at it closely, when we’re talking about ‘the cycle’, what we’re really talking about is the ‘over-correction’ dynamic.

So in the business cycle context, people get excited and things go well. But then the economy runs a little too hot. We overcorrect on the upswing. But then prices and wages go up. That starts to pull things back a bit. We’re in the middle of the road for a while. But then we pull back too far, people start getting a little nervous, they cut back spending, and we overcorrect to the downside… and round and round we go.

The ‘cycle’ describes a car driving down a straight road that maintains its course by swinging to the left, until it’s time to swing to the right. Then swinging to the right, until it’s time to swing to the left…. And so on.

It describes an observed phenomena in many natural systems that there is no static state. Rather, there is a continual process of correction around a desired average.

So don’t talk about the cycle. Talk about the over-correction dynamic.

And I know every property analysts and their dog in this country talks about the property cycle – but very few of them understand what they’re talking about.

And just as the ‘cycle’ gives you relatively small movements in the broader economy, the cycle, or over-correction dynamic, gives you very small movements in property prices. And by that I mean, ‘the cycle’ is almost impossible to identify in the middle of everything else that’s going on.

I mean, show me any significant trend in property prices over the past twenty years, and I’ll show you a structural force that was driving it.

The boom in Sydney from 2000 to 2003 – I would point to the flow through of the Olympic infrastructure spend, and the negative gearing changes introduced in 1999.

Or the slow down from 2003 to 2006? Two rate hikes and a whole lot of jaw-boning from the RBA.

2009 to 2012? Mining boom.

2013 – 2017? Foreign capital inflows and strong immigration.

You get the point. I’m simplifying to be sure, and there’s no way of knowing what the exact cause was… truth is, there’s always a number of factors pulling in different directions at any given moment.

But my point is that what we call ‘the cycle’ – the tendency for the market to move in swings and roundabouts because natural systems have a tendency to overshoot – is a very small part of the story.

Now, why does this matter?

It matters because a lot of investors ‘play the cycle’. And a lot of analysts out there encourage investors to play the cycle by banging on about the cycle all the time.

And they’re all missing the point.

One, the cycle, or overcorrection dynamic, is too small to create serious returns. It’s not worth dicking around with.

Two, it creates this false sense of certainty about future directions. It creates ridiculous ideas like: this markets done well in recent years. It must be due for a breather. Or, this market has done nothing. It’s due.

If you’re basing your investment decisions on ideas like this, you’re going to get slaughtered.

Let’s take Perth as an example.

Take the boom that took place between 2010 and 2015. Was the cycle telling you to get into that one?

Not at all. There was nothing in the Perth’s market history that would have given you any idea that that boom was coming.

Because that boom had nothing to do with the cycle. It was all about the mining boom and the surge of population that went with it.

Or take the correction that kicked in in 2016. That looks like the cycle right? Bad times follow good times.

But again, that had nothing to do with any inherent cycle – it was about the mining investment boom coming to an end, and population flows reversing.

And what does the future hold. Well, the cycle will bottom and Perth’s fortunes will pick up.

That probably is what will happen, but it won’t be due to any overcorrection dynamic. I’ll be watching what’s happening with the Western Australian economy, and how their managing their transition through the mining boom fall out.

When Perth’s market picks up again, it will be because the economy or population flows have created the right conditions for a recovery.

It absolutely won’t be because of the ‘cycle’.

So be careful with this. The idea of a cycle is fallacy.

It is a useful fallacy when you’re starting out. It’s good to remember that markets can go up and down, and it’s not just a one way street.

But as you become a more sophisticated investor, you need to let this go. Put it in a box alongside Santa Claus and the Easter Bunny.

If you believe there is a cycle, or it is the cycle that is driving things, you’re going to miss what’s really happening.

And what’s really happening – that’s where the money is.

Heard any BS about the ‘cycle’?

What is a house? (asking for a friend)

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

What is a house?

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

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

But again, this is only part of the story.

Housing, as a concept, is changing.

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

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

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

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

But now the game is changing again.

Some of those changes are easy to identify.

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

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

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

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

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

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

This is a real shift.

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

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

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

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

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

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

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

This is something different.

So what is it?

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

(It was an unprecedented vehicle for porn!)

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

So how should we think about housing?

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

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

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

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

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

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

So the unreal rests upon the real.

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

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

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

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

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

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

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

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

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

No modern economy can do with out it.

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

What’s your framework for thinking about property?

Whispers of the next boom

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

Okay, little bit of a news flash.

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

Might not be coming.

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

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

How do I know this?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Perhaps WA has turned the corner?

So it’s all looking pretty solid.

Surprisingly solid even.

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

But by then, everyone knows about them.

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

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

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

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

Economies do move in cycles after all.

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

So watch out! Good times ahead.

What’s the feeling in your crystal balls?