Property Investing

RBA raises a flag on Brisbane apartments

April 19, 2017 by Jon Giaan

I’d be assessing my options if I was exposed to Brisbane high-rises right now.

It was interesting to see that the RBA singled out he Brisbane apartment market in their latest Financial Stability Review (FSR).

I’ve been saying it for, what, like almost three years now, but I’m not going to claim bragging rights over the RBA.

They don’t have the luxury of throwing big calls all over the place like I do. If I’m wrong (which I’m not. Ever.), no one really cares. I’m just another pundit spouting off.

But if the RBA makes a big call, and they get it wrong, then there’s serious consequences. There’s consequences for the people who followed their mistaken lead, and there’s consequences for the RBA’s reputation as the last-word in all things economic.

So the fact that they’ve come to the party (more like a wake) around Brisbane apartments speaks volumes about the truth of that situation. No glossing over it now.

And if you’ve been following my advice you wouldn’t have bought off-the-plan into these high-rise developments in recent years, but if you did, well I’d really be taking stock of your options. Things look like they’re going to get worse before they get better.

And if you listen to the RBA, they’re surprisingly punchy.

There continue to be concerns about an oversupply of apartments in pockets of Melbourne and in parts of Brisbane, where apartment prices have declined in recent months, rental growth has been soft and the vacancy rate has trended higher.

This chart should raise some eyebrows. This is the six-month annualised price growth. That is, they take the previous six months, and say, if that rate was continued over a full 12 months, what would the year on year change be – which is what we’re used to talking about.

You can see Sydney and Melbourne are holding up, but Brisbane apartments are heading south, and really aren’t all that much better than Perth right now.

At least Perth has an excuse, with the ongoing unwind of the mining boom. But Brisbane should be doing better. And given that detached housing prices are holding up, this suggests that it’s really an over-supply story.

Which is what the RBA reckons too…

The construction of new apartments and other higher-density housing has increased substantially over recent years, reaching historically high levels. In 2016, higher-density dwellings accounted for around half of all residential building approvals (Graph 2.6).

As would be expected, much of this activity has occurred in the most populous cities of Sydney, Melbourne and Brisbane. In Sydney, construction activity has been spread across the inner and middle suburbs, and the increase in new supply relative to the existing stock of apartments is relatively modest (Graph 2.7).

However, in Melbourne and Brisbane, where apartments have historically accounted for a much smaller share of the dwelling stock, activity has been concentrated within the central business districts and in a few surrounding inner suburbs.

Moreover, in Brisbane the overall increase in the supply of apartments in inner to middle-ring suburbs is much larger than that of Sydney and Melbourne as a share of the current stock, and population growth in Queensland has slowed in recent years.

This large number of new apartments recently completed and currently under construction raises the risk of localised pockets of oversupply. As discussed earlier, apartment prices have fallen in Brisbane…

No kidding! Look at that chart. Brisbane has been pumping out the high-rises like there’s no tomorrow. Not only that, there’s plenty still left in the pipeline, with large surges of supply coming through til late 2018.

If we’re already at a stage where over-supply is putting downward pressure on prices, where will be in 18 months?

And if we look at the vacancy rate data, we can see the pick-up in Brisbane vacancy rates that has people worried.

Right now, it’s not all that hectic. We’ve seen worse in recent memory. But as I said, there’s still a lot of supply working its way through the system. You’d have to think the trend increase we’ve seen in recent years would have to continue.

They key swing factor here is interstate migration, with net population outflows out of Queensland making things all the worse lately. That could turn around. If the commodity boom continues, and price differentials between Brisbane and the other capitals continue to widen, Queensland might become a net population importer again.

That would help.

But it’s not likely to swing the dial or swing the dial quickly. This is going to get worse before it gets better.

As the RBA notes, this raises the prospect of settlement risk, which will put pressure on the big developers.

While liaison with industry suggests that settlement failure rates remain low, developers are continuing to report delays in settlement for some purchasers… Liaison also indicates that valuations at settlement are sometimes coming in below what buyers had anticipated and, in some cases, below contracted purchase prices, reducing the amount banks will lend.

For investors buying these new apartments, declines in apartment prices raise the likelihood that they fall into negative equity at settlement. The potential for rents to fall and vacancy rates to rise also raises the risk that investors may find it more difficult to subsequently service their mortgages.

Geez. They’re not pussy-footing around there.

If you invested in these things in the past few years, expect to take a bath. Developers hold on to your hats.

Nothing lasts forever, and you’ll be back in the money eventually. But it could be a long, and bumpy, ride.

Know anyone who got into Brisbane apartments recently. How are they faring?

The fun and games behind rate hikes

March 29, 2017 by Jon Giaan

What’s really causing banks to hike up their investor loans?

So I’ve seen a lot of people make a bit of a deal of the recent out-of-cycle rate hikes – especially people in the media. (Haven’t you got anything better to do with your time?)

No, I get it. It’s important. In the last week all the big four have jacked rates at least a little.

But it is interesting how much of a hoo-ha it has caused this time around.

So let me make a couple of points.

#1 – This isn’t really new
We’ve been seeing a series of out-of-cycle hikes since Trump took office back in November. Little by little. And nothing’s changed. The story is still the same. Bond yields in America are rising. Funding costs are rising. Banks need to pass it on to their customers.

Lol. Soz.

#2 – It’s still chicken feed
We’re generally talking pretty small amounts still. A few basis points here or there. Even putting them all together we’re still well short of the 25 basis points that the RBA usually moves in.

That’s not to say that it’s not putting a dent in people’s pockets, but it’s hardly time for panic stations just yet.

#3 – Credit is still loose
Even if we see this go on for a few more months, we’re still living through some of the loosest credit conditions in modern history.

UBS put it together in their Financial Conditions Index, which mashes interest rates, bond curves, exchange rates and asset prices. On their reckoning, we’ve seen financial conditions tighten in recent months, but not all that much.

The financial conditions index is the blue line, and you can see that it’s edged down towards the tighter end of the spectrum.

But track it across from it’s current levels and what does it tell you? It says that these are some of the easiest credit conditions since 2006 – so it’s hardly a disaster.

What’s more, the way they track it against GDP growth, they still reckon that financial conditions are still very expansionary – that is we should see further solid growth on the back of current settings.

Again, that’s hardly disaster.

#4 – The funding costs story is B.S
That’s what I reckon. Everyone’s talking about how much funding costs are rising, but it’s hard to see in the data. This chart here looks at CDS spreads – a proxy for funding costs – for CBA and some internationally similar banks. CBA is the grey line.

What it shows is that funding costs have been falling since the end of 2015, and are still falling!

Maybe there’s some stuff that’s being driving costs that’s not being picked up here, but even if there is, it’s hard to imagine that funding costs are surging all that much.

Which raises the question, what is it really about?

#5 – This is mostly politics
If you look at where banks are raising rates, so far it’s mostly been focused on investors and interest-only loans.

Now if it really was all about funding costs, why focus on investors? Do investor loans cost the banks any more than owner-occupiers? Do their funds costs more depending on where they end up channelling their funds?

Do the forms for interest only loans cost more to process?

Of course not.

So there’s another game going on here. And that’s about the banks trying to get ahead of the curve of any regulatory intervention.

There’s a growing clamour for regulators to get a lid on the Sydney and Melbourne “bubbles”.

(Yeah, I know.)

The banks are also on the back foot right now. They only just fended off calls for a Royal Commission and they know there’s no political mileage in sticking up for them.

So they’re on notice.

They also want to avoid any regulatory limits because they like money. They’re making hay and they don’t want it to end. And any regulatory limits just limit their flexibility to run their business as they want to.

So they’d rather avoid it if they can.

So what I think they’re doing is throwing the regulators something.

“You don’t need to regulate us. Look, we’re already making it tougher for investors.”

I don’t think it’s going to be enough. I still think we’ll see APRA action in some form or another in the near future. But we’ll see.

#6 – It’s not the end of the world

Since this is still fairly small fry, and since this is mostly domestic politics rather than some fundamental seismic shift in the financial landscape, it’s not the end of the world.

There are always risks to the outlook for property. Always. But right now, this funding costs BS isn’t one that keeps me up at night.

Don’t let it get to you.

What do you think the risks are here?

Alert: Govt. bribe coming!

March 1, 2017 by Jon Giaan

Some pretty clear signals the government is paving the way for a massive property bribe.

We’re still a couple of months off the May budget, but I reckon it’s a budget that will have little something extra for the housing sector.

I’m not sure what form it will take – but I think we’ll see something aimed at first home buyers. Maybe they’ll be allowed to raid their super. Maybe they will make their mortgages tax deductible, even if they’re owner occupied. Maybe they’ll just give them an extra chunk of cash to play with.

But we’re in line to see something.

And if the government does decide to target the demand side – which is pretty much all the Federal government can do – then we should see that pass directly through to property prices.

Throwing money at the problem always ends up on the price side of the ledger.

You can see the government casting around ideas at the moment – flying them up the flag pole and seeing who salutes.

Right now we’re seeing more middle fingers than salutes for these thought bubbles, but you get the sense that they’re desperate to find something.

And in many ways they don’t have a choice. Housing affordability is a problem that refuses to go away. The kids are hurting, and as more and more parents find that they’re being asked to bail their kids into property, more and more boomers are annoyed about it to.

Time to do something (or look like you’re doing something.)

Here’s a fun exercise. Find a random punter on the street and ask them what Labor are doing about housing affordability.

They’ll probably tell you that they’re going to cut negative gearing. In the public’s mind that policy is tied to affordability (even if the connection is a little weak and dubious in practice.)

But that’s Labour policy. When it comes to affordability they have something that’s bold, visionary and courageous.

(or at least looks that way.)

Now ask them what the Coalition is doing?

*Blank stares.

In the public’s mind, the Coalition is out to lunch on this one. And to be fair, they have been out to lunch. It’s almost 4.30 and they’re still not back in the office. All we’ve got is an incoherent phone message from Scott Morrison about getting his wife to order ribs.

They concluded an inquiry at the end of last year that came up with precisely zero recommendations.

Zero.

That was money well spent.

The only thing they’ve got is a pledge not to do something (cut negative gearing).

So they’re outgunned right now. The longer the negative gearing – affordability connection sticks around, the more entrenched it will become and the harder it will be for the Coalition to fight it.

So they need to move quickly. The May budget is the obvious battle ground. They need a policy that is bold, visionary and courageous.

They also need a policy that is safe and improves affordability, without lowering prices. They need something that doesn’t mention negative gearing. And they need a policy that doesn’t blow out the budget.

They need a unicorn.

The government does have a bit of a war chest to work with. A few weeks ago the government announced they were axing the National Housing Affordability Agreement (NHAG). From The Australian:

The $9 billion National Housing Affordability Agreement is set to be axed in the May budget following a report revealing that the states and territories had failed to meet almost every benchmark set by the federal government since it began in 2009.

Figures obtained by The Australian revealed that the Rudd government scheme, with a price tag of almost $1.5bn a year in grants to the states, had not delivered any measurable improvement in the provision of affordable housing.

Despite pledges to increase the supply of social housing, the 2017 Report on Government Services (ROGS) shows that public housing stock, instead of increasing as committed, had been falling since 2009, going backwards by 16,000 homes.

So that gives them $9bn to work with. And they can hardly cut one of the few measures targeted at affordability and not replace it with something.

So something is coming.

The only question is what.

As I said, the Coalition has been floating a few ideas around, testing the waters.

Scott Morrison has hinted at a government-backed bond aggregator scheme – a sort of financial intermediary that will help developers of affordably rental housing get finance.

This was one of the ideas he came back from London with.

The idea to let FHBs raid their super for a deposit has been around for a while too. Understandably the super industry is dead-set against it, since it means cycling money out of super and into the property market, but I’m not sure how much political clout the super industry has… it’s not nothing though.

And then last week, Andrew Broad, the Member for Mallee, said that banks should forgo a deposit from FHBs if they’ve got three solid years of rental history behind them.

Yep, 100% LVRs.

(Not so many salutes for that one).

So who knows. It’s hard to predict, especially with Tony Abbott sniping from the clock-tower. It could be anything.

But you’d have to think that something is coming. We’re probably talking something in the $2bn a year range. It will probably be targeted at FHBs, but could possibly extend to all owner-occupiers.

But the government needs something.

So hats out folks. The money is coming.

What do you think they’ll do?

NO B.S. FRIDAY: How you can “cash-in” on the big tax cuts coming…

February 10, 2017 by Jon Giaan

Trump’s got some big tax cuts on the table. But where will all that money end up? I’ll tell you.

Picture this. It’s 1974. America. Cars are long and brown. Suit pants are tight and brown. Mary Tyler-Moore was the bombshell I’ll always remember.

It’s the early afternoon. Dick Cheney and Donald Rumsfeld walk into a bar. It’s the Two Continents Restaurant in the Washington Hotel.

Across the yellow and brown paisley carpet, over near the puffy, golden-brown curtains is a serious and dashing young economist. Arthur Laffer. He rises to meet them.

President Gerald Ford has just put a bunch of tax hikes on the table. Cheney and Rumsfeld are spewing. They are ideologically opposed, but the only thing more unpopular than tax hikes is debt, and the US government is piling it on.

They need a way to stop this tax-hike madness in its tracks. Enter Arthur Laffer.

Over lunch, Arthur explains that there is (theoretically) a tax rate that maximises government revenue. There was an optimal tax rate.

He also says that, counter to what most people think, raising taxes doesn’t always increase total revenue.

He put it like this. If the tax rate was zero, then the government’s take is nothing. Zero percent of anything is zero. However, if the tax rate is 100%, then the government takes everything and all economic activity ceases. Why work if the government takes everything you’ve got? At this point, the government’s tax take is also zero. 100% of zero is zero.

So somewhere between the zero take at zero percent, and the zero take at 100% is an optimal tax rate that maximises government revenue.

Arthur got out a napkin and drew a diagram to help them understand what he was saying. It looked like this:

He never invented the concept, and it was never particularly insightful, but this is what is now known as ‘the Laffer curve’. It made him famous and made his career. He’s still banging on about it.

Apparently Cheney wasn’t so impressed with it at the time, but others could see the implications.

If the tax rate was currently set higher than the optimal tax rate, then decreasing the tax rate could actually increase government revenue.

And if that was true then it was a magic pudding. You could give everybody a tax cut AND increase government revenues and pay for everything you needed to do.

The central idea was that tax cuts would spur economic activity and tax revenue would actually increase. There were no losers. Only winners.

(Apparently at this point Rumsfeld got so excited he bombed some remote north Asian villages.)

And so Cheney and Rumsfeld, with the intellectual cover Laffer provided, started pushing for the idea to become Republican policy.

The idea took a little while to take hold. Maybe due to modesty. There was no way of proving where the country currently sat on the Laffer curve.

It could be that the tax rate was too high. But it could also be too low, in which case cutting taxes would actually decrease revenue. There’s no practical way to know. You can’t test it.

But by the time Regan was running for office, it was a central platform. It became known as supply-side economics.

It also became known as trickle-on economics, in the sense that if you gave tax cuts to the rich, they would go and trickle on poor people.

“Edwards and I got so high last night old chap, that we stumbled into the servants quarters and took a trickle on Jeeves. Fwah fwah fwah.”

Oh no, hang on. Trickle-down. It was trickle down economics. Give money to the rich and it would trickle down through the rest of the economy, like salty champagne.

Really, how any body took these ideas seriously at the time I have no idea. But they did. And the tax cuts happened.

And the economy under Regan had a dream run for a while. And it cemented supply-side economics into conservative political lore.

Don’t get me wrong. I’m not against tax cuts, but I think you need to be clear why you’re doing them. Cutting taxes so you can maximise government revenue is a bit silly. I don’t even think ‘maximising government revenue’ is a worthwhile aim.

(We should be aiming to keep revenue to a minimum, subject to achieving our social goals.)

But the real fallacy I think is imagining that tax cuts will have a permanent affect on activity.

At best they create a temporary stimulus to the economy, that slowly works its way through the system, and ultimately disappears from the growth rate stats.

That is, tax cuts cause a level shift (which might be awesome if that’s what you need), but not a permanent change to potential growth rates.

And in a mature economy, where consumption is maxed out, like in Australia – then that tax-cut stimulus will trickle-down and pool in the prices of fixed-assets – property to be specific.

And this is what we saw with Regan. Supply-side economics created a land-price boom that took ten years to work through the system.

And now there’s Trump. He’s definitely the most aggressive trickle-on’er since Regan (especially if you believe the Russian dossier).

Modelling shows that most of his proposed tax cuts will go to the top 1% of income earners, who are right now giddily trickling their names into the snow outside the White House.

Laugh it up, but we know that property and land will be the ultimate beneficiaries of the tax cuts.

And if other countries feel competitively pressured to follow Trump’s tax cuts, then we’re potentially looking at another global land-price boom.

People will argue about how good tax cuts are for the economy.

But land, as always, will have the last laugh.

How will Trump’s tax cuts reshape the world?

Warning: The property herd has turned (But which way?)

February 7, 2017 by Jon Giaan

If you’re looking for a read on the herd, and what property prices will do this year, this is it.

Just when you thought there couldn’t be any more gas in the tank, the Australian property market finds another gear and slips into the overtaking lane, horns and hazard lights blaring, and couple of pretty girls in the back seat throwing their arms out the window.

Sydney is growing at an annualised clip of 16.5%!

Zooom.

And when you look around, most of the data is pointing to fairly pumping conditions – definitely in Sydney and Melbourne. The more resource focused states are lagging, but if the commodity boom-let continues we might see that all turn around.

Vacancies are low, auction clearance rates are high, price expectations are strong.

The price expectations one is interesting, and I haven’t tuned into it for a while. You might say, ‘who cares what the herd is thinking. The herd can be (and often is) wrong.’

But really, the market itself is a herd. At the ‘fundamental’ level of economic activity we’re grinding grains into flour and trading pretty beads with each other. Everything else is a social construct.

What the herd thinks, the market does.

And so where’s the herd’s mind at these days. What kind of start to the year has it had?

Well, if you look at the property price expectations component of the latest Westpac survey, it says the herd is pretty bullish on property prices right now.

Since the beginning of last year, expectations for future price growth have been trending upwards, and now they’re on a quick march north.

As far as the herd is concerned it’s 2013 all over again.

There’s been a sharp recovery in NSW. In Victoria and Queensland expectations have held at high levels, while over in WA, price expectations are actually picking up quickly.

This WA story is particularly interesting. I’ve noted before that Perth has become a buyers market – which is exciting for deal-makers like me – but now it seems the herd thinks that prices are already bottoming out.

That’s interesting. I don’t know what would have driven the change in sentiment… Maybe they just figure they’re due.

Anyway, when you look at the expectations data and the actual results, they line up pretty closely.

So fairly broadly, across the country, 2017 looks like a very solid year for prices.

If there was a downturn coming, like some people keep saying there is, it’s not on our radar just yet. On these figures, expect price growth to continue through 2017.

That means Sydney and Melbourne should continue to hold their double-digit clip.

Staying with the Westpac index, it’s interesting that on the ‘Is now a good time to buy a house’ question, the herd is pretty agnostic.

The index is hovering around 100, which means that there are as many people who think it is a good time to buy as there are who think it is not.

How do you square that away with the expectation that prices will rise?

Perhaps it just comes down to how expensive prices are. Now is not a good time to buy because things are just to pricey. It will be a better time when prices come down. But I don’t expect them to come down. I expect them to go up.

It’s going to get worse.

Maybe… I’m speculating here. But the point is, taken together, the indications from the Westpac survey is that the herd is pretty bullish right now.

At the same time, we’re starting to see lending standards begin to loosen.

Last week, National Australia Bank dropped the rate it uses to ‘stress test’ borrowers by 15bp to 7.25%.

That is, if you want a loan from NAB you need to be able to show that you could handle your mortgage repayments even if rates were hiked to 7.25%.

In practice what that means is that any given borrower can now borrow a fraction more than there were able to a few weeks ago.

More borrowing capacity, across the board, means higher prices.

NABs move brings them into line with ANZ and CBA, but it shows that competition in the mortgage market is getting a little hotter.

Of course this is at the same time as banks are hiking rates to cover increased funding costs, so it’s not all one-way traffic. But still, it shows that the mortgage market is competitive, and the banks feel that the APRA dog is on the chain for now.

So put these all together, and the picture starts to look rosy.

We’ve got

A market entering the year with strong momentum already behind it
A bullish herd
And a competitive mortgage market.

That’s starting to look like a pretty good year.

Did anyone say ‘double-digit’ growth?

Has the herd got the wrong end of the stick? With Perth?

What numnuts was trying to say

January 31, 2017 by Jon Giaan

Dig into Barnaby’s latest clunker and you’ll find that when it comes to housing, the government’s cupboard is totally bare.

I wonder if everyone caught the latest effort last week from wonderkid, Barnaby Joyce:

“I get annoyed when people talk about that the only house that you can buy apparently is in Sydney and it’s too dear,” he told ABC Radio National. “There are other parts of Australia. I live in one, it’s called Tamworth”…

“Houses will always be incredibly expensive if you can see the Opera House and the Sydney Harbour Bridge. Just accept that,” Mr Joyce said. “Houses are much cheaper in Tamworth, houses are much cheaper in Armidale, houses are much cheaper in Toowoomba.

“Sydney’s wonderful and so is Melbourne. The trouble is so many people think it’s wonderful that the price of houses is incredibly expensive. But there are other parts of Australia…

“I did move out west so I can say this – if you’ve decide you’ve got the gumption in you and you want to move [west], you’re going to have a very affordable house. If you say ‘I want a really affordable house in Mosman’, well, don’t we all.”

I don’t even know where to start…

My first thought is, how can you be so stupid? What politician has ever made any mileage by telling people who think they have a problem that they don’t actually have a problem?

“It’s all in you head, kids. You’ve just set your sights too high. Just accept it.”

Seriously, that’s got to be Politics 101, doesn’t it? On any issue the correct answer is always:

“I understand how tough it is. I emphasise. I’m working on it. We’ll be releasing an comprehensive, appropriate solution at the appropriate time.”

It is never, “You’re having a whinge, get over it.”

That’s a general rule. But is there any hotter button in Australia right now that housing affordability? Seriously? Baranaby can hardly claim that he was blindsided by that one, right?

“Yeah, sorry Malc. They just threw this question on ‘housing affordability’ at me from out of left-field. Who saw that coming? But I thought I handled it…”

And seriously, what planet is he on if he thinks that housing affordability is only a problem for people who want harbour views.

This is CoreLogic’s lastest heat-map of Sydney:

There’s isn’t a suburb within 20km of Sydney CBD where the median value isn’t north of the million dollar mark.

And ok, I’m in the property game so I’ve got a better handle on prices than most, but still. This is hardly a new issue. Negative gearing was one of the defining battlegrounds of the last election.

Here’s a tip for you Barnaby. If they’re asking you about an issue on national radio, it’s not because there’s a handful of disgruntled hipsters in Mosman.

It affects everybody.

Barnaby and co. still seem to be operating on the idea that affordability is just about fussy millennials wanting it all.

It’s not. It’s about people with good jobs who can’t afford to live close to work. It’s about retiring parents being forced to chip in for their kids deposit. It’s about business owners having to pay through the roof for staff because anyone on an entry-level wage can’t live within 20 k’s of work.

Seriously guys. Wake the F up. People are pissed.

Now maybe you have some ideas about what should be done. Maybe you are determined to do absolutely nothing (certainly seems that way).

And that’s ok. But you can’t go around telling people that there isn’t a problem.

It just looks like you’re living in la-la land.

You can’t tell people struggling to buy a unit in Strathfield that maybe they need to give up on the need to have a view of the bridge.

It’s like Joe Hockey’s call last year that people just needed to “get a good job and then get a bank loan.”

Can they really be that out of touch?

In a way Barnaby started out on the right track with his line of thinking.

Part of the problem is that everyone wants to live in Sydney. But then that’s not about views, that’s about jobs.

So that opens the way to any number of solutions if the government was serious about it.

Houses are expensive in Sydney. They’re cheap in Tamworth. Therefore…

… we’re funding regional business infrastructure

… we’re building a high-speed rail network

… we’re building a world-class data network

… we’re going to build a 200m tall pork-barrel in the middle of the Darling Downs.

Whatever, you guys are the politicians. Come up with some solutions. That’s your job.

But, “…we’re going to tell people to harden up and move to Tamworth” is not a solution.

But we keep getting brain farts like this because on housing affordability – one of the hottest topics in the country – the government really has nothing.

Scott Morrison just came back from a junket to London. He went there to learn about housing affordability from one of the most unaffordable cities in the world – another global city that has totally failed its citizens.

And what does he come up with? Nothing. Just a partisan dig at Labor for wanting to look at negative gearing.

“We are determined to do nothing.”

Brilliant.

I’m used to governments having nothing to offer on housing affordability. It’s been that way for 20 years. And I do get that the politics is tricky. People want housing to be cheaper, as long as that doesn’t include their house.

But man, these guys are making a total meal of the politics. And it’s not that hard to find a line and stick to it – even if that line is, ‘we’ll have another useless inquiry and get back to you’.

But really, it does make you wonder… We’re not in a safe pair of hands here.

What did you make of Barnaby’s bluster?

Chinification

January 24, 2017 by Jon Giaan

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

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

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

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

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

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

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

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

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

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

Problem sorted.

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

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

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

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

Reuters was running the story:

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

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

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

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

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

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

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

“I fixed it. I’m a fixer.”

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

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

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

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

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

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

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

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

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

Bananas.

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

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

Who the hell signed up for that?

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

These are big questions. Huge.

Why are we still not talking about it?

What do you think China’s up to?

Bargain hunters, the forgotten property market…

January 18, 2017 by Jon Giaan

I made my money in property through great deals. But dealmakers need to look further and further afield. Like here:

Have you tried doing a deal in Sydney or Melbourne lately?

I had an interest in a Melbourne suburban site recently. I thought it could be a nice townhouse play. But I thought the price was a good coupla hundred ‘K over what was workable.

So I tracked down the owner to see if we could make something work – if there was a way to make it win/win.

But she wasn’t interested in talking (to this) turkey. She wanted the full asking price, 30-day settlement, and for me to send her flowers every year on her birthday for the next 5 years!

And look, good on her. If that’s what she wants, she should go for it.

But this is just what it is like working with Sydney and Melbourne right now. Market sentiment is high and it’s a seller’s market. They’re calling the shots.

I’ve always been a big believer in that saying “you make money when you buy”. And so when I buy, I want to explore all the options. I want to sit down and nut out a deal.

But when market sentiment is high – when we’re approaching the Euphoria phase – then sellers don’t want to come to the table. They want you to come over to the couch and slip your offer in under their tim-tams so they can look at it in the ad break…

And so your only shot at buying well is when a seller aims too low. You might get lucky, and it does happen, but I get frustrated with markets like this.

Markets tend to move in cycles, and market sentiment has a well-worn cycle, from optimism to Euphoria to panic to capitulation and back to hope again.

Now, nothing in life is ever this smooth and predictable, but right now Sydney and Melbourne are somewhere between “thrill” and “Euphoria”. (I can’t tell you how many dart-board investors I’ve met who think they’re a genius because they bought any random property in Sydney three years ago.)

So where’s a deal-making investor going to go?

Well, take a look at this ad for a rental property in Perth from a few months back:

“Financial Black Hole for Rent”!!!

Here’s her pitch: “Despite having bought this property at a peak time in the market and paying a small fortune for a cardboard house, this financial black hole truly is an awesome place.”

It got her a bit of attention in the papers, and I think that helped her land a tenant, but my guess is even then she’s probably still bleeding cash on it.

But where is she is the market sentiment cycle? This is capitulation, pure and simple. This is, “Oh shit, I made a mistake. A big financial mistake. How am I going to get out of this mess.”?

This is what capitulation looks like.

Now, how willing would this woman be to come to the table and negotiate? The house probably isn’t even listed with an agent, but make her a good offer and she’d take it.

This isn’t a woman who would want flowers every year for her birthday. In fact, she’d probably send you flowers.

You could even do something like negotiate a two-year settlement with early access – give you a chance to get in and fix the place up.

She would just be happy to know that her financial nightmare had a definitive end date – even if that end date was still two years down the track.

In a market like this, you’ve got options and options are power.

Now people at this point might be saying, hang on Jon, prices in Perth are still falling.

And I know that. Prices are falling. Rents are falling. In fact, rents are falling faster than prices so yields are actually getting worse.

It’s not pretty.

But you don’t get capitulation in pretty markets. You get capitulation in ugly markets.

But you can still make pretty money in ugly markets. Most people think its market movements that create profits in real estate.

But that’s only one way to make money – and in fact it’s the way you have least control over, and so is therefore my least favourite way to make money.

I mean, imagine you find the property above. It’s located in an area that’s got growing appeal with young families. You buy it with extended settlement and early access. You do it up and sell it on after 12 months, pocketing easy profit that’s got nothing to do with market movements.

These kinds of markets can be great for reno strategies. If you can increase the value of the property by 30% in a year, it doesn’t matter if prices fall another 10% this year – especially if you’ve got flexibility with when your money is in and out of the deal.

Hi-Res strategies can play well in these markets too. In soft labour markets, there can be strong demand for cheaper, higher-density housing options. We’ve seen that play out in some of the mining centres.

There’s opportunity in every crisis.

And personally I was worried for Perth. With falling iron ore revenues, the state government was looking at ratings downgrades, and then things could have really hit the skids.

However, with commodity prices back at recent highs, the economy is looking steadier.

This downturn still has further to run in my mind, but whether it’s 18 months to two years down the track, I think the end is in sight.

So a market in full capitulation, with a steadying outlook – that’s the kind of thing that gets the dealmaker of me excited.

NO B.S. FRIDAY: I’m confused, please help me out…

December 2, 2016 by Jon Giaan

Sales volumes have tanked. What’s going on? Please, someone tell me.

Here’s a puzzle for you. Let’s see if we can crowdsource an answer?

It’s got to do with volumes – the number of houses being bought and sold in Australia.

Right now, we’re living through one of the driest periods on record. It’s a veritable drought.

John McGrath had this graph in a recent report to shareholders:

As it shows, the share of total dwellings for sale right now is at the lowest level on record.

There was a particularly sharp fall that kicked in around the beginning of the year.

This is a bit of a puzzle. Why have volumes fallen – especially since we haven’t seen falls in prices in most cities. In fact, volumes doesn’t seem to be connected to the cycle at all – or at least not clearly.

So why have volumes fallen. I’m genuinely asking here. I’m not sure what to make of this phenomenon.

John McGrath reckons its because people are afraid that if they sell, they won’t be able to get back into the market.

“For much of calendar 2016, we have been in an environment in which vendors are reticent to sell, fearing they will not get back into the market.

… it was as though every vendor woke up in the New Year and made a resolution not to sell.

… In 2005, residents in Australian Capital Cities would move house on average every 6.7 years, and apartment every 5.9 years. Today that is 10.7 years and 9 years respectively. This contributes to the decline in volumes available for sale, eroding housing affordability in many capital cities of Australia, including Sydney.

Of course it’s a bugger for John McGrath. Real Estate Agents are a volumes business. They need to be selling houses to be making money.

But McGrath’s explanation sounds a little simplistic to me. ‘People are just afraid to get out of the market’. It’s not very satisfying.

I mean, maybe it makes sense now that volumes are at historic lows. It might be reasonable to worry about whether you’re going to be able to get back in if you get out now.

But that doesn’t explain why volumes tanked in the first place. It couldn’t have been fear that drove the market at that stage.

Though if you remember back to the new year, we had a very rocky first couple of weeks. Real Estate markets were still reeling from the APRA restrictions, and there was a major stock market wobble.

So maybe volumes dried up with the New Year, and uncertainty stopped people coming back. From then on, it’s been a fear of not getting back in.

Maybe. Sound convincing to you?

But the ‘fear of not getting back in’ only applies to owner-occupiers. 30-40% of the market are investors, and I don’t think investors ‘upgrade’ their investments the way owner-occupiers upgrade their homes.

That said, I think investors are more likely to hoard properties and keep them from the market. I know I do. Once a property is working for me, and it’s positively geared, why would you sell it?

So I don’t know… I need to do a bit more thinking about it. Would welcome anyone’s thoughts on it.

Part of me wonders if Australians just think about property differently these days. You can see from the chart above that volumes peaked in 1999, and have been on a downward run since then (with a few ups and downs).

So maybe everybody thinks like an investor now. Once you’ve got a toe-hold in the market, hang on to it. If you’re going to upgrade, buy a new house and keep the old one as an investment. I know a few people who have done this…

Maybe..?

The implications are kind of interesting too. On the face of it, thin markets tend to bid up prices. If demand is the same, fewer properties for sale means there’s more competition around the ones that are on the market, and that means higher prices.

And the ongoing surge in Melbourne and Sydney, which has taken a few people by surprise, could reflect this.

However, it’s a double-edged sword. In thin markets, a small number of ‘low-side’ sales can create the impression that the market overall has fallen.

That has the potential to create a self-fulfilling run lower.

But so long as volumes fall short of the growing population and particularly first home buyer need, then I think this phenomenon will keep a floor under prices.

But I’d feel a lot better about this conclusion if I had a better sense of what was driving it.

Help a brother out?

ALERT: More money for investors only means one thing

October 25, 2016 by Jon Giaan

It’s really starting to look like the market has turned.

It seems like banks are starting to ease up on investors.

Anyone tried to get finance recently? What’s been your experience?

Back in the middle of 2015, APRA split the property market in two. It was investors bad, owners good, and the banks were forced to tighten up the finance they were willing to offer investors – with higher interest rates, lower LVRs and tighter serviceability calculations.

And for a while there, it seemed to be putting the brakes on the market, bringing growth in Sydney and Melbourne back down from double-digits.

But now competition for investor loans is hotting up again, and banks are cutting chalk-board interest rates.

From The Age:

Banks are being forced to cut the interest rate premium they are charging new property investors, as lenders compete more fiercely in the investor mortgage market once again.

The mortgage market was split in two last year, after banks resumed charging property investors interest rates that were about 0.25 percentage points higher than owner-occupiers, something that had not occurred since the 1990s.

Now, however, the interest rate gap is narrowing, with several banks recently lowering what they are charging new landlord borrowers.

…Dutch lender ING Direct on Friday was the latest to announce a cut-price mortgage deal for investors, offering new investors with a deposit of more than 20 per cent an interest rate of 3.99 per cent.

…AMP, which was forced to briefly stop writing new loans last year after growing too quickly, is also charging property investors 3.99 per cent if they borrow more than $750,000. That is about 0.1 percentage points higher than its owner-occupier rate promoted to mortgage brokers.

…Macquarie Group cut its fixed rates for investors earlier this month, with a three-year rate of 4.09 per cent.

Mortgage brokers say the trend is gathering pace, and the Reserve Bank observed the bout of competition in its Financial Stability Review on Friday. It played down the risks from banks targeting property investor lending, which it has previously seen as a “speculative” influence on the housing market.

These are small-fry banks, and a lot of the growth is coming from CBA and Westpac.

And what that all means is that investor lending has turned. It fell distinctly after the APRA limits came into effect, but you can now see the first signs of reversal in the charts.

You’d have to think that without further APRA limits, investor lending is going to continue to pick up.

The APRA limits were artificial in a sense, and as their effect passes, the market will return to its previous direction – which was solid growth.

At the same time, average loan size is growing again.

Again, we’re not back at levels we saw before the APRA limits came in, but we’re definitely on the way.

So it’s not hard to see what all this means. More investors in the market, taking out larger loans – it’s a rock-solid recipe for higher prices.

And so it’s little wonder that we’re starting to see the market heating up.

Take a look at the Auction Clearance rates for example. Right now they’re suggesting that we’re back on track towards double-digit growth!

Just quietly, I’m a little disappointed. I was hoping the APRA restrictions would take more wind out of the sails. I was looking forward to a ‘correction’ or ‘consolidation’ or ‘minor downturn’.

I had a war-chest ready and was all set to grab me some bargains.

Now, I’m looking at that war-chest and I’m having second thoughts.

It’s early days, but right now, it’s not looking like the market is slowing down.

So if you’re a first home buyer or an investor waiting in the wings, I don’t have any good news for you. You can rule out a correction in prices this year. And realistically, the way the market moves, I think you can lock in accelerating growth from here through to at least the middle of the next year.

After that, we’ll be seeing what else is shaking the market.

Maybe it’ll be the unwind of the apartment boom, or some bleed from the downturn in Perth.

That might give some buyers some relief.

But the APRA restrictions have done their dash. They slowed the market a little, but the market brushed off the tackle, a couple of quick goose steps, and it’s on its way again.

Is it too early to call a turn? Remember, you heard it here first.

Have mortgage conditions eased? Has the market turned?