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How to make and how to lose $100K in 13 months

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Flipping always looks like a great strategy in the good times. But are some investors about to come unstuck?  

 Sometimes you strike it lucky in property.  

Like this story of a guy on the Gold Coast who flipped a parcel of land for a $130K uplift.  

(The story appears in the UK’s Daily Mail, because there’s a picture of him with his girlfriend in a G-string. Pure class).  

A 23-year-old man has made more than $101,000 profit after buying a plot of land and mowing it twice. 

Anthony Dart, 23, bought the property on the Gold Coast for $310,000 and 13 months later he sold it for a staggering $439,000. Mr Dart told Daily Mail Australia he made a solid profit of $101,000 after expenses. 

The young entrepreneur was shocked by how much the property appreciated in value in just over a year. 

Hats off to him. From what I know of the Gold Coast market, at that price I expect he bought under market value, and that’s what made those kinds of gains possible.  

And with property prices on a tear-away in recent years, a lot of people would have similar stories.  

Trouble is though, people seem to think that these kinds of stories are the norm.  

Amazing deals like this happen when you do your research and buy under-market, or when you do your research and buy in an area primed for growth.  

That is, when you do your research.  

If you’re not doing your research, then you’re only going to get these kinds of results if you get lucky. And if you’re relying on luck, then you’re just gambling.  

And all gamblers lose at some point.  

Western Menbourne might now be about to become a case in point.  

There’s been a bit of a frenzy going on out there in recent times around house and land packages.  

It’s pulled in a lot of speculative activity, with buyers looking to flip their purchases before settlement.  

As prices stall though, there’s an air of panic brewing:  

Speculators who hoped to get rich on a boom in Melbourne land prices are “panicking” as settlements loom and they can’t find developers to on-sell their sites to, according to Resi Ventures’s Khurram Saaed, who has been developing for 15 years. 

Mr Saaed said he was getting one call a week from panicked speculators, including one buyer who had put down $21 million in deposits on a number of sites and risked losing all their money. 

“These are people who have been successful in other business, and who have just bought land with no due diligence in the hope of making a lot of money in three to four years’ time by flipping the site prior to settlement,” he told The Australian Financial Review. 

And there’s been a strong rise in people taking to gumtree to offload their properties, as real estate in general takes longer to sell:  

A rising number of land owners in Victoria are selling off-the-plan housing lots on classified advertisement and community website Gumtree ahead of their expected settlements next year. 

In the first three weeks of October, nearly 50 advertisements have been uploaded – more than twice the number in September – offering sales of lots in communities like Dahua Group’s Orchard project in Tarneit, Satterley Property Group’s Botanical in Mickleham, MAB’s Merrifield in Mickleham and Stockland’s Edgebrook Community in Clyde and Cloverton in Kalkallo. 

Other land sites for sale are in places such as Greenvale, Melton, Lyndhurst and new suburb Weir Views, all of which are about 20 to 35 kilometres from the Melbourne CBD. 

I’d be keeping a wary eye on this space.  

I don’t think the growth corridors of Western Melbourne were bad places to invest, if you were genuinely investing. I think they’ll be decent going forward.  

And I wouldn’t say no to buying there now… but I would be driving a very hard bargain with eyes wide open.  

But if the flipping spree was as widespread as they say it was (possibly isn’t, who knows), then some extra diligence really is in order.  

Don’t say I didn’t warn you. 

JG 

How to make and how to lose $100K in 13 months

by Leave a Comment

Flipping always looks like a great strategy in the good times. But are some investors about to come unstuck?

Sometimes you strike it lucky in property.

Like this story of a guy on the Gold Coast who flipped a parcel of land for a $130K uplift.

(The story appears in the UK’s Daily Mail, because there’s a picture of him with his girlfriend in a G-string. Pure class).

A 23-year-old man has made more than $101,000 profit after buying a plot of land and mowing it twice.

Anthony Dart, 23, bought the property on the Gold Coast for $310,000 and 13 months later he sold it for a staggering $439,000. Mr Dart told Daily Mail Australia he made a solid profit of $101,000 after expenses.

The young entrepreneur was shocked by how much the property appreciated in value in just over a year.

Hats off to him. From what I know of the Gold Coast market, at that price I expect he bought under market value, and that’s what made those kinds of gains possible.

And with property prices on a tear-away in recent years, a lot of people would have similar stories.

Trouble is though, people seem to think that these kinds of stories are the norm.

Amazing deals like this happen when you do your research and buy under-market, or when you do your research and buy in an area primed for growth.

That is, when you do your research.

If you’re not doing your research, then you’re only going to get these kinds of results if you get lucky. And if you’re relying on luck, then you’re just gambling.

And all gamblers lose at some point.

Western Menbourne might now be about to become a case in point.

There’s been a bit of a frenzy going on out there in recent times around house and land packages.

It’s pulled in a lot of speculative activity, with buyers looking to flip their purchases before settlement.

As prices stall though, there’s an air of panic brewing:

Speculators who hoped to get rich on a boom in Melbourne land prices are “panicking” as settlements loom and they can’t find developers to on-sell their sites to, according to Resi Ventures’s Khurram Saaed, who has been developing for 15 years.

Mr Saaed said he was getting one call a week from panicked speculators, including one buyer who had put down $21 million in deposits on a number of sites and risked losing all their money.

“These are people who have been successful in other business, and who have just bought land with no due diligence in the hope of making a lot of money in three to four years’ time by flipping the site prior to settlement,” he told The Australian Financial Review.

And there’s been a strong rise in people taking to gumtree to offload their properties, as real estate in general takes longer to sell:

A rising number of land owners in Victoria are selling off-the-plan housing lots on classified advertisement and community website Gumtree ahead of their expected settlements next year.

In the first three weeks of October, nearly 50 advertisements have been uploaded – more than twice the number in September – offering sales of lots in communities like Dahua Group’s Orchard project in Tarneit, Satterley Property Group’s Botanical in Mickleham, MAB’s Merrifield in Mickleham and Stockland’s Edgebrook Community in Clyde and Cloverton in Kalkallo.

Other land sites for sale are in places such as Greenvale, Melton, Lyndhurst and new suburb Weir Views, all of which are about 20 to 35 kilometres from the Melbourne CBD.

I’d be keeping a wary eye on this space.

I don’t think the growth corridors of Western Melbourne were bad places to invest, if you were genuinely investing. I think they’ll be decent going forward.

And I wouldn’t say no to buying there now… but I would be driving a very hard bargain with eyes wide open.

But if the flipping spree was as widespread as they say it was (possibly isn’t, who knows), then some extra diligence really is in order.

Don’t say I didn’t warn you.

Shock! Can your tenants sue you now?

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New “renter’s rights” don’t make sense… until you understand where they’re coming from.

Why are we now so concerned about “renter’s rights” all of a sudden?

In the last month both Victoria and NSW introduced new “reforms” to “protect” renter’s “rights”.

Victoria led the way (as it always does):

Premier Daniel Andrews announced 130 reforms will be introduced into parliament this week…

Every rental home will have to meet basic standards including functioning stoves, heating, deadlocks, gas, electricity and smoke alarms.

Rental bidding will be banned and rent increases will be limited to once a year.

Renters will be given the right to make minor modifications without landlord consent, such as nailing a hook on the wall or installing anchors to stop furniture falling on children.

People will also be able to keep pets with landlords only able to refuse the right of a tenant to have a pet by order of the Victorian Civil and Administrative Tribunal.

The changes will also allow for quicker returns of bonds, which will be capped at four weeks’ rent…

Ummm…. Were there really many rentals out there that didn’t have electricity or functioning stoves? I thought we already had legislation around that… and smoke alarms?

And that pets one… man, that is a doozy. What if my tenant wants to keep a horse in my two bedroom unit? What about Great Dane, which is really just a horse pretending to be a dog?

Have I got no capacity to say, I really don’t think a pet is appropriate? Where do you draw the line?

Anyway, NSW then followed up with a similar bunch of reforms:

NSW renters are set to see the biggest shake up of rental laws in more than two decades.

The major changes will include limiting rental increases for periodic leases to once a year, set fees for breaking a fixed-term lease and no penalties for domestic violence victims who break a lease.

Other changes include introducing minimum standards like basic access to electricity and gas, that buildings are structurally sound, and have adequate natural or artificial lighting and ventilation…

Better Regulation Minister Matt Kean on Thursday introduced long-awaited amendments to the Residential Tenancies Act, labelling them “sweeping reforms for tenants’ rights”.

“Under these common-sense changes, renting families will be able to make minor alterations, such as installing a picture hook to hang their family photos, and will benefit from a new set of minimum standards to ensure properties are in a liveable condition,” Mr Kean said.

Again with the “minor alterations”… what does that even mean?

I mean, everyone is going to have a pretty different definition of ‘minor’. Am I going to get a call from a tenant:

“Hi Jon, just wanted to let you know I made some minor alterations to the walk-in pantry…”

“Oh…?”

“Yeah, I just turned it into a hot-tub and sauna. Nothing major.”

“What? That sounds like a pretty major alteration actually.”

“Oh… Well, you’re probably not going to be happy about the new meth lab then either.”

Seriously though, does the legislation cover every definition of what you could possibly do to a place and what could be considered minor or major? Are we going to tie up the courts deciding if the changes to the light fittings were excessive or reasonable?

Madness.

But that’s all a problem for the legislators.

But I come back to the original question. Where has this come from?

Were there a spate of deaths in rental properties without fire-alarms? Were there thousands of people desperately wanting to put in picture hooks, petitioning the government?

Were there rental properties without electricity?

No. I don’t think so.

Rather, this happened:

The number of rental households has been steadily increasing, and broke 30% nationally at the last census.

At the same time, higher house prices have meant that many wanna-be home-owners are realising that they may be renting for a lot longer than they thought.

In the past, I think people knew that renting didn’t give you the same privileges as owning, but that was ok because you didn’t think you’d be renting for all that long. Just long enough to get your deposit together before you bought.

Now though, as house prices remain out of reach, people realise they’ll be renting for a while, and so find that they do actually care what rights renter’s have, in quite specific detail apparently.

And so put these two together: a growing number of households renting plus a growing interest in renter’s rights – and you’ve got the making of a serious political block.

30% of the population is huge, in political terms.

And so there were votes to be won in playing to the “renter block”.

And that’s exactly what Victoria and NSW have done. This is where this is coming from.

And I’m afraid it probably won’t be the end of it either.

If Labor wins, buy this type of property

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

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

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

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

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

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

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

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

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

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

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

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

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

There’s gems to be found wherever you look.

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

So am I worried?

I would say I am ‘cautiously optimistic’.

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

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

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

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

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

Stockland CEO Mark Steinert sees the writing on the wall:

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

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

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

Good luck to him. He’s probably right.

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

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

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

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

… provided Labor doesn’t fluff the timing.

We’ll see.

Why long-term Melbourne property prices will rise…

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The Victorian Government is on a hiding to nothing – there is just nothing they can do to bring house prices down.

How desperately chronic is the housing shortage in Australia?

This chronic – chronic enough that this fluff from the Victorian government about streamlining the energy connection process can get passed off as an ‘affordability solution’:

Power companies AusNet Services, Jemena and CitiPower, Powercor and United Energy have agreed to a series of commitments to speed up the rollout of power in the areas where they provide electricity, state Treasurer Tim Pallas said on Tuesday.

“We’re acting to make sure new homes are connected to electricity faster, cutting costs, and making it easier for Victorians to access new housing,” Mr Pallas told an Urban Development Institute of Australia audience…

UDIA Victorian executive director Danni Addison said the changes would help speed up housing production.

“The urban development industry is working hard to meet the demands of population growth, but people can’t live in a home without power,” Ms Addison said.

How is this about helping boost “affordable supply”? I mean sure, it helps at the margin, and it’s definitely better than not doing it, but still I can’t see millennials priced out of a home organising a ticker-tape parade over this one.

“Yay, this will shave at least $1500 off the purchase price. Finally the dream of owning my home is within reach. Honey, pack your bags.”

But seriously, this probably is the best that any government can muster.

Because, meanwhile, prices in Victoria continue to march onwards to all sorts of crazy.

Land prices are the real flash point. HIA-Corelogic reckon that Melbourne’s median lot price per square metre surged a massive 30% in the past year. That takes the typical median lot price per square metre to $359,000.

Remember, these are Greenfield sites, many of them located so far from the CBD of Melbourne that they have West Australian post codes.

And even then, it’s going to cost you $360K for the land, even before you start looking at landing a caravan on it, or whatever you can still afford.

And this is all despite the fact that median lot sizes in Victoria are actually shrinking!

A few weeks ago, Satterly Property Group announced they would start offering lots in Melbourne as small as 80sqm – less than a fifth of the size of a traditional lot – in an attempt to boost profits.

Sorry, I mean, in an attempt to offer anything that could reasonably be considered ‘affordable’.

And so in Melbourne, if you don’t have at least half a million, there’s no chance of securing a new house and land package, no matter how far you are willing to commute.

How has this happened? How is it still happening?

This is the chronic undersupply in action. When there’s too many people and not enough homes, then prices will rise. It really is as simple as that.

And while supply has continued to come on-line at its usual dribble in Victoria, the population has actually boomed.

Melbourne is now adding a full MCG worth of people every year.

That’s a million people every ten years:

There is just no planning response that the Victorian government can come up with that can deliver the housing that is needed to stop the market getting tighter and tighter and tighter.

Which in turn means, prices will just go higher and higher and higher.

You know, except streamlining power-supply regulations…

That’s going to have a big impact.

JG

Thought the codes kept you safe? Think again!

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A new class-action will have a big impact on the building industry.

I reckon the most interesting case before the courts right now is a class-action by the owners of apartments in Melbourne’s Lacrosse residential tower.

Basically, Lacrosse had the same outside cladding that was responsible for the Grenfell disaster in London. There was a fire in 2014 (thankfully no one was killed) and the owners are being forced to replace the cladding.

The owners, obviously, are trying to sue the builder, LU Simon, to make them pay for it.

From the AFR:

They want $24 million. On Monday, owners of the 328 apartments in Melbourne’s Lacrosse residential tower will start their long-awaited case for damages against builder LU Simon, over the combustible cladding placed on their building…

As they seek redress including an estimated $10.7 million in recladding costs, $1 million in lost rent and emergency accommodation costs and over $500,000 in insurance premium hikes, the Lacrosse owners are not the only apartment owners in Australia trying to resolve a cladding problem not of their own making. But they are the highest-profile group so far. And there will be more…

The Lacrosse owners are now finalising a loan of $11 million to replace the polyethylene-core panels that still wrap around their building on Melbourne’s La Trobe Street…

Combustible cladding forces insurance premiums higher, devalues apartments and even makes apartments unsaleable… And when it catches fire, it is dangerous…

It’s going to be really interesting to see where this one goes.

The best-case scenario for the owners is obviously that the builder has to foot the bill. That leaves their property values, (after the dangerous cladding has been replaced) more or less in tact.

But it’s not clear that it is going to go that way. There’s a good chance the builder did everything by the book – purchased cladding with the right certification and installed it correctly.

The problem could well be, as a lot of people in the building industry have been telling me, that sometimes when you’re buying cheap building materials from China, they’re not exactly as they claim to be.

For example, not as fire-retardant as they claim to be.

So the builder might have been doing the right thing, putting their faith in the certification processes behind the materials. Is it really their fault if the Australian or Chinese government certification process were subject to rorting?

It hardly seems fair to make them pay if they’ve been doing the right thing.

But that just leaves our owners on the hook, and it’s definitely not their fault.

But even if the courts find the builder liable, where does that leave us? How many builders and developers across the country have used materials that they thought were up to code?

Do we now say that every builder in the country is responsible for testing the quality of the materials that they use and ensuring that they’re up to code? Like, seriously?

That doesn’t seem workable.

It may also be a moot point in some places like NSW. The government there recently reduced the warranty claim window from seven years down to just two:

Also from the AFR:

Many owners of the 1000 NSW buildings identified with possible non-compliant cladding won’t be able to claim against their developer or builder because the two-year window to make such claims will have passed, a property lawyer says.

A change in law two years ago cut the window to make such claims from seven years, in part to reduce the risks for the statutory warranty insurance the state government underwrote.

This meant owners of buildings built under a contract agreed after 1 February, 2012 – which includes many built in the current housing boom – would not be able to claw back the costs of rectifying any non-compliant cladding. This is the view of David Bannerman, the principal of North Sydney-based Bannermans Lawyers.

So then it’s on the owner’s head?

So what, our due diligence as buyers now involves chasing a paper trail of materials used to make sure they were up to code – I mean, genuinely, really-truly up to code?

Who’s got time for that?

This is all just throwing a lot of uncertainty all over the place. As someone who buys property, but also as someone who develops property and engages builders, this is all just a risk I don’t know how to place.

Because while I think the flammable cladding is the highest profile example, I get the feeling it is the thin end of the wedge. Who knows what next?

So I feel sorry for the owners of Lacrosse, I feel sorry for the builder, but I’ll be watching what happens closely.

Which property segment is booming?

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Headline numbers are hiding a big secret. Some markets are booming.

I’m going to show you what segments are actually booming in Australia right now, but first I’m going to show you a scary picture.

This is every property price decline in modern Australian history:

Whoo-oooh.

Ok, let’s pull a few things out of this. The first is that declines are common. We’ve had seven in the past 30 years – so like one every four years or so.

The property market moves in cycles. I think a lot of investors might not be aware of this – they might never have lived through a serious turn in the cycle before.

And so Sydney starts hitting the brakes and they start wetting themselves. At the risk of sounding like a grizzled old investor, get over it. It’s what markets do.

If you can’t tough it out for a soft-patch that might last a year or two, this game isn’t for you.

(Not that I know what game is. Bond trading?)

Anyway, the other point is have a look at where the current cycle sits in historical perspective.

On this chart, the peaks of each cycle have been lined up, so you can track each one from its peak.

And what you can see is that the current cycle – the red line – is actually the tamest cyclical downturn in history.

Let me say that again unless pants-wetters are still reading my blog. This is the tamest correction in history.

It’s still early days, sure, but let’s just remember that. Nothing to flip your lid over here.

But here’s what I actually wanted to share with you. This is the current property market broken up into segments. The top 25% most expensive houses. The middle 50% and the bottom 25%.

So look at what’s happening here. The top end of town – the top 25% – is falling, coming off some pretty heady peaks.

However the middle 50% – the majority of the market – is still growing, although it does look like the pace of growth is slowing.

And then there’s the bottom 25% of the market, which is going gang-busters.

And so only the top 25% of houses are falling, but they’re falling far enough fast enough that they’re able to pull down the aggregate numbers.

And enough to put a bit of doom and gloom on the paper headlines.

And so what’s the real story here?

Yes, the property market has peaked, and we’ve entered an historically common cyclical downturn, which, in fact, is the most benign downturn in modern history.

BUT – when you pull it apart, that downturn is entirely due to the top end of town. Without the falls there, the overall market would be growing strongly.

And some segments – your cheapies and your entry-level homes – they’re actually booming.

So tell me again what kind of market we’re in?

And tell me again what I’ve got to be afraid of?

JG

Is a rate cut coming?

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Looks to me like the RBA has their finger on the trigger.

The talk at the moment is all about the slide in property prices. This is a little overblown in my mind, but a consolidation is definitely underway.

To get a sense of where the current momentum is, take a look at this chart here. I ripped it from a recent RBA speech.

This is ‘six-month ended annualised’. What that means is that it takes the last six months and then says, what if that pace lasted for the whole year?

So if prices grew 10% over the past six months, then the six-month ended annualised is double that – 20%.

Anyway, it amplifies trends, but it’s a good way to get a handle on what the current momentum is.

And what is shows is that the consolidation in prices is well underway in Sydney and Melbourne. On that annualised basis, Sydney looks like it’s falling at about 10% per annum. Melbourne looks closer to 5%.

We probably won’t actually hit those numbers in actual growth terms, but the momentum is clearly heading lower in those cities.

Interestingly, prices in Brisbane are dead flat, and it will be interesting to see if they get dragged down by the action in the bigger capitals. And over in Perth, it looks like the bottom is in, with prices having stabilised over the past six months.

That’s good news for Perth, but nobody cares about Perth. Not in policy circles anyway. If they did, we would have started cutting rates months ago.

And so what we’re looking at is a market that has clearly entered a consolidation phase. As I’ve stressed before, there’s no surprises here. The Sydney and Melbourne markets did get red-hot, and with the regulatory assault coming out of APRA in recent months, a consolidation really was inevitable.

The question now is, what do authorities do about it?

Now maybe they’re prepared to let prices slide for a while. They’ve been saying for a while that they’d like prices to ease a bit, but that has limits. They don’t want to crash the housing market. In fact, given the carnage it would unleash on the broader economy, they’d be looking to avoid a housing crash at all costs.

And while we’re on the topic, what does a crash in housing prices look like?

Well, I’d say if Sydney prices were consistently falling by 10% per annum, that’d be raising some red flags.

And so do we think that is what the RBA is doing here? Raising a red flag? They’ve released this clever little chart that shows that Sydney prices are currently falling at a 10% clip, and we wouldn’t want to see that going on for too long?

Are they flagging that rate cuts are coming if the market doesn’t pull up in time?

Maybe.

Here’s another piece of evidence. It compares auction clearance rates with the timing of recent rate cuts.

 

What it shows is that auction clearance rates have come off in recent months. Auctions aren’t as successful as they used to be.

What it also shows is that the last time clearance rates were this low, the RBA started cutting official rates.

Long story short, the RBA has all the justification they want to start cutting rates. No one would blame them.

The only question now is, do they want to?

As I said, I think they’ll be happy to let prices consolidate a little further, but not too much.

As far as I can tell, the RBA has their finger on the trigger already.

Make my day.

PurpleBricks goes plop. What does it mean?

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Maybe real estate agents aren’t ready to be disrupted? Or is it just where the market is at?

I’ve been following the PurpleBricks story with some interest.

Basically, PurpleBricks wants to disrupt the real estate agent business. So far it’s done pretty well in the UK, but its foray into Australia isn’t faring too well, at least according to the Australian Financial Review:

(with the disclaimer that bad news could always be about PurpleBricks failing to grease the palm of their media suppliers – I’m always open to that idea.) Anyway:

“Broke” real estate agents are quitting British disrupter Purplebricks in droves as the fixed-fee agency’s low-margin, high-turnover business struggles to achieve enough sales amid a slowing Australian housing market.

Research by The Australian Financial Review found at least 27 agents had quit Purplebricks Australia since March with overall agent numbers now down to 88 from 105 reported by the company in October when it filed its British interim results.

Purplebricks territory owners (franchisees) and agents, who spoke to the Financial Review, said they were struggling to make a living and were preparing exit paths after the $100,000 to $180,000-a-year salaries they were told they could earn failed to materialise.

… Internal sales documents obtained by The Australian Financial Review covering the first two weeks of June highlighted underperformance by its NSW agents.

The documents indicated that 27 NSW Purplebricks agents secured a combined 26 listings.

… Agents who earn $1000 per instruction – with the remaining near $5000 of the upfront fee going to Purplebricks – require a high volume of listings to make a living.

Interesting.

I don’t think PurpleBricks is the disruptor it paints itself out to be. It’s not fundamentally changing the business model. Rather, it’s simply restructuring the back end – leaving the front-end – the real estate agent – in place.

And that structuring seems to be selling itself on sort of economies of scale (a large RE company with no physical offices), and apparently using its muscle to squeeze real estate agents on their cut.

It’s not all that disruptive. It’s not Uber.

And just like real estate agents, it’s a volumes business. Success depends more on the number of properties you sell rather than the price you get for them. And being flat-fee, then it all depends on volume.

It’s just that right now, market conditions are making it tough for volumes businesses. There’s a lot of doubt in the market, buyers are cautious, and vendors are preferring to hold.

And so sales volumes are now tracking below their ten-year average:

The sleepiness of the market is showing up in New Home Sales as well, with a pronounced downturn continuing:


So with volumes approaching some of the lowest levels in years, this is a crappy time to be trying to launch a volumes business, no matter how disruptive you are.

That, and ‘PurpleBricks’ as a name sucks. It makes you think of toy lego or something (the only purple brick I think I’ve ever seen), and that opens you up for existing agents to attack you on your professionalism, which they’ve done.

That, and I’ve pronounced it BurplePricks on at least three separate occasions.

And so for now, looks like your real estate agent is safe.

I still think the market is ripe for disruption.

But it won’t be today.

Where the market is really at (My thoughts)

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Cut it up and things actually look robust.

Where is the market fundamentally at?

This is an important question in any asset class, but it’s particularly true of property. And that’s because the market can get buffeted about by all sorts of ‘extra-market’ factors. And by that I mean things like the kind of restrictions APRA’s had in place for last two years.

And you’d be forgiven right now for thinking that the market is fundamentally softening. Headline numbers are soft, prices are actually slipping in Sydney, investor lending is cooling.

But in my mind, these things are more sea-foam than sea – more noise than signal.

A few charts will help tell this story I think.

First, let’s look at what investor lending is doing – this is amount of finance going to investors.

You can see that investor lending growth slipped into negative territory in September last year. At that point, the amount lent to investors was less than it was at the same time a year earlier.

So ‘the market’ is getting softer right?

Well, maybe. But if you showed this to the staff at APRA, they’d be saying ‘job well done, boys.” This is exactly the kind of outcome they were trying to engineer. Investor lending had been growing too quickly (growing at more than 40% a year in 2014!) so it was time to rein it in a bit.

What followed was a bunch of restrictions at the individual bank level, and investor lending, predictably, started to fall.

So while it looks like a cycle, it’s has nothing to do with the normal cycle of the market, and everything to do with APRA.

To make that point clearer, come over and have a look at the same chart on housing finance, but this time, just to owner-occupiers.

The first thing to note is that these charts are on the same scale, so the smaller hills and valleys on the owner-occupier chart tells you that the cycle of owner-occupier lending is generally much smoother and gentler.

The other thing to note is that growth in owner-occupier lending peaked about the same time as investor growth turned negative. So just as investor lending was cooling, owner-occupier lending was pumping.

Partly, I think this was about a bunch of lending that would have normally been classified as ‘investor’ was instead classified as ‘O-O’ – just to get around the APRA restrictions. But that can only be a small part of the story.

Rather, it shows that as the APRA restrictions were taking effect, the fundamental demand in the market was strong.

O-O lending has since followed investors down, but even then, we haven’t dipped into negative territory. We’re still lending more to owner-occupiers than we were this time last year.

Lending is still growing.

And the other interesting thing in all that is that lending to first-home buyers is actually picking up.

And now, the percentage of O-O lending going to first time buyers is back to around ‘normal’ levels, after freaking everybody out for a bit there.

So to me, when I look at these charts together, what I see is this: Yes, investor lending is falling thanks to the APRA restrictions. But looking through that, owner-occupier lending is still growing, particularly to first time buyers. To me that suggests that fundamental demand is still strong, even though the investor segment and the market overall appears to be cooling.

It’s just not as bad as the headline data suggest.

The fear-clouds are gathering.

Soon it will be time to be greedy.