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Revealed: The best properties to buy in this recovery

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This recovery will favour some properties over others…

So the property recovery is on. No one has any doubt about that now.

But there’s an interesting question about which segments will see the most price action first.

CoreLogic’s Cameron Kusher reckons we’ll see it in the Premium Property segment.

He’s just released a new report examining price growth across the three broad market segments – bottom 25%, middle 50% and top 25%. It shows that the most expensive 25% properties have shown the most improvement recently, and are likely to lead any recovery:

Nationally, from the market peak to the end of May ’19, the most affordable quarter has seen values fall by -1.4%, the middle of the market has seen values fall -6.6% and the top quarter has fallen by -11.6%…

Over the past year, most capital cities and regional markets have been recording value declines. While values are broadly continuing to fall, the rate of these falls on a monthly basis has been slowing.

After having seen much larger corrections than the other two segments (following a larger growth phase), the most expensive segment of the market is seeing its rate of decline slow.

This is a trend that has played out before whereby premium housing values fall the fastest initially but also sees the falls cease earlier than other market segments. It is still early days but with the housing market expected to trough in late 2019, the premium housing sector may find a floor first and start to show some level of recovery before the other segments.

Maybe. It is true that the Premium market is more volatile and reacts to price stimulus more quickly. This would be true to form.

However, we’re also seeing a lot of stimulus aimed at the bottom of the market right now.

First, and most obviously is the government’s First Home Buyer Deposit Scheme. We’re still to see exact details, but we know it will be restricted to lower income earners, and restricted to cheaper properties (on a region by region basis).

And like all schemes that effectively just give first home buyers more cash, we know it is likely to push up prices in those entry-level segments.

That’s what Fidelity International investment specialist Anthony Doyle reckons:

Mr Doyle said that introducing subsidies on the buy side doesn’t address housing affordability. He said the result of such schemes is to drive up demand…

That’s good for people who want to sell their current property and upgrade, but it’s not so helpful for those struggling to enter the property market in the first place.

“It’s not going to address housing affordability, but it may have some role in stabilising house prices,” he said…

Albert Edwards from Societe Generale dubbed the UK equivalent a “moronic policy”. Mr Doyle said that he wouldn’t go that far, but he was highly sceptical.

Of course it will. Everyone one in the market knows these things push up prices. It’s just that everyone’s too polite to mention it.

So that’s going to give the entry-level segment a boost.

At the same time, tweaks to how banks assess serviceability, and particularly how they use the Household Expenditure Measure (HEM) to assess living expenses, is also biased to the cheaper end of the market.

Basically, the HEM was something of a poverty-line measure. It was an estimate of the bare minimum a household needed to get by.

The trouble was that banks were applying the HEM measure to calculate the serviceability of all households, even if they were earning $500K a year, and had no possible way of surviving on HEM.

So by removing HEM and forcing banks to look at actual expenses, APRA is cutting back the credit available to higher-income households.

And the further away from the poverty line you actually are, the more impact it has on your serviceability.

So if you’re a higher-income earner, and someone likely to buy a premium property, your serviceability will be more affected, relatively, than a lower-income earner and someone looking to buy an entry-level property.

So the move away from HEM will have more impact on the premium market than the cheaper market.

So put these two factors together, and current market conditions clearly favour cheaper properties.

Premium properties might be leading the recovery for now, but I don’t expect it to last.

Momentum is with the entry-level segment.

JG

Exposed: Banks’ secret against rate cuts

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The banks don’t want you to enjoy lower rates.

One of the things about being trained in the dark-arts of marketing like I am, is that you recognise a publicity campaign when you see one.

They happen all the time. Most of them just slip under the radar. They subtly slip into the collective consciousness, and just become fact.

“Women need to eat more meat, because iron,” for example. 

Anyway, one of these clandestine campaigns came up on my radar the other day. While most people were celebrating last week’s rate cut, The Australian Financial Review was not loving it.

In fact, it started running a bunch of articles about how we didn’t really need rate cuts, and in fact, rate cuts weren’t good for us anyway.

Like this little nugget from Morgan Stanley’s James Gorman:

Morgan Stanley chief executive James Gorman has warned central banks that further cuts to official interest rates risk reducing their “firepower” to deal with an unforseen geopolitical crisis.

After Reserve Bank of Australia governor Philip Lowe suggested the official cash rate could fall to 1 per cent and US Federal Reserve chairman Jay Powell indicated US rates could move lower amid fears escalating trade tensions will hit the US economy, Mr Gorman described monetary policy as unpredictable and limited in its impact.

Won’t somebody think of the unforseen factors?

Or there was former RBA Deputy Governor Stephen Grenville:

Former Reserve Bank of Australia deputy governor Stephen Grenville has challenged the effectiveness of the RBA’s inflation target and interest rate cut, as he warned that cheap borrowing costs distort housing and stockmarkets.

Following the historic reduction in the RBA’s cash rate to a record-low 1.25 per cent on Tuesday, Dr Grenville writes in The Australian Financial Review today that negative real (inflation adjusted) interest rates “don’t make much sense” and fiscal policy should play a larger role to stimulate the economy.

Yeah, kinda. Fiscal policy (government spending) could definitely be doing a bit more heavy lifting, but that’s hardly news.

And there was a raft of others, none of them any more insightful or persuasive than these.

And so when you see a string of weak arguments for something, all supposedly unrelated, but adding together to give the impression of a broad consensus, then you know you’re in a clandestine publicity campaign.

But I’m like, why? Who doesn’t love rate cuts?

So I did a bit of digging. And you know who doesn’t love rate cuts?

The Banks.

Turns out that when interest rates get super-low, the banks have much less flexibility to manage their money, and that starts cutting into their profit margins.

That’s what the analysts at Goldman Sachs reckon:

…if the cash rate was to fall below 1.50%, every additional rate cut thereafter would shave about 5 bp off sector margins. The sensitivity of margins to falling rates accelerates once the cash rate falls below 1.50% because the various levers the banks have at their disposal become less flexible as the cash rate approaches zero and we would particularly highlight the following:

So banks don’t like rate cuts because the lower rates go, the more it binds their hands, and the less profit they can make.

And so what do you do? You use your mouth piece (The Australian Financial Review) to start campaigning against rate cuts…

… no matter what the country needs, no matter what the economy needs, and no matter what the property market or individual borrowers need.

Nope. It’s bank profits and everyone else be damned.

That Royal Commission sure was money well spent, wasn’t it?

JG

Bears go bananas. Must be a good sign for the market.

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The property-doomsayers are getting hysterical. That’s always an interesting signal.

I’m actually ready to call the bottom on this market.

The declines are coming to an end. The market is about to turn.

And what data am I basing this bold prediction on? None. I don’t actually have any evidence.

But it does appear to me that we have hit peak crazy, and that’s got to be a market signal for something.

I’m talking about ‘news’ headlines like this one: Property ‘Armageddon’: House prices could fall by 50 per cent.

Yup. They’re going all in with this one.

With Sydney and Melbourne’s falling house prices infecting other capitals such as Brisbane, Darwin and Perth, some doomsayers say property prices could slump by as much as 50 per cent by 2022.

Digital Finance Analytics chief Martin North says Sydney and Melbourne houses will suffer price falls of 20 to 30 per cent, while high-rise units could slide by up to 50 per cent from their peak prices in 2017.

North says prices in Melbourne, parts of Brisbane, Perth and Sydney will fall the most between now and 2022, but it is outer suburbs that will be hit with the largest price falls.

“Prices will unwind in Sydney and Melbourne for at least another three years,” he says. “The problem is a lot of the high level data is averaged and averaging tells you nothing at all. Prices are not dropping by the same rates everywhere.

“In some places, for example western Sydney, prices are 23 to 25 per cent down or more, but areas closer into the city, particularly houses, are probably only 3 to 5 per cent down.

“If you look at Newcastle or the Illawarra, it’s 7.5 per cent down but there are other areas out in those regions where prices that have hardly moved at all.

“Perth is down 15 to 18 per cent on average. And if you look at Darwin, it could be 25 to 28 per cent. So these are big movements, they really are.”

Economist former government adviser John Adams — who once worked for Liberal senator Arthur Sinodinos — believes economic armageddon is coming.

Adams says Melbourne’s falling house prices are in a devastating slide that will go beyond Moody’s forecasts and could reach more than 40 per cent from peak to trough.

Meh.

I’ve heard all this before. North has been trotting the same numbers out for about six months now.

And I think the bears are getting more excited and shrill because the data does seem to be turning.

The pace of declines in the big capitals is getting slower, not faster.

And that’s because, despite the headline falls, most things have been running in the property market’s favour in recent months.

  • The Hayne Royal Commission wound up and was a lot better for banks than a lot of people were expecting. Financial sector funding costs had blown out to 60bps above the cash rate in anticipation of the worst, but are now back down to a 24bps premium.
  • At the same time, some banks are cutting their retail rates, so funding costs are down overall.
  • The APRA restrictions caused a bit of logjam in the mortgage market as everyone tried to get themselves up to speed. That seems to be clearing now, and the market has found its feet.
  • The RBA has clearly moved to an easing bias, and rate cuts seem likely in 2H2019.
  • And the election should give things a bit of certainty, and the market a bit of a bump, as it normally does.

Add to that some property bears screaming at their coming irrelevance, and I think you have the making of a bottom.

Too soon?

Negative Gearing Reckoning: who will it hurt?

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If Labor wins, negative gearing reform is go. But who is it going to hurt?

Labor has announced that their negative gearing and capital gains tax reforms will come into effect on January 1, 2020.

Like most people, I was expecting them to go for the end of the 19/20 financial year, so this means two things:

  1. there’s going to be a rip-the-bandage off approach, and I think that’s probably a good thing.
  2. Labor knows it’s onto a vote-winner and is happy to double-down.

But like all things in politics, there must be winners and losers, so who is going to be worse off under the new policy settings?

Well, literally everyone, according to the Real Estate Institute of Australia:

“The REIA has always been concerned with the impact the policy would have on housing markets, buyers, renters and economic activity,” REIA President Adrian Kelly said.

“This concern is magnified in the current market.

“There is almost truck loads of analysis and reports showing the adverse impacts of the policy on mum and dad investors, home owners, renters, the construction industry, state governments and the economy.

Investors, home-owners AND renters?

How does that even work? I actually struggle to think of a scenario where all three are made worse off under ANY policy proposal – maybe something like “All housing will be nationalised and turned into jumping castles for Swedish tourists.”

Or are we using a definition of “worse-off” that I’m not aware of?

I want to pick this apart a bit, not to be cruel to REIA, but to make a point about how the housing market actually fits together. I think it will be useful.

Anyway, if we’re saying everyone in the market is going to be worse off, then I assume we’re saying that house prices are going to fall (bad for investors and owner-occupiers) and rents are going to rise (bad for renters).

That’s the only scenario that makes sense. If rents fell, that’d be bad for investors, but you’d have to chalk that up as a win for renters.

Likewise, if houses became more expensive that would be bad for renters looking to buy, but would be a win for owner-occupiers and investors.

So we’re talking about falling house prices (though I know a café full of millenials cheering that on), and rising rents. But how would negatively gearing actually make rents go up?

They might go up if the reforms exacerbated our housing shortage, but since negative gearing will remain in place for new stock, it’s hard to see how removing it for existing homes will have any affect on construction rates…

But, just for arguments sake, let’s imagine that somehow negative gearing reform does increase rents.

What happens then?

The point to remember here is that since housing is an asset, like all financial assets, the return is linked to the price.

The link between the rental return and property prices is captured by “yield”.

Now the thing to note about property yields is that they’re affected by structural conditions in the market – interest rates, risk appetites etc. Yields are not determined by rents and prices themselves.

That may sound counter-intuitive, given that yields are a calculation of prices and rents, but the causation actually runs the other way. Yields determine prices.

If you track yields over recent years, you’ll see that they’ve been very stable.

For 15 years, they’ve barely deviated from 4%. Even though rents and prices have been all over the shop, yields have barely changed.

So if rents go up, what happens to yields?

Well, you’d think yields would go up as well. But that doesn’t happen, because prices are set by people buying property, and the people buying property are happy with yields of 4%, on average.

So if rents go up, yields stay constant, and the adjustment is forced on to prices. Prices go up and yields remain at 4%.

Statistically, that’s been true for as long as we have data for.

But if prices go up, isn’t that a win for owner-occupiers and investors?

Yes.

Personally, I think the reforms will have no impact on rents, and push prices down at the margin, but not by a huge amount. Yields will adjust a little because the ‘cost of carry’ appetite will have changed (I’ll talk more about that another time).

But all this ‘everyone is worse off’ is just BS.

But remember this. If you want to know what’s happening to prices, look to rents and yields first.

One Bank Breaks Ranks With New Boom Mortgage

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ANZ is issuing ten-year IO mortgages… What does it mean?

So ANZ has broken ranks with the big four, and is aggressively targeting investors with a new ‘boom mortgage’.

That’s not what they’re calling it obviously. To them it’s just an interest-only mortgages with a ten-year interest only period.

But to me, that says ‘boom!’

From the SMH:

ANZ Banking Group is loosening some of the clamps it put on interest-only mortgage lending in 2017, after pledging to reopen the door to property investors following a period of excessive caution.

The big four lender on Thursday said it would again start offering customers an interest-only period of up to 10 years, up from five years now. It will also allow interest-only loans where a customer has a deposit of 10 per cent of a property's value, where previously it required a 20 per cent deposit.

The changes are a clear signal the bank is trying to spur growth in the housing investor market, where interest-only loans are most popular, after chief executive Shayne Elliott last month admitted it had been “overly conservative”.

It is also the latest sign of a loosening in restrictions on investor and interest-only loan growth, after the Australian Prudential Regulation Authority (APRA) late last year removed caps on these types of mortgages.

“On recent review, we have made a decision to increase our focus on the investor market. The upcoming changes demonstrate our continued appetite in the investor market, whilst ensuring we remain in line with our APRA requirements,” ANZ said.

Latest Reserve Bank figures show housing investor credit growth was just 1 per cent in the year to January. ANZ last month said its housing investor loan book shrank 3.8 per cent in 2018.

The remainder of the big-four already offer IO mortgages with a 10% deposit, so that’s not a huge change. But 10-year interest only periods… that’s pretty aggressive.

I did look into it, and it’s not going to be available to everyone. They’re going to be assessed at a minimum floor rate of 8.25%, which is a very high hurdle to cross. They’re marketed only for high-income professionals with stable jobs.

Still, it’s an interesting change in direction.

Over the past year or so, we haven’t seen any news that has pointed to a looser credit environment. It’s all been about how much tougher credit conditions have been getting.

So this is a real break in direction.

It signals that either

  1. APRA is now willing to back off a bit; or
  2. The banks have stopped caring what APRA thinks

Both are bullish signs for the market.

And if the market recalibrates so that ten-year interest only mortgages are the norm, that will give prices a boost. It increases the amount that people are able to borrow and service, and increases in borrowing capacity mean increases in prices.

So something has shifted here. There’s a break in the weather. A change in the wind.

It’s not exactly clear what it is, but either way it’s a big boost to the market.

Court shock: Govt knew about fire risk for years!

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The Lacrosse ruling sets an interesting precedent… but there are still a lot of unanswered questions.

As someone who does his fair share of developments, I’ve been a little bit concerned about the uncertainty surrounding the ‘flammable cladding’ crisis.

In case you’re new to this, this is the revelation that many buildings across Australia, particularly high-rises, have been clad in a substance that has an unfortunate tendency of catching fire.

The Grenfell tragedy in London is the most famous example, but there have been a number of fires in Australia recently too.

Thankfully no one has died (yet!) but it’s a pretty worrying state of affairs. And at first I didn’t think I had too much skin in the game since I don’t tend to build high-rises.

But then there were the revelations this month that even suburban houses could be affected. From the ABC:

The VBA alert said the certification withdrawal meant nine types of cladding “cannot be relied upon as evidence of suitability”, meaning they would no longer be regarded as compliant with building codes…

The organisation’s vice president, Wayne Liddy, said the affected products were commonly used on small residential homes as well as high-rise apartments, meaning the impact would be felt throughout Australian cities and suburbs.

“It’s very alarming,” Mr Liddy said.

“It affects the industry as a whole. From high-rise to suburban housing.

“It’s not just aluminium composite panel, or ACP, it’s also expanded polystyrene, which is common in many buildings with fewer than three storeys…”

Oh boy. That’s not good.

And a key question is who picks up the bill? You can’t leave the flammable cladding up on the buildings. You have to fix it. But who pays?

We might have a bit of clarity on that with the Victorian Civil & Administrative Tribunal ruling on the Lacrosse Building.

The Lacross building caught fire in 2014, when a single cigarette sent a fire racing up 8 storeys.

The tribunal has found that the builder LU Simon must pay apartment owners $5.75m in damages, but LU Simon can pass that cost on to their architect, their fire engineer and their building surveyor, who were deemed ultimately responsible. From The ABC:

The owners of apartments at Melbourne’s Lacrosse tower in Docklands have won more than $5.7 million in damages in a lawsuit launched after a fire fuelled by flammable cladding caused significant damage to the building in November 2014…

That claim for damages covered the cost for owners of replacing non-compliant cladding, damaged property, additional insurance premiums and “anticipated future losses”.

In a decision handed down in the Victorian Civil and Administrative Tribunal (VCAT) by Judge Ted Woodward on Thursday, LU Simon was ordered to pay more than $5.7 million to apartment owners.

However, most of that money would be paid to LU Simon by the architect, fire engineer and building surveyor who worked on the project, after Judge Woodward found they had breached contractual obligations…

In his ruling, Judge Woodward found the architects Elenberg Fraser had failed to remedy “defects in its design”, specifically designs which allowed the “extensive use” of aluminium composite panels (ACPs) on the east and west facades of the building…

He also found the building surveyor, Gardner Group, breached its agreement with LU Simon by failing to exercise due care when it issued a building permit in 2011 for those architect plans.

Thirdly, he found the fire engineer, trading as Thomas Nicolas, failed to recognise and warn the builder that the ACPs proposed for use on the building did not comply with the building code…

As a result, he ordered that the three parties pay LU Simon a combined total of 97 per cent of the damages owed to apartment owners.

Gardner Group was ordered to pay 33 per cent, Elenberg Fraser 25 per cent and Thomas Nicolas 39 per cent…

Some of the $12.7 million sought by apartment owners is yet to be resolved.

The architecture firm Elenberg Fraser is also on the hook for replacing the cladding, at a cost of $6.8 million for the cost of the cladding’s replacement

So there’s a bit of clarity here, but not a lot of comfort. As a developer, if I’m doing everything right, then I should be ok. It’s the responsibility of the architect, the fire engineer and the building surveyor to make sure everything is tickety-boo.

It’s also great news for people who have bought apartments recently. They’re not going to end up on the hook.

But I’m not sure that this is where this story ends.

Because it has emerged in the AFR that the government has known about these problems for 30 years.

According to fire engineer Jonathan Barnett, Canadian researchers first raised concerns about combustible cladding in a report published in 1990, and testing by the CSIRO in 1995 found that such cladding was a fire risk, but no formal reports were published in Australia until five years later.

State and territory building regulators were made aware of fire authorities’ concerns about the use of combustible cladding in 2010, as was the Australian Building Code Board. However, in the case of Victorian regulators, they did not issue any warning about the use of combustible cladding until June 2015… which was more than six months after the fire in the Lacrosse building.

Hmmm. Smells like liability to me.

Westpac is giving away houses?!

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Westpac is in the courts already, with a class action on the way. The mortgage market is getting crazy.

This could possible be the opening chapter in a whole world of crazy.

There’s a class action being brought against Westpac for breaching their responsible lending obligations.

Look out!

Westpac is facing a class action for allegedly giving loans to people who couldn’t afford to pay them back.

The class action, in the Federal Court, is the first against one of Australia’s big four banks since the banking royal commission delivered its damning report.

Maurice Blackburn principal lawyer Ben Slade says Westpac will be accused of breaching its obligations to protect customers from financial harm.

“Westpac is required to comply with strict obligations which are specifically designed to protect consumers from irresponsible lending and the risk of financial hardship,” he said on Thursday.

“This case will seek to prove that Westpac failed to comply with these obligations and that this failure caused substantial losses for many consumers.”

The case could involve thousands of home loans issued after January 1, 2011.

The central issue here is the use of HEM – the Household Expenditure Measure.

What we learnt in the Royal Commission was that many banks were using benchmarks to calculate serviceability, rather than looking at people’s actual expenses.

One benchmark was the HEM – which was apparently pretty much set at poverty-line levels.

What that means is that if your actual living expenses were more than the HEM (and unless you were on the poverty line, they probably were), then the bank was willing to lend you more money than you would normally get.

That sounds great, but the flip side is that from the regulator’s perspective, the bank was giving people bigger debt burdens than they could reasonably be expected to carry.

That is, they breeched their responsible lending obligations and put people into undue hardship.

And that’s what Maurice Blackburn are going to argue.

I actually didn’t think it would come to this. It’s hard to imagine anyone who bought a property in 2011 now regrets the decision.

But that’s with prices at their current levels.

The further prices slide, the more people might start to regret their decision.

And if they slide far enough, people might suddenly feel like they actually would like a way out of their mortgage.

Enter Maurice-Blackburn.

Now I don’t know what happens if you prove that the bank gave you more money than you should of got.

Do you just write off the mortgage and call it even. “I’ll just take the house thanks. I’m not greedy.”

It could happen.

Or does the bank owe you compensation? Do you just get to pay the amount you should of received and the monthly repayments that entails?

But then who picks up the difference?

And where does this end? Right now Maurice Blackburn are going after Westpac because we know that Westpac were using benchmarks (ASIC is currently in court proceedings against them.)

But you can be sure that they were not the only ones. If Westpac was doing it, it was probably rife across the majors but also across the smaller players as well.

Maybe there’s hundreds of thousands of active mortgages that could be up for review.

Crazy-town.

I’ve got no idea how this plays out. But if you’ve got a mortgage with Westpac, I’d be watching this one closely.

Does Macquarie Bank have an ulterior motive?

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Mortgage brokers have started campaigning to save their industry, but they’re in a tricky position.

Macquarie Bank has stepped up to defend the role of mortgage brokers.

Isn’t that nice of them?

Obviously they don’t have any ulterior motives. They just felt an affinity for those plucky little underdogs, being a plucky little underdog themselves.

The Age gave us an insight into how a recent conference call went:

Macquarie Group chief executive Shemara Wikramanayake has backed mortgage brokers' claim that they are important for competition in the home lending market but says how they get paid may need to change.

As Macquarie reaffirmed its guidance for a record profit, Ms Wikramanayake said it was “important” that brokers continue to operate, given their role in distributing loans for smaller competitors to the big four, such as Macquarie.

The royal commission last week recommended scrapping brokers' commissions, which are paid by banks, and replacing them with an upfront fee. Brokers have vowed to fight the proposed change, which has also divided the banks.

Macquarie has about 2 per cent of the $1.6 trillion mortgage market. Ms Wikramanayake said the bank used brokers “principally” for selling loans, and 57 per cent of the market also used the service of brokers. While there may be changes in how brokers were paid, she said it was important the industry continued to operate.

“So today mortgage brokers do provide a valuable service, we presume, to customers just by the fact that they are predominantly used by the customers,” Ms Wikramanayake said.

“We think they do provide competition and they do provide a service and it’s important that [we] try to continue [this].

I love that little ‘presume’ tucked in their. “Mortgage Brokers provide a valuable service. I mean, we presume they do, because we have no idea what their value proposition to customers actually is, but people keep using them. LOL.”

But what Macquarie does know is their value proposition to Macquarie bank. To MacBank, brokers are front line sales staff.

Try walking into Macquarie Bank in Sydney and asking about a Mortgage. No chance. In fact, unless you enter via the heli-pad, I don’t think they even let you into the building.

But Macquarie has no branch network. It has no branch managers and lending specialists in non-threatening chairs. They rely on mortgage brokers to sell their products.

And this is where it gets tricky for mortgage brokers. Really they should be hitting up banks like Macquarie who have no alternative distribution channels, and getting them to go into bat for them. Get them to stump up for the costs of an advertising blitz.

But that just then proves the point that consumer groups are trying to make. They argue that banks have just outsourced their front of house services to mortgage brokers, and mortgage brokers are simply the retail to the banks’ wholesale.

That is, they are working for the banks. They are paid by the banks. They are working for the banks.

And not, unfortunately, the customers.

Getting banks who desperately need your service to pay for your political campaign just reinforces this impression.

Awkward.

Sadly, mortgage brokers really need a grass-roots campaign. They need consumers to come out lobbying for their brokers.

But how many people have any connection to a mortgage broker? I churn through a lot of properties, so I have a broker on speed dial. But for most people it’s just a one-off service you use every 15 years or so.

I find it hard seeing people taking to the streets about it.

Mortgage brokers do provide a valuable service, and I really think the industry needs them. The market will be much worse off without them.

But they’ve got to find a way to distance themselves from the banks. They need to find a way to clearly demonstrate their value to the public – even if that means educating a bunch of people who have no idea how the market actually works.

It’s going to be tempting to get the big money guys like Macquarie to go in and bat for them, but I really don’t think it helps their cause.

Drop the ‘doomsday chatter’ – Goldmans

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Goldman Sach busts some of the doomsday hype

Sentiment matters. It’s just one of the realities of the market. Sometimes mood just matters more than fundamentals.

Right now is a classic case in point. Sentiment is low. Ordinary investors are a bit bummed. People are worried about a crash…

But how much of that is based in reality?

Not much, according to Goldman Sachs.

The Australian arm of the old Vampire Squid reckons that market sentiment is currently running miles ahead of reality.

Exhibit one in that argument is this chart here. This is the number of Google searches for the term ‘housing crash’ in Australia.

As you can see, they spiked towards the end of last year. There’s unprecedented levels of searches for that term…

(Though, are people really getting their read on the market by punching ‘housing crash’ into Google?!? I think it says more about how sophisticated most property owners and investors are than anything. The fact that you are reading this blog puts you miles ahead of the crowd.)

Goldman Sachs is calling this phenomenon “doomsday chatter” and they reckon it’s just a bit silly.

“In our view, while there is a kernel of truth to many of the popular narratives, a close inspection of the data suggest most are overly negative.”

Their read on the data still suggests that things are tracking along ok. They are also keen to put to bed the idea that there is some kind of ‘credit crunch’ in effect.

“The evidence that supply-side credit tightening is significantly worsening is not compelling to us…

 “The value of finance approvals to investors in NSW and Victoria continues to fall sharply, but is little changed elsewhere; while the number of finance approvals to owner-occupiers remain fairly elevated in NSW and VIC (albeit a bit weaker) and mixed in other regions…

“In our view, this remains broadly consistent with our earlier view that the primary driver of softer loan approvals over 2018 has been lower demand from investors – driven by a normalisation in expectations for capital gains in Sydney and Melbourne.

“Tighter scrutiny of mortgage applicants' expenses was slowing approval times, but the effect was likely to be temporary…

“This slower processing period may well take a few months to wash through and cause some temporary distortions in the interim…

What is interesting to me is that given all the dark clouds supposedly hanging over the property market – the credit crunch, APRA, the interest only reset, the Hayne Royal Commission etc., the only one they’re really worried about is…

… immigration.

Yep. That’s right. The only downside for the property market is potential cuts to immigration.

“In our view, the much more material risk to both the underlying supply/demand balance and the level of construction activity would be a significant reduction in population growth.

“We note Prime Minister Scott Morrison recently proposed to reduce Australia's annual permanent migration quota by up to 30,000 per annum (or about 15 per cent) and redirect new migrants away from Sydney and Melbourne.

“But while formal changes are yet to be made – and the impact on population growth of this proposal would likely be negligible given (i) actual permanent migration is already below the current cap, and (ii) the measures don't address the large amount of temporary migration – the increasing political focus raises the possibility of a more substantial policy shift in the future.”

So they’re kind of saying that immigration is the only possible downside risk for property, but there’s very little chance of anything substantial happening on that front…

So what? All good then? That’s what we’re saying?

Yep. That’s what we’re saying

Hayne: what it means for property… and capitalism!

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Hayne says the problem is capitalism. The solution? Let’s all move to fairy-land.

Ok, so I’ve been digesting the Hayne Royal Commission report over-night, trying to make sense of it all.

But there’s something weird at the heart of it all.

I’ll get to that, but first, what are the implications for the property market and property investors? Here they are in a nut shell:

1. No big changes to the industry

This is being billed as a reset of the financial industry, but I don’t see any major changes here. The banks aren’t having to break up their vertically and horizontally integrated business models (e.g, where a bank owns a funds manager that recommends the banks products to its customers), and apart from doing more to comply with the law, the banks aren’t being asked to change their business models in any real way.

2. No changes to the law

Hayne went to lengths to point out that he didn’t see any need to change the existing laws, only to make sure that the laws were being properly and prosecuted.

3. Regulators need to pull up their socks

On that front, the regulators need to do more, and he wants to see them being less shy about prosecuting banks under the law. Remember how ASIC dealt with the Comminsure scandal by asking for a $300,000 community contribution rather than issuing an $8 million fine? Hayne probably has a point.

4. No changes to the credit environment

As Hayne uncovered more and more dirt on the industry, the banks started tightening up their credit standards. The fear I had was that Hayne would push this further and harder, and credit would slow even more. This hasn’t happened. There’s no recommendations here that are going to crimp credit.

That said, there’s nothing here that relaxes credit either. The banks have already started moving away from income and expenditure benchmarks in favour of looking at customers actual income and expenses, and Hayne wants this to continue.

For property prices, I reckon Hayne is neutral, and given the banks’ history of successfully watering down reforms, possibly price-positive in the long run.

5. Mortgage Brokers hung out to dry

Hayne recommends banning trailing commission on mortgage broking, and moving the mortgage broking industry to a fixed fee system. Many mortgage brokers reckon this will kill the industry, and they’re probably right. I think your owner-occupiers and mum and dad investors will probably just go back to walking into whichever bank has the cuddliest mascot, rather than paying a couple of grand upfront. Banks will go harder on these customers and they’ll pay more in the long run (while the customers will pat themselves on the back in the short run – look how much I saved, Honey!)

I can see there is a mis-alignment of incentives with trialling commissions paid by the banks, but killing the industry without putting in place something to help your average punter navigate the complex world of mortgage finance is a recipe for ripping people off.

6. Capitalism is a flawed system

This is where we get to the bit where it’s just a bit weird for me.

Hayne reckons there’s a problem with the banks’ “culture”. Not “culture” in the sense of their rock art and quixotic dance rituals, but culture in the sense that many people in the industry seem to be motivated by money.

“Why did it happen..? Too often, the answer seems to be greed – the pursuit of short term profit at the expense of basic standards of honesty. How else is charging continuing advice fees to the dead to be explained?

“…Banks searched for their ‘share of the customer’s wallet’. From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales.”

Staff were rewarded by reference to profit and sales… what a highly unusual business model that is. What are freakishly strange culture to have.

I mean, you wouldn’t see that in my business. My staff are motivated by my witty company-wide emails and by premium biscuits in the break-room. Money never comes in to it.

But seriously, what are we even talking about here? Yes, capitalism has its flaws. When people are motivated by money, sometimes people with low ethical standards do things that people with higher standards wouldn’t do. There’s nothing new there.

But are we really suggesting we should remove the profit-motive from banking? And if so, why stop at banking. Let’s just make profit illegal altogether. Let’s move to an economy-wide biscuit-based incentive structure.

Let’s all move to fairy land.

But no, I actually think this talk of culture is a squib. It allows us to feel morally righteous, while doing nothing to address the fundamental issue – the disproportionate power that has been allowed to accumulate in the finance sector, and the captured, wet-lettuce approach to regulation.

But no, we’re not tackling that. We’re talking about some fantasy culture, where no one cares about money.

Off the planet.