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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.

NO B.S. FRIDAY: Am I the first human to think this?

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Many people overestimate their intelligence

I think we can avoid a lot of trouble in life if we stop and ask ourselves, “Am I the first person to think this?”

Particularly if you’re on a break-away from the mainstream, thinking that you’ve discovered something that the herd just doesn’t see. Take a minute, sit down and ask yourself, “Am I the first person to think this?”

It’s funny how weeks have themes sometimes, hey. Well, this was a theme for me this week. I met a few people who have landed themselves in hot water and probably should have asked themselves this question before they gambled everything on a long-shot.

Let me give you some examples.

So think about someone who sold up their property in 2003/4, thinking that a crash just had to be around the corner.

Sure, it was possible to tell the story at the time, but if they had asked, “Am I the first person to think that this major asset class is about to go down in flames?” they might not have been so confident.

Because the answer, if they had been honest, would have been no. Not at all. At any point in time, there are decent chunks of the population who expect that housing/stocks/gold/whatever is about to collapse.

And how many of them turned out to be right? A staggeringly small percentage. Crashes do happen, but much less often than we actually imagine. And across time, the chances of being one of the doomsdayists, at the right time to be a doomsdayist, is actually very small.

We’re not good at balancing statistics in our minds, which is why we’re such terrible gamblers, and this is another example.

So if you’re thinking, yep, housing is about to crash, you’ve got to keep it in mind that you are not the first human to have this kind of thought, and at least statistically speaking, the chances of you being right are very, very small.

And if the chances of you being right are very, very small, then you shouldn’t gamble everything on your hunch. You shouldn’t sell your lovely terrace house in Surry Hills for example

What are some other examples I’ve seen recently?

“Money is a scam, therefore I’m throwing everything into Bitcoin.”

There’s another example. People have known money is a scam for centuries, but how many of them lived to see a currency actually collapse? Practically none. So tipping everything into Bitcoin is a wild gamble.

(I’m still a fan of Bitcoin, but I’m not putting 100% of my wealth there. No way.)

Another variation on that is
“The stock market is one giant bubble. I’m putting everything I have into gold.”

Literally, thousands of people have lost fortunes on that gamble over the years.

Or what about,
“Civilisation is about to collapse. I’m retreating to a bunker in the hills.”

That one is very common too. Many humans have had that thought over the years. And many humans have had to wander out of the forest as they approached retirement age and they realised that they were getting too old to live off possum meat.

Now I’m not saying that everything’s rosy and will always be rosy. I’m just pointing to this tendency we have to overestimate our ability to pick massive shifts in the human story.

And if we’d stopped to think about it – If we had asked ourselves ‘Am I the first human to think this’, we would have realised that a great many humans had had very similar ideas in the past.

And when we looked at what had happened to them, we would have realised that the majority were proven to be wrong.

And that should have given us a moment of reflection. Hmmm. Maybe selling everything to buy canned food isn’t the right strategy here.

So today I’m asking humanity to check themselves and not overestimate their intelligence

… because I like banging my head against walls.

Negative Gearing Reform – HUGE Possibility

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New Zealand leads the way

Bit of news from across the pond. Looks like New Zealand’s new Labour government is setting the stage to remove negative gearing, by ring-fencing losses on residential property so they can’t be offset against salary income.

An Issues Paper has been released by the Inland Revenue Department on the proposal to change the rules in what the Government says is “an effort to level the playing field between speculators and investors – and home buyers”.

IRD is proposing that the new rules will apply from the 2019-20 tax year and will mean that investors will no longer be able to offset losses on property investments against their other income. It’s not definite yet that the new rules will be applied in entirety from April 1 next year as the IRD says it would be possible to phase the rules in over a two or three year period (by gradually reducing the amount of losses that can be applied against other income). However, the IRD appears to favour applying the rules in entirety from next year.

Revenue Minister Stuart Nash, in “encouraging feedback” on the proposed changes, says the “persistent tax losses” that many property investors declare on their investments indicate that they rely on capital gains to make a profit..

The changes will “make the tax system fairer” Nash says…

“In conjunction with the recently announced extension to the bright-line test, ring-fencing losses from rental properties would make property speculation less attractive and level the playing field between property investors and home buyers. The time is right to test the detail of this proposal with investors and other stakeholders,” Nash says…

IRD is suggesting that the ring-fencing should apply on a “portfolio basis”, which means that investors would be able to offset losses from one rental property against rental income from other properties – calculating their overall profit or loss across their portfolio.

Also under the suggested changes, a person’s ring-fenced residential rental or other losses from one year could be offset against their residential rental income from future years (from any property) and their taxable income on the sale of any residential land.

I think this is all pretty interesting. For me, if New Zealand pulls the trigger first, you can pretty much lock it in that Australia will go at some point. The same way that Trump’s tax cuts breathed life into the prospect of tax cuts in Australia.

It’s working at the collective consciousness level.

And I actually don’t mind some of the proposed changes. The idea of a portfolio basis – where loses in one property can be offset against income from another – is a great idea. It’s about recognising that property investors are running a business, and treating all their activities that way.

But I didn’t know what the ‘bright line test’ was. I had to look it up:

The bright line test – which requires tax to be paid on any gains made from a residential property sale – was first imposed by the National-led Government in 2015.

The Labour-led Government has argued the measures don’t go far enough and that extending the test to five years will help deter property speculators and “may” have of a dampening effect on the housing market.

National opposed the changes, despite it being a bill that “in the normal course of events, we very much would have been supporting,”.

“But we cannot support this bill because of the egregious, and I think in fact duplicitous, way in which a stealth capital gains tax is being imposed on New Zealanders through this legislation.”

So the gain you make on any property you sell within 5 years is added to your personal income and taxed. And that’s new because NZ doesn’t have capital gains tax…

(Why aren’t their prices higher?)

But seriously, 5 years is a pretty long time in property investment. I don’t think you’re just going to deter ‘speculators’ and ‘property flippers’ with that. You’re deterring everyone.

It’s that old narrative again. That everyone investing in property is just flipping and speculating and getting something for nothing.

I guess unless you’ve actually owned an investment property, you don’t realise how much work is involved.

It’s not nothing. And there’s risks too. You could get a bad tenant. Or no tenant. As an investor, you’re wearing that risk.

So I’m a little tired of this narrative that all investors are speculators and gamblers. That we’ve got nothing to offer the world.

Give us a break.

But I just don’t know how we’re going to shift it.

JG

Your apartment – now with a McHappy toy!

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What is McDonald’s up to?

What’s a company’s most valuable asset?

Take McDonald’s for example. What’s their most valuable asset?

It’s people, right? That’s the conventional wisdom.

Actually, not even close. People barely make the top ten. They’re down there somewhere with photocopying equipment and toner.

McDonald’s most valuable asset is real estate.

Think about it. How much real estate does McDonalds occupy? In prime locations across the country. It must be like hectares and hectares worth.

And all that land must be worth a small fortune.

I often think about it when I drive past these places. Like, how much business do they actually do?

It wouldn’t surprise me if the fast-food restaurants were just revenue-neutral place holders for a massive real estate empire.

McDonald’s is a real estate company with a fast-food arm.

I think the same thing about op-shops. It’s a patient but profitable business model. Buy shop-fronts in out of the way locations, wait for the areas to develop, sell the real estate on.

All the while sourcing your products by donation and your staff from volunteers.

Seriously, those guys must be killing it… over the long run.

I don’t know any of that for sure. It’s just what I see looking at those businesses through the real estate paradigm I live in.

But then there’s this news the other day. McDonalds is doing a joint venture with Stockland to develop an apartment complex in Western Sydney.

From Property Observer:

The biggest name in fast food, McDonald's, has moved into apartment development in western Sydney's Parramatta, teaming with developer Stockland.

The project is at its Parramatta restaurant site at 355-375 Church Street.

Some 350 apartments are proposed along with 1565 square metres of new retail space, a car park and the new restaurant.

The fast food group will retain ownership of the restaurant stratum lot, which is proposed to have two levels of seating, a PlayPlace, McCafe and a dual-lane drive thru.

McDonald's senior development director Josh Bannister noted this was the group's first mixed-use development.

They do not have any other plans at this stage, but the company has been looking at value-adding its property portfolio with residential components elsewhere in Sydney.

The proposed apartments will include one to three bedrooms, with views across the Parramatta Park, Parramatta River and towards the Blue Mountains.

Nice. Keep the restaurant, build a 350-apartment complex on top, roll around in jello-pits of money.

And “they don’t have any further plans at this stage…” Sure they don’t. Come on. You telling me this wasn’t the business model from the beginning?

Even if we take that at face value, you can bet this won’t be the last time they do something like this. They’re going to make a tonne of money out of this deal… for what? Effectively selling the air-space above their restaurant.

Space they weren’t using anyway!

If it’s one thing I know for sure in life it’s that patient money loves real estate. Economies change, industries grow and die, cities evolve, gentrify and decay.

But through it all, there’s real estate. Whatever is going on, on a long enough horizon, real estate makes money.

The only time it doesn’t is when civilisations themselves collapse.

But in that environment, nobody is making money.

Patient money loves real estate because that’s where the value is. Over the long run, nothing else comes close.

With those of use with shorter life-spans than McDonalds and St Vincent De Paul, we’ve got to roll with the cycles in the market.

But it’s the same dynamic that drives value for us. Land is worth more over time because they’ve stopped making any more of it.

(… apart from those garbage islands in the South China Sea).

You want to play like patient, inter-generational money?

It’s property all the way.

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

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

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

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

Back then he was predicting an almighty boom.

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

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

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

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

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

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

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

Like Harry Dent is.

Who is Harry Dent?

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

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

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

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

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

Hellava track record.

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

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

From his publicist:

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

“But that’s nothing new…

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

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

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

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

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

No one would care what Harry had to say.

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

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

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

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

Nothing.

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

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

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

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

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

But make no mistake. It’s a game.

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

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

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

Here come the first-timers

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Want to know the hottest market in 2018? This one.

Who’s market is it right now?

Would you believe first time buyers?

Poor first-timers – the smooshed avocado munchers sleeping under bridges – have been the victims of the market for years now – priced out buy cashed up foreigners or nasty investors.

But right now, they’re one of the main pillars of support holding up the national market, and the NSW market in particular.

That’s what CoreLogic’s Cameron Kusher reckons:

“…affordability [in Sydney] was stretched, more properties had been put up for sale and investors were finding it more difficult and expensive to take out a mortgage, all of which was weighing on the market.

The previous round of clamps on investor lending in late 2014 had also slowed the Sydney market, but the difference this time was that the extra interest rate cuts that had fuelled the market last time were unlikely to be repeated, he said.

The falls this month could have been even worse if the NSW government hadn’t removed stamp duty for properties priced up to $650,000, with discounts for homes up to $800,000, he said.

“That could have lessened the slowdown, because first homebuyer numbers jumped,” Mr Kusher said.”

It is certainly true that prices in Sydney seem to be easing. Prices are lower quarter on quarter for the first time in a few years.

But given regulators have thrown everything and the kitchen sink at investors this year, this perhaps isn’t surprising. In fact, this “moderate easing” is probably exactly what the regulators were aiming for.

Nailed it.

But the interesting thing about these restrictions is they’re aimed at tilting the market away from investors, which by default means towards owner-occupiers.

They weren’t necessarily trying to favour owner occupiers, but that’s what happened. The banks still have money they want to get a return on. They want to lend it out. To them, it’s all the same whether an investor or an owner-occupier is paying the mortgage.

As long as the money’s coming in…

And so banks are gearing themselves up, all their marketing and what have you, to capture more of the owner-occupier share.

So this has given us some ideal conditions for first time buyers. Banks are more willing to hear from our young folk, and mortgage brokers are more willing to give them the time they need to get their applications together.

At the same time, softer market conditions have given buyers a bit more bargaining power. Property’s aren’t quite selling like hot cakes, and first timers are feeling like they might actually have a look-in.

What’s more, we have state government’s throwing money at first time buyers. Not quite literally, like we saw with the first generation of first home owner grants, but through stamp-duty concessions.

But make no mistake. This works exactly like cash in the pocket of first time buyers, so we can think of it as FHOG 2.0.

That’s having a couple of predictable consequences.

The first is that first time buyers now make up a growing share of home purchases. The early-read, finance commitments, has shown a surge in NSW in recent months.

They’re now the highest they’ve been since the FHOG 1.0 induced spikes in 2011 and 2008.

The kids are back baby.

We’re also seeing more heat in the entry-level market segments, as young buyers start bidding up the prices of entry-level homes.

I found this chart here particularly fascinating. This looks at the price changes we’ve seen in the most expensive 25% of Melbourne homes, and the cheapest 25%.

So we can see that the trend price growth evident is the cheapest 25% of homes is unbroken. In fact, it’s just getting stronger. The cheapest 25% of homes in Melbourne are now growing at 15% pa!!

Boom!

The top 25% on the other hand maxed out at around 13% in May, around the time the APRA restrictions kicked in, and price growth has now eased back to about 8%.

Boom! (I know it’s almost half as much, and a bit silly saying boom again, but still 8%. That’s still a boom-time figure.)

So the market pivot to first time buyers in in full effect.

But there’s an echo here.

Think about the people who used to own the houses the first time buyers are buying. They’ve now seen solid equity gain, and are ready to probably upgrade their digs.

They’ll probably buy closer in to the city, at a higher price.

So there’s likely to be an echo boom here, as the stimulus injected into the first home buyer segment works its way through the market.

So watch out for that.

But for now, all the action is going to be at the affordable, cheaper end of the spectrum.

Expect this theme to dominate the first half of 2018.

Seeing any entry-level action where you are?

Are We (Property Investors) Evil?

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If investors are evil, explain this…

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

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

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

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

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

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

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

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

So it is what it is.

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

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

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

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

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

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

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

So who knows what the truth of it is.

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

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

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

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

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

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

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

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

Again, making the rise in rentals seem small.

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

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

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

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

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

“Evil” investors have nothing to do with it.

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

Why does the evil investor story have so much appeal?

The real estate singularity will destroy stock markets

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Soon, there’ll only be one game in town.

When people ask me where to put their money for the long run, I say property. Every time.

That makes me a property optimist.

But it’s also true to say that I’m a pessimist about nearly every other asset class. That’s actually probably more true, over the long, long run.

And so when I’m backing property, it’s not that I’m saying that it’s going to necessarily create a lot of value. It’s that I see other assets destroying value.

And the real estate singularity (as Dymphna and I call it – make sure you check out her Next 10 event) is not so much about real estate rising to the top of the asset heap. It’s about real estate being the only asset left standing.

Now to understand what the singularity is, I need to slow down and pick up some basic economics so we’re all on the same page.

Ok, so in Economics 101 they talk about three factors of production: Land, Labour and Capital. Everything that gets produced in an economy draws on these three factors.

It’s pretty broad brush obviously. Capital includes machines but also includes entrepreneurial capital, and land includes the things that come from the land, like fish from the sea, or iron ore from the ground.

But let's leave that to the side for the moment.

Each of these factors has an income stream attached to it. Labour receives wages, capital receives profits, and land receives rents.

The singularity in real estate is where the wages and profit streams are destroyed, and rents are the only income stream left standing.

How is that going to happen?

Robots.

Well, automation and computing, to be more precise.

Think about IBM’s Watson. Watson’s “brain” holds all 5.5 million articles in Wikipedia, growing at 20,000 per month, and each fact contained in it can be “remembered” at any time, more quickly than the human brain can remember what it had for breakfast.

And that’s just one of the things it can do.

Combine huge amounts of data with massive processing capabilities and machine learning (where the computer coordinates it’s own process of trial and error) and you have the potential for an intelligence (even a wisdom) the likes of which the world has never seen before.

And right now in Australia, Watson is helping banks with compliance. It is checking advice documentation and phone recordings for whether advisers have followed the rules (Watson can check every single one, rather than the random samples that are checked now).

Centralise that process and you pretty much don’t need auditors or even APRA.

This is coming for every aspect of our lives.

Soon your house will be reading your facial cues to gauge your mood, and then adjusting the lighting and music accordingly.

It might have also realised that you need a new fridge.

It dispatches an order.

On-demand, solar-powered robots will be trawling over our rubbish tips for scrap metal. Autonomous trucks will take the metal to a factory, also operated by robots, to 3D print you a new fridge, from designs independently developed by a computer.

The fridge will then be delivered to your door by an autonomous truck, or autonomous drone, and your house will let the robots come in and install it.

And not a human hand nor human mind will have been involved.

The implications for wages are pretty clear. Humans are quickly becoming out-dated technology. We’re about to become as valuable as CD players.

Wages are going to zero.

But what about profit income? Well, it’s under huge pressure too.

Think about that fridge story. If all the robots and computers are powered by free energy coming from the sun, and the materials used are harvested for free from rubbish tips, the marginal cost of each product is effectively nothing.

In competitive markets (and markets are going to get more and more competitive as barriers are torn down), then prices are pushed towards marginal cost.

The price of your fridge might only be a few dollars.

How much profit margin can you make on a $2 fridge?

The reality is more likely to be a volumes-based fridge business – that tries to pick up 5c on every 50c fridge, and make money by selling millions of them.

And the 5 people involved in that company, once everything from accountants to sales has been automated, might make a decent wage.

Of course, rents suffer too in this story. If companies can’t make money, they’re not paying for retail or commercial space.

But there’s still a lot of non-economic activity that has to happen somewhere. People need houses to live in, even if they don’t have jobs.

So in time, the economy will be drawn towards a singularity, where the only factor of production generating any income is land.

Land is the last man standing.

We probably won’t get there of course. An economy where wages and profits have been destroyed simply won’t function in the way we understand it. It’d need a complete overhaul.

But every step we take towards the singularity is value positive for real estate. The more wages income and profit income is destroyed, the more valuable, and relatively scare, rental income becomes.

Theoretically, since prices are relative, in the singularity, wages and profit incomes go to zero, and rental income goes to infinity.

As rental income goes to infinity, so does the asset price.

As I said, we won’t ever get there. It’s like trying to enter a black hole.

But there’s a long, long way from here to there. And every step will see the price of land increase.

And that’s why I’m holding property for the long run.

And this is all before I’m touching on the 7 mega-trends Dymphna has identified. If you want to be ready for the future, her Next 10 event is an absolute must!

The boom-driver baton now goes to…

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

It’s a tough credit environment at the moment.

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

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

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

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

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

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

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

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

“I really thought he could change!”

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

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

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

These are some seriously huge numbers.

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

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

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

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

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

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

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

(And who knows what the actual truth is.)

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

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

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

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

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

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

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

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

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

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

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

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

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

(For now. Investors will be back.)

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

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

A rising tide lifts all boats.

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

Seen it before, see it again.

Noticing any impact in the entry-level segment?

The sleeper-cell in Aussie property

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This could be a total game-changer

I’m still not sure that people are awake to what a big deal this could be for Australian property. It’s lying like a sleeper-cell, but if it gets activated, oh boy, look out.

I’m talking about cladding.

The cladding that goes on the outside of apartment towers, and was responsible for the London Grenfell disaster earlier in the year.

Apparently, it’s a problem here too.

The thing is though, no one really knows how much of a problem.

And that’s because the dodgy, flammable cladding is indistinguishable from the code-compliant stuff.

So even builders who thought they were doing the right thing, maybe have been wrapping their buildings up in dodgy imports and turning them into a powder keg.

Apparently, there’s no way to know unless you actually try and set fire to them. Maybe we have to make that a clause in any new building development? Cladding has actually had to have had a blowtorch applied to it at some point.

Every silver lining has a cloud in the modern economy. And so while open borders and expanded trade routes have brought all manner of cheap goods into our homes, it also means that we don’t really know where things are coming from, and our compliance structures hinge of the integrity of authorising bodies in Chinese provincial back-waters.

Modern life.

And the scale of the problem is potentially huge. In Sydney, Melbourne, Perth and Brisbane we’ve been building apartments like it’s going out of style.

Most apartments have now been built post-GFC. And that means post the era where cheap imports started washing up on our shores.

So we’re talking huge.

The Victorian government’s task force hasn’t reported back yet, but they reckon there are more than 5,000 buildings in Victoria that are non-compliant, according to the ABC.

So no one seems to be arguing the toss that we’ve got a problem.

The only question is what we do about it?

And on that front, surely complete remediation is the only option right? Surely you can’t have dangerous, flammable cladding stuck to the sides of buildings that people actually live in.

So obviously the dangerous stuff will have to be replaced.

But let’s run through another scenario.

Let’s say the problem isn’t as dangerous as we fear. Of those 5,000 buildings in Victoria, only 20% are actually Grenfell-level dangerous.

The rest are just non-compliant in a slightly dangerous way.

But then what message does it send if we say, oh well, there’s a bunch of non-compliant buildings that we’ve uncovered, but we’ve decided to turn a blind eye in this case because it’s just going to cost too much money to bring them up to code…

Could they really do that?

What message does it send about the codes themselves?

“More like guidelines. Ideal if you can afford it, but if not, don’t worry.”

What’s the point in having codes at all?

And what does it say about enforcement?

“As long as you’re not using kerosene-soaked rags as drapes, you can pretty much get away with anything.”

Yeah, nah.

Neither of those options is viable in my mind. The whole integrity of the system is at stake here.

The government has to enforce the code and it has to order all faulty buildings to be remediated. I really don’t think it has a choice here.

I mean, imagine the PR disaster that would follow a human disaster if a building that was found to be non-compliant now, was not forced to refurbish, and then was involved in some sort of tragedy down the track.

And if we’re talking about refurbishment costs, who ends up footing the bill. The builder? The dodgy Chinese importer? The government? The property owners?

Right now, I feel for the 137 people who own units in Melbourne’s Lacrosse building, which caught fire in 2014 and was found to be using the same cladding as Grenfell. They’re now locked in a legal battle with the builder LU Simon.

They want to the builder to pick up the tab for the mandatory refurbishment costs. The builder is arguing that the panels they used were up to code at the time. It’s not their fault…

… or their responsibility.

Nothing but trouble once the lawyers get involved.

So this is all bad news, right?

Well, not exactly…

It’s bad news if you own one of these flammable shoe-boxes, that’s for sure.

But for the market overall, that’s a different story.

Basically, the only thing that’s kept a lid on prices in recent years, as the mining boom income works through the system, and we continue to support record numbers of immigration into our big cities, has been unit construction.

The phenomenal surge of apartment construction has helped us keep pace with population and income growth, and has helped keep a lid on prices.

(If you can call 50% in 5 years ‘a lid’).

And there has always been a qualitative difference between units and houses, but now we’re going to be looking at a markedly differentiated market.

There’ll be detached houses, with the little conveniences that come with having your own patch of turf.

And then there’ll be apartments, with a potentially hefty refurbishment bill hanging over their heads.

I mean, would you be buying into these things without being 1000% sure that the cladding was compliant?

(Hint: you shouldn’t.)

In my mind, there’s a massive TILT light going on, as demand tilts even further towards detached housing, and away from units.

And if this is as huge as it looks like it’s going to be, then we’re talking about huge price movements in the detached housing market.

Huge.

But we still don’t know for sure. The true extent of the problem is hidden from view.

The giant is still sleeping…

But look out if he wakes up.

Do you see this having a big impact on the market?