Some things never go out of fashion – like Australia’s housing shortage.

Ok, what does the year hold for the Australian property market?

Now you can get tangled up analysing all sorts of factors, but at the end of the day, you’ve got to remember that it all comes down to supply and demand.

The supply and demand framework is simple but it’s incredibly powerful. It’s famous for a reason. It works. And if you can keep your thinking anchored in supply and demand, you can’t go too far wrong.

So let’s break it down.

DEMAND

First, let’s have a look at demand. We can think about housing demand as a function of the number of people in the country, and how much money they have.

On the first front, the Australian population continues to grow strongly. We have one of the highest population growth rates in the OECD. As the chart below shows, population growth remains well above it’s long-run average.

I’d like to tell you that’s because we’re having more babies, but it’s not. It’s largely due to our immigration program, which is also one of the largest in the OECD, relative to our population.

That means that housing demand is going to remain elevated, purely on a population basis.

But as I said, it’s also about how much money people have.

On that front, credit conditions continue to ease. APRA continues to walk-back the tight restrictions they introduced in 2016, and the banks themselves are shaking off the freeze that followed the Hayne Royal Commission.

We’ve also had a string on interest rate cuts, with another one likely in the first half of 2020.

With unemployment remaining low and wages steady, that means there’s been a decisive lift in how much money people have to spend on housing.

Put that together – strong population growth, and fat pockets – and housing demand will be strong – definitely relative to the last couple of years.

SUPPLY

On the supply front, 2020 looks to be a challenging year.

Detached housing remains constrained by the availability of greenfield sites, and people are now talking about a ‘construction bust’ in the high-rise sector.

We did have a boom in high-rise apartment construction through the second half of the last decade, but in 2019 high-rise construction approvals started to tank. This was driven by a tighter credit environment and the exit of some big foreign developers.

What’s worse, the high-rise sector remains beleaguered with quality control issues. The number of cracked buildings with structural faults points to something systematic, and the prevalence of flammable cladding is nothing less than alarming.

If this stock gets taken off-line for remediation, supply constraints will become even tighter.

But whatever the case it is clear that supply will be lower in 2020 than in previous years.

THE BALANCE

Put them both together and it’s not hard to see why prices will continue to rise into 2020. Demand remains strong, and is accelerating. Supply remains constrained, and is contracting.

That’s a recipe for price growth.

And the figures from the Urban Development Institute for Victoria are typical. They show that after a brief period of excess supply in 2018, the market has now gone back into shortage.

It will get worse in 2020.

This shortage has persisted for years now, as supply has struggled to keep pace with consistently strong population growth.

And this, more than anything, is why prices have grown as much as they have…

… and why they’ll keep growing into the foreseeable future.

JG

Have you ever thought about oysters. I mean, REALLY thought about oysters?

If you’re feeling life is tough these days, remember, you could be an oyster.

No seriously. Well, not in the sense that you could actually be an oyster. That’s probably not going to happen.

But there is definitely something to learn from the humble oyster.

I remember one time I was by the ocean in Greece, walking along the cliffs. I looked down at this particular point, and I could see all these oysters clinging to the cliff’s edge, either side of the water line.

And I got to thinking, man, what would life as an oyster be like? Think about it. You’re clinging to a hard rock face for dear life, as waves come in and out, each one battering you with water and sand and shit.

*BAM!

And after each waves comes in and pummels you against the rock, it goes out again, sucking you off the rock edge, like some sort of vacuum cleaner on curtain lint.

And this happens every few seconds. Smash, suck. Smash, suck. Smash, suck. Night and day. Day in, day out.

And this relentless pummelling is your baseline reality. It’s not something that happens to you now and then. It’s constant. Sure, some days it’s worse. Storms roll in and the waves become ferocious. Other days it’s not as bad. But still, pummel, pummel, pummel. That’s your life.

And you think you’ve got it tough.

Of course, the oyster is well-adapted to this reality. It has a shell.

It’s has a tough outer shell to protect it from the hammering waves, while the soft business of oyster life goes on inside.

… Now that we’ve come this far, watch me try and pull off one of the ballsy-est metaphors in the history of blogging.

You are an oyster, and the waves are…

… wait for it…

… your heart.

*boom.

Humans have an intense emotional life. Like, super intense. Our minds are now able to expand out over staggering horizons. I can tune in to the war in Syria. I can tune into the reality of people who have lost their homes to bush-fires. I can feel the sadness of people who have lost children to school-shootings.

And that’s not to mention my immediate emotional reality. The death of a loved one. The frustration of a failing relationship. The dull-ache depression of a life going nowhere.

Pummel, pummel, pummel.

Our lives are constantly being battered by a relentless emotional reality.

So what do we do?

Oyster up.

Or more specifically, embrace your oyster-ness.

Just as the oyster has developed a shell to protect itself from the battering waves, I think humans also have a shell that protects the pure life within from the pounding of their emotions.

The trick is to bring our awareness within the protection of this ‘shell’. If you are still enough and quiet enough, you can find a place within you where the troubles of the world – and all the grief and the sorrow your heart feels – can’t touch you.

A soft squoosy centre – the essential centre – where the magic of life happens.

This is something we all have, but we let our awareness spend too long outside the shell, where the battering of our emotions becomes horrific after a while.

So that’s what I reckon.

Come inside the shell, and find your peace.

I think I’m going to take on the oyster as my spirit animal. I might get one tattooed on my ankle….

… with some fancy cursive font beneath it…

“waves happen”.

JG

Most people are using the wrong metaphor to think about themselves, and never achieve anything.

I am biased to action.

That is, I tend to avoid movies that don’t involve explosions.

No, I am biased to action. That is if ever given a choice between taking action and waiting for more information, other things equal, I’ll go for action every time.

This is something I’ve cultivated, and is something that you need to cultivate too.

Now obviously that’s not saying that education and strategy are not important. They are. They are vitally important.

But I think humans have a natural, instinctual tendency to freeze-up in the face of complexity and challenge.

When it’s not obvious which way to run, we freeze until it does become obvious.

I think that strategy probably worked well when the situations we faced where no more complex than having two sabre-toothed tigers coming at you from different directions.

But when we’re talking about the complexity of, say, navigating your way through paid employment into independent wealth, then I just don’t think this instinct is all that useful.

And so we need to train ourselves to be biased to action – to be looking to be active and engaged, even in the face of uncertainty.

The way I see it, most people think of themselves as arrows.

That is, you set your direction, take your mark, and then let fly.

And once in the air, there’s nothing more you can do to control your path. The destiny of an arrow is set from the time it leaves the bow.

And in that context, careful aim is vitally important. You want to be exactly sure that you’re pointed in the right direction before you set things in motion.

Take careful aim, then fire.

But this strategy just doesn’t work.

And I see people think of themselves as arrows. And they always hold themselves back, always searching for more information, trying to build more confidence, trying to make the perfect move…

… and they get stuck in this holding pattern for years.

But the reality is that they’re using the wrong metaphor.

You are not an arrow. You are more like a river.

That is, once you set out, you will make many twists and turns on your journey to the sea.

Your course is not set from the get-go, but emerges and evolves as you make your way.

If a river makes a wrong turn, even if it sets out in the wrong direction initially, it will be corrected and find it’s way eventually.

The only important thing is movement. Once water is moving, the terrain quickly gives it the feedback it needs, and guides it on its way.

So don’t think of yourself as an arrow. Don’t get too stressed about your initial direction.

Think of yourself as a river. Bias yourself to movement. Bias yourself to action.

And this will take you where you need to go.

JG

Tough times for tradies, but I’m in the money

Sometimes you find a piece of data that doesn’t really mean all that much on it’s own, but really is just the perfect way to tell a complex story.

And today, that data point is ute sales in Australia, which, as it happens, have tanked:

If you use ute sales as a marker of small business investment in Australia, you get the impression small business is terrified. Sales of light commercial vehicles collapsed in October 2019, down 11 per cent compared with October 2018.

At the start of the 2019, sales were much the same as last year. Some months a bit higher, some a bit lower. Around the middle of this year something changed. Sales of light commercial vehicles – which is mostly utes but includes vans and small buses – began to get worse and worse. In October, the fall was a whopping 11 per cent.

As the next graph shows, the “ute index” is in the red, with nearly 10,000 fewer light commercial vehicles sold compared with 2018.

“The ute index shows sales are in rapid decline.

Ok, so this isn’t great for ute manufacturers, but there’s a whole lot more to this story.

What we’re seeing here is the pointy end of a general downturn in the construction industry.

We’ve had pretty good run. Over the last half-decade or so, we had a construction boom. Detached housing construction was strong, while unit construction was off the charts.

But all good things come to an end. That natural cyclical end was also  hastened along by a bit of a credit freeze following the APRA restrictions.

And with stalling high-rise apartment prices creating a fair degree of settlement risk, high-rise construction rates are tanking.

And so, the construction boom is over.

And that means tradies across the sector are going to be looking at having to weather a tougher phase of the cycle.

We might also see a bit of a shake-out in construction employment. Construction jobs ads have clearly turned and suggest that the job numbers will probably struggle too.

Which means lower wages and generally tighter purse strings all round.

(And less money for new utes, obviously.)

And so the construction boom is over.

But this is the thing.

The construction boom is finishing… without having made all the much difference to the housing supply / demand balance.

According to CBA’s model of Housing Demand & Supply, we did have a short period of housing over-supply (although this was probably entirely located in the high-rise segment.)

However, with population growth remaining strong, driven by overseas migration, housing supply is already starting to wane.

The CBA estimate that the market is about in balance now, but with construction falling and population growth remaining strong, we’ll quickly return to a housing shortage in 2020.

And when the market goes back to a housing shortage, that will add further fuel to the rocket under house prices.

And so, as someone with a large property portfolio, the construction downturn is likely to increase the value of my property holdings.

That doesn’t mean that I’m cheering it along. I definitely don’t want to see large numbers of tradies laid off, but it’s one of the odd things about the property market that most people just don’t get.

The market can stay in balance, if and only if, we build houses at a phenomenal ‘off the charts’ rate. Anything less than phenomenal and demand starts outstripping supply, and prices rise.

And this is one of the reasons we’ve seen such sustained price increases over the past decade or so.

And that’s the story here.

Australia – land of the perpetual housing shortage.

JG

Their burn was more than their earn, but their problem was much deeper than that.

I was shocked to hear that for all the money the were earning now, they were saving no more than they had been in little old Australia.

I caught up recently with some friends who had just come back from Los Angeles. They were Aussies originally, but had been living in the USA for the better part of a decade now.

I asked them how they were tracking.

She said they were doing well. She had a successful food blog. He had a good job producing reality TV shows. They were earning good money.

But they were spending good money too. They lived in a good neighbourhood (in LA, there’s a very big difference between a ‘good’ and a ‘bad’ neighbourhood) but they were still renting. They drove a nice car (she was actually surprised at how ‘old’ all the cars in Australia looked) but it was on lease. Their kids were in good schools, and had super-packed social calendars.

They had a good life and a good life costs good money.

“You know, it’s funny,” she said with a faint twinge of an American accent, “we actually moved there for the money.”

“Matthew wanted to work in TV, and the best TV jobs in the world are in LA.”

“And he’s on a great salary. But life in LA is just expensive. And financially, I don’t think we’ve got ahead at all.”

“I mean, I don’t think we put any more away each year than we did when we lived in Australia.”

“It’s not that I regret it. LA is an exciting place to live. But it’s exciting because it’s crazy and all that craziness takes its toll on your nervous system. So that kinda just balances out.”

“And so I just think we made this massive life decision “for the money” and really, I think we just came out even.”

She wasn’t looking for financial advice, so I didn’t give her any, but I don’t think there’s anything in her story that’s surprising.

In part, she has a technical problem. Savings is the difference between your earn and your burn, and as because they were unable to contain their burn, they simply spent every extra cent they earned.

This is really common, because it is actually really hard to be disciplined with your burn. You want to be able to enjoy your money, and enjoy the same standard of living as everyone around you. That very easily translates into a burn that cannot be contained.

But that’s simply a technical problem that a number of good systems could solve.

The deeper problem is really around their ‘relationship’ to money.

They were too complacent about where the next pay-cheque was coming from, and too lazy to be bothered controlling where it went.

They had always been ‘comfortable’, and so no matter how much they earnt, they would be just that: ‘comfortable’.

Not too fazed by money. Just puddling along. Never giving money the time and attention it deserves because “we’re doing brunch at Janet’s house after soccer on Saturday, honey.”

Their life situation – how much wealth they had created for themselves – reflected their relationship with money.

It always does. So does yours. Your wealth reflects your relationship with money.

And it just doesn’t matter where you go, or how much you earn, you cannot recalibrate your wealth if you cannot recalibrate your relationship to money.

This is an iron law.

So, isn’t it time you gave your relationship to money some energy?

JG

This plan will juice the market, but there’s a catch

It’s pretty interesting watching the details of the so-called ‘First Home Buyer Deposit Scheme’ roll out.

For my money this is one of the most interesting housing policy announcements in recent years – and one that has the most potential to provide long-run support to property prices.

Remember, we’re talking about a scheme where buyers who can muster a 5% deposit can lean on the government for another 5%, to enable them to get a vanilla mortgage on a property.

It’s restricted to the low-end of the market (cheaper properties), but not the low-end of buyers (the means tests ensure that it’s available to pretty much everyone).

It’s starts with an initial roll-out of 10,000 places in the scheme, but there’s nothing to say it can’t grow or just keep rolling on forever.

So the government is throwing fuel on the entry-level property market. The results will be predictable.

But there’s a catch. There’s always a catch.

The banks want to be paid to participate in the scheme. That’s the word from the AFR:

Big banks are seeking the flexibility to charge higher interest rates under the Morrison government’s scheme to help first home buyers because of the increased risk of lending to first-time borrowers with as little as 5 per cent deposit.

The big banks also query whether the government’s promised first home loan deposit scheme can be up and running by its scheduled January 1 start date.

Bankers are concerned that home buyers with deposits as little as 5 per cent of a property’s value will be riskier than other first-time borrowers who usually are required to have saved a minimum deposit of at least 10 per cent, and sometimes as high as 20 per cent.

…Housing Minister Michael Sukkar is trying to boost competition in the scheme against the big banks, by permitting only two of the big four – ANZ, Commonwealth Bank of Australia, National Australia Bank and Westpac – to participate.

The government hasn’t announced which two of the big-four banks will be allowed to play in the scheme, but its not clear that any of them want to.

Banks (and more importantly, the people who invest in banks) are very concerned about “capital quality” – that is, of all the assets on the banks’ balance sheets, how risky are they.

So an injection of young buyers who haven’t scraped together a 10% deposit, on balance, is probably going to pull the banks capital quality down. Pretty much by definition, someone who can’t pull together a 10% deposit is a riskier proposition than someone who can.

And it’s the first rule of banking that higher risk demands higher reward. And so the banks want to be able to charge these people more.

And to be honest, it’s fair enough.

But this sets up an awkward situation. Imagine finding out you won the lottery and got a spot in the government’s scheme, only to find out the banks now want to charge you 100 bips above the prevailing mortgage rates.

Two-steps forward, one step back.

There’s always a catch.

JG