Property is a cornerstone of society. Don’t underestimate how powerful that is.

Ok, if you remember from last week, I was explaining why I’m such a property tragic, and why I think it’s the best road to wealth.

I said it all came down to control and whether the world has your back or not.

If you remember, I laid those two axes out on a chart that looked like this:

I explained the control side last week. Today, let’s look at that cryptic metric – “the world has your back”.

What do I mean by that?

Well, this is about how much support your asset class can expect to receive from the world at large.

For example, when you’re running your own business, by and large, the world couldn’t give a flying fig whether you fly and soar, or crash and burn. It couldn’t give a rats.

No help for you.

But think about stocks, in contrast.

When you are investing in the stock market, what are you investing in?

Well, if you bought a broad index like the ASX200, you are effectively investing in the Australian economy. These companies are the Australian economy.

And do people care what happens to the Australian economy?

You bet!

Politicians use economic growth as a proxy for their own performance. There are entire organs of government devoted to keeping the economy on track (think RBA). Every mum and dad in Australia wants the economy to go well.

There is a broad array of large and powerful forces that want the economy to keep on keeping on.

Don’t underestimate the power of that.

And so when I invest in the share market, I feel like the world has my back. There are large and powerful forces that would prefer to see my investments do well.

They won’t always succeed over every time-frame. There’s always going to be glitches and crashes. But over the long run, there is an intense amount of human ingenuity and endeavour dedicated to making sure that the economy does well…

… and that publicly listed companies do well.

… and that shareholders do well.

I like that.

Where does property sit?

To my mind, property sits between shares and running your own business, but definitely on the positive end of the spectrum.

There is a broad array of large and powerful forces that want the property market to do well too.

The property market is central to the economy and central to our day-to-day lives. Everyone lives in a house. Most Australians have most of their wealth tied up in their house.

Everyone wants the property market to do well. (I’m not talking about continually posting massive gains, but I am definitely talking about no one wanting to see a crash or any sort of horror scenario.)

Some people might say they do – they might say they’re praying for the property market to crash – but they don’t mean it. If they really knew what happened in a property crash that’d be more careful with their prayers.

But in this regard, individuals matter much less than the government. They also want to see property do well. A lot of money and policy has been thrown at the property market over the years. A lot.

To me, I get enormous peace of mind knowing that an entire nation cares about what happens to my investments (not directly, but in general) and that time and time again, they’re willing to put their money where their mouths are. 

Property a Clear Winner

Put these two together, and property is the clear winner. Not only does it give you a high degree of control, it also enjoys a high level of social support. That’s what I’m trying to show on this chart.

These things are important.

Leverage – The Hidden Axis

Actually, there’s probably a third axis here – leverage. This gets a lot of coverage, so I didn’t want to give it a lot of detail, but it’s definitely important.

One of the great things about property is that it gives you a huge capacity to leverage small sums into large wealth gains.

You don’t see it so much these days, but there was a time there where it was common to buy an investment property with a 5% deposit.

You can borrow to invest in the stock market too, sure, but you’d never get away with that kind of gearing.

And running your own business? Forget it. Finance for business is cut-throat!

So yeah, leverage is another huge plus for property. Let’s not forget that one.

Anyway, control, social support and leverage.

These are the things that bring me back to property, time and time again.

Nothing really comes close.

JG

Not all roads to wealth are created equal. At least, not how I see it…

So Richard Kiyosaki said that there are three roads to wealth: investing in financial assets (including stocks), investing in property, or running your own business.

These are the roads to wealth.

Is any road better than any other?

Yes. Property is the best.

(What? Were you expecting something more even-handed? If you want balanced, see a see-saw.)

To my mind, property is hands-down the best way to build wealth.

Now, people who know me might think that this is strange. I didn’t “make” my money in property. I made my money by building and running a company that kicked arse in sales and marketing.

I actually came to property fairly late in the game.

But I tell you one thing. Having gone on the full journey with running my own business, and having done a fair bit of active investing (particularly shares), I can tell you that the easiest million I ever made was in property.

The quickest million I ever made was also in property. So was the fattest return-on-investment million. And so was the lowest-risk million.

It’s this first hand experience and these –est millions that convince me that property is the best (quickest, safest, easiest) way to build wealth.

(… if you do it right, obviously.)

Now, I don’t want you to take my word for it. And I can’t give you the years of experience I’ve had, so I sat down and did a bit of thinking about why I think it’s so awesome.

I think it’s really about two things: it’s about how much control you have over your path, and whether the world has your back or not.

And just because I like charts, I’ve mapped out where I think each wealth path sits along these axes. It looks like this:

Control

The y-axis here is control. This is about how much influence you can have over your end result.

On this metric, I put running your own business on top. When you are building and growing a business, it’s all about you. It’s all about the decisions you make and the things you do.

In fact, you have so much control (and responsibility), that it’s almost overwhelming.

Winding it back a little from there is property. I’m not talking the simple buy-and-hold strategies that most sheepvestors get into. I’m talking about active property investing – where you’re making deals and manufacturing growth.

There is a lot you can do to get the returns you want – renovations, subdivisions, developments… the list goes on and on.

Down the bottom is stocks and other financial assets. The way I see it, there is very little control you can have over your wealth-engine here.

Sure, you get a bit of agency when you choose which investments to buy (though studies show that most people over-estimate how good they are at doing this).

But once you’ve bought the stock, or whatever, there is literally nothing you can do about it. There is nothing you can do as an ordinary share-holder to influence the stock’s price or return.

In fact, if you try, it’s called ‘manipulation’ and you can end up in jail.

So, personally, that’s not that attractive. I like to have control. I like to be able to influence my returns.

Because if you don’t have control, you’re just gambling.

So this is one area where property is a strong performer.

The next factor is whether the world has your back or not.

What on earth do I mean by that?

Tune in next week.

JG

Another house price boom is coming. And it will be the RBA’s fault… again.

The RBA’s own research predicts that house prices are going to jump 21% over the next 18 months.

Well, officially, they weren’t quite so bold. But that is pretty much what they’re saying.

It all comes from an academic paper written by two of their senior researchers.

Trent Saunders and Peter Tulip recently published an analysis of what impact the rate cutting cycle between 2013 and 2017 had on house prices.

Remember this was a time when official interest rates nose-dived from 4.5% to 1.5%. At the same time, house prices in Sydney lept over 50%.

Now I would of thought the connection was pretty obvious, but that’s life as an academic isn’t it? – getting paid to tell people what they already know.

But remember that this was also at a time when the RBA was telling everyone that their rate cutting agenda wouldn’t inflate house prices. If house prices were rising, it was due to a shortage of supply, and strong population growth.

Sure. Those things matter too. But interest rates are the biggest story here right?

Yep.

In fact, according to the research, interest rates are almost the only game in town.

Saunders and Tulip reckon that almost all of the house price boom between 2013 and 2017 came from interest rate reductions.

They also showed that housing supply and population growth had relatively little influence on the overall picture.

And they didn’t stop there. Saunders and Tulip also put some numbers on their thinking. On their reckoning, every 100 points of rate cuts translates into a thumping 28% increase in house prices.

Think about that number. The RBA always moves in 25 basis point increments, except in emergencies.

So with just four official rate cuts – only four – you can create a 28% increase in house prices!

It’s maths mother-family!

And what’s happening right now? Well, funnily enough, the RBA is cutting rates.

We’ve had two already. The market consensus is that we’ll finish the year with three rate cuts under the belt.

Assuming it’s linear, that means we’ll get three quarters of the Saunders and Tulip figure.

So those three rate cuts should give us a 21% increase in house prices.

Twenty One flipping percent!

That’s a boom baby.

But the RBA is still running with the line that interest rate cuts won’t inflate the housing market… officially. That’s the official line. That’s what Governor Phil Lowe is saying.

But hang on. Isn’t that contradicting Saunders and Tulip?

Yes. Yes it is.

But there’s this nice story the RBA tells. They say their researchers are doing independent research, and their views “don’t necessarily represent the views of the bank.”

… even though the researchers are getting paid by the bank and have to spend the rest of their careers working at the bank. But yeah, no, sure. Totally independent research.

I actually reckon this is a cry for help.

The RBA copped a lot of flack during the last boom for letting house prices run so far. And it’s about to happen again.

The RBA is calling out from support – especially from Canberra. They’re saying, “There’s another house price boom coming. If you want to stop it, you need to help us out. Stop asking monetary policy to do all the heavy lifting. Get the cheque book out and start spending yourself.”

And Canberra is like, yeah, nah, we’ll take the house price boom thanks. Makes us look good.

And the RBA cries little tears of helplessness.

While all around them, the housing market booms.

(You heard me right..? Twenty-one percent..?)

JG

Can’t believe that tax-payers and small developers have ended up on the hook for this mess.

Well, that escalated quickly.

And this fiasco shows you everything wrong with democracy and crony-capitalism.

I’m talking about the Victorian government announcing that it has $600m to fix the cladding crisis. In case you don’t remember, a whole bunch of high-rise buildings in Melbourne have been clad in the same flammable stuff that caused the Grenfell Tower disaster in London, and they all need to be fixed.

“Victorian taxpayers will help fund major rectification works on buildings with dangerous combustible cladding, Premier Daniel Andrews says.

His Government has announced a $600 million package to fix hundreds of buildings with high-risk cladding.

Half will come straight from state coffers, and the other half will be raised over five years through changes to a building permit levy.

Mr Andrews announced the policy after receiving a report into the state of cladding in Victoria, which made 35 recommendations that his Labor Government is now considering.”

Here’s more via The AFR:

“A new body, Cladding Safety Victoria, will oversee the process, rather than the Victorian Building Authority building industry regulator…

Victoria has the largest number of known private buildings with them. Mr Wynne last month told a state parliamentary committee the number of affected buildings was more than 900…

Victoria’s move suggests other states will eventually follow in paying for rectification.”

At first, I’m like, why am I, as a tax-payer, paying for this mess. This is not my problem. I didn’t build these apartments and I didn’t buy one. Why are tax-payers now on the hook for $300m?

I mean, sure, it was a failure of compliance and the laws themselves, then sure. But it’s not clear that it is (and the government certainly isn’t admitting fault).

What’s worse, even this much might not be anywhere near enough…

Consumer advocate Anne Paten, from the Victorian Building Action Group, said the $600 million funding package would not come close to fixing the state’s cladding issues.

She told ABC Radio Melbourne the real cost was “many, many billions of dollars”.

“The people who have already been damaged and the taxpayers who’ve had nothing to do with this are going to give this token amount,” she said.

“And on the other hand, the people who caused it and should have to give and live up to the warranty that comes with the building once again walk away scot-free.”

So what happens when the money runs out and we’re only a small way into the job? Is the government really just going to walk away at that point. Say, “Nup. Sorry. There’s no more money.”

I can’t see that happening. And so I feel like tax-payers are potentially handing over a blank cheque here.

I’m not all that happy about that.

But then it gets worse.

Because it turns out that the government’s plan to raise half the money from a levy on the construction industry, isn’t a fee on the people who built and made money on these things. It’s a fee on every developer.

As The Property Council has highlighted, even small developers are on the hook.

 The Property Council has welcomed the Victorian Government’s plan for the rectification of cladding affected buildings but has warned that a 700 per cent increase in building levies would add untenable costs to new construction projects in that state.

“We welcome the Government’s commitment to take action on cladding rectification and its commitment of $300 million for the task, but we are deeply concerned about the impact of the proposed huge increase in the Building Permit Levy to help fund the plan,” said Matthew Kandelaars, Victorian Deputy Executive Director of the Property Council of Australia.

“The Government is proposing a 700 per cent increase in the levy for new buildings valued at more than $1.5 million.

“For works as low as $800,000, it is proposed the levy rate will double. These are not big building projects by any stretch.”

No kidding they’re not! What can you build in Melbourne for $800K these days? Coupla granny flats?

So now every developer, even every one who followed the letter of the law and did everything right, they’re on the hook for this mess.

I’m on the hook for this mess.

And I’m not happy about that.

How about we hunt down whoever made off with the money and made them pay for it, hey?

Why are you coming after us?

JG

This long-run driver is pointing to rising house prices… and confusion across the country.

With the short-run indicators of the cycle all turning (have you tuned into what auction clearance rates are doing?), it’s worth remember that there are some strong long-term drivers at play too.

Like immigration.

In fact, immigration into Australia is strong and only getting stronger.

On latest figures, there were 294,430 net permanent and long-term arrivals into Australia in the year to May 2019. That’s up 7% on a year earlier.

To put that in perspective, inflation and GDP are growing at about 2%. So 7% is very solid. It amounts to a serious injection of housing demand.

And even though there was a bit of talk at the most recent election about lowering immigration (didn’t happen), there doesn’t seem to be any political will to actually turning down or world-beating immigration program.

And that’s because high-immigration enjoys support across the political spectrum. On the right, high immigration beefs up consumer pools and creates slack in the job market, which holds down wages.

But on the left, you get confused garbage like this:

AREAS WITH POOR ATTITUDES TO IMMIGRATION HAVE WEAKER HOUSE PRICE GROWTH

(Can’t you just hear your primary school headmaster’s voice with these so-called ‘poor attitudes’?)

Areas with poor attitudes to immigration have weaker house price growth, new research shows

Communities where people oppose immigrants moving in experience less house price growth than neighbouring suburbs with more accepting residents, new research has shown.

Immigration lifts house prices by increasing demand for an already limited supply of housing and anti-immigrant communities were excluding themselves from this benefit, Deakin University researcher Chris Doucouliagos said.

“In theory, if people are more predisposed towards immigrants there may be a higher price as well, but we found that those areas with negative attitudes get a lower increase in house prices,” Professor Doucouliagos said.

All communities, no matter their attitude to immigration, benefited from its effect on home values, but those who didn’t want new migrants moving in benefited less, he said.

… “Immigration is a major policy issue globally. It’s always in the news, there are a lot of claims made,” Professor Doucouliagos said. “When you look at the evidence, none of those claims stand to scrutiny. We find no evidence that it reduces asset values.

“There is no case for restricting immigration on the basis of house prices. Our takeaway is ‘love thy neighbour’.”

What planet is this “professor” on?

A few years ago when cashed up Chinese buyers were outbidding locals at auctions with suitcases full of cash, people weren’t worried about the Chinese buyers “reducing asset values”.

They were worried about their kids never being able to afford a house.

And that’s exactly what the good professor just showed. I mean, you just as easily use this data to tell a completely different story:

“Areas with ‘satisfactory’ attitudes to immigration have housing affordability issues.”

But I reckon we’re about five to ten years away from lefties connecting those two dots.

And that means immigration will remain elevated, and pressure on house prices will remain.

JG

Theere was a sugre in new home sales in May. Can we trust it?

So wouldn’t you know it, there’s been a boom in new home sales.

According to Housing Industry Association (HIA) data, the volume of new home sales surged 29% in May.

Check out the chart. Look at that bounce! That’s now the highest level in over a year, reversing an enduring slow-bleed decline.

It’s almost comical really. *Boing.

What’s the deal? Has the market really turned that sharply?

April did appear to be a bit of a quiet month, so there’s a bit of pay-back in May’s figures.

However, May was also the election month, and this seems to be lining up with a bunch of data points we have that tell us that there was a real shift in sentiment in May.

Things really did seem to just turn on a ten cent piece.

HIA’s economist, Tim Reardon, is blaming Labor’s campaign to end negative gearing.

“The pickup in sales during May follows lacklustre results throughout the first four months of 2019. Federal Elections always impact market confidence and the discussion around new tax imposts on investors through an increase in Capital Gains Tax magnified this uncertainty in the first part of the year.”

This is becoming something of a narrative, but I’d be wary of overplaying the importance of the negative gearing factor. Sure, it’s probably part of the story, but the swing in sentiment has been too broad and too impressive to put down to just one policy setting, in my mind.

Particularly since we’re seeing the first stages of a much easier credit environment. To his credit, Reardon picks up on this:

 “The resurgence in home sales was evident across all five states covered by the New Home Sales survey, suggesting a broad based improvement in housing market sentiment around the country.

“An easing of the credit squeeze, lower interest rates and an expectation that APRA will implement reforms to mortgage lending guidelines are also factors supporting the lift in sales activity.”

Yep. As I’ve said before, the stars are aligning for the property market right now. The market is bottoming and is ready to launch into a new growth phase.

And my theory is still that the lower end of the market is going to lead the recovery.

I think that’s why we’re seeing such a strong rebound in new home sales – they’re at the cheaper end of the spectrum, and tend to attract first home buyers.

And government stimulus is aimed (e.g stamp duty exemptions) and will be aimed (e.g the coming Federal first home buyer deposit scheme) at first home buyers and the cheaper end of the spectrum.

And we know that so far, the cheaper end of the market has been holding up best.

And I would expect that to continue. Premium markets tend to surge (and surge strongly) when the expansion cycle is more mature. Cheaper homes tend to lead recoveries.

And so as this expansion cycle continues, expect new home sales and cheaper home to continue to lead the way.

JG