Category Archives: The Market

Sydney Siders’ Sliding

It’s being widely reported and my friends in Sydney who “know the market” attest to a slide in Sydney’s astronomical property prices.  People are getting the jitters.  The smart money has already “left town” and has found a home in the stock market, gold and other hidey-holes.

I was chatting recently with a couple in their early thirties – we started a conversation at a local coffee shop.  They were wondering what to make of rumours of interest rates about to go up.

They confided that they had a $400,000  “VIP” type loan through a Broking House on their principal place of residence.  They had an electronic copy of their contract so I took a peek.  Just as I thought – another “Interest rate holiday” that will be clawed back by the Lender in Years 4 and 5.  Poor people had no clue.  They hardly understood what I was telling them.

Their repayments NOW are $1,833.00 per calendar month, interest only.  By the time Year 4 comes around, very conservatively, interest rates will be at least 1 percent higher than they are today.  Years 4 and 5 come with an extra sting in the tail.  Their repayments will revert to Principal and Interest at “1 percent above market rate”.

I got into a Mortgage Calculator.  Their repayments will jump $642.00 per month or by 35 PERCENT.  I thought the poor dears were going to faint.  “But, but, but…..”  they stammered.

They bought me a coffee, said “thanks” in a wheezy, incoherent sort of way, and walked, leaning on each other, toward the beach.

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The Multiples are still Sky High

Post war and right up until the early 2000’s, the old fashioned Dad at work and Mum at home raising the children worked a treat.  I am not commenting on the social status of women or starting any such argument.  I am talking AFFORDABILITY!

The “Average House” which used to be say, a cottage of about 1400 square feet, 3 bedrooms, one bathroom, kitchen/dining and lounge room, with a carport or garage on just under a quarter acre, could be had for 3 times the gross annual income of the primary (and often, ONLY) wage earner.

This “multiple” persisted for more than 60 years until the whole thing went nuts.

The first house my father bought cost $10,000 when his annual salary was a smidgen over $3,000.  The first house and land that I bought and built cost me $75,000 when my annual salary was about $25,000.  The next house I built was a lot bigger, at 5 bedrooms and 3 bathrooms with a double garage on a fairly pricey piece of land.  The “multiple” went to 3.6 for that one, but that was to be expected.

Today, for a modest house of about 1,500 sq ft, typically with a single garage and a carport, 2 bathrooms but on a postage stamp piece of land (no value there folks!) the multiple in the majority of markets lies between 7 and 10.  In other words from seriously unaffordable to economic suicide.

Record low interest rates and “Honeymoon” deals have placed hundreds of thousands of people at risk of bankruptcy and homelessness.  The overall economic fallout from such a disaster, and it will happen, will be incalculable.  The media is full of people with “other interests at heart” who comment.  Why ask a major developer who has 5,000 apartments coming on to the market if he thinks the market is overheated, and due for a cliff like correction?  Is he going to answer YES and put people off buying?  Hell No.

Or other commentators who have hundreds of thousands of Bank shares in their superannuation portfolios…  are they going to tell the truth and watch their Bank shares tank?  Hell No.

Go out into the market and SEE for yourself what is happening.  I sold a number of 50 square metre studio units in 2004 and 2005 for $209,000 and $219,000.  12 and 13 years later they just changed hands for $159,000.

A large 2 story house I helped friends sell in 2007 for $650,000, had a minimum of $150,000 spent by the new owners on pool, gazebo, extensive landscaping and upgrades to 3 bathrooms and the kitchen.  Sold for  $795,000 this year.  That is a LOSS over 10 years of at least $60,000 in stamp duty, legal and agents fees, not to forget interest on loans, rates and insurance.

I do not care what you read elsewhere.  If you are in real estate now, get out while you can…

The Sky is falling … albeit slowly

I was almost relieved to see ABC Four Corners finally bring some sense to the argument that Housing in Australia is a No Lose, Bulletproof and Unassailable fortress of wealth.

I stand by my assertions that this market is poised for failure.  I am seeing in south east Queensland some REAL (not imagined) failures happening every single day.  For example three are 3 fairly major apartment developments within 5 kms of each other.  One has failed as the builder went belly up.  The new builder has yet to start the last leg of the project because there is NO FUNDING!  Huge banners on each had prices for one bedroom apartments (facing the car park, the main road or the railway line (your choice!) starting at $389,000 and $399,000.  Over about 7 months, the banner’s prices went down and down to eventually $319,000.  The banners disappeared altogether.  Not because all the nasty tiny 1 bedroom apartments had sold, but because the Banks will only finance 50% of the Contract price of such disasters because they are too small, have a limited market and quite frankly, the downside risk to the Banks is too high.

 

I saw a Studio Apartment that sold for $199,000 in 2006, $239,000 in 2009, sell last week for $169,000.  Progress?  Everyone making money?  I don;t think so.

Fancy agents are advertising their “record prices” achieved last month!  Rubbish.  One place was sold for $20,000,000.  Wow!  Trouble is it sold for $32,000,000 8 years ago!  A record?  For what, the last 7.8 years?  Probably.  Liars!

 

Here is some of what happened on Four Corners recently, copied from their site and acknowledged as not my own work…

Betting on the house: Australia’s real estate obsession driving us to the brink. “I think it’s a powder keg.” Investment consultant

The statistics are startling. Australians are carrying more personal debt than ever before. For every one dollar earned, on average, Australians have nearly two dollars of debt. We hold the dubious position of having the second highest level of household debt in the world. Much of this stems from our obsession with buying real estate.

“Housing has never been rational. In Australia, it’s probably more akin to a religion or a cult so it’s all about faith. You’re either a believer in property or you’re not.” Former banker

On Monday, Four Corners investigates the forces driving our debt fuelled housing boom and the risks it poses for the nation.

“I’ve been studying the market here for a good number of years and I have never seen this perfect storm of issues coming together.” Financial analyst.

The program draws together key experts to map the danger zones in the housing market and will reveal the Australian suburbs currently experiencing the highest levels of mortgage stress.

“It’s the nightmare that you live with all the time. You wake up in the morning and you think, ‘How much longer will we be living here?’ Constantly.” Mortgage holder

Experts are warning that a wave of home owners and property investors will be unable to cope if there’s an increase in interest rates or a change in their personal circumstances.

“You’re effectively toast if you lose your job or the main breadwinner does. That’s the point of fragility that we’re at now.” Investment consultant

Regulators have been tightening the screws on lending requirements but there are concerns it’s too little too late.

“All bubbles really depend on loose credit, that’s one of the things that’s really fuelled the Australian housing market. Anyone with a pulse could essentially get a mortgage.” Economist and investment fund adviser

The program investigates the lending practices that have driven the boom in residential lending, and asks, 10 years on from the global financial crisis, if the banks are prepared for a potential crash landing.

“If there’s a shock to the economy, that potentially leads to a rise in sensitivity to the banking sector. The banks could in fact experience higher losses because households are more indebted.” Ratings agency analyst.

It all points to exactly what I’ve been forecasting for the last 3 years.  The demise of this market has been delayed by aggressive interest rate cuts by the Central Bank, the Mining boom with huge wage earners be able to buy multiple properties, and the Chinese getting their capital out of China as fast as they can.  All 3 major influences have stopped dead… here it comes!

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I know it has been a long time coming, but…

The Sydney Morning Herald today.  Credit rating agency Moody’s has downgraded a dozen Australian banks, including the big four, citing increased risks in the nation’s increasingly indebted households.

Moody’s stripped the big four banks – the Australia and New Zealand Banking Group (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank (NAB), and Westpac Banking Corporation (Westpac) – of their Aa3 long-term rating and placed them on the next level down at Aa2, although it did not alter their short term ratings.

“In Moody’s view, elevated risks within the household sector heighten the sensitivity of Australian banks’ credit profiles to an adverse shock, notwithstanding improvements in their capital and liquidity in recent years,” the statement said.

Moody’s did not think a “sharp housing downturn” was a “core scenario” the risk posed by increasing household debt had to be considered when weighing the ratings of Australian banks.

“In Moody’s assessment, risks associated with the housing market have risen sharply in recent years. Latent risks in the housing market have been rising in recent years, because significant house price appreciation in the core housing markets of Sydney and Melbourne has led to very high and rising household indebtedness,” the statement said.

I’ve been getting real time, real life feedback from operators in the business.  The rot is setting in amongst the Nappy Land young couple buyers.  Their properties are being revalued DOWN.  it will be blood in the streets when this whole pack of cards collapses.

His only crime? Getting Caught

Thank you Australian Financial Review for this article – 07 July 2016 – A former Aussie Home Loan broker would go to jail for up to a year after admitting he submitted fake home loan applications to Westpac, National Australia Bank and ANZ Banking Group at least 18 times.

Aussie Home Loan mortgage broker Madhvan Nair admitted on Thursday making 18 loan applications totalling $5.6 million between 2012 and 2014 which had false borrower employment documents.

Of the 18 loan applications, 12 were approved by the banks, which resulted in home loans worth $3.7 million.

Mr Nair pocketed $10,000 in commission and cash payments for making the false loan applications.

I have said for a long time that this is an epidemic. A dark undercurrent of lies and deception that is NOT being thoroughly investigated by the lenders despite the fact that they KNOW its an epidemic!

These practices are silently contributing to the severity of the ultimate correction that is now long overdue.

Stats!

I’m  always intrigued, bemused and at times frustrated when I see ‘statistics’ so badly mauled in the Press.

Example. If you had $100,000 and got about 3% interest per year, compounded, your account would have a balance of around $116,000  after 5 years. Im assuming no tax, just to be clear.

Congratulations though, because your $100,000 has been eroded even faster by inflation.

When online and print articles proclaim that a 14.2% rise in the Median house price in Brisbane is a winner what on Earth are they banging on about?

14.2% compound over 5 years is a LOSS!

And the median is across all of Brisbane and can be so easily skewed by the odd high value sale. See previous parts of my blog for more detail on the ‘nil value of misquoted medians’.

Here on the Gold Coast, many Apartments, especially in the ‘basket case’ that is Southport, have dropped more than 20% in the last 12 months!

For the entire Gold Coast, sales volumes of Apartments fell through the floor,  dropping 10% in the 3 months to 31 December 2015. Just watch 2016! And see for yourself how poorly that sector will perform when March quarter figures are released. Year on year fall will be closer to 50%.

More soon.

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DISTRESS CAN COME FROM THE MOST UNLIKELY PLACES

When “Free Enterprise” gets it wrong, things can go pear-shaped quite rapidly.  Take the Brisbane Central Business District as a prime example – and if this goes as badly as I think it will, the effects will flow to surrounding areas like a cancer.

Buyers are gullible.  Who believes everything the salesperson and/or Developer tells them in their glossy brochures?    Well, the vast majority it seems.  People want a nice new shiny Apartment with a rental guarantee and massive capital gain to fund their retirement, buy a big boat and so on.  The promoters will say and write anything, as long as it comes with a Disclaimer as long as a telephone book (and about as interesting).

People do NOT do their own research.  Are they just lazy, or have so much money they can afford to lose $100,000.00 like dropping a $5 note on the ground?  Or is it that they really do not want to find out that they can buy far better value for sometimes 100’s of thousands less a few blocks away where it’s all established and happy?  Who knows?

The fallout from over 30 thousand Units/Apartments hitting a saturated Brisbane CBD market over the next 24 to 36 months will be catastrophic. This same thing happened here on the Gold Coast and was well publicised in the lead up, during and afterwards when folks lost their “investment” and their principal place of residence to the Banks as it was tied up as “security” for their supposedly bulletproof investment!

Prices of Apartments are falling – and fast – I would not be surprised to see discounting at the 15 to 20 percent range in the next 6 months.  Rents are falling much faster.  Apartments are sitting vacant for a couple of months, so cash poor landlords (many of whom have never had an investment property before) are going nuts at their letting Agent and saying “get me a tenant…at any price, as I am bleeding cash here!”

Well – there is your next problem.  Crap tenants.  Agents not only have to deal with a very large number of new Apartments to try and find tenants for, their time to check references is reduced so some very bad tenants will move in to new buildings and cause chaos.  Good tenants in the same building will cry foul and move out to get away from the drunken party animals, leaving even more apartments vacant and the cycle then spirals downwards.  There are many buildings here on the Gold Coast where the ratio of sole operator prostitutes to tenants in the same building is quite staggering!  Not to forget the Mobile Drug Labs!

As rents crash and buildings become full of rat-bag tenants, first-time landlords will “want out” so even more Apartments will come on to the market, adding to the glut.  These “distressed sales” will put more pressure on Developers, already staring at floors and floors of dead stock. Prices will “tank”.

When prices “tank” in one area, especially when you talk about tens of thousands of properties, the contagion rapidly spreads to surrounding areas as confidence falls.

I know I’ve been banging on about this rapid correction for a while now, but we are seeing the many and varied conditions required for a perfect storm, slowly but surely coming together.

Watch this space for when interest rates cycle upwards!

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HERE IT COMES!

Governments clutching at straws to balance the books. If people in business ran their businesses like the Government runs this country, there would be no jobs, no profits and no businesses.

But I digress.

Now Turnbull is talking about messing with Negative Gearing!  Oh My Lordy – ahhhhhh – idiots – didn’t a Labor Prime Minister do that is the 90’s? And look waht happened then!  Public Housing waiting lists stretched out for 5 or 10 years.  Those of us who has negatively geared properties back then (like me!)  just shook our heads and either immediately sold up back into private occupiers hands or held tight through 19 % interest rates and perhaps a reversal of Policy (which did happen thanks goodness) and came out the other side scarred but intact.

With this market at historical multiples, ANY jitter will accelerate the inevitable correction.  Playing with Negative Gearing is not a jitter boys and girls. It’s a bloody Tsunami ready to do some serious damage.

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PRESSURE FROM ALL SIDES

Hi.  As we approach Christmas there are slightly alarming FACTS emerging around the country that point to a hefty correction around the corner for our teetering real estate market.

I guess the first one should be the USA’s impending decision to start to raise interest rates as they see their economy “recovering” somewhat.  The rest is happening here Down Under.  If we have a 2 percent rise in interest rates here, 40 percent of home owners will no longer be able to pay their mortgages – period – FACT.  That many properties flooding the market will start an avalanche of sales that I won’t be joining in to buy any time soon.  Not until the  streets are running a metre deep in Mortgage Blood would I get back into property.

Aussie Banks have tightened their lending criteria.  So many (foolish) people buy OFF THE PLAN – Why?  They stake their place with a ten percent deposit.  Come near settlement time, the Bank , after re-valuing most of these places says “Sorry – we need 20% deposit or NO LOAN for the rest”.  With most of these properties selling for OVER $700,000.00 who has a lazy $70,000 lying around?  Almost none of them so 1.  The seller sues and buyer loses deposit and equity in other properties etc or 2.  Buyer just walks away and leaves $70,000 behind and fingers crossed the Developer does not sue them for failing to complete.  Has this happened?  Yes – many, many times, especially here on the (fake tan – false Gods) Gold Coast.

When the Fire Sales start, whole suburbs will be revalued and lenders will eventually be forced to re-evaluate their portfolios and admit that most of their loans are under water.  Who of these battlers can come up with extra money if demanded by the Bank – ahhh – about NONE – unless Mum and Dad come to the rescue and put the family home up for security – in a falling market, this is a really DUMB IDEA!  But they will do it and the Banks will accept it – until the market corrects some more, and they ask for more equity and so on…until both properties are at risk of default.  Combine this scenario with the aforementioned rate rise “elephant in the room” and once again you can see why I am nowhere near real estate right now.

Things are getting tighter and tighter too – just look at the continued growth in credit card debt – bad enough at 18 to 22 percent per annum, but what about Pay Day lenders, who are raking it in – double the number of loans in the last year or so (average size about $500.00 I believe), with punters paying interest of over 100% per annum annualised!  If that does not point to a lot of people “losing the plot” financially, I don;t know what does.

Combine that Genius Financial IQ with previously mentioned factors and we have a recipe for disaster.

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EVEN MOODY’S IS AGREEING WITH ME NOW!

13 May 2015 in Sydney –

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