Tag Archives: business

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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SYDNEY MORNING HERALD COMMENT – 13 FEB 2015

http://www.smh.com.au/business/rba-waves-red-flag-over-very-concerning-sydney-property-market-20150213-13eakh.html All you have to do is read what the Reserve Bank of Australia is now worried about.  Thanks to the Sydney Morning Herald for providing this story. I keep saying to all who will listen that this market is completely MAD, rising with no fundamental except for some perverse notion of “affordability” espoused by Lenders of all shades. Youngsters with massive mortgages, underpinned by guarantees and liens taken over their parent’s family home will pay the ultimate price when this House of Cards comes crashing down.  They do not realise that a 2 percent rise will mean their repayments will rise 50%, never mind the tens of thousands who currently enjoy interest-only honeymoon rate loans that will, over the next 12 to 18 months, revert to Principal and Interest at a rate significantly over market. I’m so glad I’m leasing right now, on the side lines and watching this unfold.

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CONFIRMATION

Full credit to Australia’s ABC News for this one

The international body that represents central banks has released data that puts Australia near the top of all measures of overvalued housing.

In its latest quarterly update, the Swiss-based Bank for International Settlements (BIS) has published extensive historical analysis on historical home prices in a large number of countries for which reliable data is available.

Confirming a recent analysis by the International Monetary Fund, the BIS has found that Australian home prices are higher than they typically have been when compared to rents and incomes.

Despite having had no real (inflation adjusted) property price growth over the three years up to when the BIS figures were taken at the start of 2014, Australian homes had the equal fourth highest price-to-rent ratio and second highest price-to-income ratio.

Australian home prices were 50 per cent higher than usual relative to rents, and around 40 per cent higher than usual when compared to incomes.

“A priori, this could be a reason to expect a price correction in the future,” the report’s authors cautioned, referring to countries where prices were more than 20 per cent higher than these historical averages suggest they should be.

In the months since the figures were taken, Australian home prices have increased much faster than both rents and general consumer price inflation, meaning that they would have deviated further above these historical norms.

The BIS analysts warn that these types of price rises in already overvalued markets increase the risk of future declines, especially where wages are not growing strongly –Australia has recently had wage growth that has failed to match inflation.

“This might lead to a reversal or moderation of recent growth or a further sliding of prices,” the BIS warned.

“This argument would be more compelling for markets where prices have grown rapidly in the recent past, and where income growth is projected to be rather moderate.”

The BIS has also compiled data that look at house prices back to 1970, with Australia’s current index reading of 200 second only to Norway’s growth over the past 44 years.

Out of the 14 advanced economies examined by the BIS, only the UK has house prices that come close to matching Australia and Norway for inflation adjusted growth over that period.

Recent Reserve Bank research showed that it was likely that most Australians would be just as well off, or perhaps better off, renting than buying at current home prices.

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HERE IT COMES FOLKS – WE NEVER, EVER LEARN…

I’m copying all of this excellent article from the ABC’s Alan Kohler.  Read into it what you will, but really, “are you kidding me?”… Do we never learn?  The Perfect Storm I’ve written about already is now definitely upon us.  This rise, if you will, may be rapid in some sectors of the market but when interest rates inevitably rise, the fallout will be catastrophic.  Here’s the article from ABC News Online  17 April 2014

The mortgage-backed securities market is booming and bodes well for bank competition. But it’s driving house prices higher and making it even harder for first homebuyers, writes Alan Kohler.

After five years of near death, the residential mortgage-backed securities (RMBS) market in Australia is roaring back to life, which is both good and scary.

Good because the banks might finally get some competition from non-bank lenders again; scary because the resurgent supply of prime and subprime mortgage money from yield-hungry investors is not being matched by the supply of new land to lend against, so it’s just driving house prices higher.

We are seeing two quite different markets being mixed together: one for credit that is active and plentiful (call this one nitro) and one for land that is short (call it glycerin).

In 2013, $26 billion worth of RMBS were issued in Australia, which was the most anywhere in the world, according to Deloitte partner Graham Mott. So far in 2014 the market in mortgage securities is still active, with big issues from AMP, AFG, Pepper Home Loans, Heritage Bank and Liberty.

In a speech to the Economic Society yesterday, Assistant Governor (Financial Markets) of the Reserve Bank of Australia, Guy Debelle, said: “Deal sizes have increased, especially for RMBS issued by the major banks, where the average size has increased to $2.5 billion.”

He added that issuance has picked up for the major banks as well as regional banks and non-banks (i.e. credit unions and mortgage originators), with “a number of smaller issuers returning to the market after an absence of several years”.

“RMBS … spreads, over the last year or so, have remained at their lowest level since mid 2007, despite the significantly larger volume that has been brought to market.”

A large and growing proportion of the securities are backed by non-conforming, or sub-prime loans, paying higher yields. These are about half “low doc” (not much detail on the borrower) and half to borrowers with bad credit ratings.

According to one issuer I spoke to this week, the buyers are apparently church funds, health insurance companies and state treasuries that prefer the risk/return equation of sub-prime mortgages.

But most of the RMBS being issued are AAA securities and, surprisingly, a lot of them are being bought by banks, which are, in effect, funding their competitors.

They are doing it because the furious competition, and therefore high interest rates, for retail deposits has filled their coffers and there isn’t enough demand for credit to soak it up. Buying AAA-rated mortgage securities is an easy way to make a return, even if you don’t know the end customer and can’t sell them insurance or super.

Money has been pouring into bank deposits for a few years, and now, once again, it’s pouring into the arms of “shadow banks” at lower interest rates, reminiscent of the non-bank lending boom from 2003-2007.

The typical AAA-rated RMBS issue is at 105-120 basis points above the bank bill swap rate, which is 2.7 per cent at present.

That puts the wholesale cost of funds at 10-50 basis points below retail deposit rates, and is allowing the non-bank lenders, as well as smaller banks, to gnaw away at the massive market shares of major banks.

The only problem with this idyllic scene is that all the money and lending competition is only pushing up real estate prices.

There simply isn’t enough land being released in Australia to match either the demand for housing or the supply of credit.

Bob Day, the Family First Senator-elect and one of Australia’s biggest home builders, calls it the “Baptist/bootlegger” problem.

The Baptists and the bootlegger were both in favour of prohibition for different reasons: one for misguided morality, the other to make money. He says that about 15 years ago a similar (non-collusive) coalition of environmentalists and developers formed in Australia to restrict land release.

The result, says Day, is that while the cost of building a house has come down, getting land to put it on is hard and expensive. He says that 20-30 years ago the price of a block of land was about 40 per cent of the cost of a house; now the land cost is 2-3 times the cost of a house.

The result is that instead of being three times the average wage as it used to be, the cost of housing in Australia is 6-10 times the average income. First homebuyers are now totally excluded from home ownership unless their parents support them.

It’s not a bubble – yet – because it’s merely the true forces of supply and demand working (which is the definition of a non-bubble).

Supply is restricted (of land, not houses) and demand is being fuelled by immigration and the plentiful supply of credit to investors looking to take advantage of negative gearing.

And the rejuvenation of the RMBS market will only increase the supply of credit even further and lower its price.

Next: perhaps a recommendation from the Financial System Inquiry chaired by David Murray that retirees be forced to take at last part of their super payout as a pension rather than a lump sum (so they can’t blow it on a world trip before reverting to the aged pension – which would also help take the pressure off the government-funded aged pension).

That would give another boost to the RMBS market because mortgage-backed securities are perfect investments for private annuities and pensions.

In other words, the supply of credit for mortgages, both prime and subprime, is only going in one direction – up – and it wouldn’t take another subprime mortgage bubble to produce a glut of cash available to be lent against real estate.

By the far best solution would be a big increase in the supply of serviced land in the outer suburbs of Sydney and Melbourne, but it would be slow and the infrastructure would be expensive – too expensive for the first homebuyers themselves to pay, or for governments for that matter.

Will the Coalition Government regulate the supply of credit or restrict negative gearing? Unlikely.

So it looks like your super will have to go towards buying the kids a house: they’ll never be able to afford one.

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PERFECT STORM BREWING – 03 APRIL 2014

It’s all adding up….well, for me anyway, so let’s see how this pans out.

Retail stores are closing at an alarming rate in the USA and Europe, and yes, here in Australia.  My local large shopping centre has just had 5% of tenancies “walk” at the end of their leases, with strong suggestions from people I know who are “in business” but only just, in the same centre, that up to 10% of the tenancies could walk in coming months.  Unlike 2005 for instance, there aren’t 40 people waiting in the wings to get into this centre.  There is no-one.  No registers of interest, no active list, reserve list or any kind of list.

Large shopping centres are dinosaurs and some people just won’t admit it.  Ridiculous rents forcing retailers to charge equally ridiculous prices and therefore having no chance against online retailers with cheap-as-chips warehouse rent in the middle-of-nowhere.

There are otherwise intelligent people (I think) spending nearly AUD$700 million on rebuilding and revitalising another massive local shopping/destination centre.  The reasons they cite to try and justify their decision are plain ridiculous – the place will be an albino pachydermata.

If shopping centre owners drop their rents to a level where traditional retailers can once again run a half decent business, capital values will plummet.  Flow on to smaller commercial and industrial properties is sure. Lack of return, loss of jobs and its not hard to see residential housing taking a dive as well.  Don’t think so?

Massive interest rate cuts have failed to stem the drop in residential values.  The butchering of statistics continues.  I was recently challenged as to why my view differed from the those reported in the news and delivered startling “real results” to back up my view.  Yet again a number of properties in a suburb were quoted as delivering massive price rises that contributed to the percentage rises being quoted in the news.  Shallow analysis of each of these properties showed that there were, in each and every case, factors that impinged on the price rise and therefore those properties should have been excluded from the ‘results’ for that suburb.  Trouble is, you take those properties out, and the price FALL is dramatic.

Factors that made for selling prices being reported as UP from previous acquisition prices were as I’ve reported before in my blog.  Reconfiguring a home to cater for two families. Significant and costly renovations not taken into account. Rezoning of land adding to it’s base value.  And so on.  And… no IN and OUT costs taken into account to arrive at a nett gain (if any).

Make no mistake that fiscal policy makers are all out of ideas for getting our economy going.  The USA think-tank  has screwed up and nothing is working over there.  I know many people in the USA in business and they tell me it’s rubbish that side of the Pacific, more than a little scary and they’ve little to no confidence.

The USA 30 year mortgage rate when I was there in 2013, was about 3.4%.  A year later and its nudging 4.5%.  If the same rate of rise occurs here (and it will) our rates will jump 30%!  Imagine mortgage repayments for all those silly sods who dived in with their 90% plus loans on minimal deposit using their Mum n Dads place as extra collateral…  Most are paying over $500 a week – that could easily jump to $650 a week – and wipe out their ability to EAT!

An interest rate jump of that magnitude will cause a REAL and long overdue drop in house prices.

CHINA – for a start you can’t believe most of the numbers that come out of ‘Official’ China however the word from people I know who travel regularly to that mysterious land is that things are crap. I’ve heard it said that China is at about 2004/2005 on the Western GFC Clock.  When their house-of-cards comes down it will not be pretty and the flow on will be nasty.

Its all coming to  ahead.  If you have property, sell it NOW and take advantage of the pseudo reports and spin to get some sucker to cough up.  RENT, or take a long holiday.  And buy back in when the dust settles.  Go back in this blog to see just HOW CHEAP housing is in so many desirable areas of the USA – not the ghettos of Detroit but NICE PLACES TO LIVE.

We are waaay to expensive and need a correction… It’s coming…

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MARKET UPDATE – 21 JANUARY 2013

I hope you all had a great Christmas with family and friends and that 2013 will be a great year.

I’ve been reading, calling and delving into the market this last week to uncover just exactly what is going on.

Well – the Stock Market continues to defy logic and trend higher but despite a dramatic series of interest rate cuts, the housing market is still sick. Continue reading

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ANY FOOL CAN SELL A DOLLAR FOR SIXTY CENTS!

Today I received the following flyer in my letterbox and of course was very interested to know what the property had sold for.  I searched online for the original advertisement and found it advertised at “Range $759,000 – $819,000”.  This is a most ridiculous practice and if any Agent ever suggests it to you – tell them NO!  If you, as a buyer, were confronted with an advertisement like this, where would your first offer lie?  At $805,000?  No, I didn’t think so.  You would treat the lower figure as a price the Sellers MAY accept so you would pitch under that.

Of course that actually happened, with offers starting at around $705,000.00

Good Grief!

Good Grief!

Continue reading

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MARKET – UPDATE 12 DECEMBER 2012

I keep calling, asking, digging and interpreting.  The truth is being kept from us.  The main offenders are Banks and politicians as they don’t want a stampede in the marketplace.

For example did you know that in the June quarter nearly 30% and in the September 2012 quarter more than 25% of commercial property sales were made in distressed circumstances?

Continue reading

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