Tag Archives: fear

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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MORE COMMENTARY ON HOW OVERHEATED OUR HOUSING MARKET IS

It’s not front page news but it’s news nonetheless.  Increasingly, major Banks and Government business units are becoming more wary of the overheated state of the Australian housing market.  There was also scathing reports about the New Zealand housing market published recently by “people in the know” so we are not alone.

Barclays are not happy saying that our house prices are currently overvalued by 12 percent.  Well, that’s not to scary one would imagine.  On the surface, no, but read further into that – take a peek at my previous posts.  If a “correction” were to start, it would not just “stop at 12%” and say “there ya go – all corrected – lets move on – happy days”.  Corrections such as the one I say “must happen” will be much worse than just the 12% Barclay’s economists say.

Once it gets going it will be a mudslide and will over correct, as all markets do, so, 20% is not unreasonable and nor, for that matter, given the parlous state of a lot of mortgages today, 25%.

Your $600,000.00 family home becomes $450,000.00 and that $150,000.00 that you were going to draw out and live on, or travel on, or party on before you die, is GONE!

I keep saying to people who own debt free, substantial homes – sell it now and buy it back in 2 or 3 years for a big discount…  In the meantime, rent yourself a luxurious place and enjoy the trappings that your current home perhaps doesn’t have.  I know this strategy won’t suit everyone, but  people who have $1.5m tied up in the family home and take a 25% hit, maybe 30%, is a really nasty thing to contemplate.  The correction will also take away your ability to use your home for collateral at the level it is now – so “sell-take the cash – rent – and come back when things cool off”.

It’s not just me saying it…

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EVEN MOODY’S IS AGREEING WITH ME NOW!

13 May 2015 in Sydney –

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EVEN GIANT BOND MANAGER PIMCO HAS A VIEW LIKE MINE NOW

Please take a look at this article –  http://www.smh.com.au/business/banking-and-finance/pimco-calls-on-banks-to-do-their-bit-and-raise-capital-20150428-1mv1ly.html

I rest my case – AGAIN!

If you’re a property owner – get out NOW, put your money away, rent and wait til the bubble burst-eth!

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MAYBE IF I KEEP TALKING

Maybe if I keep talking about a major imbalance in the market that is, and has been for a long time, overdue for a correction to reality, people will start to listen.  I’m OUT of residential real estate, and have been for a few years now.  The downside risk is just too high.

And today, Thursday 26 March 2015, the Reserve Bank has issued a warning that cheap credit has and will continue to fuel a housing bubble.  Hello!!!

Just Google  RBA cheap credit housing bubble.  There are many links to the various articles in today’s news.

Once again, I rest my case.

 

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THE ELEPHANT IN THE ROOM

Sydney Morning Herald today – all credit to them for this article – thanks ladies and gentlemen….

I continue to argue to all who’ll listen, that this rate cut is just fuel to a fire that will burn a lot of people when it finally rages out of control.  What is not reported is the high number of people who are diving into this super heated market who are not sophisticated investors. I recently chatted with a young couple at a Cafe who I overheard talking about buying a house.  Their SOLE source of advice – their blue collar, working class parents who owned precisely ONE HOUSE between them, bought 20 years ago!  And of course their “friendly” Broker who had given some really awful advice, far outside his legal ability to do so.  I left them pretty sure they were going to buy a nasty house in a nasty street and a nasty suburb for a “top of the market” price and rue the day they did.  This scenario is repeated hundreds of times a day all over the country.

Let us not forget the dodgy companies who still prey on people’s fear and greed to “stitch them up” into overpriced negatively geared properties with “rent guarantees” and other incentives paid for out of their overpriced purchase.

And, of course, our crazy overseas buyers who, in many cases, just want their money out of their “old” country and into the supposedly “safe haven” of Australia.  These people are losing all sense of propriety and in certain sectors of the market are causing chaos.  This chaos filters down and sideways into other sectors, fuelling speculation, rumour and fear that others may miss out on an endless bull run, and greed for the capital gain that, in my not-so-humble opinion, will never eventuate – or if it f does, will be short lived….

Sydney Morning Herald, today —- A deteriorating economic outlook sparked the latest interest rate cut, but the Reserve Bank remains concerned about the continued strength of house prices and investor activity in some pockets of the housing market.

The minutes of the RBA’s February meeting, released on Tuesday, show the board decided to cut Australia’s cash rate to a new record low of 2.25 per cent after new figures revealed the economy wasn’t doing as well as was previously expected.

But the bank also remained concerned about the continued strength of the Sydney and Melbourne housing markets.

“Housing price inflation had moderated from the rapid rates seen in late 2013, but remained high and in Sydney and Melbourne had been well above the growth rate of household income,” the RBA said.

The RBA said growth of investor credit had continued to increase “at a noticeably faster rate” than owner-occupier housing credit.

And a range of indicators suggested further growth of dwelling investment in the near term, the bank said.

The RBA said it would keep a close eye on developments in the housing market, as well as the impact of moves late last year by the Australian Prudential Regulation Authority, designed to temper investor activity.

“Given the large increases in housing prices in some cities and ongoing strength in lending to investors in housing assets, members also agreed that developments in the housing market would bear careful monitoring,” the RBA said.

“They noted that it would be important to assess the effects of the measures designed to reinforce sound residential mortgage lending practices announced by APRA in December.”

Despite the housing concerns, the RBA said it decided to cut the cash rate after indicators of economic growth began to look weaker than it previously expected them to be.

Economic growth was expected to pick up later than the RBA expected, while unemployment looked set to peak higher than originally forecast.

The central bank also took another swipe at the Australian dollar, repeating its familiar line that “a lower exchange rate was likely to be needed to achieve balanced growth in the economy”.

The RBA said it had considered acting at the March meeting instead but decided to cut in February, giving the opportunity for more detailed communication of its decision in the quarterly Statement on Monetary Policy, released three days after the February 3 meeting.

“On the basis of their assessment of current conditions and taking into account the revised forecasts, the board judged that a further reduction in the cash rate would be appropriate to provide additional support to demand,” the minutes said.

END OF ARTICLE

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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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‘Rich Dad’ author Robert Kiyosaki warns investors to avoid real estate in Australia

Yes, even Robert says this place is overheated and he is warning all who’ll listen to give our real estate market a wide berth.  The reasons he gives are sound, and echo my sentiments expressed over the last few years.

Kiyosaki said that foreign investment was spiking domestic prices and forcing local buyers to pay well above the true market price.

“Foreign investors are queuing up to buy anything they can get their hands on. This is causing average Australian punters to think they need to start buying now. It has created a bubble,” Kiyosaki told Fairfax Media.

Again – do not go there.  Its just ridiculous and whilst commentators here are saying its all good, there are still people near where I live suffering huge capital losses on sale.

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YET ANOTHER PERSPECTIVE THAT ITS ALL GOING PEAR-SHAPED

Housing leverage hits a record high  an article by Article by RP Data senior research analyst,
Cameron Kusher

 

Based on data from the Reserve Bank, the ratio of household debt to disposable income and housing debt to disposable income has increased over the June 2014 quarter with housing debt now at a record high level.

Each quarter, after the Australian Bureau of Statistics releases its data on financial accounts, the Reserve Bank (RBA) releases their ‘Household finances – selected ratios’ data sheet. The information provides a timely overview about the level of household leverage.

The latest data for June 2014 has just been released and it showed that at the end of the June quarter, total household debt to disposable income had increased to 151.1%. The figure had increased from 150.2% the previous quarter and 147.7% a year earlier. The ratio is now at it’s highest level since March 2008. As the first chart shows the ratio has been relatively flat over recent years but is now starting to rise once more.

 

Based on data from the Reserve Bank, the ratio of household debt to disposable income and housing debt to disposable income has increased over the June 2014 quarter with housing debt now at a record high level.

Each quarter, after the Australian Bureau of Statistics releases its data on financial accounts, the Reserve Bank (RBA) releases their ‘Household finances – selected ratios’ data sheet. The information provides a timely overview about the level of household leverage.

The latest data for June 2014 has just been released and it showed that at the end of the June quarter, total household debt to disposable income had increased to 151.1%. The figure had increased from 150.2% the previous quarter and 147.7% a year earlier. The ratio is now at it’s highest level since March 2008. As the first chart shows the ratio has been relatively flat over recent years but is now starting to rise once more.

 

When you look at the key driver of the increase in the ratio, it is no real surprise that leverage in the housing market is the major driver. As at June 2014, 137.1% of the 151.1% total household debt figure or a record high 90.7% was housing debt. In fact the 137.1% ratio of housing debt to disposable income is a record high and up from 136.1% the previous quarter and 133.3% a year earlier. As was the case with household debt, you can see that housing debt was relatively unchanged for a number of years but has recently started to rise once again.

 

The RBA breaks this data out further to owner occupiers and investors. Of that 137.1%, 90.9% (or 66.3% of the 137.1%) was to owner occupiers with the remaining 46.2% (or 33.7% of the 137.1%) to investors. The proportion of overall housing debt to owner occupiers is trending lower at the moment while investor debt rises.

The data also includes information on the value of assets to disposable income. According to the statistics, the ratio of total household assets to disposable incomes is 801.9%. This figure is now at its highest level since March 2008. This 801.9% is split into housing assets which account for 433.6% and financial assets which make up the remaining 342.2%. The housing assets figure is at its highest level since June 2008 while the financial assets figure is lower over the quarter, down from 342.9% in March.

 

The chart highlights the trends over time. What they indicate is that households have consistently stored a majority of their wealth in housing assets as opposed to financial assets. Unfortunately the data is not available prior to 1988 so we don’t have visibility on the results prior to that time.

Chart 4 looks at the annual change in the ratio of housing debt to disposable income plotted against the annual change in combined capital city home values. Although the ratio of housing debt to disposable income is rising it is doing so at a much more moderate pace than it has in the past despite quite strong growth in home values. It is difficult to know exactly why this is happening however, the RBA has reported in its latest Financial Stability Review that the typical mortgagee has more than 2 years’ worth of mortgage repayments sitting in mortgage offset or redraw facilities. This may go some way to explaining the moderate rise. Alternatively, a rise in foreign buyers could also be a contributing factor. Other potential reasons include lower loan to value ratios or investors purchasing using significant equity in their principal place of residence.

 

The data highlights that household and housing debt is increasing and with home values continuing to rise we would anticipate a further rise in both measures over the coming quarter. The RBA has previously stated that further increases in household debt are not ideal. With housing debt at a record high level and investor activity at near record highs, I don’t think it is any surprise that the RBA is looking to macroprudential tools to take some of the heat out of the housing market.

 

You don’t need the charts – the words tell it all.  Be very careful folks…

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