Australia’s property obsession is reaching a frenzy. There is talk of a being able to bet on a new property index, clearance rates are making news alongside gossip columns and some analysts are warning of an impending crash. One speaker at the Port Phillip Publishing’s ‘After America’ symposium pointed out that it was rude to discuss religion in polite company and so property was off the agenda.
Why the speaker thought they were in polite company remains a mystery. The symposium’s Q and A panel on Friday was thrown a few curveballs by inquisitive delegates keen to pin down speakers to predictions and opinions. They asked the panel of speakers about the prospects for inflation and/or deflation. They asked about the ideological causes behind the crisis the world can’t seem to shake off. And they asked about the survival prospects of Australia’s banks. You’ll have to get your hands on the various recordings to find out which speaker said what.
One delegate asked the panel about Australian property’s potential as an income producing investment. Being used to hearing all about negative gearing – the art of investing money into a money losing investment for tax reasons – we didn’t expect to hear property’s money making powers mentioned instead.
There might be a case that property could in fact earn a good return in regular cash flow terms. So let’s take a closer look at the world of Australian property these days…
Into the lion’s den
You might have heard of property spruikers. Now we’d like to introduce you to property preachers. Property preachers are much the same as spruikers, but with the added flair of a few desperate spiritual twists now that Australian property prices are no longer rising.
Like this one in The Age:
In an Australian-mainland first, the walls of the semi-detached homes in trendy inner-city Northcote will be made from the cannabis-based building product Hempcrete, pioneered by a Queensland company for its carbon-neutral properties.
Now that the headline for property articles can’t read ‘Housing hits a new high’, this one reads ‘Housing on a new, green high’. We’re not sure if the cannabis-linked pun was intended. But the property preachers sure are getting creative.
Australian property owners will be increasingly desperate to achieve alternative new highs over coming months if Aussie house prices continue to fall. As we wrote last week, Steve Keen pointed out that, adjusted for the timing of the peak in house prices, we’re on track with Japan’s 40% decline and not far behind the pace of America’s plunge.
So here is what The Age’s property preachers have come up with, other than using hemp in your walls, to make property ownership more pleasant:
If you’re negatively geared, a good way to improve immediate cash flow is to ask your accountant to submit an income tax variation form to your payroll office.
This reduces the tax rate charged on your wages by estimating your total end-of-financial-year tax position in advance. Rather than receiving a lump sum tax refund, you receive money evenly throughout the year.
Yes, if your property ‘investment’ is losing you so much money that you’re experiencing cash-flow difficulties, you can ask the tax collector to manage your cash more efficiently.
Or you could invest in investments that make money – a novel idea, we know. How much longer will investors believe in the idea that the capital value of an asset that makes a loss will go up? If you invested in a machine that costs you $2000 a month to own and rented it for $1500 a month, why on Earth would it go up in price?
And don’t start with any housing shortage nonsense. Rents would be bid up to make houses a profitable investment if there was a shortage. Simple supply and demand. All those homeless people and caravan dwellers who were counted in the ‘housing shortage’ data are more likely to rent than buy.
One last thing before we get to the kind of investments that make money rather than lose it. It was encouraging to see the property preachers admit the following in The Age:
Paul Osborne, of the buyer’s advocate firm Secret Agent, says it’s a smart move to understand household indebtedness in specific areas to snare a bargain.
He says many households are managing to service only the interest repayments, not the principal amount, of their home loans. As a consequence, the best buying opportunities tend to be in suburbs that have high proportions of household debt.
Now calling your property preaching firm ‘Secret Agent’ is a bit of a worry to begin with. But here’s the point – if over-indebted homeowners make for home buying bargains – and suburbs with high proportions of household debt are likely to yield good buying opportunities – where does that leave Australia as a whole? According to Vanessa Tripodi at CreditCards.com, ‘Aussies lead world’ when it comes to debt.
Steve Keen chimes in with this chart from his website http://www.debtdeflation.com/blogs, comparing our level of mortgage debt to the US’s. Sure enough, we’re worse.
Australia is the world’s over-indebted suburb. So, is Secret Agent Osborne up for a buying spree? Hopefully not, because Aussie house prices here are also world beating. This chart shows real house prices in Australia have far outpaced the US bubble.
Demographia released its 8th International Housing Affordability Survey and Australia’s cities once again featured as some of the most unaffordable. So what happened to Osborne’s relationship of areas with high debt having lots of bargains? Well, it’s a matter of timing is our best guess. The bargains are yet to emerge.
You see, debt bids up an asset, as well as being the factor that causes a plunge in prices. It’s a simple bubble story. Once people believe prices will rise, they are happy to go into debt to buy the asset. That adds buying fuel to the story. At some point, there is either too much debt relative to income, or the idea of buying an asset to make a loss simply begins to look too ridiculous to continue.
Then, all those over-indebted people sell in a panic and the bargains that Osborne is talking about will emerge.
But until that happens – and property does become a cracking investment – where are the safest and most profitable investments for you to put your money in? More on that tomorrow…
for Markets and Money
The “After America” Archives…
Debt-onomics and the Coming Debt-ocalypse
2012-03-17 – Nick Hubble
The End of Empires
2012-03-16 – Nick Hubble
Are Investment Ideas Useful?
2012-03-15 – Nick Hubble
A Chinese Mini Communist Revolution
2012-03-14 – Nick Hubble
The Final Countdown
2012-03-13 – Nick Hubble