How to Profit from the Aussie Property Boom

I currently have a bet going with a former colleague.

Back in 2012, during a heated debate about the Aussie property market, this coworker bet that the average Australian house would be worth $1 million 10 years from then. Being bearish on property on that stage, I scoffed. There’ll be a property crash by then, I figured. Nonetheless, we agreed the winner would receive a free lunch.

As of June this year, the Australian Bureau of Statistics announced the mean dwelling price in Australia at $669,700. Bringing the total value of housing to a whopping $6.6 trillion.

Given that, since 2012, the average Aussie property has grown 40% in value — with six years left to run on this bet, and no property crash in sight — chances are high that I’m buying them lunch.

Unsurprisingly, Sydney has contributed significantly to the price growth in the past five years. Between 2012 and 2017, average property prices in the harbor city rose 77%.

In the interest of reminding millennials everywhere that they can have their smashed avo on toast but not a house, newspaper The Australian recently revealed the incredible house price growth in Sydney, as you can see in the image below.

Sydney Price Growth 28-08-17

Source: The Australian
[Click to enlarge]

The red areas you see indicate the number of ‘million-dollar suburbs’. As you can see, the growth in million-dollar suburbs in our largest city has quadrupled in five years.

The ridiculous house price growth has mostly been contained to Sydney. Elsewhere, the price growth varies. Other major cities have varied from 4% in Darwin to 40% in Melbourne.

What happens to Aussie house prices next, though, remains to be seen. Moves from both the Aussie government and international governments — in addition to Australian regulators — are trying to slow dwelling values in Australia. In the case of Australia at least, I believe governments are stepping in to control housing-related debt, rather than slow a key driver of the Aussie economy.

The Sydney Morning Herald reports that Chinese investment in Australian property is now down 69% compared to this time last year.

This drop comes on the back of the Australian government increasing taxes for foreign investors. As well as the Chinese government tightening investments made outside the Middle Kingdom. The National Congress in China has listed investments that are ‘casinos and defence technology’ as banned. But hotels and property development are only categorised as ‘restricted’.

More than anything, China is trying to slow capital flight from its economy. This is where people take their money out of a country and invest it in another one, draining the local economy of capital and investment.

Yet capitalists will always adapt and overcome.

A commercial report from property research firm JLL says that higher taxes and government restriction won’t slow Asian investment in Australia.

The report, titled ‘The Future of Chinese Residential Developers in Australia’, suggests that the 10 largest Chinese developers are still yet to enter Australia. Rather than set up shop as a property development, they’ll just sneak through the back door. They’ll establish themselves first through an infrastructure set, and then move to property development once established.

As for the higher taxes lumped their way, it doesn’t matter. ‘Australian-deal’ sizes are still much lower than the US or UK. Meaning our market is far more accessible to Asian investors than the other two Western ones.

Chances are, this will go a long way to supporting property prices over the long term.

If you follow Phil Anderson’s Cycle, Trends and Forecasts, you’ll know that he believes the Aussie property boom has much further to run. Through studying centuries of stock and housing market trends, Phil has acquired remarkable insight into the cycles of rising and falling markets. He believes Aussie property prices are only half way through their boom cycle. You can read more about his analysis here.

Profiting from property — without buying property

It bothers me whenever policymakers try to step in and control things they should be keeping their hands free from.

The recent actions from the Australian Prudential Regulation Authority (APRA) is one such example.

Over the past six months, APRA has made an enormous song and dance about ‘reining’ in the big banks and protecting the country from our massive $1.6 trillion mortgage debt.

APRA started by insisting that the Big Four banks reduce interest-only investor loans from 40% of total new lending to 30% earlier this year.

As of next month, it looks like all new banks will meet this criteria, except for Westpac [ASX:WBC]. WBC has leant heavily on providing new interest-only investor loans. For the month of July, WBC had reduced its interest in this segment from 52% to 44%.

While APRA demanded control of the lending market, banks seized the moment and targeted property investors. The big banks have bumped up the investor interest-only lending rate across the board. Unlike owner-occupiers, investors are less likely to shop around for the best deal. After all, if everyone is raising rates, why bother?

To be frank, I hardly expect the big banks to target investor interest-only loans for too long. Assuming investor interest in property remains high, this is an easy sector for banks to target to increase their business when it suits them. It’s a form of revenue I’m sure the banks will be reluctant to give up.

Part of APRA’s attack on lending, though, included extending their oversight to the non-authorised deposit taking institutions (non-ADIs).

To put it bluntly, APRA hasn’t given a rat’s backside about what the non-ADIs have been doing since the banking sector was deregulated in the late 1980s. Suddenly APRA has decided it cares very much about what’s going on in the second-tier lending market.

It’s an odd move, given second-tier lenders only account for 1% of total Australian mortgage debt.

Along with extending interest in non-ADIs, changes to bank lending standards are seeing people who want a home loan head one of two ways: non-bank lenders, or using mortgage brokers instead of banks.

Instead of being locked out of the housing market, people are using mortgage brokers. Increased regulation is ensuring that obtaining a home loan remains confusing.

Since December 2016, the major banks have lost ground to mortgage brokers. At the end of last year, banks accounted for 51% of mortgage lending. But, come June this year, mortgage brokers are now responsible for 51.5% of all new loans, and the big banks’ share has fallen to 47%.

For investors, however, this could be a win. Stricter compliance and tricky legislation showed up in Mortgage Choice Ltd’s [ASX:MOC] financial results this year. Arguably the barometer of the mortgage broking business, the $295 million market cap broker increased their loan book to $53.4 billion, with full-year profits jumping 13.5%, to $22.2 million.

Flying under the radar is the lesser known — but slightly bigger — $329 million mortgage aggregator Australian Financial Group Ltd [ASX:AFG], which is benefitting from more people using brokers.

The company reported a net profit after tax (NPAT) of $30.2 million — an increase of 33% on the 2016 financial year. Furthermore, the company now has a whopping $133 billion loan book through commercial and residential debt.

APRA may be trying to rein in the big banks by clamping down on lending restrictions. But if you can’t afford to buy property, perhaps there’s an opportunity to invest in those that do take on the debt. Then you can have your smashed avo and eat it too.

Kind regards,

Shae Russell,
Editor, Markets & Money

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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