Real Estate: Make Sure You Know the Rules of the Game

While the RBA umms and aars about what to do with their interest rate policy, there’s no doubt what the rest of Australia is doing: calling their mortgage broker to buy real estate.

Australia’s largest mortgage broker, AFG, reported its largest day in terms of volume ever this week. That’s in a history spanning a quarter of a century. In one part of the Australian Financial Review on Thursday, they put the figure at $280 million. In another section, they had it at $250 million. I won’t quibble too much. The point is it’s a LOT for one day’s work.

Perhaps the key quote is this: ‘AFG helps to arrange about 10 percent of all new home loans, so its numbers are a useful leading indicator of how the mortgage market is performing. The numbers include refinancing as well as new lending.

The last line about refinancing is important. Consider the implications of a lower interest rate when older loans on a fixed rate come up for renewal. Refinancing will lower the servicing costs of that debt. Cash flow for those borrowers will improve.

This is even more relevant on commercial mortgages. Most commercial loans are fixed, and often interest only. Let’s say you’d fixed your commercial loan seven years ago at 9.5%. You can now do that at 6.31% and get it for 10 years. If you’ve got a good history, you could probably get the banks to fight over that and lower it further.

What else do the AFG numbers tell us? Lending growth is accelerating. $4.3 billion in home loan sales for February is 16% up on the previous year. They’re up on last year by 25% in NSW, 21% in Victoria, 31% in South Australia and 15% in Queensland. They’re down in Western Australia, impacted by the slump in mining fortunes.

I spoke to real estate expert and buyer’s advocate Catherine Cashmore on the DR podcast this week. She suggested to stay away from the West. Listen in over the next couple of weeks if you’re interested in her take on the whole real estate market.

It’s certainly a market you want to get right, because it’s the biggest asset base in the country by far. Data and analytics company CoreLogic have released their housing and economic update for March. It shows you exactly what I mean.

Click to enlarge
Source: CoreLogic

This is important in the context of a Bloombergarticle this week that showed that the value of land and housing in the United States has skyrocketed over the last several decades. It’s the same here in Australia; the underlying structure of both countries is the same. This is precisely what we show you in Cycles, Trends and Forecasts.

Unfortunately, this comes as a surprise to practically everyone. That’s because mainstream economics keeps teaching us false assumptions about how the economy actually works. Perhaps they should play the board game Monopoly more often. They might have a better idea about the real world, not the fantasy one they live in.

One of the features of modern economics, as opposed to classical economics, is how it intertwines the return to land with the return to capital. Do not make this same mistake.

Or, as writer Peter Orszag put it in Bloomberg:

In the lasting debate over Thomas Piketty’s book [Capital in the Twenty-First Century] on outsized returns on capital, a significant fact has been obscured: If you exclude land and housing, capital has not risen as a share of the U.S. economy.

If you’re surprised, you’re not the only one. Intuition suggests this capital-output ratio should be higher today than it was in the early 1900s. Yet, in the U.S., capital excluding land and housing has been roughly constant as a share of the economy since the mid-1950s, and is lower today than at the turn of the 20th century.

Or, as we put in over at Cycles, Trends and Forecasts, the Rent takes the gains in the end. The wealth of society will be captured in the land market. So if you want to build wealth, make sure you understand this process. You can learn this here.

Of course, there’s been a lot of news lately about a possible crackdown on foreign investors. I don’t think it’s large enough to deter serious buyers. That’s if it even survives the pressure it will come under from the property industry and other lobbyists.

The real estate and banking industries are already creating the platform for watering it down, with articles already appearing suggesting the ‘tax’ will derail the housing boom, impair Australian economic growth and drive off foreign capital needed for jobs.

I mentioned Monopoly earlier. There are two features worth noting. The bank never goes broke, and the rules of the game don’t change.


Callum Newman
for Markets and Money


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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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