Your Thoughts on the Property Cycle

I’m in the middle of putting the finishing touches to the presentation I’m giving at Port Phillip Publishing’s ‘The Great Repression’ conference, which kicks off tomorrow night in Port Douglas.

I’m super excited about the two-day event. The highlight will be a Q&A session I’m doing with investment legend Jim Rogers. There aren’t many people that have Jim’s success and longevity. The market is an unforgiving place. To survive and prosper for as long as Jim has is a testament to his market smarts.

So I look forward to picking his brain and finding out what makes it tick.

Your old Markets and Money editor Dan Denning will be there, too. I caught up with Dan yesterday. I’m definitely looking forward to hear what Dan has to say.

Then there’s Jim Rickards, Satyajit Das, Phil Anderson, Vern Gowdie…and the rest of the Port Phillip Publishing crew.

We sold out of this special event in a matter of days. If you missed out, don’t stress. We’re recording every minute of every presentation, as well as some behind the scenes action. You’ll be able to watch it all. Click here to book your ‘virtual seat’ at the conference.

Last week, I asked for your thoughts on the property market in Australia. Plenty of you wrote in telling me to ask Phil Anderson for his thoughts.

I know Phil and his property cycle work well. He is without doubt the best authority on land cycles in Australia, if not the world. His central contention is that all economic wealth capitalises into land values.

It does so because governments don’t tax this ‘economic rent’, as Phil calls it. As a result, the private sector bids up the price of it and gives us recurring property cycles.

But I wanted to hear your views, especially if you have experience of investing through the cycles.

So for today’s Markets and Money, I thought I’d share a couple of responses with you.

Readers Respond to Australia’s Property Market

The first letter comes from a ‘baby boomer’ that’s invested in property since 1977. Here are his concluding thoughts on the market as it stands now:

1. It is the level of debt that will cripple investors in the end, no matter what the interest rates. For the first time in my life, I found my ability to knock over the final $100K on my own home loan the toughest 3 or 4 years I have ever had financially. Sure I could have downsized (but I love the house and its central location) or I could have returned to work for a couple of years (I’m too lazy and enjoying my freedom too much) so I tightened the belt and stopped spending.

2. I don’t think too many young families can just stop spending, it’s not that simple with kids, and I think many other investors will soon realise that the prospect of high capital returns on investment real estate will be so far in the distant future, and the sacrifices involved in hanging on to a property with ever diminishing returns will simply be seen as too tough and essentially not worth the effort. 

3. That is the point when they rush to the exits along with many others and it will be ugly and destructive. 

4. I would hate to be a young buyer today. Just growing a deposit is almost impossible. I hope some have the patience to sit it out and watch and wait till the deck of cards fall.

Finally, I am one of the “boomers” at age 63 who says we have had it all very easy (yes, with a little financial sacrifice), we paid no university fees, walked out of university into  secure, permanent jobs and have ridden the longest, craziest housing boom in a century. I call that about 90% good fortune and about 10% skill!

The next response comes from someone who sells mostly off the plan apartments for property developers in Brisbane. He says:

The property market in Australia has basically worked in 7 year cycles for nearly 100 years. Sydney goes first then Melbourne follows, the prices in both those cities reach levels where rents and yields are unsustainable for investors and they move on to Brisbane where by the same happens here.

Prices in all three cities plateau or fall in varying degrees and the 7 year cycle starts again. Simplistic? Yes, but the gross incompetence and sheer bastardry of the banks have a great deal to do with these cycles.

A good example is the past 7 years! Following the GFC the banks basically pulled the pin on lending to developers for construction, even calling in loans on projects that were well under construction on loans the banks had already approved.

After existing stock was sold and the banks basically not lending for 2 or 3 years a shortage of apartments in all 3 cities was created, the banks built up a pile of money and then released it into the market again.

The developers were able to borrow, the banks lent with gay abandon causing the current “oversupply” of apartments being touted by the media in the Eastern seaboard cities.

Now the cycle is starting again only this time being aided and abetted by the most appalling government interference in the market. Queensland has lifted it’s stamp duty rate for overseas buyers to 3%, other states by more. There is now a $5,000 application fee for an FIRB certificate, which there is no guarantee that it will be approved. The banks are again setting arbitrary limits on how many apartments can be sold to overseas buyers in any one project.

Another unconscionable act of the banks has been to re-value loans, e.g:  A Chinese/South African/Singaporean buyer may have put a 10% deposit on a $500,000 apartment in Brisbane say 1 year ago. The building has an estimated 2 year build time, so at the time he signed the contract to purchase, the bank would have valued the property at $500,000 and given provisional approval based on that valuation. Now the banks are going in and revaluing those apartments 20%, 30% and more below what the buyer thought he was committed for.

This has put a lot of Chinese buyers in deep trouble, at the same time that the Chinese government are cracking down on funds leaving that country.

These buyers are having to scout around and raise the extra money from family, friends and loan sharks to settle their property or lose it.

There  is a lot of money to be made over the next 2 years by cashed up people providing mezzanine finance at 10% plus to enable those buyers that the banks have screwed over to complete their contracts.

Over the next 6 months a lot of projects that were started when the banks turned on the taps again about 4 years ago are coming to completion and there will be a lot of apartments for sale.

So! The government and the banks screw the buyers by foisting charges, regulations, low valuations, etc on buyers, the apartments gradually get sold, no construction takes place for about 2 or 3 years, the banks build up a pile of cash and loosen their valuation and lending requirements and the whole 7 year cycle starts again.

Finally, a response from a Sydneysider and his views on the market in that city:

As a Sydney resident the answer is pretty simple, few people are selling if they are thinking of relocating within Sydney. It’s not worth it as there are no bargains in Sydney anymore.

People in the north shore suburb where I live are only selling to downsize not to relocate. As many of my friends in the 50–60 year old demographic are now entering the “grandparent stage”, they are not keen to downsize from their “¼ acre block”. Some, including me, are using their equity to assist the children to buy something, so selling is not feasible.

So the problem is no stock, not enough to satisfy demand anyway, people aren’t selling , it’s not like other years where pockets of Sydney were experiencing capital growth, now we have suburbs that were once considered of lesser economic status commanding prices of over $1m .

In my experiences past property price increases were never the result of wealthy international buyers as it is now, it was just low interest rates, so not only do we have an influx of international buyers/investors, we have also had, in the past 5 years , a relaxation of property ownership under SMSF rules that has opened the flood gates for “baby boomer investors” using their SMSF to purchase properties for investment.

People like me.

So the question is, what is going to dampen demand to levels where property stock exceeds it? I am of the belief that the Chinese are buying here in big numbers in preparation if anything ever happens to change Chinese Government policy. The crackdown on corruption and the growth of the middle class has been the catalyst of this so far.

Based on these comments, there is no widespread slowdown or crash coming anytime soon. Apartments might suffer some falls, but houses built on land aren’t slowing at all.

Our property guru Phil Anderson reckons a mid-cycle slowdown will hit in 2017 or 2018, followed by a big boom into 2025.

If this sounds hard to believe, I suggest you get a hold of Phil’s work and see for yourself. You can check it out here.

Cheers,

Greg Canavan,
For Markets and Money


Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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