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Is 2011 the right time to invest in real estate?

January 21, 2011 Leave a comment

NO! Now move on or read on :).

This post began life as a comment to an article by Michael Yardney: “Is 2011 the right time to invest in real estate?“. The comment was too large for their system so I decided to post the whole thing here. Michael sees “five green lights to selectively invest in now, in the early part of 2011″. I beg to differ…

It’s difficult to find a point where I have any agreement at all with the article! On point 3 – demographics – I agree with the premise but hardly the conclusions! Here are my thoughts, point by point.

1. The Australia economy is stable?

Last year, Queensland began experiencing the largest number of bankruptcies for many years. Is this stable? The cracks are showing WA too I hear. It does seem rather odd that the resource states of QLD and WA are both hitting the skids ahead of the pack. I don’t know what it is but there’s no denying it.

2. Increase demand but lack of supply?

Come to Queensland! The Brisbane rental market has the highest vacancy rate for some months. Gold and Sunshine coasts are in even worse shape.

3. Demographics – smaller households will push up property prices and rentals?

Well, I agree that there has been a growing trend towards smaller households, however your conclusion is trite. This will not lead to higher house prices and rents. Not now. In an ordinary market, an increase in demand without a sufficient increase in supply would indeed put upward pressure on prices. However, we do not live in ordinary times. We live in most extraordinary times. We are living at the top of the greatest credit bubble in history. Supply and demand are not driving house prices. House prices are a function of credit growth – almost exclusively. Other factors such as supply/demand are swamped by the gargantuan volumes of credit that people, banks and governments have thrown at this over the last decade (and longer). At appears that, in a credit boom, incomes (salaries/wages) do not keep up with interest repayments as the public take on larger and larger debts. I’m not entirely sure why they don’t keep up, but they certainly don’t. Once you approach a point where people struggle to take on more debt, you get a slowing of credit growth – disleveraging. Subsequently, you are in for credit contraction. This is when prices will come under extreme downward pressure despite what the underlying supply/demand may be. Credit contraction is associated with recessions and depressions and increases in unemployment etc. This leads to folks changing their minds about how much debt to take on, which leads to further credit contraction. Also people will change their minds about how many people can comfortably live in a house. People will go into crisis mode. Like in the floods in Brisbane, people will stay with friends and family – some temporarily and others on a more permanent basis. Once the delusion of the “ever increasing house price” is broken, people will not forget for a least a generation or perhaps two. This being the biggest credit expansion in history, I feel that the contraction will not be one forgotten quickly. This will be worse than the great Melbourne land boom of the 1890s.

4. Rents will strengthen in 2010?

I presume you mean in 2011, because they declined in 2010 ;). In Brisbane, rents have already been declining for a few months as vacancy rates have increased. This is particularly telling in bayside area of Wynnum/Manly. Places which previously would have rented for $750/week are going for $600. I was stunned that one spectacular place at Manly went for $600. It was over my budget though unfortunately. Other places that remain over-priced have been sitting their for months! On the cheaper end, 2 years ago it was almost impossible to find a house in Wynnum below $400/week but now there are many to choose from – with quite a few near the foreshore. The floods will certainly cause a temporary demand shock to the rental market in Brisbane but many flood victims have been able to get back into their homes despite flood damage on lower levels. Others will stay with family and friends – they still have their mortgages to pay! There are only 900 flood affected homes that are uninhabitable. That figure is across the whole of Brisbane. Some of those houses that have been sitting there for weeks and months might finally be rented to a flooder – until their home is cleaned up and rebuilt. Most will make their homes habitable within 6 months and so there’ll be a supply shock in the middle of the year.

5. Steady interest rates?

It’s difficult to know what will happen here but “stable” will hardly be a word to accurately describe it! The RBA might might not increase or decrease rates for a few months but would that lead to steady variable mortgage rates? Certainly not if our banks and other ADIs cannot fathom their funding issues. Personally, I’d imagine that the RBA will be concerned with slowing credit growth and will begin cutting the cash rate by the middle of the year. They will struggle to meet their “charter” but will fail on all three points in time because they have been complicit in growing this credit bubble with it’s false feeling of prosperity and wealth.

For those unfamiliar, the RBA charter is:

  • a. the stability of the currency of Australia
  • b. the maintenance of full employment in Australia
  • c. the economic prosperity and welfare of the people of Australia

Conclusion

We are in a very precarious situation. The damage is already done (i.e. the credit bubble has been blown to the point it can take no more air). Private demand for credit cannot blow this bubble higher at this point. This is why federal and state governments have been stepping in with massive intervention which they tell us will “help” affordability:

  • Grants, including the first home “owner” boost
  • Stamp duty concessions
  • Purchasing mortgages from the banks – another 4 billion recently
  • Allowing the banks to issue covered bonds. Something the banks have requesting from the regulator – APRA – for years. APRA has repeatedly refused these requests, explaining that covered bonds put depositors funds in jeopardy in the event of insolvency. Our PM, Julia Gillard, has used her special privilege as PM to override the usual requirement of an investigative report when changes are made to the banking act. Have you heard that there’s a national emergency our banking system that would require such measures? No, I’m sure you’ve only heard that the banks are strong…

The government are taking desperate measures in an attempt to keep interest rates down (e.g. covered bonds). I don’t know exactly where we go from here or how it will pan out. I do know that it will not be good. Not for savers like myself or for debtors like Michael Yardney (assuming he eats his own dog food and borrows to invest in property). However, we do know that ZIRP (Zero Interest Rate Policy, aka 0% cash rate) isn’t much help at this point, it does however seem to delay the inevitable so we can be fairly certain that it will arrive before long. Beware though: when we kick the can down the road, it becomes more and more leaden – the final kick may break our foot! The US and UK are prime examples of how ZIRP does not work, with house prices continuing to decline despite the policy and more declines predicted this year. The US have even tried to copy our “First Home Owner Grant/Boost” but with little success. There is no magic sauce that can fix this.

Now is the worst time in history to take on debt.

I highly recommend MacroBusiness to keep abreast of news related to the Australian property bubble and the economy in general.

Brisbane house prices fall in September quarter

November 1, 2010 Leave a comment

According to the latest report from Australian Property Monitors (APM), Brisbane house prices are -1.7% in the September quarter and +3.3% for the year to September. Unit prices are in worse shape at -2.8% in the September quarter and -5.3% in the year to September. Gross Rental Yield also appears to be under pressure, standing at 4.41% which is -4.4% over the year to September. Rents are flat in Brisbane both for houses and units.

   APM House prices report (PDF)          APM Rental Market Report (PDF)

If the next quarter is similar to this quarter for houses prices, then they’ll end up being flat year-on-year. This will confirm that the trend started in 2008 has reaffirmed itself. Last year with the boost to the First Home Owner’s Grant (FHOG), house prices rose 7.7% according to APM. However, in 2008, house prices were flat at 0.4%. With Consumer Price Inflation (CPI) running at about 3%, house prices are no longer keeping up with inflation i.e. they are falling in real terms.

Re: Tony Soprano and Robert Nozick

Dani Rodrik recently posted an article entitled Tony Soprano and Robert Nozick. It’s critical of what libertarians sometimes refer to as a stateless society.

The message from the people behind the Sopranos show seems clear: In a “stateless” Robert Nozick type of society, where everything should be arranged by individual, freely entered contracts, markets will deteriorate into organized crime.

I’m intrigued by the idea of a free society based on voluntary actions espoused by some libertarians. I like the idea.

Firstly, it must be pointed out that this organised crime isn’t happening in a stateless society – it’s happening in one with the “protection” of the state acting as “third-party enforcer”.

Secondly, in a stateless society, Tony may find himself in competition with legitimate companies since drugs would not be illegal.

Of course, the Tony Sopranos of the world will exist despite what kind of political system you have in place. Libertarians would argue though, that if you put ultimate enforcer power into a single institution (the state), then many of the Tony Sopranos will find themselves attracted to that line of work :). No society should tolerate mafia-style violence whether that violence is perpetrated by depraved individuals in a mafia-style gang or – indeed – by the state itself. Murray Rothbard wrote:

the State is nothing more nor less than a bandit gang writ large

The main distinction about a “stateless” society, sometimes overlooked or at least not singled out, is not the absence of a state, government or politics. Instead, it’s the absence of a coercive state: legitimised violence and force (i.e. threat of violence). The reason this happens is because the state (or government) is always considered coercive by most writers. The idea is that society should organise not around coercion but around cooperation – voluntary exchanges and actions.

For instance if some subset of society wanted to bail out GM, then they could do so via their voluntary contributions to such a cause.

I do still have a concern that a free and voluntary society could see the rise of a plutocracy. I’m consoled by the fact that that’s pretty much what we have at the moment via corporatism or crony capitalism! In a free society, at least you can choose not to deal with the individuals and companies that you feel are part of the plutocracy (sometimes called “voting with your” feet or wallet). In our coercive representative democratic society you have no option, no “out” – except perhaps if you have a majority – or a friend in parliament ;). I should write more about the problems of representative democracy another time – particularly the usual two party, left-right political system that is so common.

Categories: Economics Tags: , ,

Rental vacancies increased throughout 2008

April 11, 2009 Leave a comment

SQM research have released an index on rental vacancies Australia wide. They show that vacancies increased throughout the whole of the 2008 calendar year.

Australia’s residential rental crisis appears to be easing with new data suggesting vacancy rates have been rising throughout 2008 for Australia’s Cities.

Australia’s nationwide city rental vacancy rate stood at 3.3% in December 2008, which is up from 2.1% recorded in December 2007. Melbourne has recorded the highest vacancy rate at 3.9% while Hobart recorded the tightest rental market, with a vacancy rate of just 1.1%.

Rental vacancies appear to be the tightest in the nation’s affordable suburbs. However, in the middle to upper end of the market place there is an increasing oversupply situation with a number of inner and top end suburbs recording vacancies above five per cent and in some cases, above 10 percent. This is particularly the case in Sydney where suburbs such as Vaucluse (11.4%) are now oversupplied.

SQM’s vacancy rates are based on monitored online rental listings, adjusted for false listings and properties that have been withdrawn from the market within the monitored period concerned. The available rental properties are then divided into the total number of established properties available for rent as provided by the Australian Bureau of Statistics.

The vacancy rates and full methodology are available for free on http://www.sqmresearch.com.au. The data is also freely available down to a regional and postcode level with a monthly back series to 2005.

According to Louis Christopher, SQM Research founder and Head of property with ratings house Adviser Edge:
“Notwithstanding a seasonal dip from November, vacancy rates for most postcodes around the country have been rising throughout 2008. We believe this phenomenon, which is most notable in inner urban and affluent areas, has been as a result of more and more vendors entering their properties into the rental market after failing to sell their properties.

It is also to do with the fact that rental demand has been flat to falling, particularly in the affluent postcodes where upper end rental accommodation is perceived to be a discretionary expense that can be cut back during lean times.
“This combined with the re-launch of the First Home Owner’s Grant, will mean that vacancy rates are likely to keep rising in 2009. And so, we believe that rents are likely to now flatten going forward for most cities, notwithstanding remaining pressure on the lower, affordable sections of the rental market.”

Saving the planet – George Carlin

March 29, 2009 1 comment

This is very funny — worth a watch.

Stop the spending spree!

March 19, 2009 1 comment

You might be forgiven for believing the line that fiscal stimulus is now needed to help the economy. Politicians would have us believe that all economists are in agreement about this. However, this is not true. The Cato Institute put together a statement against fiscal stimulus signed by hundreds of leading economists including Nobel laureates.

Some highlights from the video:

  • “Lower tax rates and a reduction in the burden of government are the best ways to boost growth”
  • “I don’t think it’s going to stimulate anything. The problem with our economy is not that we are not borrowing and spending enough and we need the government to do that for us.”
  • “…more spending and borrowing is not going to solve it”
  • “Government just doesn’t work very well…”
  • “More government spending by Hoover and Roosevelt did not bring the economy out of the depression in the 1930s.”
  • “The new deal failed. It prolonged the depression. It deepened the depression.”
  • “The thing to do now is to reduce taxes and reduce of government.”
  • “This is just basically wasting money.”

So far, Kevin Rudd, Wayne Swan and the rest of the Federal Government have wasted in excess of $50 billion of public money on direct fiscal stimulus “packages”. That’s your money! It’s our money! In fact, it’s not even money that has already been collected – it’s your future income. It’s your children’s money. It’s your grandchildren’s money. Wake up Australia!

Read more about fiscal reality at Cato.

Helicopter Ben on 60 Minutes

March 18, 2009 Leave a comment

Do yourself a favour, watch Ben Bernanke on 60 minutes.

I wonder how many times Ben utters the word “stabilisation”? Let me know if you count them! :)

Some highlights:

  • Ben is certainly printing money to “capitalise” the banks. They don’t say how much except that the Fed has doubled it’s balance sheet.
  • “It’s not tax money” Ben says as if that makes it ok, “The banks have accounts with the Fed… so to lend to a bank we simply use the computer to mark up the account they have with the Fed. It’s much more akin to printing money than to borrowing.”. However, if the banks have been lent the “new money”, how can that possibly recapitalise them?
  • Ben trys to appear as a regular middle-class person, growing up in a small town and working himself through university. His grandfather owned a store on “Main St”.
  • His greatest fear is that there is not enough political will to complete his “stabilisation” of the economy, banks and markets. He appears to be giving himself a psychological out if the American public finally say “Enough!”.

Would Obama have to be concerned now about large bonuses being given out from the UK arm of AIG if they’d simply let AIG go bankcrupt in the first place? Those employment contracts would be worthless now if it wasn’t for the Fed.

This reminds me of the “Stabilization is Chaos” T-Shirt being sold by the Mises Institute. I didn’t understand it at the time but I’m beginning

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