The Rumblings Of Discontent Continue

Here’s a great article from Steve KcKnight.

The Aussie property market seems to be running out of steam at an increasing rate, evidenced by key property statistics, consumer confidence, and interesting commentary appearing in unusual places (see the recommended reading link below).

Property Statistics

RP Data (now known as Core Data) have just released their November Data Home Value Index and it declined by 0.3%, evidencing a slowing in the growth rate across the country as a whole.

Over November dwelling values appreciated in Sydney (+1.0%), Brisbane (+0.4%), Perth (+0.9%) & Hobart (0.2%), and declined in Melbourne (-2.6%), Adelaide (-0.3%), Darwin (-0.8%) and Canberra (-0.5%).

As can be seen in the image below, there appears to be a declining ‘top’ in regards to percentage growth for the last three market peaks.


Furthermore, judging by the shape of the graph below, we seem to have reached a market peak with a classic ‘head’ shape emerging.


If the past is any indicator of the future, the previous two ‘head’ formations have preceded stagnate and negative growth periods of between 1 to 3 years.

Rental yields are remain precariously low, with the 8 Capital City yield being 3.7% pa for houses and 4.5% pa for units. Given interest rates are circa 5% pa, this means that every median house in every Aussie capital city would be negatively geared.

The Economy As A Whole

GDP numbers released yesterday failed to impress, missing expectations and leaving economists wondering where future growth in the Aussie economy is going to come from given the mining boom has ended and commodity prices are in decline. Journalists are calling it an income recession, as real net national disposable income was negative for two consecutive quarters.

The Aussie Dollar hasn’t got too many friends right now, dropping to fresh four year lows against the USD. Bad news for anyone planning a visit to Disneyland this Christmas!

Consumer confidence remains in the red, and I suspect we shall remain in pessimistic territory for a while yet.

The only bright spot has been the collapse in the oil price putting a smile on the face of anyone driving a V8 (or any petrol car, for that matter). Did you read my recent blog about oil prices? If not then you can read it here.

But just be careful about the joy you feel watching the petrol price fall. There are some good articles pointing to recessions for significant world economies; in particular Russia (and beware a World Superpower in financial trouble!)

Steve’s Summary

Low interest rates have certainly fuelled a property price revival. But it’s been patchy. Sydney and Melbourne have done really well, Brissie less so, and pretty much the rest of Australia has been stagnant.

Yet even the kick along from low home loan interest rates is fading.

September mortgage statistics revealed that for the first time ever, investors made up more than half of all new loans. This is a significant warning sign, as a market dominated by speculators will often exhibit significant volatility.

Overall, while home loan interest rates remain low (and might even go lower in 2015!), it’s getting harder and harder to mount an argument for strong house price growth in the first half of next year.

The message for the moment is: remain alert, not alarmed but fasten your fiscal seatbelts, just in case of unexpected economic turbulence.

All the best,

– Steve

Beware The Greater Fool

Early in my investing career I was told a story that illustrated the concept of ‘the greater fool‘. It’s remained front and centre in my mind ever since and given the irrational behaviour of the Aussie property market, I feel it’s prudent to tell you about it as forewarned is forearmed.

The story told to me is an account of how, in the midst of the roaring (19) 20?s, a stockbroker left his desk in a stockbroking firm on Wall Street and caught the lift to the ground floor, possibly to make a lunch appointment with a colleague.

As he got into the lift he overheard two busboys, lower paid young men whose job it was to operate the lift, talking about how they had invested in stocks and made quick profits.

After hearing the tales of easy money and gossip of hot stocks, he immediately went back to his desk and sold down his share portfolio.

For many months later his peers scoffed at him for selling too early and missing out on higher profits as the market went higher and higher still.

But then the crash came, and with it much wealth evaporated.

When asked later how he managed to exit before the crash that sparked the Great Depression unfolded, the broker said that when he heard the busboys talking he realised that instead of operating on the back of solid economic fundamentals, the stock market was being bid up by irrational speculators.

Without understanding what they were doing, or exactly how the company they were investing in was going to make money, fool investors relied on another (greater) fool to come along and bid up the stock in order to drive the price higher.

The market peaks when the greatest fool buys. That is, there is no greater fool willing to pay a higher price than the fool who had just bought. Once that happens a crash is imminent.

(If you want to learn more about this concept then Google ‘greater fool theory’.)

The reason I’m retelling this story now is that I’m becoming more and more concerned with what I’m reading in the papers about record property prices and irrational behaviour at auctions.

Bluntly, how many greater fools can there be?

These record prices are not supported by the current or expected performance of our economy, job prospects, or rental yields. Surely we are in fool territory where values are being bid up on the belief that prices cannot, and will not, fall. This is simply wrong.

Consider Moranbah in Queensland. Rents for a 3 bedroom home in March 2012 were a whopping $2,000 a week. Attracted by high returns, median house prices rocketed up to $710,000 as investors outbid each other to get a slice of the positive cash flow action (median house prices in March 2009 were $176,435). It was happy days indeed.

Then the mining boom ended, and as jobs were shed, rents fell as housing supply exceeded demand. Prices followed and today a 4 bedroom home rents for $340 a week and the median house price is $372,000.

The principle here is that any housing market characterised by more investors than home owners runs the risk of a sudden price collapse when the reason for investors being attracted to that property ends causing them to need to exit quickly.

That is, if investors cannot afford to hold the property then supply can suddenly increase as properties are offloaded, and if there are not a sufficient number of buyers (which there won’t be if the majority of buyers were investors in the first place), then price can fall, fast as sellers compete to exit by slashing prices.

In respect to Moranbah it was the high rents that ended as the job market softened and vacancies increased, but the same holds true in respect to the removal of tax incentives (beware NRAS investors), or the removal of tax concessions (beware heavily negatively geared investors)..

Rarely do you see the reason for the change in conditions coming, but you will certainly feel the nasty effects of being caught up in a whirlwind downturn.

(As a side note I have to note that several prominent hot spotting sprinklers advocated buying in towns like Moranbah and have quickly moved on to other areas and have hushed up their failed projections, whereas investors who followed their advice are left with the nasty consequences.)

So the message is simple…

Don’t be fooled by the record prices being reported in the papers. Without the required economic strength to back it up, it’s shaping up to be more mania than genuine money making opportunity.

As I have said before, it is always a great time to buy a great property, but it’s fast becoming an awful time to buy a dud. Let the buyer beware.

So, enough from me… what do you think will happen to property prices over the next 12 months? Share your thoughts by leaving a comment below. I’d also love to hear the good, bad, and the ugly if you went to a seminar and were advised to purchase in mining areas.

And now for something a little more lighthearted…

A central banker walks into an Italian restaurant to order a pizza.

When the pizza is done, he goes up to the counter to get it. There the shop owner asks him: “Should I cut it into six or eight pieces?”

The central banker replies: “I’m feeling rather hungry right now. You’d better cut it into eight pieces.

I’m off on a short vacation in Tassie. Until we speak again, stay safe and remember that success comes from doing things differently.

Steve McKnight


Growth Warning Emerging

The latest unemployment numbers released last week were disappointing to say the least: Australia’s unemployment rate jumped to a 10 year high and is now on par to when the GFC unfolded.

Australia Unemployment Graph

Now, unlike then though we don’t have a mining boom to insulate our economy or a government predisposed to spending our way to prosperity.

I noted with interest that for the first time since 2007 our unemployment rate of 6.4% is higher than the US (6.2%).

We are now on par with the UK, but their employment situation is improving whereas ours is worsening.

Peering behind the headline stats makes for pessimistic analysis, especially if you’re 15-24 years old as youth unemployment is presently 14.1%.

Apparently the culprit is a slump in part time work opportunities, but whatever the cause, the story behind the story is that the Aussie economy seems to be on the skids and the Federal government appears bereft of strategies on how to stop the rot. What ideas they do have have been poorly received by the public and aren’t going to be easily actioned as the Senate is now dominated by headline grabbing idealists.

While we remain in this political deadlock and vision vacuum (which started during the Gillard – Greens alliance) it’s hard to see much of a silver lining to gloomy economic cloud hanging over our heads.

So how does this affect the outlook for the Aussie property market?

One of my real estate mentors, Stu Silver; a man with 30 years experience investing in real estate and survivor of several downturns, once said this to me: “Steve, as goes jobs, so goes real estate.

With this in mind, although long term I remain a firm believer in the Aussie real estate growth story (because we simply aren’t building enough houses to cater for demand), in the short and possibly medium term it’s hard to mount a case for expecting house price growth above inflation.

There is also the possibility we could be at the precipice of a sustained real estate decline as forecast by the likes of economist Steve Keen. If so then I’m reminded of the words of Warren Buffet: be greedy when people are fearful, and fearful when people are greedy.

Here are three friendly suggestions to consider:

1. Build a cash buffer.

Now is a a risky time to be living on the financial edge, and for that reason I’ve decided to increase my personal cash holdings.

As a minimum it would be sensible to hold cash reserves of at least three to six months living expenses so if something unexpected happens you are not in immediate financial hardship.

Action: Calculate how many months living expenses you have right now.

2. Exit marginal and unprofitable property deals.

A softening real estate market means real estate takes longer to sell, so your ability to exit a bad deal on price and terms of your choosing is closing fast.

If you have a dud deal in your portfolio you’re carrying then be careful it doesn’t become the millstone that causes you to drown.

Action: Review your asset portfolio and identify the poor performers.

3. Remain alert, not alarmed.

Financial ignorance leads to loss, so even though the news may be ordinary, don’t be spooked by it or ignore it. There is always opportunity for those who bother to look.

Action: Keep up to date with the latest economic news.

Perhaps a joke will help…

A man is flying solo in a hot air balloon and realises he is lost.

Spotting a man below he lowers the balloon and shouts, “Excuse me sir, but can you help me? I promised my wife I would meet her half an hour ago, but I don’t know where I am.”

The man below says, “You are in a hot air balloon, hovering approximately 30 feet above this field. You are between 50 and 52 degrees N. Latitude, and between 62 and 64 degrees W. longitude”.

“You must be an economist,” says the balloonist.

“I am,” replies the man. “How did you know?”

“Well,” says the balloonist, “everything you have told me is technically correct, but I have no idea what to make of your information, and the fact is I am still lost.”

The man below says, “You must be a politician.”

“I am,” replies the balloonist, “but how did you know?”

“Well,” says the man below, “you don’t know where you are, or where you are going; you have made a promise which you have no idea how to keep, and you expect me to solve your problem. The fact is you are in exactly the same position you were in before we met, but now it is somehow my fault.”

Author: Steve McKnight


Positive Cashflow Property Home Study Pack

Here’s are some great training videos from the Positive Cashflow Property Home Study Pack featuring:

1. Steve McKnight

2. Cherie Barber

3. Rowan Burns; and

4. Helen Collier-Kogtevs