Before I get on to today’s topic, Australia’s most dangerous man hit the headlines again on Friday.
And like every megalomaniacal madman, there’s always a mum stood behind them.
Last Friday’s Australian Financial Review (AFR) contained the headline, “How Henry’s mother saved the economy.”
It retold the story how our hero, Treasury Secretary Ken Henry’s mum asked Ken if she should take all her cash out of the bank when markets started to meltdown late last year.
Rather than give you the answer, see if you can guess how Emperor Ken responded.
Did he:
a) Tell his dear old mum to withdraw every last cent from the bank,
b) Tell his dear old mum that Australia’s banks are the safest in the world due to their strong balance sheets, tough regulation and sound management, or
c) Tell the Fairy Ruddfather to put the taxpayers on the hook for billions of dollars by introducing the retail and wholesale bank guarantees, and handing out $10.4 billion of other people’s money as ‘stimulus cheques’, so Emperor Ken’s dear old mum could get a good night’s sleep.
You’re getting good at this.
That’s right, the correct answer is ‘c’.
Apparently, the following is what Emperor Ken said to the Fairy Ruddfather. According to Ken anyway:
“I think you [Rudd] need to do something and I think you need to do it very quickly and it needs to be big.”
It’s the kind of comment you’d expect from someone so delusional about their own ability. Clearly the King Poo-Bah of pen pushers knows exactly how to ‘fix’ an economy.
It’s just a shame that after billions of dollars have been poured into the economy, it’s not worked one jot.
But we knew that. And the reason is simple…
In order for the government to pour billions of dollars into the economy it had to withdraw billions of dollars from the same economy.
And of course the main problem is that the dollars that have been ripped off from taxpayers have been spent on things nobody wanted – school buildings, hospital buildings, roads, bridges, etc…
“How can you say that nobody wanted them? Everyone wants school buildings, blah, blah” the stimulus lovers will claim.
Well that’s simple. If people really wanted them or even needed them, then the same people would have voluntarily funded them. The fact the money needed to be ripped off from taxpayers is proof school buildings are low down the priority list.
Instead, the population has something higher up the priority list.
And that brings us to today’s Money Morning.
Because we could hardly come to the investment property capital of Australia – the Gold Coast – without looking at the property market.
But even before we got here we took a few minutes to check out real estate on the Gold Coast.
And if we base the results of our research on the first twenty apartment sales we came across, then six out of thirty, or three in fifteen, or one in five apartments in Surfers Paradise are subject to mortgagee auctions or where the vendor “must sale.”
Maybe that’s just how it is up here. Perhaps mortgagee auctions are just par for the course.
The Ray White Real Estate sales shop on Cavill Mall proudly announced on a sandwich board:
“Apartment, $179,500 Cash Flow Positive!! Mortgagee auction.”
As I say maybe that’s how it is up here.
No pain, no gain. You’ve got to be in it to win it.
Don’t believe a word of it.
Despite what the property spruikers will tell you, the housing market is in desperate trouble.
And it’s not surprising these properties are getting repossessed by the banks.
As we took a stroll round the corner we looked in the shop window of 21st Century Real Estate.
And that gave us all the reasons why so many properties end up on the books of the banks.
From what we could see, a property investor up here isn’t going to get much change out of ten grand a year in rates and body corporate charges. Add on other maintenance fees and loan interest charges and the investor is well under water – not just as a one-off, but every year.
It’s not just the big priced properties either. The apartments being sold under mortgagee auctions were low-end properties too – some priced at no more than $120,000.
Clearly if an investment property is up for a mortgagee auction then it is not cash flow positive.
Not when you take into account all the fees and the mortgage repayments.
Anyway, we plugged in the numbers for a $120,000 investment loan. The repayments are about $760 per month. That’s a decent sized repayment amount.
Maybe not if that’s your only mortgage commitment. But if that’s in addition to the mortgage against your home then it’s a fair chunk on top.
But then we’re told by the spruikers that due to the tax breaks and the rental income that the “taxman will fund your rental property.”
Obviously that’s not the case.
With so many investment properties on market as mortgagee auctions and new building projects a dime a dozen here on the Gold Coast, talk of an undersupply in housing is just a downright lie.
Rather than there being a shortage, it’s merely the case that due to the tax deductibility of investment properties, resources are being misallocated into investment properties rather than owner occupier properties.
Everyone wants to be a property investor. Everyone wants to be a landlord.
Simple logic will tell you that not everyone can be a landlord. There have to be tenants to rent the properties out to.
The number of mortgagee auctions of investment properties tells you there are plenty of investment properties where the tax man isn’t paying off the mortgage. Where the tenant isn’t paying the mortgage…
And where the total costs of holding a property are so oppressive that investors have no other option than to be forced sellers.
Maybe another investor can take advantage of this and buy the property. But that isn’t the point.
The point is the numbers don’t stack up. Property investors are being suckered into buying apartments where the numbers just don’t stack up.
As I mentioned before, the real problem is that this is creating a massive misallocation of resources.
Debt is being used to buy and build what are largely unproductive assets.
Assets which once built just create a drain on the finances of those unlucky enough to buy them. Assets which produce no income or growth for anyone apart from the builders and property managers.
Builders and property managers who just build and manage more unproductive properties, creating an even bigger misallocation of resources.
It’s easy to see why property investors don’t make money.
When you’re buying an investment property you’re paying the retail price for it. Just the same as if you pay the retail rate for anything else. There’s no way for the investor to mark up the property for resale unless they spend money on improvements.
Even then, those improvements have to be made for below the retail cost otherwise again there is no mark up opportunity.
How can the property investor do that? Well, they can do the work themselves of course.
But that means sacrificing something else. They either have to devote less time to their ‘day job’ or they have to sacrifice some of their free time. The so-called profits from investment properties don’t just happen from buying at the retail price, waiting a few years and then selling at the retail price.
That just doesn’t happen, even though the spruikers will try and claim property investing is a guaranteed and simple way to make money.
All this debt that’s being poured into the cesspit of property investment means funds not being invested in real productive businesses and industries. Businesses and industries that could provide genuine income and growth.
And so tomorrow, if interests rates do rise, that’s more interest dollars going to the banks, more dollars that can’t be spent or invested elsewhere, and the closer the property market moves to its ultimate collapse.
Cheers.
Kris.
60-Second Market Round Up
by Shae Smith
The S&P/ASX 200 closed up on Friday finishing at 4,643.20 a 68 point gain. However, a dismal run on Wall Street on Friday night has seen the ASX 200 drop sharply on market open.
The Dow Jones Industrial Average closed at 9,712.73, down a huge 2.51%. Despite the news last week of a stronger than expected economic growth, traders were showing concern about the so called ‘recovery’ from recession. Information that consumer confidence was down only drove the Dow further into the red.
In Europe the FTSE finished lower by 93 points to 5,044.55. Even though the market reacted positively to the news from the US, the FTSE couldn’t climb up and finish in the black. Learn more about the UK market here.
The Nikkei took a tumble by 143 points, closing to 10,034.74.
Gold declined again as the US dollar gained some ground.
In Australian dollars is trading at $1,163.59, while in US Dollars it is trading at $1,044.90. And the price of silver in Aussie dollars is $18.17 and in US Dollars it is $16.32.
The Aussie dollar against the US dollar took a pounding on Friday night, driven below the 90 cent mark again, to USD 0.8967. The Aussie dollar dropped against the Japanese Yen, closing to JPY 80.44.
Crude oil, slumped overnight, closing at USD$77.00.
For the biggest movers on the market yesterday click here…
Listen out for the RBA’s announcement regarding interest rates tomorrow afternoon. I won’t be surprised to hear they have been increased 25 basis points.
Shae.
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PF – that’s all good and well – EXCEPT in the case when property prices start to tumble… then the banks lose
Sandra – very rarely actually. All home loans over 80% LVR are insured against loss, and commercial properties are finance around 65%. LVR so there is good margin for error. That is not to say they can’t lose, but it is not as prevalent as many think, especially in residential sector lending. When you see a “Mortgagee in Possession” sign up it will be the insurer who takes any eventual loss, and they collect on very house to support the few that fall over, and they cross cover with other insurers.
If we saw prices dropping by 30% or 40% they would be in trouble, and the government would have to make a choice between MASSIVE support levels for the banks (ala US and IK levels) or let the world as we know it collapse whereupon the government would instantly lose any support it had in the electorate.
Naturally the government took the lowest cost option (and best political outcome) by supporting the residential sector with stimulus, and they will continue to do that if required for as long as it takes. What amazes me is that so many don’t comprehend that simple fact.
Put yourself in Swann and Rudds shoes, what would you do. Commit suicide or stimulate until the problem goes away. Run an honest poll of any politician and you will get a 100% vote on stimulus if put in the same position. Show me one government who CHOSE to let their country go bankrupt.
PF – I couldn’t agree more with your summary of the situation. That is exactly what is occurring. The government’s electoral fortunes depend on propping up arguably the twin pillars of the Australian economy – mining and real estate. But that doesn’t mean I think it’s what they should be doing.
The least they could do is announce that increasing house prices is the key to future prosperity and get it out on the table. Say openly that we’re keeping house prices high so that people can feel wealthy, draw down on their equity, keep banks solvent and generally keep the economy ticking over like it currently is. People could make decisions with confidence then – they would know that houses really are a safe investment and direct funds towards it. But the government is going about it sneakily and refusing to declare its real intentions. It’s all about saving the jobs of builders (which are less than 10% of all jobs) – yeah right. Talk about spin.
The government NEEDS to continue to prop up residential real estate and therefore the banks. To not do so is almost certain electoral death. But for how long can it keep doing so? That’s what I wonder.
We’ve seen cut-backs to the stimulus recently. Insulation batt handouts have been cut from $1600 to $1200. Solar panel rebates have been tinkered with. Even the much lauded school buildings cash splash has been cut back somewhat. This tells me that the government does not have an endless bucket of money. If they are going to continue propping up real estate, they’ll need to cut funding from elsewhere. Or they’ll need to go further into debt to do it. Or they’ll need to print money. Or a combo of all three. The question that remains whether the public and the Opposition will let them get away with it. We’ll see.
Ralph – agreed. They will try to cut back and conserve capital where they can, but they could increase the stimulus if needed.
As Buffet once said “never bet against the Fed”
But I think what’s holding them back to some degree is the Zimbabwe option. Sure, governments could stimulate and print money willy nilly to solve also sorts of pet projects such as real estate prices and many others – even more then they already have. But surely central banks care about the value of their currency and will act to keep that in check. Any central bank and/or government that goes too far will suffer capital flight.
We hear a lot about the Fed always being able to back out of a corner with rampant inflation. But I don’t reckon they would be keen to exercise that option unless they really have to. Not unless they’re ready to trash their currency in the process. So in Australia, the I think even though Rudd wants to get re-elected and would surely be tempted to open the fiscal and/or monetary floodgates to ensure that he does, the government doesn’t have a blank cheque if they want to retain their integrity.
Ralph – you are spot on. Hyper-inflation is enormously politically and socially destabilising and is not a viable scenario in a democratic society. It is the bogey man of the loony libertarian/gold bug fringe. An acceptance of a Zimbabwe/Weimar-style hyper inflation would by defintion mean an acceptance of a Zimbabwe/Weimar-style society.
Far more likely is a systematic, orderly and negotiated debt repudiation process. You can always blame the need for massive debt write-offs on the faults of previous administrations, but the blame for hyper-inflation always lies with the current administration. If you accept that politicians want to live and feed their families just like everyone else, the answer to your question follows naturally.
Ralph I doubt that we will become like Zimbabwe.
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