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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which means that there is a wealth transfer going on, slowly but surely. Fat cats are getting fatter and more bloated while the balance sheets of the nation and of indivudual businesses and households are slowly but surely are being destroyed.
PuntPal – I was beginning to think that you had met with an accident. Glad that is not so. Guys here are the current funding rates for developments: –
Construction Finance
· GRV based facilities up to 70% of GRV
60% LVR: from 8.45%
65% LVR: from 8.65%
70% LVR: from 8.95%
Note: Pricing will vary state to state limited locations & Eastern Seaboard preferred
· Mezzanine Finance which bridge the gap between Senior Debt and the developers equity up to 80% of GRV from 18.00%
And they are not necessarily the available rates. Mezzanine finance at 18% means that any developer not highly organised or well capitalised will lose in this market.
In good times developers can make good profits, but when it is tough it is really tough. Part of the GFC fallout is the re-pricing of risk, which means higher development costs which equals higher end prices to the consumer, or developers lose money.
Houston we have a problem….
Whatever it is PuntPal, one thing is for sure: there is intense jostling for every dollar available. The bureaucrats want their cut, and so do the finance parasites, and bigger and bigger cuts at that. And what cannot be paid from current income, has to be borrowed – the net effect being the fat cats get more and more bloated, while the balance sheets of borrowers get more and more sick, until eventually their owners must default, loosing everything they worked for. A very depressing prospect.
We sure do have a problem, PF. Just looking at those figures is enough to make your stomach turn, but what I would like to point out is that with rates from hell like that, it is the banks themselves that make business borrowings risky. The higher they put their rates, the more likely it will be that the borrower is going to default. To my mind, the so-called repricing of risk by lenders is little more than a badly disguised screwing of businesses that have become dependent on finance to maintain day to day operations.
cb – that is a non bank lender. Banks are not lending for developments at the moment. Residential lending is easier and almost risk free.
lol, PF, thanks for pointing out that minor oversight by me. Saying that we have a problem is clearly an understatement.
I understand Meriton / Triguboff does not need any loans. Why is he still complaining?
How is construction risk today different from what it was five-ten years ago? Why are the local councils more hostile now and how are the lower interest/higher prices going to alleviate that?
PuntPal, I doubt banks curb development finance with a specific goal of blowing housing bubble. Although everything is possible, this behaviour would amount to a cartel and should be prosecuted by ACCC. However, they may have an acute case of group paranoia, continuing giving money to fund unproductive assets.
SV – I think Harry T was just giving his opinion as an interested party, in the same way that we are.
Banks do not conspire against the nations interest, but they do weigh risk in industry sectors and lend to those sectors on a risk weighted basis. That is if Wool producers were deemed to be risky over the next 5 years they would decrease their exposure to sheep farmers. It is the same for development. Many developers are quite small and just build 6 or 10 packs. They are the ones who struggle if not cashed up. If you drive around the suburbs most developments fit into that category.
In the past small developers made money because prices were rising, and even inefficient ones made profits. Over the next few years property prices will experience slow growth, so efficient builders/developers will be the only ones who survive. That will take some time for them to establish a reputation as such.
Until then banks will be wary.
PF – all that sounds very sensible by the banks, but how about the suggestion that they are in fact increasing the lending risks when they increase their rates and fees to particular sectors?
Other things being equal, the very act of increasing a business loan rate and associated fees and charges places those loans at higher risks of default. When my bank insists that I pay 2.5% higher rate on my borrowings for whatever reason they come up with, they are making me that much more likely to default on the loan because of the strain they put on the business’s cash flow.
This is what nobody seems to talk about, but to my mind, the lenders have been doing just as much to increase their lending risks as anything else I have seen during this GFC.
cb – that is why they take bricks and mortar security – if you default they sell you up. Sorry but that is how it is.
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