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The missing listings mystery

The missing listings mystery

We all love a good mystery, but don’t usually expect to find one lurking in our property markets. What is the mystery all about? The riddle is about the number of listings, or rather the lack of them in our largest property markets.

Listings are properties that are for sale, and when buyer demand falls, as has been the case since the end of the Sydney and Melbourne housing booms, listings tend to rise because more owners are trying to sell their properties but fewer properties are being sold.

The laws of supply and demand dictate that prices decline when demand falls and supply rises, but here we have an enigma that is befuddling property market analysts, because as the graph shows, the number of new house and unit listings has been falling in both Sydney and Melbourne since the middle of 2017.

While fewer people are buying property, the number who are trying to sell is falling as well. The only possible explanation for this conundrum is that potential sellers believe that the housing market is about to turn around.

Owners appear to be waiting for some signs that the market has passed its low point and that buyer demand is about to rise.

Are there signs that we have passed the low point

These indicators might be a rise in auction clearance rates, an increase in sales, interest rate cuts, rising yields, falling vacancy rates, growth in housing finance approvals or even an actual rise in median sale prices.

But what do you suppose will happen if some of these signs occur and they encourage more owners to try and sell? The number of properties listed for sale will start to rise, and the recovery could be short lived – which is what economists call a dead cat bounce.

This is created when potential sellers hold off because they think that prices have hit the bottom and the market is about to recover. The fall in supply causes a slight rise in prices to take place.

The bounce quickly ends when owners realise that the market is going to get worse after all, and they decide it’s time to cut their losses. Listings then rise as they try to get out before prices fall further.

Once this rise in supply starts it often escalates, because more and more owners decide to try and sell before conditions deteriorate any more. On the other hand, potential buyers will do the opposite and wait for prices to fall further before deciding to buy.

Luckily, three-quarters of houses are owned or being paid off by owner-occupiers and are more or less crash proof, because they are held for long periods of time. First home buyers typically hold their homes for at least four years, and then only sell to upgrade. Existing home owners stay put much longer while they raise their families in family homes.

Property owners are playing the long game

This is the reason that property, especially houses, offer such long-term stability to investors – most of the owners are playing the long game on our behalf. Rent demand, rental yields and rental vacancy rates mean nothing to these households, who have no incentive to sell their homes just because prices are rising or falling.

The property is their home, and when it’s time to upgrade to a bigger house or a better location, any movement that has occurred in the sale price of their current property will be reflected in the buy price of their new dwelling.

Don’t expect a property market boom anytime time soon

The missing listings mystery is warning us not to expect a boom anytime soon, in fact, I predict that median housing prices in many locations may keep falling for some time. The outcomes for property owners, sellers and buyers will, however, be very different.

Investors in off the plan units are likely to find that their investments will be worth less than they expected, and that their new properties will be harder to sell while listings keep rising.

On the other hand, aspiring first home buyers will gain the benefit of lower asking prices, and existing home owners wishing to move won’t experience any effect either way. It may take longer to sell their current home with more listings on the market, but they will also have more choices and bargaining power for their next purchase.

Source – Quarterly percentage change in new listings graph data: Published CoreLogic Macquarie Research, data to July 2019
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Beware of the modern day property prophets

Beware of the modern day property prophets

Thousands of years ago, we relied on wise men called druids or shamans to interpret the meaning of signs and predict the future. For example, when our forebears saw a solar eclipse, they thought that the sun was being devoured by some huge invisible monster as they stared upwards in horror.

They were unable to comprehend why this was happening, but the wise men knew all about eclipses and could even predict when they would occur.

Rather than impart this reassuring knowledge to the people, they told them something quite different.

‘Yes,’ they said, “a huge heavenly monster is eating the sun and only we, your protectors can save you – but this will be for a price.’ When the people had paid up, the druids assured them that they were scaring the monster away, and that the sun would soon return to its former glory, which of course, it soon did.

We still rely on modern day druids and shamans

Home owners, investors and potential buyers all want to know what’s in store; whether to buy, where to buy, what to buy, whether to hold or sell, and because most of us don’t know how to interpret the meaning of all those figures, stats, indicators and dynamics out there, you may have to rely on modern day druids or shamans to do this for you.

Whether they’re called property theorists, strategists, advocates, agents, advisors, educators or mentors these days, most of them will still only reveal the future if you pay them, just like the shamans of old.  

This is where it really gets complicated, because each of your advisors or educators may give you a different spin, depending on their own perspective and even personal interest. Who should you listen to and who should you avoid?

One expert is urging you to invest in Brisbane, another says buy in Perth, still another warns you that Brisbane’s housing market is about to crash, yet another urges you that Darwin is about to go gang busters. Who is right?

How to check their motivation, credibility and past accuracy

Well, there’s an easy way to test them. The internet makes this easy. You can check the motivation of any so-called expert by checking their website – do they claim to have “acquisition experts” on their team, or do they have access to “unlisted” or “off market” properties?

This code language means that they are probably seller’s agents or project marketers who will be getting paid a commission, finder’s fee or kick back for pushing a property on to you. In other words, the property you purchase will certainly be in their best interests, but may not be in yours. 

You can also check to see what others are saying about these experts. Google the person’s name, together with words such as “housing market” or “property expert” and see what pops up. You might be surprised!

You can also easily test their past accuracy. Using Google, go back in time and compare what they said some years ago about the property market to what actually happened.

Of course, not everyone can be right all the time, but at least by testing the accuracy of the those who claim to be experts, you’ll be better informed than our forebears were when they thought that the sun was being eaten.

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Tips and traps of buying overseas

Tips and traps of buying overseas

At some stage in our lives, many of us dream of owning a cottage in the south of France or a hacienda on the Spanish Riviera, maybe even a log cabin up in the Swiss mountains. Others may be tempted to buy an overseas investment property, particularly when our own housing market is stagnant and there’s no growth potential.

Buy a property in Spain and receive an honorary residency permit

Some countries enthusiastically welcome overseas property buyers, with Spain and Portugal even offering residency permit enticements to foreigners who buy a property worth over €500,000.

This is because housing demand in many European and Asian countries is flat as their populations decline. Not only are fewer babies being born, young people are emigrating.

While the demand for aged care accommodation is growing, the declining populations in many countries is creating a growing surplus of family homes. Hence the Spanish government offers incentives for families to move there and buy a home.

You can’t buy a property in Switzerland unless you are a resident

The opposite applies in Switzerland, where the government is charged with discouraging foreign immigration and restricts property ownership to those people who already have residency permits. But before you jump into foreign home ownership, it is also important for you to know the tax and legal systems that apply, as they could be very different from ours.

Beware of wealth, property, value added and inheritance taxes

For example, if you rent out the property during your absence, both the local country and Australia may tax your income from rent, unless Australia has an arrangement with the other country which takes the tax you have paid overseas on rental income into account. 

Most countries have a capital gains tax, plus an ongoing property tax similar to our state-based land taxes, but some also have property related taxes that do not exist in Australia.

These include value added tax, which is applied to improvements made by the owner, wealth tax applied to properties worth more than certain amounts and inheritance tax which kicks in when the property passes to beneficiaries.

In some countries, inheritance tax is low or non-existent when properties are left to spouses or children, but become onerous when estates are left to others, or if immediate family are bypassed in a will.

And on the subject of inheritance, it is worth noting that some countries oblige you to leave your property to your next of kin in accordance with the established practice of the country.

This means that your lover or mistress, if you have one in France, is entitled to a share of your French estate when you pass away. Could be quite a shock to the family back home!

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A Chinese ghost city

A Chinese ghost city

We tend to think of ghost towns as places where all the residents have long since packed up and gone, but in China some huge cities have recently been completed – built entirely on the opposite premise, that people will arrive.

One such new ghost city is Kangbashi, located on the barren steppes of Inner Mongolia, the home of summer sandstorms and freezing winters.

While it may be fairly typical of modern cities in most respects, Kangbashi stands out because of its remote location, its huge size, its impressive monumental architecture – and an almost total lack of residents.

A city built for over one million residents remains largely empty

Kangbashi was intended to house over a million residents and the city was virtually completed by 2009. Every possible need of the future residents was catered for, with sporting centres and stadiums, cultural galleries and museums, showcase architecture, monumental gardens and massive shopping centres.

The only thing missing was residents, as only a few thousand moved in when the building work was completed. The few westerners stumbling across Kangbashi at that time could not make any sense of what they saw – a huge city without people; it was a ghost city. 

Why was such a huge empty city built?

This prompted questions about the purpose of Kangbashi. Some cynics say that the city’s remote location indicate that it was designed to house people displaced from other parts of China in the event of a nuclear war, or other major catastrophe. It was designed to be a sort of refuge of last resort. However, given the scale of the city’s monumental artworks, impressive architecture and attempts to encourage tourism, this seems extremely unlikely.

Others claim that the city was built to help diversify the economy of the area, to encourage the impoverished rural communities in the region to relocate to Kangbashi, assisted by generous compensation packages. If this is true, then the city’s isolated location and harsh climate would not matter to people already used to such conditions.

Property investing is a form of life insurance to some

Another cause of the lack of residents is that many Chinese see property investment as a form of insurance, and buy new apartments not to rent out, but to keep brand new and unoccupied, as security for the future, like someone might hoard gold under the bed. Therefore, while many apartments in Kangbashi were purchased by Chinese investors, only a few have been bought for their owners to occupy.

Maybe the city just needs time. The population keeps growing steadily with nearly 200,000 residents at last count and nearly 5,000 local businesses operating successfully. Tourism is also growing steadily, and likely to rise even more as the city slowly springs to life.

If we build it, will they come?

The concept of a whole city being built on the premise that residents will follow is something we are not comfortable with in the west. The proof, if we need any, lies in the massively overdeveloped high rise, high density unit blocks in our inner urban areas whose owners are suffering from high vacancy rates and falling prices.

The issue is that these have been built by developers on the basis that past buyer demand reflects future buyer demand. Rental demand is not the concern of a developer, although it soon becomes one for the investor who buys a property.

In centrally managed and controlled countries such as China, prebuilding a whole city is quite feasible and residents can be created by encouraging or even forcing people to relocate.

It remains to be seen whether the vision will be realised and Kangbashi becomes a model for other such bold enterprises, but at this stage the ghost city is definitely slowly coming to life.

 

Acknowledgement: Image by Popolon – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=44947017

 

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Cashflow comes to the rescue

Cashflow comes to the rescue

Many commentators hope that property market prices are on the rise again, but there’s a much more likely prospect in store for property investors, because rents are about to start rising dramatically.

Property investors have two strings to our bow – cash flow and growth, and the recent media focus on prices has pushed cash flow into the background. This is understandable, because capital city rental yields are currently at lows that landlords haven’t had to deal with since the early fifties and seventies.

There is currently little incentive for investors to get excited about property, but while we don’t always experience both cash flow and growth at the same time, our major cities have always consistently delivered either high cash flow or good price growth at different times.

This is clearly demonstrated in the graph below, showing you the average annual rental yield and house price change for Australian capital cities from 1901 to now. 

Rental_Yield_and_Price_Changes

The graph shows that during the years when Australian capital city house price growth was low or even went backwards that rental yields boomed at the same time. The correlation is close because our capital city populations (apart from Darwin in 1975 after Cyclone Tracy) have always been rising. This in turn means that if new households can’t get housing finance the demand for rentals rises.

How many years does it take for rent to equal a house price

The years are grouped together in the way that they appear in the graph because they show you another statistic – the number of years that it took for the rent received by a landlord to add up to the value of a house. In other words, from 1936 to 1939, it took just four years of rent to be the same as the value of a house. But right now, it would take twenty-four years of rent to equal a current house price.

Years_Rent=House_Price

The stats are out of kilter, as the table below shows. Rental yields are way below their historic long-term average, housing prices have gone up too much, although they certainly haven’t boomed, and rents are too low to make housing a viable option for investors.

Rental yields are well below their long-term average

Table

Yet our big city populations keep growing, with most of the new households coming from overseas and interstate, generating an immediate rise in the demand for housing, especially in Sydney, Melbourne and Brisbane. The issue is that most of these new arrivals can’t buy houses or units – they have to rent for a number of years, until they are sufficiently established to be able to obtain housing finance.

While the last few years have seen a massive fall in investor owned housing stock in our major cities, rental demand from new arrivals has been shooting up. History shows us what happens next – that massive increases in rent are highly likely to occur over the next few years.

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Why our governments are building useful things

Why our governments are building useful things

In its July Statement, the RBA has stated why it has cut the official cash rate twice in just two months: “Easing of monetary policy will support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.’

If you turn this “bank speak” into plain English, it means that the RBA thinks that unless we spend more, we are in for rising unemployment and may well slide into recession.

One of the main reasons for this unhappy situation is that, according to the latest HILDA survey, average Australian incomes have not risen in real terms (after being adjusted for inflation) since 2009. And so, the RBA is doing all it can to increase the amount of spending money we get each week. 

The value of safe haven assets keeps rising

We are not responding to this stimulus by buying more, so the Federal Government has chimed in with tax cut incentives, including a big once off income tax refund. But rather than planning huge spending sprees, most consumers are apprehensive.

They sense that the economic mood is changing and rather than spending more, they are spending even less, putting their spare cash into safe havens such as bank shares and gold (the graph shows the rise gold’s spot price in US$ since August 2018.)

The RBA can do little to prevent this decline in spending and in its July statement urged our governments to spend more money by building useful things to stimulate jobs and growth.

Build freeways, railways, tunnels and airports

The government knows that spending more, while foregoing revenue with its cut cuts will delay the long-awaited return to a balanced budget, but the alternative is far worse – being the first government to lead us into recession in thirty years.

That’s why the Federal Government, in concert with most State Governments are committed to an infrastructure-based approach to economic growth, building freeways, railways, tunnels and airports, all of which will help to reduce unemployment and put pressure on real wages to rise at last.

Real income growth will increase both housing affordability and buyer incentives, something which our exhausted housing markets are desperately calling for, but it’s going to be a very slow process. Investors would be wise not to seize on any slight rise in housing prices over the next few months as proof of a recovery, especially as potential sellers are likely to flood markets hoping to get higher prices, only to find their hopes dashed as buyer demand remains sluggish.

The “two-tiered housing market will soon return

This is why we are likely to see a “two-tiered” housing market dynamic occur once again over the next few years. The losers will be those capital city housing markets which experienced the highest price growth in recent years and also have large supply overhangs. The winners will be those areas which are likely to benefit from current or fully funded government infrastructure projects creating more housing demand. This is where rents and prices could rise dramatically.

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The armchair dream of set and forget property investing

The armchair dream of set and forget property investing

With housing prices continuing to slide in most major capital cities, many investors feel exposed and threatened, because they have gone heavily into debt to purchase their properties.

This is when we get reassurance from some armchair experts who insist that the property market is merely subdued, that it’s marking time and growth will return soon. To support such “set and forget” buy and hold strategies, these theorists point to the long-term performance of property and state that growth is about to return, because it always has in the past. But how has the market really performed in the past? And what does this actually tell us about the future?

The theorists show us graphs such as the one below, proving that regular and consistent price growth exponentially increases your equity over time.  

They then assure as that this is how the Australian housing market works, with prices doubling every eight to ten years. Because the market has behaved this way for so long, they argue it will continue to do

But has the market actually performed so reliably in the past? The graph below shows the rate of price growth that has taken place in every capital city other than Sydney and Melbourne over the last fifteen years, according to ABS published data.

Quite clearly, the buy and hold reality is nothing like the buy and hold dream at all.

The differences between the dream and reality are more extreme when we compare the performance of different suburbs to each other, even in the same city, and different types of property in the same suburb.

“Buy and hold” can certainly be a workable investment strategy if you purchase the right type of property in the right area, at the right time and pay the right price, but the evidence shows that jumping in and buying anything, anywhere on the assumption that all housing markets and all types of properties will perform the same over time is totally flawed. Investors who follow such an armchair investing strategy are likely to find that their dream soon becomes a nightmare.

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Timing the turning point

Timing the turning point

With housing prices falling and many markets in disarray, there’s been a lot of talk in the property media about the benefits of counter cyclical investing, or buying at the bottom.

It seems simple enough to follow the advice of experts such as Warren Buffet, who advises investors to “buy when everyone is selling, and sell when they’re buying”, or Baron Rothschild who even more dramatically, told investors to “buy when there’s blood in the streets”.  But if that was all there was to it, we could all easily become highly successful investors with little more effort than to do the opposite of everyone else.

In reality, such advice is almost impossible to follow successfully because it flies in the face of perceived logic – if everyone is selling and prices are falling, how do we know that this trend won’t continue and leave us even worse off? Unless we are sure that the market has bottomed out, and we have reached the turning point, our efforts are likely to be futile and costly.

Most investors and analysts attempt to time the bottoming out of market by relying on lagging indicators such as sales and sale prices, but these can only reveal the past, not the future. It’s a bit like trying to navigate a car by looking through the rear-view mirror. Only leading indicators, such as the number of properties on the market, asking price trends and search trends can forecast a likely change in direction.   

Even if the turning point has really arrived and it’s time to buy, it becomes impossible for most of us to take any action, because the price crash has left us with insufficient cash reserves and we discover that the banks are unwilling or unable to lend. The solution to this dilemma is to look for low priced properties in areas which have price growth potential and high rental yields driven by genuine rental demand

Such investments are low risk and will give your lender more confidence in providing finance. Then you can look forward to positive cash flow from day one with healthy price growth over time.

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The feeding frenzy furphy

The feeding frenzy furphy

Many commentators are predicting that investors will rush to buy established properties before the negative gearing and capital gains tax rules are changed if Labor wins the Federal election. They claim this could cause a mini boom, but the stats show that the opposite may actually occur.

This is because many owners are holding off listing their properties in expectation of the buyer feeding frenzy later this year. This could result in a sudden surge of properties for sale, rather than a surge in buyers.

 

The numbers are revealing this steady decline of new listings in both Sydney and Melbourne – that is, the number of properties for sale on the market is falling, even though the number of sales isn’t rising. The graph clearly shows this downward trend, which is much greater than the seasonal variations that occur each year.

The only possible reason that fewer owners are listing their properties for sale is that they think investors will rush to buy established properties if Labor wins and they’ll get a better price by holding off for a while, so owners are waiting until after the election for the feeding frenzy to start.

But, will sales rise after the election if Labor wins? Investors form only a small percentage of buyers and there’s no evidence that they are putting off buying properties until after the election. There’s no point in their waiting, because if the Liberals win nothing changes, and if Labor wins, the time window to avoid the new tax rules is already open. Property purchases are being held back because of tighter lending rules, and the new tax rules won’t directly affect owner occupiers anyway.

 

On the other hand, it looks like we will see a massive lift in listings later this year from owners keen to secure the anticipated higher prices. This rise in supply is unlikely to be matched by a similar rise in demand from investors. Relying on hypotheticals is never a good reason to put off buying or selling, because the right time to buy or sell should be determined by how such actions help you meet your aims from investment, such as securing long term growth, doing renovations, developments or obtaining positive cash flow. 

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Pumping and dumping schemes

Pumping and Dumping schemes

Faced with the prospect of little price growth on the horizon, property investors are starting to see innovative get rich quick schemes being promoted which offer huge returns.

It has always been true that if the property market can’t generate a return for investors from market driven growth, then investors can make some growth themselves. We have traditionally done this by improving the value of our investments through cosmetic or structural renovation or even developments.

The issue is that the buy and hold costs for such projects can deter most new investors, and there’s always the threat that if prices fall, they may cancel out the value we have added, or even lead to a loss.

But some new investment alternatives have recently emerged, bringing us glitzy promises of high returns from property investment without the need to outlay any significant cash up front. The risk seems low, the opportunity to participate is high and many of us are sucked in, usually at free so called “investment” seminars.

One clever land banking scheme offers you an easy way to get into the property market with one low upfront cost and the promise of eventual riches. The promoter sells you an option to buy land which is slated for future development, showing you the concept plan and glossy “artist’s impressions” of the finished project. All it takes is one affordable fee and no repayments. Then years later, when the land is subdivided, you can exercise your option and sell at a huge profit.

You can even participate in the property market without any upfront cost at all, by searching for and finding property owners who are willing to enter into an options agreement with your mentor. Your mentor signs and pays for the agreement, which gives them the option of buying the property at an agreed price and future time from the current owner. Then by agreement with your mentor, you will be handed a percentage of the profit.

There are also adverse possession schemes using what is known as “squatters rights” where you search for and find long vacant or abandoned properties for your mentor who then improves and rents them out, taking title to the property when the legal waiting period has expired. By agreement with your mentor, you will then split the profit from the sale of the property.  

These sorts of schemes pump you full of confidence and then dump you when they fail. For example, if the land banking property is never developed, or the option for a property you have found is never exercised by your mentor, you receive nothing. Similarly, if the owner of a property which is in the process of adverse possession suddenly turns up before your mentor can legally claim title, you end up with nothing.

You can avoid getting pumped and then dumped by sticking to tested and proven property investment strategies which offer worthwhile rewards and incur risks which are manageable.