Paul Wallbank – Brilliant Communications

Tag: property

Australia welcomes the multi generational mortgage
At the height of the Japanese property boom in the 1980s, the hundred year mortgage came into being.

Pushing payments onto children and grand-children was the only way home prices could continue to rise once they hit levels which the average Japanese worker could ever afford with a more traditional twenty or thirty year mortgage.

Twenty five years later Australia finds itself in a similar position as parents guarantee their childrens’ mortgages.

Repeating the Japanese mistake

While the Japanese looked to sticking their mortgages onto their kids and grandkids, Down Under the kids are fighting back and getting mum and dad to underwrite their unaffordable loans.

This weekend’s Sydney Morning Herald features in its property section the story of how Sharon and Graeme Bruce guaranteed their son’s and his fiance’s mortgage in Sydney’s inner suburbs.

While the story isn’t clear on the size of the deposit (which isn’t surprising given the SMH’s shoddy editing), it appears the Bruces’ have guaranteed around $300,000 so his son and future daughter-in-law can grab a five bedroom, 1.45 million dollar mansion.

One wonders what great businesses Matt and Hannah could build if mum and dad were prepared to stump up a similar amount to invest in a start up?

Australia’s property obsession

Sadly we’ll never know – in Australia, the smart money gets a job, pays off a mortgage and accumulates wealth through investment properties. What cows are to African tribesmen, negatively geared units are to the Australian middle class.

The hundred year strategy hasn’t worked too well for Japan, with a declining population those mortgages entered into a boom level 1980s values now don’t look so attractive and are one large reason for the nation’s lost decades.

In Australia, things aren’t likely to work so well either. The Baby Boomers and Lucky Generationals – those born from 1930 to 1945 – guaranteeing their kids’ and grandkids’ mortgages are relying on ever increasing property prices.

This is understandable given that few of them have any experience of long term stagnation, let alone decline, of property values but it leaves them incredibly exposed should the Aussie housing market slump.

Can an Aussie property decline happen?

Many Australians, particularly those with vested interests, maintain such a decline can’t happen but the prospects aren’t good as the SMH story shows;

The couple had attempted to buy a small terrace in Newtown but kept getting pipped at the post by other young professional couples. At a higher price point they had no competition.

Despite his parents’ generosity he said he would still need to rent out a few of the rooms to help pay for the mortgage.

So Matt can’t afford the mortgage. That’s not good starting point and one that could cost his parents dearly, which they don’t seem to care about much.

”Obviously my dad guaranteeing the loan was the only way we were going to purchase this,” Mr Bruce said. ”You need to have a 20 per cent deposit otherwise the banks want you to pay insurance … it’s a bit of a rort really.”

It’s fair to call mortgage insurance a rort – as it certainly is – but its purpose is to protect the banks should a mortgagee default and the financiers find themselves out of pocket.

With Matt’s parents getting him out of paying that insurance his bank has much better default protection, equity in his parents’ property.

Guaranteeing risk and misery

I’m not privy to the finances of Sharon and Bruce, but most of their contemporaries can ill afford to lose several hundred thousand dollars in home equity in their later years.

That is where Australia’s multi-generational mortgages could turn very nasty, very quickly as older Australians find themselves having to deliver on the guarantees they gave on behalf of their over committed offspring.

In Japan, it’s taken a long time for the population to realise their national wealth has been squandered on twenty years of propping up unsustainable property prices and economic policies.

One wonders how long it will takes Australians to realise the same has happened to them and what the political reaction will be.

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March 10, 2013
Desperate Ken and market realities
Ken Slamet has a problem, his in-laws are trying to sell the family house and no-one will give them the price they want.

The house at 228 Warrimoo Ave has been on the market through an agent for more than 100 days, pulling in ridiculously low offers, Mr Slamet said.

Depending on the deposit, Mr Slamet is seeking between $1.5 million and $1.6 million for the house his wife grew up in.

One would argue that those “ridiculously low offers” are actually Mr Market giving Ken and his in-laws a slap of reality. They are simply asking for too much money.

St Ives, a suburb on Sydney’s Upper North Shore, is going through demographic change. In 1960s and 70s St Ives was the suburb for successful stock brokers and bankers, however in the 1980s and 90s that demographic decided they wanted to live closer to the city and Harbour and suburbs like Mosman and Clontarf became their areas of choice.

For Ken’s in-laws and their neighbours, this is bad news as few other people can afford 1970s mansions on large blocks within 30km of Sydney. Those who do manage to sell often find the buyers are developers who sub-divide to build townhouses or apartment blocks, madness in a congested, car-dependent suburb with poor public transport links.

Adam Smith’s invisible hand of the market is giving those holding properties that were attractive to stockbrokers in 1972 a nasty slap over the head in 2012.

Ken though has a solution for his problem – he’s offering a rent to buy scheme at a mere snip of $2297 per week. An amount 70% higher than the average Sydneysider’s gross income and a whopping four and half times the city’s average rent of $500.

Good luck with that.

The real problem is that Ken’s in-laws are stuck with expectations higher than the market reality. Like many of us in the Western world, they believe their assets are worth more than they really are.

As the global economy deleverages there will be many more people like Ken’s family. For many the transition to a less wealthy lifestyle is going to be tough.

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November 13, 2012
Short sharp shocks
In Atlantic Magazine’s China’s long history of defying the doomsayers, Stephen Platt and Jeffrey Wasserstrom put the case that the Chinese Communist Party is unlikely to fall in our lifetimes.

China’s military is presently powerful enough and its diplomacy stable enough that the Communist Party faces no realistic threats from outside. Internally, its control over society is effective enough that, while unrest and discontent may be widespread, there are neither well-organized opposition parties nor rebellious armies that might seriously challenge the central government.

They are probably right, it’s difficult to see any immediate threat to the power of China’s current leaders.

Although we should keep in mind that only a few decades ago it was inconceivable that the Soviet Union would disintegrate or the Warsaw Pact dissolve.

Had someone wrote in 1986 that within five years both would happen, they would have been written off as being foolish. But that’s what happened.

In the stock market it’s said “the market can stay irrational longer than you can stay solvent” and it’s true for any pundit – you may be right that property is overvalued, the US is in decline or the Eurozone will break up, but the powers that be will may be able to kick the can down the road and sustain the unsustainable for a lot longer than any of us expect.

Steve Keen found this with the ‘walking to Kosciusko” bet where he was railroaded into giving a fixed date of when the Australian property market would fall. He, nor anyone he made the wager with, had any idea of the billions of dollars governments would throw at the market to maintain prices.

All too often people make the right calls about property markets, economies or the fall of regimes but get their timing wrong.

In his book The Sun Always Rises Ernest Hemmingway’s character Mike Campbell describes how he went bankrupt – “Two ways. Gradually, then suddenly.”

And so it is with empires, nations, ideologies and even the most powerful corporation. When the change happens it’s sudden and unexpected.

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September 1, 2012
Economic cholesterol
Australia’s productivity isn’t growing and it’s fashionable among business community to blame Australia’s productivity decline on high labour rates.

While there’s an argument that the cafe worker earning $25 an hour is overpaid – although we don’t hear the same criticism of multimillion dollar packages paid to executives with at best mediocre track records – the argument is far more complex.

In the McKinsey report linked to above, the mis-investment is put down to the recent resource boom, but is this really true?

To really understand why Australia hasn’t performed well, we need to look at why the country is so reluctant to invest in assets that will increase our productivity.

The role of property

Underlying the recent Australian “economic miracle” is the property industry. The country’s domestic building sector is one of the most efficient job generators in the world. Stimulate the Aussie property market and job growth ripples quickly through the economy.

This was one the lessons learned in the 1990s recession – successive governments and bureaucrats have learned the mantra “go early, go hard and go residential” when it comes to cutting interest rates and introducing home building incentives like the first home owners grants.

It was no coincidence that when the Rudd Government was faced by the Global Financial Crisis they launched a wave of initiatives to boost the property industry and shore household wealth. Just as the Howard and Costello governments did in response to the Long Term Capital Bank collapse, Asian economic crisis or the 2001 US recession.

While those stimulus measures have kept Australia out of recession for two decades, the failure to unwind the measures after the economic shock has passed leaves the nation’s property market remains “hyper stimulated” and over valued. That over investment in property has sucked funds away from other areas which affects the competitiveness of Aussie industry.

The great property squeeze

One of the great tragedies of the 1990s was Sydney’s East Circular Quay precinct which could have been one or two of the world’s greatest hotel sites, literally on the steps of the Sydney Opera House.

Instead, high priced apartments were built on the site and Sydney’s tourism and convention industries are crippled by a shortage of top end hotel rooms.

Tourism isn’t the only industry affected by the Australia’s obsession with residential property – across the country service stations, sports clubs and convention centres are being demolished to make way for high rise apartment developments. No economic activity seems to trump property speculation when it comes to attracting Australian investors.

Ideological beliefs

Adding fuel to the property obsession are the ideologies of the 1980s which are still closely held by the nation’s business and political leaders.

Capital gains tax concessions introduced by the Howard government in the late 1990s made property and share speculation far more attractive that invention, innovation or entrepreneurship.

To make matters worse, Australia’s social security policies and taxation laws favour capital gains – any Australian over thirty who has tried to build a business has plenty of mates who did far better out of negatively geared property than those who foolish enough to create new enterprises.

For those older entrepreneurs facing retirement, they are in for a nasty shock if their businesses don’t sell for what they hope. They would have been far better staying in a safe corporate job and buy a few negatively geared investment properties.

Again, this ideological belief that capital gains trumps wage or business income means investment is steered away from productive assets and into residential property that can be held for a capital gain.

The Ticket Clipping Culture

Australia’s failure to invest in productive assets is not just a feature of the household investor, the corporate sector has a lot to answer for as well.

While good in theory, the superannuation system has been a failure in providing a capital pool for new and innovative businesses and productive investments.

The superannuation trustees have largely focused on hugging the index, the ticket clipping funds management culture means that any real investment for productive assets is restricted to funding toll roads where fat management fees and guaranteed commissions mean an easy life for those fund managers.

In a perverse way, the short term appearance of the ticket clipping might mean increased productivity as costs are cut to improve profits. In the medium and long term, the lack of investment in these assets means in the long term these assets too cease to add productive capacity to the economy.

Of course there’s more to infrastructure investment than toll roads and airports with crippling parking charges, but the ticket clipping classes of Australia’s investment community don’t see a quick buck in that.

Increasingly the boards of Australia’s major companies are appointed by those running the superannuation funds and these people have the generational bias away from productive investment. Instead they see slashing IT, training or asset investment as costs to be cut in the quest of boosting bonus delivering profits.

More fundamentally, three decades of consolidation in most of Australia’s industries has seen a generation of Australian executives whose main expertise is that of maximising their market power at the expense of their competitors. Investing in productive capacity is not a major concern for those corporations.

Fixing the problem

Getting Australians – whether mom and dad property speculators or high paid fund managers parking money in the ASX 200 or plonking money in the latest toll road boondoggle – to change attitudes and invest in productive capacity is going to take a generational change.

As long as the attitude persists that property is a safe investment that doubles in real value every ten years then Australians are going to continue to ply cash into apartments and houses.

It is possible that a period of Australian Austerity that suppresses property prices may force that change in investment attitudes. An weak property market is one of the unspoken effects of the spending cuts advocated by many right wing commentators,

The question is whether those commentators, or the political classes who derive their much of their policies from right wing ideologues, view have the stomach for disruption that will come when weaning Australians from the teats of corporate ticket clipping and property speculation.

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August 18, 2012
Looking at the wrong curve
“We don’t understand it, there’s a property shortage but prices are going down,” bleats the property expert in a recent interview.

Property booms are always excused with claims of “shortages”. The US, Ireland and the UK in recent years property markets all collapsed despite business and political leaders claiming there was a “property shortage”.

The shortage meme happens because the property spruikers, economists and finance writers focus on the wrong curve – they look at the supply curve and assume prices are going up because there isn’t enough property to go around.

What drives speculative booms is easy credit – demand driven by access to money drives speculation, not supply shortages.

Australia’s long term property boom which started in the late 1960s and went onto steroids in the late 1990s has been driven by access to credit. Banks were prepared to lend to property buyers, who were increasingly speculators, and government policies favoured those speculating on property over investing or building businesses.

The crisis of 2008 was the end of the easy credit era and the Australian property speculation boom is over. For the policy makers, politicians and economists the basis of the 1980s corporatist ideology is crumbling around them.

No ideologue lets go of their beliefs easily – that’s why Western governments who bought into the corporatist worldview are pumping trillions of dollars into supporting zombie banks and releasing constant stimulus packages to prop up the property market.

Like the communists of the 1970s, today’s corporatists are looking at choosing the statistics that suit their ideological views.

To support their beliefs they look at the wrong curve and then wonder why the world isn’t working as they thought it would.

Times have changed. Have you?

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June 14, 2012