Except of course, what we are currently facing is nothing like a plague nor a flu epidemic.

But don’t let the truth get in the way of hype. May the Lord protect anyone who needs toilet paper or bottled water in a hurry right now – the stores are sold out because of sudden panic buying.

Okay, I can sort of understand stocking up for essentials in case of an enforced 14-day self-quarantine period… but bottled water? This isn’t a cyclone where we need to be concerned that our water (renowned as being amongst the cleanest in the world) might get contaminated.

Sure, it’s wise to be informed and to take precautions. And if this virus mutates into something nastier, then it will truly be something to get worried about. But do we all need to rush out and buy a year’s supply of toilet paper? Surely not.

Now, while I’m concerned about the coronavirus, I am actually afraid of bubbles.

No, not the bath variety, but rather the asset and debt varieties.

Have you noticed the recent huge fluctuations on financial markets? The astounding rises, and falls, on world stockmarkets as people lurch from fear to greed and back again? This volatility scares me because if people act irrationally and stockpile toilet paper, how might they react when it comes to their financial nest eggs?

Recall the wisdom shared in the movie Men In Black (seriously!):

A person is smart. People are dumb, panicky dangerous animals and you know it.

Without wanting to be a false financial Cassandra, my ‘spider sense’ is tingling.

Did you know that US consumers are in more debt now than they were in the GFC? It’s true. They currently owe about US$14 trillion. That’s US$14,000,000,000,000 (see: https://www.debt.org/faqs/americans-in-debt/)

And corporates owe nearly as much again. Quoting from Forbes (emphasis added):

U.S. non-financial corporate debt of large companies now stands at about $10 trillion dollars, 48% of GDP. This represents a rise of 52% from its last peak the third quarter of 2008, when corporate debt was at $6.6 trillion, about 44% of 2008 GDP.

And the US government? The highest it has ever been. US$22trillion increasing day by day.

Perhaps you think things will be different here Australia. No. Here in the land of Oz we’re price takers, and so what happens on world markets will most certainly happen here.

So when you read that the solution to firing up the economy is to reduce interest rates to encourage people to borrow more and spend, you should be afraid. Very afraid. Not so much about the coronavirus, but about the crippling debt bubble that is inflating before our eyes that must certainly, eventually, pop. And when it does, the economic pain and associated social upheaval will be much, much worse than anything in living memory – even the GFC.

What should be our response? Well, so long as interest rates remain low it’s likely that asset values will continue to rise as cheap and easy money looks for opportunities to multiply (see my commentary on the latest property data here). As it does, the value proposition of assets will begin to look absurd, but people will invent excuses as reasons to justify why things are they way they are, and why prices must continue to rise.

Think tulips, or Internet stocks, or commercial real estate where right now average grade commercial property in Australia is selling at 6% returns. High grade on long leases is 4% to 5%.  Junk is 8%. This is just way too low (truly, historic lows not ever seen before) for the risk involved, but cheap interest rates make the returns enticing nonetheless, especially when you compare to residential where the leverage returns are mostly negative.

Honestly, it’s not fun being the only sober one at a party… until the following morning when everyone except you has a horrible hangover and a humongous headache. Think about it… how much lower can interest rates and unemployment go? Sooner or later the benefit from both must be fully realised, so without increases in income (not likely as wage growth is low), what will drive prices higher? Possibly innovation in debt products (think Afterpay for property), but aside from that, I’m not sure.

That’s tomorrow though. Viva La Vida! Let’s tap open another debt keg – or two, turn the music up louder and start dancing on the tables. Bottoms up!

To wrap up then… Friends, sober won’t necessarily make you popular when everyone else is acting irrationally. But it will keep you safe, and it will help you make smart and sound financial decisions (and especially help you not to make stupid choices that drunk people make so willingly but regret so readily later). Sober right now means having a realistic strategy, and following it, without getting caught up in the hype.

If you want to hoard anything right now, cash is surely a better option than toilet paper. One can buy the other, and can also be used to purchase assets that may become available if values slip irrationally lower should panic selling set in. The other can only be used one way, and then flushed forever.

What do you think? Share your thoughts below.

The post Why I’m Afraid Of Bubbles appeared first on PropertyInvesting.com.

At the time of writing there is a large bush fire about 300m from my northern fence line, but thankfully it is heading away from my property. That said, a small wind change and everything is on the line. It is a scary, anxious time.

Normally a catastrophe such as humongous deadly bush fires would bring the whole country together. In some respects it has… generous donations of clothing, food and water, and money. Yet reading social media posts, there is also a worrying amount of division about the cause of these fires, and what we should do once they’ve been extinguished.

Here’s what I know….

What Caused The Fires?

These fires were started as a result of nature (e.g. lightning strikes), and/or human intervention (e.g. cigarettes tossed out of windows, arsonists, back burning gone wrong, power line failures, etc.).

Why Are These Fires Particularly Bad?

Bush fires are a part of life in Australia. Our forests even depend on fire for survival. So why are these fires even worse than normal? Despite what some people claim, the answer is not singularly a lack of back burning (i.e. fuel reduction). The land around my property has been substantially cleared for grazing, yet there is a threat to my property without trees, or built up fuel.

The answer is a combination of the following: extremely dry conditions (we had 2mm of rain in Omeo in Dec 19, compared with 40mm in Dec 2018), extremely low air humidity, and under-resourcing of key staff and boots on the ground workers by successive state and federal governments over many years.

It’s a simple fact that starting with Jeff Kennett in the 1990s, in Victoria there has been a dramatic reduction in the number of staff overseeing and managing the state forests. In 2019 Daniel Andrews made a budget conscious decision to delay the arrival of fire fighting aircraft. The federal government under funded fire fighting equipment, blaming it as a state issue. And on it goes… Governments were too worried about surpluses, and not worried enough about safety.

Are We To Blame?

What’s caused the climate to change? A shift in the earth’s tilt? Solar flares? ScoMo? Trump?

Why is it so hard for us to wholeheartedly agree that cutting down a few trees will cause soil erosion, raise problems with salinity and destroy habitat and environment for wildlife, yet believe we can cut down a billion trees and it won’t impact our planet, or our homes?

Or how can we know that burning plastic in backyard incinerators (as was customary in the 1970’s, but now outlawed!) and releasing clouds of toxic black smoke was a bad outcome, but we look away at the trillions of tonnes of black smoke we happily emit by burning fossil fuels under the name of progress?

Hello! It’s cause and effect. Not effect and cause.

The chemistry is undisputed and pretty straightforward. The carbon that is stored in trees, coal (i.e. fossil fuels), etc. changes from a solid to a gas when it is burned. This chemical reaction will result in change. Enough change, and the consequences become bigger and more evident.

Think CFCs… back in the 1980s, when the ozone layer was wasting away, we identified CFCs as the problem and eventually banned them worldwide. In the beginning though, there were deniers, sceptics, industry with vested interest because it was cheaper to use CFCs than alternatives, etc. etc. In the end though, we finally got moving on a global scale and a few decades later the ozone layer is regenerating.

History repeats, this time its carbon dioxide…

Now I don’t know for certain if the way we use and manage our natural resources has been the entire cause, but surely 200 years of systemic human induced chemical reactions will impact our environment.

Yes, yes, yes… it has been hotter, colder, wetter, drier, etc. in ages past. But the rate of change was previously over eons, not decades, years or months. In NSW, there was snow in early December, and devastating fires too.  Think of it this way… we’ve hit the ‘environmental’ beehive with a stick, and are now wondering why the buzzing has increased.

What about the argument that what we do in Australia doesn’t matter? True! It probably doesn’t on a world scale, but just because all your friends are high on emitting carbon doesn’t mean you shouldn’t try to get clean and sober. Maybe our actions can encourage them to lift their game too.

So, What Should We Do?

It won’t be easy. Or simple. And it will take time because we’re used to our convenient standard of living in Australia, but can we afford to do nothing?  Is this a risk we’re willing to take? Have your say by leaving a comment below.

The post Drought, fires and ScoMo… appeared first on PropertyInvesting.com.

Sometimes I lost the deal because I negotiated too hard, or maybe it was because of personal procrastination, perhaps even stubbornness where I won the battle (i.e. didn’t pay the asking price), but lost the war (i.e. missed out on a great deal in hindsight).

One example comes to mind. It was a multi-tenant gem in Orlando that would have been a fantastic pickup in my US real estate Fund. I managed to haggle down the price a little, and even get some seller financing thrown in. Truly, every ounce of opportunity was sucked from this deal until there was nothing left. Then at the last minute, the owner pulled the sale, only to relist it a couple of months later. The selling agent said “Shall I re-engage with the buyer we had on the hook?” “No”, the seller replied. “I’d prefer to get a little less and go with another buyer.”

Oh so close…

In a more recent example I’d thought I found a great deal in Queensland. It was leased to a brand name tenant on a three year lease that had two years to run, and returning an 8.75% income return, and a cash-on-cash return pushing 13% per annum.  Even better, I had it under contract for my new AREIT about $500k below the estimated replacement value. Surely a great deal, right?

Imagine how surprised I was when the independent valuation came in at $300,000 below the price I’d negotiated! Heck! The justification was that the current rent was above what might otherwise be possible if that tenant vacated, so resetting the value for the lower rent equalled a lower value.

So, what do you do when you think you have a great deal, but it’s not supported by the valuation, or the property inspection, or something else? This is where you have to listen to your head, not your heart, and make an intellectual rather than an emotional decision.

As the seller wasn’t interested in re-trading the deal at a lower price, with gritted teeth I called the agent to say I’m pulling out.

The lesson is this: It’s better to miss out on a great deal, than to buy a dud and have the risk and aggravation of having to fix it. I call this the John West approach to investing – be the best because you reject deals that others accept.

When I’m feeling melancholy about missing out on a deal I remind myself of two sayings:

1. First, there is always another bus around the corner – meaning great deals come by all the time.
   
2. Second, mollifying me after missing out on a good deal, my real estate mentor Stu Silver once told me “Nine Cup, you can’t get hurt by deals you don’t buy.”

Find out why my real estate mentor calls me 9 Cup, together with listening to an audio podcast series I did with him, here

The post When Push Comes To Shove appeared first on PropertyInvesting.com.

Many investors might be thinking the same thing – wondering whether we’ve arrived at the bottom of the decline in real estate prices. The answer is a predictable “No. Not yet.”

The latest house price index data put out by CoreLogic indicated that, for the month of May, though the rate of property price falls slowed in some capitals, a decline was still underway – except in Adelaide where there is a very weak growth pulse.

Delving into the data, the highlights I saw (for the year to the end of May) were:

• Poor Perth – down 1% for the month and down 8.8% for the year, with units performing even worse than houses. This is unusual because, unlike the eastern seaboard, there wasn’t a glut of units built during the last WA housing boom. I wonder whether this means that in a material downturn, when the difference between houses and units contracts, units fall more in percentage value as people prefer to live in a house?
  
  
• Sydney officially sucks – with the annual fall in dwelling values now 10.7%, Sydney is officially the worst performer of any capital city.
  
  
• Melbourne meltdown – not that Melbournians have much to rejoice about. Like their weather, dwelling values are in the freezer – down a sick and sorry 9.9%, an awful outcome that is worse than Perth and Darwin.
  
  
• Hobart Hoopla – long trumpeted as the shining light of the property market, and up 3.4% for the year, Hobart house prices were only slightly up for the month, while unit prices were down an eye-catching 2.7% – the most of any capital city in May. Could this be the start of a Tassie takedown?
  
  
• Adelaide Alive – only Adelaide recorded a growth in dwelling values, up 0.2% for the month, but still only an underwhelming 0.4% for the year to May. Still, up is up.
  
  
• Canberra – good news for houses (up 3.4%), but not units (beware the glut!) down 1.1%.
  
  
• Elsewhere, Brisbane (down 2,3%) failed to live up to hopes and expectations, while Darwin (down 8.6%) remained in the dungeon.

You can check out the results for yourself here:

CoreLogic Hedonic Home Value Index, May 2019 Results

Interpretation

Have you ever driven at 100km per hour for a while, and then had to slow to 60km as you pass through a country town? Doesn’t it feel slow? Yet driving in normal city traffic, 60km an hour seems fine. How can that be? 

Because speed is relative.

Sydney, Melbourne and Hobart were cruising along in a 100km speed zone for quite some time. Now though, they’ve hit a 40km/h construction zone, or even stuck waiting for a government work crew to repair the ‘property road’ so that higher speeds can be reattained (i.e. stimulus packages to get people active again).

In these markets, things feel slow, and they are. And they feel even slower than they otherwise might be because they had been roaring along at such a great pace not that long ago.

Elsewhere, like in Perth and Darwin, declining prices is actually the new normal, and it would be front page news if prices could simply stop going down, let alone actually go up. A great lesson other cities can learn from the cellar-dwellers is how a property price decline feeds into a broader economic malaise, which in turn creates a negative financial feedback loop, putting more downward pressure on real estate values. This could easily happen in Sydney and Melbourne, which is why the government, and the RBA, are now attempting real estate CPR.

Purse Strings for Lending Remain Tight

Conditions are unlikely to turn around quickly.

APRA might have dropped their more stringent serviceability benchmark, and the RBA might have dropped interest rates, but financiers are still stubbornly holding the lending purse strings tightly because they got smashed by the Royal Commission for dodgy lending practices that are not related to either APRA or the RBA.

We’ll Be There When…

Image courtesy of realestate.com.au

So, if we’re not there yet (i.e. the bottom), when will we be there (i.e. prices on the up and up)?

The quickest answer is to sell the family silverware and welcome back the foreign buyers, in droves. That will suck up the stale listings that are gumming up the system, and also get some more action happening on auction day.

I can’t see that happening just yet.   Indeed the Victorian government just made it less appealing for foreigners to purchase, with an increase in stamp duty for offshore buyers.  To me, the more realistic driver of higher prices will be when jobs and wages materially improve, and at the same time, lenders, (er, how do you say this politely…) start looking the other way, or else look less rigorously, at what people can afford to borrow. There’s recent form here because that’s what the Federal government is promoting, isn’t it, by deciding to underwrite the debt of some homebuyers borrowing 95% of their house price? Madness! Sheer madness!

Friends, what we are facing is the “financial hangover we had to have” (thank you, Mr. Keating) from a property party that went on for longer, and harder, than anyone imagined. We’re simply sobering up from a dangerous debt binge (which APRA flagged a while back, but is now somewhat confusingly overlooking).    The idea of tapping another keg of beer and getting drunk again might delay the hangover, but it will just make it all the worse when it eventually does come.

Here’s what I say – don’t see a price decline as a bad thing. See it as the best way to make housing affordable, and, at the same time, as an opportunity for savvy investors who can play a long game.

As sure as I’m bald, we will get there (i.e. with prices rising again) …..  eventually.

The post Are We There Yet? appeared first on PropertyInvesting.com.

Australian Property Market Update

4 June, 2019

Home prices continued to fall in the month of May, but at a slower pace than previous months. Although the property downturn continues to lose momentum, the RBA, APRA and Coalition Government are all galloping in to save the day.

Will it be enough to breath life back into a weary property market? It all comes down to how much more Aussies are willing (and able) to borrow.

Auction Clearance Rates 

Many of those brave sellers who scheduled auctions post-election are being rewarded with rising auction clearance rates. Both Sydney and Melbourne saw a bump in buying activity on rising auction volume.

Here’s a look at preliminary and final auction data for the combined capital cities, plus Sydney and Melbourne, over the past five weeks:

Click the link in the Capital City Average columns to see the sources of the data.

There’s still some slippage between the preliminary results and final count, but the margin seems to be narrowing, especially in Melbourne. Depending on how the Sydney count plays out, this may be the first week in many months where both Sydney and Melbourne return a clearance rate above 60 percent.

Here are the latest preliminary auction results from CoreLogic for all the capital cities:

Source: CoreLogic

Home Prices  

Median dwelling prices continued to fall in May, but again, at a slower pace than the previous month. As you can see below, the rate of decline in Sydney and Melbourne has been decreasing steadily since January.

Here’s a look back at Corelogic’s recent monthly price movement data:

While the downward trend is improving in Sydney and Melbourne, Brisbane continues to fall at a brisk pace, and Perth has reverted back to a plunge downward, as in January and February. Canberra and Adelaide are mostly flat, while Hobart is showing signs of rolling over.

Here’s CoreLogic’s latest monthly median house price data:

 Source: CoreLogic  

In terms of falls from the peak, which can be extracted from CoreLogic’s back series of data, the Sydney market, which peaked in July 2017, has now fallen 15.0 percent. Melbourne, which began falling in November 2017, is now down 11.5 percent from its highest level.

At the current rate of slowing decline, I expect Sydney and Melbourne house price movements to flatten out sometime in the next six months, likely pulled forward to the next three months by cheaper and easier credit and improved post-election sentiment.

RBA Shoots Down the Cash Rate

After a strong dovish signal in a speech last month, Philip Lowe has finally started earning his wage, cutting the RBA cash rate to a historic low of 1.25 percent. It was August 2016, back when Glenn Stevens was the RBA chief, when we last saw a rate cut from our central bankers.

Futures traders had already fully priced in the 25 basis point rate cut, with another cut of the same measure priced in for October as well. Many economists expect a follow-up rate cut to 1.00 percent sooner than that, at the August meeting.

As reported last month, the dovish policy is in response to a completely impotent CPI reading in the March quarter, bringing year-on-year inflation to just 1.3 percent. The RBA’s primary goal is to keep annual inflation somewhere between 2 and 3 percent, preferably now at the higher end.

Just how low will interest rates go? Well, AMP is expecting an RBA cash rate of 0.50 percent by mid-2020. If there’s ammunition left in the gun, the RBA will no doubt use.

Treasurer Josh Frydenberg gave a stern warning to the banks that the Australian public is expecting them to pass today’s rate cut along to consumers in full. Of course, that will also benefit the Coalition party, but yeah… it’s mainly for the consumers.

ANZ and Westpac have defied the Fryd by only passing along a portion of the rate cut to borrowers. Commonwealth Bank and NAB, along with most other smaller lenders, have all fallen into line and passed along the full quarter of a percent rate cut to borrowers.

But the big question looming in property investors’ minds is whether lower interest rates will open the door for more buyers to enter the market. Maybe with a little help from APRA.

APRA Pulls a Knife on Interest Rate Buffer

Back in 2014, house prices were soaring higher and the RBA had plans to cut its cash rate far below 2.50 percent. Regulators needed a way to keep too much credit from flooding the housing market too fast, so APRA enforced an interest rate risk buffer on borrowers. Lenders were forced to assess the repayment capacity of borrowers not on the actual interest rate they would be charged, but at their current interest rate plus 200 basis points, or at 7 percent, whichever was higher. Although this was the official policy, APRA actually told lenders to be more strict than this, so most banks adhered to an assessment rate of 7.25 percent.

In line with anticipated interest rate cuts from the RBA, APRA has now signaled it will slash this 7 percent minimum requirement, allowing lenders to review and set their own minimum interest rate floor for use in serviceability assessments. This likely means means that as the cash rate falls, serviceability of buyers will be assessed against the two percentage point buffer alone.

According to APRA Chair Wayne Byres…

“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so.”

As interest rates fall, and for lenders who pass on the rate cuts, borrowers will likely end up being assessed on their ability to repay a 5.5 to 6.5 percent loan. That would mean a couple with two kids on $80,000 per year may be able to borrow about $120,000 more than they could before.

History has shown that most homebuyers aren’t really great at assessing their own risk. They let the banks do that for them, or at least that’s what they think the bank is doing. So this change will very likely increase the number of buyers entering the market.

However, before the flood gates will truly open, lenders will need the freedom to move away from verifying actual household expenses and instead return to the Household Expenditure Measure (HEM) for estimating expenses. As Philip Soos has accurately pointed out…

This is why the decrease in the RBA policy rate and APRA serviceability rate will do nothing to inflate house prices: the HEM is by far and away the largest factor in inflating loan sizes. Using verified expenses easily counteracts any benefit in cutting both rates. pic.twitter.com/IvH6VNqmz7

— Philip Soos (@PhilipSoos) May 26, 2019

Coalition Government Saddling Up First Homebuyers With a Carriage Full of Debt

The week prior to the election, in a bid to garner votes from a younger demographic, the Coalition threw out a scheme to lower the amount first homebuyers would need to save to buy a house. For up to 10,000 applicants (earning less than $125,000 a year or couples earning a combined income of less than $200,000), the Government has promised to guarantee the additional amount needed to reach a deposit of 20 percent, with the first homebuyer bringing as little as a 5 percent deposit. Qualifying buyers will therefore avoid having to pay Lenders Mortgage Insurance (LMI).  

Why any first homebuyer would think it’s a good idea to borrow to buy a home at a 95 percent LVR in a falling market, I have no idea. Unfortunately, we as humans have not had a great track record of assessing risk during our twenties.  

Case in point… Domain reported this week on five first homebuyers who went to war at auction for a two-bedroom apartment in Northcote. By the time the fourth buyer had bowed out, the winning bid was nearly $90,000 above the seller’s reserve. For perspective, the median price of a two bedroom unit in Northcote is $577,500.

Land Developers Desperate to Make Out Like Bandits

Developers of struggling greenfield projects could be the most desperate for an uplift in sales from the recent regulatory stimulus. In Sydney and Melbourne, 27 percent of new homebuyers have been defaulting on their land purchases, unable to get finance due to more stringent lending criteria and low valuations.

For insight on just how much it sucks to be one of these buyers, click the video below to watch this 7News piece:

Hundreds of Melbourne families are panic selling housing blocks as they face financial ruin. @NickMcCallum7 #7NEWS pic.twitter.com/9ofC4RWWLx

— 7NEWS Melbourne (@7NewsMelbourne) May 20, 2019

Don’t Get Shot Down In a Blaze of Glory

What does all of this mean for property investors?

Although the regulators are coming to the property market’s rescue, the leading market indicators are still flashing red. Housing credit growth had another dismal month in April, growing at only 0.3 percent and residential building approvals fell sharply again over the month, down 4.7 percent.

While low credit growth tends to signal falling prices over the next six months, we’ll probably see the credit growth numbers improve once APRA’s changes go into effect.

Given enough time, the weak building approvals data should have the effect of decreasing supply, which should help house prices. However, it will be a tough year for tradies and others in the building industry, which won’t help to boost wage growth, which is what’s needed most if we’re going to see sustainable rises in house prices.

As we see a floor established under house prices in the coming months, it should be good times for manufactured growth investors. When you’re looking to do renos and subdivisions, what you need is a stable market.

But if you’re looking for a good time to jump in to a buy and hold deal, it may be best to wait a few more months and see how the market shakes out.

What do you think?

• Will we see house prices begin to rise soon or is there already too much debt in the system?

• For the Young Guns fans, did Pat Garrett really shoot Billy the Kid dead?

Take a moment to share your thoughts below.

The post Regulators, Mount Up! appeared first on PropertyInvesting.com.

Australian Property Market Update 

7 May, 2019 

As the pace of house price declines slow and economists point to an impending RBA rate cut, is the worst of our property market woes finally behind us?

The Auction Market – Still Plodding Along

Last week’s auction results appear to show a healthy boost in demand, with the highest preliminary auction clearance rates posted in months. However, we also have a significant lack of reporting on the part of agents this week, which means we can expect to see the final numbers adjusted down more than normal.

That means the true auction clearance rates in Sydney and Melbourne are likely around the mid-50s, as was the case in late March and the first half of April.

Keep in mind that auction volume was much lower last week than in the weeks leading up to Easter, which could account for a boost in the clearance rate this week. If we still have the same number of buyers, but with fewer properties available at auction, clearance rates would be expected to rise.

Here are the latest preliminary auction results for all the capital cities:

Source: CoreLogic

Home Prices – Better than Last Month, Sort Of 

Dwelling prices are still falling, but the pace of decline is slowing. April marks the third month in a row that CoreLogic’s monthly figures have shown an improvement.

Could we see the Sydney and Melbourne markets flatten out and a buying opportunity emerge? It’s a little too early to tell, but watch this space.

Here’s a look back at Corelogic’s recent monthly price movement data:

Looking beyond our two largest capital cities, Brisbane remains weaker than at the start of the year, but managed a slight improvement from last month. The pace of house price decline is also slowing in Perth, and Adelaide remains mostly flat.

The best performing capital city in April was Canberra, rising nearly half a percent, and the worst performer was Hobart, declining nearly 1 percent.

Here’s CoreLogic’s latest monthly median house price data:

 Source: CoreLogic  

Looking back over the past twelve months, Sydney is down about 11 percent and Melbourne has fallen around 10 percent. But house prices in our largest capitals have been falling for longer than the past year. The Sydney market peaked in July 2017 and Melbourne started falling in November 2017. 

I keep monthly tabs on CoreLogic’s back series of data, and according to my assessment of their data, Sydney has fallen 14.56 percent and Melbourne is down 10.79 percent from the peak.

Keep in mind that’s just a metropolitan area average. Some suburbs have fallen more and some less. As Martin North recently reported, Gladesville and North Ryde have both fallen 21.6 percent since mid-2017. That means some homeowners who purchased around that time will now be in negative equity and have lost ALL of their cash deposit.

Mortgage Delinquencies on the Rise

As long as they can continue to make their mortgage payments and don’t become forced sellers, homeowners in negative equity may be able to ride out the storm. But according to a recent report by ANZ, an increasing number of mortgagees are getting behind on their payments.

The following chart tracks the number of households more than 90 days behind on their home loan payments.

Source: ANZ via SBS

In all states, mortgage delinquencies have been rising year-on-year. Things aren’t too bad in NSW at the moment because the job market is strong and unemployment is low. But WA is a different story, with an unemployment rate of over 6 percent.

While the RBA focuses primarily on the rate of inflation, to keep it between 2 to 3 percent, the unemployment rate is also on its radar. And for good reason. With house prices falling, a weak jobs market in NSW or Victoria would be devastating.

It’s About Time for Philip Lowe to Get Busy

The RBA just racked up a 33rd consecutive month without a change to its target cash rate. For now, we remain at a record low 1.50 percent.

But that streak is likely now coming to an end. May was the first month since before the last interest rate change 33 months ago that a rate cut was a 50/50 bet according to futures market traders. Looking forward to July, a full 25 basis point cut is already priced in, and futures traders have priced in cuts to a 1 percent cash rate by early 2020.

Why so much dovishness all of a sudden?

The consumer price index figures, the primary measure of inflation, was dismal in the March quarter. Economists weren’t expecting much, but they got even worse. Over the march quarter, the CPI was 0.0 percent. That brought the year-on year figure through March to 1.3 percent.

Yikes! That’s well below the minimum acceptable target for the RBA of 2 percent annual inflation. Were we not a few weeks out from an election, I reckon we would have seen a rate cut this week.

Will Lower Interest Rates Bring More Home Buyers?

One thing is certain – lower interest rates will not cause house prices to fall faster. But will a lower RBA cash rate stop falling prices or even cause prices to start rising again by bringing new buyers to the housing market?

While it’s true that we can see a direct correlation between falling interest rates and rising house prices in Australia from 2012 to 2017, low interest rates alone do not make house prices rise. There are two other factors we must consider: the availability of credit and the supply of housing.

Just because interest rates are lower does not mean banks will be writing more loans. Most banks are not permitted to assess the creditworthiness of borrowers at the variable mortgage rate. Regulators force banks to determine borrower serviceability assuming a mortgage rate of 7.25 percent, to provide a buffer against future rate rises. That won’t change with a rate cut unless APRA changes this assessment rate.

The other factor is the supply of housing. With many apartment developments still being built in Brisbane, Melbourne, and Sydney, and settlement risk still hovering over developers, plenty of supply remains in the pipeline. In fact, there are more houses on the market now than anytime since 2012.

Of course, the other wild card is how possible changes to investor tax concessions from Labor could impact the property market. According to the latest Newspoll, if the election was held today, Labor would come out on top.

Source: The Australian

It’s hard to imagine a scenario where negative gearing and CGT discount policies change and house prices don’t face further downward pressure.

March’s Credit Growth Numbers Really Sucked

Because housing demand depends primarily on the availability of cheap credit, the rate of credit growth is the most important leading indicator of home price movements. Changes in housing credit growth tend to lead changes in home prices by about six months.

In March, housing credit only grew by 0.25 percent. That brought the annual growth rate to 3.99 percent. That’s the lowest level on record.

As credit growth numbers are a leading indicator, home prices will likely still be falling six months from now, unless current lending restrictions loosen significantly.

Building Approvals Tanked Again

Although February was a solid month, building approvals tanked again in March. Approvals for the construction of new homes fell 15.5 percent, wiping out most of the previous month’s gains. This brought the annual figure through March to a decline of 27.3 percent.

Developers of apartments and units were the major culprit, plunging 30.6 percent in March. Approvals for houses only fell 3.2 percent.

Building approvals are important because they are a good indicator of what lies ahead in the construction industry. The latest figures mean there will be less work available for tradies and builders.

Longer-term, lower supply should be good for house prices, but it could take us a while to get there.

What does it all mean for property investors? 

On the bright side, house prices are falling at a slower pace than in previous months, especially in Sydney and Melbourne. We’re also likely to see at least one or two interest rate cuts in the coming months by the RBA.

But many headwinds remain. Our economy isn’t really growing, construction and property industry jobs are coming under pressure, and credit growth is slow.

That doesn’t mean it’s time to batten down the hatches and go into hiding. Astute investors will continue to make money in the coming months.

That said, if you’re a passive buy and hold investor, keep in mind the importance of market timing. It may be best to look for signs of the bottom before you jump into a deal.

If you’re a manufactured growth investor, make sure you have a solid due diligence system and, depending where you’re investing, factor falling prices or a longer sales period into your projected profit.

Regardless of your strategy or your market bias, commit time and money to your property education. You can never go wrong investing in yourself.

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Australian Property Market Update 

3 April, 2019 

Dwelling prices are still falling, but not as fast as in previous months. Is the latest housing market data showing signs of a soft landing?

The Auction Market – Don’t Be Fooled, Sydney

We continue to see Monday morning headlines about rising auction clearance rates in Sydney, with this week’s preliminary result at nearly 66 percent. But don’t be fooled; remember it’s the final (not preliminary) results that tell the true story.

Check out the difference in the table below between the preliminary results (released Monday morning) and the final results (posted on Thursday morning). This week’s preliminary results only include about 60 percent of the total auctions, and because most late reported results are for properties that failed to clear, the final figure tends to be much lower.

The data for the week ending 24 March is especially telling. Sydney’s preliminary auction clearance rate was 62.2%, but the final count comes in over 10 percentage points lower. That’s the widest disparity I’ve ever seen and indicates a final clearance rate this week of around 56 percent.

Melbourne’s preliminary results have been much closer to reality over the past few weeks. This may indicate that more properties are finding a winning bidder in the auction itself, rather than in post-auction negotiations.

If Sydney’s final result does come in around 56 percent, that does indicate an improvement from previous weeks. Melbourne’s final results are also trending upward through March, although this week’s preliminary result is several percentage points lower than last week, due mainly to an increase in auction volume.

Looking at the nation as a whole, the clearance rate continues to hover around the 50 percent range. But considering that auction volume spiked significantly this week, a clearance rate that doesn’t fall is a sign of improvement.

Either there are more buyers entering the market, or vendors are succumbing to market forces and becoming more realistic with their sales price expectations. Given the recent price action (which I’ll cover below), I’m inclined to believe it’s a little of both.

Here are the latest preliminary auction results (for what they’re worth) for all the capital cities:

Source: CoreLogic

Home Prices – Will they flatten out soon? 

Dwelling prices continued to fall in March, but not as much as in February. This was the second month in a row that the pace of decline slowed, meaning February’s price decline was not as great as January’s.

While it’s too early to be breaking open the champagne, it’s certainly a hopeful sign that the falling dwelling price curve could flatten out later this year.

It’s really only Sydney and Melbourne where there’s a clear trend of improvement. Brisbane price falls may actually be accelerating, and Adelaide, which has been subdivision paradise over the past year, seems to be softening.

Here’s CoreLogic’s latest monthly median house price data:

 Source: CoreLogic  

As you can see, all the capital cities, barring Canberra and Hobart, were in the red last month. Even Canberra seemed to be barely keeping its head above water with growth of 0.01 percent.

The rolling twelve-month declines are somewhat meaningless when we could be focusing on falls from the peak, so I’ll jump straight to those figures.

According to my assessment of CoreLogic’s back series of data, the Sydney median dwelling price has now fallen 13.96 percent from the market peak back in July 2017. Melbourne’s median dwelling price is now down 10.33 percent from the all-time high in November 2017.

If we average about half a percent decline over the next twelve months in Sydney before the market flattens out, the falls from the peak in Sydney will amount to around 20 percent. While that seems to be an optimistic outlook, given the current trend, it would still leave many 2017 Sydney buyers in a world of hurt.  

Many of these buyers on an 80 percent LVR will have lost nearly all of their equity by year end. Buyers who qualified for a 90 percent LVR loan in 2017 have already been losing sleep at night for months.

Comparison website Finder just released results of a survey of borrowers. Their findings estimate that 4.8 million households across Australia are already experiencing mortgage stress. Forty percent of mortgage holders are living “month to month”, 7 percent are “barely able to make repayments each month” and 2 percent are “behind in repayments”.

RBA chief Philip Lowe’s comments about how “prices are still 75 percent higher over the decade” will do little to console homebuyers who purchased at the peak. For their sakes, let’s hope the Sydney and Melbourne property parachutes have indeed opened.

Interest Rates – WTF is Phillip Lowe doing all day?

Speaking of Philip Lowe, he and his central banking cronies met this week and decided yet again to leave the cash rate on hold at 1.50 percent. That’s a record 32 consecutive months without a benchmark rate change.

While the cash rate may remain the same, the tone of his monetary policy statement has shifted. He hasn’t quite gone as hard-core dovish as his American and European peers, but his closing statement was different this month than previous months.

Previously, he had been ending with words to the effect of, “leaving the cash rate unchanged is consistent with sustainable growth in the economy and achieving the inflation target over time.”

This month, however, he shifted the wording. “The board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time.”

It seems they are now “monitoring developments.” I’m not sure what they’ve been up to for the last few years, but it’s good to hear that developments are now being monitored.

Expect a lower cash rate by year-end, especially if Labor comes into power. The future tax cuts that Scott Morrison and team are proposing likely won’t make it into a Labor budget, which would put more onus on the RBA to stimulate the economy.  

Credit Growth at a Snail’s Pace

Housing credit growth ticked up ever-so-slightly in February by 0.3 percent. That’s better than moving backwards, but it brings the annual growth rate of credit to a meagre 4.2 percent, the lowest growth rate on record.

We have tighter lending restrictions in part to thank for that, but the reality is there is only so much debt a nation can carry. According to the latest RBA data, total household debt to income has risen to 189.6 percent, as of December 2018. It seems we are approaching that ceiling and at some point we’ll need to deleverage.

Because housing demand depends primarily on the availability of cheap credit, the rate of credit growth is the most important leading indicator of home price movements. Changes in housing credit growth tend to lead home prices by about six months. That means that six months from now, home prices will likely still be falling. The pace of those falls will depend on other factors.

Woohoo! Building Approvals Just Spiked 19.1%

It’s been a rough couple of months for the building industry, with the recent summer months marking some of the worst approvals data since the GFC. January saw a slight bounce, but February’s data far exceeded expectations.

Analysts were expecting another drop in February of 1.7 percent. Instead, approvals for the construction of new homes jumped by 19.1 percent.

Again, we need to pause to look a little deeper before cracking open the bubbly. Looking back over the past year, total building approvals to February is still down 12.5 percent.

We also need to consider the finer points of the report. Approvals for houses fell 3.6 percent in February, but the “other dwellings” category, which includes apartment blocks and townhouses, soared by 64.6 percent. In other words, houses fell and units rose alot. That’s not a particularly great sign. Sustained growth in both sectors would be a promising sign.

March’s building approvals data will be important to watch. It’s not uncommon after a big jump like this to see a correction lower again in the following month.

What does it all mean for property investors? 

While the rate of price decline seems to be slowing in Sydney and Melbourne, it’s important to keep in mind that prices are still falling, and according to credit growth data, will likely still be falling six months from now.

If you’re a manufactured growth investor, factor that into your offer price. Make sure you discount your anticipated sales price from current comparison sales. If your renovation deal has a 10 percent ROI based on today’s prices, don’t expect that profit by the time you sell. Perhaps a 15 percent RO on a three to six month turnaround time would be a better target.

If you’re a buy and hold investor, be sure to read Steve McKnight’s latest article which he’ll be posting soon. He offers some great insights on how to invest in a down market.

If you’re currently searching for deals in South Australia or Queensland, be aware that tigher lending restrictions and buyer sentiment seems to be negatively impacted by falling prices in Sydney and Melbourne. While prices outside our largest two cities have not fallen considerably, properties are taking longer to sell, which will likely increase your holding costs and diminish your profit outcome.

Wherever you are investing, be prudent, focus on the numbers, and don’t get emotional.

The post Has the Property Market Parachute Finally Opened? appeared first on PropertyInvesting.com.

Interpretation of data can be much the same game. On the ABC’s Insiders program on the weekend, the host and his guest (a politician) each argued that the summation of the facts they were quoting, which was at complete odds with the other, was right, and that the other person was completely and factually incorrect. An independent review of the facts later on proved they were both right, and both wrong! It was a duck, and a dinosaur!

The same mixed reading is also present in the latest real estate and housing data. Now that the Autumn sales period is underway, there is certainly more transaction volume, and this ought to mean that the trend should be easier to identify. However the number of properties actually being listed for auction is well down on the same period last year (with major auction markets Sydney down 27% and Melbourne 31% lower).

Fewer properties being put up for sale is also confirmed with RealEstate.com.au noting that its listings dropped 3%, and they flagged possible further declines as buyers hold off until after the election. If Labor win, as seems likely, there will be a period of substantial uncertainty as lobbyists jockey to be heard while new policies are formed. Typically, when people don’t know what to do, they do nothing.

CoreLogic’s read of the property market for February revealed a decline of 0.7% in national dwelling values, with all capital cities falling except Adelaide (no change) and Hobart (up). Sydney is now down more than 10% for the year to February – the first time that has happened in 30 years. Melbourne is not far behind.

It’s not all doom and gloom though. Initial auction clearance data from last weekend showed ‘green shoots of growth’ in Sydney’s property market with a preliminary auction clearance rate of 61.3%. Melbourne was still soft at 54.9%, but recovering from being stuck in the 40%’s. Add to that strong jobs growth, projections of population growth, along with a natural ‘correction’ to housing supply causing approvals number to throttle back, and perhaps the claims of a pending crash is nothing more than alarmist rubbish.

Still, how do we invest with confidence and clarity in times when there is such uncertainty?

I think the story of how pilots fly at night or through fog, when visibility is low, provides a great illustration. At such times pilots have to rely on their instruments rather than their intuition.

In other words, investors would be wise to lean on the investing ‘optics’ – the financial parameters – of the investment rather than second-guessing their intuition about timing. If it’s a good deal because the income stacks up, or you feel the growth story over the medium to long term makes the risk worthwhile, then go ahead and buy with conviction. Why? Because eventually this current market malaise will pass, and if I know anything about real estate it’s this: when the market does turn, tomorrow’s investors will wish they had bought more at today’s prices, and at today’s low interest rates.

A Steveism to remember is the antidote to risk is skill. Risk has surely risen with all of the conflicting data and current market uncertainty, so to offset this heightened risk, the amount of skill you need to succeed must also increase.

In summary, now is not the time to close your eyes and guess that we’re at or near the bottom, and thus go buying in hope the prices will recover. However, it is the time to invest in being able to read and interpret what your investing instruments are telling you about the deals and opportunities you ought to be enquiring about. After all, you can’t buy a great deal you’re not looking for, and, as my property mentor, Stu Silver says, if you’re not making offers, you’re not making money.

The post Dinosaur or Duck? appeared first on PropertyInvesting.com.

6 March, 2019 

We’ve seen what seems like a few little rays of property market data sunshine through the dark media clouds over the past few weeks. Is it time to call the bottom for Sydney and Melbourne home prices?

You may find yourself feeling a little like Lloyd Christmas at times – hanging on even the slightest glimmer of hope.

So let’s take a closer look at the most recent data and see if there is a chance the downward trend in house prices is nearing the bottom.

The Auction Market – Clearance Rates in the 60’s?

Two weeks ago, and this week, Sydney posted a preliminary clearance rate in the low 60’s. “So you’re telling me there’s a chance?” The final (not preliminary) results tell the true story.

Over the past four weeks, the nationwide auction clearance rate has been hovering around the 50 to 51 percent range. Auction volume has been gradually swelling since the market cranked back up in early February. However, auction supply remains weak for this time of year, with about 800 fewer homes taken to auction this week compared to the same time last year.

From the weeks of the 17th to the 24th of February (last week), we saw a significant surge in auction volume. With more homes on offer for buyers to choose from, auction clearance rates dipped last week, barely clearing 50 percent in both Sydney and Melbourne.

This week, with slightly fewer homes offered at auction, it appears based on preliminary reports, that auction clearance rates have again bounced back a little.

You’ll notice in the chart below I’ve compiled data from CoreLogic showing both the preliminary and final results over the past five weeks. Preliminary auction data is released on Monday morning, and is based on initial reports from agents at the end of the weekend. The final results, usually released on a Thursday, are most accurate, reflecting the totals of all auctioned properties.

It’s important to understand, we nearly always see the auction clearance rate drop from Monday to Thursday, as the preliminary data tends to have fewer unsuccessful auctions in the mix. Those properties finally make it into the count in Thursday’s report. Agents are quite happy with this, and may even use the subjective nature of the reporting to their benefit, as it helps to paint a rosier picture in the Monday morning headlines.

Following is the nationwide, Sydney and Melbourne auction data for the past five weeks. Notice the percentage point drop from preliminary (Monday) to final reporting (Thursday).

For all the final results in the other capital cities, click the relevant date in the table above.

Here are the latest preliminary auction results for all the capital cities:

Source: CoreLogic

Once this week’s final results are counted and reported tomorrow, expect the combined capital city clearance rate to sit between 50 and 51 percent, reflecting a slight improvement from the previous week, thanks to lower auction supply. Sydney might just clear 55 percent, but Melbourne will likely report in the low 50’s.

Keep an eye on supply in the coming weeks. Higher auction volume will mean lower clearance rates.

Home Prices – Is the Downward Trend Slowing?

While home values continued to decline in February (down 0.9 percent across our five largest capital cities), the rate of decline was slower than the previous two months. Is this an early sign that the downward trend is slowing? We’ll need a few more months of data before we can make that call.

Melbourne and Sydney dwelling values both fell about 1 percent in February, an improvement from January’s declines of 1.60 percent and 1.35 percent respectively. Perth’s weakness accelerated from a 1.0 percent decline in January to nearly 1.5 percent in February. Brisbane prices are down slightly, but Adelaide remained flat and Hobart surged 0.82 percent higher.

Melbourne and Sydney’s rolling twelve-month declines have increased to 9.14 percent and 10.37 percent respectively. This marks the first time we’ve seen double-digit annual falls. Adelaide and Canberra are in positive territory for the year, but Hobart is the standout, up more than 7 percent over the past twelve months.

How much have Melbourne and Sydney prices fallen from their respective peaks? According to CoreLogic’s back series of data, Sydney house prices peaked in July 2017, then four months later, prices began falling in Melbourne. Since their peaks, by my calculations, Sydney house prices have fallen 13.2 percent and Melbourne is down 9.62 percent.

For a little perspective, consider the average Sydney home buyer in mid-2017 with a 20 percent deposit on a $1 million property. There are thousands of these buyers, give or take a few hundred thousand on the purchase price.

That $1 million home is now worth $868,000, which represents a cash on equity loss of about 50 percent, factoring in deposit, stamp duty and legals. Their LVR, which started at 80 percent, is now at about 92 percent. If the current downward trend continues, these buyers are about eight months away from negative equity.

Here’s CoreLogic’s latest monthly median house price data:

 Source: CoreLogic  

So how much farther will house prices fall?

Based on the current trend and the state of affairs in the lending market, the likely best case scenarios for Sydney and Melbourne seem to be falls of around 20 percent from their peaks. That would amount to another twelve months or more of falling prices.

AMP Capital’s economist Shane Oliver says,

“For Sydney and Melbourne our base case has been that prices would have a top to bottom fall of around 20% out to 2020. However, the further plunge in auction clearance rates and acceleration in price falls late last year suggest a deeper fall possibly of around 25% (although it’s impossible to be precise).”

If AMP’s prediction plays out, we’ll have wiped out about two and a half years worth of rising property prices, taking us back to early 2015.

ANZ has been a little more optimistic, predicting falls from the peak of around 15 to 20 percent. UBS Bank is also on board with the 20 percent peak to trough forecast.

But let’s keep things in perspective. House price growth so dramatically outpacing wages and consumer price inflation was never going to be sustainable.

As RBA chief Philip Lowe has been quick to point out,

“Even after the recent declines in Sydney, prices are still 75 percent higher over the decade. In Melbourne, they are 70 percent higher… We recognise that this correction will have an effect on parts of the economy. But our economy should be able to handle this, and it will put the housing market on a more sustainable footing.”

Central bankers… like Lloyd Christmas, always the optimists.

Interest Rates – Holding Steady, For Now

Speaking of the RBA, Philip Lowe and company met yesterday and decided to leave the cash rate on hold for a record 31 consecutive months, at the record low of 1.5 percent.

Their monetary policy statement suggests they’re banking on a strengthening labour market bringing a boost to wages, which they hope will bring economic growth. The problem, however, is that household spending sucks at the moment, thanks to weak growth in household income and falling housing prices.

Unless the RBA gets that boost in wage growth soon (highly unlikely), expect one or two rate cuts by year-end. This could be the one thing that actually does breath some life back into the property market.

The problem though is that a rate cut does not automatically mean lower mortgage borrowing costs. Whether lenders choose to pass these rate cuts on to variable rate mortgage holders is another matter. APRA and the Government will need to come to the party to loosen bank capital requirements and lending restrictions.

The Lending Market – Show Me the Money!

I’ll need to mix film metaphors here because there’s not really much good news in the lending market at the moment. Housing credit growth just suffered its worst month since 1984, rising a meagre 0.2 percent in January. December looked just as bleak, with credit growth hardly better at 0.3 percent. The twelve-month growth figure now sits at about 4.4 percent, which is about as bad as it’s been since 2013.

In light of the expectation of more falls in house prices, such a decline in demand for mortgage lending should not be a surprise. In fact, until buyers are confident the worst is over, housing credit growth will likely continue to fall.

CoreLogic research analyst Cameron Kusher points to other psychological factors beyond supply and demand. Kusher says,

“I suspect that demand has certainly fallen, but possibly it has fallen a greater amount because people are talking to the bank lender or mortgage broker and the feedback they are given is that there is no point applying because with current credit conditions this just isn’t going to get approved.”

As I mentioned, before home prices can start rising again, the credit markets will need to loosen up. Post Royal Commission and with banks now facing the prospect of class action lawsuits from borrowers, it’s difficult to build a case for where this easy money will come from.

Building Approvals – A Glimmer of Hope?

Back to some good news…

After two months of the worst building approvals data since the GFC, new construction prospects were looking up in January, with a slight bounce in approvals of 2.5 percent.

Unfortunately, there’s little reason to celebrate yet. Total approvals are still down by 28.6% from January last year. Developers are not only hesitant to start new projects, but also finding it increasingly more difficult to access finance for new acquisitions.

 Source: Business Insider Australia  

With few approvals in the future pipeline, once we work our way through the existing jobs underway, we could soon see the building industry in decline. This doesn’t bode well for the labour market nor for consumer spending on home improvement items. Weak building approvals does however eventually lead to lower supply, which could bring the market back to equilibrium.

“So you’re telling me there’s a chance.”

What does it all mean for property investors? 

If you’re making offers in Sydney and Melbourne now, you’d be wise to do so under the assumption that there’s still more downside to come. You’ll need your renovation or subdivision to be able to absorb another 7 to 10 percent in price falls, just to be safe. That’s a tall order as vendors tend to be six months behind, no ahead, in their emotional property valuations.

If you’re entering the Sydney or Melbourne markets to buy and hold, be sure you have an opinion on how long it will take for the property market to start rising again (at a pace greater than inflation). Sydney house prices have historically tended to be flat periods (5 to 7+ years) before rising again. You’ll need to climb out of the negative cash flow hole before banking profits.

Thankfully, we have other markets in Australia where house prices are either very stable or rising. If you can’t get vendors to accept your offers in Sydney or Melbourne, then perhaps it’s time to look to Queensland, South Australia or Tasmania.

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That’s my summary of the Royal Commission into the Banking and Financial Services Industry.

Stories of charging dead people fees, rampant greed, corporate misconduct and much more resulted in 76 recommendations, but none of them ground-breaking nor revolutionary. Perhaps the best result that emerged was the public shame that occurred during the hearing. In the aftermath, powerful lobby groups will likely be working overtime to argue for no change.

In some ways, given the financial resources of those it implicated of misconduct, it is a tap with a velvet sledgehammer (with the possible exception of the few criminal and civil trials that, if they happen, will take years to action).

In the hands of a government that didn’t want the report in the first place, there is no political ruin arising from it. Federal Treasurer Mr. Josh Frydenberg, like an exasperated parent who has lost control of an errant child, released a benign tongue-lashing that is more bark than bite.

A Difficult Job

To be fair, His Honour, Commissioner Hayne, and his team of helpers, had a very, very difficult task. As noted in the report, “Not every complaint that was made could be publicly examined. There were too many to do that.”

Gosh… too many to hear? Sounds like the Libs succeeded in scoping the enquiry to be so wide as to make the task of doing it properly, with the time and resources available, nigh on impossible. Who’d have guessed that when they begrudgingly agreed to the review in the first place?

Sandwiched between extremely well-heeled entities hopelessly blinded by greed, and regulators so overworked and under-resourced as to be tossed in to the ring with both hands tied behind their backs, it is unsurprising that the findings centred around two core principles – entities need to do better to care for their customers, and regulators need to do better at regulating.

Neither is likely to happen for long.

After the minimum possible period of contrition, the mighty pulling power of making money will again see consumers and customers compromised by greedy organisations that care more about profit than people. At the same time, regulators may receive a temporary bump in funding to levels still lower than they used to be, until inevitable budget cuts will force them to return to a ‘run on the smell of an oily rag’ operation.

What Will Change?

In the near-term, the answer is nothing. Most of the recommendations require changes to law, and with only a few sitting days of parliament left until it shuts up shop prior to the next election, it will be for the next government to roll out. With the housing market on the skids, and the economy likely to stall, there will be bigger fish to fry.

The one big change that might happen, eventually, is Recommendation 1.3:

The borrower, not the lender, should pay the mortgage broker a fee for acting in connection with home lending.

In other words, consumers may have to pay some, or all, of the fees paid to mortgage brokers for their help in finding and obtaining a loan, if a user-pays system is implemented.

If you don’t know, presently mortgage brokers are paid by the lender. This means that the client pays indirectly through either loan application fees, or via the interest rate charged on the loan. 

I suspect this will be the death knell to the mortgage broking industry as we know it, and, in a reversal of what happened in the 1990’s, large financial institutions will upscale in-house loan services to offer ‘free assessments’, and pay the higher overhead from the money they’ll keep rather than paying third-party brokers. It might be more transparent, but will it be better? I doubt it. Small to medium mortgage brokers simply won’t survive and they will need to find employment elsewhere. I note in particular Recommendation 1.5: 

After a sufficient period of transition, mortgage brokers should be subject to and regulated by the law that applies to entities providing financial product advice to retail clients.

This will require that mortgage brokers will have to ‘know their clients’ and provide ‘statements of advice’ similar to what financial planners have to do now. Sounds good but will add a lot of time, cost and administration that small businesses won’t be able to absorb. 

Aside from that, most of the recommendations relate to businesses being forced to have better moral consciences and regulators to have better regulating. No more blind eyes on either side.

Conclusion

I can’t help thinking the real damage done to the perpetrators of industrial-scale corporate greed and financial malpractice was the daily interrogation in the court of public opinion. Watching them squirm, their humiliation, their incompetence, their hubris and the embarrassment and erosion of their highly-prized goodwill that came from the public hearings was surely worth keeping the show going for a while longer. 

With the report released, an election some way off, and the disruption of a possible change of government, this will likely mean many months will pass before the issues highlighted in the report are revisited. And as we all know, justice delayed is justice denied.

You can read the Royal Commission’s report in full here:

https://treasury.gov.au/publication/p2019-fsrc-final-report/

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