MELTDOWN

Events are now occurring so quickly it is hard to keep up. New York is down again sharply, Harvey Norman has just had its worst month, Ford Australia is retrenching more, Rio Tinto is reviewing its capital expenditure because it can’t sell assets quickly enough, and the new NSW government is searching desperately for a property fix, etc etc.

Everybody is clutching at straws. Meanwhile, Rome burns.

Nouriel Roubini, a Professor of economics at the Stern School of Business was reported in the Australian Financial Review on 15.10.08 in the article “G7 tadalafil online economies likely to tip world into recession“, as saying we are witnessing 8 bubble bursting simultaneously:

• Housing bubble

• Mortgage bubble

• Equity bubble

• Bond bubble

• Credit bubble

• Commodity bubble

• Private equity bubble

• Hedge funds bubble

Prof. Roubini says we are beyond a V-shaped recession (6 months) and U-shaped recession (2 years) and into the decade long L-shaped recession. Fasten your seatbelts.

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Welcome

Welcome to our relaunched and now interactive website. We hope to bring you useful information about real estate in general and auctions in particular. Beach & Bay’s website is focusing on our immediate suburbs from Cronulla to Lilli Pilli, but the system will be extending to the whole of Sydney (Agent enquiries welcome at info@housebook.com.au). We will show you details of forthcoming auctions, Beach & Bay’s and most other agents. After the auctions each week we will gather as many results as possible, hopefully http://ourtadalafil.com/ with help from you, the public, and make that information available to everyone who wants to check our website. The intention is that every week on our website we will have an up-to-date list of auctions taking place in the area for your viewing. We trust this will benefit all agents and hope potential buyers will give us their feedback on our blog. Historical information will also be available, updated where possible. For example, if a property was passed in at $3.8m at auction and then later comes back on the market for sale we will attempt to keep you abreast of that development, again with a little help from our friends through the blog.

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Phew!

The last time I mentioned our clearance rate we were down to 25% so I decided to leave it for a few weeks. Now I am very happy to say that last weekend the auction clearance rate was 50% in our area, compared to the 50.7% Sydney wide rate quoted in the Sun Herald on 11th May 2008.

Didn’t I say May was going to be a good month!

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CREDIT CRUNCH

In America they have tens of thousands of banks, merchant banks, mortgage brokers and call centres all trying to outdo each other to lend America’s cheap money to anyone who wants to borrow it. At the call centre level the operators ring up people using a reverse phone book (addresses first so you can ring everybody on a particular street) until someone on the other end of the line says yes I would like a loan or I would like my loan to be cheaper. Before that person hangs up he gets passed to a mortgage broker on his list who on that day is paying the biggest fee. If the broker accepts the call he gets charged a fee regardless whether the call is productive or not. Put in very simple terms, that is how millions of loans are made or renegotiated in the USA, to this day.

After taking the call the mortgage broker is under pressure to perform and secure a loan. Gradually over a number of years millions of people borrowed money whilst real estate values were rising. Once those values started falling or if borrowers became unemployed they could not repay the loans.

In the meantime, the brokers who made the loans, grouped their mortgage papers into packages, which they sold at a discount to banks, superfunds and investors generally. Whilst real estate values were firm these assets returned good income. Credit agencies, to their shame, even gave many “A” Grade credit ratings. When millions of borrowers were foreclosed and others just walked away the security on the loans, now held by banks and investors, became worthless. The American banks started to unload these worthless assets at ever increasing discounts. It became pass the parcel and when they no longer realized any funds from selling them they had to write down their asset values and mend their balance sheets by borrowing. Quite soon banks were not even lending to other banks and certainly not to “Fannie Mae” which holds trillions worth of marginal home loans. Hence the subprime crisis.

Even Australian banks have bought many of these now bad loans. NAB just wrote off AUD1billion of them. The Australian banks have also lost billions lending to companies such as CENTRO, ABC Learning, MFS and a host of others who once borrowed cheaply in America, but where they now cannot borrow at any price.

There are many serious consequences for Australia from the subprime crisis. Foremost it has destroyed what little competition there was between the four big Australian banks, one of which will probably gobble up St George. Many of the mortgage brokers have been eliminated because they cannot borrow cheaply overseas anymore. RAMS was worth about $800m when it listed on the stock exchange just before the credit crunch hit and within weeks was snapped up by Westpac for about $150m.

The big four banks can now, with impunity, keep their rates up and even higher than the Reserve Bank. As well, having lost billions on bad loans and with less competition the banks will have to keep their rates up to maintain dividends for their shareholders. So do not expect rates to come down anytime soon.

Just this month Morgan Stanley has frozen thousands of equity loans called HELOCs (home equity lines of credit), another financial tool used in America and here, to unlock unused equity in homes. This difference between the sale value of the home and the debt on it has been falling sharply. In America, this is because there are some 18mil homes for sale or just standing empty in rust bucket cities like Detroit. GM and Ford are headquartered there and they are closing factories worldwide by the dozen, literally.

Parts of Detroit are like ghost towns where every second house is for sale and investors pay huge municipal taxes that rents cannot possibly cover, if, indeed, they can secure paying tenants, at all.

It is even more depressing that, at the same time as people are losing their jobs, then their houses, prices are going up on basic food items because of drought here or floods there or climate change everywhere. Then there is the demand for commodities from Asia helping many of us in Australia as the tripling in the price for coking coal (of which Australia is by far the world’s largest exporter) and a near doubling of the price of iron ore filter down to us all but also make the price of almost everything go up. Separately, but for similar reasons oil prices have risen steadily to exorbitant heights. All these factors lead to higher prices when we can least afford it.

A number of factors have led to rising unemployment in America. These factors have been at work for many years, exacerbated by recently skyrocketing fuel prices. Another major reason for America’s woes is the fact that China’s currency has been undervalued for many years now. The Chinese yuan is pegged to the USD at an artificially low rate. China has an almost inexhaustible supply of cheap labour making quality product so cheaply that consumers in America and Australia have not been able to resist. Our factories have closed and our famous brands are all made in Asia. In short, we can say we have exported our jobs to Asia, particularly China. As a country it becomes more powerful by the day, holding trillions of dollar reserves.

Meanwhile back home, Americans are experiencing little or no growth overall in many parts of their economy yet they have to cope with rising petrol prices the cost of which flows quickly through to the rest of the economy. Thus they suffer stagflation (rising prices in a stagnant economy). Just when we have least to spend we have to spend more for our basic essentials.

Sadly, not a good outlook for America. Australians, for the time being are somewhat insulated from but certainly not immune to most of these adverse trends. Even though we are suffering our own financial crisis we are supplying a large part of Chinas raw material import requirement. We have vast unused land to the north. We have untapped green energy, an educated workforce, political stability and a great climate. And … we are coming fifth in the gold medal tally at the Beijing cialis for daily use Olympics!

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Real Estate Internationally

It certainly looks like real estate worldwide is in for a very interesting year in 2008. Home prices in the USA are in free fall. In fact, USA Today, reported on 30th January 2008 that about 2.18 million vacant homes were for sale in the fourth quarter of 2007 with nearly 1.3 million home owners in some state of foreclosure. Construction approvals to build homes are off 56% from their peak 2 years ago.

To counteract these developments exacerbated by the fact that many loans have been made to people who could never have been expected to repay them, (subprime crisis), the Federal Reserve has reduced US interest rates twice in January 08 already (0.75% – which is 3 times a normal rate change in one go, and then another 0.5% down to 3%)

On the other side of the Pacific, in Vietnam real estate is its hottest market (Wall Street Journal, 30 January 2008)

“Brokers say residential prices have risen 50% since the beginning of 2007, although in some areas prices have tripled…”

Whilst Australia’s economy is going gang busters real estate is feeling the brunt of rising interest rates with further increases imminent. With interest rates now more than double those in the US our Reserve Bank is using one of the few tools it has to fight inflation ie. interest rates. Unfortunately, it has become a blunt tool for some and the Sword priceofcialis.com/cialis-coupon of Damocles to others. Those people spending most, have good jobs and high income, do not get affected by 0.25% rises, those not so fortunate get tipped over the edge leading to increased forced sales in many parts of Sydney.

During January 2008 when buyers and real estate salespeople were all on holidays there were some very serious developments in commercial real estate with CENTRO, MFS and Allco all suffering huge falls. The stock market generally has been hurt with superfunds losing retirement money for many.

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IF AN AUCTION GO TO AUCTION

Several auctions have been cancelled or withdrawn lately on the day of the auction and signs posted on the signboard saying “Under Contract” or “Under Offer”.

A real estate agent interprets this as “There are no buyers”. This might seem cynical but there are several reasons for this. Practically it should not be possible to be “under contract” or “under offer” on the day of the auction or during the course of an auction campaign. One of the reasons sellers choose to market their property for auction is so the pressure is put on the buyer. If you buy at auction or negotiate and buy after auction (until midnight on the day of the auction) you must exchange contracts and put an unconditional deposit on that property, normally 10%. The buyer loses that if they pull out after exchange for any reason. The big difference with “Under Contract” is that the buyer exchanges contracts on a small deposit (0.25%) and has 5 working days to pull out for any reason (otherwise known as exchanging under cool off). The seller can not pull out, only the buyer. Why would a seller accept worse conditions the day before an auction, or on the day of the auction, it just does not make sense.

Even worse is “Under Offer” which means the buyer has made a verbal offer, no contracts signed and can pull out at anytime with absolutely no financial penalty. Better to hold the auction than cancel under those conditions. If you have committed to an auction make sure you go to auction.

Recently there was an “auction cancelled – under offer” sign on a property on auction day, then the ad in the Leader appeared the following Tuesday with the same property advertised “For Sale”. This is interesting as the Leader advertising deadlines mean that they must have known on Thursday prior to the auction that the offer in place on auction day was no longer an “offer”, 2 days ahead of the Saturday auction!!! I am confused are you?

Even during an auction campaign it is not smart to exchange a property under contract with 5 day cool off. In these uncertain times, imagine the situation where a seller accepts an offer of say $800,000, contracts are exchanged under a “5 day cool off” with a $2000 deposit. For 5 working days the seller waits to see if the buyer goes ahead, in the meantime, no one else can buy the property. 5 working days is a long time in a month marketing campaign. Worse case happens and the buyer pulls out. Even mid way through the marketing campaign, all momentum is lost. All the other interest has gone elsewhere as they thought the property was sold. Even worse the buyer could have pulled out for any reason ie decided to go on a holiday or buy a car instead but other buyers start to think the worst, maybe the pest and building was bad…

My advice to the public is, if your agent tells you in the course of marketing your property for auction that you should accept “under contract” or “under offer” conditions, ask the agent why you are paying extra to do an auction campaign and ask him to go back to real estate school!

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May Is The New Selling Season

There are no public or school holidays this month so residential sales should be back on track for May. With Easter so early this year and not tying in with the school holidays sales have been in go slow mode!

But already this month several properties have sold prior, one with an auction date of 24th May.

Quality properties will always do well and sellers know how competitive the market is these days. Sellers also understand the importance of marketing and presentation as they compete with other sellers. But if the price is not right or in the ballpark, this can all be a waste of time. Buyers are choosey, researched and know their market, and so they should be if they are paying interest rates of 10%!

Happy house hunting and happy selling.

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Coming Up Short In America

The New York Times of 19th September 2008 features an article on the pain of selling property for less than the loan on it (called a “short sale” in America). The article “The Pain of Selling a Home for Less Than the Loan” gives an actual example of Mr Kelly who got a new job 75 miles away, so he and his wife wanted to sell their house. Unfortunately, the best offer they could get was USD 220, 000 whilst the loan was for USD 300, 000 in the “foreclosure plagued central valley of California”

CitiMortgage said it would agree to a sale at that price, but at the last minute told the borrowers they needed to pay USD 166 a month for the next 20 years (or just under USD 40,000) to make up the shortfall! How demoralising would that be?

The same article quotes Moody’s economy.com estimating that 10 million home owners in the USA have negative equity, a condition known colloquially as being upside down or underwater. By next June the forecasting company expects the total to rise to 12.7 million – a quarter of all home owners who have mortgages.

The Kelly’s, both 64, did not want to surrender their home to foreclosure, thereby ruining their credit rating, hurting their neighbours and “betraying their image of themselves”.

Mr Kelly offered to pay USD 20,000, but before the lender could answer Mr Kelly was laid off. Now the lender will be lucky to get anything.

What does all this mean to the Shire? The number of mortgagee sales has gone through the roof (forgive the pun) here too. There are still groups ourtadalafil.com/ of people selling:

1. Baby boomers and empty nesters going from a big house to a villa or weekender

2. Those in financial stress

3. Those in family stress

4. Those upgrading

Group 1 will be spending less because their super has fallen out of the sky. Groups 2 are “underwater” and they will probably just add to the pressure on the rental market. The current perilous financial situation can’t be helping family stress but, as few as possible will be selling into a poor market and then end up with half the net proceeds and on the rental market. Those few upgrading will, with few exceptions, not buy before they sell. Because it is taking longer to sell, there are less and less buying.

Our NSW state government is in crisis, largely because stamp duty from real estate purchases has halved in the months of July and August of this year. This despite the fact they charged land tax twice this year on any property they could show went up at all!

I believe Daniel Potts got it right in a lead article in the Investor section of The Sun-Herald on 28th September when he said

“…potential vendors hold off in weak markets, giving the false if reassuring impression that prices are stable when the real situation is that the market has shut down…Heaven help us if property had regular trading hours like the sharemarket…”

Mr Potts did highlight one positive for Australian real estate over the US and that is our

“…critical shortage of housing exacerbated by record immigration”.

It is becoming clearer, at least in the US, UK and Australia that it is the real estate crisis that has caused the subprime and financial crisis. Neither are going to go away quickly or without further corrective action. The Reserve Bank announced today (30/09/08) that it stands ready to buy another USD 20 billion to improve international liquidity.

But, how about a 50 basis points rate cut to improve clearance rates beyond the current 30% in the Shire last weekend. (Sydney wide the clearance rate was 59.3%).

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Superannuation Vs Property

At this time in the quarter all small businesses should just have paid their 1st quarter 9% compulsory superannuation guarantee payments.

For those people like myself who have to make these payments, this can be a very frustrating time:

1) Because under “CHOICE” I have to send the money into about 10 different funds using about 5 different methods

2) With the financial crisis the money goes into funds that are just going to lose a lot of it.

3) How much better would it be if the money had been invested in residential real estate?

If you want the details, read on.

1) It’s great that we all have “Choice” as to who to let lose our hard earned 9%, but “Choice” has become an administrative nightmare for small businesses.

I got bombarded with paper from about 10 different funds, most of them trying to get me to send them money monthly instead of quarterly, which is the government requirement for the superannuation guaranteed (9%). Do you seriously think I want to send amounts as small as $100 to 10 different funds monthly rather than $300 once a quarter, just so the government can take their 15% contribution far earlier, so that the funds can get their excessive fees earlier, and lately, just so they lose the remaining amount more quickly. Because I refuse to do this, one fund wrote me quite threatening letters which start by stating that their fund (who better remain nameless)”….requires superannuation contributions you make on behalf of your employees to be remitted at the end of every month.” Because I refuse, even though the law allows me to refuse and the funds know this, the fund & several others make me write individual cheques to cover the superannuation guarantee (SG).

At the other end of the scale there is BT (now part of Westpac) who are super efficient. They allow me to pay by Bpay. Each member has a unique reference number, which my financial institution stores and the process of sending that staff members SG takes about 1 minute, with absolutely no paperwork involved. Brilliant! But I have all the range of funds and their individual quirks in between. Some funds are still in the dark ages with their accounting systems. They want a cheque and a letter, or Bpay plus follow up advice.

How is a small business supposed to have time to make money and survive when this chaos reigns supreme? There are simple solutions to this problem, but does anyone in authority care?

2) What is going to happen over the next few years is anyone’s guess, but we have to face facts. We have just had 15 fantastic years of economic growth so we can’t really complain that about 8 different bubbles (see my blog 18.10.08) have burst at the same time. It is unlikely that we are going to recover quickly from this crisis, if, in fact, we have reached the bottom yet. We might even have a way to go down yet. So what does this mean for your 9% SG. Firstly, the government will take 15% off the top, then there are the administration fees, the insurance cover costs and before the funds have invested a cent your money is below 80c in the dollar. After only a few years of negative income, it is going to take a lot of positive returns to even get your money back. Anyone approaching retirement would not voluntarily put money into super.

When I was young and worked for a bank, my bank’s superfund was so rich it was compared with Fort Knox. If you stayed till you were 65 you walked away with guaranteed super benefits. One year they actually worked out the bank could give all its staff some money back because we had overcontributed. Other years the expected liability was such that the Bank had to fork out huge money so shareholders got sick of that & closed the fund to new members and gradually changed over to a scheme where the benefits depended on the economy and financial managers who are like lemmings and follow each other over the cliff. By that I mean that because of ratings no funds performance can be too different from that of another so they all have to be in the latest fancy investment or derivative or lose funds to those that are. Of course when the bubble burst they all fell over the cliff at the same time without exception, like sheep to the slaughter.

Quite apart from the performance aspect I remember writing to the committee of the bank when it was looking for submissions on superannuation. I said I didn’t want to contribute to superannuation for my retirement when I was already battling to feed, house & educate my four children. Also, I was working just before the 1987 crash and after the 1974/5 crash. Crashes are not new, but this one is a beauty.

3) One of the investments, super fund managers don’t get into is residential estate. Yet over my working life, land in my area has gone from $10,000 to $500,000 without any finesse or intervention from fund managers.

Admittedly, 2 years ago, it might have been worth $550,000 – $600,000. Why not package residential real estate into trusts and let super funds ourtadalafil.com home buy into them?

Another solution might be, and this is not a new suggestion, to allow self funded retirees to get the pension, but tax it along with their retirement income. After all, they have probably worked and paid taxes for 40 years before getting the pension.

Alternatively, do away with the 9% SG and add another income tax such as is charged in many European countries and invest the specific proceeds in some sort of infrastructure future fund.

With the benefit of hindsight it is easy to criticize the SG. Two years ago when funds were returning +15% everyone was happy. Hopefully the good times will return. In the meantime government can do a lot to improve the system we have.

Or think about investing in quality real estate?

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School Holidays!

School holidays are never a great time to auction a property and last week was the perfect example. 2 nights of midweek auctions, the middle weekend of the school holidays and 3 Sunday auctions, culminated in a 25% clearance rate. Let’s blame the school holidays and the rain.

1 auction is scheduled this Anzac Day Long Weekend. Maybe we will achieve a 100% clearance rate for a change!

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