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Do you think the property market will burst in 2015?

sydney

One of the most real estate obsessed cities in the world

This is a question real estate agents get asked a lot as we head into the final month of selling. It’s a dangerous question because really we don’t know the answer and no one else does either.

According to SQM Research, the median house price in Sydney’s inner fringe has now surpassed $1million. To many that seems absurd, we dreamed years ago about our homes being worth a million dollars and somehow our dreams have become reality, even if that millionaire reality is a far from palatial home we imagined many years ago.

SOLD $1,280,000 - 3/5 McDonald St, Cronulla

SOLD $1,280,000 – 3/5 McDonald St, Cronulla

In Cronulla it is now very difficult to find an entry level house on a small block of land for $1.3mil.  If you are thinking of buying an apartment in Cronulla, it is just as difficult to find something under a million dollars. Last month a 2 bedroom apartment with superb ocean views and only a single garage sold for $1.4mil.

If you are not in the market already, how do you get into a market where you have to be a millionaire to buy a basic home? Parents are panicking for their children, 30 and 40 year olds are becoming first home buyers.

Should we take the plunge in November 2014 or should we wait and see till February 2015?

SOLD $1,118,000 16 Targo Rd, Beverley Park

SOLD $1,118,000 – 16 Targo Rd, Beverley Park

This is the dilemma now facing many buyers. Sure, interest rates are low but when you have to borrow the bulk of a $1 million dollars plus stamp duty then the mortgage you end up with is not cheap.

The Reserve Bank has been recently warning us to stop getting carried away, to stop borrowing too much money, but so far this has not had too much of an effect on an insatiable Sydney market.

Anything can happen as shown with the Global Financial Crisis and we now live in a very interconnected world, where something that happens in another country, on the other side of the world can affect us here very quickly.

SOLD $1,570,000 - 5 Cook St, Caringbah South

SOLD $1,570,000 – 5 Cook St, Caringbah South

Unfortunately I don’t have a crystal ball but I did win the Melbourne Cup this year so if I had to have a punt on which way the property market was going to go next year I would say upwards, but not at the same intensity as this year.

NSW is now the economic locomotive of Australia and Sydney the most desirable city to live in. Property sales off the plan are booming which means the residential construction industry will also stay robust. Also the NSW government has embarked on huge infrastructure projects which will support thousands of jobs into the medium term.

A steady increase, then a plateau is my guess but full disclaimer here, I have really no idea, just 18 years of being a real estate agent in one of the most real estate obsessed cities in the world…

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Investing: Real Estate Vs Shares

As we ride the rollar coaster known as the stock market, and we watch our portfolios disappear overnight, it highlights the relative stability of the real estate market.

When panic hits the stock market, people sell VS when panic hits the realestate market, vendors still have to wait. You might pick up the phone to call your agent to see what your property will sell for, but you can’t sell immediately. You need a contract, agency agreement and then you need to market the property to attract a buyer. All this helps to reduce ‘panic selling’. By the time you have photos taken the crises of a share market crash could be ancient history.

Of course, as a real estate agent I will encourage people to put their money into property over shares and at a time like this I am quite happy to say I told you so.

However, as Saturdays auction clearance rate shows all is not rosy in the realestate market. We achieved a 40% clearance rate in the postcodes of 2229 & 2230 on the weekend. The results are misleading though; the 2 properties that sold were top sales. The Sydneywide auction clearance was 57% which is clearly lower than March 2011. Sale results have been sliding since March 2011 but all is not lost. People are still buying and selling and if you are doing both then you have nothing to worry about at all.

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Taxing Homes Vs Carbon Tax

A group of top businessmen were reported in the SMH last week as recommending that homes be taxed instead of taxing carbon. Letters to the editor quickly showed how horrified people were about that idea even though the promotors were probably not planning to tax past gains.

Even so, if the government were to tax  purchases of family homes from now on there would be an outcry because such a scheme would be placing a huge tax burden on future generations who are not necesarily the ones polluting the most. If interest on new family homes became tax deductible then a case could be made for taxing them. The trouble would then be that new buyers are not likely to be sellers for a generation (while they get a tax deduction for interest) so tax proceeds will rise only slowly, whereas under a carbon tax  government coffers will fill immediately.

No, the carbon tax should hit polluters, e.g. 4WD’s, cows (which produce methane which is 25 times worse than CO2), coal fired power stations.

Taxing petrol is a blunt instrument which will hurt those commuters most that have to drive long distances because there is no public transport alternative. On the other hand how will the Federal government tax V8’s and 4WD’s out of existence without hurting ordinary people who have to use a car to get to work. Registration would be one way but that is a state government area. Any suggestions?

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Changing moods as Australian Banks break-up and Obama wrestles debt.

The mood seems to have changed as we enter the second month of 2011. As the summer holidays end and its back to work, people and countries are starting to worry about their debt. From a domestic viewpoint, it looks like Australians are going to benefit from the war that has just been declared today, by the NAB against the other banks in a full page newspaper spread, cleverly marketed as a post-Valentines day break up.

The hope is that this will make the banks more competitive for mortgage rates and bank fees. A great relief for many mortgage holders, as Australians pay some of the highest rates and fees in the world.

How effective will the National Australia Banks strategy be?

I don’t think that the CBA, for one, will worry too much. Firstly, CBA would not be scared about losing a few disgruntled home borrowers, they have too many (as a % of total lending) anyway. Secondly, the CBA is so far out in front of technology that few will want to forgo that technology unless they are desperate for any slight reduction in rates. Those people are going to walk again as soon as someone else offers them a slightly lower rate.

Internationally, in regards to country debt, Australia is fine for now, thanks to the resources boom. Once the boom is over, say in 10 years time when China and India have completed their development, hopefully Australia has something to show for digging up its mineral wealth and selling it overseas. Another Snowy Mountains scheme?

Other countries e.g. U.S, U.K have huge public debt which threatens to get out of control like it did in Iceland, Greece and Ireland ever so recently. The US, for example has national debt of US$14 trillion, or, as much as the country produces in a normal year. The comparable figure for Australia is about 10-15% against 100% for the US.

Mr. Obama is grappling with this problem right now, in his third annual budget. The best he seems to be able to offer is $1.1 trillion in cuts over a 10 year period. This figure is less than this years suspected deficient. And guess who is going to take the brunt of the cuts? Of course, the already poor (energy assistance for low income families) and poorer states (in grants to develop low income areas). The other cuts are in environmental programs and forest services which are crying out for more funding.

All debt riddled countries are caught between the conflicting need for debt reduction through cuts to spending on the one hand and the pressing need to reduce unemployment on the other. Mr Obama is hoping for innovation and productivity gains to reconcile the two, an impossible task, particularly as Asia copies and improves all new inventions so quickly, a job made easier because everything has to be made in Asia now.

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Putting Commonwealth Debt in Perspective

The liberal election campaign is, to a large extent, based on the fact that the Rudd-Gillard Government is borrowing $100million every single day. In actual fact if you average out Labor’s budget shortfall over the 1000 or so days it has been in power, the figure is much higher. Currently however it is slowing down and it is forecast to drop away almost completely in 2012-2013.

In the mean time, Australian government debt should reach $150billion by June 2012, and the government will issue bonds to pay for this shortfall in revenue. These bonds will be eagerly sought by superfunds and the public, so the Commonwealth won’t have to pay more than 6% per annum in interest. At that level the Australian government interest bill should be no more than $25m per day, compared to Australian government expenditure of $1000m or $1billion per day (i.e. about 2.5cent in the dollar). This compares with 10p in the pound in the UK and 14c in the US dollar.

When considering the upcoming election, issues on Government debt need to be thrown out the window. Even after Rudd’s stimulus package last year, Government debt should peak at 12.5% of GDP provided total debt can be limited to $150billion.

Comparatively, Australia still has one of the lowest Government debts in the world. England, for instance, has a Government debt equivalent to 62.2% of their GDP (according to the UK Office for National Statistics). The United States is sitting on a national debt of 93% of their GDP (according to the CIA World Fact Book). If America decided they wanted to pull themselves out of debt tomorrow, it would cost each US citizen over US$30,000… every man, woman and child. For an interesting international debt comparison, check out Visual Economics.

It’s a bit embarrassing that debt management even features as a key policy this election. A more pressing issue is private debt, which is around 150% of GDP or 27 times greater than Government debt. The global financial crisis sorted out the private companies that should not have borrowed overseas (e.g. Babcock & Brown, Allco, ABC Learning, Rams home loans), as they all went bankrupt. The majority of companies that borrow overseas have offshore earnings to offset the risk they take on currency movements. So when this is factored in, even private debt levels are not overly concerning. Just as long as the debt is used to add to our income producing stock of capital and not wasted on casinos, or property in the wrong area, or on more coal power stations or other investments that are likely to become redundant with climate change.

On the revenue side Australia’s position is even better by international comparison. Our mineral exports are booming. For example, our iron ore costs around US$20 per tonne to dig up (or scrape off the mountain) and US$10 to ship to China. Spot prices are currently US$150 per tonne. Tax proceeds, even under the scaled down new mineral tax, should boom.

The important thing is that Australia uses this wealth wisely, because once their gone these minerals cannot be replaced. Hopefully, our politicians will invest this once in a century mineral bonus in schools, hospitals, roads and rail infrastructure for the future.

The major political parties sparring over the “national debt issue” is ridiculous. What we should be asking our future leaders is how they plan on spending the money from the minerals boom?

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Aussie Government Spends Almost Entire Greece GDP in Budget

This is a big spending election Budget, with handouts to Labor voters paid for by smokers (a relief for drinkers this time around), miners and tax collected from a growing workforce and reduced unemployment.

The Federal Government spends or allocates to the States for spending, 1 in every 3 dollars spent in Australia, (almost equal to the entire GDP of Greece, which admittedly only has half our population). Almost half the expenditure and all the increase in total expenditure goes to health, social security and welfare. The main areas of reduced expenditure, education, housing and energy efficiency are areas that needed boosting rather than cuts.

Labor’s heartland will welcome the reduced income tax, the superannuation guarantee increase from 9% to 12% and easier tax returns (plus higher deductions) so much so that if the Liberals refuse to pass elements of the Budget because , for example, they don’t like the super profits tax on miners then Labor will easily win the election to be called shortly.

I believe Mr Abbott has made a serious mistake aligning himself with the miners. That’s a no win situation. Voters will want the handouts and won’t care about big mining companies paying for them. Politics at its cynical best.

Hidden in the Budget are some interesting nasties for small businesses. The government is going to spend a quite massive extra $420m targeting GST avoidance and the cash economy. If the FBI can catch a terrorist because he paid for his car with cash, the sky is the limit as to what can be achieved if serious resources are directed at the black economy.

Most individuals and most industry sectors gain a little from the budget. The government has cautiously increased spending as much as it dared without raising the ire of the RBA. They are pinning their hopes for revenue raising on miners and smokers. Once the election is announced we will see the hollow logs raided for more election promises.

Lucky we can still afford a glass of wine or 2 for another year.

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….World Dumps Greenback

The above is a partial quote from the AUSTRALIAN of 16/11/09. I have been concerned about the US economy for some considerable time and have been writing blogs musing on the likely fall out. So far I have concentrated on the direct impact on Australia, i.e. AUD up, gold up, interest rates up, unemployment up in, manufacturing, inbound tourism and property. I had hoped and predicted the RBA would hold back on the rate rises to minimise the affect on unemployment but clearly the RBA is starting to be concerned about inflation and potential asset bubbles.

Several manufacturing enterprises have since called it a day, the Bridgestone Tyre Company being the biggest. Thousands of exporters, however, must be feeling the pinch because the AUD is becoming so expensive. One positive aspect of the larger pool of unemployed is that some will be available for the massive resources projects getting underway throughout Australia.

The article in the Australian by David Uren titled “Golden lining to the currency cloud as world dumps greenback,” highlights the impact of the sagging USD on its domestic economy. The USD’s fall (apparently down 35% from its peak in 2002) is proving a major bonus to US exporters whose businesses have taken off. On the capital side, the US government and all the US companies holding international assets are making squillions. For example, the US private equity group TPG that has just lured the Australian public and institutions into buying MYER out, may have originally bought the AUD when it cost around USD 60c. That same AUD is now worth over USD 90c at a time when a lot of American companies like TPG will be tempted to repatriate assets, including their property holdings, from Australia.

The downside for America lies in the potential for serious inflation from all this money swirling around. Firstly there is income from the sale of overseas assets. Then there are various stimulus packages and last but not least there is the inflationary impact of the increasing costs of imported goods. Interest rates in the US may have to rise sooner rather than later. The longer they delay the higher they will have to go. The US Federal Reserve probably should have raised rates before we did.

So the world has dumped the greenback and justifiably so. Central banks like India are buying gold instead (200 tonnes in the past week or just short of Australia’s annual production). Companies like the private equity group TPG that just made over AUD 1.5 billion flogging Myer shares to an unsuspecting Australian public will not be leaving the proceeds in USD for long. They will probably put the money straight into the Chinese Yuan which surely can not be pegged to the USD for much longer, but about that in another blog…

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Interest Rates On The Rise

I don’t think the RBA has taken enough consideration of the international implications of this rate rise.

We are a trillion US dollar economy compared with the US 14 trillion USD economy and the USD 60 trillion world economy. Our country is only a speck internationally, traditionally only 2% of turnover for global giants like Nestle, Unilever & Shell. However, our interest rates are internationally high by comparison. So where is a lot of hot money going to flow, if not into the AUD? If the RBA continues along this path whilst the huge US economy keeps deflating and the USD keeps falling, our currency will reach parity with the USD in very short order.

This could be fatal for our exports, especially in the manufacturing sector which will become uncompetitive with imports if they haven’t already become so.

Since I recently predicted, wrongly as it turns out, that US rates would rise before Australia’s, the US economy has continued to weaken. Unemployment has risen to 9.8%. President Obama’s health care reform is stalled, Afghanistan is a quagmire, Chicago lost the 2016 Olympics to Rio, gold continues to break records (because those in the know have lost faith in the USD).

So, whilst US interest may not have risen for domestic reasons, investors will vote with their feet and search for a currency that is rising.

What better place to put their money than in Australia, which is politically stable, supplies the world with resources and now has one of the highest interest rates in the world (but lower than India and Brazil), and a rising dollar.

The upward pressure on the AUD will rise each time the RBA ratchets up the cash rate. Inevitably more money will flow into the AUD pushing it rapidly towards 1AUD = 1USD. As the Aussie dollar buys more US dollars, imports get cheaper, outbound tourism will boom and inflation may abate, but….on the other hand, exports, import/ competing manufacturing, inbound tourism, property and jobs will all suffer.

Is inflation that much of a problem that this should be allowed to occur?

Hopefully, at least the Federal Government will maintain its fiscal stimulus. In any event, Mr Turnbull, which schools precisely, would you deny their once in a generation opportunity for a new (“freebie”) multi purpose hall?

Whilst I may have been wrong in predicting that Australian interest rates would not rise until they do in the US, the consequences of the rise, yesterday, will seriously hurt sectors that do not need further shocks.

Another consequence of the tightening of monetary policy will be that the Federal Government will have to bring in a tough Federal Budget next year if it is to avoid unnecessary rate rises now that Mr Stevens has put his hand on the interest rate trigger. Will the Federal Government want to have a tough Budget before the next election? I don’t think so. No wonder it’s looking for an excuse for a double dissolution. What better time then when the Liberals and Nationals are imploding.

Henk Emans, B. Comm, MBA, LREA

Interest Rate Rise

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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 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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