Do you think the property market will burst in 2015?


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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Why Interest Rates Should Not Go Up In June

I am one month off celebrating the completion of 10 years in business (Beach & Bay Realty). As I look towards the next decade, I wonder what is in store. I have seen a lot of changes over the 10 years in the Cronulla area, many real estate agencies, big and small, have come and gone, but not just real estate, Cronulla Mall is a constant revolving door of new and reborn restaurants, cafes and retail shops.

The government says Australia has come out of the Global Financial Crisis relatively unscathed. The economy, they say, is doing fabulous, so much better than so many of our counterparts ie USA, and many European countries.

So why then are we as stressed as our American counterparts, why are Australians under so much financial stress, why are we spending less, why are mortgage foreclosures on the rise, business confidence down, new housing figures down, house prices down and so many businesses closing?

I am no economist but I know this:

Sydney has never been so expensive to live in. I am a bit of a traveller as you know and it always amazes me that when I am overseas in some fantastic city whether it be New York or Florence, both supposed to be more expensive than Sydney, my $100 goes so much further than $100 in Sydney (all currencies being equal for this exercise).

Food and day to day living expenses have never been so high. Even though the Aussie dollar is high, nothing seems to go down in price, except online shopping of course but certainly not petrol! If you are not responsible for the grocery shopping in your household I suggest you take a $100 and go to the supermarket and see how much you can buy for $100, forget the trollery, grab the carry basket!

Running a business has never been so difficult, largely due to the costs involved and taxes. Even in the inner city, well known, established restaurants are closing due to rising costs and reduced revenue as customers dine on restrained budgets (think main, no entree, byo).

Sydneysiders, and I expect most Australians have never been so stressed.

So why are they saying interest rates must go up next month?

Because they are politicians who don’t live in the real world. I challenge Wayne Swan to be a real person for a week and see how it feels!

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Currency Wars and QE2 continued

In a previous blog post, I discussed the global currency wars being waged across the globe in the aftermath of the global financial crisis. Last week’s G20 summit in Korea saw heated discussion and debate over the state of the global currency market. So what did the G20 summit achieve?

The G20 Nations including Australia’s Julia Gillard met in Seoul last week to expressly look at competitive currency devaluations but very little was achieved except a strengthening of the IMF to help the basket cases. China with its pegged currency and the US with its QE2, faced off but neither side would budge and both leaders blamed  each other for the world’s woes. China maintains that to revalue the yuan would  lead to hordes of unemployed. For its part the US needs its currency to fall to allow it to export more and compete domestically with Chinese  imports.

Unfortunately developments in Ireland are making investors worry about the euro. The immediate investor reaction is to sell euros and buy USD  pushing its value up (which is exactly what the US does not want happening).  At the same time QE2 has led investors to dump US treasury bonds in excess of the monthly amount of QE2 (USD100billion) leading to interest on bonds rising instead of falling (excess sales lead to lower prices but higher interest rates). QE2 could become counterproductive.

Meanwhile China does continue to tighten the restrictions of overseas investment into its already booming property market because its artificially low currency is attracting hot money into property. Chinese leadership fears a property bubble of the  type that first brought Japan undone and now has led to Ireland’s woes. I read today (17 November 2010)  in the Australian that Ireland allowed construction costs to be offset against tax and  the banks were encouraged to offer low interest mortgages with no deposits.  Since the GFC Irish taxpayers have been keeping their banks afloat at a cost of 14000 euros per man, woman and child.  I am so glad we have profitable banks.  If only the Greens would stick to their knitting and worry about the environment rather than stop the banks from raising their rates we would be all much better for it.

It is not inconceivable that Ireland might default  like Iceland did during the GFC (again because of bank failure) and Argentina did in 2001. Argentina seems to have recovered,  but could Ireland or the euro recover from a default?  If not then the USD will rise even faster and QE2 will be a waste of time. We will need a strong Australian banking system to survive that impending storm.

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Shame On You

What were they thinking, Pacific Brand paying their executives more than double their usual salaries while crying poor and then closing down the factories and laying everyone off. And what was McDonalds thinking with their new socio economic pricing strategy – basically putting up prices in lower income areas where they sell more?!! Isn’t it the more you sell the cheaper the price?!! (Economics of scale)

What sort of business person would think this was an intelligent business strategy especially in the economic climate we are in. The backlash from this is going to be huge. Any company that thinks they will get away with this in Australia will get a rude shock. A country whose residents respond like the way Australians did to the bushfire tragedy in Victoria has a conscience and a voice and will act. I don’t think I will be the only Australian boycotting Bonds undies and my Maccas cheeseburger!

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The Reserve Bank Wasn’t Listening

Comfort words/phrases such as “cushioning the economy” are all the rage right now with the Reserve Bank, explaining their recent rate cut policy.
Simultaneously the government is telling us to spend, spend, spend!

Don’t they realise it was only 9 months ago that the Reserve Bank was still raising interest rates (and the banks only 8 months ago), while telling us to stop spending and every second word was inflation.

Do they not think some of us are wondering if they really know what they are doing?

They need to take into consideration the psychological scarring we mortgage holders might have experienced due to this sudden turn around. Businesses and consumers were telling them months prior that they were hurting and that the interest rate increases had already done enough to dampen our spirits!

On a positive note, at least our government is trying to do all it can to prevent our economy from the fate of the USA and England, in particular. We seem to be booming compared to those economies.

In addition we still have one of the highest interest rates in the world so there is room for more cuts. The US is now a range 0 – 0.25% and England is expected to drop to 1% today. We are officially at 3.5%.

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Economy/ Real Estate in Florence, Italy

I have now spent almost a month based in Florence, Italy and it seems that the locals here are suffering the same problems with the economy as Australians.

But even though they are technically “in recession” (along with most EU countries – in particular Germany and Spain who are really taking a hit according to the news) the Euro is so strong that as a tourist you almost cry every time you hand over double the money you would in Australia.

The Italians are saying the strong Euro is killing them, turning away tourists and making their export products too expensive.

Australia seems to be in much better shape than Italy and even though as a tourist I am complaining, the lower Australian dollar might actually be a good policy right now for Australia.

For Florence the strong Euro is also affecting the real estate market as Florence is part of the Tuscany area which was very popular with Americans in particular, buying up run down villas which led to prices skyrocketing over the years. That has all changed now with the credit crunch in America. I have met with a few local agents now and they are all saying that the market has been terrible for 2 years.

Mind you they can’t complain too much, the coffee, cheese, pizza, pasta and vino etc is so good, at least they can drown their sorrows in good food and wine.

Ciao for now!

PS This week the Vatican announced it was divorcing itself from Italian Law

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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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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 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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