Sydney Property Bubble

[specuvestor]

Australia will be a good case study on how hot money is detrimental to long run economics, in REAL TIME. No tickets needed to watch the show or learn from other people's mistake

RBA won't lower interest rate to stoke more leverage demand but that's exactly the ingredient for hot money until global interest rate rise. But RBA is a very credible central bank and I'll be interested to see what structural measure they will come up with. It is not difficult to envision SGD and AUD parity in 2015.

[greengiraffe]

There is no need to look so far to Australia to see the damage forlong run economics. London, Hong Kong and Singapore have all witnessed the impact of hot $. Basically, the lack of willingness behind policy makers to tackle the hot $ flow is the key problem and frankly when a central bank is caught between the rock and the hard place, they are all likely to take the easy way out.

RBA in this instance is also caught between the demise of mining investments and the need to find a replacement engine. I have long given up on the prediction of currency trends as it is a complete black box of factors driving currency directions.

Overall, my simple conclusion with major central banks all still printing at different rates in hope of lowering unemployment, hot $ flow will continue to be a nuisance. The relevant consideration for us as investors is how to position to beat the asset inflation that comes with hot $ flow.

GG

Australia will be a good case study on how hot money is detrimental to long run economics, in REAL TIME. No tickets needed to watch the show or learn from other people's mistake

RBA won't lower interest rate to stoke more leverage demand but that's exactly the ingredient for hot money until global interest rate rise. But RBA is a very credible central bank and I'll be interested to see what structural measure they will come up with. It is not difficult to envision SGD and AUD parity in 2015.

[Boon]

Interesting case study !
______________________________________________________________________________________________________________________________________________-
Why Did Australia Fare So Well in the Global Financial Crisis?

By Jennifer G. Hill February 7, 2013

Not all jurisdictions around the world suffered the effects of the so-called “global” financial crisis equally. Even among common law countries, which are routinely bundled together in much academic literature, the impact of the crisis varied significantly from jurisdiction to jurisdiction.

The crisis proved dire for some common law countries, such as the United States and the United Kingdom. Others, however, including Australia and Canada, were considerably more fortunate. Although there were over fifty government-sponsored bank bailouts around the globe during the crisis, including in the United States and the United Kingdom, there were no such bailouts in either Australia or Canada.

For many, the stock answer as to why Australia fared so well during the crisis was that it was “lucky”. This appears to be code for the view that Australia’s economy was buoyed by China’s seemingly insatiable demand for resources. My recent chapter, “Why Did Australia Fare so Well in the Global Financial Crisis?”, which was published in the 2013 Cambridge University Press book, Ferran, Moloney, Hill and Coffee, The Regulatory Aftermath of the Global Financial Crisis, explores the adequacy of this account of Australia’s performance during the crisis.

The chapter argues that, although strong trade links with China undoubtedly form a piece of the puzzle in this regard, there are a number of other relevant, but under-appreciated, factors which differentiated Australia from other common law jurisdictions and potentially contributed to the country’s resilience.

For example, although Australia’s regulatory regime shares many features with other common law jurisdictions, there were interesting structural differences between its framework and the pre-crisis regulatory systems in the United States and the United Kingdom. Australia operates under a “twin peaks” model of financial regulation, which was introduced in the late 1990s in accordance with the recommendations of the influential Wallis Committee in 1997. Under this “twin peaks” model, one regulator, the Australian Prudential Regulation Authority (APRA) is responsible for prudential regulation of financial institutions, including deposit-taking, general insurance, life insurance and superannuation/pension institutions. Another agency, the Australian Securities and Investments Commission (ASIC) is responsible for business conduct and consumer protection. The Reserve Bank of Australia (RBA) essentially constitutes a third peak in the regime, controlling monetary policy, systemic stability and payments systems.

This regulatory system contrasts strongly with the complex and fragmented US framework for financial market regulation and, equally, with the UK reliance on a single super-regulator in the pre-crisis era. The crisis has prompted reconsideration of the basic structure of financial market regulation in both the United States and in the United Kingdom (where a major overhaul is now underway), however, this did not occur in Australia.

In addition to the issue of regulatory structure, there are other important factors, which arguably contributed to Australia’s economic performance during the crisis. These include monetary and fiscal policy; regulatory history; corporate governance; and the structure and history of banking (where there are close parallels between Australia and Canada). Australia’s experience of the global financial crisis is a reminder that financial markets do not operate in a vacuum, but rather form part of a complex economic, legal and regulatory ecosystem.

In spite of its good economic performance, Australia implemented a variety of regulatory responses to the global financial crisis. These included reforms relating to: deposit and wholesale funding guarantees; covered bonds; short selling; executive remuneration; and retail investment protection. Australia also introduced a large economic stimulus package, which Joseph Stiglitz has praised in terms of its size, design and timing. The chapter assesses these reforms and initiatives, raising questions concerning the extent to which they addressed international or national problems

http://clsbluesky.law.columbia.edu/2013/...al-crisis/

You could download this paper
http://papers.ssrn.com/sol3/papers.cfm?a...id=2063267

[Boon]

Rebalancing act begins to pay off for the economy

March 8, 2014

At last some good news on the economy. This week's national accounts for the December quarter show the economy speeding up and, in the process, starting its fabled ''transition'' away from being driven largely by mining investment.

The economy's medium-term ''trend'' rate of growth in real gross domestic product - the rate that holds unemployment constant - is thought to be 3 per cent a year. For much of last year the economy was seen to be travelling at only about 2.5 per cent, thus leading to a slow but steady rise in unemployment. But this week's accounts from the Bureau of Statistics show real GDP growing by 0.8 per cent in the December quarter and by 2.8 per cent over last year. Applying a bit of judgment, we can say the economy is probably now growing at an annualised rate of about 2.8 per cent.

This isn't enough to stop unemployment rising - and we really need a period of growth well above 3 per cent to get the jobless rate heading back down to its own trend level of about 5 per cent - but it beats 2.5 per cent. And, as I say, the accounts show reasonably convincing evidence the ''rebalancing'' of the economy - away from mining investment and towards the other sectors of the economy and sources of growth - is finally under way.

After quite a few quarters of weakness, consumer spending grew by 0.8 per cent in the quarter and by 2.6 per cent over the year. This strengthening is a bit of a surprise when you remember household disposable income is only crawling ahead, with no growth in employment and very low rises in wages.

Arithmetically, the explanation is a fall in the household saving rate from 10.6 per cent of disposable income to 9.7 per cent. But this ratio is volatile, so I wouldn't take it too literally. It's possible households have shaved their rate of saving - say, from the high 10s to the low 10s - but I doubt it signals a return to the low saving rates we saw in the couple of decades before the global financial crisis.

The second sign of rebalancing was long-awaited real growth of 1 per cent in spending on home building, including renovations. This is not unexpected considering the rises in established house prices and in the issue of local government building permits.

More recent ''partial indicators'' for the month of January confirm that consumption and home building have picked up. Nominal retail sales grew by a strong 1.2 in the month to be up 6.2 per cent on a year earlier. And residential building approvals rose strongly in the month to be up 34 per cent on a year earlier. Public sector spending rose by 1.1 per cent in the quarter, contributing 0.3 percentage points to the overall growth of 0.8 per cent in real GDP. Most of this came from public infrastructure spending.

But now we get to the bad news. Most of the growth I've outlined so far was offset by a sharp fall in business investment spending, which dropped by 3.6 per cent.

Most of this decline is explained by a drop in mining investment as the investment phase of the resources boom comes to an end. It's now clear mining investment peaked about a year ago.

It was our knowledge that mining investment was about to fall back from the dizzying heights it reached that caused us to see the need for ''transition'' or ''rebalancing'' in the economy (plus a few other buzzwords I've forgotten).

But this brings us to the weak part in the transition so far. Although most of the fall in total business investment is explained by mining, it's clear investment spending in the non-mining sector also fell - which is not what the doctor ordered. Rough estimates by Kieran Davies, of Barclays bank, suggest it fell by 1.2 per cent in the quarter and by 7 per cent over the year.

So if most of the growth in domestic demand in the quarter was cancelled out by the fall in business investment, where did the overall growth in aggregate demand of 0.8 per cent come from? From the one place left: net external demand, otherwise known as ''net exports'' - exports minus imports.

The volume (quantity) of exports grew by 2.4 per cent in the quarter and by 6.5 per cent in the year, whereas the volume of imports fell by 0.6 per cent in the quarter and by 4.6 per cent in the year.

Put the two together and net exports made a positive contribution to overall growth of 0.6 percentage points in the quarter and 2.4 points over the year.

Why are exports growing so strongly? Mainly because of rapid growth in our exports of minerals and energy as new mines come on stream. Why are imports so weak? Partly because domestic demand has been weak, but particularly because of the fall off in mining investment, which involves a lot of imported equipment. So the investment phase of the resources boom is coming to an end and leaving a hole in the economy, but the production and export phase of the boom is helping to fill the hole - helping to tide us over while the non-mining economy is getting back on its feet (to mix a few metaphors).

The resources boom's now favourable effect on net exports translates into a much lower current account deficit on our balance of payments. Whereas it used to get as high as 6 per cent of GDP in the old days, and averaged about 4.5 per cent, for the December quarter it was just 2.6 per cent.

Maybe the economy has a future after all.

Read more: http://www.smh.com.au/business/rebalanci...z2vLaivRYQ

[Boon]

A housing bubble isn't the problem

By ABC's Alan Kohler
Posted Wed 18 Sep 2013, 2:46pm AEST

Bubbles only occur when supply exceeds demand. Australia has a housing supply-side problem that means the definition of a price bubble is distorted, writes Alan Kohler.

Investing in property is a no-brainer at the moment. Prices have bottomed, auction clearance rates are on fire, especially in Sydney, and you can get a fixed rate mortgage for 4.8 per cent with 100 per cent gearing, 70 per cent in your super fund.

And the experts are now saying there'll be another housing bubble. What could be better?

There's no sign of a housing bubble yet: values are only just back to where they were three years ago. Will there be one next year or the year after? Who knows? But one sure way to make it happen is to sternly warn about one.

By way of confirmation, a lot of the coverage of yesterday's RBA minutes plucked out the comment that:

"Property gearing in self-managed superannuation funds was one area identified where households could be starting to take some risk with their finances."

Yes, well, you'd be mad not to move some of your DIY super money from bank shares into geared residential property.

The bank share index is up 54 per cent in the past 12 months while the median house price is up 7 per cent over the same period. If there's a bubble it's in high-yielding shares, especially banks; it's time to take the profits and put them to work in the next bubble.

The main problem with housing in Australia is that we never build enough of them, and the main problem with the Australian economy is not housing - it's that it's begun a transition from resource investment-led growth to… well, hopefully something else.

In the United States between 2002 and 2007, low interest rates led to a boom in both house prices and house building. They ended up with a glut of houses and prices collapsed: you could famously buy a house for the price of a second hand car.

In Australia over the same period there was a house price boom and that's it - no glut. In fact there has been a consistent shortage of housing in this country right through the boom and bust of at least 50,000 per annum. As a result prices didn't fall much and have started rising earlier than in the US.

Why is there a persistent shortage of housing in Australia when it's one of the least-densely populated countries?

Good question. The reasons are complicated and probably boil down to a lack of spending on infrastructure by state governments and planning restrictions by local councils.

Why are people in outer suburbs, especially western Sydney, so grumpy that during the election campaign politicians are thick on the ground, wearing holes in the carpets of motels there? Because they can't get around because the roads are clogged and schools, hospitals and shops are miles away.

So Australia has a housing supply-side problem that means the definition of a price bubble is distorted. Bubbles only occur when supply exceeds demand. Just because a price rises a lot, that doesn't mean it's a bubble if there's a shortage.

So what about the issue that, according to yesterday's minutes, the RBA board spent most of its time talking about this month?

For example: "Members noted that, based on a profile for projects derived from the Bank's liaison and public statements by mining companies, the staff assessment was that mining investment was likely to decline noticeably over the next few years from its recent very high levels."

That's Australia's real problem.

In 2001 when China entered the World Trade Organisation, gross fixed capital formation, or investment, broadly defined, represented 18 per cent of our GDP. Ten years later it was 28 per cent, having contributed about 1.5 percentage points to the average annual GDP growth of 3.1 per cent since 2001.

Since the GFC the proportion of our economic growth contributed by investment has been even greater - 1.4 percentage points out of 2.7 per cent.

Australia's great investment phase is now over, and capital expenditure on non-dwelling construction and plant and equipment is falling. Half of our GDP growth of the past 12 years is in the process of disappearing.

As the RBA minutes noted yesterday, housing construction has "increased moderately", but household consumption had been "below average". Wages growth has eased and as a result of the declining terms of trade, national income has fallen.

So GDP growth is below trend and its main prop is being pulled away. We just have to hope that stable government - if that's what we get with all blokes in charge - improves consumer and business sentiment, and that the dollar falls some more so that investment in manufacturing, agriculture and tourism increases.

Low interest rates aren't getting much traction because they're feeding into house prices, not house building, and borrowers are not using the lower rates to cut their repayments so they can spend more.

Apart from that, the new Government has to find a way to persuade super funds - both SMSF and public offer - to invest in building things rather than betting on rising asset prices, and since asset prices are indeed rising, that won't be easy.

Treasurer Joe Hockey has been talking about infrastructure bonds where the Commonwealth guarantees some of the risk. Good idea. Get on with it.

http://www.abc.net.au/news/2013-09-18/ko...ng/4964916

[greengiraffe]

The trouble with being a landlord
Duncan Hughes
1058 words
8 Mar 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
HIdden costs

There is far more to successfully leasing real estate than collecting the rent, writes Duncan Hughes.

Investor confidence that property is a sure-fire bet for guaranteeing a lump-sum bonanza or an income stream from rentals could produce as many lemmings as ­landlords, say industry experts.

Soaring insurance premiums, inflated property prices, a spike in apartment ­construction and increasingly choosy ­tenants could result in spiralling costs, ­oversupply and a drain on an investors' ­disposable cash, they claim.

"What is it going to take before the ­industry gets cleaned up?" asks Corina ­Bailey, who runs Landlord Specialist, a ­company that provides a range of services for rental property owners.

Bailey believes the absence of industry standards for monitoring property ­inspections by real estate agents is another potential pitfall for the unwary investor.

Australian spending on investment ­properties is increasing at three times the rate of home buying, fuelled by record low interest rates and through self-managed super funds.

Well-chosen properties in the right location and with a range of unique selling points will continue to be a centre piece, if not crowning jewel, in many investors' portfolios, say property and investment specialists.

But a rush to buy off-the-plan apartments in nondescript estates of similar towers growing like Meccano blocks across city ­skylines, particularly in Melbourne and Sydney, could become the dizzy limits, rather than dizzying heights, for some portfolios.

Industry insiders, such as Bailey, believe many investors are taking the plunge ­without fully considering all the costs, responsibilities and the possibility that hopes of rich rewards from price rises could become lean pickings.Make sure you're covered

Insurance brokers, including Tim Dale, director of Ausure Insurance Brokers, warn many investors are unwittingly exposing themselves to massive liabilities by failing to take out specialist cover for landlords and contents or encourage their tenants to take out separate cover.

Dale says major floods in Queensland and NSW are behind premiums jumping by up to 20 per cent over the past 12 months.

Many property investors are out of their depth in finding the right mix of insurance cover, particularly under strata title – a form of ownership devised for multilevel ­apartment blocks and horizontal sub­divisions with shared areas.

Dale reckons some owners believe their insurance needs are covered by third party cover taken out by the body corporate, which is the legal structure for a block of land subdivided into flats, units or ­apartments to manage, and maintain the common areas everyone uses like the ­stairwell, car park, or pool.

"Many don't realise that a body corporate covers certain things and it's their responsibility – and their tenants' – to cover others," he says.

For example, lawyers such as Freehills are warning investors about their potential liability for negligence if their properties don't have glass that conforms to new ­glazing standards.

Lacerations caused to tenants from breaking shower glass and glass doors are resulting in five-figure payments for ­damages, according to recent settlements.

Another problem, says Will Hamilton, chief executive of Hamilton Wealth ­Management, is that body corporates sometimes need expensive legal prodding before they will accept their financial responsibility to compensate for third-party loss or injury.

Hamilton says legal fees to convince the body corporate that it had responsibility for a wall in a block where he owned a flat totalled five times the final cost of repairs.

Bailey says only one-in-four respondents to a recent survey were happy with the ­quality of third-party management and wanted industry-wide, enforceable standards for monitoring and auditing property.

"Inspections must be done at the beginning and end of a lease," she says. "But from our research, there has never been a ­standard set. In some cases they are not even done, or when they are done, it could be just a bogus replication of an old report, or a ­one-page tick and flick."

There are estimated to be more than two million rental households with about six million residents, annually generating more than $39 billion, according to research group IBISWorld.

Annual revenues are expected to grow by about 4 per cent over the coming 12 months.

Earthquakes and other headaches

Owning six investment properties in Australia and New Zealand has generated as many dilemmas as dollars for Gary Pearson (above), president of Landlord Australia, an online chat site for property owners.

"It's no bed of roses," says Pearson, who recommends investors think long and hard about property as an alternative investment to shares and bonds.

"It's a close run thing, a 50-50 call," he says about whether he should cash in his multimillion-dollar property portfolio for equities. "There's a real undercurrent of nasty stuff you don't get told about."

His list of grievances runs from having less disposable income than most of his tenants through to the hassle of maintenance and stroppy leaseholders.

While he fears a property slump, the prospect of a big capital gain keeps him going, he says.

"As a long-term investment, it is difficult to argue there are fewer headaches and better returns in shares."

His latest headache involves a three-bedroom apartment he bought in Christchurch about two weeks before the February 2011 earthquake.

A lengthy legal battle to have the apartment declared available for rent was revoked after subsequent tremors. He is negotiating for compensation.

"Those considering investing in property need to be aware of the difficulties," he adds.

Questions to ask

1. What is the vacancy rate in the area?

2 What is the average number of days on market?

3 How do you intend marketing the property? Internet? Pro-active marketing?

4 If using an agent, check percentage of their property in arrears. Anything more than 5 per cent should ring warning bells.

5 How often do your agent's tenants go to tribunal? Why? What does this say about their tenant selection.

6 How often will your agent update you?

7 How often will the agent pay you? How much is kept for maintenance, repairs?

8 How easy is it to access all financial records on your property held by the agent? Can you see the information online?

9 How often is property inspected? How thorough?

10 How often is rent reviewed?


Fairfax Media Management Pty Limited

Document AFNR000020140307ea380004z

[greengiraffe]

No housing bubble but beware of froth in areas, warns Bouris
ANDREW MAIN THE AUSTRALIAN MARCH 08, 2014 12:00AM

Home loans guru Mark Bouris, who is launching a new home loan venture with a new company called Yellow Brick Road, pictured ...
Mark Bouris says that in some locations, apartments off the plan are `selling to a particular market’ and their pricing is `a bit irrational’. Source: News Limited
IS now the time to buy an investment property?

Mark Bouris, founder of Yellow Brick Road and a substantial lender thanks to the fact that its biggest shareholder is Macquarie Bank, says he’s never seen the percentage of investment loans so high as they are now, at 42 per cent of the total being made for residential real estate purchases.

“That’s the highest I’ve ever seen it, certainly since 1998 when I first got involved in this business,” Bouris says.

But he doesn’t buy the suggestion that Australia is in the grip of a housing mania.

“On a national level I would rely heavily on the Reserve Bank’s position”, which he describes as “relatively relaxed”.

Its February minutes say: “The effects of low interest rates were clearly evident in the housing market, where prices had increased further and turnover had picked up to be just below average. These conditions were expected to provide further support to new dwelling activity over the period ahead, and leading indicators of dwelling investment had increased.”

The RBA also says a quiet commercial building sector means there is labour available to support the strong growth of higher-density dwelling construction.

“Growth of housing credit was gradually picking up, particularly so for investors,” the RBA says.

“They’re saying there’s no bubble,” Bouris says, “but that doesn’t mean there’s no froth in certain segments.

“You’d have to say people should have a careful look at buying off the plan in Sydney, Melbourne and Brisbane,” he adds, referring to one form of purchase where overseas investors have carte blanche to buy and, what’s more, may even get a $5000 grant for doing so, at least in NSW.

State Treasurer Mike Baird says the extra building activity stimulated by the grants makes economic sense, even if it’s not so electorally popular.

“Within Sydney, Melbourne and Brisbane there has been extraordinary growth,” Bouris says.

“You’d have to be careful in the investor market because when aggregate demand is so high, you have to start considering that their pricing is potentially above where it should be.”

He says big confusion comes from the fact that although there has been a 10 per cent lift in prices overall in the past 12 months, “averages are deceiving”.

“Some of them are up 30 per cent and that’s where you have to be careful,” he says.

Choosing his words with care, he says that in some locations, apartments off the plan are “selling to a particular market” and that their pricing is “a bit irrational. It doesn’t equal the yield”.

Bouris’s rule of thumb, or what he calls the “sweet spot” for property valuation, is that the price of the asset should not exceed, if possible, a figure six times the annual earnings of the cohort of its potential buyers.

“Make sure to check the asset price to income ratio, in equities or any asset class,” he says.

“If the average income is around $100,000 and you are paying $1 million, that’s 10 times - that’s unsustainable. If the average price is around $500,000 or $600,000, then you’re OK.”

He says the RBA’s guide for the ratio is “about 6.2 times on average”, above which the price might be on the high side.

“If you own a place where houses are selling at 10 times, maybe you should look at selling into that, not buying into it, and investing somewhere else where the ratio is lower, as long as there’s no problem with the area.”

Bouris himself is comfortable about Yellow Brick Road’s model, which started out as a straight mortgage arranger but which has branched out into areas such as a retail, floating rate-based bond fund called Smarter Money, launched two years ago.

More than 40 per cent of YBR’s revenue and 55 per cent of its transactions are non-mortgage, he says.

“There’s no money in that fund that goes to mortgages, and never will be,” he says, noting that most of the mortgages are funded on a “white label” basis by Macquarie.

That’s maybe no bad thing.

The Smarter Money fund has been returning just over 6 per cent per year, net of fees, to the retail investors who are in it, while YBR’s standard mortgage rate is 4.94 per cent.

It’s a good thing people must buy houses with the money lent, or they’d be trying the old “revolving door” trick of borrowing cheap and lending at a higher rate.

Think about it: 1 per cent a year margin on $1m is a nice $10,000.

And what about Basel III, which will discourage banks from taking deposits of less than a year?

“Basel III affects all the banks and I hope the banks do move away from short-term money, because we’re not a bank and it would be to our advantage,” Bouris says.

“But I won’t have a fight with the banks. Don’t forget, we invest into banks and basically we’re a client of the banks now.

“We all need them. I’m not one to smack banks around as it just doesn’t work.

“We’re a distributor and get products out and we still have to work with the banks.

“We can’t do without them.”

[Boon]

RBA Sees Rates Buffer Preferable to Other Tools, FOI Papers Show

By Michael Heath Mar 10, 2014 7:52 AM GMT+0800

The Reserve Bank of Australia has examined a range of macro-prudential tools to help contain house prices and sees loan tests that include buffers for higher interest rates as the preferable option, according to papers released today under a Freedom of Information Act request.

“Other than avoiding an over-easing of monetary policy, the most promising policy response seems to be to introduce a regulatory regime that automatically requires larger interest buffers in loan affordability calculations when interest rates are low,” Luci Ellis, head of the RBA’s Financial Stability Department, said in documents dated July 19. “This could be introduced either as a prudential measure or as part of the National Consumer Credit Code, or both.”

The central bank’s record-low 2.5 percent benchmark rate helped drive a 14.1 percent gain in Sydney dwelling prices in the 12 months to Feb. 28 and policy makers have signaled a period of steady borrowing costs. The RBA, balancing surging property with decade-high unemployment that may preclude a rate increase, finds itself in a similar position to New Zealand last year, which opted for macro-prudential measures.

“Good practice would suggest that the difference between actual and qualifying interest rates should increase when actual interest rates are unusually low,” Ellis said in the discussion papers. “Liaison suggests that many, if not all, lenders do this, but there is a case for doing more to ensure that interest rate buffers are countercyclical to actual interest rates.”

Along with conducting monetary policy, the RBA’s charter tasks it with controlling risk in the financial system. The Australian Prudential Regulation Authority is the regulator of the financial services industry, overseeing banks, credit unions, building societies, insurers and pension funds.

http://www.bloomberg.com/news/2014-03-09...-show.html

_______________________________________________________________________________________________________________________________________________

Cashed-up Chinese are pricing the young out of the property market

DateMarch 10, 2014

We need the Chinese. But the growth of the Chinese middle class has been so explosive, and on such a scale, that it has the capacity to affect Australia in ways that will need to be controlled if some trends continue to accelerate. Notably home buying.

There has never been a lower percentage of first-home buyers in the Australian market. They have never had to pay and borrow more to enter the market. Especially in Sydney and Melbourne, where first-home buyers now represent a tiny segment of the market, where traditionally they had been about 20 per cent. This is not culturally healthy.

First-time buyers, young buyers, are now caught in a pincer movement between superannuation and Chinese investment.

On Friday, when the governor of the Reserve Bank, Glenn Stevens, briefed the parliamentary standing committee on economics, most of what he said was unremarkable until he said this: ''Over the past three months, approvals to build private dwellings numbered almost 50,000, an increase of about 27 per cent from a year earlier, the highest three-month total in the 30-year history of this [statistical] series.''

Yet he then described consumer demand as ''skittish'' and business investment, outside of mining, as ''very low indeed''. In the midst of this skittish, sluggish growth, there is an exuberant housing market. It is not just low interest rates.

A survey by HSBC Bank found that more than one-third of affluent Asians own overseas property, and Australia is their number one destination. Of the wealthy mainland Chinese surveyed, 9 per cent owned property in Australia; of those surveyed in Hong Kong, 10 per cent; from Singapore, 18 per cent; and Malaysia, 26 per cent.

Given the size and wealth of the Chinese diaspora, these indicate big numbers which could become much bigger if investors from China continue to kick in and the Australian dollar continues to decline in value.

Friday's South China Morning Post had a story which began: ''Chinese investment in Australian real estate has grown 60 per cent in the past two years with buyers and developers focusing largely on Sydney and inner-city Melbourne. Huge interest from cashed-up Chinese buyers has been a major driver.''

The story then recycled news published in Australia that Juwai.com, an online real estate broker which connects Chinese buyers with overseas properties, estimates there are 63 million Chinese who could afford to buy property overseas, the fastest-growing market was Australia, and the most popular price bracket is $550,000 to $750,000 for houses or apartments.

This is pretty much what first-time property purchasers look to buy. If cashed-up Chinese buyers, and superannuation funds looking for investments, are both driving the market, this becomes a cultural issue if Australia wants to maintain the tradition of having one of the world's highest rates of home ownership.

Vancouver is further down the same road. Vancouver ranks as the second-least affordable housing market, according to the 2014 Demographia International Housing Affordability Survey of 360 housing markets in nine Western countries.

Vancouver is, by far, the least affordable city in Canada for housing. The survey found Hong Kong the most expensive housing market, by far. Sydney and Melbourne rank fourth and sixth on the same list.

A common link in these markets is investment from China and the Chinese diaspora. The weight of investment in housing by the Chinese diaspora comes from multiple channels: direct investment from China and Hong Kong; investment from the Chinese middle class in Singapore and Malaysia; investment from the large Chinese community in Vancouver, and investment by Chinese immigrants who use New Zealand citizenship as the back door to Australian residency.

Hong Kong, acting to keep a lid on prices for its own citizens, has imposed a 15 per cent tax on outsiders, overwhelmingly from mainland China.

Canada has just abruptly shut down its visa scheme for wealthy foreigners, the Immigrant Investor Program, which for years was the express gateway to permanent residency. The scheme had a backlog of 65,000 applicants, most from China, and most of whom intended to live in Vancouver.

In Australia, there are no indications of any official concern at the effects of overseas buyers on prices in the Sydney and Melbourne markets. Stevens gave no indication on Friday that he thought restrictive measures were necessary. The official consensus is that the demand for property from Asia is tightly focused by suburb and in new housing developments, creating a growth in housing investment that might not otherwise exist.

While there is a recognition of the growing displacement effect caused by Australians buying investment properties for their superannuation portfolio, there is no such official concession of a displacement effect caused by blocks of units being built specifically for Asian investors, or suburban clusters favoured by Chinese buyers.

Not yet. Given the size of the Asian middle class, given its continued rapid growth, the indicators in Hong Kong and Vancouver are that curbs on foreign ownership will become an inevitable public debate if a critical mass of locals believe they are being priced out of home ownership in their own cities.


Read more: http://www.smh.com.au/comment/cashedup-c...z2vW9jm9mX

[greengiraffe]

Rather than Sydney, it appears that apartment glut is more real in Perth, Brisbane and Melbourne...

Apartment glut threat to inner cities
Duncan Hughes
908 words
15 Mar 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
New inner-city apartments are flooding into the nation's capitals at up to three times the markets' ability to occupy them, prompting red-light warnings to investors.

Hidden behind the national housing shortage which has forced house prices up by 10 per cent nationally is a glut of inner-city apartments which in some cities is already driving down rents.

Even more supply is coming, with 41,400 high rise apartments approved last year, a 30 per cent increase on 2012.

The surge is driven by Asian and local developers and is being encouraged by state governments, low interest rates, and changing demographics. Offshore investors and local self-managed superannuation funds have helped to prop-up demand but experts are now warning investors to keep clear.

"We are beginning to see high-rise ghost towns," said Christopher Koren, a director of Morrell & Koren, a buyers' advocate, former auctioneer and 30-year veteran of the property market.

Independent property advisers are issuing red alerts about buying apartments in Brisbane, and are increasingly nervous about Perth, Melbourne and Canberra.

Sydney could come under growing pressure, as large new projects soak up the long stifled demand.

"Investors are buying into very high vacancy rates," warns Louis Christopher, managing director of SQM Research, which provides independent analysis of the property market for investors.

"Many are going to have to cut rent to find, or keep, a tenant."

Angie Zigomanis, senior manager for BIS Shrapnel, said longer lead times for building apartments – typically three years compared to six months for a house – meant economic conditions could turn around between approval and completion.

Leading investment advisers believe geared self-managed super scheme investors, which have about $500 billion under management, are driving a large chunk of sales. Financial advisers are warning about hard sales tactics and big commissions used to sell apartments through the funds.

The Reserve Bank of Australia head of financial stability, Luci Ellis, warned it was stepping up surveillance amid fears the increase of property spruikers selling to SMSFs was a potential risk to financial stability.

At the same time, Chinese money is surging into property around the globe . In Australia, over 30,000 local apartments are being developed with Asian backing.

Another $10 billion worth of apartment approvals in the pipeline could add to market pressure, with the latest total approvals in NSW up 45 per cent in 2013 and more than double in Queensland and Western Australia.

Sadhana Smiles, chief executive of Harcourts Victoria, a real estate group, also blames the glut on lousy design, failing to recognise that younger people remain longer at home and their parents are reluctant to live in a high rise.

"From a sales perspective this is pure and simple. supply and demand. The rising supply is not being matched by demand," Ms Smile said.

Developers fail to understand a big section of the community they target. They "have not got their head around living up, rather than across", she said

"They are used to living in single, or low rise buildings where they are surrounded by services and greenery."

Other agents complained about the unimaginative design, small size and lack of amenity in many of the large developments being built in central business districts.

According to Mr Koren, some government incentives for developers in past years backfired as demand slumped as new flats and developments became available.

For example, a fourfold excess of demand for tenancies over supply in the ACT has been reversed with the number of vacancies jumping from 250 to 1100 a month.

Big cuts in the Canberra public service, lobbyist and consultant numbers results in fewer people seeking homes.

Investors are being particularly warned about Brisbane's CBD, where the number of units has increased by about 25 per cent in three years and there are twice as many vacant apartments as potential tenants.

Rents have fallen by more than 10 per cent for apartments around Perth's central business district, and vacancy rates are also twice demand. Thousands of new apartments are due to become available in the Melbourne inner city market later this year, pressuring a market where supply is more than 60 per cent higher than supply and rents are flat-lining and, in many cases, falling.

Mr Zigomanis said market conditions would depend on pent-up demand, continuing supply, the economy and whether overseas buyers were seeking tenants or keeping empty flats for investments, or holidays.

He agreed Melbourne, Perth and Brisbane looked vulnerable.

"Brisbane has the potential to go over the top," he said. "It's likely the city could absorb the current round of developments but it depends on how far it goes."

Mr Zigomanis said Perth also faced problems depending on the scale of the slowdown in resources, because many apartments were occupied by temporary and fly-in-fly-out workers.

He said "pent-up demand" in Sydney and the large numbers of migrants that settle there should soak-up a lot of excess supply. Approvals for apartment building during the past 12 months compared to the previous period jumped by 45 per cent to $4.5 billion.

In Queensland and Perth they have doubled to a total of about $2 billion. In the past two years Perth approvals have jumped from 950 to 1800.

In Victoria the value of approved apartment construction has fallen marginally to about $2.6 billion.


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Eight ways to avoid the apartment glut
Published 17 March 2014 08:47Duncan Hughes
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Apartment investments in Sydney are faring well but other cities, such as Perth and Melbourne, have an oversupply. 
Wannabe landlords planning a plunge into flats need to make sure they avoid the nation’s growing number of postcodes where supply massively outstrips demand and rents are falling.

Apartment block towers reshaping ­skylines and low-rise clustering suburban streetscapes are proliferating two times faster than cities such as Perth can absorb them, analysis shows.

Investors trapped with an empty apartment or having to compete with other landlords by cutting rent to attract a tenant could see their cash flows become cash-goes as revenues dwindle and costs rise.

More from Smart Investor:

• The best floor in the building

• Don’t blame SMSFs for the property boom

• Why your home is worth more than you think

It could be even worse for the huge numbers of self-managed superannuation investors that have been sucker-punched into buying off-the-plan high-rise apartments with promises of rental rivers of gold.

“It’s the worst possible decision,” says buyer advocate Christopher Koren, a director of Morell and Koren, who warns of uninhabited “ghost” apartments dotting clusters of big city skyscrapers.

“It’s very alarming,” Louis Christopher, head of SQM Research, says about the building binge in Perth that has continued after thousands of itinerant miners have packed their picks and shovels and gone home.

Christopher’s research reveals inner-Perth vacancy rates are about 6 per cent, or two times what a comfortable market for landlords should be. It’s the same story in Brisbane and marginally better for Melbourne, where it is about two-and-a-half times.

Sydney, which for years was starved of housing investment and remains a migrant mecca, is in good shape, with demand pressuring available stocks.

For investors it should be obvious that when supply massively outstrips demand, there’s going to be a big impact on apartment values and rent. The growth in value of apartments is a miserable 1.7 per cent, 10 basis points below the inflation rate, which means the real value of the property is falling by about 1 per cent a year.

By contrast, an investor can earn two-and-a-half times as much in a high-interest online account without the hassle of setting up a mortgage, screening tenants or finding the right apartment.

Nationwide, apartment rentals have largely flatlined, with some cities, such as Sydney, posting rises, and parts of Melbourne showing falls. For example, research by the Real Estate Institute of Victoria reveals median monthly rents in metropol­itan Melbourne have generally been flat or fallen, while vacancy rates have risen, particularly in central Melbourne.

Meanwhile, property developers in Melbourne are competing to increase supply with applications to build 70-plus-storey skyscraper suburbs in the sky.

Industry experts claim self-managed super funds (SMSF), which have assets totalling more than $500 billion and account for more than 5 per cent of the population aged over 15 years, are a popular way to invest.

Official statistics hopelessly lag the market, but analysis of what is available suggest SMSF borrowings exceed more than $10 billion and appear to be annually growing by between 50 per cent and 100 per cent.

Danger for SMSFs
SMSF could also stand for the mantra “sell more sky-high flats” being chanted by property developers and some financial advisers targeting investors seeking income and capital growth.

A good property investment in the right postcode, offering convenience and unique features not easily replicated, is the crowning jewel in any investment portfolio.

But, according to Adam Stanley, an exec­utive director with Pitcher Partners, the wrong investment could be a crown of thorns, particularly for those gearing an SMSF to buy property.

“If an investor purchases a property and has difficulty finding a tenant, then the SMSF would need to have sufficient other cash and liquid assets to service the loan,” he says.

In addition, low rental incomes might need a top-up from other fund assets, or a top-up, to service the loan.

Also, what strategies are in place if a scheme member, say, a spouse, dies or is permanently incapacitated and there’s a fire sale, where the price comes in well under the expected return?

It can get a lot messier when the scheme is required to pay members an income from the assets.

“Minimum annual pensions will be required to be paid and if the yield on the property is insufficient to cover the out­goings together with the minimum pension payments, then the scheme trustees will have a problem,” Stanley says.

“This again may result in a forced sale of the property at a less than opportune time in the market.”

Even high-flying property professionals such as Sadhana Smiles, chief executive of Harcourts Victoria, are being caught in the turbulence of too many flats competing for tenants.

Smiles’s $490,000, one-bedroom investment property in the rapidly gentrifying inner-Melbourne suburb of Richmond is new, fashionable, funky, convenient to the city and close to plenty of public transport.

But she had to drop weekly rent nearly 20 per cent, from $480 to $400, to secure a tenant in what is a popular, low-rise postcode.

“What many investors don’t appreciate is what happens when a lot of apartments become available at the same time,” Smiles says.

She still considers it a great buy because the lower price attracted a tenant, there are no cash flow issues, the bank’s happy and there is no pressure to sell.

“For me, investments are a buy and hold,” she says. “I plan to use this one to leverage up to the next investment.”

But, she warns, conditions might be a lot tougher for those considering a purchase in central business districts, particularly Melbourne, where high-rise building booms have pushed up the skyline and apartment availability.

Eight ways to dodge the apartment glut
1. Have a well-thought-out investment property strategy.

2. Buy with your head, not your heart. Find a place that will be easy to rent, not where you’d like to live or retire.

3. Regularly review the portfolio.

4. Ensure you have flexible financing. Make sure a rent cut or delays finding a tenant will not cause financial distress.

5. Work out the unique selling points of the property. Is there a lot of competing property offering similar features?

6. Make sure the lease maximises investment returns and security of investment.

7. Consider lease lengths. Leases of two or more years lower legal, leasing and maintenance fees.

8. Set rents that attract the largest number of applicants to find the best tenants.