The latest happenings in the Melbourne property market. For our Essays and The Secret Agent Report, see our Research page.

Category Archives For: Economy

Leveraged to the hilt or buying what you can afford?

Probably the most concerning thing I see with property market is over leveraged property buyers.

So called educational events and speakers are incredibly open about teaching people the art of leverage.  The task seems not to be how to buy the right property but on how to buy as many properties as you can.

Using loans to borrow for other loans and ‘minimum down’ techniques are taught to everyday people.  Spruikers manipulate to get rich and some people obey as the lure of easy money and being rich cloud rational thought.

Borrowing is part of the process.  Yet leverage to the extreme is a very dangerous thing.  Sophisticated investment banks such as Lehman Brothers couldn’t defend themselves from taking too much leverage.  The company went bankrupt after it engineered a system that leveraged 99% of its entire portfolio.

“You always found out who’s been swimming naked when the tide goes out” said Warren Buffet a respected financial investor.

The tide always goes out at some point.  This is why you need to think twice about getting yourself too highly geared with debt.

The world has moved to a faster pace environment.  We’ve had financial meltdowns,  earthquake’s, terrorist attacks and now nuclear reactors going into meltdown.

As public sentiment is perhaps the biggest factor in financial markets,  prices can move irrationally rapid in both up and down directions.  As we move forward into the future,  I think this will intensify further.

Australia is perhaps the luckiest country on the planet at the moment.  Doesn’t mean though that you shouldn’t be ready for any swift tide changes.

Austin Texas

After spending a few weeks in Austin Texas,  I must say that I’m pleasantly surprised at the quality of the city.

From an outsiders perspective, Austin shares very different values to the remainder of Texas.

Organic markets,  the abundance of push bikes and alternative music scene certainly made way for a very different Texas experience than I had imagined.  Even though this is not an overall reflection on Texas!

It actually reminds me much of Melbourne in some contexts.  The spread out nature of the city is perhaps rather more noticed in the CBD area.

Pricing of Real Estate essentially seems good value.  A large home that is a 10 minute bike ride into the CBD can still be had for around $500,000.  Not bad considering that Austin has one of America’s best economic growth rates plus lowest unemployment.

Are we in a bubble?

This is a very fair question.  Asset values have soared over the past decade and a half.

Australia has turned from a small forgotten country to an economic powerhouse.  Our resource rich land is the envy of the world.  But are we in a bubble?

I’ve made plenty of comments on this blog about bubbles.  My personal opinion is that some areas in fringe amenity poor areas might just be in a bubble situation.  While inner city quality assets seem like they will hold their own and grow further.

The question of a ‘bubble market’ invariably comes up at dinner table conversations.  My own person view is that people without property suggest a bubble while those who have property tend to think that the market will power forward.  In some cases,  I think people’s desires can become ones opinion.

Those that are leveraged ‘to the hill’ with investment property are the most optimistic of all.  Now that’s concerning.

The economist writes a though provoking article on the Australian market.

Some missing points about our taxation structure would be welcomed into the article.  Interesting was that the IMF have produced a paper to suggest a 10% improvement in our terms of trade tends to lift
Australian property prices by about 5%.

Well worth a read if you can.

Top ten most liveable

Melbourne has been listed as the second most liveable city in the world, scoring 97.5 out of 100, close behind Vancouver which came in at number one, scoring 98 out of 100.

In an annual ranking, compiled by the Economist Intelligence Unit, 140 cities are ranked from 0-100 on 30 factors from a range of areas including; stability, health care, culture and environment, education and infrastructure. Cities that tend to score best in ranking are mid sized cities in wealthier countries with a relatively low population density.

Australia has ranked four cities in the worlds top ten most liveable – Melbourne, Sydney, Perth and Adelaide.

At the other end of the scale sits Harare, the capital of Zimbabwe, likely due to it’s poor scores in stability, health care and infrastructure.

Up and down

American home prices rose by over 40% between 2000 and 2004.

A very interesting fact, made more interesting by fact that during this time the average income actually dropped.  The population did not dramatically increase and housing supply increased by 8% over the four year period – more than enough to cope with the population increase.

For home prices to increase so dramatically, we would expect the following:
* Rising Incomes
* Large population increases
* Shortage of property

In 2000, obtaining a loan from the bank required a large deposit and solid credit history. However as the years continued into 2004, the banks began handing out loans like lollypops, opening the barrier of entry to purchase property and therefore pushing house prices up significantly.

But why would the banks drop their standards and allow just anyone to obtain a loan?

The return for investors who provided the money for the loans was huge.  As more and more people wanted to invest, the banks began to give out loans to anyone and everyone. More money to the banks, more money to the companies selling the loans and more money to the investors.

This all seemed like a risk free process while house prices were on the rise, however when home prices began to fall… It was a different story and many people lost their shirt.

It’s no wonder the American housing market crashed so severely. Important lessons that need to be remembered in every country.

Stats, are they helpful?

How many reports can be produced regarding how expensive property prices are in Australia and in particular Melbourne? It is truly mind boggling. Another survey, once again places Melbourne well up the list. But does this make any difference to the market. The answer is NO.

No property seller is going to wake up one day and say, Oh, my property is worth $400,000, but because this is pricing people out of the market I will sell it for $250,000, to make it more affordable. And this seems to be what these reports and surveys want to see happen.

All buyers would love to see property prices drop significantly, but the market, and that is what a buyer competes against, is strong. When demand is high for property, that’s when we see the prices go up or remain at a high level.

What are the alternatives? If incomes were to increase, thus making loans more serviceable, but if we have more money to spend, wouldn’t we see buyers put this money to outbid another buyer to purchase the home.

Perhaps the alternative is to rent or buy further out from the CBD. Ok, so you don’t want to rent, buying further out from the CDB gives many people a shiver up their spine, and I can see why.

In Melbourne, we simply don’t have the public transport infrastructure to support people living out of the more traditional Suburbs, whether it be North, South, East or West. We all complain that to drive to work in the Inner City or CBD is terrible, and it is, but how many people actually need their cars at work during the day. Very few would be the answer, and even if you do need to get around to appoints during the day, why don’t we use the bus, tram or train?

So until we sort out the outer suburbs and truly support these areas, making them desirable to the wider market, then the inner suburbs are only going to keep increasing in value.

Transaction costs and stamp duty; are we over thinking this?

It’s every where.  Internet, Newspapers, TV and it’s part of every day conversation.  The discussion of stamp duty and how grossly unfair it is.

I’m going to look at the other side of the coin in this instance.  By comparing other countries true transaction costs against ours.  I’ll also look at why eliminating stamp duty could be a problem rather than a benefit.

These views are not necessary my own. Yet in the spirit of having a better housing market I do see the upside of having the ‘friction’ that stamp duty creates. I’ll also show some reasons why they actually might even benefit you.

First up we are going to discuss the entire transaction costs rather than stamp duty when buying a property.  The chart as part of this post shows transaction costs across many different countries.

Australia is indeed expensive when buying property.  Yet when you compare Australia to a country like Belgium,  we seem lucky.

For a home buyer to acquire a property in Belgium,  they’d expect to pay on average 14% of the property value on transaction costs.  These transaction costs defined by the OECD, include taxes, legal costs and agency fees.  An $800,000 property purchase in Belgium would likely mean the purchaser finding an additional $112,000 in costs!

In Victoria for instance, which has the highest stamp duty in Australia, we don’t even get half way to that figure including other costs associated with purchasing.

Other countries such as France, Italy, Spain, Portugal and Germany all have extremely high transaction costs as well.

The bottom three countries; Britain, Denmark and America have relatively lower transaction costs.  All of these countries have experienced sharp property downturns and still have soft conditions.

Now this information above does not reveal to a conclusive level that higher transaction costs are actually good for property markets. Belgium currently has plenty of national debt which could flow onto the housing market and Spain which has high transaction costs has had a dreadful housing bust.  Spain however did suffer for being over supplied in new property for its population.

So what do transaction costs such as stamp duty do the the overall market?

Transaction costs lower the amount of transactions which limits supply.  People think twice about moving so quickly.  A family needing more accommodation might decide to renovate and go ‘up’ rather than find another property.  As they lose valuable capital through selling and buying costs,  they might decide to spend money on a renovation instead.

Many families will still choose to move yet the volume of this happening will always be lower if transaction costs are prevalent.

New Zealand has very low transaction costs.  Stamp duty fees are non existent in New Zealand and they’ve suffered from a big drop in prices.  Speculation was rife with many Australians buying into their market due to the attraction of no stamp duty.  For many,  this hasn’t worked out.

Now large transaction costs can be a huge burden if the property market does drop or even collapse.  That ‘friction’ will work against the market and could make downturns extend for larger periods of time.

So what would happen if Australia became a zero stamp duty country tomorrow on all property transactions?  Besides the lack of government income,  I think we’d find ourselves quickly in a bubble market were prices would peak and then crash.

Property in Australia is not controlled by big business like in many other countries.  95% of property is owned by everyday people.  My concern would be that a lack of ‘business smarts’ would cause irrational behaviour to take place. This ‘crash and burn’ market would see many everyday people loose their shirt.

Eliminating stamp duty for 1st home buyers I think could be a good idea to help them enter the market. Assistance to other demographics such as the elderly could also be beneficial.  Yet as much as my capitalist cap would suggest to open up the market and remove all taxes and duties.  I think for many Australians, this could be a bad thing.


$600K Median

It looks as though the home buyer property market has been dealt another blow.  With the December quarter the median price of a home in Melbourne is now $600,000. The results issued by the REIV, will put further pressure on the market. As confidence is one of the main driving factors in the market, we wonder how many hits the property market can handle before we see some significant down turn, resulting in lower prices for buyers.

We are told incomes are strong and increasing but this is of little consequence when Melbourne  property is now one of the least affordable in the world.  If incomes were to increase substantially, would this not result in prices increasing as people would feel as though they had more to spend?

Potentially these factors together could result in a good case for the RBA to increase interest rates, we don’t have long to wait, with the next meeting due for the 1st February.

As we have discussed previously, an increased median is only that, a median. Further analysis needs to be conducted, were then many more valuable homes sold in the quarter, therefore increasing the median. We will update you later in the week with some interesting results.

Australia, the land of opportunity – the world seems to be shifting our way

Growing up in Australia we have always been told how isolated we are from the rest of the world.  Much of this is true,  however by the term ‘the world’ many people were referring to countries such as England and America.

Rather than being severely disadvantaged at out distance –  our ever expanding Asian neighbours have been tremendous for Australia’s prosperity and growth.  The economic world has started to shift our way too.

From a street level, many people in countries like America and England are pessimistic about the future.  Can you ever remember recently hearing someone say that Australia has no future?  Nope, neither can I.

I’ve met plenty of entrepreneurs in the age bracket of 20 – 30 who are helping guide the next innovations and great business’s in this country.  Each of them see Australia as a future powerhouse that is still evolving.  You can’t argue with that.

The Economist has released some GDP forecasts from the OECD for the next two years.

Many argue the importance and correctness of the GDP measurement however one thing can’t be argued –  Public sentiment rides much on these figures.

You can see that Australia is tipped to be one of the worlds best performers over 2011 & 2012.  Australia’s expansion has been nothing short of remarkable.

Stamp Duty – The Perfect Business Model

At Secret Agent we don’t normally discuss politics, but with the Victorian State Election coming up this weekend, it has ignited a discussion amongst property buyers.  Please reduce Stamp Duty Levies.

Every election this topic comes up and we all get excited about the possibility of the new or existing government reducing the amount we pay on property transactions.  In reality I think we will all be waiting a very, very long time before this ever happens.

Stamp Duty is a massive income stream for the Government, with very little output required from them, a truly great business model.  Who wouldn’t want to maximise their profits through very little effort.  Most of us would be very happy if our own businesses ran this way, expect for the fact that it comes at our expense.

With the median house price hovering around $565,000 stamp duty is $28,970. Last year the government raked in over $3billion in duties, therefore I can see no reason as to why stamp duty will be reduced, the government simply can not do without it.

As Benjamin Franklin famously said over 220 years ago “In this world nothing can be certain, expect death and taxes”.