Pete Wargent blogspot
Co-founder & CEO of AllenWargent property advisory & buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.
4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.
"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.
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Thursday, 15 November 2012
Magical Minsky Moments and the Great Aussie Property Bubble
Magical Minsky Moments and the Great Aussie Property Bubble
The hypotheses of American Economist Hyman Minsky (1919-1996) never really gained any traction in mainstream economics or influence in central bank policy-making, but posthumously, they suddenly seem to be all the rage! Professor Steven Keen and now Phillip Soos of Deakin University, two hard-line supporters of the ‘Great Australian Property Bubble’, now refer to Minsky’s theories regularly.
Minksy’s financial instability hypothesis (with my notation)
In an economic cycle speculative bubbles can build in financial markets (no arguments there). During the good times, when corporate (?) cash-flow rises beyond what is needed to pay off debt, speculative euphoria or irrational exuberance may develop. Soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis.
As a result of such speculative borrowing bubbles, banks and lenders tighten credit availability, even to companies (?) that can afford loans, and th economy subsequently contracts. The slow transition to financial crisis is known as a “Minsky moment”.
Minsky argued that these swings, and the booms and busts which accompany them, are inevitable in a free market economy unless governments or central banks intervene (!). As such, Minsky opposed the deregulation of the 1980s, and obviously these ideas received some attention when the subprime crisis hit the US a few years ago.
Recently Keen and Soos have applied Minsky’s economic theory to Australian residential property, highlighting that speculative buyers are fuelling a Ponzi scheme. Do the ideas have some merit? Yes. Cash-flows on many investment properties do not cover all holding costs, and thus if investors believed there was nil prospect of future capital gains they could indeed rationally exit the market.
Soos also said that:
“The only thing that prevented Australian house prices from crashing during the 2008 GFC was the first-home owners’ boost”.
Is this statement accurate? Nada. The principle reason Aussie property didn’t crash in 2008 is because credit was still readily available – and cheap – and Aussies continued to believe in the future upward trend in prices. First home buyers are only one part of the market.
Advantageous tax treatment
Destiny’s Margaret Lomas delivers an insightful point on tax:
“To the average punter, what matters most is cash-flow, and since investing in property in this country is tax advantaged, (and includes on-paper deductions for depreciation in many cases), the cash flow for many properties purchased today in economically strong areas with great yields and potential for further values growth is positive, or at least even.
Whether gross rent covers principal and interest repayments is a moot point when you consider that you can get a tax break equal to, or greater than, the difference. And while ever that possibility exists, investors will continue to support those markets, creating further, albeit moderate, values growth and continuing strong yields.”
John from North Sydney
A friend of mine named John*, married with kids, recently bought his first home in a northern suburb of Sydney. His children are approaching school age and he wanted to get on the property ladder in a suburb close to good schools. Did he dust off his calculator and consult his textbook on Minsky’s financial instability hypothesis? I haven’t asked him, but I’m doubtful.
Instead, he saw a fine 4 -bedroom house, on the market for $600,000, with plenty of space for his offspring to grow up. It was in the vicinity of excellent schools and there were no other houses for sale in that suburb which he liked. With interest rates low he can easily cover the potential mortgage repayments, so he made an offer of $560,000.
There were two other interested bidders, so he upped his offer to $585,000 and secured the property at that price. So what determined the house price? Supply (S) and demand (D). A great house (S), few others available on the market (S), close to schools (S/D), two interested bidders (D), mortgage repayments he can afford (D)…
I can’t give you a precise figure but I’d estimate that investors comprise between a fifth and a quarter of property buyers in that suburb.
And herein lies the crux and the key reason that Keen’s doomsday predictions have missed their target: residential property is not a pure investment asset class. Most purchasers are first homebuyers or repeat buyers and are emotion-driven, seeking a dwelling for shelter and lifestyle. Investors affect property markets, but they alone do not drive prices.
Using supply/demand to your advantage
People ask me if it’s possible to make money in property when ‘the market’ is flat. Well, according to SQM Research average vacancy rates in Darwin are just 0.5%, and are very low at below 1.75% in Perth, Sydney, Adelaide and Canberra.
I popped over to Darwin a fortnight ago, and the lack of appropriate dwelling supply is so acute it’s almost as tangible as the Northern Territory humidity. According to RP Data house prices are up 10.6% year-to-date to a median price of $486,000. Here’s an amazing fact: a decade ago the median house price in Darwin was under $200,000.
Am I saying you should rush out and buy in Darwin or Alice? No. But finding suburbs where long-term population growth and property demand is high and supply is constrained will see you attain a great result.
Have you noticed that the financial press has begun to warn of a property bubble being re-inflated by low interest rates? Hang on…re-inflated? So a bubble no longer exists?
It seems to be so. While every man and his canine buddy seemed to be predicting instantaneous property price corrections of 40%, most sane commentators instead suggested that, absent a Black Swan event or credit market short-circuit, what would transpire was a steady easing in prices in most significant markets as household incomes are given a chance to catch up.
Read what Michael Matusik has had to say about the percentage of incomes being spent on mortgages in Brisbane. All the evidence seems to be that the property markets are gradually consolidating following a fairly monotonous easing of prices.
*Name prudently changed for the purposes of my own self-defence.