The secret to becoming a millionaire in Australia

….is to invest three million dollars into a business built by a real estate “entrepreneur”.

Exhibit 1 McGrath Estate Agents

John “Million Dollar Agent” McGrath has presided over one of the most classic examples of wealth destruction of our time. I think the people we should feel most sorry for are those who bought into the bull traps in 2016 and 2017. It must have been like that exhilarating feeling a surfer gets as they catch a large wave but then realise they’ve got the angle wrong and are shooting to the bottom rather than gracefully gliding across the face of the wave.

Exhibit 2 – Yellow Brick Road

It would seem others have been paying attention to Mr. Bouris too:

ASX suspension? What ASX suspension?! Yellow Brick Road’s Mark Bouris has spent the week since the business failed to lodge first-half accounts doing what he does best. That is, self-promotion.

Ah, self-promotion. That’s a common factor, isn’t it?

Those who’ve spent some time in the UK might recognise the type:

Bill’s Opinion

Australia entered a per capita recession this week. Property prices have been on the slide since September 2017.

The two examples above are both completely reliant on the health of the real estate market to return a profit. Which direction do we feel these share charts are going in the near to mid-term? At the time of writing, Yellow Brick Road shares are on their 4th business day of suspension.

In the words of Bob Dylan, “just when you think you’ve lost everything, you find out you can always lose a little more“.

Introducing the “Are we there yet, Mum?” Index

In case you haven’t realised it already, the organisations that most loudly proclaim their “Independent. Always” credentials are, in fact, some of the worst peddlers of fake news. At best, there is a distinct lack of critical thinking when it comes to reporting what clearly vested interests are pitching. No-one is really looking for the dog that isn’t barking……

Worse, there are people out there heavily-invested in certain outcomes yet being interviewed and given publicity as if they were a credible information source; Stephen Koukalous, for example, long property much?

The epitome of this Lord Haw Haw mentality is the Doctor of Property himself, Andrew Wilson, a man with so little credibility, Fairfax fired him.

Two recent outputs from this mendacious fool have prompted the creation of the “Are we there yet, Mum?” index;

Firstly, this one where he claims prices have bottomed because the median price at auction didn’t fall significantly since the previous week. Just re-read that again slowly…… (by the way, I’m pretty sure he edited this from an earlier version that even claimed prices were on the rise – if anyone can confirm my suspicions, I’d be grateful).

And this one where he claims a high auction clearance rate despite the glaring problem that only 55% of results were reported;

Therefore, readers who are interested or mildly bemused by the current “completely unpredictable” housing bust occurring in Australia may enjoy this new monthly feature.

William of Ockham’s “Are we there yet, Mum?” index.

This is a collection of public data, which is intended to illustrate the bottom of the Sydney housing market, when it arrives.

The datasets used are as follows;

Housing credit source: RBA
Monthly indices source: Core Logic
Auction data source: Core Logic

The last one was created by looking back on the Core Logic website for the final print of weekly auction data. I stopped at August last year but will continue collecting it while on a dull conference call. Of course, if anyone has access to an Excel version of the back series, please do let me know and I”ll drop that into the chart.

These charts will be updated monthly, probably just after the RBA credit change data is published.

Any debate or discussion on dataset chosen, interpretations or additions/modifications are welcome in the comments section.

(note: there are 4 to 5 weeks in December and January where auctions volumes are too low for Core Logic to bother reporting).

When the tide goes out we learn who has been swimming without clothes

The Lucky Country tends to lack the entrepreneurial spirit.

The reasons behind this are many, my personal view is that it’s a function of the incentives in the economy; for four decades, Australians have been rewarded by investing in property or working in industries relating to it.

The corollary to this is that there’s been few reasons and rewards for investing one’s cash or pension into stocks, shares, bonds and non-property assets.

Some people have won bigly in this environment. Fair play to them, they followed the cues and were rewarded accordingly.

Mark Bouris is one such big winner. In the 1990s he made his fortune in the mortgage finance business and has continued to go from strength to strength ever since.

The danger of viewing this type of success from a distance is believing that it is a) due to the unique and mercurial skills of the winner and, b) that it is repeatable across industries and markets or indeed, time.

In other words, just because Mark made a large fortune from real estate in a market where everyone made small fortune from real estate, it doesn’t necessarily follow that he can continue to make money in different areas or even in his area of expertise.

Today will be interesting, therefore; Yellow Brick Road shares suspended after trading close.

Bill’s Opinion

In a rising market, everyone is a genius.

Mark Bouris’ Yellow Brick Road might be having some innocent difficulties with the regular filing requirements.

On the other hand, 18 months into a property price downturn and an environment of tighter lending, one company has to be the first major casualty.

On verra.

Responsible borrowing

Australia is on a bank-bashing roll currently. As the market (and by that we mean property market – really the only important market in the Dutch Diseased country) rose solidly over the previous decades, the national psyche shifted to one where the expectation of continued growth became pervasive.

To a certain extent, that’s a rational position to take; if everybody, lending institutions and central banks included, is predicting a double digit rise next year there’s wisdom in listening to them.

There’s a similar theory about “technical analysis” of stock charts, that it might not be based on any underlying science but, because everybody believes in “support lines” and “double tops”, it becomes a self-fulfilling prophecy.

However, trees don’t grow to the sky and no market moves in a straight line.

More importantly, if you’re going to make a bet, any bet, you better bloody well know that you can live with the wrong result should it occur.

Westpac has been hit with the first class action against one of the big four since the banking royal commission’s final report earlier this month.

Lead plaintiff Michelle Tate told a media conference in Brisbane on Thursday she and her husband Ian were ruined after the bank lent them more than $1.8 million across five properties, despite the family having just one income.

Ms Tate said Westpac trusted a loan broker who provided information about her family’s financial position, and did not independently verify the situation. She said her family would now lose all of their properties save for a block of land.

Wait, what?

They bought their first home in 2008 but decided to invest in a further three in 2013 and 2014 while Mrs Tate was a full-time mum, all funded through Westpac loans they locked in as interest only and secured against their first property.

Are you insane?

Maurice Blackburn Principal lawyer Ben Slade said Westpac was “required to comply with strict obligations which are specifically designed to protect consumers from irresponsible lending and the risk of financial hardship”.

“This case will seek to prove that Westpac failed to comply with these obligations and that this failure caused substantial losses for many consumers,” he said.

That highlighted claim reminds me of the regrettable line we all mistakenly say once in our lives;

“Honey, does this dress make my bum look fat?”

“No dear, your bum makes your bum look fat”.

Bill’s Opinion

Michelle Tate and her husband knew exactly what they were doing when then went all in on property. It was a one way bet they couldn’t lose.

Blaming the bank that lent you the money in the hope of compensation is an understandable tactic and a common coping mechanism rather than coming to terms with one’s own stupidity and greed.

But you were still stupid and greedy and you absolutely knew what you were doing.

Special pleaders gonna plead specially

For those not following the Australian economy (and judging by the readership statistics of this blog, that’s most of you), there’s some huge fun to be had in observing the logical knots people are currently tying for themselves.

 

The problem is that the Reserve Bank of Australia has again, not lowered interest rates. The last time the RBA moved rates was in August 2016, down from 1.75 to 1.5%.

 

I have a real job, i.e. I’m not an economist, so whether or not the RBA is taking the correct course of action is not really something I’m qualified to comment on. However, I am able to spot blatant special pleading when I see it:

 

The “Kouk is lining himself up for a job as an advisor in the next Federal government, assuming the current incumbents lose the election. This is likely to be a nice final job before his retirement. An ongoing house price crash in the two biggest cities of Australia will make this semi-retirement gig far more stressful than he’d appreciate.

 

 

The “Doc” was recently the “Chief Economist” (whatever that means; how many do they have to employ to need a chief?) at Domain, the only profitable arm of Fairfax…. until it was sold off. He was fired last year and is now pitching himself as “Chief Economist” of a company called My Property Market. The website of this esteemed company is still under construction, but I’m sure it’ll be finished soon. After all, they’ve got at least one employee now….. 

 

One imagines the Doc is personally very heavily invested in property.

One of the unusual quirks of the Australian property market is that there is a tax incentive to run your investment properties at a slight revenue loss.

There are, of course, two minor problems with this; firstly, you’re accepting an operating loss today in the hope of a capital gain tomorrow, and secondly, the tax benefit only works while you’re drawing a salary or other income at a level that attracts the higher marginal tax rates to offset the negative gearing. Amateur property investors who get fired from their regular job are clobbered with a double whammy, in other words. Ouch.

Bill’s Opinion

 

In the words of Upton Sinclair,

 

 It is difficult to get a man to understand something when his salary depends upon his not understanding it.

 

Westpac’s Diversity and Inclusion Officer writes…

…about banking and house prices. One wonders how that got past the Corporate Affairs twinkies.

Obviously we’re being facetious, Brian isn’t really the Head of LGBTQI123& non-TERF Advocacy (not that you’d know it to look at what he seems to spend most of his time focusing on).

No, he’s the CEO of Westpac

Which means, on balance, the article is even more worrying.

Why?

Ask yourself a question; when the CEO of the 2nd biggest bank decides to write a blog post explaining that the property market isn’t crashing, that the bank is sound and they are still open for business, does that make you feel great comfort and security?

Or, do you think to yourself, “why is he telling me this, why wouldn’t everything be fine, what does he know that I don’t?

Bill’s Opinion

The lady doth protest too much, methinks

It’s highly unlikely any of the major Australian banks are going to be in trouble any time soon. However, the prime candidate if one does hit hard times would be the one with the largest exposure to interest only investment loans and a top of the market (2007) acquisition of a competitor that they never got round to integrating and realising economies of scale….

Australian banks’ dichotomy

This is not a trick question, but what is the primary purpose of a retail (AKA commercial) bank?

 

Assuming it’s not been nationalised, like RBS and other 2008 basket cases, presumably the main function of a bank is to make money for its owners, i.e. the shareholders. Sure, the corporate mission statement might waffle on about helping customers through the key milestones on their life journey, blah, blah, blah, but if they don’t increase the shareholder’s value, they’re dead.

 

Australian retail banks have performed this task very well over the years. CBA’s share price and dividend history is shown below as an example, the other 3 major banks are not dissimilar;

 

 

That the dividends barely missed a beat following the minor difficulties in the banking world in 2008 is amazing. Of course, this masks a slightly inconvenient fact that they were supported by an implicit government guarantee of a bail out should one be required, allowing investors to remain calm and not rush for the exit like in other jurisdictions.

 

Gifts rarely come without an expectation of a quid pro quo, however. In the Australian case, the banks are expected to “do the right thing” by the public, by which we mean, “help the government”.

 

On the way up, when values are increasing and there’s a wealth effect to the public, or at least those exposed to the upside of property ownership, these two purposes (shareholder value and public service) are reasonably well-aligned.

On the way down, as property values decrease and regular members of the public start to experience financial pressure, the two purposes diverge. If the government of the day would like the bank CEOs to show some forbearance to those in distress or even take a haircut on the margin between borrowing and lending costs, the bank shareholders are going to suffer.

 

What might this mean in the short to medium term?

 

There’s a few factors at play currently which may provide us with an indication of how the next year or two might play out.

 

  1. The Royal Commission in to the financial sector has unearthed some unpleasantness by most major institutions. There will be ramifications for the sector in terms of increased oversight and regulation.
  2. Macroprudential restrictions on lending has resulted in a cooling of the housing market with prices down around 10% from the 2017 peak and perhaps, conservatively, 1 in 10 owner occupier mortgages being in negative equity (more, according to some sources).
  3. A likely change of government in May and the possibility of the removal of some tax breaks for new owners of investment properties.
  4. Costs of borrowing from overseas sources (currently about 60% of mortgage funding) has increased and looks likely to continue to do so, albeit mildly, during 2019.
  5. A halving of the number of foreign (by which we mean Chinese) property investors buying in Australia since the peak in 2014.

 

Predictions are notoriously difficult, especially about the future, but this combination of factors suggest that the decline in values is unlikely to halt during the next 12 months.

Whichever flavour of government is in power, and let’s face it, there’s little difference between the two parties other than one group is more competent at being corrupt than the other, won’t really matter; neither of the major parties are going to enjoy governing during a -15% or perhaps -20% property crash.

The calls to “do something, do anything” are going to become deafening.

The professional economic troll, Stephen Koukoulas, and the “Chief Economist” of My Property Market (i.e. the only employee), Dr. Andrew Wilson, are already flooding social media with pathetic begging of the Reserve Bank to cut rates.

God only knows how many more vested interests will come out of the woodwork over the coming months. 

 

Bill’s Opinion

 

Obviously, the government is going to call in the favours owed. At the very least, banks are going to have to take a hit on margins. The banking regulator, APRA, may find itself under political pressure to ease the responsible lending restrictions that have been put in place and then banks will be “encouraged” to open the spigots again. Friendly State Governments may be under pressure to reverse restrictions on overseas ownership.

 

None, some or all of this might “work”. 

 

Regardless though, shareholders of the banks are going to take one in the chops.

 

What’s that definition of insanity….

….that Einstein probably never said?

Real estate agents are starting earlier this year.

Shame. You’ll be telling us next that divorce lawyers, journalists and politicians are having a hard time, and then we’ll really have to get the tissues out.

Falling prices, tighter credit and uncertainty ahead of a federal election and the final report of the banking royal commission mean a busier year for agents on the country’s eastern seaboard as they sell an increasing stock of homes on the market.

I’m not sure that statement is completely accurate; perhaps replace “busier” with “tougher”?

As several commentators on here have pointed out, in a falling market most sellers will rethink whether they really need to move. There’s a high degree of emotion attached to the perceived value of one’s house and the attitude that “it’s worth $x and I won’t take a penny less” can be deeply ingrained.

So therefore we may well see far fewer properties up for sale this year. Those who have to sell due to death, divorce or unsustainable debt will be the exceptions.

Something else will need to change too, although Eliza McGrath hasn’t spotted it yet;

Our first open [day] is on 19 January. Then we’re extending it to be a five-week campaign with the first auction on 16 February.

Given that fewer than 1 in 2 properties are selling at auction, it seems somewhat poor advice to her clients to chuck a bunch of cash at a marketing campaign and planning for an event that has a higher probability of disappointment than ever before in living memory.

Finance is getting harder to get,” McGrath says. “So getting a five-week campaign is more standard. Some people are asking for six weeks. They know from trying to buy themselves how hard it is to get pre-approval.

She’s not getting the hint, is she? The auction favours the seller only in a rising market, that power dynamic reverses on the way down.

A search for her on Google Images explains why. She looks like she is barely 30 years old. The last time the market was like this she wouldn’t have been potty trained.

Ren Hor Wong seems to have a better idea, however;

“Given the current market condition and low auction clearance rate, vendors’ confidence is low when it comes to selling,” chief executive Ren Hor Wong said.

“We see a surge in listings activity, but majority of them would not go to auction, and some probably don’t even want to go for a marketing campaign.”

Quite.

This is interesting too;

“So it’s imperative for agents to have a database of finance-ready buyers”

He might regret dropping that gem into the interview. He’s just told his competitors a good tip on how to survive this year, if they are clever enough to listen.

He’s got some other intelligent insights too;

Going off market also allows the seller to save marketing costs, a key for vendors at this low point in the market, Wong adds.

“When you can’t ask for a higher price in the market, next thing you want to do is to save money,” he says.

Smart thinking; drop the price and lower your sales costs.

Meanwhile, on Planet Millennial, reality hasn’t arrived yet;

McGrath isn’t sure what will come. The year is likely to start well, but it is hard to see further beyond, she says.

We’ll have a strong start to 2019, like 2018 did, but it’s hard to say what’s after the first quarter, with the election coming up and the royal commission [final report],” she says.

I bet you won’t, Eliza, I bet you won’t.

Bill’s Opinion

For some time now, being an estate agent on the east coast of Australia required nothing more challenging than possession of a cheap suit, a driving licence and pulse.

Things have changed this year. There will be significant consolidation of agencies and a huge reduction in the number of agents employed.

The question is, what does one do as an alternative job if all your previous work experience consisted of handing out leaflets at open houses for the last decade?

The price of Uber journeys and dog waking services in Melbourne and Sydney are likely to reduce significantly.

The Kouk; troll or fool?

One of the Australian Labor (sic) Party’s advisors on matters economic is a shy and retiring character by the name of Stephen Koukoulas, AKA “The Kouk”.

I don’t tend to waste spend much time on social media these days but, in between large meals and long walks, I came across this provocative tweet by the person who, should Bill Shorten become Australia’s next Prime Minister for the obligatory 18 month term, will be whispering sage advice to the highest office in the land;

If, like me, you aren’t a professional economist, you will be wondering why this claim simultaneously seems to make sense but also seems like it shouldn’t be correct.

We’ll explain why it’s wrong shortly, but first, let’s recall an old brain teaser that used to go around in the school playground in various versions;

Three friends decide to split the bill after a meal at a restaurant. The waiter says the bill is £30, so each guest pays £10.

“Later the waiter realises the bill should only be £25. To rectify this, he takes £5 from the amount to return to the group.

“On the way to the table, the waiter realises that he cannot divide the money equally. As the customers didn’t know the total of the revised bill, the waiter decides to just give each of the three friends £1 and keep £2 for himself.

“Each guest got £1 back: so now each guest only paid £9; bringing the total paid to £27. The waiter has £2. And £27 + £2 = £29 so, if the guests originally handed over £30, what happened to the remaining £1?

If you haven’t come across this puzzle before the explanation is here.

It’s a classic misdirection.

Which is precisely what The Kouk is doing with his tweet.

The explanation as to why his statement is incorrect can be found here in an excellent and highly-recommended free PDF of a classic and easily read lesson on economics for mere mortals such as you and I. Treat yourself to a quick education before opening the next festive bottle.

The mistake or misdirection Koukoulas is guilty of is, helpfully, described in the very first chapter. In it, Hazlitt re-explains Bastiat’s Broken Window Fallacy and the concept of “opportunity cost”.

The explanation is so precise and economic (pun intended) in its use of words that I won’t recreate it here, but hope you follow the link and see it for yourself.

Bill’s Opinion

It is almost inconceivable that a professional “economist” is not aware of this fallacy (the first in the book!).

I can think of three possible explanations; either The Kouk is playing a festive game of trolling OR he’s deliberately misdirecting his followers for some other reason OR he’s not a very competent economist.

Of course, economics is a pseudoscience anyway. For proof of this, one only need look at the history of the so-called “Nobel Prize” for the subject; it was created as an effort to lend the subject some scientific credibility.