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.

Pips preparing to squeak

House prices are a matter of opinion whereas debt is real.

Mervin King, former Governor of the Bank of England.

The fun continues apace in Australia as people too young to have ever experienced a significant downturn are coming to terms with the first in their adult lives.

Our old friend, The Pwoperdee Doctor, is calling on the Reserve Bank of Australia to cut interest rates, not for him, you understand, but for the sake of the kids;

And later this week, more questionable content from The Doctor;

His content sometimes seems suspiciously like financial advice. This, for example, seems to be encouraging first time buyers into a falling market;

Since when was instant negative equity ‘The Great Australian Dream’?

Here’s a question for The Doctor; would you advise a close relative of yours to buy their first property today or wait a while for the falls to flatline? If not, be prepared for a little legal action in a year or two seeking a contribution from you for giving poor advice when someone sitting in a 2 bed apartment finds it’s now worth $100k less than they paid for it.

Over at the Sydney Morning Herald, a media outlet that previously relied almost entirely on its property listing subsidiary for any chance of making a profit most years, reality is starting to sink in.

One has to enjoy the circular nature of Finder’s Graham Cooke’s logic and his demonstration of a Nobel Laureate’s mastery of mathematics;

Yes folks, that’s right; if property falls by 20%, people who bought recently with a 20% or less deposit will be in negative equity. I bet he had a team of monkeys up all night with calculators working that out.

Actually, it’s worse because stamp duty is several percent depending on the jurisdiction so negative equity is achieved earlier.

This is all so unexpected, of course. Nobody could have seen this coming.

Which reminds us of Taleb’s classic chart from ‘Black Swan’;

Meanwhile, theres an interesting bet on between the Kouk and Tony Locantro;

Specifically, we are wagering $15,000 to $2,500 that Sydney or Melbourne or national wide house prices will or will not fall by more than 35 per cent from their peak at any stage before and up to the December quarter 2021.

 

Bill’s Opinion

 

At the current trajectory, Stephen Koukoulas will lose $15,000.

Of course, no market ever moves in a straight line and, as we saw in 2008, expecting any government to simply let markets run their course in a downturn is a very naive position to take.

It’s far more likely that interest rates will be cut, regulators will be told to ease lending restrictions, banks will be reminded who really owns them and the Millennials will be encouraged into another generational wealth transfer over to their parents’ generation.

By the way, this is all happening at a point in the economic cycle where money should still be made. The USA is unlikely to go into recession in 2019 and that should have been good news for the Australian economy. That the mood seems not so cheery in the “Lucky Country” speaks volumes.

If you’re about to buy your first property, why not wait until you’ve seen 3 to 6 months of no falls in prices, just to be certain you’re not jumping in a year too early?

Ask a financial planner (a good one, not one who relies on selling you “products”) whether some physical silver or gold might be a good thing to own right now, perhaps? Ask also about uranium mining shares.

After all, there’s always an inherent risk to catching falling knives…..

Capitalism and democratic choices are a distant memory in Australia

Remember how, back in the mists of time there used to be a clear choice for voters; a party of the free markets and less government spending versus a party representing the working class and unions?

Perhaps we’re looking back with rose tinted glasses and t’was always thus. Nonetheless, Australians were given a very clear glimpse of what lies ahead should the economy take more than a minor dip over the coming months and years; the federal government becomes lender of last resort to crap businesses.

No. Really.

Treasurer Josh Frydenberg and Small Business Minister Michaelia Cash will announce the small business funding policy on Wednesday, promoting the soon-to-be-established Australian Business Securitisation Fund as a way to overcome banks typically only lending to the self-employed when they pledge their personal home as collateral.

To summarise the announcement; “if the banks looked at your business and decided it was a poor bet and you didn’t have enough skin in the game, we’ve just decided the Australian taxpayer and their superannuation funds will lend you the money anyway“.

It’s very easy to be generous with other people’s money, isn’t it?

This is bound to end well.

The irony is that this policy wasn’t announced by either of the openly Socialist parties but by one of the two parties that historically claimed to be champions of free markets and minimal government intervention.

At a state level, similar disconnects have been shown between expressed and revealed preferences. Here’s a “free markets” politician bailing out rent-seeking taxi medallion speculators.

The $2bn fund to lend money to businesses judged by commercial lenders to be poor risks is an interesting development though, coming as it does so soon in to the worst housing crash in a generation, but particularly after this little legislative gem was snuck through onto the statute books with hardly any media coverage or explanation; insolvent banks can be rescued by confiscating deposits.

Bill’s Opinion

Will a “bail-in” of superannuation funds or bank deposits ever happen in Australia?

Unlikely, but not impossible. The risk isn’t zero.

There’s a great and often quoted dialogue in Hemmingway’s The Sun Also Rises;

‘How did you go bankrupt?’ Bill asked.

‘Two ways,’ Mike said. ‘Gradually and then suddenly.’

Perhaps this is the “gradually” part for Australian depositors. If so, it might be an idea to know how quickly you could act to not be caught out by the “suddenly“.

Special pleading to commence in 5, 4, 3…..

Australia’s stellar run of property price inflation has come to an end.

The current decline is already the worst in modern history;

So what? Markets are cyclical, trees don’t grow to the sky, etc. The current decline comes after many years of incredible capital gains for those exposed to the asset class. These single digit percentage falls should be of no concern to anyone except those who speculatively bought in the last two or three years or who have taken on extreme levels of debt.

Everyone with a brain and access to standard economics textbooks should have been able to predict that, eventually, there would have been a correction, either minor and slow or major and quick. One way or another, the fact that the double digit percentage increases would not have continued forever should have been news to nobody, not least those paid large sums of money to navigate these markets.

Our old friend Brian “admire my signals of virtue at shareholder expense” Hartzer seems to have been slightly startled by reality, however;

Westpac’s profits flatline, which, to be fair, still means they’ve made a truckload. However, trends are important.

What’s also important is that throwaway line above; “the country’s biggest lender to landlords“.

Let’s pose a question here for Westpac shareholders –

Q. In a falling market, which categories of mortgage debt are least likely to perform well?

If you answered, “the most heavily-leveraged and properties that are not the primary residence of the mortgagee“, give yourself a pat on the back.

Elsewhere Stephen Koukoulas has smashed the glass to get at the emergency alarm button; The next rate move by the RBA should be down.

An RBA rate cut is not about housing – it’s about exports and investment

Many people misunderstand my concern about falling house prices and the coincident call for the Reserve Bank to cut official interest rates.

Well sure, but given that your call for rate cuts conveniently occurred at the point it became obvious these price falls weren’t a blip and, in fact, show many signs of being the new normal for the next year or two, allow us a few moments to consider quite how unbiased your views are.

As for this claim;

The house price declines in the current downturn are much what I was forecasting a year ago.

Are you sure about that? This interview from 14 months ago suggests otherwise;

He’s talking specifically about Sydney prices there. If by “flat” he meant negative 7.5%, then fair enough but that would seem a generous retrospective reading.

Other commentators with an even worse track record are pleading to higher authorities now too.

From the same article, our friend “Doctor” Andrew Wilson (he’s a doctor of property! No, really!) making a prediction so accurate that he got it almost exactly 100% wrong;

So much for a doctorate in property economics. Where was it from, the University of Baghdad, studying under Professor Comical Ali?

Based on that stunning example of incompetence in his core area of expertise, perhaps we might also be allowed to ponder the altruism behind his current pleading for rate cuts;

Economics-wise, that’s just all over the place. Explain please, how lowering rates improves savings rates, for example…..

Bill’s Opinion

Predictions are a fool’s errand on something as complex as an economic system.

We can, however, provide a conditional prediction here today of which we are extremely confident;

Should the decline in Australian property values continue, the current low whine of calls by vested interests to lower interest rates will become a defeating cacophony as they claim it’s in the best interests of the entire country, not just themselves as they are staring down the barrel of large paper, possibly soon to be realised, losses.

The pips will squeak.

John McGrath’s investment advice – caveat emptor

There are just some people whose advice is best taken with an industrial-sized pinch of sodium chloride. Or, in other cases, not taken at all.

In fact, there are some investment “experts” who have a track record of giving great advice…. to themselves, but utterly disastrous advice to others.

Some examples spring to mind; Dick Fuld, Bernie Madoff, Fred Goodwin and, in Australia, John McGrath.

For those not obsessed with the Australian property market (i.e. the other 7.417bn people living in the rest of the world), you may not of heard of the financial disaster zone who is the self-styled “million dollar agent”, John McGrath, let’s quickly catch you up;

John is an estate agent (“realtor”, in North American speak) with a chain of 90+ franchise offices across the country. He started his business in 1988. There might be something significant about the year which we’ll come back to later.

In a recent opinion piece, John offers sage advice to people who might find themselves somewhat underwater with property that is worth less than they paid for it… that’ll describe anyone who bought property in most Australian cities in the last year, for example.

What is that advice then, is it nuanced for owner-occupiers, amateur investors, those nearing retirement, etc.?

Hold, don’t sell.

What, even someone close to retirement, hoping to maximise the capital available to buy an annuity and worried that they’re exposed to a falling asset?

Hold, don’t sell. I repeat; Hold, don’t sell.

Crikey (in the vernacular), that’s ballsy.

Ok, but he’s a seasoned veteran of 30 years in the industry, he knows what he’s talking about, doesn’t he? He’s seen the cycle multiple times.

What cycle?

Oh, he’s barely experience a recession or significant economic downturn in his adult life, let alone when he managed any material level of financial asset. He started work in 1988 and the last recession was 1992. He probably didn’t notice as he was still living with his parents.

Ok, so what if all he’s ever known is large percentage asset growth, he’s proven himself a canny advisor to assist others to make great investments.

Witness; the share price of his business, the imaginatively-titled McGrath Ltd. since the launch in 2015;

To paraphrase Sesame Street, “today’s chart was brought to you by the words ‘shareholder‘, ‘value‘ and ‘destruction‘”.

Perhaps the fairest thing one can say about John McGrath is that he gives very canny investing advice….. to people named John McGrath.

It’s a fool who says they know what will happen to a particular asset price. But, with a property market that seems to be desperately searching for any good news, and failing to find any, the greater fool is someone who thinks that John McGrath has a Scooby about what’s about to happen next and, if he does, he’s about to tell you the truth.

Bill’s Opinion

If you really want to become a millionaire, take 6 million dollars and invest it in whatever John McGrath tells you to.

A cynic might suggest John would like you all to not flood the market with your firesales until he’s finished the conveyancing on his.

Caveat emptor, indeed. Perhaps he ought to change his name to “the 900 thousand dollar agent, 899, 898, 897…….

Containerisation

….is a word invented in 1956 by Malcolm McLean to describe the switch from loose freight that had to be manhandled in and out of trains, lorries, cargo ships, etc. to the standard TEU and FEU shipping containers we still use today.

Depending on your source of choice, containerisation lowered freight costs by almost 50% due to lower rates of breakage, pilfering and required labour. Obviously, if you were previously employed as a stevedore in a port, that last efficiency might not have felt quite so positive.

The word “contained” similarly can have positive and negative connotations today. Witness;

Here’s another use of “contained” to compare and contrast;

That was from Ben Bernanke.

He doubled down a couple of months later;

Hubris is a painful lesson to learn. Of course, if you’re the Chairman of the Federal Reserve, the only real injury you suffer from being proven utterly wrong and professionally incompetent is a bruised ego which you can nurse with your gold-plated pension (it’s funny how, in these times of fiat money, “gold-plated” is still used to refer to great pensions, isn’t it?).

Back then to Australian property prices….

For non-Australian readers, there are several important points to make before judging an opinion on the subject;

1. There is no such thing as a single “Australian property market”. In a country as large as Australia, with so many economic and climactic differences, there are multiple markets.

2. Many people have tried to apply lessons from other countries to Australia and been proven wrong continuously.

3. Opinions are like arseholes; everyone has one.

So, that being said, here’s some opinions with supporting information;

Sydney and Melbourne account for about 40% of the population and roughly 60% of the value of housing. Sydney is about 15% times larger in terms of population than Melbourne and 50% greater in terms of value (being mindful that “value” is determined by someone actually being prepared and able to pay the price quoted). For the purposes of this blog, therefore, we will use the term “Australian Property” as meaning the Sydney and Melbourne markets rather than, say, a small town next door to a mine that’s just been approved in a remote part of Queensland.

Predicting how a group of assets will be priced in the future is notoriously difficult, even the “experts” struggle with it. A search over the years for one such expert, Dr. Andrew Wilson (yes, he’s a doctor of property economics!) shows that he’s under-predicted the rises and not forecast the falls in his area of apparent expertise. The newspaper articles seeking his views never show his past performance in their analysis, however.

We might be able to at least predict the direction of the trend, perhaps?

Let’s list the main factors which might indicate main two Australian cities are on a trajectory for an increase in prices (“Column A”) and those which suggest a fall (“Column B”).

Ok, they aren’t actually presented as columns because I can’t be bothered to work out how to do that in WordPress, but you get the idea;

Column A – The bullish case for Australian property

The Federal government has a moment of largesse with taxpayer’s money and implements quantitative easing or hands out a cash gift to debt holders to sustain prices.

China primes the pump and begins another phase of massive infrastructure creation, requiring more of the stuff under the Australian gound.

India decides to rebuild the 3 largest cities and connecting infrastructure and strikes an iron ore deal with Australia.

Australia develops a widget that is manufactured locally and is as popular as an iPhone.

The largest natural disaster in history destroys a few states of the US and, the US Federal Reserve opens the faucets again.

Column B – The bearish case for Australian property

Lending criteria stays tight to retain the illusion of banking strength and prudence to the world.

An incoming new Federal government makes sweeping changes to the way tax is calculated, with negative unintended consequences.

Overseas funding for mortgages becomes more expensive. 60% currently comes from outside Australia and this is subject to the rate rises being seen elsewhere and Australia’s banks have fallen out of favour.

Banks play out Game Theory and reduce their exposure to riskier asset classes in the face of evidence of a downturn.

Criminal charges accumulate as political pressure demands scalps.

Employment weakens.

In anticipation of or in response to the decisions by the regulator, APRA, the banks impose and enforce tougher credit standards.

New rules and laws are introduced to regulate investment from overseas.

Chinese capital constraints are introduced, stemming the flow of funds south to safer Australian assets.

Interest-only loans reset to interest plus principal.

Global politics fracture further and protectionist stances become policy (in extremis, protectionism might create “hot” conflict).

Bill’s Opinion

It’s been a stellar ride, Sydney and Melbourne, but consider the possibility that your house might not be the pension fund you perhaps previously considered it to be. 18% annual rises will seem a distant memory if the current trend continues and “Column B” is stronger than “Column A”.

As for Scott Morrison, your Treasurer who is likely to be replaced within 18 months; in the words of Christine Keeler, “well he would say that, wouldn’t he……”