Weekend links: 26 & 27 January 2013

Here’s a list of things Reynard has read so far this weekend.

Global Macro:

  • Marc Faber Fears 1987 Redux As “Markets Will Punish Interventionists” – Zero Hedge
  • Banks exacerbate the economic cycle on both the upside and the downside – The Economist
  • In Davos, the World Economic Forum’s Big, Unintelligible Ideas – Bloomberg Businessweek
  • Rogoff: World is right to worry about US debt – Financial Times
  • Roubini Says ‘Hyped Up’ BRIC Success at Risk on Rising State – Bloomberg
  • Credit Bubble Seen in Davos as Cohn Warns of Repricing – Bloomberg
  • Soros Says the Euro Is Here to Stay as Currency War Looms – Bloomberg
  • The other doping scandal: central banks – The NZ Initiative

North America:

  • Is Canada talking itself into a housing crisis? – The Globe and Mail
  • Canadian house price growth slows to three-year low – National Post
  • Tim Geithner’s legacy: an unpopular bailout that helped save the economy – Washington Post
  • Fed Pushes Into ‘Uncharted Territory’ With Record Assets – Bloomberg
  • December new U.S. home sales fall 7.3% – MarketWatch
  • America’s new energy muscle – The AFR

Europe:

Asia:

  • China: A Place That Makes New York Real Estate Look Cheap – New York Times
  • To Fix Overproduction, China Wants to Supersize Industries - Business Week
  • Rich Chinese leaving the country, and why that matters to the economy – Also Sprach Analyst
  • As Graduates Rise in China, Office Jobs Fail to Keep Up – New York Times

Local:

  • REIV shows Melbourne house prices grew by 2.4% seasonally-adjusted in December quarter - REIV. Don’t read too much into result as REIV uses simple median, which is affected by compositional bias. Wait for stratified median from ABS before forming any conclusions.
  • Low interest rate to turn interest to shares – The AFR
  • Laying property price myths to rest – The SMH

Other:

  • Why were so few jailed for the GFC? – The Economist
  • Soros Says Hedge Funds Can’t Beat Market Because of Fees – Bloomberg
  • Financial Job Losses Near Four-Year High as Europe Leads – Bloomberg

59 Responses to “ “Weekend links: 26 & 27 January 2013”

  1. TheRedEconomist says:

    Double page thread in the Saturday Telegraph in Sydney.

    http://www.dailytelegraph.com.au/news/empire-built-on-dreams-and-toil/story-e6freuy9-1226562190614

    Quite an interesting read.

    There is no mention of how much he owes the bank, but if he has $5m equity in 72 prooperties he would have roughly $70K equity in each place.

    Some would have more and some would have less or none at all.

    If the average property is worth $400K, I would suggest he would owe the banks around $15-$20m.

    I’d like to see a follow up story in 12-24 months to see if it is still all rosy.

    I doubt we will see that.

    • If he listened to doubters like you he wouldn’t be where he is today.

      I’ve seen Nathan in the media multiple times over the last several years and followed his story loosely on Somersoft. I recall similar comments when he only had several to a dozen properties a couple of years back.

      While I don’t think property will perform that well (medians) the next few years, that doesn’t mean that someone who knows the market, knows how to negotiate a good deal and value add (Nathan’s done a fair amount of work with renovations including kitting badly burnt out homes) can’t make a good living from it.

      If we saw prices AND rents crash, then he might be in trouble… guess you have to work out how likely that is. IMO not likely.

      • csfn says:

        Yep, I’ve read his story before too, he’s obviously a level or two above the majority at that site. From memory his strategy involved focusing on regional areas with fairly low house prices so I’d guess the $400k figure above is way too high.

        No idea whether he will be successful in the long term btw, but credit where it’s due, he had his own strategy and executed on it with complete commitment.

      • dam says:

        this guy is very professional, very hardworking and connected.I deserve is succes

      • Monkey says:

        So, he has worked hard for about 15 years to become good at this. His story is irrelevant to the average property investor who buys one or two properties and hopes to be made rich by the market’s relentless climb. To use his story as a justification for small-time property investors would be equivalent to some suburban butcher seeing that a surgeon makes $400K pa and deciding to do a bit of surgery on the side.

        Property is not the ‘only way’ to do this. If someone else had worked hard for 15 years to become a doctor, lawyer, engineer, trader… they could well earn a similar annual income and would not have to take on the risk that this fellow has.

        Hope he found some time to kick a footy and chase girls.

      • How many doctors/lawyers/engineers do you know with $5m assets and $200k income by 27yo? It would take an exceptional person in any of those fields to achieve what he has.

        His story is not representative of what everyone can do, but no need to attack his accomplishments.

      • Mining Bogan says:

        I’m with BB on this one. Seems this lad understands investments paying for themselves as being a good thing. Whodathought?

        He should go on a tour of the west and speak to my fellow bogans about his strategy. Probably need chicken wire in front of the stage to stop the bottles hitting him though…

      • Mav says:

        If it is too good to be true, it probably is.

        I don’t believe the figures until I see the entire balance sheet. What are his liabilities? Is the $200k figure really his net income or revenue?

        And, if he is so rich, why does he have to run one of those seedy ” property seminars” that are a hallmark of conmen in the RE industry?
        https://www.binvested.com.au/services.html

        His leverage structure reminds me of the movie “Inception”, where the protagonist leaps from one dream into the next, at a deeper level. In the end, he can’t tell the difference between dream and reality. In this case, you can’t tell the difference between debt & equity.

      • Monkey says:

        I’m not attacking his accomplishments, but don’t think the average property investor should take his case as an example – it’s clearly an exception.

        I only referred to his income, not his assets. I know doctors, lawyers and engineers earning about that amount, but with less assets. If property prices fall substantially, then his $5million will disappear, hence I mentioned his risk level. If property prices fall, people will still get surgery done and use lawyers.

      • Peter Fraser says:

        It’s not too good to be true, it is only a 4% ROI – very realistic.

        OK then lets make some reasonable assumptions. He has 72 properties in regional areas – maybe $145,000 each – Total value $10.44M and has $5M equity so he owes $5.44M

        If he gets a rental return of 5.5% which is do-able for property held for some time, then he receives a gross possible return of $574,000 pa less 20% for vacancies and rental agents, rates, maintenance etc leaves $459,360 net return before we deduct interest.

        Interest would be $304,640 at 5.6% leaving a net of about $154,720

        Perhaps he is exaggerating, but he should be doing OK IMHO.

        If he is still buying more homes he must be doing better than that because he couldn’t pass the servicing requirements on just $154,720 profit per annum.

      • TheRedEconomist says:

        PF,

        He has 72 properties in regional areas – maybe $145,000 each.

        I did not realise Western Sydney is termed regional these days.

        3 Bedda’s Mt Druit and the like go for $300-$350K, so I would suggest your $145K each is very conservative.

        Please recalc you number with about $15M debt

      • Mav says:

        Perhaps he is exaggerating, but he should be doing OK IMHO.

        PF, thanks for doing up the sums…, coming up short and proving my point :)

        Now IMHO, if it is too good to be true, it is.

      • Peter Fraser says:

        Not really mav and the TRE.

        BB has told us and given examples of the types of houses that he buys – regional low cost homes. I was probably over estimating at $145K.

        I also over estimated costs by using an allowance of 20% for agents fees, vacancies etc. He simply may not experience such a highlevel of vacancies and running costs. It’s a standard “worst case scenario” type of allowance.

        Look I really don’t care whether you believe that guy or not. He might also get a higher rental return, if I up the rental to 6% he will get the stated net return quite easily, and yes he could easily get 6% rent returns if he uses the buying methods that BB has outlined above.

        I don’t know this guy, I haven’t seen his A&L (balance sheet) nor his P&L statements, but a quick calc certainly confirms that he is probably on the money. These are calcs I do every day, but if you are such a negative type of person who can’t believe that anyone can ever do well out of property, then you’re are living in a wierd fantasy world, because smart people do well out of buying all sorts of assets every day – but perhaps smart people think on a different intellectual plane. I don’t know what your problem is, maybe you should read some self help books, or maybe you should stop thinking that life is just one big stream of endless misery – it’s not.

        Get out and smell the roses.

      • Peter Fraser says:

        I should state that i wouldn’t even entertain owning 72 properties. We are lucky in Australia because we have one of the best property management systems in the world, our REA property management set up is superior to that available elsewhere in the world, so it is possible to have properties managed quite efficiently, but IMHO 72 properties has too much risk, and is too much work.

        He could sell half of his portfolio, and then he would have half the work, a greater cash flow as there would be minimum debt, and he would almost eliminate risk.

        But it’s his portfolio not mine. With that cash flow he might be paying off 2 or 3 properties every year, and so his long term plan might be superior to my suggestion. Nevertheless I probably wouldn’t take the risk.

      • Mav says:

        PF, the fact that he is conducting property seminars is big red flag for me. Maybe you are the gullible type or want to convince other people to be gullible.

        Do you get a steady stream of clients from these property seminars?

      • Peter Fraser says:

        Actually I tend to agree, I don’t go to property seminars, largely for that reason, but also because most are just a sales pitch. they sell you the property, the finance, maybe the management, but it’s no better than what you could do yourself, in fact it’s usually worse.

        Writing property self help books and releasing DVD etc can be lucrative I believe, but there is a lot of competition in that space.

        That said, for anyone wanting to build a portfolio, those books can have some important tax and management tips, so it’s probably worth spending $5 down at Vinnies where they have hundreds for sale, and the $5 goes to help the needy – how good does it get.

        All I could do with my quick calcs was confirm that based on his information it is possible. I can’t confirm the authenticity of the information itself.

        He may be shonky, or he may be legit, I just don’t know.

      • flawse says:

        Mav
        Our problem with this is that the bloke, through a bit of nouse, seems likely to be making money out of property. That’s just reality.
        Our problem is that we ask the question whether the nation should be selling its assets and, indeed, it’s soul in order that the RE bubble be maintained?
        As I always ask, but never get answered, given the attitude of Govt to business, the so-called Fair Work legislation, the sorts of problems thrown up by an education system so out of whack with reality, what hte hell else would anyone ever invest in here in this country but ‘property’?
        I can tell you this much. As well as my business I’m invested in a few other things such as, my own iindustrial shed, mines etc. I have many friends in the various rural industries. Of them all, I wish that over the past 5 years I’d been invested in houses!!!!

        Frankly it’s a bloody tragedy but that’s how it is. Even worse we are quite happy to keep running CAD’s and selling off assets to cover them just to cover the continued reliance on ‘property’….
        INDEED it is the STATED goal of the RBA.

    • And I would guess the average property’s value to be a lot lower than you have guesstimated ($400k). Many of the deals I have seen Nathan post are much lower and then money spent on renovations to get them up to scratch.

      $350k for 4 units:
      http://somersoft.com/forums/showthread.php?t=83630

      $240k for 8 units:
      http://somersoft.com/forums/showthread.php?t=78619

      $50k purchase + $25k reno:
      http://somersoft.com/forums/showthread.php?t=75430

      $20k for Unit:
      http://somersoft.com/forums/showthread.php?t=73526

      $7k purchase, $25k reno:
      http://somersoft.com/forums/showthread.php?t=73736

      Good on him I say. More often than not he is value adding to the property’s, buying those that no one else will touch because he knows what he is doing.

      • accor1997 says:

        PF,

        With your figures above have you considered his land tax liability? which could be, and I stress again could be, his greatest expense even before his interest payments.

        As most are saying we are making assumes here but with that many properties it would not be a trivial expense.

        Land tax will be there year in year out long after he owns them all. It is a tremendous expense which needs to be allowed for even when making back of the envelope calculations as you have done.

      • accor1997 says:

        Ok ok assumptions not assumes sorry about that

      • Peter Fraser says:

        accor1997 – no I haven’t taken land tax into account. The effect of land tax could be negated by buying over different states, or buying under different entities. So tax could be either Nil or a significant amount. I would expect that anyone buying 72 properties would get wise after a while and take steps to minimise land tax.

        You seem very worried about land tax, but I think you may be over exaggerating the effect, it’s not that high in Qld. I don’t know the land tax regulations in other states, but after 72 properties I’m sure that he would be taking that effect into account.
        Here are the Qld land tax rates – http://www.osr.qld.gov.au/land-tax/about-land-tax/land-tax-rates.shtml
        You can check the rates for your state – it will be managed by the Office of State Revenues. Note that the tax is paid on the assessable value which is usually lower than the market value. So his tactic of buying fire damaged or wrecked homes and restoring them should minimise the impact of land tax.

      • Pfh007 says:

        Speculating on the numbers is unlikely to illuminate as it will be a guess. Depending on your assumptions he is doing well or doing okay or shaping for a fall.

        From the links posted by BB it is clear that there is money to be made provided that you have the energy and determination to turn housing wrecks/slums into viable rentals.

        How many people would look at a burnt out house and not think “Where would I start” and know how to get it back into the rental market quickly and cheaply.

        Nothing wrong with restoring derelict properties to the low cost rental market, arguably it is a public service. The definition of affordable housing is housing that people of limited means don’t get out bid by other tenants when trying to rent it.

        Probably the bigger issue is whether his business model is sustainable as it scales. It may be the type of business model that only works if the owner is young, smart, very hands on and committed.

        It appears unlikely to be a set and forget – subway franchise for example.

        Property management is one thing. Property management of the very bottom of the rental ladder can be a challenge.

        (A few of the wrecks he bought may have become wrecks due to the loving attentions of previous tenants)

        His model is not unique – there are other people doing it – what is unique is the scale he appears to have achieved.

        Sounds like a lot of very hard work.

        Possibly, the seminar angle is less a con than a genuine strategy.

        There would be a few hard working youngsters who are prepared to get dirty fixing up the wrecks if they knew the ‘art’ of doing it.

        Why not sell the secrets.

        Certainly, this is not a business opportunity for the average joe who fancies themselves getting rich quick without getting their hands dirty or having a few sleepless nights.

      • Peter Fraser says:

        Well said – very rational. I think you have summed it up well.

        There is no “one size fits all’ strategy.

      • Pfh007 says:

        Though now i have had a look at his facebook page – this statement is a little concerning

        “As a consequence of his success, Nathan has gone from working 20-hour days, seven days a week, holding down two jobs to spending just a few hours a week maintaining and expanding his property holdings while helping others achieve their own investing goals.”

        Can’t see how he could be expanding his holdings following his model of chasing the fire-sales and only spending a few hours per week unless he has some very trusted 2IC who is now doing all the heavy work.

        Plus not sure how followers of his method are going to avoid the 20 hour days 7 days per week that he put in getting to the point where he only needs to put in a few hours per week.

        https://www.facebook.com/binvested

        The phrase “How to make millions fast” always gets my antennae twitching.

        A bit like “You can be like Don Bradman fast …….. just keep your eye on the ball”

        It will be interesting to watch the story unfold.

  2. 3d1k says:

    “As that happens, I think 2013 is likely to be a transition year. Where that cash, large amounts of cash… that will start to change. It will also move. It will move to stuff. It will move to all sorts of stuff. It will move to goods, services and financial assets. So, that will include most goods, services and financial assets…It will move into equities. It will move into gold. It will move… out onto that curve.” Dalio

    “The Fed would be well served to go immediately back its drawing board and try to figure out how to stop all this liquidity from turning inflated and highly speculative global risk markets into an out of control mania.” Noland

    all that and more…

    Ray Dalio at Davos; Pts 1&2

    http://video.cnbc.com/gallery/?play=1&video=3000142389

    Doug Noland’s (Prudent Bear) take on Dalio’s interview (includes partial transcipt).

    http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10752

    Both well worth a look at.

  3. Wing Nut says:

    The Washington Post should get together with The Economist and pen an article called ‘The bail out that saved the world but why was no one jailed?’

    • Alex Heyworth says:

      I thought we all knew the answer – any half way adequate investigation would reveal that politicians and their backers and cronies were among the main culprits.

      • Wing Nut says:

        We do but there needs to be more pressure from publications like the Post and the Economist. The fact there are still two (Bankcheque and Diamond) of the original 7 GFC banksters still at the helm of their respective organizations. The fact they received tax payer support should have warranted their resignations. More pressure needed but will never happen.

  4. Monkey says:

    Another property related article – no affordability crisis, it’s just that first time buyers have unrealistic expectations: http://smh.domain.com.au/real-estate-news/first-home-buyers-not-keen-on-going-west-to-invest-20130125-2dc3z.html

  5. vonZetty says:

    More than $114 billion exited the biggest U.S. banks this month, and nobody’s quite sure why.
    http://www.businessweek.com/articles/2013-01-23/missing-114-billion-from-u-dot-s-dot-banks#r=read

  6. The Patrician says:

    The order of sale for todays “big event” on the GC

    http://f.tlcollect.com/fr2/413/75003/Order_of_Sale_The_Event_2013.pdf

    I will see if I can get some results.

    • dam says:

      I was going to go to see if i could pick up a good deal but with this crazy weather, noway I would drive that much.

      I m pretty sure I will not be the only one to stay safely at home.will see post-auction neg if avail

      but for those who attend, that s a great bounty, reduced competition.

      • Bobby Fischer says:

        Dam, it looks like some of these GC auction chumps were using your deep level of analysis before throwing away a few 100K on tiny shitboxes in vertical caravan parks (I’m sorry, ‘luxury apartments’):

        http://www.couriermail.com.au/news/queensland/auction-drops-hammer-on-the-tough-times/story-e6freoof-1226563039697

        “Bruce Carson, a stainless steel fabrication business owner from Silverdale in south west Sydney, bought two investment units, a two bedroom for $243,000 in the Kensington on the Park and a single bedroom apartment for $180,000 both in Southport attracted to the coast for its “good buying”.

        “My son recently bought property in Surfers Paradise and I thought the prices were fairly cheap,” Mr Carson said. “I started researching and came to the conclusion that the Gold Coast was at rock bottom. So I flew up Friday. I’ve bought them unseen my wife is going to spin out!”

        Mr Carson said his research had led him to believe Southport along the new light rail path and where the new 750 bed and $1.76 billion University Hospital will soon open – was a good investment.

        “When I crunched the numbers I thought they gave a good return. It’s a different buying environment to Sydney.”

        Dam! That is some hot analysis right there:

        - didn’t look at units
        - bought spruiker BS alleging market is at price bottom
        - #1 factor for investment -> hospital/light rail opening nearby
        - listened to his brain injured son who thinks GC property is a bargain because the net yield is almost half the going cash rate
        - father notes GC is not as expensive as that great wanker abode Sydney (particularly Martin Place)
        - father notes he is going to lose a gonad to his testy wife when he gets home for not letting her pick the future ‘drug coast’ money pit in which to burn their retirement savings

        What could possibly go wrong?

      • dam says:

        Look like the Auction went very well, seller meeting market, plenty of buyers.

        This year will be a memorable year for realestate even on the GC, and everywhere.I though 7% was quite a very optimistic scenario but i know think we will get it, perhaps more, even Melbourne is now turning.

        it was not a crash, it was merely a bump, with plenty of grumpy bear who got analysis paralisis and now will have to pay the price (or the rent )

      • dam says:

        Look like the one I checked few months ago and I was interested in, I tough then they were asking too much but got it sold above
        I got it badly wrong obviously

  7. TheRedEconomist says:

    Dam,

    “This year will be a memorable year for realestate even on the GC”

    What does this mean? Another throw away line? Perhaps.

    Happy to be renting off a landlord whose cops all the expenses and maintenance for an anaemic single digit yield, on an asset that is slowly decreasing in value in real terms with no nominal growth

  8. Gunnamatta says:

    Interesting piece on the Canadian housing bubble in the Atlantic

    http://www.theatlantic.com/business/archive/2013/01/the-biggest-housing-bubble-in-the-world-is-in-canada/272499/

    As realtors like to remind us, every market’s different, but there are three big takeaways here.

    1) Rich Chinese buyers tend to make for overheated markets. Some of the priciest housing markets in the world have one thing in common, besides low-interest rates (which prevail most everywhere): Chinese expats. Vancouver, Hong Kong, Singapore, and Sydney are among the most popular destinations for wealthy Chinese looking to hedge their bets, and this exit-strategy buying has helped push prices in these locales into the stratosphere.

    2) Housing busts can take awhile. After a decade of boom and bust, prices are back to fair value, below it actually, in the U.S. and Ireland, but still have a way to come down in Spain and Britain. Zombie banks tend to be reluctant to realize losses on bad loans, propping up prices in the process, but eventually reality has its day. The sooner that happens, the sooner housing, and construction, can come back.

    3) Housing recoveries can take even longer. It was just 20 years ago that the land below the Imperial Palace in Tokyo was supposed to be worth more than all of the land in California combined. But beware the enduring costs of bad macro policy. Too tight money for too long has kept housing prices in hibernation decades on.