Tick Tock goes the clock

For those of you who don’t happen to live in Brisbane you probably will not know who Michael Matusik is. He is an old property bull turned bear who then picked up a job as the property blogger at the Courier mail. It seems however that his time at the newspaper has spurred him back towards bullishness, not that I am surprised I consider the Courier Mail to be a real estate magazine with a news supplement.

Michael produces a monthly report on Queensland’s property market called the Matusik snapshot which is created by his own company. Since joining the Courier Mail, Michael’s profile seems to have risen somewhat and I have recently noticed that his “snapshot” is being linked to by a number of prominent real estate newsletters.

Today I recieved one of these wonderful productions in my inbox and I noted that Michael’s latest snapshot was utilised as a piece of evidence that the Brisbane market had bottomed out and now was the “time to buy”.

This obviously is not Michael’s fault. He produces these newsletters and has left quite a few warnings that this is only his “opinion” with statements like “In theory, at least, now appears to be a good time to buy“, but when you are somewhat of a media star you need to be a little careful of what you say.

As I have talked about previously I find the fact that people connected with the real estate industry can say almost whatever they want with no legal recourse is a disgrace. This certainly gives them an unfair commercial advantage over other industries but more importantly leads to the potential for financial entrapment. Just ask yourself what would happen to the share market if brokerage services were allowed to make statements like “you must buy BHP now, because it will double in value every five years“.

I therefore have no issue with calling a spade a spade when analysing media releases produced by people inside this industry. So let us take a look at Mr Matusik’s latest snapshot.

We have featured the property clock in two previous Snapshots –in late 2003 and again in early 2006. At those times, like now, the residential market was in somewhat uncharted waters. The housing outlook was then, again like now, quite polarised. Whilst a simple tool, the property clock is one of the more effective ways of clearly showing where things stand.

The positions on the property clock are determined by supply – either undersupply or oversupply. Everything else is either leading in to one of these market conditions or coming out of it. Let’s start with undersupply.

12 o’clock An undersupplied market, where demand exceeds total supply. Rents and prices rise. The economy is strong, as is wage growth. It is a vendor’s market and the best time to sell.

3 o’clock Asking prices become overwhelming and the market starts to lose confidence. An “even supplied”market, where the number of properties for sale usually matches the number of buyers. Interest rates often rise and economic growth slows. Buyers wait for discounting to begin. A very cautious market.

6 o’clock An oversupplied or buyer’s market. Harder economic times and usually at the tail end of high interest rates. Borrowers become frugal, some feeling that their income or even job is at risk. Residential property in general loses its shine. Ironically, it is often the best time to buy as many properties are undervalued at this time.

9 o’clock In the lead up to 9 on the clock, stock is either withdrawn from sale or is sold, often at prices below replacement cost. The market supply tightens and buyers become more optimistic. Economic conditions improve, unemployment is low and wage growth high. Prices start to rise again, making new developments feasible once more. Spruikers return and property starts to become overvalued once more.

Residential markets also tend to fluctuate between undervaluation and overvaluation. What is “high”for a market (at 12 o’clock) and what is “low”(usually around 6 o’clock) is largely a matter of history. Property values usually increase over the long term. Over-valuated markets can be very seductive and hence why most buy too late, whilst the opposite sentiment holds true at the bottom of the cycle.

Fair enough, a little simplistic but harmless enough… surely. Michael then goes on to produce the following “clocks”,  just after stating that they are only his opinion.

Woo there Michael!!!

Sure this is only your opinion, but as a now prominent member of the Queensland property media circus I think a bit of background on these predictions is necessary. Do we get any ? No, it’s for the snapshot.

As my readers would know I believe that in the last decade the major driver for house prices was credit growth. Was this always the case? No. Prior to that I believe that house prices rose on the back of wage growth and inflation.

My family home was a good example of this. My parents purchased a 3 bedder in Townsville in 1983, it cost them $66,000 at the time. They sold it 12 years later for $113,500. Not bad , they nearly doubled their money in 12 years. Yes they did, but only because of inflation.

That same house sold again 8 years later in 2003 for just $25,500 more.  However it sold again in 2004 for nearly $100,000 dollars more. Hang on you say, inflation was running at 2.5% in 2004. Yes it was, but by then it didn’t matter because another force had taken over the property market.


18 months later the house sold again for $80,000 more.  Since then it has stayed with the same owner so I can’t give you anymore stats on it. However as I have said in previous posts I purchased my first house in 1998,  I sold it 18 months later for just $3,000 more. I purchased a much larger house in 2001 for $190,000 I sold it in 2007 for $550,000.  Have a look at the credit graphs above. Do you see any reason why you think this was possible?

With inflation running at between 2-3% the only real driver in the market is credit. Yes foreign investment also plays its part but there is little evidence that it is having any meaningful broad effect in Queensland at this time.  You can see from the credit issuance graphs why I think housing left economic fundamentals behind a decade ago, and why I have been saying since I started blogging that the current state of the Queensland market is driven by government stimulus.

The limit of non-stimulated credit (debt saturation) seemed to have been reached in 2008 and it took the first home buyers grant boost and historically low interest rates to kick start the market again. Both of these things have now ended and the market is correcting with the added downward force of stimulus hangover.

As I have been saying for some time the market is in trouble without further intervention because at this point in the broader economy there is nothing left to drive further demand for increased levels of new credit.  The recent disaster in Japan seems set to make things even worse. The longer the market is allowed to linger in its current state the more houses will be added to the market. This will put further downward pressure on the market as currently house prices are governed by the ratio of new credit issuance to the number of houses on the market.  The longer this continues the worse the problem will become.

As houses are not liquid assets then economic effects take a long time to show up in the prices. I started talking about the falling rate of credit demand and sales volumes in Brisbane in June last year. It has taken 9 months to show up as an identifiable trend in house prices.

Does Mr Matusik mention any of this in his snapshot ? No he does not. But it seems fundamental to understanding where the market is going next. Have a look at the credit issuance graphs for Queensland and then tell me what time you think it is.

Comments

  1. Michael probably didn’t want to state a “why” because for Brissie it would probably read “because I have have my fingers crossed”…

    Interesting that the Gold Coast and Sunshine Coast are, apparently, so much further behind Brisbane…

    I think not… and there is likely to be a lot of feedback between these local “glamour markets” and the very nearby capital… not just psychologically, but by accelerating the baby boomer retirement sell down affect on Brisbane as the increasingly affordable coastal retirement beckons…

    No, I think it is very clear that the panic button is being pushed in lots of places… like here (see my post with the email from the Ray White agent)

    http://www.bubblepedia.net.au/tiki-view_forum_thread.php?comments_parentId=15658&topics_offset=6&topics_sort_mode=lastPost_desc&forumId=7

    And in the editor’s desks of all of the metropolitan newspapers…

    A lot of the concern is focused on the south east Queensland “basket case” (h/t to Louis Christopher of SQM for that turn of phrase), and that it is just the canary in the coal mine… actually, those auction clearance rates from Melbourne and Sydney are suggesting that the canaries are off their food, they’ve stopped preening, and their feathers are looking tattered…

  2. How does one find the history of purchases for a property in Australia.

    I recently moved from UK (am Aussie but lived there 19 years) and I can easily find a history all house sales in my old UK postcode since 2000 (a postcode in the UK identifies a street not just a suburb).

    But how does one find this sort of data in Aussie? I’d like to see what my Sydney rental property was last purchased at?

    • Thanks heaps. Had searched for this type of site!

      Shows my landlord is getting a gross yield of 4.3%.

      His borrowing costs will be around 7.3%.

      Why would I buy a house when my landlord is paying me 300 bps to rent his house 🙂

      • Nice one…I’ve been using onthehouse for a while now.

        Just worked out my landlord is doing a lot better than yours Scott. He gets a whopping 4.9%. Oh, and he’s got to replace the gas oven pretty soon too!

        • Endrortsonhousing

          My landlord is earning a HUGE 3.5 percent.

          According to the NY Times rent v buy calculator, it would only make sense for me to buy if I expect annual capital price appreciation of 4 percent or more. See below link:

          http://www.nytimes.com/interactive/business/buy-rent-calculator.html

          Even the spruikiest spruikers seem to be saying we are in for flat prices – a soft landing or soft expiration of air from the mattress as Jessica Irvine said earlier this week in the Fairfax papers. In other words, even on the best bull case, it is better to rent than buy until such time as prospects of capital gain return to Aussie housing.

  3. “I consider the Courier Mail to be a real estate magazine with a news supplement.”

    Totally with you there, DE

    I’ve long thought all of our MSM, and especially the commercial print and TV media have slowly scrubbed out the line between news and advertising, to the extent that, in its entirety, it should be regarded as the promotion of an idea, a feeling, a fantasy, or behaviour for us to buy.

    Switched on Americans call it “drinking the Kool-Aide”

    As for:

    “I find the fact that people connected with the real estate industry can say almost whatever they want with no legal recourse is a disgrace”

    Yes, but this would just bring the RE industry down to the level of restriction on freedom of speech that others have

    I think, far better, would be to have disclosure statements of conflict of interest, or warning signs, like on cigarette packaging, or the PG, MA, R and X ratings for movies, but this time as a guide to spruiker porn

    • The fact that ANYONE can start a website, newsletter or make investment advice on property without an AFSL infuriates me no end.

      As a professional investor, if I want to take on board anyone to invest in my company, I need to jump through a variety of regulatory hoops, have a custodial service to “firewall” the investors funds, make complicated and intensive disclosure statements and maintain a high level of annual and continual compliance to keep that license (AFSL).

      Property? Nothing. Make a statement like “it doubles every 7 to 10 years no worries” and no problem.

      Qualifications required? Bachelor level finance/economics/accounting? Post-grad in risk management?

      Nope. On line 3 day Cert IV “course” for a real estate agent: nothing for anyone spruiking/publishing.

      A person/couples biggest financial investment in their life and along every step of the real estate chain, there is no legitimate safeguards, strong regulations or qualifications or any firm oversight.

      Infuriating that this regulatory framework continues to be pathetic? You bet.

      • Prince, I get real fired up about this too. I have had two RE agents give me the “best time to buy” “we are on the bottom, prices to be up 5-10% this year”. My wife has barred me from reacting to these comments as she says it is embarrassing! On asking these guys (out of her earshot!) on what basis they make their claim, they quote Heron Todd White….when I have pressed the issue and ask for guarantees they then retract to “well I haven’t got a crystal ball”! It makes me so cross…if us “laymen” didn’t have the ability to do our own research (ie pre interweb) we would likely be suckered in. Fortunately with platforms such as this site we can expose ourselves to an alternative point of view.

        This must be my opportunity to thank you guys….So thanks. (I guess I am not alone in appreciating the time and effort you guys put in to this blogsite…and manage to keep it commercial free and free of charge.)

  4. ThePrince you got a very good point. Sucks that these agents can just do and say what they want. Most of them are like used car sales men.

  5. Prince & Big P i wouldn’t be too concerned. Someone has to lose money in order for you to make some. If lazy want-to-be investors are willing to commit to a lifetime of debt (b/c they heard that a friend-of-a-friend made a killing out of real estate), without doing a simple common sense investment evaluation, then they deserve everything that’s coming.

  6. I don’t know why everyone gets so fired up over real estate.

    As an investor I am a property bear because I don’t think the nrs add up but I don’t see a problem with real estate agents shooting off their mouth because ultimately one is buying “real property” as distinct from a “security” which may actually not turn out to be a security or have any real estate backing the NAV.

    Securities or equities can be very difficult to understand or value whereas you can see, touch and inspect a house.
    That is a very big difference.

    It seems to me that property (with a reasonable land component) will always have some intrinsic value whereas shares can evaporate into thin air despite my broker’s most earnest recommendation to buy stocks like ABS and BNB. Thanks a lot!!!!!!

    To be fair MSM does come down pretty hard on agents selling islands that disappear at high tide as distinct from agents that are selling what we may think is an overpriced property.

    Plus it is considered that banks or lending agencies (no need for a reply on this one) act as a safeguard in the property acquisition process because they conduct their own valuations and have their own lending standards which should mitigate against a buyer from overpaying or over committing.

    Finally agents are engaged and paid (big time) by the VENDOR to extract the best possible price for the VENDOR – that means they are not on your side or your friend as a buyer. Personally I hate the fuckers and if the opportunity arises I just toy with them and have some fun.

    I am in the market for property both to trade up and also to find something to assist my kids get into the market. This is one case where I believe timing the market and not time in the market will be clincher.

    Like Big P I too would like to extend my gratitude to all the contributors to this site.
    Fantastic work, I am learning a lot.
    Since I discovered this site about two weeks ago I have just about stopped referring to all other websites.

  7. Good agents will continue to make money even in a falling market. Hopefully some of the sharks will drop out as I’m sure the industry needs a good shake out.

    By the way I’m sure I can beat everyone else with my landlord’s paltry returns. I’m assuming the house I rent here in trendy inner Melb is worth about a million (as there are lots of other houses sold around me for that price or more) therefore my landlord gets a bit over 2 percent return for this place. He’s owned it since the seventies so he kind of knows he’s not getting a commerical return and doesn’t care since there (apparently) isn’t any debt on the place.

    THE point is that I’m living in a house/street that I could NEVER afford if I tried to buy. The flip side is just that: I can’t ever own where I live but I also get access to jobs that I would otherwise have to commute hours a day to get to. When the time comes I plan to move to a rustic rural locale and grow veggies and with the money I save I’m hoping one day to buy a few acres outright. I know I’ll miss Melbourne but with these crazy prices I don’t have any option.