Bears roar!

The AFR goes all bear porn today:

Highly regarded Australian Ethical Investment portfolio manager Mason Willoughby-Thomas warns “the risk of capital loss once monetary conditions eventually normalise could be significant as investors rush for the door en masse.”

…Baillieu Holst equity analyst and author of market newsletter Sunset Strip Mathan Somasundaram is also comparing current stock market conditions to what happened prior to the 1987 stock market crash and GFC, which saw the stock market nearly halve in value.

…Pete Wargent, property buyer and co-founder of AllenWargent property buyers, said any further gains in popular property areas would push the market well and truly into unchartered territory…I think the property boom will die of old age when rental yields fall so low that investors start to question whether they stack up,” he said.

A couple of points:

  • interest rates aren’t going to “normalise” for many years so the first concern is unnecessary;
  • conditions prior to 1987 were bubbly but the trigger for the crash was offshore. My best guess for when that arrives is Jeremy Grantham’s notion of a post 2016 US Presidential election bust but in the shorter term a Chinese property hard landing remains a very real risk. If nothing else, the Chinese property correction will keep the heat on commodity prices so the local headwinds will intensify, and
  • sure, unless the above shock gets here first.

To cut a long story short, now is a good time to exit illiquid assets and to bubble-ride on a hair trigger the liquid ones, if you’ve got it in you!

Comments

      • Bestinvestinproperty

        Agree, I think there is some gas left in the property price rises, RBA have got another potential 4-5 cuts up their sleeve so prices should remain elevated for a little while yet (Although from some of my conversations people are starting to head for the exit and cash in on the current high prices)

      • IF you look at prices outside the two major capital cities its already happening. BIG TIME.

        If you look at apartment prices in Melbourne its already happening BIG TIME.

        Melbourne is the canary – its on like Donkey Kong.

        Average city prices and indices are skewing the reality on the ground – like unemployment and inflation figures they are very rubbery.

      • Didn’t rate cuts come after the crashes in US/UK etc?

        Australia seems to be using its ammo before the battle has started.

      • I think the real question is how much longer can our banks push credit expansion whilst Lower IR reduce deposits and off shore funding.

        Throw in high unemployment and “high” under-utilisation rate due to most probably high property prices causing rent seeker behaviour and you have a unproductive shit sandwich.

        Anyway went on a tangent there but the picture is painted, we all see it, its a pure gamble buying into most shares.

      • fend it off for a bit longer, and make it worse when it finally arrives…

        Although to be fair, perhaps it is in the nature of these things that governments will always cut until they can cut no more.

    • crash is a tricky word …

      It took 12 months after prices peaked people in USA, Ireland, Spain to realise that crash is on the way

  1. What happened in Australia after Japan turned out to be stagnant? I wasn’t here.

    When was the last time Australia suffered a shock/crash independently while the rest of the global economy hummed along (i.e. a crash not induced by a global/outside shock)? We should be looking at that to know the risk factors. Not sure the 90s recession was a huge shock.

    • “When was the last time Australia suffered a shock/crash independently while the rest of the global economy hummed along (i.e. a crash not induced by a global/outside shock)?”

      I don’t know of any more recent examples, but you can take a look at what happened during the 1890s as compared to the Great Depression. The bad news is that we did far worse in the 1890s than the Great Depression largely due to property speculation and rapid credit growth unwinding. No lessons for us now of course though.

      http://www.rba.gov.au/publications/rdp/1999/pdf/rdp1999-06.pdf

      Over the past 150 years, Australia has experienced two macroeconomic depressions, both of which coincided with worldwide depressions.

      The first of these was in the 1890s and the second in the 1930s. These were also times of financial distress both domestically and in the rest of the world. For Australia there were many similarities across both depressions. Indeed Sinclair (1965, p. 85) suggests: ‘There is such an obvious similarity between the economic depressions which occurred in Australia in the 1890s and the 1930s that it is tempting to suggest that history was repeating itself in the latter case’.

      However, in this paper we highlight one of the major differences between the two depressions. Namely, the 1890s involved the collapse of a significant proportion of the Australian financial system, whereas the disruption to the financial system in the 1930s was comparatively mild.

      The fact that Australia did not experience a major financial crisis during the 1930s is remarkable in a number of respects. First, the initial fall in real output during the 1930s was just as large as the initial fall during the 1890s – that is, around 10 per cent during the first year of each depression. Second, the world depression was worse, and the Australian terms of trade fell further, during the 1930s than during the 1890s. Third, both the United States and, to a lesser extent, the United Kingdom experienced more severe financial crises during the 1930s than during the 1890s.

  2. I think the property boom will die of old age when rental yields fall so low that investors start to question whether they stack up,” he said.

    They haven’t stacked up for quite a while lol

    • Each city and suburbs within that city are different, so rental yields vary considerably.

      Investors who rely completely on capital gains for a return are certainly playing with high risk.

      • >Investors who rely completely on capital gains for a return are certainly playing with high risk.

        So most of the Australian real estate market then….interesteing.

      • Are you still sanguine on housing Peter?

        Even when the RBA is inserting sentences like this in it’s statements “The Bank is working with other regulators to assess and contain risks that may arise from the housing market”? And referring directly to Sydney?

      • “Investors who rely completely on capital gains for a return ” are correctly termed speculators.

      • @ sweeper – yes mostly – especially in the short term with an easing bias at the RBA. I think that buyers need to be careful about what they buy and where, and I expect we will see a mild correction in some cities, first in Perth..

      • @Peter Fraser “I expect we will see a mild correction in some cities, first in Perth..”

        Anecdotally I would suggest this is already in it’s early stages and I do have to wonder about “mild”. Not trying to be too bearish here, but I just wondering what WA has left to hold the market up once it becomes obvious it is in a downturn.

      • @ DE said “Anecdotally I would suggest this is already in it’s early stages and I do have to wonder about “mild”. Not trying to be too bearish here, but I just wondering what WA has left to hold the market up once it becomes obvious it is in a downturn.”

        Yes Perth does seem to be already in a downturn. I expect Perth to be hurt the worst. The same mining downturn factors just don’t apply to most other capital cities with some exception for Brisbane, who has already had it’s downturn (mining slowdown, Campbell Newman, and 2011 flood)

        I think that you live in Brisbane so you will have seen that.

        The downturn will be quite savage for anyone who has to sell, but most people don’t have to sell, so the median price chart will only show a modest downturn.

        If you look at the charts for the recession in 74, 81, and 91 you will note that it looks mild, but it wasn’t for those who had to sell.

        Actually I think that the mining downturn is a bonus for Sydney, Melbourne, and the Gold Coast where the dollar matters to industry and tourism. I can’t see it hurting prices there at all, the opposite in fact.

        Any downturn in Sydney and Melbourne will be because the market has run out of steam, which it will.

        I would be interested in your thoughts on this issue.

      • @Peter Fraser

        “I think that you live in Brisbane so you will have seen that.The downturn will be quite savage for anyone who has to sell, but most people don’t have to sell, so the median price chart will only show a modest downturn. If you look at the charts for the recession in 74, 81, and 91 you will note that it looks mild, but it wasn’t for those who had to sell.”

        Yes the post-GFC downturn in Brisbane was very obvious and happened relatively quickly if I remember correctly.

        I think Brisbane has done ok in the last 18 months, but it was certainly a slow grind out with quite a few years of falling prices. I lived in Townsville for a number of years and friends there tell me it is pretty bad and getting worse. I hear Mackay and other FIFO cities are also not doing so well.

        I agree with you on the previous recessions, but I am concerned that the leverage is higher these days and I do wonder what sort of outcome we would get if UE went up to 10%+ as it did in the early 90s.

        As I said I remember the downturn in Brisbane happening quite quickly, it, like the rest of the market, really was arrested by the massive stimulus program from China post GFC which, given our relative population, was a massive injection of capital per capita. If that hadn’t of occured I suspect the outcome would have been very different, and that is what worries me now about a renewed downturn.

        I wouldn’t be that concerned if I thought this would be concentrated in Perth, but I see WA as a bit of a bellwether for Qld, and I’m not sure the banks can really handle 2 capital cities taking a big dive, even if the others are doing ok.

        Hopefully, we’ll be lucky again, but the Capex downturn has barely begun and already there appears to be some significant flow-on effects. Unfortunately it’s got years to run and, as I said in the previous comment, I’m struggling to see what external event can save it this time.

      • Thanks for the reply DE.

        Well if we are discussing Qld then I don’t think you have allowed enough positive support that the falling dollar gives to tourism, education, and primary production. Mining areas will suffer, in fact they already are – been there before.

        I wouldn’t count on 1991 happening again. Too many things are different.

        • PF I’m sure there will be areas that will do ok out of the falling dollar, certainly I would expect to see it have a positive effect on GC etc. But the economic offset required to fill the mining hole is significant and I’m not sure all of those things will do it. But time will tell.. Perhaps I am being too bearish, but on balance I have to say I am quite concerned.

      • Brett Edgerton

        For what it’s worth, Peter, I agree with you.

        What happens in Sydney I think has a lot to do with the success (or not) of Macroprudential. If it puts a lid on price appreciation, there is some chance that authorities can put in place the conditions for a prolonged period of flat-ish nominal prices which Stevens seemed to be aiming at 2 yrs ago. (It’s true that what has occurred recently is partly a “catch-up” for a lacklustre decade.) All eyes should be on default rates over the next 4 years or so (APRA modelling shows that they tend to rise strongly 4 years post origination, so it will be interesting to see how the market digests that – or has the market structure changed fundamentally so that modelling is now outdated?)

        Melbourne, I’m not sure. It’s been running fairly consistently warm-hot for a number of years and there has been consistent construction.

        At the same time, like it or not, we have seen a structural shift in our housing market over the last 30 years to a more investor driven model. Steve McKnight discussed this in a book about 8 years ago, and it was what fired me most up to become politically active about housing affordability (question to Rudd at community cabinet, website, and submissions to enquiries). I don’t agree with it, but each of us has to play their own hand based on what they are presented with, and personally I try to remain true to my principles while making financial decisions which have a reasonable probability of paying off for my family (i.e. we have bought 2 IPs on the Gold Coast which were built for holiday homes or holiday letting but are now rented on a permanent basis – so I feel good about that).

        Of course we also have the foreign investor element – which is now different (larger?) ???

        How this structural change ultimately plays out is not clear to me – i.e. will investors sell down property assets or hold on for yield or other reasons?

        I too live in Brisbane and, having bought a family forever home nearly 4 years ago, I am pleased when I read house price data which show that prices have gone sideways for 5 years in nominal terms (and if you look at a graph of real prices current pricing is not much above 2003 levels – and the 2001-03 period could reasonably be seen as partly a “catch up” after another lacklustre decade). This makes me optimistic that default rates should not rise sharply here and I think that we will have a reasonably stable market relative to others (still we won’t be totally immune if the economy goes to hell in a hand basket)…

        As I said above, we have two IPs in the Gold Coast, purchased nearly 18 months ago both yielding over 5% after (non-financing) costs. I saw it as an opportunity to buy down-trodden assets (both down about 50% in real terms from the 2008 market high), suggesting a low chance of significant losses, and a play on a declining AUD (for the reasons you mention above) and good chance for capital growth leading into the 2018 Commonwealth Games at least. I remain extremely pleased with these.

      • @ DE
        I’m pretty comfortable with the mid term prospects for SEQ – other places such as Mackay not so good, but they will get through, Mackay has other industries. Purely coal towns will have issues for a long time.

        You might be interested in this article on renewable energy which can produce energy more efficiently than oil at current prices.
        http://reneweconomy.com.au/2015/even-at-10barrel-oil-cant-match-solar-on-cost-37540
        I suggest that you go back to the bank report (linked in article) If the report is correct then oil can’t complete above $20 or $30 per barrel which is extraordinary and will change the cost of everything as we know it. It does raise a question for the CSG industry.

        @ Brett – I agree on the GC which is why I did much the same as you. I also bought in Redcliffe which has changed a lot in recent years – better road access and a rail line coming. it’s now a suburb of Brisbane for all intents and purposes, and yet it’s a weekend holiday destination as well.

      • Brett Edgerton

        DE & PF, do you guys remember John Johnston’s 2008 prediction of a Brisbane median price of $1 million by 2015 ???

        Article here

        http://www.brisbanetimes.com.au/news/business/skys-no-limit-for-property-prices/2008/09/03/1220121270692.html?s_rid=smh:top5

        And the “in depth research” here

        blogs.abc.net.au/queensland/files/JOHNSTON_DIXON_Report.pdf

        I tried to set up a wager with him back then, through The Courier Mail, but Michelle Hele wrote back and said it would be inappropriate (I thought they might have liked the story behind it – I guess not)… I suggested $10K if he was right and in 2015 and the median breached $1 million, $10K to me if not, and $5K extra for each whole multiple of $100K in the correct person’s favour… then I expected worst case the 2015 median price would be about where it was then… well not too far off … So would have been in line for a $35K pay out 🙂

      • I still don’t understand how people can consider property investment as an alternative to bank accounts.

      • I have spoken to many people who have investment properties. They do not analyse the returns, they do not know how much return they are getting. They do not do this analysis that lots of fund managers do with shares.

        That is why they just buy buy buy. And do not intend to sell.

    • One thing that keeps on being missed by many on MB is the fact that a lot of these “Investors” are not really investors. They just want to own a house and they want to do it the cheapest way possible.

      Many and most people i know simply buy an investment property to enable them to have a house later on in life and not just to make money out of it. If the rent sort of pays the mortgage and bills, at the end of it, you would have got yourself a house that was mostly paid for by rent if that makes any sense.

      I’m inclined to think that most of these so called investors have no idea what their yield or profit/loss is at the end of each financial year…

      • They are people who want to have a home at the end of their days and not be at the mercy of a landlord. Too much to ask for?

      • So why do so many people have more than 1? Seems there is an awful lot of speculation going on…

      • Some very well might be first home owner turned investors to get a piece of the market before they think it gets more expensive. But they still are buying into a frothy market when they themselves cannot afford to live in it and pay the mortgage (considering they are currently living in shared accommodation or with parents). They might think they are buying it cheap and it will increase but that is what causes the bubble. People’s expectation that it will only go up. That fear factor that they might not be able to afford it later might pushing some people into taking high leverage and get into the market. Now what happens when the market corrects and they are left with a mortgage they cannot afford + wage declines or outright job loss ?

        I guess since they aren’t living in there makes it much more easier to sell and take the loss. Or will they sit and watch their savings go down the drain as the market disintegrates ?

      • @Dogbert, don’t know many with more than one to be honest and i’m only speaking from my own experience. Maybe there are some reports out there that shows how many “investors” have more than one.

        @calvinhobbes, I don’t disagree with you but my point is that you can’t call someone an investor because he wants a share of the market or of fear of not being able to get into the market(FHB). That’s a speculator and we have plenty in OZ .
        To my mind an investor would have a plan to buy and an exit plan and who would know his expenses,yields, his market…

        Maybe i’m wrong and we simply have a lot of lousy in property investors in OZ!

      • Completely agree paulF. I have spoken to many “investors”…who just buy for the reasons you outlined. There is no “analysis of ROI, P/E, P/B, Yield”. Just buy.

        And yes, a lot I know have bought “one”. Many of the “how to invest in property books” quote lots of figures that show most folks only buy 1 investment property.

        The ones who buy “hundreds” with massive leverage etc are in the minority. (They also write books on it and sell them and run training seminars…)

  3. clone278MEMBER

    Sadly bear porn only gives me a semi-erection these days… getting sick of waiting for it to blow!

    It’s weird ’cause if you read USA news it’s like the bull market is only just starting, where as we all know the global macro situation is in decline.

    • there’s a lot of skepticism about share markets here in the US. a lot of big names are bearish or at least advising of low yields this year. housing bubble really isn’t on the radar. Only bubbly markets are NY (foreign, finance), LA (foreign), SF (symptom of the tech bubble), Miami (Latin America, Russia). Actual households aren’t levering up to partake as they did in 04-07.

  4. The biggest story is the flattening in yield curves everywhere even in emerging markets (despite rate cuts) & the emergence of negative yields in the Eurozone. Over $4t in global bonds are now in negative yield territory.
    I don’t buy this front-running Draghi QE story. Instead I reckon the bond market is downgrading growth and inflation. In the Eurozone they are pricing deflation – that is the only way negative yields across 1/4 of all EZ bonds makes any sense.
    At some point – probably soon – the reality of flattening yield curves and negative yields will catch up to risk assets.

  5. “interest rates aren’t going to “normalise” for many years so the first concern is unnecessary;”

    This is wrong. The infrastructure spending genie is going to be let out of the bag and will put real tangible spending power into the hands of the middle class around the world.

    It will start with an HUGE infrastructure program in the United States and this will force a copy cat response around the world.

    • Yes – I agree Optimus.

      The Debt Machine only works while some of the new money represented by the debt that gets sunk into housing leaks into the hands of real people spending that leakage.

      The problem the RBA faces is that the Debt Machine is producing a lot less leakage than before (even while it hits the RPM redline) so even as house prices keep rising the impact on the level of economic activity in the broader economy is diminishing.

      In order to avoid economic collapse some way has to be found to get money out into the economy other than via the RBA Debt Machine.

      Infrastructure might be a goer if the government can stomach the public debt that it would involve. But we know they cannot because they keep rabbiting on about PPPs and how much they need to keep the public debt issuance as low as possible – just like a household.

      The other possibility is to just print the deficit and spend it by public expenditure (infrastructure etc) or by increasing the tax free threshold.

      Either approach will get cash where it NEEDS to go – into wallets of real people who will spend it.

      In short if we have low interest rates for an extended period it will only be because we are sleeping walking into economic recession or depression.

      My hunch is that when the message gets through we will have a six months of stories explaining why QE for the People is not only better than QE for Wall Street but there is NO ALTERNATIVE.

      It will take a bit of effort to soothe the frightened ponies and their stories of Weimar and wheelbarrows for potatoes – but explaining that as being mostly the result of private banks and their money printing efforts might help.

      We are starting to see signs of this but the main stream is proving even thinker or dumber (ref Gunna) than I would have imagined possible.

      Then we will get some inflation and higher interest rates because as sure as night follows day our pollies will over do it thinking they have found a new magic pudding (happy Flawse 🙂 )

      • “The other possibility is to just print the deficit and spend it by public expenditure (infrastructure etc) or by increasing the tax free threshold.”

        Here’s the rub for some, you could do A. public expenditure and adjust with B. taxes. Tho the propaganda wrt B. makes it a political hand grenade.

        Skippy… but yeah voters is dumb….

      • to be fair to the voters skip, they have been taught to be dumb by a lot of politicians and commentators, who know no better.
        Dumb is an easier sell.

      • Yes – my generally sunny optimism about human nature aligns with Peter.

        I think that the public can be brought on board and as the Debt Machine model is broken and will eventually collapse there is no real alternative anyway.

        Good ideas eventually win out and in these days of instant communications and ready access to unfiltered information it is much more difficult for the peddlers of myths and bad policy to avoid exposure by the incessant drip drip drip of electronic graffiti artists – all present company included.

        The MSM and the pollies keep dissing and whinging about social media for a reason – they know it is a real competitor to their narrative machines.

        If a civil attitude to LGBT issues can develop in little more than a generation (yes still room for improvement), a more rational approach to public finances will be a doddle.

        We shall overcome!

    • “It will start with an HUGE infrastructure program in the United States…”

      With a Republican House and Senate?

      And a gerrymander that means Republicans are likely to hold the House for a long time?

      Seriously?

      • Per the funding for homeland security, it seems the upper and lower are not one and the same and at some point the TP mob will have its own Damascus moment.

  6. Tis interesting to watch stripes that extolled the virtues of home “ownership” for decades and then investment thereof become moribund.

    Especially as I’m want to point out, too a fault, Milton Friedman’s dalliance with less than honorable sorts.

    Skippy… societies built upon a scam thingy….