McGrath paints big red target on self

On John McGrath from the AFR:

McGrath Estate Agents is bulking up and plans to penetrate the Melbourne market ahead of a potential $200 million initial public offering.

Street Talk understands the group, run by high-profile real estate agent John McGrath, is looking at acquiring a business with earnings of $5 to $10 million before the possible float, which has been earmarked for late October or early November. Sources said McGrath would be unlikely to pay more than 4 to 5 times earnings and does not need a deal.

In addition to this, McGrath will roll out four to six new franchises in Melbourne, a market that it is yet to enter, prior to a listing and add more offices next year. These offices will be re-branded McGrath franchises, focusing on inner-Melbourne suburbs.

So, Mr McGrath, you’re going to buy and poach a bunch of franchises in a notoriously parochial jurisdiction at the top of the market before listing at the cliff’s edge of the boom.

And it will be a cliff despite Robert Harley’s best efforts to sell it otherwise:

The end of the property boom, in Sydney and around the country, is almost in sight.

Forecaster BIS Shrapnel has looked towards the end, and forseen further rises in 2015-16, by 7 per cent in Sydney and 5 per cent in Melbourne. But prices will start falling in 2016-17, though not by much, as the threat of rising interest rates coincides with worsening affordability, a big increase in supply and weaker investment returns.

HSBC’s chief economist Paul Bloxham has a not dissimilar base case. Yes, house prices will keep rising, 7 to 8 per cent this calendar year, and 2 to 6 per cent in 2016 as the Sydney market weakens in the face of falling affordability and rising supply.

But at some time, says Mr Bloxham, the RBA will start lifting rates, possibly in 2017. “Just the hint that the next move in rates is up, coming with the increase in supply, will be enough,” he said.

Rate rises? Faaark. Prices will indeed fall by 2017, but it won’t be because of the RBA raising interest rates. Rather, the fall in property values will be caused by:

  • rising unemployment as mining-related capex craters, the car industry shutters, and dwelling construction begins to decline;
  • an oversupply of homes (particularly apartments) caused by the run-up of strong dwelling construction in the face of falling population growth;
  • near record low affordability as prices have outpaced income growth;
  • growing regulatory restrictions placing downward pressure on prices, including tighter macro-prudential controls and greater monitoring/enforcement of foreign investment;
  • the West Australian crash pulling down national sentiment, and
  • a likely external shock that raises the funding costs of Australia’s banks and non-bank lenders, preventing rate relief for households during the next recession, especially as the sovereign rating is stripped and fiscal policy is also constrained.

The downside will also likely to be much greater than 5% to 10%, with the genuine prospect of Australia experiencing a housing crash as its structural imbalances correct sharply.

I wish you all the best, Mr McGrath, but you have just tattooed an enormous red and luminous sign on your forehead that reads “short me”.

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