Over the long weekend the increasingly desperate Domainfax wasted thousands upon thousands of words in a coordinated assault upon the Australian imagination and its views on property. It began with fake market blogger Patrick Commins on Friday:
…a lengthening list of factors – from the threat of higher rates to tighter lending practices – appears to have signalled the turning of the cycle, and in the minds of some started a countdown to a potentially dramatic end to the long housing boom.
…Constrained supply and relatively rapid growth in demand as a result of population growth have provided the fundamental underpinnings for the boom. The cherry on top has been preferential tax treatment for property investors, from negative gearing rules to capital gains tax concessions.
…All of the supportive factors cited here are now either threatened or at their most extreme and unable to continue. Rates cannot go much lower, nor can debt climb much higher.
RBA governor Philip Lowe has warned that the next move in rates will be up, although the timing is uncertain. Housing credit is growing at around half the pace of five years ago, and a quarter of what it was a decade ago. UBS economists expect it to continue to fall.
A powerful housing construction boom has brought the supply and demand dynamics more into balance and in some markets, such as inner-city Brisbane apartments, threatens a glut.
Meanwhile with politicians under pressure to ease affordability issues, Labor is set to carry into the next election a policy of “reforming negative gearing and the capital gains tax discount”.
Still, “house prices are unlikely to drop sharply unless the RBA hikes rates earlier than expected”, UBS economists say. That said, the economists predict “prices will likely still weaken further to flat or modestly lower in 2018 and 2019”. A booming labour market is another factor that speaks loudly against an imminent crash, as does continuing strong population growth.
All of these factors weighing against residential property may be objectively true. Any regular reader of this newspaper would be aware of the facts and figures. But what would it actually take to get property investors selling? To change their minds about an asset class that has made many wealthier than they could have reasonably hoped?
Affinity Private founder Catherine Robson says among her clients, “there is not generally the expectation there will be a collapse in property prices”. That means the “safe as houses” mentality remains. Indeed, Robson’s clients are “much more concerned about volatility in sharemarkets than in property markets”, she says.
“Over the past 10 or 20 years people have speculated on property and borrowed, without a plan, and a lot have done extremely well,” Sentinel Wealth managing director Justin Hooper says. “By now it is a classic situation of confusing skill and luck: these people are convinced they know what’s going on and feel like heroes, and so they keep doing it.”
And when interest rates are so low, the temptation is to borrow as much as possible to take advantage…So far at least, the signs of an imminent bust appear remote, and property investors unwilling to sell.
There is just no stopping property prices, eh, Patrick. Especially when your job depends upon saying so. Sunday we got the punchline from the AFR‘s fake reporter, Matthew Cranston:
The alarm on the bedside table is ringing. Wake up! Wake up! The great Australian dream is coming to an end.
Or is it?
If you bought a home in Sydney about six years ago, you won’t want to wake up. You have, on average, enjoyed a 70 per cent gain, built up a war chest of equity and your ability to service the debt has improved every year as interest rates hit record lows.
Those who got into the housing market early should probably hit the snooze button – stay in the housing market. You have a great buffer – especially if you are a homeowner in Sydney. Population growth is strong, jobs growth in 2017 was the best in a decade and yes, while rates are set to rise, they are still at record lows.
Maybe that’s all too lazy, maybe you should be flying out of bed, selling at the top and investigating where to put your money to get a better return. But if your priority is achieving the great Australian dream then you have done it. Why wake up?
For those who didn’t or couldn’t get in to the housing market, now is your time.
Banking regulators have been able to tighten the cost and availability of credit to target a specific asset – investor housing demand. So that already starts to cut out a few competitors in the market to help you get in.
Governments have started to increase taxes for foreign buyers and banks have become stricter on foreigners trying to get loans. Again, more competitors out of the market.
For a first-home buyer, it might seem a bit like catching a falling knife because as more investors and foreigners move out of the market, the prices might start to reverse.
The message, of course, is time you parents went long property for your kids.
But wait, there was more. The dying Chinese realty bid is also unstoppable according to The Good Weekend:
It’s Friday night at Chadstone shopping centre in south-east Melbourne, and a queue has formed outside the Chanel boutique. A sign at the store’s entrance says it’s full: “Due to safety reasons, we are unable to let any more clients in at this time.” A dark-suited staff member stands near the sign, as if to deter anyone so desperate to spend $7000 on a handbag that they are thinking of forcing their way inside.
Chadstone is Australia’s largest shopping mall, with more international designer-label boutiques than anywhere else in the country. Dior, Balenciaga, Saint Laurent, Prada, Armani, Burberry, Givenchy, Valentino, Fendi – they’re all here, under the soaring roof of the centre’s high-fashion precinct. And Chanel isn’t the only one making prospective customers wait for admission. As I join the throng on an indoor boulevard, I see lines snaking out the doors of Dolce & Gabbana, Gucci and Louis Vuitton. In the air, there is barely contained retail mania. And the sound of people speaking Mandarin.
Just 2.2 per cent of the Australian population was born in China, yet Vogue Australia editor-in-chief Edwina McCann gives the group a good part of the credit for a boom in demand for luxury goods. From Hermès scarves and Cartier watches to top-of-the-range BMWs, products with pedigree – and preposterously high price tags – have never been more popular in this country. “It is quite an interesting phenomenon,” says McCann, who publishes a twice-yearly Mandarin edition of her magazine for the Chinese expatriate community. (She’s not the only one. The production of Chinese-language versions of glossy Australian magazines is one of the few growth areas in the beleaguered publishing industry.) In the 1981 Australian census, fewer than 26,000 people gave China as their place of birth. The number of Chinese-born Australian residents rose slowly over the next 20 years, then started to shoot up. By 2006, it had reached 206,000, and over the following 10 years the figure increased to 510,000.
McCann points out that among those who have arrived from China in the past decade are many who differ in one significant respect from most earlier settlers from around the globe: they are flush with funds. “This is probably the first time in Australia’s history that we’ve had a huge influx of wealthy immigrants,” she says.
The impact goes beyond boosting sales of fabulous frocks and fancy cars. Over the past few years, Chinese newcomers have injected billions into the economy, spending with particular enthusiasm on real estate and their children’s education but also supporting a range of niche industries. Mark Ashton, president of the Australian Society of Plastic Surgeons, reports that he and his colleagues devote an increasing amount of their time to procedures that make Asian faces look more Western. “And the wealthy Chinese are absolutely driving it,” Ashton says.
Idy Chan, manager of Woolwich Marina in Sydney, says she has a waiting list of Chinese émigrés wanting berths for their smart yachts. Prosperous Chinese immigrants are providing jobs for housekeepers, nannies, drivers and interpreters, says Sydney real estate agent Lulu Pallier. “The very wealthy have an army of people around them.”
It seems to Pallier, herself originally from Shanghai, that “this is all very positive for Australia. They bring good ideas and lots of money.” She is aware, though, that rich Chinese have a tendency to keep their heads down – even if it means passing up the opportunity to purchase a waterfront mansion. “I’ve had people say, ‘This is a very beautiful house but I will be in the headlines. People will think I’m showing off, buying the most expensive house.’ They have lately had that kind of concern in their minds.”
The wariness is partly a reaction to recent allegations that expatriates have acted as agents for the Chinese government, making large donations to Australian political parties in order to influence policy-making. But wealthy Chinese have long been reluctant to draw attention to themselves. “They don’t really like publicity,” says Gold Coast property agent Tony Yan, who in 2016 sold a vacant riverfront block at Paradise Waters to Chinese railway tycoon Wen Bingrong for a local record price of $9.2 million.
“You have these teenagers living by themselves in big, rambling, expensive houses and apartments all over town in Sydney, Melbourne and Brisbane,” says Kevin Kwan, whose Crazy Rich Asians has been made into a film, due for release later this year.
We saw exactly the same thing from the Japanese in the eighties so this is not new or unique at all, but hey that wouldn’t create FOMO. On and on the article droned starring all of the usual suspect including Sinofax property spruikers, the ubiquitous Moniqua Tu and the biased Geoff Raby. As if any of this was even legal.
Had enough yet? No? Just as well, because if it annoys or upsets, if you resist or recognise any downside, then you’re a racist, said another broadside:
Qiao Huan, a 21-year-old student, is showing me a photo on her smartphone of a young white male with boy band hair. The object of her affection is a mystery to me but I am later reliably informed his name is Alistair Bayley – a former Melbourne student who became a hit on the Chinese chat show scene after winning a Mandarin-speaking competition on national television. Bayley has 232,215 followers on Weibo – China’s version of Twitter.
Bayley is one of the reasons why Ms Qiao, who is hanging out with a group of friends in Shanghai’s Xiangyang Park before heading to a dance rehearsal, wants to visit Australia. “Australia looks very beautiful. My friend is studying there and I see a lot of pictures on WeChat,” she says. Ms Qiao and her friends seem oblivious to the negative reports about Australia that have been running in China’s state-run media since the start of the year. Not everyone in China feels the same way.
“It seems like Australia is getting a bit racist and they don’t like yellow-coloured people,” says a man selling cooked duck, chicken feet and tofu from a stall on a busy corner in Shanghai’s French Concession.
But wait, there’s also a set of steak knives as McGrathmageddon appeared:
Like any good real estate agent, John McGrath knows how to accentuate the positive.
So when when the 54-year-old fronted his company’s annual Kickstart sales conference at Randwick Racecourse on Tuesday, an event attended by more than 1000 agents and staff members known as the “McGrath family”, he did not dwell on what has been a chaotic start to the year.
…Only three days earlier his board had met to discuss a worrying slide in earnings for the first half of the 2017-2018 financial year. Over the weekend it became clear to directors that McGrath would have to issue profit warning to the Australian Securities Exchange, the company’s second downgrade in three months.
This was the final straw for directors including chairman Cass O’Connor, a former Goldman Sachs analyst during Malcolm Turnbull’s time in charge of the bank’s Australian operations, and chief executive Cameron Judson, who said they would resign over the coming weeks.
Many observers are convinced some good will come of the turmoil.
They believe McGrath lives and breaths real estate and the business will benefit from having the founder back in charge.
”People do ask about the business and what they have read and heard in the media, but it has not impacted our business,” says Peter Starr, an agent. “Adversity can bring you closer and there is a great atmosphere in the company.”
When Mr McGrath asked the Kickstart audience what they learnt from conference, one agent replied: “the best thing I got from today so far was that you’re taking back the wheel.” His comments were met with applause.
However, others are not so sure. They question whether McGrath can even hit its newly-reduced earning targets. The say the loss of key staff has hurt a firm that has consistently over-promised and under-delivered.
“Look it’s not complicated – this is a residential real estate business that has reported multiple profit downgrades during one of the biggest east coast residential property booms in history,” says one rival, who did not want to be named.
…Another McGrath agent, who declined to be named, said relinquishing control of a company that bears his own name across the door was never going to be an option.
…”He lives and breaths real estate and his business defines him,” he said. ”But because of that passion, if it falters, will he be able to bounce back?”.
Another agent, who declined to be named, said he was ”genuinely worried” for McGrath.
”He is a very proud and successful man, and to have this happen with the share price falling and directors leaving, will have an impact on John,” he added.
The only shred of credibility that McGrathamageddon has left is in the timing of his IPO and that is only for market observers outside of realty. He exited near the top of the market, very obviously deliberately.
All of this turnaround talk is drivel. McGrathmageddon is not about the man it’s about the market. His profit warnings are stemming directly from the stalling of major city property sales first in existing property and now in new property. Next it will be falling prices, as strongly suggested by a board that just abandoned a sinking ship.
Domainfax did this kind of property carpet bombing at the beginning of 2016 after the first round of macroprudential hit the market. The endless streams of propaganda helped freeze the market as sellers evaporated, ironically stalling its own revenue stream in the process.
This time around its job will be more difficult given:
- monetary policy exhaustion;
- household balance sheets exhaustion;
- fiscal authorities on downgrade watch;
- economy structurally buggered as China slows;
- immigration sinking into a political economy storm;
- Chinese capital fleeing;
- negative gearing headed for the scrap heap;
- house prices falling coast to coast, and
- the global business cycle melting up into its next major bust.
Yet this sick firm knows no other way to do business than to disgorge full bore property vomit.
