Vimal Gor: Property boom next

Via AFR c0mes the excellent Vimal Gor, head of bond, income and defensive strategies at Pendal Group:

The next side effect we will see is in real estate. The RBA tried to distance itself from the 2016 boom after its rate cuts. This time around, the official cuts may only have been about 0.75 per cent but the real impact to savings and lending rates is closer to 1.5 per cent.

This is because the RBA has flooded the system with cash. Banks are getting $200 billion of three-year funding for virtually nothing. Added to this is large excess reserves from quantitative easing.

Rates on term deposits, the backbone of bank deposits and most people’s savings, will be falling further and anything above zero will be seen as a bonus.

Not surprising then that when encouraged to invest, not save money, many reach for the only tool they know, property investment.

Growth is slow for now with, fortunately, first home owners the main buyers this year. Give it time though.

Hmmm, my own thoughts have been tilting this way for a few weeks. I still can’t see how Sydney and Melbourne can boom given high unemployment, huge oversupply, crashed immigration, falling rents, etc but the credit tsunami combined with the suspension of capitalism seems to swamp everything to prevent losses. Prices around my area already look stupid again. Other capitals certainly look much better, though I worry for Perth next year as iron ore halves.

Those who wish to resist had better start revving up APRA because the RBA is not going to back away at all. Indeed, if cheaper credit is again capitalised into prices then the central bank will only be forced one way, further into progressive bank nationalisation a’la Japan.

David Llewellyn-Smith
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Comments

  1. The90kwbeastMEMBER

    Where I am (Hills District of Sydney) prices have held stable if not increased a couple of % from 12 months ago.

    There has been no COVID crash and the market does feel ready for its next 10% leg up the next 18 months, on the assumption that the various govt support programs continue to be extended.

      • “Not surprising then that when encouraged to invest, not save money, many reach for the only tool they know, property investment.” – Correct, but how many understand that? Plus, there will be some buyers that do understand the difference between real and nominal as Some will see it as no other choice.

      • The90kwbeastMEMBER

        Yes I should have added primarily houses and townhouses. 3 bedroom townhouses in particular, if renovated, are routinely fetching $1m+ in Castle Hill. It’s nuts.

        • boomengineeringMEMBER

          A Croatian ex work buddy lives in Castle Hill. Worked at Lihir Island together and shared a cabin on a cruise ship in dry dock at Garden Island only s few years ago. He used to party at the Cross all night with his Croat ships engineers mates putting his nose in the dancers front crack then come back in the morning and start work. Don’t know how he did it as he was same old age as me.
          One day after work shower I put my clothes on to go to the ships gym but something didn’t feel right. Yep those undies on my bed that I put on were his dirty ones. Extra long shower and dished out some scolding from this squeamish soul.

    • Grew up in that area, was a lovely location prior to them clearing 90% of the bush, all the orchards and farming land for McMansions. Old bloke across the road used to have acres of orchard, sold it off for houses.

      Now in Melbourne, can see similar issues down here as green leafy areas fight for survival as developers rush to put up poorly built townhouses. Can still navigate around Sydney without a map, useless in Melbourne.

      • The90kwbeastMEMBER

        Interesting. I’d say its still to date a very leafy area as it stands in the suburbs mostly built out in the 80s and 90s, with numerous parks and reserves. Kellyville not so much however as it’s all newer. We bought here as we recognised the Hills are about one of the last nice places in Sydney not totally overrun by various groups of people (yet – that will change in 1-2 decades), good connectivity now, not too expensive and its not massively far out (40km+) from the CBD.

        Overall if you think the hills are a concrete jungle now, you should drive through southwest Sydney. You will be appalled.

  2. without wage growth only two things are in play for RE prices to go up. Open advertising for druglords and warlords to launder their funds via our RE and for intergenerational home loans for structures that will only last 15 years. There is limit for how long that can last.
    Agree prices will go up from here but I am not buying. Will put all my money in gold stocks, and some other miners and get part time work to clean offices at night. I will make better return than buying RE as dividends from these miners are/will be paying better rates than RE.

    • robert2013MEMBER

      RE = government backed asset price rises with the cheapest leverage in the land…unless you think the kitchen sink has already been thrown. IMO there’s still more they can do to keep prices up. Don’t forget all those students studying at Australian unis online now entitled to work visas. As soon as covid barriers fall….

  3. Still see the issue being one of serviceability. At some point locals simply wont be able to afford the repayments, regardless of how low interest rates go. If however we continue to sell the country off to the highest bidder with ill gotten gains and laundered money then prices will stay stratospheric.

    • There’s a lot of latent demand floating around in the rental pool. Every increment of serviceability converts a new crop of renters into buyers. For mine the big sticking points are lending restrictions (removed) and the deposit. The super scheme was a great help but that dries up next year…

      • I’m seriously considering pulling out my second super allotment just before year end. I’ve decided that before the end of next year, and possibly much sooner, I will have at least purchased my land outright. Then I can figure out how much to spend of a house to put on it (and how to finance that). But I want the land outright, and soon.

        • I reckon that makes complete sense assuming you have plenty of earning years left ahead of you. The Super-nazis never talk about the time value of money but it is very real.

          • I don’t have lots of those left, but I basically have FA super given I spent 15 years os, and I’m now a low income earner. I’m unlikely to earn much going forward (health issues, can’t work full time) and with the employment trends going the way they are that’s unlikely to change. Therefore my goal is to own my own home (and be debt free), be as self sufficient in fruit, veg and nuts, and be energy independent (plus have an electric car). Possibly I could sell excess energy (for other people to charge their electric cars, where I’m looking to buy I’m sure connecting to the grid would be worth it) and excess food production which would help make my home pay for itself over time. If I’m going to have a comfortable old age I need to be self funded from investments, not from super from my meagre inflation adjusted income. So that means being nimble and strategic short/medium and long term. Not easy but as several people have said to me recently re Covid and the state of the world “it is what it is”. You’ve gotta understand the paradigm you exist in to have a hope in h3ll of surviving.

            However upon further reflection I’m not sure the ATO would classify me as being in ‘hardship’ as I’m now back at work, so I probably missed that boat for a 2nd withdrawal.

        • Sound great Poppy. Try Swanbuild for a modular house. More solid construction than the others, cheaper, and you can be in it in 3-6 months, and know what you’re up for upfront. Plus they subsidise transport costs.

  4. pfh007.comMEMBER

    “..Those who wish to resist had better start revving up APRA..”

    APRA!!!!!!
    APRA!!!!!!
    APRA!!!!!!
    APRA!!!!!!

    So many LOLs.

    If you want to resist the asset price bubble blowing and further erosions of the public monetary system there is only ONE option.

    End the private bank monopoly on trading electronical liabilities of the Central Bank.

    “MyRBA the solution for those who like reform that works”

    😉

    https://theglass-pyramid.com/2020/10/08/rba-watch-central-bank-digital-currency-on-the-way/

  5. The best housing can hope for, is that prices remain steady.
    There are simply not enough people with enough money to push up median house prices further.
    This was my belief before the virus… so housing going up now would be implausible.

    • Implausible? Come to Perth…..haven’t seen this many places suddenly above the 1 million mark since the peak of the boom. Prices unfortunately are off to the races again….

      • This is the same in my area Brisbane South. This is for listing price , time will tell on whether they get the money, but I thought the same a month ago, and they are definitely up at 5-10% in that time . Also lots of under offers but rarely list the sale price.

      • I do live in Perth.
        The recent interest in housing is likely due to “The West Australian Government has unveiled a $125 million stimulus package for the state’s home building sector, providing cash grants to prospective homebuyers” place in front of naive’ buyers and mix with media hype.
        Will die out when the scheme ends in 6 months.

        • Plus banks throwing cash around. Im not convinced this is a temporary blip or deadcat bounce, I fear the various government bodies will just continue to prop up the market with endless amounts of cash, incentives and bandaids. How do you see this ending?

  6. I also think there is a bit of a divergence in the market between apartments and houses. There are a lot of vacant apartments with no tenants (or massively reduced rental rates) which were generally owned by investors, and which there is no demand to purchase. The ‘market price’ for those apartments has no doubt dropped a great deal, but with mortgage holidays (or their owners simply being able to hold on), most of them haven’t hit the market yet or otherwise aren’t selling. I think we will see a large correction in apartment prices if the borders don’t open by mid to late next year.

    Houses on the other hand are booming. WFH has reinforced demand for houses, and with interest rates at all time lows prices that seem crazy are still serviceable.

    • Strange EconomicsMEMBER

      Work from home crowd are higher paid and office workers. They want to buy a bigger place, (with one room for an office).
      Apartment Renters are gig economy, students moving back in with parents,, foreign workers etc – all out of work. Apartment Rents are down down down at Coles.

      But I think house rents have dropped as much as they will. or maybe its just seasonal with everyone staying put till February.

  7. working class hamMEMBER

    Anecdata
    Although the NE of Brisbane softened, 5-10% in the 5 or so suburbs we were looking in, prices have held.
    A lot more double block, land banking style properties on the market as boomers cash in their investment properties.
    Rentals are basically non existent with most being snapped up sight unseen for over asking.

  8. That’s not my point ( Mike 179 above re Negative Oil). It’s that Negative Oil rates were supposed to be ‘impossible’ yet they happened.
    The RBNZ has embarked on a deliberate policy of inflating our (NZ) property market, and as such, anecdotally, some property ( Hawkes Bay = say, Torquay,Vic.) went up ~10% last WEEK alone. The expectation of Negative Mortgage rates has probably triggered that response; the most ‘logical’ of outcomes.

    • for as long as it takes. so they say. need to sound confident in order to convince the unwashed that FOMO is real. Even though there is no more cut teh rates left and without jobs there is no more open teh gates. this time no one can fix thing but RBA and Scummo need to sound confident.
      If Scummo calls early elections, expect things to get ugly soon after. He will want to have another 3-4 year free loader ride before drives into the sunset on a taxpayer funded pension.

      • For my money it will all come home to roost if/when the widespread availability of a vaccine doesn’t produce normalcy. At that point natural market forces will overwhelm central bank contrivances

          • Trivially true but clearly there’s a continuum and we’re moving further down the contrived end with every announcement. It can’t go on forever

        • By the it will be “normal”.

          I cannot understand how our Wile E. Coyote moment has gone on this long, unless our money has become so completely disconnected from on-the-ground economic reality that nothing matters any more (until it does, of course).

  9. So Property will join this illustrious group:
    From their closing prices on Friday October 30th, 2020 (in only 8 trading days), this list of selected equity indices, commodities and currencies have produced the following returns.
    Spain’s IBEX 20%
    France’s CAC 20%
    Italy’s MIB + 16.2%
    KBW (U.S.) Bank Index 15.8%
    Germany’s DAX 14%
    The U.K.’s FTSE 13%
    Russell 200 (small cap) 12.9%
    Russia’s MOEX 12.8%
    MidCap 400 11%
    Singapore’s Strait Times 11%
    Japan’s Nikkei 10.1%
    Hong Kong’s Hang Seng 9%
    DJ Transports 8.9%
    Australia’s ASX 200 + 8.8%
    India’s Nifty 50 8.6%
    S&P 500 8.4%
    HSCEI 8.3%
    Korea’s Kospi 8.2%
    Nasdaq 6%
    Shanghai Composite 3.8%
    Gold in USD 0.2%
    Gold in AUD (3.7%)
    Lumber 17%
    Heating Oil 16.7%
    Brent Crude Oil 16.2%
    Corn 7%
    Iron Ore 5.2%
    Platinum 5%
    UK 10 Year (10’s) Government Bond Yield +52%
    Australian 10’s yield +19%
    Canadian 10’s +16.7%
    U.S. 10’s +12%
    and currencies;
    AUD 3.8%
    NZD 4%
    Bitcoin + 13.6%

  10. OK so riddle me this………..

    Wage growth in the toilet (and about to be flushed)
    Immigration in the toilet (odds on it will crawl out at some point)
    Unemployment structurally higher
    Low rates for the forseeable future
    All spare money going into the property casino

    Where is the real recovery coming from?

    Or doesn’t it matter anymore?

  11. Even if they wanted to, how could APRA go against the entire stinking ezfka edifice. Why is APRA so special when the rest of the edifice is captured and sold out.

  12. Martin North looking foolish now with all that egg on his face.

    I was going to buy an investment property but prices jumped so fast that I’m out, folding my hand.

    Thinking hard about where else to invest money. I have significant precious metals investments, but considering more silver based on this interview in which an expert predicts a massive move into solar energy, with an attendant requirement for enormous quantities of silver:

    Verlinden tells us some experts think we will reach 4 degrees C by 2100. Only 1 billion people could find habitable paces to live, which means for our grandchildren, only 1 person out of 10 will survive, unless we take drastic action to prevent the most serious climate change. By the calculations on emissions required to keep us under 2 degrees, he says we only have 2 years of our current emissions left. Beyond that, if we continue as we are, we are committed to at least 2 degrees of warming, and likely much more.

    In this interview, we focus on a Pierre’s co-authored paper “Terawatt-scale photovoltaics: Transform global energy” (2019) and his latest paper “Future challenges for photovoltaic manufacturing at the terawatt level” published October 27, 2020 in the Journal of Renewable and Sustainable Energy.

    …….

    While I still worry about the rare minerals required for battery storage, Pierre Verlinden says the concern about massive production of solar panels is actually silver. Ninety five percent of solar panels installed in the world are currently made with some silver. The contacts to transmit power from the silicon cells are made from silver.

    “Currently we use about 20 milligrams of silver per watt, which means that today we roughly use about 3,000 tons of silver per year just for photovoltaics. The actual production of silver in the world is about ten times that value. Which means that when we reach roughly about a terawatt per year of annual production – photovoltaics will use about 100% of the silver production in the world.”

    We could increase silver production, but silver is still a rare material (which is why it has been used in coins and as a substitute for money). Plus, if there is a rush to solar, that will push up the price of silver, which would increase the cost of solar panels, at a time when we need even cheaper photovoltaics. There is always speculation in silver, and its price goes up and down. But currently, Verlinden says, silver represents 8 to 10% of the production cost of a solar panel.

    To be sustainable, at the three terawatt level of production the world needs and the industry can maintain, the amount of silver needs to be reduced below 5 milligrams per watt, meaning 1/4 of current requirements. That is a production challenge still needing solutions.

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