TOP 10 IA STORIES OF 2011Classic economic theory is ripe for debunking. Managing editor David Donovan, who has worked for two decades all over the world as an accountant and finance analyst turned his gaze on the overripe Australian property market — and opened the mind of many Australian investors in 2011.
#7: THE GOVERNMENT RUN AUSTRALIAN PROPERTY MARKET PONZI SCHEMEThe Australian housing market is a Government run Ponzi scheme set up to advantage governments, banks, developers and the real estate industry at the expense of ordinary Australians. Managing editor David Donovan comments.
If you have a mortgage on a house you bought recently, you may wish to turn away now because you may not like what I am about to say.
Real estate in Australia is overvalued by between 10 and 56 per cent. On one end of the extreme, the IMF said last year property was overpriced by a relatively benign sounding 10 per cent. However, the Economist magazine released a special report at the start of March which said it was overvalued by 56 per cent, making Australian property the most overvalued in the world. Sitting in the middle of these two estimates is that of global strategist at Morgan Stanley, Gerard Minack, who says the market is 30-40 per cent above sustainable levels in the medium term.
Speaking on the ABC’s PM programme on March 4, Minack said our expensive housing makes Australia extremely vulnerable in any economic downturn.
The fact we have very expensive property makes Australia very vulnerable to any sort of economic shock and the example I'm pointing to at the moment is what's happening in the Gold Coast in Queensland where tourism numbers are down. It's not macro economically significant for the entire country but what we're seeing is quite acute distress in their property market because without the constant income growth they can't sustain prices where they are.You do not need to look far to see what can happen when an economy with over-priced housing stumbles. In the US, a downturn in the US economy in 2007 led to widespread job losses, then mortgage default, a spate of bank foreclosures, before an eventual capitulation in the price of US housing of between 40 to 50 per cent. Many people in the United States are now stuck paying off houses that are worth far less than their mortgages.
Some economists argue that all recessions are caused by a collapse in the value of the property market and it was without question this collapse in the overvalued US market that led to the global financial crisis (GFC). Australia escaped the worst ravages of the GFC due to continuing strong demand for Australian minerals by China – the so-called mining boom – as well as Government stimulus spending. Still, the mining boom does not affect every sector of the community and, as Minack alludes to, some parts of the economy in Australia that are in distress. And now Australia has spent its surplus, what happens when the oft-expected double-dip recession comes around—has the Government fired all its bullets?
The Gold Coast property bubble
An example of an economy in distress is – as Gerard Minack alluded to – the Gold Coast in Queensland, where there is no mining and which is being negatively affected by the decrease in international tourism and the closure of some boat building companies. In the northern parts of the Gold Coast, unemployment is running at over 10 per cent. The overall rate of unemployment on the Gold Coast is 6.9 per cent, well above the national average of about 5 per cent. The unemployment rate jumped a whole per cent in January alone, with 3,000 people (net) losing their jobs. This local recession has had obvious effects on the housing market with sluggish sales and a massive oversupply of housing as vendors hold out for prices that simply are not attainable under the current conditions. But, for now, most people are not in distress and there has not, yet, been a rash of foreclosures as in the US and other economies.
As mentioned, there is a massive supply of units and houses on the Gold Coast market. A report in The Australian on March 12, 2011, makes the depressing and depressed situation clear:
According to property analysts RP Data, over the past decade there has been an average of 867 houses and 1087 units sold each month across the Gold Coast, but last December there were just 359 house sales and 396 unit sales - the lowest sales volumes over the past decade.To put this in perspective, a search today of http://www.realestate.com.au shows over 2,045 houses for sale in the northern Gold Coast suburb of Coomera alone. Up until relatively recent times, the Gold Coast was a construction park with massive numbers of new developments in the housing corridor in the north of Oxenford, Helensvale and Coomera. A typical story you will hear now is people are complaining about trying to sell their 5 year-old duplex, but being unable to because across the road a new development is selling off the plan for $100,000 less than they paid for their unit new.
The situation is no better for the apartment dwellers closer to the city centre and the beach. Indepedent Australia has been studying the Gold Coast market for some time and a typical example is a one bedroom, fully renovated flat in Surfers Paradise with ocean views that has been on the market now for 2 years. It was initially offered for sale at $400,000; it is still unable to find a buyer at just $270,000. These stories are being retold right across the Gold Coast in both units and houses.
Despite all this, the Real Estate Institute of Queensland put out a press release in February that implied that a crisis awaited because of a looming shortage in the supply of new units on the Gold Coast. The Gold Coast Bulletin reported the press release almost in its entirety, without any mention of the obscene property glut on the Coast:
A LACK of new Gold Coast apartments for sale after 2012 is likely to see cashed-up foreign investors head to Brisbane and Sydney.
There will be 1364 apartments for sale in new buildings between Surfers Paradise and the Tweed before the end of the year.
But in 2012 the only new apartments added to the market will be 32 at Oracle in Broadbeach.
There is nothing more locked in from 2013.
Real Estate Institute of Queensland Gold Coast chairman John Newlands said one of the most significant impacts of the units shortage was that overseas interest could shift to places like Brisbane and NSW.
"Foreign investors are required by law to buy new homes and units," he said.
"So if there is less for sale here, they will have to go elsewhere."
According to Gold Coast property manager Rene Thalmann, the REIQ's call for more new units is a typical example of them lobbying on behalf of developers to pressure the Government to provide more favourable conditions.
“There may be a new unit shortage in 2013, but there is plenty of old units for sale, as well as new units that have not yet sold,” he said.
“Here, the REIQ is simply acting for property developers with a mind to softening up government regulation and gaining them access to new land at favourable conditions.”
“In the case of an oversupply, the market should work the old supply down before new units come onto the market.”
The Ponzi scheme
Mr Thalmann, who manages apartments on the Gold Coast as well as holding real estate interests in other parts of Queensland, says that he is concerned that the speculative nature of real estate in Australia is leading to unsustainable prices.
He says he is suspicious of any information that comes out of the REIQ or the leading online real estate valuation company RP Data.
“I believe there is a massive crisis in real estate, which the REIQ and RP Data are trying to cover up by using stats to prop up the market,” said Mr Thallman.
“They realise they’re in trouble, so they’re throwing sand in people’s eyes to keep the market moving to get more suckers.”
He also says that governments and the banks are complicit in trying to keep real estate prices high and rapidly changing hands for selfish reasons.
Rene Thalmann presents a compelling argument. It stands to reason that the Federal Government has a vested interest in investment property changing hands at ever increasing prices because of the revenue it will accrue from capital gains and other taxes. For the State Government, one of its major sources of funding is stamp duty, which is greater when more property changes hand at higher values. Local Governments love development because it attracts investment into an area and because developers pay the lion’s share for the provision of new services – such as roads, water, waste and utilities – which are otherwise the responsibility of councils.
For banks, the more mortgages they write at higher loan values, the more interest income they will accrue. And banks make a premium in the Australian loan market, since Australian interest rates are on average about 3-4 per cent higher than other similar western economies. In addition, while property prices increase rapidly people “feel” more affluent and so there is presumably less demand for wage increases, which helps business by keeping down staffing costs.
To try to keep the prices of property high and to encourage property transactions, the Federal Government uses various mechanisms. With the negative gearing provisions, the Government encourages small investors to speculate on the property market by allowing them to deduct from their income expenses association with rental properties. Unfortunately, this increased demand does little more than artificially inflate property prices, making it more difficult for the battlers, such as first home buyers, to afford to enter the market. So, to try to help first home buyers, the Government has a $7,000 non-means tested grant it offers them. This offer is so casually enforced, that it is available all permanent residents of Australia, whether they are citizens or not, and whether or not they own a home outside of Australia. For obvious reasons, it is well received amongst foreign residents, who have frequently sold homes in their own country to emigrate to Australia, or perhaps even still own homes elsewhere in the world.
Rene Thalmann says that apart from the obvious inequity of the grant it also does absolutely nothing to produce more affordable housing for first home owners.
“The first home owners grant does make it more attractive for first home buyers to buy property, but all it really does is simply increases demand to drive up the price of real estate by the amount of the grant. It is really nothing more than a Ponzi scheme.”
Is, as Rene Thalmann suggests, the property industry and its stakeholders staging a massive confidence trick on an economy-wide scale?
It seems likely. We have seen evidence of the property industry provides selective statistics to support the property market and advantage their members, particularly developers. And, rather than looking at the motivations of the stakeholders, the popular media report this PR credulously. The Federal Governments, eager for tax revenue, and no doubt worried about the property bubble bursting, provide tax breaks and subsidies to keep property prices and turnover high. State and local governments ease regulation for developers and do their part to support the industry and increase their share of the pie. Developers are also major donors to political parties, as we have seen with NSW Labor. Banks do everything possible to bolster the industry also, mindful of losing their exaggerated interest returns. And their are other interests, such as insurance companies, that are also happy travellers on the property market gravy train.
And who is losing?
Well, all of us, really, since every taxpayer pays for grants for first home buyers that eventually merely end up in the hand of big developers. And, each taxpayer subsidises investors to speculate on the property market through negative gearing. Most of that ultimately also ends up in the hands of property developers. But, more particularly, the losers are the poor, since speculation on the property market removes housing from the letting pool, reducing the supply of rental accommodation. It also drives up the price of housing so that the poorer sections of the community can no longer able to buy their own home, or if they do, have little disposable income to raise their standard of living since they are paying ridiculous amounts of their income in mortgage repayments.
And, because people have less money to save since they are ploughing it all into their mortgage, if economy suffers widespread job losses then they have nothing to fall back on. If every part of the economy becomes like the Gold Coast, but worse, heaven help us all. If the US economy is any guide, if the battlers start losing their jobs, then the bubble will burst and the Ponzi scheme will come crashing down on everybody’s heads. Despite the tearful cries of the property industry, and its own self interest, the Government must act now to try to try to untie the knot and slowly deflate the bubble before it’s abruptly pricked by a big sharp needle.
The first place to start is the first home buyers scheme. If the Government needs additional capital to pay for flood disaster, a good place to start would be right there. And if you're a first home buyer priced out of the market, join the Get Up first home owners strike.
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