Strange goings on

House prices in Melbourne and Sydney – particularly in better suburbs – have risen very fast in the last few months. At the same time, home lending is sharply down. As Peach business partner, financial e-newsletter The Sheet reports “The Australian Finance Groups mortgage index really a fancy label for their monthly new sales report for September showed an abrupt drop of 21 per cent in residential lending that month as borrowers retreated from the market.”

So what’s going on completely beats me. The explanation for the reduced turnover in new loans (which we’re avoiding but only with increased advertising spending) seems to be procrastination ahead of the election.

But then where is this money coming from to buy all those properties in Toorak, Brighton, Double Bay etc?

Again, I could understand general rises in these suburbs as a result of demographic factors, but they’ve all turned up in the last three months.  Pretty strange.

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cs
cs
14 years ago

But then where is this money coming from to buy all those properties in Toorak, Brighton, Double Bay etc?

Cashing out equities into property, I assume.

Jc
Jc
14 years ago

And lots of money being made by people selling off their businesses at some pretty high multiples. i have heard of some amazing numbers.

cs
cs
14 years ago

some pretty high multiples

such as?

cs
cs
14 years ago

Rare, perhaps, but the decision depends. Property is a traditional place for equities to go if stocks are judged to have peaked. The sums can square, as would the class of real estate, and the mystery would disappear. I’m open to a smarter but at least equally logical answer.

Jc
Jc
14 years ago

some pretty high multiples

such as?

One guy older guy I know sold his commercial insurance business for $80 million to a large US insurance form. He sold this at 6 times earnings as the US firm wanted to put a foot in the door in the sector.

Another person was a part owner is money management firm that sold for $60 million. Can’t recall what muliuple but it was pretty rich.

There are a numerous IPO’s going through for businesses in the $100 million that get touted every week by brokers. not all, but a many of them are the ownners partially cashing out.

A house sold for 18 million in Malvern / Toorak for 18 million that needs about 10 mill spent on it to a guy that owns a medium sized art Auction house. this was in the paper.

Cashing out of commmerical real estate is another example. Commercial real estate was selling on yields of about 9% 6 years ago. Now they’re going for 5-6%. Factor in yearly rental increases of 3% over that period and you some fairly big gains. That’s about a 16 compound rate over the past 6 years. Not bad.

Really good resturaunt- The botannical- sold for $16 million recently to a new pub group. That was just the business not the real estate. I know that sold for a mutliple of 7 times which is pretty unheard of in that game

Mining.

Huge amounts of money being made by all sorts of guys. Next time you see a scruffy bearded guy around the earth sciences part of the campus, he could be a geologist who struck paydirt and is worth 50 million. Look at what happened to small urnaium companies over the past few years. Some have gone up 5 times without earnings!

In fact Oz has possibly created the largest wealth per cap in history over the past 7/8 years.

Try and buy a top of the line Porsche and there’s a 12 month wait list just for OZ alone.

Lot of wealth in OZ, CS.

Jc
Jc
14 years ago

CS

Stocks are still cheap compared to other asset classes and the benefits of owning stocks far outweigh property. Mutliples in stocks are still higher than land and who wants to buy bonds.

You’re screwed over with land tax, agents fees, stamp duty with land and it’s not liquid. Residential property gets worn out by the renters and you can wait 6 months to find a tenant in commerical at times after which you have offer a 3-6 month rent free period.

Compare that to great quality stocks trading at lower mutliples with tax benefits. I dunno why people would want to own property. I dunno why people don’t rent either when the mutliples are 3% and the law is one your side as residential tenant.

————–

Been looking at Citigroup over the past few days wondering if its a good time to catch that falling knife.

Look at this: six years ago Citi was at around US$55 buck and the Aussie was around 53 ents. That meant it would cost you 103 bucks a share in Oz terms.

Now: It’s 38 bucks in Aussie terms.

Could be a decent stock to buy for a 6 year horizon if you think they are ok depsite the big write downs and more coming. But it has a great frnachise and the break up value alone could put it at around US60 bucks a share (A$65). Have to buy unhedged.

You ought to like it as Bob Rubin a Dem is taking over.

Jc
Jc
14 years ago

Mutliples in stocks are MATERIALLY LOWER..

David Rubie
David Rubie
14 years ago

Doesn’t need to be stocks directly. Might be options or other types of renumeration based on a financial instrument. Executives are granted options at very preferential strike prices and allowed to “call” on them after a waiting period (say two years for the place I used to work). This is very, very lucrative, as the massively underpriced equities purchased from your employer this way are then quickly shunted into the market.

It’s one way the profits of various institutions are being discretely shuffled into the hands of high-end employees and kept from shareholders. It would also explain why expensive housing just gets more expensive – those guys no longer need shelter, they now need trophy houses. These people do not necessarily mortgage to buy – or their mortgage is relatively hidden within the financial structure of their employer.

cs
cs
14 years ago

According to Nicholas, this has nothing to do with rental. It’s the high property end, which suggests people are socking earnings away under the bed (many beds, and many swimming pools, etc), consistent with your Porche data. With the RBA looking like it has put the discount rate up, socking it away in your high-end free-gains property can be similar as a flight to cash.

Jc
Jc
14 years ago

Yea that’s right david. Suddenly the french provincial/ gothic/ roman/ neo georgian toorak home is within reach.

Look at this tastless mix of everything that will go for 7 mill plus.

http://www.kayburton.com.au/?nav=view&OID=1012842&s=89758623&Sub=TOORAK&BeL=0&BeH=9999&PrL=0&PrH=99999&Surr=&IKW=&PT=hou&PTr=&CS=&OrderBy=auction2&OrderStr=&Con=S&SearchPage=&Bkmk=_&OFI=&OFIDays=&BS=10&Thu=on&Qui=&tp=8_2

Jc
Jc
14 years ago

With the RBA looking like it has put the discount rate up, socking it away in your high-end free-gains property can be similar as a flight to cash.

Actually i see it as flight from cash. Cash in lots of ways is the worst, most dangerous thing to own simply because it’s being devalued away relaive to hard assets.

My guess is that inflation for the well to do is running at anywhere between 10-15% at the moment which is why I think the CPI is a crock of shit measure of real inflation.

I subscribe to a monthly letter written by a guy who been around for 30 years in th financial markets. He so bloody negative that it can turn one suicidal, but he’s not bad overall and usually gets market inflection points pretty right.

He thinks cash is dying and gold wil be the hoarding currency. At 820 and ounce he is looking good.

Jc
Jc
14 years ago

What’s the yield on residential prop these days, nic?

Jc
Jc
14 years ago

On todays price gold price:

a home now valued at $500,000 takes 563 ounces of gold

500,000/886 (gold price)

6 years ago that house may have been worth $250,000 (?), the gold price was $568 an ounce which meant it took 440 ounces of gold.

————–

The temporary new “currency” large mining stock with little debt: BHP.

6 years ago BHP was trading at around $10 dollars a share.

It took 25,000 BHP share to buy an average home.

Now with a BHP share price of 45 bucks it takes 11,000 shares.

cs
cs
14 years ago

No need to get excited and go to bold, JC. Take 10 deep breaths.

Suit yourself pal; but the question is why would rich folks sock whatever they are socking except debt into property? Or, if you like, in storing equity in their homes, where are they taking it from and why? I’ve suggested that it is traditional when it gets around that stocks have peaked for rich folks to take capital gain into property, as it does not disappear, but I’m open to arguments, as I supect most people, including Nicholas, are.

On the other hand, as distinct from the question at hand, I’m afraid I’m not really interested in what you think is the best bet, with all due respect … although carry on all the same.

Jc
Jc
14 years ago

Now now. I’m spending quality face time with you, CS.

Suit yourself pal; but the question is why would rich folks sock whatever they are socking except debt into property?

Trophy home and the personal home is cap gains tax free. And it’s cheap in terms of what they have made elsewhere. They also see these places have appreciated in value and they think it will continue.

Ive suggested that it is traditional when it gets around that stocks have peaked for rich folks to take capital gain into property, as it does not disappear, but Im open to arguments, as I supect most people, including Nicholas, are.

a lot of these people are not tipping their entire equity in these homes as they have a more in assets.

There was a report recently from a buyers agent who said he had about 30 interested buyers in the 5-15 million range. He said that it looked like these people were only tipping about 10 to 20% of their net worth in the home of their dreams. Not like the old days when the rich were highly leveraged.

the risk, the real debt is being carried in the middle and lower economic groupings as far as I can see. This is problem because the banks think they are well diversified as they have lots of “smaller” loans on their books. But the loans a pretty concentrated in a sorta way. A downturn could really hurt this group.

Niall
14 years ago

The election has much to do with the retraction in individual markets, combined with the very real rises in cost of living. The class divide in the country is becoming broader and the statistics you mention are merely indicators of it.

Mark
Mark
14 years ago

I have heard, anecdotally, that this has been driven by the big suprannuation changes that kicked in on 1 July.

A lot of small business people, etc, geared up their businesses and investment companies big time in the month or so before the change (see the growth in business credit in that period). They then paid this money into their self-managed super funds, and it has been these cashed up super funds that have gone on the inner-city buying spree.

Patrick
Patrick
14 years ago

a) there are a lot more of them than there are $5m+ houses. Anecdotal but I’m fairly confident.

b) they use instalment warrants so much of the borrowing (from a third party) might not be picked up in residential lending? Wild guess but I know using instalment warrants has been very du jour.

Patrick
Patrick
14 years ago

Maybe more than you think! With SMSFs there is, for the reason you outline – these guys for example.

I know a few people who have looked at them because an opportunity came up but they didn’t have the cash, and they wanted it in their super. Whilst that was mainly for commercial premises and investment properties, it could apply equally to high-end residential properties.

But as I said, it was a wild guess.

Graham Bell
Graham Bell
14 years ago

Nicholas Gruen:

Just guessing but think the election has very little to do with it.

b.t.w., way up in this part of regional Queensland and in a completely different market, quite a few people [and not just dills and dropkicks either] are putting their dwellings on the market and offering to stay on as long-term tenants. They have Buckley’s chance of ever becoming house owners again.

observa
observa
14 years ago

An SMSF can purchase your luxury home for you and rent it back at arms length current renatl prices, earning the(your) fund the more important capital gain over time while you enjoy relatively cheap rent in the meantime. Aslso you have no idea how much the luxury market is being driven by wealthy Asian investors. Someone’s financing that CAD I can assure you, given the price of our dollar doesn’t reflect the state of play.