Prepare to lose enormous [property] wealth: UBS and Harry Triguboff
Earlier this week, The Australian – the newspaper I write for fortnightly – updated their reporting of Australian property mogul Harry Triguboff’s view on property prices.
Separately this week, UBS reported the results of a survey of almost 1000 Australian mortgage holders who borrowed in the twelve months to August 2017. They observed; “Our 2017 survey found factually accurate mortgage applications fell to just 67 per cent. There are now ~$500 billion in ‘Liar Loans’ on the banks’ books.” A third of borrowers admitted to understating their living expenses.
UBS found ANZ had 45 per cent inaccurate applications – the highest of all the banks – while NAB had 38 per cent. Both were substantially higher than in 2015 and 2016 suggesting standards are not getting better, and if anything, the banks are slackening their due diligence in order to drive growth.
As you know we have long been concerned about property prices in Australia.
You can read some of our most recent warnings following any of the below links:
We could be wrong about the property bubble (but we don’t think we are)
The property boom may finally be about to bust
Cash crunch is coming for property investors
Unless Treasury’s latest data showing a 17 per cent lift in intended business capex, or the forthcoming infrastructure, spending boom leads to significant employment and/or wage growth – highly indebted property investors and speculators could be much worse off.
According to The Australian on Monday 12 September 2017,
“The slowdown in the apartment market is worsening and will have a severe impact on the economy if it is not arrested”, according to the country’s biggest apartment builder, billionaire Harry Triguboff.
“The number of new apartments sold had dropped and prices had fallen about 10 per cent over the past six months, the founder of Meriton Group told The Australian.”
“China’s continued restrictions on capital flowing out of the country, the local banking crackdown limiting finance for investors and sluggish domestic wages growth had combined with government policies causing a perfect storm for apartment construction.”
Back in May, we warned here, that Chinese interest in Australian property had plunged.
The Australian also reported this week; “At the same time, Reserve Bank governor Philip Lowe last week said he was watching the Brisbane property market carefully, particularly given the pressure on prices from the large rise in the supply of new apartments in that city.”
Back in March we warned you about Brisbane property prices in particular. In our blog post entitled Brisbane apartments are ground zero we specifically highlighted the issues for Australia’s property investors emanating from Brisbane.
With serious implications for the economy, BIS Oxford Economics now expects national building starts for high- density (above four-storey) apartment buildings will have halved by 2019 from last year’s peak and could drop further in 2020.
Managing director Robert Mellor told The Australian; “The RBA and Treasury are being a bit optimistic on the dent to GDP growth. We will not see economic growth at 3 per cent”.
Mr Triguboff added; “Australians could lose an enormous amount of wealth.”
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
simon
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christopher joye @cjoye 15h15 hours ago
Why house prices won’t crash http://www.afr.com/news/economy/biggest-population-surge-since-2008-20170927-gypt76 … via @FinancialReview
Andrew
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Backstopping the bubble.
Lynton Pipkorn
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I agree with you Roger that apartments are a dud buy as most of them are an overpriced commodity and fall well short of what I consider to be investment grade asset quality. However population growth is hoovering up.mich of this supply. Pete Wargent offers some good insights here: http://petewargent.blogspot.com.au/2017/09/population-growth.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed:+blogspot/STvRI+(Escaping+the+Rat+Race)&m=1
Roger Montgomery
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As long as everyone realises peter is a property adviser, I have no issue with reading about the view on population growth. Also keep in mind it is ‘household formation’, rather than population growth directly, that determines dwelling demand
Doug Bullen
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Roger, I come to this discussion late but I think you have pictured it correctly. Triguboff’s comments that partly ascribe the risk to stalled wages growth are pertinent in the context of low interest rates across the board. Just one half of one percent increase on a nominally 4.25% mortgage rate represents an increase in cost of funds for those borrowers of about 12 per cent. I haven’t seen any sustained increases in cash flow from these investments of that order and there sure as hell hasn’t been any wages growth in that league either. The domestic banks and their borrowers would both seem to have wedged themselves nicely in this scenario. The ones who will weather the storm better if there is one will of course be the banks, so the politicos will have to make sure it doesn’t happen otherwise they will end up out on their ears. They have to either free up the personal tax structure or return to a more equitable and permanent plan for wages growth. Alternatively they could just let it happen which is the usual modus operandi for anything too hard.
simon
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Roger pls post this long article about Hetty Green – the Warren Buffet of 1900
On a November evening in 1907, an emergency meeting of New York city’s most prominent bankers convened. The aim of the all-night conference was to arrive at a solution to stave off a run on the banks.
Referred to as The Panic of 1907, there were runs on banks in New York City in October and early November that year. It was triggered by a failed speculation that caused the bankruptcy of two brokerage firms.
President Roosevelt looked to JP Morgan to engineer a solution, who in turn invited others to brainstorm and strategise. In the midst of this high-powered meeting of suits in JP Morgan’s private library, sat a veiled woman in a worn-out black gown.
Though despised by some, she was feared by many. In an age where women were not allowed to vote, she was a formidable character in high stakes finance who built a reputation as a ruthless loan shark.
That was Hetty Green, nicknamed the “Witch of Wall Street”.
Green was born into wealth, inheriting a few million (varying accounts put it at $5 million to $7 million) in her early thirties. Being a brilliant strategist and shrewd investor, she converted that to $100 million over a span of 50 years.
The Telegraph gives a better perspective: When she died in 1916 at 81, she had an estimated $100 million in cash and owned more than 6,000 assets (railways, hotels, office buildings, theatres, churches, cemeteries). She was worth almost $200 million, which would have the purchasing power of about $4.5 billion today (this was written in June 2016).
By comparison, the estate of JP Morgan, one of America’s most prominent bankers when he died three years prior to Hetty, was worth $80 million.
That probably made her one of the richest women in the world during her day and definitely the richest one in America.
Unfortunately, her personal quirks and eccentricities were more newsworthy than her financial exploits. Her disregard for fashion, and obsession with money and frugality, were ample fuel for gossip. While she had the skill and laser-sharp focus when it came to making money, she detested spending it.
She refused to turn on the heat, even in cold weather. Using hot water was too expensive. There was no need to eat lavishly–crackers, oatmeal, ham sandwiches and pies that cost 15 cents were just fine.
She bought broken cookies for her children because they were cheaper and returned the berry boxes for a 5-cent refund. She haggled with local merchants over every penny.
Why spend money on a decent wardrobe when her worn-out black shabby gown would serve the purpose? As a teenager, her father gifted her $1,200 to shop for clothes. She spent $200 and saved the rest.
She instructed the laundress to wash only the hem of her dresses to save money on soap. It was her black attire (gown, hat, veil, and cape–all in black) that earned her the sobriquet “Witch of Wall Street”.
She refused to pay for decent medical care for herself or her children. Renting and constantly shifting home was a smart move since having a permanent residence would attract property tax (property tax collectors first had to establish proof of residency to collect personal property tax).
Once on her mantle she displayed a bouquet of “roses” made from dyed chicken feathers because it was cheaper and lasted longer than a bouquet of real ones.
Her penchant for thrift was as disgusting as it was bizarre. It even turned out to be historical (she entered the Guinness Book of World Records as the “World’s Greatest Miser”).
Known as the “Queen of Wall Street,” the “Witch of Wall Street,” “Hetty the Hoarder,” “America’s first female tycoon,” and “Wall Street’s first female financier,” the life of this idiosyncratic lady has a storytelling charm to it that instructs as it amuses.
So how did Hetty Green make money?
Hetty learned the rudiments of finance at a tender age. As a child, she was required to read reports on the stock market and on various business transactions to her father who would carefully explain to her things she did not comprehend.
She was also expected to keep a strict account of personal and household expenses. By the age of 8, she opened her first bank account.
Hetty made her fortune during the Gilded Age. In case you are wondering, Mark Twain called the late 19th century the “Gilded Age.” By this, he meant that the period was glittering on the surface but concealing decadence below–corruption, conspicuous consumption, and unfettered capitalism.
Upon her father’s death in 1865, she invested her inheritance in government bonds, which were deeply discounted in the aftermath of the Civil War. The public were wary of the country’s post-war prospects. Her faith in the government’s ability to pay its debts rewarded her handsomely. She later claimed to have made $1.25 million from them in a year.
But it was stock market panics that really proved her mettle. When there was blood in the streets, metaphorically speaking, she kept her cool and benefitted from it.
The Panic of 1893 was a national economic crisis set off by the collapse of two of the country’s largest employers, the Philadelphia and Reading Railroad, and the National Cordage Company.
When that happened, banks and other investment firms began calling in loans, since hundreds of businesses had overextended themselves by borrowing money to expand. This caused hundreds of bankruptcies, especially across banks, railroads, and steel mills. Over 15,000 businesses closed during the Panic of 1893.
During this time, Hetty loaned millions to individuals who put up their real estate as collateral. When they could not repay, she took the property. She also acquired property primarily through foreclosures from collateral underlying her bond investments. In this way, she acquired property scattered across states. It is said she received $40,000/month as rent only from her Chicago properties.
Her flint-eyed instinct to spot an opportunity was admirable. She saw the Panic of 1907 approach and began to maintain considerable liquidity for lending purposes. In the aftermath of the event, a number of major investors found themselves in her debt.
Upon her death, it was estimated that she owned 6,000 to 8,000 parcels of real estate across various states. Just the Chicago holdings were valued at $5 million to $6 million. Alongside hotels and office buildings she also owned cemeteries and mortgages to churches, estimated at around 28 when she died.
Though she never borrowed, she became the go-to person for loans–be it America’s great cities like New York and Chicago, or a church. More than once she came to the rescue of New York City (loaned $1 million in 1898 at 2 per cent, $1.5 million in 1901).
In 1907, she gave $1.1 million in exchange for short-term revenue bonds at 5.5 per cent. In 1900, Tucson, Arizona, needed capital to finance the city’s water and sewage system. She bought the entire bond issue.
As an investor, she was drawn to real estate, bonds, and railroad stocks, and confessed that she found them more attractive than mines, factories, or trade.
Hetty focused on buying low. She had the courage and nerve to buy when others were selling, and sell when everyone was buying. She never speculated or bought on margin. She had a preference for conservative and long-term investments, substantial cash reserves, and used a crisis to her benefit.
Though she never wrote a book or maintained a diary, she did share her thoughts on and off with reporters:
• Common sense and hard work are the recipes of success. Common sense is the most valuable possession any one can have.
• Before deciding on an investment, I seek out every kind of information about it.
• There is no great secret in fortune making. Buy cheap. Sell dear. Act with thrift and shrewdness and be persistent.
• Watch your pennies and the dollars will take care of themselves.
• When I see a good thing going cheap because nobody wants it, I buy a lot of it and tuck it away. Then, when the time comes, they have to hunt me up and pay me a good price for my holdings.
• Her advice to her son when he had to manage some mortgages she held that had fallen in value: Get the exact sum due on each mortgage, interest and principal, fixed in your mind … If anyone is fool enough to offer you the full amount, take it. If you’re offered less, tell the man you will give him the answer in the morning. Think the matter over carefully in the evening. If you decide it will be to our advantage to accept the offer, say so the next day. In business generally, don’t close a bargain until you have reflected upon it overnight.
Her love for money might have been pathological and her obsession with frugality eccentric.
But going by her sheer business acumen, her single-minded intensity and sharp focus, at a time when women were shunned in matters of finance and not allowed to vote, the Witch of Wall Street could well have been called the Wizard of Wall Street.
James Chappell
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Well in Wollongong the market has definitely changed. Good quality family homes are still selling quick and for high prices but the lower end of the market has tanked. Only 2 months ago I was seeing 30 to 40 people at an open home for a dump in a commission suburb. Just this Saturday I went to a similar property and was the only one at the open home. It was the first open.
Roger Montgomery
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Thanks for sharing those stories from the ‘coal’ face James.
christian
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Remove from your thinking property Prices always go up. My parents lost Money on real estate and so has my uncle who had to sell his own home to cover losses on his Investment Portfolio in 2011. The current Australian real estate market is powder keg waiting for a light to ignite the fuse….
Andrew
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Jimbo,
Here is the article from the AFR. http://www.afr.com/real-estate/residential/70pc-of-chinese-pay-cash-to-buy-australian-homes-sparking-moneylaundry-worry-20170403-gvc5vv
It is only been recently that the Chinese government has put the clamps down on its capital controls (and now the bitcoin price starting to drop since China is getting serious about these outflows.
http://www.smh.com.au/business/chinas-smurfs-beat-cash-controls-sending-real-estate-soaring-20151102-gkpab9.html
http://www.austrac.gov.au/sites/default/files/sa-brief-real-estate.pdf
Even so, the Australian Government has a lot to answer for.
jimbo james
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Believe what you want Andrew, this one suggests otherwise – 97% are mortgaged.
http://www.theaustralian.com.au/business/business-spectator/four-common-misconceptions-about-chinese-property-buyers/news-story/ced248892ae7bd5b772be4de802a2f82
Here’s a snippet;
‘There is a widely held belief that Chinese buyers pay for their real estate purchases in Australia in cash and there is little need for them to borrow. This could not be further from the truth. In fact, according to a recent survey from GiFang — a Chinese language website that specialises in selling property to overseas investors — conducted across 283 buyers online, 97 per cent of Chinese buyers in Australia rely on mortgages.
The big four banks have all established offices in China in order to assist China-based buyers to purchase Australian properties using home loans. Westpac is responsible for 70 per cent of all home loans from China, according to our survey results as well as a banking source.’
Andrew
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Then there should be no damage in the government implementing money laundering laws to cover Accountants, Lawyers and Real Estate Agents.
http://www.fatf-gafi.org/media/fatf/documents/reports/mer4/Mutual-Evaluation-Report-Australia-2015.pdf
simon
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Roger
you need to clarify your belief that its apartments your arguments are referring to and focusing on (not land/ housing?) because in that case I am in agreeance with you my friend !
I had assumed no-one round here (was dumb enough to ) buy apartments so I mistakenly believed you were talking about housing in general /not specifically apartments…
Also what is your feeling on retail ?
Now Im not a retail investor/ I feel they are like TLS
but Im starting to feel that JBH and HVN are oversold /overshorted on newspaper artciles re-Amazon fears and housing slowdown.
Roger Montgomery
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Thanks SImon,
I am similarly minded regarding retail. If Amzon takes $15b of revenue in a few years time, it will amount to 5% of retail sale market share. That doesn’t send everyone broke. nevertheless the 40% decline in NSW apartment consutruction approvals will feed into lower activity over the next twelve months, and lower payments to contractors (construction is the third largest employer in Oz) could impact retail sales.
Andre
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Roger,
I have stated previously my bullish predictions on the property market. These predictions weren’t based on any form of analysis but rather the first hand witnessing of on a Saturday morning more than 100 people showing up to an open house. My thought was (and continues to be) that these were family home buyers, not investors. Their appetite was unlikely to change, for whatever reason they were looking for a new place to call home. The long held opinion of the Montgomery team is based on economics and in in reality it makes absolute sense but I suspected that not enough of your team witnessed firsthand the fervour that these buyers have. In any case, reading your blog is one of the better parts of my day, please keep up the good work.
My question is, how does the Montgomery team view the recent uptick in business sentiment from China? Does your team believe that this will translate into a pickup in the export of raw materials to China and as a consequence, have the potential to absorb the bulk of job losses from the retail construction space, like it has in previous economic cycles?
Roger Montgomery
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Hi Andre,
Intresting observations. Thanks for sharing. In 2014/15 the pace of CHinese growth was much weaker than the officials numbers suggested and it was wise to be out of materials and resource stocks. By contrast, in 2016, the Chinese economy grew very strongly, even though the official GDP numbers were relatively unchanged. It was wise to be in resources (we of course don’t believe resource companies are high quality and are somewhat circumspect aboput investing in them). The bounce in 2016 Chinese activity was not picked up in the official numbesr but it was picked up in Capital Economics’ (“CE”) China Activity Proxy. Since the beginning of 2017 however the China Activity Proxy has turned down again (suggesting weakening demand for materials) and CE are forecasting new lows by late 2018/19. You can see the chart here http://www.abc.net.au/news/2017-06-08/china-gdp-graph/8602362
Andre
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Thanks Roger for that information. I also think that we should also note an equal level of caution as real estate agents use terms like “basis points” and “the Fed”. Scary stuff.
karl
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Thanks Roger.
How do you reconcile your warnings on the property market and your ownership of the heavily exposed banks? This appears contradictory.
Roger Montgomery
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Hi Karl,
The big four banks represent 27% of the ASX200. We have 7.5% invested in the banks. Stating it differently, we are significantly underweight the banks – which reconciles with our view.
Richard Vidal
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For those interested check out Australian Economist, Phillip J Anderson’s take on the property market and property cycles worldwide since the dawn of time……..if he is right there is some way to go before we see a slowdown or the sell-off that everyone fears…….his research and analysis is backed by hundreds of years of data from property cycles worldwide…..his views, as such, are contrarian but present a much wider explanation/thesis as to why economies have always been inextricably linked to rising land prices and will always be …… he has not just popped up in the last few years but has been detailing his views for the past 20 years or so……definitely worth a read
Roger Montgomery
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Yes Richard, The Japanese would be very interested in the inextricable link to ‘rising’ land prices, given they’ve endured declining prices for several decades.
simon
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Roger hopefully one day you will stop ‘throwing everything at it’ in your attempt to talk property prices down and admit you were wrong. Look at how wrong you were on HSO and ISD and VTG.
Property has never dropped 70% in value like those shares have.
You dont seem to bring that topic up every month yet you keep coming up with every negative view on property you can scramble around on google to find. How about you find a bit more of an objective view rather than constant doom and gloom which has proven incorrect for 3 years running.
Roger Montgomery
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Hi Simon,
Thanks for the frank assessment. I have to confess to a wry smile when I read such passionate words on the subject of an asset class. We aren’t talking about the welfare of children or a threat to democracy or a military invasion, so I am always a little stumped by heated words over nothing more than apartment prices. Nevertheless I hear you but I’ll back a portfolio of 30 quality companies (including a few that we get wrong) over Sydney, Melbourne and Brisbane apartments, purchased at retail prices with 80% or 90% leverage, any day of the week.
karl
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Actually Simon, I see Roger and his team regularly and openly discussing their ‘failures’ – which ironically is why you’re able to use them as ammunition.
Andrew
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Thank you Roger,
How do you feel about the massive amounts of people the LNP is bringing into the country (+278,310 to July, so probably much more due to 457 /student visa conversions) which will continue to put pressure on wage increases. Additionally there is a tacit refusal to close the loop holes on money laundering to accountants, real estate agents and lawyers (considering that 70% of Chinese buyers pay in cash). Will not these factors continue to backstop the bubble? Additionally as inflation numbers continue to dissapoint around the world are we going to see interest rates rise in the major markets (Fed/ECB/BoJ?)
Roger Montgomery
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Yes it could Andrew. As I mention in the article; if Treasury’s latest data showing a 17 per cent lift in intended business capex, or the forthcoming infrastructure spending boom leads to significant employment and/or wage growth things might be OK.
dane campbell
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This forecast capex increase was mentioned in another MIM article recently – where do you foresee these dollars going? 4×4 utes? IT infrastructure? Mining Equipment?
Roger Montgomery
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A very useful question to have answered. We are in the process of investigating. It should be pointed out that the many of the relevant companies are up 2X-3X.
jimbo james
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Source that says 70% of Chinese buyers pay in cash? I’ve seen credible data suggest it’s the complete opposite and around 80% are highly leveraged, largely through Australian banks! There’s also data suggestive of Chinese buyers paying cash, with money borrowed from foreign banks. Who to believe?!
I thought this inner western Sydney agent spoke very frankly about the state of the markets, namely Sydney which literally fell off a cliff in July (down 5-6% at this stage), Melbourne still solid but close to top, the dangerous levels of leverage being employed, flawed auction clearance rate reporting, liar loans and his involvement as an agent dealing with pushy mortgage brokers looking for favourable rental valuations on behalf of aspirational buyers. Sobering listening direct from an insider via ABC Nightlife (one of Roger’s great hangouts).
http://www.abc.net.au/radio/programs/nightlife/real-estate/8912992