I am reluctant to add to the property debate in Australia, multiple tomes have been written on it. People attach the same fervour to talking about property as they do religion and politics. I like to keep my identity small on these things so I will offer a limited view.

But when I see articles like these appear in the Financial review over the last week I can not help feel that these are parody write-ups and these people are from a make believe land of fairy dust and entitlement. Sadly I think they are not.

http://www.afr.com/real-estate/residential/property-club-investors-stung-with-45-pc-mortgage-repayment-increases-20180105-h0e7w1

Here are some quotes from Mr Young. Put your opinions aside and your vested interest whether you are long and strong property or not and read what he is saying.

And here from the AFR last week talking about another >200 property “owner” that is struggling to pay off principal.

http://www.afr.com/real-estate/residential/nathan-birch-sued-over-gold-coast-mortgage-default-20171211-h02l0p#ixzz53FdRzr24

Property in Australia has been a win-win for a long time. agents, banks, state stamp duties the list goes on. And when you create incentive structures that favour rising house prices then this is the behaviour you will get.

Its the Amazon flywheel taken to property:

Cheap debt – More demand/Lower Supply – Rising prices – More equity – Banks lending more – More demand etc etc keep it spinning forever.

Interrupt that flywheel at any part then the flywheel will slow down. APRA decided last year to slow the debt down for investor loans and now we are seeing this in the property flywheel.

Now I understand the bull arguments that housing affordability is low, interest rates are low, limited supply, increasing demand due to immigration etc. But it seems to me we have created a system that appears to be very fragile and any slight changes to the system moves people into a distressed state. Fragile systems have a habit of breaking and when you least expect it.

I do not know the level of supply the 20,000 club members mentioned in the article have, maybe they are in the small minority and there is not much stock to be released on market if at all. But if there are a lot of people that have levering up their equity and constantly putting any revaluation back into more debt, it has the potential to turn any debt deleveraging systemic.

Never expecting to repay the principal and then relevering any revalued equity to buy more properties in perpetuity is crazy. If you want to run this scheme then take your property loans securitize them, get a ratings agency to rate them and sell them to some crazy German or Icelandic bank and whatever you do make sure your sales cycle is super quick as you do not want to warehouse them on your balance sheet cos you never know when Chuck Prince is going to stop dancing. Oh wait this was tried a few years back.

Chuck Prince has some advice for you Mr Young and all the members of your club:

I think some guys are a bit slow in realising that the music may have been turned off, as well as the liquidity for their leveraged play just like Chucky was when he made these comments in July 2007.

I’m sorry Mr Young and all you property “club” mates, but if I was running a bank and you complained that you could not pay off P&I then you are just the guy I want off my balance sheet. ‘Cos if you are struggling with rates here then look out if any part of this complex system changes and its not to your advantage.

As a final bit of humour, I posted this Simpsons snippet the other day and it describes that these guys genuinely believe they have unlocked the secret to wealth creation. It’s not a pyramid or ponzi its a trapezoid….

 

2 thoughts on “Oz Property – Keep dancing Chucky Prince style”

  1. Hi Ben,

    Regarding your comment

    “levering up their equity and constantly putting any revaluation back into more debt, it has the potential to turn any debt deleveraging systemic.”

    Without knowing the exact statistics, I suspect that many Australian (at least middle income) is fairly (to highly) levered in residential property (holding multiple investment properties). Any unfavorable development in employment, interest rate, existing tax incentive, regulatory intervention have the potential to prick the thin layer supporting the property price.

    I’m afraid when that happens. It may trigger a very unpleasant, deleveraging, systemic downward spiral to the property price, banking sector (including LMI) and subsequently Australian economy. Let’s see if labor would like to be the prick over the next couple of years.

    Note: not looking forward to that

  2. Thanks for your comments Andy. I try and steer away from making any predictions as I have no real idea what is going to happen. Forecasting is hard.
    However I try and make sure that if a systemic event does occur then I have no permanent risk of capital loss. Typically these means having no leverage.
    Time will tell.

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