Cooking a frog....

Been away for a bit but nothing has changed.

Looks like we have a decent chance of the stock market correcting finally. Suspect the key question to ask is what is your view on 2010 ? Maybe it is a buying opportunity if you believe 2010 is going to be fine. If you think otherwise, the current downturn may just be a prelude to another gut wrenching ride. It is important to have a firm view these days because valuation no longer affords much protection.

In the local real estate scene, nothing has changed either. We went to see 7 houses today. They were packed. Maybe everyone is trying to find their dream home before Christmas.

I have finally worked out what is so tricky about the local property market. If you look at enough houses within a short time, you start to frame the valuation of each house relative to a recent comparable sales. You will then lose track of the fact that valuation is an absolute concept. It is like cooking a frog really.

Good luck to all.....

Houston.....We have a problem.....

You have to be living under a rock not to see the property market heating up. Haha guess I have been very wrong so far. Two stories to recount.

First, the whole family went to see an auction today in Cremorne. Price guidance/expectation was $1.65M+. Open bid was $1.8. It was eventually sold for $1.98M. 5 active bidders slugged it out. The house is quite old and probably need some work and is located on a main road. However, if you build a second floor, you can probably see the CBD from the second floor. Land is big for the area (over 700 sqm). The house next door was for sale last year and only "got" a vendor bid of $1.8M.

Second, a friend went to an auction in Chatswood last week. A few months ago, a similar house on the street was sold for $1.2M. The house last week was in far better condition. Open bid was $1.2M. Second bid was $1.4M. Third bid was $1.6M. Needless to say, it was over quickly.

It would not surprise me if prices are now higher than the peak in some cases. Thinking back what went "wrong"....Suspect the key supporting factor behind the LNS property market has been the lack of supply. Other factors have also contributed to the "happy" market. The first home buyer grant has allowed lots of property owners to trade up. The rapid recovery for the local investment banks does not hurt. Low interest rate definitely improves affordability for most folks. The list goes on and on and on....

What is our plan ? Looks like it is time for Plan B. We have given up on the LNS property dream. Supply so far is not picking up there. We are now looking further north. Sad to report but it is not getting any easier. Same story...Crowds everywhere. The good news is supply is picking up in the area but prices are comparable (if not higher) than even LNS if the houses are close to station and on the East side.

My strategy is simple. We have a set budget. We are only prepared to pay that price. If we like a place, we would just offer what we think the house is worth (subject to that upper limit) and see if it sticks. So far, no luck. I figure this is a compromise of sort. If successful, I suspect while we would be over paying relative to other alternative investment opportunities out there, at least we protect ourself from future financial distress. If not successful, suspect my next blog title would be "Houston....We have a BIG problem.....".

Turning to the stock market, tricky times. Looks like consensus is the world is on the mend. Just look at the strength of the AUD. Stocks have rallied globally. Seemingly, a lot of folks are so far refusing to believe and have not adjusted their asset allocation accordingly. While it is hard to believe, the proverbial "money on the sideline" may still apply. My scenario and my time horizon are very short term now. Maybe there will be a short term correction and then if all stars are aligned stocks may melt up towards the end of the year. I really don't have a clue what 2010 will look like.

In the meantime, if you are a distressed buyer like us, keep your fingers crossed and pray for more houses to come on the market. We really don't want to have to shift our property aspiration to include the Central Coast area....

Radioactive zone

Due to a various things, could not find the time to blog in the past 2 weeks. Strangely, the world suddenly has acquired this healthy glow. Stock markets could not drop for even a day. And the Sydney property market is getting into full swing as Spring approaches.

Officially, I hate to say it but we are rolling over to a limited degree. We are looking to buy a property seriously now. The decision was sparked by a lunch with an ex-colleague. He told me the Sydney property market had all the reasons to tank but it held together. While the world is still not well at its core, the next downturn may take some time to brew. And Number 2 is growing every day......We do need to buy our house at some point.

We actually submitted bids on 2 properties in the past 1-2 months. Needless to say, we missed out on both properties. A bit sorry to miss out on the first one but the other buyers were just willing to pay more. The property ended up going for 15% more than our bid. So fair game. We threw in the towel to participate in the great property game but at least we did not throw caution to the wind.

The second property was a more interesting story. For those who have been looking at the LNS, it is somewhat odd that there is this part of Greenwich that seemingly is very cheap. A reasonable house in that part of Greenwich (4-5 bedrooms + decent land) can be bought in the low to mid 1 range. The catch is it is quite close to a broadcast tower along the Pacific Highway. We put in a bid and thought maybe the broadcast tower is not such a big deal. Luckily, a friend told me to search on the web to see what I could dig up. After I saw a study specific about that issue in that area, we decided to pull our bid. I am not a scientist but, with our two little kids, we just did not want to risk it. Just before we called the agent, the agent called us and told us that the vendor was not prepared to sell at our price so we had a relatively graceful exit.

Talking about the agent......I just have to vent. The agent for that Greenwich house was a total jacka@@. Arrogant to boot. He is an out of area agent. One of the big agencies. We all know the tune..."Thank you Mr %$#@er". Instead, I would say something else less thankful to Mr %$#@er if I ever see him again. By the way, he operates in the Northbridge area. When my Better Half told him that we were not prepared to raise our price. He asked was it because we just could not afford to in a condescending manner.... I know how hard we have to work to save what meagre sum we have. Admittedly, he saw our bomb of a car when we went and saw the property the first time. He was just plain RUDE. Seriously, what real economic function does a real estate agent serve ? For God's sake, the vendors even pay for their marketing campaigns. I guess this is how a capitalist society works. The "Haves" get to laugh at the "Have-Nots".

Guess my strategy going forward is to put in bids for properties that we like. I figure, with our budget, for a property that ticks all the boxes, we are not really over-paying by that much. We will see.

Place your bet

The US market was just about bullet proof on Friday. Microsoft came up short and the stock tanked. Amazon tanked 8%. Broadcom dropped 7%. The market ended up flattish. In the meantime, both the transport and the Dow index are now above their recent highs. The so called Dow Theory is now bullish....Time to turn bullish ? Maybe but be agile.....

The property market ? It is winter. Not a lot of new listings. Prices are holding up. What is there to tell ? The only good news is some houses (seemingly asking too much in my opinion) remain unsold.

Watching paint dry

What is there to say about the Sydney property market ? It is certainly good to have my Saturday back. Not a lot of choices. Prices remain high. We have gone from focusing on the LNS market. And now we are even widening our search to the Upper North Shore. Prices in Lindfield and Roseville are certainly not especially affordable either. The way things are going we will be looking at Newcastle next :) Just plain boring. I figure it will be more exciting watching the Masterchef grand final today. I love the show. It is a different kind of reality show where the hosts come across as genuinely trying to help/teach the contestants, instead of creating a snake pit. By the way, hate to say it but I suspect property prices may not come down in a hurry either. The other day I saw this article about how investment banks in Australia are really doing well this year. They have benefited from all the placements earlier in the year. 2009 is shaping up to be a very good year relative to 2007-2008. No wonder the more expensive houses are starting to move.

Turning to the stock market, same story....The US market has gone back from the edge of the abyss and is looking to challenge the recent high. The so called "head and shoulder" topping action has been averted. We will see how sustainable is it. Volume on the decline and the recent surge has been quite dismal. Suspect we are still in the middle of no where despite more confidence about the global economy pulling out of this mess relatively soon. Now there is this emerging idea that we are looking at a "square root" recovery. What will happen next year is NOW the BIG question ?

How does one cope in this environment ? One common mistake people make is they think they have to act all the time. Sometimes it makes a lot of sense to just stand on the sideline and observe. My philosophy with investing is one can make very good investments during crisis. It is almost guaranteed that something will go amiss over the next 4-6 years. The period in between is more about maintenance and protecting capital. Maybe now is such a time....

An interesting trade

I am just about bored by the property market in Sydney. Not a lot of stocks out there. And owners are still expecting good prices for their properties. Just so boring.....

One suspects the stock market is far more interesting right now. The big bet is will the world recover next year ? Basically, I suspect no one has a clue.

One interesting trade idea is to go long volatility in USA. The VIX index has come down from the high. Think it was 60-70 at its peak and has since declined to around 25-30. For a long time before the current mess, volatility was hovering around 20 for quite some time.

I suspect going long the VIX index is not such a silly idea. Or maybe think about ETF like VXX. If you tell me the world is the same as 5 years ago, I suspect you are not going to be TOO right in the future. The world is on the cusp of a lot of changes (inflation or deflation, the start of the secular demise of USA/USD, is the miracle of China/Australia a mirage etc etc...). I don't know anyone who will get all these changes right. But what I know is a lot of people are going to be wrong at some point on one of these big upcoming changes. A little protection is not such a bad idea.

Serendipity

I haven't blogged for a few weeks now. A few things happened. Who says life is not full of surprises. My old PC blew up and I have spent the past few weeks trying to buy a new PC. I bought a Dell and it was supposed to be delivered around 12 days ago. It did not arrive. I spent the past week trying to sort out the mess. It was one VERY frustrating process. Spent hours on the phone with Dell's delivery agent (Schenker). It was a truly awful experience to say the least. Finally, Dell got onto my case after I sent several emails to the customer service representative who sold me the PC. While I am feeling a bit better, it is a lesson in brand/marketing. A lot of good will/brand can be blown up by the little things. The lesson is, when there is a problem, it is far better to proactively manage the case. Even if it involves making a call and say we don't know where is the PC but we are looking into it. A little effort makes a huge difference.

I must say I am feeling quite fishy about the stock market these days. Be careful out there. If green shoots don't grow into something else, it is going to hurt. I find it amusing that everyone is now counting on China to crarry us through this mess. The little problem is, even if we assume China can run its own race, China only accounts for some 40-50% of certain commodity demand. I had lunch with some of my friends last week. One of them is a management consultant. One of them is a tax hotshot in a large firm. They told me that internally they are all planning for a slow 2H. Btw do you notice that everyone now expects the stock market to stay above its recent low ? We may have a bit of a dip and then resume the ascent. It feels a bit too neat for me. If we assume the market is always wrong, maybe there are two distinct outcomes that will totally surprise all folks. First, a raging bull market. Second, we tank below the recent low.

Can the property market do its own thing ? We made our FIRST ever offer 2 weeks ago. We came across this property totally unexpectedly. We went to lunch in this new restaurant. We haven't looked at this suburb before. It is a bit further from the City but manageable. Anyway, after spending years looking at the Lower North Shore area, everything else outside stacks up well (big land, big house etc etc...). When we heard the price guidance from the agent. We thought it seemed low so we put in an a bid. Subsequently, the agent found another interested party. It went to auction which we did not attend. A third party came in and won. We missed the final price a fair bit. So a "good" loss I guess. Still, it is quite interesting to me that only 3 parties were interested in that property. Everyone knows this is a tight market in terms of supply, what happens if we get more houses coming onto the market ? Despite all signs of life in the property market, I still suspect we are not out of the wood yet.

Cold Turkey

Really there is nothing going on..... It was a pleasant surprise that Australia escaped the popular definition of recession. Stocks markets globally are happy.

I guess now the big question is where do we go from here ? the truth is no one knows.

A more interesting question is where do the world economies go if the governments stop pumping money into the system now that they work out we are not looking into the abyss.

Will the Joe oridinary consumers modify their behaviour following their experience in the past year ?

It is never easy if an addict has to go cold turkey from the banned substance.....

Green Shoot = Green Tree ?

By now, you would have heard about all the "green shoots" sprouting everywhere. Ignore Australia for the time being, it is probably fair to say that the environment has "stabilised". The environment is still bad but at least we are not starring into a bottomless abyss. But then stock markets globally have rallied a great deal in anticipation already. The words from the brokers remain that plenty of funds have missed the bounce and are still catching up.  The easy trade is to ride the current momentum trade. But it has just been too easy. Personally, I am starting to lighten up. I am not too concerned if I am too early. The truth is I am playing from a position of strength. Not to mention, the stock market (US in particular) is acting particularly inconsistent. Last week, the retail stocks were acting weak after a good run. The US treasuries did not act particularly well. Think 30-year is around 4.4-4.5%. The VIX has drifted down to 30ish. I just don't see the point of taking on this massive macro bet that the world is mending and 2010 is set to be the recovery year. Maybe the market will have a bit of a dip before resuming the ascent....Or go straight up along with the Green Tree....I just don't know.

Meanwhile, the Sydney LNS property market is doing just fine. Same story. Stocks that have not been sold for awhile were sold. It does look like the property buyers are climbing on the Green Tree as well. Arghhhhhhhhhhhh....Like I said before, there are no distressed sellers out there. There are only distressed buyers. It never cease to amaze me how many rich folks are out there in Sydney. Still, it would be interesting to see what happens when more stocks come on the market.....Time will tell.

Square Rooted

Been having major problem with the PC this wkend.....So a brief post is all I can manage today.

Basically, the world is having this big debate - is the "recovery" for real ?

The answer is no one knows. BUT I find it interesting that, according to a recent survey, quite a few economists in USA are forecasting recovery in 2010. And a new popular buzz word is " square root". If anyone tells you they know what the answer is, don't believe anything he tells you. Afterall, these same economists did not forecast the current mess in 2007/2008.  Guess we will just have to wait and see.

In the meantime, you have to be living in a cave to not realise the Sydney property market has become a bit more chirpy. Vendors are now comfortable to push up their expectations that little bit. The bottom line is, if you end up paying the asking price without haggling, I suspect you won't save too much relative to the peak.

Quite amazing how Australia can manage to navigate this mess so well......

As to where I stand, I am having second thoughts but suspect the same square root analogy applies here. And that is if we are lucky....Guess I have been "square rooted" by the LNS property market again :)

The best thing since sliced bread....

The property market is getting so boring these days. We went and saw a few houses these past two weeks. The agents came across as more confident. Not sure if this is such good news for the "distressed" buyers out there. Unfortunately, I am one of them and am starting to sound like a broken record. The fact is there are plenty of people out there with enough money to keep the market afloat. Just this week, two of my colleagues have decided to take the plunge and upgrade. It does feel that the market is thawing.....Ouch.....

On the other hand, things are actually getting better elsewhere. The short selling ban on bank has finally been lifted. Another interesting bit of news is we may get to bet (via futures) on the Australian property market. This new "product" is expected to be available in Aug/Sept. Can't wait to read the specification of the contract. You can guess which side of the trade I will take....

Turning to the stock market, suspect we are arriving at an interesting juncture. Now we really need data to proof that the world is indeed getting better. One suspects merely stabilising is no longer enough. Green shoots may no longer be enough. We may need a solid oak tree in its stead if the market is to push on from here. Hold on tight. Suspect the easy money has been made for now. Or at least, we are getting close to the temporary peak for now....

Oh what joy !!!

Today, we went and looked at a few houses in Mosman. We went to this house which has been on the market for quite some time. Quite expensive and out of our price range somewhat. Anyway, there were no other parties, other than the agent. The agent did not even bother to take down our contact details. Haha he saw us when we were parking :)

Anyway, it does seem like the market is thawing. More people are looking. And they are prepared to bid on properties as well. In fact, I notice that several "dated" stocks had been sold in the past 2-3 weeks. It got me thinking...Is my thesis wrong ? Don't know yet because a lot does hinge on the economy.

The Domain blog has been quite entertaining lately. The latest blog features the typical shouting match between the bulls and the bears. One of the bulls even went as far as to suggest one of the bear posters could not afford a property otherwise.

Oh what joy !!! Oh what fun to be a contrarian. One suspects there are more bulls than bears out there. Truth be told, it is easy to join the bullish crowd. Just hit the bank for a 30-year mortgage. But to be contrarian after considering a lot of other factors, it is a different matter. In a perverse sense, I still feel that my "hypothesis" is right for the simple reason that it is not the consensus view. One of the changes which the bulls (people who are buying houses and paying roughly 2008 prices) may not have taken into considation is how suddenly the governments (Federal + States) are running up massive debts. The long term implications can't hardly be positive. Time will tell......

Boring....

After a short hiatus, this wkend we went looking again. Nothing much new to report. Just a few anecdotes:

a) We went to this auction in Waverton. The room was full of onlookers. Two registered bidders but the property was passed in without a bid.

b) The standard line from the agent is there are just no new stocks. Prices are holding firm because the vendors can afford to hold firm in light of tight supply.

c) We noticed that one or two properties that are currently on the market were only bought 2-3 years ago. Why are they "flipping" ?

Just boring really.....

The new paradigm

Something just clicked for me last week.

I have come to realise a new paradigm is at hand. It doesn't apply to the Sydney property market but it does apply to the stock market.

The new paradigm is forget about buying stocks for growth. The stocks that will make you money through time will be stocks that grow slowly but with high probability. In addition, those stocks need to be cash flow generative so they can buy back stocks or pay dividends.

Nothing especially new about this revelation except that the world is now a vastly different place. Do you notice that there was a palpable sense of deterioration in the Australian economy over the past two weeks ? I wonder what is our budget deficit this year ?

Make it counts

The past few weeks had been hard to believe. It was very hard to lose money in stocks recently. Plenty of stocks doubled from their lows. We like to say stocks like to anticipate. Does it mean the world will recover in 2010 ?

This is decision time. If you believe that 2010 will be just fine and smooth sailing, time to pile in on pull backs. If you don't believe in Santa coming to town in 2010, a tremendous opportunity awaits as well.  BUT timing is critical. A bear market rally tends to run longer and harder than anyone dreams ever possible. It sucks everyone in before the truth reveals itself. This one won't be any different. I am still going go for the May-Jun/Jul dip before a very strong snap back. And then maybe an implosion later in the year.

The Sydney property market is no different. To buy or not to buy. I have been thinking about this issue a long time recently. We have finally got enough of a deposit. And boy it tooks us nearly 10 years. And let's be frank, the journey has not been easy. My better-half, when she still had a job, worked till midnight regularly. We had to send our kids to childcare far earlier than we would have liked. The work environment was brutal. I really don't want to squander our deposit so easily.

I have been asking myself should we yield to the market reality now and just buy something ? I just did my usual rental yield comparison. Here is one example. A house (4/4/3)  is for sale in Mosman for $3.15M. Its next door neighbour (4/3/2) is for rent ($1400/week). Forget what everyone tells you about now is the time to buy, collect as much data points you can before you make the plunge.

Like all those war movies, this is the time to "make it counts".

Time to hop on ?

Wait.....The train is leaving without me.....I need to catch this train.......

My fuzzy logic is leading me to tie the stock market to the Sydney property market. By now, we have seen that stocks have bounced a lot from the low. If you are truly good or lucky, you would have at least doubled or tripled your money. Before we get too excited and put new money to work, it is worthwhile to step back and cool down a bit. As far as I can tell, most results are only suggesting that the environment is stabilizing. Most companies are not seeing any sharp snap back in orders. The stocks are running because analysts are typically using say EPS in 2010/2011 and then arrive at their price targets by using terminal PE of 12-15X.

Hello ? I can't even forecast my household budget of 2 adults and 2 kids 3 months out. Analysts are trying to forecast the macro + companies earnings' 2 years out. Throw in a banking system that was going to disappear a month ago, and you want to buy stocks based on their forecasts ?The only good news is, anecdotally, lots of funds have missed the current rally. Maybe it can go on longer than anyone thinks possible. Do be careful out there. Don't be too greedy on the way up.

Turning back to the Sydney property market....I notice that the market is thawing a bit. My better half was talking to an agent last week and he was telling her that the buyer/seller balance is now a bit more even than late last year. In the LNS area, a few houses in the high $1 - low $2M range were sold. These houses probably fetched $1-200K lower than "peak" prices one feels.

Let's see. The stock market is saying that 2010 should be better. Mortgage rates are low. I still have a job. Prices have come down a bit. Should I take the plunge now ? I guess this is a question a lot of folks ask themselves these days. From my perspective, there are two considerations:

a) There is no secret that there are limited number of new houses coming onto the market. As a matter of fact, we haven't seen a house this year that meets our needs.

b) I really don't think a 10-15% price fall is enough to compensate for the risks. For a start, we know that the Australian economy is seemingly lagging the rest of the world by 6 months or so. Furthermore, I struggle to see why house priecs would rocket up over the next 3-4 years. Imagine how much your dream home would cost today ? And assume house prices appreciate by 5-10% a year for the next 4-5 years, just take a step back and think about how many people in Australia can afford to pay you enough to get you to sell your dream home ? When I mentally run this exercise, I discover that there is no way I can afford my "appreciated" dream home ever. Even if I work till I am 130, the mortgage would remain very substantial. For the FHOG warriors out there, imagine if a 30 year old 2 bedroom flat costs $700000 in Sydney.

In my situation, I haven't found our dream home so I really can't be bothered. I also figure that over the next 5 years or so Sydney house prices probably won't go crazy. So why the rush ? If I were a rational person, I would gladly miss the Australian home ownership train for the time being.

Sub-prime in Oz

Here is an interesting idea. What if Australia is having its own version of sub-prime loans with the FHOG ?

Think about it.....Let's say you are looking at a $3-400K flat/apartment. You have struggled to save for the deposit for the past 1-3 years. Suddenly, our beloved leader Ruddy magically gives you $17-21K to spend. There is your 5% deposit. If you are truly nice to your friendly banker, you will tip in an extra 5% to round up your deposit to 10%. Your little problem is Ruddy is playing Santa to everyone else as well. You end up battling with other buyers with similar firepower.

Thus far, the situation in the magical Kingdom of Oz is a little bit better than USA. We don't have people forging documents. But we are getting lots of folks who have over represented their abilities to save. To make it worse, they are signing up to variable interest loans and are fully confident that their jobs are safe.

Hello ??? Did anyone notice in the past 2 weeks even the government has acknowledged that the Lucky Country may not be so lucky afterall ? Economists are forecasting 7% unemployment rate later in the year.

For the lucky winners in this property rat race in 2009.... The more you end up over paying relative to 2008, the higher the risk that you may end up with negative equity in your home if something else goes especially wrong in the world.

Tick....Tick......Tick........

Head Fake

Two things happened this week. First, I finally finished the Black Swan book. I feel inspired by it. What I got from the book is the idea that no one can forecast the future so surfing to the far edge of the risk curve is not such a crazy idea after all, providing you manage the overall risk well. Second, something happened at work. Let's just say it changed my perspective on life forever. 

Outside of my little universe, an important thing happened. The stock market globally rallied strongly. Yet, the world hasn't changed this much. Maybe the only big change is how Europe is contemplating "quantitative easing" as well. Otherwise, the best that we can say is the world is not getting any worse. US car sales dropped 40%, instead of 50% like the previous few months. One suspects we are also seeing inventories being replenished. Also of note is how the US market is feeling somewhat more optimistic about the various measures (say TALF) to save the banking system.

If you are perfectly smart, you may say so what ? The world is still in a lot of trouble. There is no way the global system can be fixed so quickly. Now is the time to call the market bluff and short the market. My humble advice is don't. The market's collective might is bigger than you and I. The market is voting that maybe there is a chance that the world may be on the right track. Remember, the gist of the Black Swan book is you and I don't have a clue on what is going to unfold in the next 12 months. Don't adopt the "holier than thou" attitude and be pigheaded. Be flexible and agile. For all we know, all these countries printing money may actually bring back inflation and growth.....We just don't know.

In my case, I have seen this before. My game plan is don't argue with the market. Enjoy the ride. It may go on far longer than anyone can anticipate. Remember as recent as 3 weeks ago, there were lots of shorts out there. Comes mid-Apr, we will see if the "inflection" trade can persist. Maybe another 2-3 weeks of happiness if the companies report as expected results and that things have "bottomed". But I will definitely cut back my exposure in late Apr - "Sell in May...Go Away". After a lull, if you are very aggressive, maybe you can resume the "2010 will recover" trade towards Q4. If 2010 turns out to be another down year, you are toast. If 2010 turns out to be OK, you will make lots of money. Take your pick and overlay your macro view there.

By the way, I don't offer financial advice. Think of the above as rambling of a worthless stock market participant who has plenty of scars on his back to remind him of all the lessons over the past 10+ years.

Turning to the Sydney property market, again I am quoting the fantastic RWM.com.au. Got the following statistic from the latest blog there:

MOSMAN HOUSES

• 2009 – 24 sales. Averaging 8 sales per month with a median sale price of $1,425,000
• 2008 – 264 sales. Averaging 22 sales per month with a median sale price of $2,200,000
• 2007 – 409 sales. Averaging 34 sales per month with a median sale price of $2,230,000
• 2006 – 396 sales. Averaging 33 sales per month with a median sale price of $1,900,000
• 2005 – 293 sales. Averaging 24 sales per month with a median sale price of $1,850,000
• 2004 – 310 sales. Averaging 26 sales per month with a median sale price of $1,637,500
• 2003 – 376 sales. Averaging 31 sales per month with a median sale price of $1,699,500
• 2002 – 392 sales. Averaging 33 sales per month with a median sale price of $1,690,000
• 2001 – 446 sales. Averaging 37 sales per month with a median sale price of $1,250,000
• 2000 - 349 sales. Averaging 29 sales per month with a median sale price of $1,150,000

Source: RP Data

Looks like property prices in Mosman have doubled since 2000. 2009 is turning out to be a very quiet year. I also notice that quite a few auctions fall through. The $2-3.5M range feel very quiet. An interesting question is what will drive prices down ? Maybe something is happening. Remember I once wrote about how property valuation is such an imprecise science. Here is an example. In Cremorne, a 4/5 bedroom house with proper harbour/city view was sold for $1.66M (vs. $1.8-1.9M initial asking price). When I saw the price, I thought it wasn't a bad deal for the buyer. The house is now available for rent at $1495/week. A house round the corner was up for auction last week. We saw that house as well. The vendor was asking for around $2M at the time. It wasn't sold and the vendor bid was $1.6M. I am waiting to see if the domino effect kicks in elsewhere.

I think I will stick to my 2010 scenario. Further, if I were to look at my own circumstances, I no longer feel secured about anything. My perspective on life has turned 10 shades more grey than 2 weeks before. I can imagine how a lot of folks will feel how their circumstances have changed for the worse as well. Really can't see any reason to hurry.

Latest stat

From www.rwm.com.au:

"In 2007 Mosman, recorded 409 house sales, last year (2008) it recorded 261 house sales and in 2009, Mosman is currently recording just under 7 house sales per month. So under the current formula in 2009, we could be looking at somewhere in the vicinity of 90 to 125 house sales – despite all time record low interest rates. In the space of two years Mosman house sales could be down by seventy five per cent."

I notice that quite a few auctions fall through. Some properties couldn't even attract a single bid. Take your pick. You can have volume or price but not both. Something has to give at some point.

Rambo in 2009

We are currently witnessing the reincarnation of Rambo in 2009. I am not talking about the muscle man Rambo but how several central banks are resorting to "quantitative easing". Put it simply, they are printing their respective currency, stopping short of throwing money off a helicopter...Hold this thought for the moment.

Turning back to the property market, I assume everyone has worked out where the market is by now...If you are a First Home Buyer, you must have noticed you are at war vs. your fell0w citizens. If you are everyone else, the market is very boring. There are just not many new or interesting listings. I relish having my Saturdays back. I just can't be bothered anymore. Most of the listings have been around for awhile and the vendors are not keen to meet the market either.

A few observations though.....Some houses still got sold. Those vendors probably cut their prices by $100-200K. Fortunately, if one works hard and happy to compromise a bit, there are bargains to be had. I noticed two good transactions in Cremorne in the past 2 weeks. A house (4/5 bedrooms + decent land + OK condition but not great BUT no car park) with an almost stunning harbour view was sold for $1.66M. Another house (4 bedrooms + pretty run down but decent land in a good street + next to an apartment block yet to be built) was sold for $1.22M. The original asking price was $1.6-1.7M late last year.

I usually don't follow the "dream" segment. The other day I wandered to this auction in the City where 3 houses were going to be auctioned. 2 houses in Palm Beach and a house in Mosman (expecting $2.8-3M). When I got there, I found out that the auction was cancelled. Guess the agents couldn't find enough interested parties.

What do the Rambo central banks have to do with the Sydney property market ? First, one suspects it is a big deal. The brains in these central banks would not resort to this "nuclear" option unless they have no choice. One can surmise that things are looking pretty grim in UK and US. Second, I was sitting on the sideline quite happily waiting to see if my thesis holds water. Things were brewing in my favour for awhile. Third, now I am not so sure......

Think about it....What is the major consequence if a government tries to debase its currency ? Inflation is a likely outcome. In an inflationary environment, one wants to have debts and real assets.

To wrap this up, my gut instinct is to hang on to my thesis. With the latest interventions, the world may stabilise but likely won't go back to the races in 2009. The prospect for further job losses is real in Australia. And the fact that the LNS market is hardly (10-15%) off its high makes me reluctant to throw in the towel now.

Rome is burning....

I have been in the finance industry long enough to remember that any bear market is never fun. I have survived the Asian crisis, LTCM, Russian default, the IT crater in 2001/2 etc etc. Basically, all the implosions since 1995/1996. However, I honestly can't recall things ever get this bad. Thus far, I remember Australia has always managed to side step other messes in the world. It would be a miracle if history repeats itself this time. Truth be told,  this is the first financial crisis that I get to observe up close and personal.

I suspect we are going to take the cake this time.  4 of my immediate family members lost their jobs in the past 2 months - my better half + my brother and his wife + my sister. One of my friends recently lost his job. My better half went to a high school gathering last night - 2 of her closest friends lost their jobs last month. I shiver to think what happens if I lose my job with 2 young kids and a wife......

By the way, listening to Coldplay today certainly doesn't help my mood. I don't think my family situation is that unique, although in terms of GFC-related job loss, we are hard to beat. What does this personal anecdote have to do with property in LNS ? 

Lest we have any illusions, don't hope. This is a complete reset of the financial system as we know it......Be patience.......This is a marathon and whoever can hold on longest wins.

There are no distressed sellers only distressed buyers

Today, we went to Mosman and initially wanted to look at 6-8 properties. Today ended up being a surprisingly interesting day.

Let's get the bad news out of the way. Two of the houses we went to were sold on Friday/Saturday and were not open. One of them recently cut its asking price by 10%. The other one looked like a decent property on the web and the asking price was not cheap but fair. Forget what people tell you, just work on the assumption that there are lots of people with firepower out there. We also went to another new opening. People were literally queueing to get inside. The property culture is alive and well. 

The good news is maybe there is a credit crunch brewing..We went to this auction but found out it was called off because, according to the agent, several interested parties could not line up financing before the auction. Take it with a grain of salt of course.

Also saw an article in the Mosman Daily talking about people from the Eastern Suburb looking around in LNS, driven by the rumour of distressed sellers in LNS. Personally, thought it was an example of selective sampling. If you are a journo and you obtain a story based on interviewing 2 or 3 folks, journalism is indeed an easy job. While I have no doubt the migration up north may be happening, one wonders if there are no distressed bankers in the Eastern Suburbs ? Another point is do people bother to think at all ? There may well be distressed sellers out there. However, let's think about when did corporations start reducing their workforce last year ?

In summary, nothing is ever easy. Be patience and do the hard yards......

Two more interesting examples

I don't have time to see too many properties that I am not interested in. I rely on the price ranking function of Realestate.com to work out what the agents/vendors are expecting. Just last week, came across another example. A duplex in Mosman that was ranked around the $1.5M range on the website was sold for $1.1M.

A house in Greenwich was asking $1.69M. It was sold for $1.58M. Think when it was first listed last year, the owner was expecting $1.75-1.8M.

On the other hand, to be fair, the market is not totally inactive. A few houses in the mid to high one range did get sold. Prices for those houses were probably $1-200K lower than what they would have fetched in 2008.

I guess the lesson is buying a house is like having a job. The harder you work the more likely you will end up lucky.

Is this really happening ?

Especially the last paragraph.....If this becomes wide spread, why would you accept 4-5% rental yield ?

>>>>>>>>>>>>>>>>>>>>>

From the SMH (21/2/09):

Clearance rates in the east and lower North Shore are down on the same time last year.

There have been 400 auctions so far this month, the lightest February volume since 2004.

February sales have averaged $563,000. The cheapest was a Willoughby studio mortgagee sale netting $142,000.

Last Saturday agents secured the sale of 66 per cent of their 164 listings. The dearest sale was that of a $1.83 million six-bedroom Strathfield house with a new swimming pool. It last sold for $1.77 million in 2003 and potential buyers were advised during its initial January marketing to expect above $1.5 million.

It is all happening.....

It is hard to imagine but the stock market is not getting any easier. Last night, the Dow index punched through the support and triggered a classic bear signal. Looks like the merciless bear is back in charge.

Talking about bear, wonder if there is a bear strolling through LNS these days. Yesterday, I noticed quite a few houses having lowered their asking price. A $2M house in Wollstonecraft cut the asking price by $50K. Two $3M+ house in Cremorne cut their asking price by $300K. However, cutting asking price is one thing but it does nothing if the asking price is too high to start off with.

A more useful indicator is a recent sales on H*lt Avenue in Mosman. A 4 bedroom house went for $1.525M. I remember several comparable houses were sold for $1.9 to $2.1M or so. Have not seen the latest one but I suppose it should be fairly comparable to the houses sold in 2008.

Not a bad fall but  it feels like it is an isolated transaction. Pressure is slowly building on other sellers as well. I have heard of a seller offering to pay for the building inspection. Things are cooking but I wish more houses would come on the market. A common complaint these days is there are not a lot of listings out there. One presumes most sellers still want to wait through this mess before they sell.

The tug of war continues.....

Shouting from the rooftop

Today we went and saw5 houses in the LNS area. It feels like we are still VERY early in the game.

For the recent listed ones, there were lots of people inspecting. Moreover, one or two already had offers. To make it worse, those offers were pretty close to the asking price.

The funny observation was we went to see this house with an asking price of $3M or so. Of course, we didn't know it was asking $3M. We thought maybe $2-2.5M. Ocassionally, we like to see these dream homes. It is like catching a glimpse of the lifestyle of the "Rich & Famous" or seeing a celebrity on the street. Anyway, we drive a pretty ordinary Toyota. While there were quite a few parties going through as well, as we walked out, we noticed that the cars parked on the street were nearly as beaten as ours. I think we, Australians, have become very good at concealing our wealth. In our case, it is certainly not difficult :)

Personally, I am intrigued that some people are so ready to act. I feel like shouting from the rooftop - Don't we know how bad things will get ? Winter is coming.... Hope not but there is a chance that it will.

What is going on ?

Somehow, I have an impression that things are really not disastrously bad out there. When I went to Westfield over the weekend, it felt a bit business as usual. Certainly not a ghost town. Yet, the government is literally dropping money from the helicopter. Not to mention, the soap opera with Turnbull. Does the government know something that we don't ? 

Having wiped out $96bn in debts and now we are on the way to accumulate another $100bn in debts, makes you wonder if we may one day become  the Banana Republic again ? But then we can always grow more bananas to earn the precious foreign currencies.

Anyway, something of note this week. I was browsing Real Estate.com. Looks like some vendors are lowering their asking prices by $100-200K.

Things are warming up.....

Two markers out there.....

Now that the 2009 season is underway, would be interesting to see whether the bull or the bear will prevail.

As far as I can tell, the market still feels OK for the apartments. When it comes to the houses, it feels a lot less velocity. On the other hand, don't think the vendors have adjusted their price expectation too much either.

Personally, I suspect my requirements are similar to most folks. An OK house in reasonable/good condition on a reasonable patch of green stuff in a reasonable location (close to school/transportation etc etc...). I am not after one of those architectural masterpiece with a "w@@ker" street address with the view of the blue stuff. I don't plan to have to work until 2098 to pay off that super size mortgage. 

There are two markers I am watching:

a) There are two houses on H**t avenue in Mosman. Both are slated to be auctioned in Feb. These two houses are interesting because a few houses on the same street were sold for $1.9 to low $2M last year. Per Realestate.com.au, the price range for these two houses are over $1.6 to $1.7M.

b) There are two "normal" large houses in Wollstonecraft (for sale) asking for $2M+. If buyers snap up these two houses at the indicated price range, the price gap between Mosman and surrouding suburbs would have become minimal. It would also suggest that there are still buyers out there who are quite aggressive.

Let the game begins !!!

What would you do if you were a buyer ?

Richardson and Wrench (Mosman) maintains a blog (www.rwm.com.au). In its latest blog, the blog provided some data about the Mosman property market.

Number of transactions nearly halved between 2007-2008. Both median ($2.4M) and average price ($3M to $2.9M) crept down a bit but nothing especially alarming. In the last 3 months of the year, 14 houses were sold in Oct, 12 in Nov and 9 in Dec.

The blog also estimates that there are 4900 houses in Mosman and, in strong strong markets, 10% of houses would turn over. The agent is sort of bullish by arguing that there will not be a lot of new listings this year. In addition, the agent further notes that RWM has not been asked bythe  banks to value a lot of distressed properties.

Looking at Real Estate.com, there are currently 171 houses on the market, mostly left over listings from 2008. Imagine, if you have the regular number of new listings in 1H 09, how many houses would be for sale in Mosman ?

Draw your own conclusion (and good luck)....

An expat spotted in Balmoral

Hurray !!!!!! An expat was spotted in Balmoral.

The latest issue of the Mosman Daily (22nd Jan) wrote about an auction for a duplex within walking distance to the Balmoral Beach. Two things caught my attention. An expat bidded on the property. It was sold for $3.51M.

Apparently, 8 parties asked for the contract during the marketing campaign. 4 bidders rocked up and only 2 were bidding. It feels like the market is slowly thinning out.

Funny enough, the article did not talk about if the expat won the auction. I wonder if the expat argument is a concoction from the marketing saavy agents. To be perfectly frank, if an expat has made it, I won't be competing with them for a $3M+ property within the next 100 years. However, if an expat is coming home and is looking for a $1-2M house, he probably hasn't made it yet. Considering the current environment, would any expats really want to come home ? Just look at the latest AFR !!! There are not a lot of jobs out there at the moment.

Another bit of information that caught my interest was the property was last sold for $1.2M in 1991. The auction yielded the vendor 6.5% p.a. return. Considering it is tax free, not too shabby. However, if we ignore the special tax treatment, the return is only OK but not exceptional. Now imagine you had $1.2M in 1991 and you put it to work with a good fund manager, assuming 14% p.a. return, that sum would be worth $11M today. Even if you take into account of the taxes you have to pay, where would you rather put your money ? Admittedly, both the world markets and the Sydney property market have had their day in the sun. Still, where would you rather put your money ? A market that has already tanked and is higly liquid. Or a market that hasn't quite tanked and is very illiquid and there are a lot of fees to be paid on the way out ?

Nevertheless, I suppose most of us would not mind to be the winner of that auction. Having $3.5M to spare and can spend it however you want without regard to whether you need to make a return on that sum or not.

Looks like it will take until 2010...

Today I was in the city and I had nothing to do. So I decided to do a little survey. I wanted to find out how much I can borrow ?

A few stories here:

a) From what I understand, Westpac has a home finance manager in every branch. I went to 4 branches and their home finance specialists were all booked for the day and their schedules were packed. 

b) While I was talking to the banktellers to see if I could make an appointment, two of them told me that the housing market is going up (low interest rate and prices have fallen).

c) One of the chatty tellers told me that his bank (ANZ) has been tightening the amount it is willing to lend. In my case, ANZ would only lend me a sum based on my base salary. 

Just like the stock market, it is often people with different views that make the market. Put it another way, if enough people believe that pigs can fly, pigs can really fly for the duration of the "collective illusion". I can't help but wonder if this will end up being a protracted mess now. For a start, banks are still lending and folks are looking to borrow. 

The only good news is my peers in the finance industry can now borrow only what their base income afford them.

If one wants to time the market perfectly, suspect the catalyst is if banks start demanding bigger deposits.

A new tactic by the agents ?

I have been watching these two properties closely.

One of them went to auction late last year and was not sold. We spoke to the agent before the auction so we roughly knew what price the vendor was expecting. After the failed auction, the property is for sale but the indicative price is 20% higher.

Another one is a terrace which has been sitting on the market for over a year now. Late last year, the vendor cut the asking price by around 20% but still no taker. Yesterday, I noticed that the vendor incresaed the asking price by 10%.

I wonder if these are indications that the vendors are suddenly seeing more potential buyers ? Or maybe they are pushing the asking prices up so they can do a "bargain sale" of 10-15% off and still come out ahead ?

Guess the morale of the story is, as a potential buyer, one really needs to find his/her own data. I feel a bit like Spooky Mulder in the X-Files - Trust no one....Haha.....

A few anecdotes

This market is baffling to say the least. Got a few anecdotes here:

a) A house in the LNS area was only bought in late 07. Now it is back on the market and the vendor is asking for around 10% more than what s/he paid for the house. Makes you wonder why do people flip their houses ?

b) Saw 3 houses that were sold late last year and they are all available for rent today. Either the expats bought them or their owners deem it sensible to negative gear houses worth $2M or so.

c) There is this apartment block for sale. One of the units is currently available for rent. Working backward, that unit is yielding only around 4%. It reminds me of how the property market is different from anything else we know. Typically, when you buy in bulk, you get a discount. In the Sydney property market, you pay a premium for buying in bulk.

Whichever way you look at it, prices are still holding up. The vendors are not budging.

Here is an objective look at the current mess

Just like everyone else, I am totally confused about the current financial mess in the world.

The link below may help to shed some light on what is going on (or what is to come):

http://www.platinum.com.au/images/ptqtr_1208.pdf

It is the link to the Dec 08 quarterly report of Platinum Asset Management, an international equities fund.

For the more adventurous souls, check out the blog below:

http://brontecapital.blogspot.com/

It is a collection of thoughts and not in any particular order but some topics he raised are quite interesting and relevant to the current environment.

Do you deserve to make money ?

First, thank you for reading this blog. Today, okmijn42 posted the first ever comment. At the very least, now I know I am not a madman muttering to himself.

I often wonder if we are about to witness the end of the age of entitlements. Investment bankers believe they are entitled to earn millions before they turn 30. Hedge fund managers believe they are entited to earn "2/20". The Gen Ys believe they are the complete package right from day 1.

To be perfectly fair, a lot of people, in my opinion, are fully justified in what they have achieved. Macquarie Bank/Nicholas Moore deserves to be so successful because they created the entire infrastructure fund concept. Regardless of what we think, its Sydney Airport deal was ingenious. On the other hand, the likes of Babcock and Allco do not "deserve" to be as successful because they simply copy the concept. The flip side is a lot of investment bankers do not deserve to be so highly paid because they simply copy the one "play book" again and again. Put it very simply, one suspect a lot of bankers are trained to be very good with Powerpoint and Excel spreadsheets ONLY. In hindsight, it makes you wonder why did Macquarie choose to go after Qantas and London Stock Exchange ?

In the funds management industry, apparently 90% of funds lag their benchmarks. Why should a fund manager deserve to be paid his bonus (let's say he out-performs his benchmark by 5% but the benchmark is down 50%  i.e. a lot of unit holders still got wiped out) ?

In my time, I have read a lot of investment books and I have the privilege of observing closely a few good/great investors in full flight. I have discovered the key to the stock market kingdom !!! Shhhhhhhhhhhh.... To be successful in the stock market, it comes down to psychology and luck. The stock market is a very efficient discounting machine. The big gains are typically made when the environment is utterly dismal. This explains why psychology is a critical ingredient. The next part is luck. After all these years, if I have to choose between being good or being lucky, I would prefer to be lucky because being good doesn't guarantee the stocks will work. The key is how do you make sure you are consistently lucky ? It comes down to hardwork and being half intelligent and sensible. These are the "ingredients" you need to be at the right place at the right time more often than not.

What does this post have to do with the Sydney property market ? I often ask myself do I deserve to own a decent place in LNS ? I have been asking myself this question a lot lately because prices haven't really changed and the quest just seems as remote as ever. A few ideas here:

a) I suspect I have a more comprehensive framework than a lot of folks out there. My idea that property prices may fall is different from consensus. I am hopeful that my bear arguments are more logical (but may well not be right) than the simple bull arguments (supply and demand + property prices have always gone up).

b) I am prepared to buy if and when prices collapse. In my personal experience, my best stocks have been the ones that everyone hates. I suspect the day I buy the house people will be telling me you are truly mad.....

c) My better half was telling me that we have seen over 100-150 houses over the past 2-3 years. She has even compiled this monster spreadsheet of all the property transactions in the LNS since 2006. I suspect now we just have to make sure we work hard in order to be lucky. It is quite likely we will see another 100 houses and turn up at a lot of auctions. And then one day, we will find a place that we like and the vendor will struggle to find other interested parties. Then things will get interesting.

Nevertheless, there is a very good chance that my framework may end up to be flawed. And then the LNS property market will keep on going up and up - just look at Wollstonecraft. Afterall, the age of entitlements is coming to an end and no one, including yours truly, deserves any easy pickings. See the similarity with the stock market here ? Being good will only get you so far. One does need a lot of luck as well :)

Time will tell.

The emu effect

In case anyone thinks it is wishful thinking on my part, the Australian stock market is half right to portend that we are facing one big mess.

In my job, I follow the results of a lot of international companies. Trust me it is very ugly out there. In fact, I have not seen anything as bad in my time in the financial market and I have seen a number of bear markets. Late last year, it felt as if the world just stopped. Take the semiconductor industry for example, a lot of companies saw 30% qoq sales decline in Q4 08. The US car makers saw 40-50% sales decline in Q4 08. Even businesses in China are starting to feel the impact. Lots of stories about factories shutting down in Southern China, the export/manufacturing centre. Retailers in China are seeing weaker demand as well. Property prices in HK have declined 20-30% vs. a year ago.

Do you think if Australia can stay above the fray ? In case, we think we are "better" than the rest of the world. Check out the link below:

http://www.pmcapital.com.au/document_download.asp?documentid=B59D89F918B43A1E

PM Capital is an international equities fund. I am especially interested in slide 15. When I first saw it, I was astounded. The bottom line is Australia has had the benefit of more than the commodity tailwind. We have been borrowing and borrowing to fund our little indulgences in life as well.

Let's hope we don't have to pay the piper anytime soon.

Are you a hedge fund ?

I was reading an article earlier today talking about how the local banks are tightening their lending standards by "lifting" their loan to value requirements to say 90%.

Let's see....The major investment banks got themselves into trouble because they have an asset to capital ratio of as much as 30. It is not too shabby for an average Australian home owner who borrows 90% of the value of the asset. Put it another way, the leverage ratio is 9 to 1. Throw in the tax free capital gain concession, life is pretty darn good.

If the asset price goes up by 10% p.a., ROE is close to 100%. However, leverage cuts both ways. If the asset price drops by 10%, the leverage is enough to wipe out the equity. If it drops 15%, negative equity kicks in.

I always find it amazing reading those property magazines profiling some guys/gals somewhere having 7 properties and living happily ever after. Those articles never discuss how much debts they still owe. I often wonder if they have indeed sold some of their properties and are happily retired.

All hail the Australian government. A job well done. The First Home Buyer Grant just keeps the gravy train rolling. It ensures there are always exits for property speculators/investors. It certainly protects the economy from the negative equity spiral.

But does it ? If you are a first home buyer and you have struggled mightily to save a decent house deposit and the grant gets you over the line, how confident are you in your ability to save the necessary repayment for the next 30 years in order to service the mortgage ? 

In short, the clever country is producing a lot of small hedge funds inadvertently. To make it more interesting, mismatch of duration of assets and liabilities can be quite pronounced at these "funds". If the perpetual price appreciation myth is no more, the whole pyramid may well come tumbling down.

So far NO good

I know it is still early in the year but I am secretly relieved that my Saturdays will remain pretty free for the next 6 months. So far, there really have not been a lot of new listings, let alone interesting new listings. Moreover, asking prices are not budging either. Fortunately, there is a silver lining to everything. It looks like the mythical expats have not come back home and hoovered up all the older stocks from 2008. 

I came back to work last week. Nowadays, AFR can't stop talking about how grim the job market is out there. Today (Wednesday), AFR even reported that some graduates have had their job offers rescinded.

A storm is seemingly brewing on the horizon. Rising stocks in some suburbs. Rising unemployment. I wonder who will blink first ? I can promise you it won't be me. Doesn't matter how low interest rate goes, it won't change my budget. Ask any buddies of yours who work in the finance industry this question - are they expecting any pay rise for the next 2-3 years ? I am not. 

Investment psychology

Today at work, I was reminded that making money in the market is just very hard work. If you care about your clients, fund management is one of the most stressful jobs out there - 24X7 non-stop pressure. To be successful in running money, a lot comes down to psychology as well. Outperformance comes from courage in the face of uncertainties. One needs to be a contrarian.

Yet, it is the exact opposite when it comes to the Sydney property market. It is one of the most popular "trades" or "investments" out there. Today, I saw this blog on Domain. The MD of a major real estate agent argues that, because stock markets have collapsed everywhere, the property market should perform that little bit better as funds get diverted into properties in Australia.

How strange indeed !!! In fact, the correct response (when it comes to making money) is to allocate more funds into the asset class that has fallen. It is the harder decision (in terms of the usual feel good factors) but it is the right decision. How much upside is there from an asset class that hasn't fallen much at all (vs. stocks that have fallen by over 50% in some cases) ?

By the way, don't forget that properties are illiquid assets. Normally, illiquidity translates into discount on the asset. In contrast, Sydney properties are priced at significant premium.

I have another dilemma.......Instead of buying a property and earn 4-5% yield, in some extreme cases, I can buy small stocks trading at 1-4X PE (growing and balance sheet is bullet proof i.e. market cap = cash on hand). As long as these companies are not fraudulent, I figure I stand to make more money buying these stocks long term vs. buying a house in Sydney.

The Sydney property market doesn't feel rational at all.

Black Swan

I have been working in the finance industry for over 10 years now. Through the period, I have seen and experienced several vicious bear markets. I have seen stocks falling by over 99%. Yours truly did have a few of these quality stocks as well. I have also seen property prices falling by over 60-70% in other countries as well. This leads me to the next question. Why do we think the Sydney housing market will come through the current financial mess unscathed ?

I often wonder if this is a case of a "Black Swan" waiting to happen ? 12-18 months ago, not many people could have predicted the sub-prime mess in USA would blow out into a global financial crisis. In the context of this crisis, why is it so difficult to believe that the Sydney property prices can easily fall 30-40% ?

A lot of commentators point to falling interest rate as a potential safety valve. You can ask people in Japan what has been happening to property prices in Tokyo since the bubble years. How about supply and demand ? An anecdotal observation is consumers have more babies during boom times. Migration (international or domestic) is driven by where jobs are. My point is property is a confidence game. 

The sentiment in Sydney at the moment smells like USA 12-18 months ago. At the time, a lotof  people thought the problems would be contained. They were optimistic for no other reason than they were optimistic. Does this ring a bell ? I can hear a Black Swan silently flying into Sydney....

There is nothing logical when it comes to house prices !!

What is the key difference between the Sydney property market and the stock market ? If anything, the Sydney property market is inherently more restrictive. The transaction costs are much higher. The holding period is a lot longer. The opportunity to make a monumental mistake is arguably higher. The only upside to owning a property is there is no capital gain tax applicable. 

BUT I suspect the key problem with the property market is how does a seller set the price ?

Even though, we are talking about a high value transaction here, the whole price setting process seems like a magical black box to me. This is how it works. The real estate agent looks up the database of comparable sales in the area. He considers factors like land size, condition of the house, the need of the seller, how many rooms etc etc...... This is a perfectly subjective process. The price is to a large extent set by the price a previous buyer was willing to pay for a similar property. 

Here is a real life example. Take Wollstonecraft for example,  it is becoming quite a frustrating suburb for me personally. What is noticeable nowadays is there are plenty of houses over $2M (even over $3M) in the suburb.  It all started when a house (4/5 bedrooms and big land) on Cable Street got sold for $2.8M. I was at the auction that day and what stood out was the agent played the 2 bidders against each other very well. I would go as far as to call the auction a "war" between the 2 bidders. From that point onwards, I notice that prices for the bigger houses easily jump over $2M. Take one current listing for example, the asking price is now $2.35M after a failed auction. Before the auction, the agent was suggesting $1.9-2M. What is also discouraging is the house next door was sold for $1.65M around 2 years ago. Close to 50% price appreciation in less than 2 years is quite impressive I must say.

Another example is Mosman. Why is it that prices go through the roof whenever it is close to the beach or has some sort of a view ? I have no problem with that, after all it is supply and demand and people do like the life style of living close to a beach. What I don't understand is why is a view overlooking Middle Harbour also push prices through the roof ? There is only 1 Sydney Opera House and I Harbour Bridge in the world but plenty of ocean view eveywhere.

My point is valuing property is hardly a precise science. There are too many emotional factors involved. Conversely, based on what we know, there are hardly any arguments to suggest that property prices are currently under valued.

Is this sensible ? Risk management in buying a property ?

I saw this blog from a buyers agent (published in Nov 08):

 

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

 

I am working with some clients at the moment that were initially looking to sell their current home and upgrade to a larger home to match their growing family.  They didn't have not had any luck selling their home (at the price they felt it was worth) so were feeling dismayed about not being able to move in to a larger home. 

With the drop in interest rates and taking in to account what they could rent their current home for in the current market, it turned out they are able to buy the larger new home and still hold the current home.  They are now really excited at the prospect of bing able to buy a great home that they couldn't have afforded before due to its price coming down and holding their current property to sell in a few years time when the market picks up.

They did their sums and are turning the current financial doom and gloom in to an opportunity.

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The blog is especially interesting because it brings into focus a key bull argument for the property market i.e. falling interest rate. It also brings into focus that the property market may be stalling a bit for some sellers. The blog got me thinking....Would I follow this strategy ?

The answer is NO personally but a lot depends on your risk tolerance. First, let's see why it is a good idea. The ONE reason why you would want to follow the strategy is if you strongly believe in the property market i.e. it will go up and up and up. In that case, the rent pays for your holding cost and, if you are truly astute (your property is positive yielding), your tenant will help you to pay down your mortgage as well. In short, you are strongly increasing your leverage.

However, leverage cuts both ways (up or down). It brings me to the key idea of this post. I remember in the years past when I was snoring in the lecture hall in the back row, a finance professor said again and again one of the core tenants of risk management is matching the duration of assets and liabilities. Incidentally, I suspect this is also the reason why some of the high profile investment banks got unstuck recently. 

Applying the concept to the Sydney property market, I would argue that some folks have probably taken on a lot of risks without aware of it. In the simplest term, a bank will foreclose a property if interest payment is not being made. In most cases, the interest payments are funded by the wages of the household. We also know that most people do change jobs every few years. Thus, we can probably assert that there is cash flow uncertainty (bonus may change/disappear, two income household becoming single income etc etc...) for every household. In contrast, a 30-year mortgage is a very long term liability with minimal flexibility. This is a case of pretty bad asset/liability mismatch.

So far, this mismatch has caused minimal problems for the society and households (very vibrant economy and ever increasing house prices). Still, do bear in mind that good times do not last forever. 

Now imagine if you are the home owner advised by the buyers agent. Let's say you have a comfortable 3 bedroom house worth $1.2M. And you are looking to upgrade to a $2M 4 bedroom house in Mosman. Let's say you have paid off a reasonable chunk of your mortgage and you only owe $600000 in your own home and have another $400000 saved in the bank/shares. If you could sell your home, you would only need to borrow another $400000. You can still be quite comfortable because you would have 50% capital in your new $2M mortgage. Let's say you follow the strategy of the buyers agent, you still owe $600000 in your original house and then you take on another $2M in mortgage (or $1.6M assuming you have saved another $400000 somewhere). Suddenly, you find yourself with total debts of $2.2M. Imagine one day you find out you are having another kid or maybe your tenant has lost his/her job ?

Food for thought.

 

 

Is it conceivable that the Sydney property market may fall 30% ?

Looking back at 2008, the one important lesson is never say never. I remember watching this film (Dumb and Dumber). There was this quote that got stuck in my mind. Someone told Jim Carey something along the line that you have a one in a million chance to win. Jim Carey responded enthusiastically: " Yes I still have a chance".

The same may apply to the Sydney property market. See the article below:

http://www.theaustralian.news.com.au/story/0,,24747381-25658,00.html?from=public_rss

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Below is an excerpt from the Australian article:

THE home of a Sydney property developer in one of the country's most prized streets has sold at mortgagee auction for $4.1 million.

This is a 40 per cent discount on the original asking price of about $7 million

Avi Hershco's three-apartment property in exclusive Bellevue Hill was sold to an eastern suburbs buyer on Tuesday night, in a further sign of problems besetting Australia's top surburbs.

He had handed over the property to the bank, along with his development of six luxury residential units in Beresford Road, Rose Bay.

Mr Hershco said he had planned to rip down the three apartments on the Kambala Road site, where he lives, to build a home. But those hopes were dashed when Suncorp Metway called in loans on his properties.

"I am not bankrupt, but the bank wants the money and they are also under financial stress," Mr Hershco said.

"Suncorp Metway pulled the plug a month ago."

In March, Mr Hershco said, he had an offer of about $7million for the Kambala Road block, but it collapsed at the last minute.

He bought the Kambala Road site for $4.3million in 2005. The site has three multi-storey apartments, one of which he lives in, as well as some land and a tennis court. It went to mortgagee auction in Double Bay on Tuesday.

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Below is the link to the property:

http://www.realestate.com.au/realestate/nsw/eastern+suburbs/105352179

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Now imagine how much your dream house would cost in 2008 if it goes back to the 2005 price level ?

What is wrong with this picture ?

If one visits Realestate.com.au today (2/1/09), it is interesting to observe that there are 152 properties asking for more than $2M each. I must admit, even though I am in the finance industry, a $2M house is well over my budget.

In my personal experience, $2M is seen as "pocket change" these days. The Mosman real estate agents remind me of this one famous quote from the super model Naomi Campbell.

I am sure there are many more successful and intelligent people out there than yours truly. But sometimes I wonder how much leverage would someone take on in order to enter the pearly heavenly gate of Mosman ?

A disclosure here....I am working on anecdotes here. I was told 2 stories about the property market in the Eastern Suburbs 2 months ago. Bankers (about my age...early to mid 30s) put down a deposit of $500000 to buy houses worth $3-4M. A couple (both law firm partners) put down a deposit of $500000 to buy a house worth $5M.

Imagine if you are the banker here. Your mortgage rate is say 6% and you have borrowed $2.5M. Your base salary is $300000. Your interest payment alone should be close to $150000 a year. We all know what is the top marginal tax rate is and we can work out that there is not a lot of the base salary left after paying the interest, let's alone repaying the capital. Thus, to afford a comfortable lifestyle, you, the banker, needs to count on healthy yearly bonuses in years to come.

To make it more interesting, let's assume you, the banker, have 2-3 kids. Or you wouldn't need a 4/5 bedroom house. It is no secret that it costs more than $20000 p.a. to send a kid to a reputable private school these days. Hmmm I hope you, the banker, are married to another hard charging banker/lawyer/business executive.

Now if we turn to the second example, we know that a junior law firm partner probably makes $4-500000 a year. A more senior partner easily makes over $1M a year. Needless to say, a household income of $2M can easily work down a $4.5M mortgage. But it gets more interesting if the household income is only $1M. Interest payment alone on a $4.5M mortgage adds up to $270000. Still a fairly comfortable situation but the quesiton is how long would it take to pay off the mortgage entirely ?

My point is margin for error is low in both scenarios. If I have to take out a 30-year mortgage, by definition, I will be working until I am 65. Doesn't strike me as especially fun. But I must be old fashion. Apparently, 30-year mortgage is the norm these days.....

Why lower North Shore property prices may drop 30% ?

A lot of people will say I am crazy..... I have not really pulled the number out of thin air. Just to illustrate my point, a 30% general price decline is not really that outrageous. 

Remember in the first blog, I used 4% gross rental yield as the current yardstick ? I arrived at the 4% range by going to www.realestate.com.au and look up the rental section. At the moment, there are currently a few houses which were for sale as recent as last month. Take the house on Congewoi road in Mosman for example, it is currently asking for $2000/week (for rent). We are looking at gross rental income of $104000 p.a. for the property owner. The original asking price was $2.75M and more recently, the asking price was lowered to $2.5M. We can work out that the gross rental yield is around 4.16%. While we do not know if the property will actually be leased at the asking rate, the information is useful because it does reflect the thinking of the real estate agents concerned.

How do I arrive at the 30% price decline target ? Let's assume, a property is worth $100 and it currently yields gross rental income of $4. What if the property owner suddenly demands 5% or 6% or 7% in rental return ? The property would be worth:

5%        $80

6%        $67

7%        $57

Mortgage rate at present is around 6-7% from the major banks.

We can see that the cost of fund is currently higher than the return available. If one were a rational person, owning a home at this point in time should be seen as a consumption item, not an investment.

To be absolutely fair, the rental yield argument hasn't worked for quite some time. It is because property is widely perceived to be an appreciating asset. Using the $100 property example above, we can illustrate the leverage if rental yield drops to say 2%.

3%     $133

2%     $200

If one wants to be bullish, one can certainly argue that Reserve Bank is poised to push interest rate to a very low level. However, I would like to point out that no one can properly forecast interest rate. If one were to take on a very long term obligation (say 20-30 years), even being able to guess the interest rate movement over the next 3-18 months is not going to be especially helpful.

In summary, despite my concern about the un-economical nature of home ownership, I suppose I would be happy to pick up a property after a 20-25% price correction (or roughly 5% rental yield). I am happy to do so because it is a personal consumption/lifestyle choice.