Saturday, February 5, 2011

Desperate times calls for desperate measures!

"Desperate times calls for desperate measures" - was the sales pitch for a property which just sold last weekend at Mountain Creek on the Sunshine Coast.

Desperate times calls for desperate measures!
No if's or but's, owners require an immediate sale and has instructed us to submit all offers! One thing is certain - the sale of 26 Glenfields Boulevard' will represent EXCELLENT VALUE in today's market.
Lets examine just how desperate it was for these property owners and the claim that property prices double every 7 -10 years which is the mantra for property spruikers all around this wonderful country of ours.

Its a beautiful property, here is a link and a little photo on the property.
This property last sold in July 2005 for $425,000 and the sales history clearly indicates what property spruikers are saying - 'that property doubles every 7 -10 years'. Lets have a look:

So between 1995 and 2005 the property has gone from a vacant block of land sold at $72,000 to a block of land with a beautiful home sold for $425,000. Now judging the size of the home with the extras such as a pool I think it would be fair to estimate that there were around $250,000 of improvement to the land. A total acquisition cost of $322,000 and assuming a Real estate Agent sold the property we can add an extra say $13,000 to that amount for commission and therefore over 10 year period the capital gain made would have been roughly $90,000.

So what was the return. Well if we divide the capital gain by the acquisition cost and times 100 we get the answer as a percentage. This figure should be close to 100% (which is a doubling) to line up with the spruikers double every 7 - 10 years. Therefore the return over 10 years was Return = $90,000 / $335,000 = 0.2686 * 100 = 26.86%.

27% is along way short of 100% and according to the spruikers would have been an awesome deal. Why? Well you have just purchased a house at the end of a 100% cycle for an increase of only 27%. The new owners stand to make a motza over the coming years. Right...???

Lets see.
The property has just sold some 5.5 years later in Feb 2011 for $480,000. A gain which after you take out real estate agents commission, lets again say $13,000 and stamp duty of say $12,000 the total capital gain equals a pathetic $30,000.

What was really amazing was how hard it was for the owners to sell! Lets look at the listing history:

So in March 2010 they started with a auction - Result - FAIL
Then they list for $598,000 in newspapers and magazines - Result - FAIL
Then online for 'Incredible Value $549,000' - Result - FAIL
Finally they are able to sell at auction for $480,000 (reported in My Property Review)

11 months and a total end discount of 20% and SOLD!

So with this much effort to sell the property the $30,000 capital gain might have been a little less after auction and marketing fees, but we'll just assume that these things were free. (I'm a nice guy)

And the return as a percentage. Return = 30,000 / 425,000 = 0.0705 * 100 = 7.05% for 5.5 years. This equals 1.28% pa!
Unfortunately this property didn't even keep up with inflation let alone double in price and I was being very nice. I didn't take into account rates, insurance, interest on a home loan, lost interest on the deposit, inflation or the cost of lost opportunity.

It's no wonder these owners were desperate. At no point in the history of this property has it lived up to the hype of the property spruikers. Not even on the Sunshine Coast.

All in all this property is a very nice home in a very nice areas, but as a place to park your cash it is a dud.

Monday, January 31, 2011

Spruikers change tune

The tide is starting to turn on property spruikers in Brisvegas. The spruikers are always the last to one to admit that a negative return could be at all possible - and it's always when it's to late. Today we see in the brisbanetimes that:
Brisbane property analysts have said prices are expected to fall a further 10 per cent in the next 12 months, in the wake of the flood, before a resurgence in the first quarter of 2012.
What is interesting is that they first try and lay the blame on the floods and then just two paragraphs later we get this:
However RP Data research analyst Tim Lawless said interest rates would be the primary determining factor of Brisbane's housing market in the year ahead.
So in other word - the flood only helped bring the price falls on, but the real cause for the fall is interest rates. Funny how there is no mention of overvalued property or excessive debt being the cause.

The problem with all spruikers is that they always exaggerate the facts to best suit them. For example Riskmark said:
national dwelling price-to-income ratio has already fallen from 4.7 to 4.4 times
However the independent study conducted by Demographia (7th Annual International Report) shows that our national price-to-income ratio is actually 7.1 times. (Brisbane is 6.6 times) So Riskmark is spruiking to the tune of -38%.

If we carry this spruiking ratio of being under the real figure then we get a closer look at what the real fall in house prices could be -16%. Not at all technical I know, but the purpose is to show that Property Spruikers,... well they spruik! The 10% fall that they are admitting to is more then likely going to much larger then what they are willing to let on. 10% is the extremely optimistic view.

Time's up for Brisbane Property. No one will want to buy now if they know that their property is going to be worth 10% less next year, and what bank will give a loan with a 95% Loan-to-Value Ratio (LVR) when it will be 105% LVR next year? And when a bank reduces it's LVR from even 95% down to 90% it halves the available money to purchase a property with the same deposit.

I'll do another post on how this works over the next few days. All in all it's very bad news for Brisbane property.

Commercial Property struggling all over SE QLD

This morning I got a comment on my last post about increasing vacant commercial real estate in Buderim on the Sunshine Coast. It seems that the increasing trend of vacant commercial property is happening all over South East Queensland and it's beginning to hit the banks and wider economy.

The Sydney Morning Herald's article on how the floods and debt levels are impacting the banks had this to say:
The warning by Standard & Poor's on Friday that it could downgrade the credit ratings of banks with exposure to the Queensland floods shows that the floods will continue to wreak havoc on business for a long time yet.
The problem with this article is that it is putting to much weight on the impact of the floods, but the really issue is the debt levels. - the floods are only highlighting how hard small business has been and how the community is burred under a flood of debt.

This statement shows some of the real concern:
Even before the floods there were concerns that the values of at least 30 per cent of Gold Coast properties were lower than that of their mortgages. House prices are flat, and the property group Mirvac announced last Wednesday that it had made a $215 million provision on zero-margin projects and unsold stock in poorly performing regional markets. Put all that together and you have to wonder whether banks are providing full disclosure of "Gold Coast to Noosa" properties, especially holiday homes.
And with some people saying that there are 2 years of unsold property on the Gold and Sunshine Coasts the problem of being under water has nothing to do with the floods. 30% of properties being under water on the Gold Coast are USA kind of numbers. The kind of numbers which causing a 'pop' to any housing bubbles which might exist.

The author, Adele Ferguson, is right - you do need to wonder whether banks are providing the full picture on the SE Queensland property market.

Comming back to the main topic, Commercial Property, Adele had this to say:
The downgrade came after a three-week review of the bank's top 250 property exposures confirmed the sector was performing much worse than expected. Queensland's commercial real estate market was singled out as the main offender, with an acknowledgment that it had suffered impairments to the value of two of its retail shopping centre exposures in the state. It declined to name which ones. It denied that exposure to the struggling high-rise residential property market on the Gold Coast had a role in the downgrade.
We will begin to hear this line more and more over the next 12 months - "the sector was performing much worse than expected". I don't know if its really worse then expected or just worse then disclosed.

Like I said in my previous post, vacant shop fronts are the start of the down turn (or at least the visible downturn). As small business owners stop being able to pay their massive rents and loans then they close the doors. Employees are put off, and mortgage repayment begin to fall behind. Less borrowing is taken on as consumer sentiment falls. This de-leveraging of debt compounds the downward trend (see Steve Keens work).

The floods in Queensland, NSW and Victoria only help bring the problems into the light faster then they normally would. However don't be fooled into thinking that the floods are the cause. The years of excessive debt, restrictive land use policies and ongoing miss management and 'stimulation' by our State and Federal Governments have made the problems of over valued real estate and massive personal debts and the floods are just the spot light which show the problems for what they are. Don't be fooled and get ready for the economic fall out.

Thursday, January 27, 2011

Commerical Real Estate in Buderim

Following on from my commercial real estate post on Maroochydore I took a ride in Buderim and snapped some pictures of vacant shops. Buderim is a great little town however over the last 6 months we have been witnessing more and more vacant shops come up for lease.
 Beautiful and prime offices vacant for many weeks.

It was a sad loss of the pizza shop upstairs.

All the pictures above are from the main street within about an area of 400m.

The growing vacancy rates in Buderim and around the sunshine coast is the fore shadow of what is coming. Shop are first to go, along with their jobs. Mortgage stress which is here already escalates. I have spoken with a few small business owner across the state over the last few days, from Toowoomba, Emerald and here in the Sunshine Coast and the story is all the same. Business is very very hard. Very little has happened since before Christmas and the feeling is that they're expecting it to be like this for the next few months.

I hope they can hold out, I hope they can survive - but it's on it's last leg for many.

I'll get to Mooloolaba over the next week or so and show you the vacant shops down there - I think they have the most - but we'll see.

Wednesday, January 26, 2011

Australia Day

Today is a special day for me. The day we remember nothing else but this Great Country Australia, who we are and how lucky we are to live here. Today we remember that we really are different, no not our economy, not our housing, not our resources - Us. You and Me. We are Australian. We are red dust plains and summer rains. We're true blue and fair dinkum.

We are different from anyone else in the world. As I sit here listening to John Williamson's "And the Band Playing Waltzing Matilda" I feel a little dose of Green and Gold Malaria coming on. You see the Australian people have a spirit that can't be found anywhere else in the world.

So today, forget about our economy, our over priced houses, our vacant shop fronts and remember Australian. You and me. It's not the land but the people. Get outside and cook a barbie, knock down a tilly, dance with a shelia, waltz a matilda. Love, laugh and hava go ya mug.

Tuesday, January 18, 2011

Flood Victims – Strategic default?

I spend all day Saturday and all day yesterday in the suburbs of Brisbane cleaning up the mess of what is shaping up to be one of Australia's most financially costly natural disasters.

Residents homes and financial situations are completely devastated. Here are a few pictures i took from the one spot - all i did is turn around at a T intersection.

The piles of rubbish are often 6 - 8 feet high of furnisher, white goods, walls, carpets, insulation. The houses are stripped bare from the floor to the ceiling. All the power points are filled with mud and need to be repaired by an electrician. The there is no gyprock on the walls and carpenters needs to do extensive repairs. The kitchens and bathrooms are bare and need to be replaced.

It is easy to expect that each house will require $50,000+ to repair it back to it's original condition and another $30,000 - $50,000 to replace the furnisher, white goods, clothes etc. And where will the insurance companies be in all this.... well if you're not covered with Suncorp and GIO, then they'll be high and dry and won't pay out a cent.

One questions which comes to mind is: 'Will Suncorp and GIO offer insurance for these homes at policy renewal? and if so will the premium increase by 100%, 200% or more' I might discuss this in another post in the future.

On top of the close to $100,000 that each resident will be out of pocket to get themselves back to where they were, the mortgage will still need to be paid on a house which may now be worth less then the debt your paying off - and you can't live there because there is no power, has no kitchen or bathroom and stinks with 10cm of slimy mud.

So the situation for many might look like this:
  1. You need $100,000 to repair and furnish your house, and cloth your family.
  2. Your house is now worth less then your mortgage.
  3. The bank still wants mortgage payments.
  4. Your house is unsellable.
  5. Your house could flood again this year... or next, or the year after that.
  6. You're renting another house to live in while you figure out what to do. (still paying the mortgage)
  7. Because of the above you can't afford to cloth you kids, feed your family or go on a holiday ever again.
  8. Maybe you have even lost your job as the small company you work for is broke because all their stock was also wiped out in the flood.
So what do you do if you are in this situation??? Many may choose to strategically default and declare bankrupt. This would not be an easy decision but may be the best decision to put your finances back into a position to move forward. Here why.

1. The banks will go after you for everything you have... lets see what that is:
  • Your House.... That's ok because it's worth less then your debt, and it needs at least $50,000 work to make it livable again.
  • Your personal possessions... well you don't have any because the flood wiped them out and the insurance company is not going to pay out.
2. You won't be able to get a loan for 7 years - but that shouldn't be an issue because it will take that long to build up your personal assets again and save a deposit.

3. You won't be able to be a company director again - not everyone wants to be one anyway.

4. You can start again from scratch - this sounds bad but it actually might be a lot better (by hundreds of thousands of dollars) then your financial position at the moment.

5. You can rent a nice place to live (maybe on a hill) and you can feed, cloth and education your family and maybe even take them on a holiday every now and than.

Because insurance wont pay out for many people they might not ever be able to repair their homes to a livable condition (the banks wont give them the money). The best option for many may be the strategic default.

One thing is for sure, property prices will not be as high again in the affected suburbs for years and maybe decades to come. A flood of defaults maybe just around the corner.

Thursday, January 13, 2011

Floods Tipped to Hit Economy Hard

An article by Peter Martin on highlights what I wrote about 2 days ago. That the Queensland economy, with 75% of the state declared a disaster zone, has ground to a stop. With the overall cost to the economy now tipped to hit 13 billion dollars or 1% of GDP this could be the major trigger for the housing market collapse which many have been predicting.
 ''Look at the size of the Queensland economy relative to Australia. At the moment a fair chunk of it has just stopped,'' Professor McKibbin said.
Despite this devastation Prime Minister Gillard is unwilling to alter budget spending:
As estimates of the financial damage wrought by the Queensland floods climb, the Prime Minister has ruled out loosening the budget purse strings to cope with economic shock.
''We will bring the budget to surplus in 2012-13, and yes that will entail some tough choices,'' Julia Gillard said.
Coal export are also being hit very hard with up to 75% of Queensland's coal production stopped -
''Our initial estimate is the floods could drive a 25 per cent fall in coking coal export volumes and around a 9 per cent fall in thermal coal export volumes in January,'' she said. ''This could see exports alone strip 0.5 percentage points from [gross domestic product] in the quarter.''
 The article gives the damage so far as:
Coal exports down 5 per cent.
Falls of up to 25 per cent predicted.
Projected cotton exports down 8 per cent.
Cotton, coal and ethanol prices rising.
Rebuilding to cost billions.
Uncapped disaster relief payments.
Total bill of up to $13 billion.
 In the very near future we could be adding to this list:
  • Qld unemployment hits 10%
  • House prices drop 25%
  • Qld floods force Federal Government to drop NBN
I hope not, but our economy has been on a knives edge for 12 months now and without some serious stimulus (which Gillard is saying is not going to happen) to help kick the debt can down the road this could be the trigger which brings the housing ponzi con down.