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The Great God of Real Estate Gains

Investing in property competes only with Christianity as an Australian faith...

THIS IS where it gets interesting, folks, says Greg Canavan in his Daily Reckoning Australia.

US markets are again challenging their all-time highs. But the recent rally from the February lows wasn't accompanied by a rise in corporate earnings. The Financial Times reports:

"'The market is expensive,' said Jack Ablin, chief investment officer at BMO Private Bank. The S&P 500 price to earnings ratio touched its highest level on Monday since earnings collapsed after the financial crisis.

"'The move that motivated investors over the last few months is, What else are you going to own? I'm not sure that's a compelling reason to own equities,' he added."

Of course, it's not a compelling reason to own stocks. But near zero interest rates, or even negative in some parts of the world, isn't a compelling reason to own cash either.

This is the reality of the investment world in the age of financial repression. Hold interest rates low enough – for long enough – and you'll create all sorts of distortions throughout the economy and asset markets.

As Walter Bagehot, the founding editor of The Economist, famously wrote in the 19th century, "John Bull can stand many things but he cannot stand two per cent."

In saying that, Bagehot wrote that in an era when Britain was creditor to the world. Having a halfway decent rate of interest was important for Britain.

These days, the former creditor nations (Britain and the US) are now the largest debtors. John Bull is a borrower, not a saver, so he can stand 2% just fine thanks.

And because the political imperative is to keep John Bull happy, interest rates are low, cash is trash, and asset prices are high.

In Australia, the asset of choice is, of course, property.

But what's this? Could the sector, which now competes with Christianity as Australia's most important belief system (in property we trust) be faltering?

It's not the first time we've said it. And it won't be the last. But when you see one of the nation's largest rent seekers complaining to the media about the state of the market, you know there's something going on.

It follows the negative gearing debate from a few months back which saw more foaming at the mouth from the property lobby than a pack of dogs with rabies.

That was the first sign...

Yesterday, we had billionaire apartment developer Harry Triguboff writing in the Financial Review (albeit via Robert Harley) about a bunch of things that threaten his ability to continue collecting the economic rent.

As Phil Anderson of Cycles, Trends and Forecasts never tires of pointing out, economic rent is unearned income that goes to land owners. This income is so attractive in Australia that it's created a speculative bubble so people can get their hands on it (who doesn't want to receive unearned income?).

And it's created property barons who have direct access to the nation's highest regulators and media outlets. The barons proclaim they are acting for the public good. But don't be deceived, it is the economic rent they are after, and not one in a thousand can see it.

Poor old Robert Harley seems blind to it, anyway. The advertising he gives Triguboff today is worth millions. His article kicks off...

"Billionaire apartment developer Harry Triguboff had just been to see APRA chairman Wayne Byers when we met last week.

"The banks' moves to toughen lending to offshore apartment buyers worry him. And it is not the only issue that concerns the founder of Australia's largest apartment developer, Meriton.

"Most of all he is angry about the increasing use of voluntary planning agreements (VPAs) by local governments who trade increased planning density for a developer contribution to council funds or facilities."

Local governments are just another form of property rent seeker. Because they are at the start of the planning/approval process, they have quite a bit of power; power that's way in excess of the competence of most councillors to manage. Which is why many local councils are so dodgy.

But Triguboff is simply complaining about the councils trying to take some of the economic rent off him! Hilarious!

Triguboff is also concerned that the banks are now becoming too tough on Chinese buyers – his main client base. That's why he went and saw APRA boss Wayne Byers last week.

"Most of Meriton's apartment buyers come from China and most fund their purchases locally. But local borrowing has become more difficult as the banks, prodded by APRA, seek the security of more documentation and higher deposits.

"Many are already locked into off-the-plan contracts to buy apartments and may struggle to settle the purchases.

"'The banks had a very good name with the Chinese but now they cannot trust them,' says Triguboff.

"'The problem is they don't know how much the banks will give till the end.'

"Triguboff says the banks now ask Chinese buyers to produce their tax statements. 'Let's see how that goes,' he smiles."

The last comment is revealing. Banks are now asking Chinese buyers for the same documentation that everyone else must provide. Yet Triguboff seems bemused by it all; he clearly doubts the banks' chances of actually getting such documentation.

Could it be that the Chinese are merely having a punt on Aussie property in the hope of making quick capital gains, and have no real intention of servicing the loans over the long term?

Of course, Australia has an interest in continuing to attract Chinese capital. We have a gaping current account deficit, and we need foreign capital to plug it.

So far, it's working beautifully...if by beautifully I mean selling off prime assets to fund our ongoing excess consumption.

And don't forget, this rush of Chinese capital is all a result of financial repression in the Middle Kingdom, where interest rates barely above the level of inflation force savers to look elsewhere – like Aussie apartments.

While Triguboff is worried about the flow of Chinese buyers, he is putting on a brave face:

"'I am very happy at the moment because I have a lot of approvals, at Dee Why, Rosebery, Mascot, Pagewood, and in Sussex Street.

"'That is over 2000 apartments, so I can start building, and I bought the sites very cheap.'

"But there is always another call to make. Triguboff would like to talk to NSW Transport Minister Andrew Constance about extending the new light rail to Maroubra and around to that Pagewood site."

That last bit comes straight from the developers' playbook. That is, buy a site, then lobby some politician to extend transport infrastructure to the site. All of a sudden, the land doubles in value and the development gets underway, no doubt with plenty of 'thanks' to the political party involved.

That is how you extract economic rent, dear reader. It's extracted from the end buyer, who goes into lots of debt to buy the apartment.

Greg Canavan is editorial director of Fat Tail Investment Research and has been a regular guest on CNBC, ABC and BoardRoomRadio, as well as a contributor to publications as diverse as and the Sydney Morning Herald.

See the full archive of Greg Canavan.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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