If you have substantial investments in residential property, particularly in Sydney and Melbourne, it is time to have a second look at whether you are overexposed or whether your strategies stand up.
What is certain is that we are headed into an environment which is very different from anything we have experienced in recent years.
We have had a vast number of overseas analysists come to Australia and declare that the market was about to crash. They have all gone home with a reputation akin to Chicken Little. But now, serious events are taking place.
It is hard to make accurate commentaries, because we are dealing in a multiple of markets. During the week UBS analysts declared that the housing boom was over, but they didn't really explain why. It was just a feeling.
Floors apart: Old versus new
But tangible events that have happened are that the used apartment prices in Sydney have fallen between 20 and 25 per cent. For new apartments, prices are down between 12 and 15 per cent. In Melbourne, if I walk around the inner-city areas like Southbank, Victoria Harbour and West Melbourne in the company of a real estate agent, he will quote me a price of say $500,000 - $600,000. And I immediately know that I must take $100,000 off that price to get to the real level.
While he might be showing me one apartment, he has a vast number of apartments to sell. Builders with large amounts of off-the-plan purchases by the Chinese have managed to get a lot settled, but there are a still a large amount on the market.
I think we can be sure that the Melbourne inner-city apartments market has already fallen by 25 per cent. In Brisbane, I was yarning to an investor who some years ago bought a small apartment for about half a million dollars and similar apartments are selling in the same block for $100,000 less.
And so we have a situation where the biggest single investment of individual funds – inner-city apartments – has crashed spectacularly.
Other parts of the market have not experienced anything like that fall – indeed in the outer suburbs of Melbourne, land prices are still rising.
But in Sydney and Melbourne, auction clearance rates have fallen. That means there is a large overhang of unsold properties, which over time will weaken the market. However, in most areas, I don't think we will see anything like the fall rate we have seen in apartments.
The catalysts for a slowdown
For some time now I have been warning that the banking clamps being imposed on investors, which include a credit squeeze and higher interest rates, were unco-ordinated and dangerous.
What I did not realise was that buried in the Federal Budget was a measure that meant that investors buying used properties could not claim depreciation. That has slashed 6 to 8 per cent off the value of Sydney apartments. It was the famous last straw that broke the back of the camel.
You will remember that the Coalition government was very critical of the ALP when they announced their negative gearing plan, whereby negative gearing would not apply to purchases of existing homes – only to new ones being built. The Coalition pointed out that it would cause a big fall in the construction of rental housing.
And what did they do? Almost exactly the same thing via eliminating depreciation on used dwelling investments. That means that if you buy a new property for $1 million from a builder, you can claim depreciation. But if you want to sell it, the buyer can't claim depreciation so they will pay less than $1 million.
Worst still, the bank valuers had been valuing properties below purchase prices for some months. But now they are getting even tougher, because they know that any buyer of that $1 million apartment will not be able to claim depreciation. Accordingly, buyers with less bank finance available are reducing their prices. And, just to make matters worse, state governments in Victoria and New South Wales are making life tougher for investors with greater rights to renters.
In NSW there is a danger of competition between the two major parties as to who can hit investors hardest and gain the most renter votes.
During the boom a lot of people became overexposed to residential property, and that group of people need to look carefully at their position. Remember, that at any price movement bankers will get jittery. All our banks say that their housing loans are fine, and they have not taken big risks.
Clearly the Reserve Bank and APRA are very nervous that the banks are not telling the full truth. Those who are lending on apartments or to apartment developers are likely to suffer losses given the magnitude of the fall. At this stage elsewhere, it is less serious.
The oil price and BHP
You might remember that a year or two back I was explaining that the oil price was going to be controlled by Russia and Saudi Arabia.
At the time a few people were reading the research reports that led me to that conclusion. But now it is clear to all that Russia and Saudi Arabia are calling the shots at OPEC, and that is why the oil price has increased.
Fascinatingly, BHP has been telling anyone who wanted to listen that they were bulls on the long-term oil price, but didn't believe iron ore would rise much further than current levels. They have been spot on, and we saw oil rise above $US60 a barrel this week. Read Tim Treadgold's article published on Wednesday, Will oil march higher, in which he discusses the current market dynamics.
Interestingly, profits from the shale oil and gas interests of BHP will be rising. Because the company was bullish on oil it wanted to hold its US shale and oil interests longer so as to maximise value, but the pressure from the Elliot Group worried the board and they have put the US shale and oil interest up for sale now.
The latest rise in oil price and the increased production coming out of the area may help increase the price.