Tuesday, 4 October 2011

The Implant

The latest housing data is out from RP data. Its a train wreck draped in Christmas decorations or, as I prefer, a turd rolled in glitter.

RPData Sept

Read that headline. Is this Enron accounting?

If I have an underlying 'asset' (I use the term loosely with regard to the money shredder that is investment property), that is rented out at 5% and was worth $100,000 a year ago but is now worth $90,000, sure I have still 'made' $5,000 in income but the 'asset' has cost me $10,000, a loss of $5000.

Here is how to polish that turd, the 'asset' is still getting $5,000, so some grade 8 maths, and ($5000/$90000)x100 and that rental yield has 'jumped' to 5.55% an 'increase' of 11.1%. Sounds good doesn't it?

How to bleed to death with a cheesy smile on your face whilst sporting an erection you can hang your golf clubs off.

Referring to the median prices back to the report from December, Aussie dwelling values tread water in December.

Sydney, from $525,000 down to $500,000 Year To Date (YTD), a 9 month loss of $25,000 (extrapolated to -$2800 a month) or -4.8% in 9 months (somehow spun ('polished') to Sydney bucks trend in bogan papers and positive returns in the latest report).

Melbourne, from $505,000 down to $462,000 Year To Date (YTD), a 9 month loss of $43,000 (extrapolated to -$4800 a month - wow!) or -8.5% in 9 months (that's pain).

Brisbane, from $435,000 down to $420,000 Year To Date (YTD), a 9 month loss of $15,000 (extrapolated to -$1600 a month) or -3.5% in 9 months.

North Queensland

One of my favourite places I visit regularly is North Queensland, just a beautiful part of the world that still retains some country charm amid the growing tourist gouging restaurateurs and god awful local TV and print journalism and despite appalling local political leadership and governance.

A few months ago I wrote a little bit about the Real Estate carnage up there in Boomers Bailing  with some discounting examples.

One of Australia's foremost econo-bloggers Delusional Economist at Macrobusiness recently wrote Beautiful one day, bust the next with some ugly data coming from up North.

Then I read his work,Sinking into negative equity  and its obviously a wreck up there Real Estate wise.

The Far North region of Queensland which includes areas such as: Cairns, Palm Cove, Port Douglas, Innisfail,Weipa and Atherton has recorded the greatest proportion of properties in a negative equity position at 13.5 percent of all homes. The housing market within the north of Queensland has been noticeably weak and has felt the full brunt of the economic downturn. House values in the region have increased by just 3.2 percent annually over the past six years and unit values have grown by 2.8 percent annually. Although values have risen over the period, if we focus on just the last three years, house values are currently -7.3 percent lower than they were three years ago and unit values are -20.4 percent lower. The vast majority of home owners that have purchased since 2008 are likely to be in a negative equity position

And, his fellow blogger Houses and Holes wrote Mortgage delinquencies by postcode
to put some more nails in the coffin.

In our primary report on performance, we classified 11 regions as performing very poorly, and six were from New South Wales (NSW), four from Queensland (QLD) and one from Western Australia (WA),” says Karabatsos. “NSW remains the worst performing state overall with six of its regions performing very poorly.”

Those four regions in QLD are Wide Bay-Burnett, Sunshine Coast, Gold Coast and North QLD.

The Ridiculous

That's some ugly stuff but it gets worse. This little gem was in the local paper, How Cairns couples can make money from their mortgage. Unbelievable. You couldn't make this up.

it costs money to own a house," Re/max Cairns agent Lance Richards said. 

Got that?  

"There are a couple of different areas where money can be saved when turning your property into an investment, such as tax deductions – because it comes under an investment property and interest on the mortgage repayments are tax deductible which is a killer for the first five years on your loan.

"This is a way out until the market picks up and they can sell to get their money back.’’
Mr Richards said homeowners should lease out their home then rent somewhere cheaper. 

This is getting better. In the housing bubble of the late 1880s to early 1890s it took 60 years to get your price back. Snake Oil Salesman alert is flashing red.
‘Rent somewhere in the city where you don’t have to mow lawns on the weekend and don’t have to worry about repairing the fence when it blows over in a cyclone,’’ he said.

Plus by living in the city, he said, you only need one car – so you can sell the other.

Maybe the agent has 80% overpriced condo's in the city on or about to be on the company books? Living in the city and sell the car? Pity most of industry is in the strip outside the CBD between Portsmith and Earlville.

Mr Richards said first home buyers considering buying should buy a property to rent out, rather than live in.

"First home buyers should be buying their first house as an investment property and have tenants subsidise half of the mortgage repayments, which will then allow that couple or person to then go and rent a property or maybe share with another couple to make the rent cheaper.’’

Buy a property and NOT live in it (I thought housing was shelter, obviously not). This bloke has the touch of the alchemist in  turning turds into Gold.

This way, Mr Richards said, they will be saving money and getting a tax deduction on their interest repayments. 

By renting out their home, he said they can get more cashflow each week and save ‘‘five or 10 grand a year’’.

Or, what about stay the hell away from the toxic shit and save 20 grand a year through NOT owing money on a stagnating shrinking 'asset'? If the $400,000 house is falling by 5% a year that's $20,000 disappearing in year one alone. Yeah claim the tax deduction. Pay more than you are receiving on something that's shrinking by $20,000+ a year and get a 'feel good' boomerang from the taxman (it was your money to begin with).

Lets summarise, say a $320,000 mortgage @ 6.5% (generous!) on a $400,000 house rented out at $20,000 a year (5% yield).  Assuming marginal tax rate of 37% (income over 80K),

Rental income (after tax) is             $12,600
Tax refund on interest paid is            $7,000
Total Loan Repayment out going is $23,750-
                                      Nett Loss:     $4,150

So, you need the house to up in value by at least $4,150 to break even, but the house is falling by AT LEAST 5%+ a year or $20,000. THAT IS WHY YOU ARE TAKING THESE INSANE MEASURES, THE PRICES ARE FALLING.

By taking this deluded advice you are PAYING Rent PLUS $4,150 a year for the privilege of watching another $20,000 a year go up in smoke. That's with a healthy 20% deposit, the less your deposit the more you outlay for the privilege of watching your potential bankruptcy take form. It must be The Implant.

What about the journo? "How to make money from your mortgage" (??!!), a deliberate misleading lie or just The Implant kicking in? In the hard copy, "people are being encouraged to...", just who is doing the encouraging?

Mr Richards said first home buyers considering buying should buy a property to rent out, rather than live in.
How about potential buyers putting their deposit in a Term Deposit or High Yield at call account, rent and watch the carnage from the sidelines? Whilst Ms Bester publishing the article demonstrates a modicum of inquisitiveness and hints of good intent she has failed to stomp all over the ridiculous underlying proposal where the fact is prices are in a deflating bubble and yields poor.

All you had to do was some basic money in vs money out maths Cait and you would have blown it away. Also, why is there hardship? Other than some mild increases in energy, cost of living is pretty flat and interest rates haven't gone up for quite a while. No mention of falling house prices and negative equity nor how the local Real Estate industry continue to line their pockets by destroying the financial futures of locals by perpetuating a continuous lie and misinformation mainly via her paper. What about integrity in the industry Cait, does that bear scrutiny?

From Ridiculous to Delusional

Now Check out the article on the right. Just a week before the above mentioned article on making money from your mortgage was revealed to the world (just 7 days! prior), the local representative of the Real Estate Institute Of Queensland (REIQ - propaganda machine that Goebbels would be proud of) came out with a slightly different piece of 'advice' in "On The Pulse" (of a corpse?), often a cleverly disguised Saturday morning comedy insert in the 40+ page Real Estate liftout (where do News Corp rags in the clockwise arc from Darwin to Adelaide get the bulk of their revenue from in their weekend editions?) in the Cairns Post.

There is nothing like spending a Saturday morning with the paper during a Cairns visit. Good coffee, fresh croissants and a side splitting giggle.

You have to laugh otherwise you'd be in apoplectic rage if you think about the lives financially destroyed by these peddlers and their journalist sycophants.

 Just read the final two paragraphs on the left and try and hold down your breakfast.

So no-one with any brains is buying but YOU should so someone can get a commission.

4-5% vacancy is meant to be a good number? 5 empty out of every 100 is good?

Yeah buy an investment unit where the prices are  dropping like Wile E. Coyote tied to an anvil. And, in a region with a glut of units - massively over supplied.

Go to realestate.com.au and see the avalanche of units for sale in Cairns, Northern Beaches and Port Douglas.

Never a better time, come on down, I need a commission victim. Its like the plethora of pop culture vampire garbage permeating the idiot box lately.

So how good have these investments been? Well. in the same weekend paper for a few weeks is a full page colour advert similar to the following (I wonder how loud NewsCorps cash register rings when that ad goes in?).

This is not an end of winter coat sale or swim wear or shoe sale. This is half a million dollars disappearing for the fools who got sucked in and paid 7 figures for these dog boxes (over 200+ victims). These fanged carpetbaggers have milked the victims blood and are scarpering.

This was sharing the same paper as "come on down, never a better time". How do these people sleep at night? Where are the pitchforks and burning torches? Its The Implant I tell you.

I did write earlier.,

country charm amid the growing tourist gouging restaurateurs and god awful local TV and print journalism and despite appalling local political leadership and governance.

I should have added gouging developers, agents and real estate industry in general. All whilst the Fourth Estate not only do nothing they help facilitate the impoverishment of the society they live in.

The Implant

I have a theory (too much Star Wars and Star Trek in my youth?) that maybe all children born between 1945 and 1990 (immigrants included) get a microchip implanted in their skulls on first visit to a Community Health Nurse or on first immunisation.

The Real Estate Implant which activates when a Baby Boomer or Gen Xer considers buying a house where all rational thought ceases when it comes to parting money for Real Estate. Rudimentary mathematics get discarded first and foremost then logic and the bleeding obvious.

Take this young chap I work with, intelligent, analytical, witty, charming, good looks and an all round good guy. An asset to any team or organisation. He discusses the stupidity of young folk financing new cars for $23,000 and 5 years later the car is worth $11,000 whilst the pleb has forked out $35,000 in the mean time. Five star smarts.

He wisely acknowledges that the world is on the brink of a financial meltdown, the housing carnage in Ireland, Spain, USA etc and Real Estate is getting nailed in SE Qld.

But on the mention of Real Estate then the Implant starts to throb and he says how he is going halves in an investment property in Brisbane in an interest only loan as a tax right off. WTF?

Quick maths time. Say $200K IO loan halves on a $400K property  and 5% rental yield:

Rental income (after tax paid)            $6,300
Tax refund on interest paid                 $4,804
Total Loan Repayment out going is $12,984-
                           Annual Nett Loss:    $1,880

If the house price continues to meet trend and falls by 5% annually he takes a paper loss (his share) of $11,880 in year 1 (house value minus finance loss), without accounting for stamp duty etc. Now say this continues for three years, he is in the hole for an accumulated $34,165, if 10% falls as the slump accelerates, he is down $59,840. Great investment.

If you are going to burn tens of thousands, why not dump it on hookers, sports holidays and booze (?), at least you'll have fun.

I've wondered why my Implant has failed. I considered that maybe it was the long stints working overseas cut it's Australian power source but that can't be it, as my wife's works. I'm now convinced it was a combo of Tequila shots in Mexico, Rum shots in Cuba and Single Malt demolition nights in Britain, the thing is pickled.


When will I buy an investment property? When prices of average homes are 3 to 4x average income (currently 6 to 7x plus), Rental yields are 7% AND (after a banking smashdown) banks restrict total (cards, mortgages, cars etc combined) household credit repayments to 30% of gross income. That last point will force people to rent until they have a decent deposit and only borrow a reasonable amount within their means, you know like the 109 years before the New Millennium housing madness. Then and only then will long term growth be sustainable IMO and that involves a 40% to 50% price fall from current levels as a start. But there is a lot of pain to endure in the mean time... The "Muddle Through" Has Failed: BCG Says "There May Be Only Painful Ways Out Of The Crisis"