How The Belief in Australian Property Will Go With the Generational Wind

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Old structures creak in the wind. Leaves swirl about the streets as the gusts gather in intensity. There are a few spots of rain…but they’re hardly discernible.

People go about their business, unperturbed. They have faith in the structures. They’ve been there so long. They will always be there.

When it comes to matters financial, faith usually only lasts a generation. Very rarely does belief in financial matters endure. And when it does, it’s belief in a way of doing business.

We don’t accumulate knowledge and wisdom. In fact, we all start from the beginning. We mostly choose to ignore the lessons passed on from those who have made mistakes before us. We’d prefer to make them anew.

If there is one belief that has endured in Australia beyond a generation it is a belief in Australian property. At our inaugural investment conference last month keynote speaker Satyajit Das said he doesn’t get into conversations about property with Australians. It’s like debating the existence of God. The inference? Das is a property atheist.

We’ve been talking about the Australian property slowdown/bust for years now. So has our mate Kris Sayce over at Money Morning. You, dear reader, sometimes get annoyed when we’re not all singing from the same hymn sheet. One of us sees a long slowdown while another sees a quick-fire bust. You think we’re hedging our bets.

We just see a different route to the same destination. Whatever way it happens – via a bust or a drawn-out slowdown – hindsight will prove Aussie property vintage 2012 (and for many years previously) to be a bad investment.

Another gust of wind just blew in the gathering storm. Genworth Financial, a US-listed mortgage insurer, has abandoned plans to list its Australian division on the ASX. Genworth is Australia’s largest mortgage insurer. The US parent company hoped to raise $800 million by selling 40 per cent of the business to Aussie investors.

That no longer looks likely. As a result, Genworth’s US shares promptly fell 20 per cent. The decline doesn’t simply reflect the lost transfer of wealth from Aussie investors to the US parent. It also represents the fear of more losses to come.

For years the Aussie mortgage insurance business was a big cash generator for Genworth. According to Morgan Stanley analysts, over the past two years it generated average quarterly earnings of $50 million. However, in the first quarter of 2012 it expects to report a small loss.

That’s some turnaround. And US investors don’t like the fact they’re stuck with the business.

Genworth Financial Stock Price Plummets

Genworth Financial Stock Price Plummets

In a statement to the US stock exchange, Genworth said its decision to pull the proposed float was due to…

“…elevated loss experience in Australia as lenders accelerated the processing of later-stage delinquencies from prior years through to foreclosure and claim at a higher rate and severity than expected, particularly in coastal areas of Queensland that experienced natural catastrophes and regional economic slowdowns and among certain groups of small business owners and self-employed borrowers.”

That’s a long sentence. And a lot of information. Those who genuflect before sitting on the Australian property pew believe this is just a temporary slowdown. It’s mostly related to the Queensland floods…and the abysmal Gold Coast property market.

Others (your editor included) believe this is yet another sign that Australian residential property has entered into a long bear market.

According to today’s Financial Review, ‘Lenders use mortgage insurance where customers borrow 80 per cent or more of a property’s value, with Genworth covering any short fall between the loan value and the property sale price in the situation of a default.’

Given the lax lending standards in the run up to the credit crisis in 2008, a 20 per cent deposit seems quaint. The banks may have tightened their lending requirements after the GFC scare. But we would guess a large proportion of first time homeowners in the past five years or so would not have scraped together a deposit of more than 20 per cent.

So that means a lot of mortgage insurance. And now, with the China slowdown in the early stages, Australia’s subprime borrowers are getting into trouble.

Of course there is the tragedy of the floods to take into account. Queensland’s natural disasters last year took lives and turned many others upside down. When that happens and you have debt, it’s a vice-like grip that’s hard to wriggle free from.

But that can only be a small part of the problem. When you go from making roughly $50 million a quarter to incurring a loss, there’s something else going on. That something else is a silent sub-prime crisis. Busts and slowdowns ALWAYS start at the periphery…before moving to the core.

Regards,

Greg Canavan
for The Daily Reckoning Australia

From the Archives…

What the News on Bond Yields Say About the “Resolved” Eurozone Crisis
2012-04-13 – Eric Fry

The Art of Selling Stocks
2012-04-12 – Chris Mayer

Misguided Faith in an Economic Recovery
2012-04-11 – Joel Bowman

Beware the Big Government Debt Switcheroo
2012-04-10 – Dan Denning

The Discount Rate: Borrowers, Lenders and Bonds
2012-04-09 – Nick Hubble

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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22 Comments on "How The Belief in Australian Property Will Go With the Generational Wind"

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Lachlan
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“We’ve been talking about the Australian property slowdown/bust for years now. So has our mate Kris Sayce over at Money Morning. You, dear reader, sometimes get annoyed when we’re not all singing from the same hymn sheet. One of us sees a long slowdown while another sees a quick-fire bust. You think we’re hedging our bets.” The property market here is a credit bubble which is somewhat different than China where savings have financed much of the price appreciation. I would argue its getting late in the day for a property crash in nominal terms and the credit bubble will… Read more »
Biker
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GC: “…hindsight will prove Aussie property vintage 2012 (and for many years previously) to be a bad investment.” No, despite a few variations on a theme, you’re all singing from the same hymn book, Greg. You have to, if you’re to _sell your product._ As you say: “If there is one belief that has endured in Australia beyond a generation it is a belief in Australian property.” This kind of belief (which you’ve aligned to religious fervour) gets in the way of your pitch. It _must_ be attacked. Scan DRA’s Real Estate threads and you’ll find your adherents echo your… Read more »
X
Guest
Still talking your book Biker? Well, here’s a little tune for you from the Rolling Stones. Time, is on my side, yes it is. Time, is on my side, yes it is. >> There are some interesting property developments recently, which will impact markets. As with any major shift, there will be winners and losers. WHAT!!! Losers ???? In PROPERTY???? That’s UNPOSSIBLE!!!!! You’re not the real Biker, someone is impersonating Biker. The real Biker would never say that there will be LOSERS in property!! Still, even if you are the real Biker making a small concession that the property market… Read more »
Biker
Guest
X (Stoned): “Time, is on my side, yes it is. Time, is on my side, yes it is.” Let’s look at Greg’s headline, X: “How the Belief in Property will GO With the Generational Wind” Yet his fifth paragraph commences with this little truism: “If there is one belief that has endured in Australia BEYOND a generation it is a belief in Australian property.” Time is on the side of the property investor who watches debt shrinking 30% every decade, due to inflation. Time is on the side of the same investor who raises the rent each time tenants vacate.… Read more »
Ned S
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“You’re not the real Biker, someone is impersonating Biker.”

If that’s someone impersonating Biker, they are doing a jolly fine job of it … :)

X
Guest
>> Time is on the side of the property investor who watches debt shrinking 30% every decade, due to inflation. Here in essence, is the core of your philosophy: The future will be exactly the same as the past. But which past? The ‘Howard Years’ past, where an expansion of credit saw property prices outpace inflation and wages by almost double, or the other ‘recession we had to have’ past, in which property prices decreased in real terms, and interest rates hit 14% in response to the previous credit bubble? Inflation occurs, regardless of whether one is in debt or… Read more »
Biker
Guest

Sharp contraction? We’re well-placed to take advantage of your property crash fantasy, son.

Stillgotshoeson? You mean that Irish fella who cursed me with incurable diseases and a broken-neck bike accident on this very site? :D :D :D

You’re a _desperate_ mob, you lot!~ ;)

Biker
Guest

Your comment is awaiting moderation. :) Not surprising!

Sharp contraction? We’re well-placed to take advantage of your property crash fantasy, son.

Stillgotshoeson? You mean that Irish fella who cursed me with incurable diseases and a broken-neck bike accident on this very site? :D :D :D

You’re a _desperate_ mob, you lot!~ ;)

X
Guest
>> Sharp contraction? We’re well-placed to take advantage of your property crash fantasy, son. I’m not sure what you mean by that, but I suspect you don’t either. You didn’t type drunk again did you? Did you mean that you believe we are still in a growth cycle? That there will be no credit contraction? If so, then that is the point we disagree on. As long as the growth cycle resumes, your investment strategy is probably the best that someone with your financial knowledge can achieve. So, good luck with that! If on the other hand you are claiming… Read more »
Ned S
Guest
“At our inaugural investment conference last month keynote speaker Satyajit Das said he doesn’t get into conversations about property with Australians. It’s like debating the existence of God. The inference? Das is a property atheist.” Interesting that Satyajit Das was a keynote speaker for DRA. Das is bearish alright (so am I – though maybe not as bearish as Das.) But I recall reading a general comment of his that went along the lines that when things turn turkey housing ‘typically’ drops something like 30% compared to 70% for stocks. (Don’t quote me on those figures and I considered suggesting… Read more »
X
Guest
@Ned S The reason the *INITIAL* drop in price is greater in stocks than property is because of liquidity. Because property is illiquid, the transactions dry up almost instantaneously, but the stock market tends to overshoot on the sell side, and tends to ‘dead cat bounce’ at the bottom. Property debt tends to be periodic, either weekly, fortnightly or monthly payments, but equity leverage (through derivatives such as options,short selling or CFDs) is operated through a margin account, and the instant THAT goes into the red, the position is either closed out immediately, or the client receives the dreaded ‘margin… Read more »
Biker
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‘X’: “If there is a crash, there will be bargains a-plenty, with willing sellers (both in property AND stocks).”

Yes, I recall the last major ‘crash’ knocked shares for 55.4%… . ;)

Seems DRA may have decided it’s somehow counter-productive blocking my stuff, Ned. Quite a few ‘lost posts’… but who’s counting?!~ :D

X
Guest
>> Seems DRA may have decided it’s somehow counter-productive blocking my stuff It’s an absolute mystery why they would ‘block your stuff’. Every post you dig yourself a deeper hole! I would have thought they would be encouraging you, not censoring you. >> Yes, I recall the last major ‘crash’ knocked shares for 55.4%.. And then central banks began flooding the market with liquidity to save the housing sector, shares gained back nearly half of that drop within a year, we got 7% inflation for 5 years,and gold rose 70% per year for 3 years. Soon we will all be… Read more »
Ned S
Guest

“Soon we will all be billionaires, but it will cost $100,000 for the weekly groceries.”

Yep, life’s been a bit annoying since September 2008 – For me anyway. To the point I’ve even opted to start working again – I’d prefer part-time stuff. But full-time seems to be what’s being offered?

Oh well, take the full-time stuff and see if it just mightn’t turn into part-time stuff further down the track maybe.

Biker
Guest

Billionaires? You’ll punt yerself into oblivion*, King X.
How much are shares _still_ down, son?

* Probably already have!~ :D

Biker
Guest

King X: “…we got 7% inflation for 5 years,and gold rose 70% per year for 3 years….”

_I_ dig myself into a deeper hole each post? :D
Did you graduate from primary school? ;)

X
Guest

>>King X: “…we got 7% inflation for 5 years,and gold rose 70% per year for 3 years….”

>>_I_ dig myself into a deeper hole each post?
>>Did you graduate from primary school?

Which part are you disputing, the 7% inflation, or the 5 years?

X
Guest
>> Billionaires? You’ll punt yerself into oblivion*, King X. >> How much are shares _still_ down You think I am invested in shares? Not sure what gave you that impression … Or is it part of your fantasy on your brilliant investing that anyone not in property must be in shares, and therefore losing? You hear that whooshing sound above your head? That’s you completely missing the point of my comment on ‘billionaires’. >> , son? Oh, and by the way, I’m not young enough to be your ‘son’. I know you use the term deliberately to be condescending, but… Read more »
X
Guest
@Ned S There have been some changes to IR laws recently. IIRC it makes part-time a bad deal for companies, so they tend to wait until they have a full-time position and hire for that. Also, if you have any skills at all, they want to get as much of your time as possible, as it’s difficult to hire people who can do anything. Inflation bites, but we can expect a lot more of it. We can’t export it like the USians, so those on a fixed income can expect to take a hit. Precious metals are a good hedge,… Read more »
Chris in IT
Guest
Biker, Long time no chat. Still winding people up I see :) Quick anecdote from Sydney. On chatting with a nice lady in Chatswood yesterday she noted that 85% of her household income went to paying her mortgage. This just stopped me mid sentence. “Pardon?”. Yes. 85%. I asked how she could even eat on 15% of her income. All investors are assuming that there will always be someone else to come along and pay more for their investment, exactly when they want to sell it. So far, that has been a good bet. This is helped by a good… Read more »
Chris in IT
Guest
“Sharp contraction? We’re well-placed to take advantage of your property crash fantasy, son.” It has always made me wonder… As a retired guy in northern QLD in a semi rural area who’s primary investment strategy is to be a residential landlord what value you find in the primary output of this site. DR for the past decade has sold the idea of currency debasement (answer:gold, and they were right) and increasingly a shakey property market, which every other country has dropped except Australia and Canada, both countries you have links to (assuming your Son actually bought that land in B.C.).… Read more »
watcher7
Guest
House price change 1997-2008: Ireland 193%; Spain 184%; Australia 163%; Britain 150%; USA [Case-Shiller ten city index] 102%. * Joe Brennan, Irish Bank Evicts Pensioner After $155 Billion Losses, bloomberg.com, April 25, 2012: Home prices may drop as much as 70 percent from their 2007 peak, according to Dublin-based securities firm Davy. The central bank assumed prices would fall 55 percent to 60 percent when it tested the banks’ financial strength in March 2011. * Rick Ackerman, Interest Rates May Be Close to a Major Bottom, rickackerman.com, May 23, 2011: We have been predicting here for years that home values… Read more »
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