Disclaimer: The content from The Daily Reckoning Australia’s global cast of characters is their own view and opinion. It is not to be taken as investment advice.
The Shrinking of Melbourne Property
Jetlag be damned!
My eyes might be tired, but they’re good enough to catch the most intriguing story of the day: Pepper Group’s latest $1 billion securitisation transaction.
This shows money is still flowing into Aussie real estate — with a twist.
Pepper is not a regular bank like CBA or Westpac. It’s a ‘non-bank’ lender.
It’s not subject to the same regulations and restrictions. It can — and does — target borrowers with chequered credit histories and higher-risk profiles.
It then bundles up these loans into a ‘security’ and sells them to investors. Apparently, Pepper’s latest securitisation attracted investors from the US, Asia, Europe and Australia.
This is the second billion-dollar issue in four months from Pepper. And the third this year.
This type of lending expands the pool of potential borrowers and allows more buyers to enter the market.
It’s also why the rumoured credit crunch predicted earlier in the year is unlikely to materialise.
But it’s not the only news of interest surrounding Aussie property.
Big banks go after market share
The big Aussie banks are flexing some muscle too.
The Australian Financial Review reports they’re cutting selected rates on fixed-interest loans as smaller lenders are forced to raise rates because of their higher costs.
We can only watch to see how long this can continue. Currently, short-term funding costs are facing upward pressure.
The bank bill swap rate (BBSW) has risen over the last six months despite the Reserve Bank leaving official rates unchanged.
Rising short-term costs squeeze the banks’ margins. Higher lending rates are one way to compensate.
Historically, when the three-month BBSW has been 0.5% above the Reserve Bank’s overnight rate, it’s been a sign that interest rates are going higher.
However, the banks could potentially get some help from the ongoing strength in commodity prices.
Well, the Aussie government’s fiscal position is looking very healthy right now. This is thanks in part to higher revenues and royalty taxes from mining and energy companies.
This outcome was not expected this time last year. Nonetheless, it helps the credit rating for the federal government and the banks as well.
All told, it’s yet another reason to keep an eye on the oil price.
That’s because a lot of the LNG contracts that export gas from Australia around the world are linked to the price of oil.
This is why the June quarterly report from the Department of Industry, Science and Innovation says Australia is on track for an $8.1 billion windfall in export revenue over the next two years.
Rising output and prices are a heady mix.
And it means the property game can continue for a while yet.
The cost of land in Melbourne up 40% in a year
Last month, data came out showing that the cost of land to build a house in the outer suburbs of Melbourne was up 40% over the year to March.
This is naturally driving up the cost of the average house.
And so the average house and land package will get smaller.
Veteran developer Nigel Slattery said he will soon start selling Melbourne lots as small as 80 metres — a fifth of the traditional-sized block.
His housing estates will have more apartments and townhouses.
Such is the way of the world when you have Australia’s idiotic tax system: the standard of living goes demonstrably down.
There’s nothing you and I can do about that, so we might as well try and keep making money from it.
The market in property will adjust as best it can.
There are enough renters out there that they would be happy to settle into a house, even if it’s smaller.
Times change. The days of the big backyard are dead for young buyers looking to settle anywhere near Sydney or Melbourne.
Yet change is not always negative.
On my recent flight to Ibiza I happened to pick up a copy of the New York Times.
It ran a report on a new company called Spacious.
Spacious is converting upscale restaurants in New York and San Francisco into co-working spaces during the week.
To be clear, the restaurants still operate. But they only serve dinner and let the lunch traffic go.
In its place, they host remote workers who mostly only need a laptop and access to coffee and some quiet space.
Meanwhile, the restaurant business takes a cut of the membership fees that the users pay to Spacious.
Why do I bring this up?
If converting a restaurant into a Spacious office creates higher use value, it’s likely to drive higher rent for the property. This in turn pushes up its capital value.
It’s an example of how a changing market can send property higher when so many people say it’s reached its ceiling.
Smaller blocks and a business like Spacious are two clear examples of why property can still rise from here. Growing credit, as in Pepper Group’s case, is another.
That’s why I dismiss the perpetual real estate market doom-mongers for now.
The tide is still rising.