Sydney investor splurge is much ado about nothing

The question that really needs to be asked is why investors have become so one dimensional?

The answer is pretty easy given servicing household debt presently sits at the lowest level for the best part of a decade. Finally, as the dust settles commentators are starting to recognise that home owners and first home buyers have not been caught up in the Sydney property euphoria.

Property investors are simply following infrastructure trails such as the South West Rail Link, which is due to be opened early in 2015. What many forget is that such vital infrastructure is decades behind where Sydney’s cumbersome and tired transport networks should really be. These areas are high impact growth areas, although some see them as nothing more than an investor wave of speculation. Of course Sydney’s projected population explosion has no significant relevance in this debate.

One of Australia’s largest residential developers Meriton is currently courting Chinese property developers with the view to selling their entire operation to them – another clue.

Again key points keep getting missed here; the Sydney property market is now a global market. We keep referencing what is happening in China, yet fail to point out the increasingly growing number of Chinese residents that now want to call Sydney home as well as a multitude of other nationalities. Sydney is envied as it continues to attract investor funds, which further drive ongoing infrastructure investment given its solid reputation for employment and population growth.

Then of course we must not forget the second Sydney airport which the federal government announced on 15 April, 2014 would be located at Badgerys Creek at a cost of $6-8 billion – again another colossal infrastructure spend. As quick as a flash investors jumped on to this newly created wave of speculation only to see local property prices post double – digit growth.

What then happened was that the likes of RP Data and APM Price Finder released ridiculous property statistics heralding Sydney house price growth explosions, despite not even closely resembling what is happening in the Sydney markets overall, which if anything have been subdued. The reason is that they sell their respective suburb reports – so given that overall results are average to reasonable at best. They then manipulate key word statistics to on-sell their products.

This takes me to that old saying pertaining to the use of statistics in the media: “Some people use statistics like a drunken man uses a lamp post – for support rather than illumination.”

On 7 August, 2013 the Reserve Bank of Australia (RBA) decreased the cash rate from 2.75% to 2.50% where fourteen months on it still sits at 2.50%. In time we will see this cash rate become the longest ever hold in RBA history. As I have commented on numerous occasions before, the next move by the RBA will be down. There is a very strong possibility the first number of the cash rate will, in all probability, remain at 2.00 something for quite a few years to come – advantage investors.

Cue the much awaited Murray inquiry which is due for release this month with many agreeing not before time. There are, amongst many interesting recommendations that will be made, two in particular (but I’m speculating).

The first – that Australian banks must hold more high quality capital to offset their risk weighting of housing loans. If proven true, this will quite possibly see investors move from bank stocks to residential real estate investment.

Secondly, to offset that risk the Murray Inquiry will recommend negative gearing changes where investors can only claim against that particular asset, as against broad based investment deductions.

On that basis the Abbott government would accept all the recommendations given it would be much easier to sell and furthermore reduces the federal government’s financial exposure to negative gearing – which has become a major mover and shaker in the property investment market. With the benefit of hindsight it’s an embarrassment that the previous Labor government decided to completely ignore the Henry Tax Review recommendations.

It has become completely obvious that RBA ‘jawboning’ has not worked given investors are very, very short on investment choices. The Murray Inquiry ‘macroprudential’ lever will all but ensure that the Australian cash rate remains with a two in front for quite some time to come.

For those actively spruiking that imaginary ‘bubble’ conversation – your argument basically ceases to exist. Unless of course you’re from RP Data or APM Price Finder and you’re selling ‘suburb reports’.

The saddest part with this entire property critique is that property investors are mistaken in the vital role they play in the machinations of the Australian economy. Australian Census figures reveal that approximately one-third of the Australian population reside in rental properties.

The Murray inquiry will make for compelling reading where no doubt it will more than ruffle a few feathers.