jake bernstein & jordan wirsz2chimps.com/2012/australianrealestate/media/pdf...jake bernstein...
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Jake Bernstein & Jordan Wirsz www.jakebernstein.com / www.ibarons.com
Australian Real Estate Market Forecast
Jake Bernstein and Jordan Wirsz
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18 January 2012
©2012 by Jake Bernstein & Jordan Wirsz
www.jakebernstein.com www.ibarons.com
My goals
My Australia market presentation goals:
• First and foremost to serve you
• To give you good, sage, objective information based on my knowledge and experience
• To give you fundamental and technical indicators that cannot be denied
• To give you enough information for you to make your own judgment
• To help you preserve your net worth, and profit from this presentation
Disclaimer
My forecast is bold. It may be contrary to your views. It may be offensive to you. It is not a popular opinion. Timing is uncertain, but I believe it’s already begun, and we haven’t seen anything yet… I could be wrong. There are other forces at work that could influence the timing and depth of the situation…
My background
• Real estate investor for last 11 years • Founded & managed a real estate investment lending firm with approx. $150 million
in assets • Founded & managed a private real estate fund • Credited with approx. $500 million R.E. in transactions • Personally underwritten/funded, developed, owned, built, leased: Office buildings Industrial complexes Retail shopping centers Residential developments Apartments Land / Lots Hotels Gas stations Churches ….And the list goes on…
My background
• I have seen the best of the markets in “parabolic” mode…
• I have seen the worst of the markets in the “collapse…”
• I have seen the turning points of markets, and the awkward time between parabolic and collapse…
• I have been there when the market slowed and people said, “I’m going to wait to sell until the market gets better,” only for the market to fall another 50%!!!
• I heard the news, and “experts” saying: “This isn’t a bubble, just a temporary slow down.” - “Our economy is strong.” - “We have unique circumstances that will help us be different…”
My background
• I dealt with large international real estate firms…
• I had many colleagues dealing in Dubai real estate, trying to convince me to join them
• I had many “international” opportunities from Mexico resorts, to Dubai high-rises, to London apartment buildings…The list goes on.
• So why did Australia catch my eye?....
Why Australia
• In 2009/2010, early 2011 I had been traveling abroad speaking and promoting my books. • I ended up marrying an Australian who had substantial family holdings in Melbourne real
estate, among other areas (gold coast, etc.)
• During my time in Australia, I saw many signs of trouble ahead: A. Very high Loan-To-Value (LTV) lending practices B. People making ordinary wages fearful of missing out, buying far above their means… C. Property values that had increased far beyond the pace of inflation, job growth, normal
demand (NOT speculative demand!) D. A parabolic decade long housing boom E. Huge amount of discretionary spending habits F. Equity lending to purchase new properties G. Completely unrealistic and unsustainable bull market sentiment H. Flooding of average people who considered themselves “professional real estate investors.”
Why NOT Australia?
I’ve heard every reason why Australia is exempt from a correction:
• “Our economy is not tied to the rest of the world” – What about tourism, import/export, and natural resources?
• “Our lending system is different” – nope, not really
• “People won’t default on mortgages because Australia laws are different, and debt isn’t forgiven like in the U.S.A.” – This is likely to only make it worse from a macro economic point of view
• “We have a housing shortage, the experts say so.” – So they said about the U.S. market as well.
Facts
• FACT: Australian real estate has slowed down substantially
• FACT: The Australian shares market is seeing pressure
• FACT: The Australian economy is “showing signs of slowing” (whatever that means)
Market Forecast
• International Real Estate Market:
BEARISH outlook on broad international markets, specifically Australia
Why:
A. Artificially low interest rates due to financial crisis
B. Outrageously high price appreciation over last 10 years
C. Economic bubble due to commodity prices & Asia strength
Technical Information
• Australian Real Estate Market:
http://en.wikipedia.org/wiki/Australian_property_bubble • The Australian property market has shown steady increases of around 3% per annum since the 1970s. Since the 1990s however,
prices have risen by around 6% per annum.[1]
• In the late 2000s, housing prices in Australia, relative to average incomes, were among the highest in the world, prompting speculation that the country was experiencing a real estate bubble, like many other countries.
Technical Information
• Compare this to the USA Bubble….Look how extreme Aus is in comparison
International Market A little extra detail
“The trend is your friend…Until the end.”
International Market A little extra detail
Variable Rate Loans are great!...Until interest rates rise, then watch out! Rates are low now due to global financial crisis – when rates rise, variable rate loan defaults will skyrocket!
International Market A little extra detail
Credit: Jim Chanos, “never in modern history is there a record of a country that has invested so heavily in fixed assets (greater than 40 percent of GDP) for such a sustained period of time.” He estimates that the overbuilding in commercial real estate has been so extreme that there’s a 5×5 office cubicle for every man, woman and child in China. THIS IS HUGE OVER INVESTMENT IN CHINA REAL ESTATE
What the media is saying…
• www.economywatch.com: “In 2010, Australia exported US$48.6 billion of goods to China, more than nine times the amount a decade ago. The mining industry was particularly lucrative - iron ore exports accounted for more than half of Australia’s exports to China.”
• Marc Faber: “I think a lot of people will care if china grows only at 5%
rather than 10% or 0% in a hard landing case because China is the largest buyer of commodities in the world, and if the Chinese economy slows down the demand for commodities slows down. then the economies of Brazil, Argentina, Australia everybody is affected and then they can buy less from China and then you have a downward spiral. - in CNBC 03 Dec 2011
What happens in China WILL matter to Australia…
Fundamentals of the Aussie economy - China
Courtesy of the Wall Street Journal (http://online.wsj.com/article/SB10001424053111904140604576498353661884930.html)
…”a small but rising number of Chinese economists are beginning to predict sharply lower annual growth rates of 6% to 7% over the next few years. But the arithmetic of adjustment suggests growth is likely to be even lower, perhaps half that level.”
…This can't continue. Investment, especially in infrastructure and real estate, is increasingly wasteful. With Europe in crisis, and Japan and the U.S. struggling with their debt, demand for China's exports will stagnate.”
Courtesy: http://news.bbc.co.uk/today/hi/today/newsid_9666000/9666589.stm
• In China, house prices in most cities have fallen as government policies aimed at cooling the property market start to take effect, prompting fears from some economists that the house price bubble is bursting.
• FORBES: “China Housing Bubble Deflating; More Declines Seen In '12” (http://www.forbes.com/sites/kenrapoza/2011/12/19/china-housing-bubble-deflating-more-declines-seen-in-12/)
Fundamentals of the Aussie economy - China
The media cannot deny the China slowdown any longer…
…Despite their attempts to keep it positive with underlying optimism.
What happens in China, will not stay in China.
“When the Chinese economy slows, Australia’s may tumble.”
Courtesy: www.SharesWatch.com
What do we KNOW
Lets not talk about what we don’t know, lets talk about what we DO know.
I am not an economist…I am a real estate analyst and investor.
FACT: Much of the Australian citizen wealth is tied to real estate…If they lose that wealth, it WILL affect the economy.
FACT: Most major world economies are tied closely to the strength or weakness of their real estate relative to the past.
Enough rhetoric… Lets look at reality.
Auction
results
as of NOW
Vs. 83%
Vs. 60%
Vs. 85%
Vs. 80%
Vs. 47%
Enough rhetoric… Lets look at reality.
Look at how extreme the Australian RE market bubble is compared to the U.S. bubble
…”But Australia is different than the
U.S….”
The argument that Aussie economic fundamentals are different than the U.S. is incorrect
Australian Housing $
A lot of mortgages have been taken out by investors and speculators = BIG TROUBLE
Australian Housing $
Prices rising while Demand for mortgages Decreasing = big trouble This means fewer people Are buying but willing To pay more… True demand is in Number of buyers, NOT The price…This is Indicative of a bubble Top
Australian Housing $
30% - 35% Of homes Owned by investors = big trouble -And BTW: This Number is just how Many the banks KNOW are investor Owned…There is a high probability there are many more.
Australian Housing $
Less demand, tighter Lending standards is Causing the beginning Of the slowdown and Problems for banks In Australia
Signs of being “on the edge” of a steep slope…
• Major slowdown in buying activity, less willingness for buyers to step in… - Happening now
• Major slowdown in lending and tighter guidelines for lending… - Happening now
• Denial of sellers, holding out for “better prices…” - Happening now
• Major media attention to the matter, lots of debates… - Happening now
• Popularity and “fads” of property ownership fading… - Happening now.
Reality came to Reality TV in Australia last week, when 3 of the 4 properties in the much-hyped “Flip that House” program The Block failed to sell at their nationally televised auction. A 400 person live audience, watched by over 3 million TV viewers, couldn’t entice more than one person to part with money rather than eyeballs. As the SMH observed: Whatever the lure of a celebrity house, the would-be buyers in Fitzroy Town Hall were just as jittery as the would-be buyers at any other auction in recent weeks. (“Auction failure shocks The Block“, SMH August 22)
How far can it go?
• Is a 10% correction a buying opportunity? - I don’t think so.
• Is a 20% correction a buying opportunity? - I don’t think so.
• Is a 30% correction a buying opportunity? - I don’t think so. • Is a 40% correction a buying opportunity? - Possibly.
• Is a 50% correction a buying opportunity? - Likely.
• Is a 60% correction a buying opportunity? - Yes.
Q: Can real estate REALLY drop 60%???
A: Yes, and it can even drop more….See examples:
How far can it go?
• Examples in the U.S. – How far did our market go? 20%? 40%!? 60%!!!???
This example: 4 bedroom, 2.5 bath home of 2,000 S.F.
1848 Pacific Terrace Dr. – Las Vegas, currently listed for sale: $130,000
Last sold: November 20, 2006: $280,000 (55% devaluation approx.)
How far can it go?
• Examples in the U.S. – How far did our market go? 20%? 40%!? 60%!!!???
7217 Eve Ct.– Las Vegas, currently listed for sale: $67,000
Sold March 28, 2008 for $300,000 – a 78% DEVALUATION
How far can it go?
• Examples in the U.S. – How far did our market go? 20%? 40%!? 60%!!!???
7217 Perfect Day Ave. 5 bed, 3 bath 3723 S.F. – Las Vegas, currently listed for sale: $219,950
Sold June 5, 2008 for $514,000 - a 57% DEVALUATION
How far can it go?
• Examples in the U.S. – How far did our market go? 20%? 40%!? 60%!!!???
2641 Golden Sands Dr. 2 bed, 2.5 bath 1557 S.F. – Las Vegas, currently listed for sale: $111,700
Sold December 28, 2006 for $267,000 - About 60% Devaluation!!
How far can it go?
• Examples in the U.S. – How far did our market go? 20%? 40%!? 60%!!!???
900 Heavenly Hills Ct., 2 bed, 2 bath 1067 S.F. – Las Vegas, currently listed for sale: $50,000
Sold June 31, 2005 for $176,500 - About 72% Devaluation!!
How far can it go?
• Q: How far could the Australian real estate market fall? A: No one has the answer, including myself, however, I believe it could fall as much as 50-60%
My forecast is:
• A drop in the Australian real estate market that will bottom in or around 2015/2016
• A magnitude of approximately a 50-60% drop in values from the prices at the height of the market
• Lending/banking issues to come
• Lending guidelines to tighten significantly, tighter credit, fewer will qualify
• A slow recovery at a more normalized rate of appreciation
• Opportunities will begin with residential real estate (as opposed to commercial, land, etc.)
What to do now?
If you are a real estate professional:
• Be ready to alter your business plan and demographic
• Adjust to current market conditions
• Look for opportunities to sell bank owned properties
• Be flexible
• Be prepared for a lengthy period of time of little to no activity as banks, borrowers, owners, and the general population tries to figure out what to do next
What to do now?
If you are an investor:
• Consider liquidation of existing properties
• Wait for timing to buy again – be patient, it’s not anytime soon
• De-leverage as much as possible
• Stockpile resources, preserve your credit rating
• Watch it unfold over the coming years
What to do now?
If you are a innocent bystander or homeowner:
• Be cautious
• De-leverage
• Consider selling if you plan to be in your home for less than 7-10 years
• Become a tenant
• Reduce overhead & live well within your means
• Stockpile resources (Cash) for future opportunities
What to do now?
If you are a member of the media, I humbly request, for the sake of the wonderful Australian people: • Serve others; report it as it is • Know that unfounded optimism is not helping anyone
preserve their wealth • Interview removed third parties who have nothing at stake
and nothing to sell, but that have REAL and sustained long term experience
• Real estate agents/banks and their industry have a lot at stake – they MUST be optimistic – not the best sources for the “real story”
Ways to trade it
Look for short selling opportunities in Australia real estate sectors. Some to consider (I have NOT done research on these):
ASX Listed:
• VAP
• CQO
• CPA
• DXS
• GPT
• MOF
• SGP
• SLF
• CQR
• CER
• ALZ
• MPF
• ***Note: Timing may have already triggered, look at your charts & indicators. Research each to determine if they have exposure to other countries besides than Australia, or other relevant factors.
Disclosures
• DISCLOSURES:
1. I could be wrong.
2. These are my opinions based on my experience and research.
3. I am not giving you any financial, legal, or other advice.
4. There are many factors to consider when analyzing the Australian real estate market, not all have been covered here…Including larger global economic factors.
5. Be smart, diligent, come to your own conclusions, make your own decisions, and use caution as any sophisticated investor does.
Resources
I’ve created a website for people who are interested in my real estate forecasts and strategies.
Visit the website: www.ibarons.com
(Site being remodeled soon)
Questions? E-mail me: [email protected]
Also on Twitter & Facebook
Thank You’s
Thank you Jake for inviting me here and entrusting me with your family of clientele.
Thank you Marilyn and Ray for your hard work to make this all happen.
Thank YOU for attending, for giving me the joy of sharing my work with all of you.