The Rotting Fruits of a 100 Year Old Trend

By Calllum Newman of The Daily Reckoning

Perhaps you heard the news? The Australian Financial Review reported ‘Hong Kong-listed property giant R&F Properties has agreed to buy a Brisbane riverfront site for more than $80 million, greater than four times what DEXUS Property Group sold it for 18 months ago, in another sign of Chinese appetite.’

Talk about capital growth!

The purchase isn’t quite over the line yet, but there’s been such a string of these deals we can see the trend clearly in place. As the AFR points out, with the Aussie dollar down 25% in eighteen months, Aussie property looks cheaper to foreign money than it does for any of us.

Of course, foreign money means mostly Chinese money. And Chinese money is going all over the world right now. According to American research firm The Heritage Foundation (as reported by Business Insider), China’s foreign investments abroad were $870 billion at the end of last year.

You can see where it’s going on the map below. I’ve set it to show data for capital flowing to Australia.


[The global interactive chart is here]

By the way, the bigger the red dot, the bigger the investment figures. You can see the US and Australia loom large, with Canada a bit behind for the top 3.

Africa, the UK and the Middle East don’t look too shabby either. It seems to me that China is securing resources all over the world. It does make me wonder how long before Chinese troops start appearing in far flung parts of the world to protect these investments. Military bases have a habit of following pipelines.

As you can see, in our part of the world, there’s more money going into metals and energy projects here than Australian real estate. Having said that, rising land values and rents are showing up in the share market.

On Monday, property trust Generation Healthcare reported earnings were up 78%, and it enjoyed a $4.8 million boost in property revaluations.

Another stock I like to watch is BWP Trust. It’s basically the landlord to the Bunnings Warehouse chain. It reported its profit was up 14.6% on its $1.9 billion portfolio.

If we broaden out the scope to the wider market, you can see the property sector [ASX-listed Real Estate Investment Trusts] is starting to lift.


Mind you, we’re a long way from the giddy days of 2006/7. That’s why I think there’s plenty of room for this to run yet.

All this is perfectly in accord with the movement of our property clock over at Cycles, Trends and Forecasts. The clock actually tells you how the economy will move…long before the events come to pass.

For example, the next phase we’re looking for over in the US is a rapid expansion in new construction. Of course, for that to happen, people need to be able to afford to buy in. That hasn’t been easy over in the US in the wake of the subprime debacle that brought on what the Americans call the ‘Great Recession’.

So it was with interest I saw this from USA Today…

‘US makes it easier to buy first home

‘New policies — including lower down payment requirements, decreased mortgage insurance premiums and looser lending standards — are intended to make it easier for first-time like Mr Eddleman to get a loan…

‘Easier access to credit will be one factor in getting first-time home buyers into the market. A bigger factor may be that Millennials are settling down. “The pure demographics [of Millenials overtaking Baby Boomers as the nation’s largest generation] are going to increase the number of first time buyers in the market.”’

This will soon put the American banks back into the profitable business of financing property. That’s basically what banks all over the world exist to do. They’ve left businesses to raise money from the share and bond markets these days.

This trend’s been 100 years in the making. The Economist reported on this in late January and created this handy graph.


Here’s the key quote: ‘Since the 1970s virtually the entire increase in the ratio of private-sector debt to GDP around the world has been caused by rising levels of mortgage lending.’

What? Aren’t we Westerners nothing but a bunch of spendthrift consumers who cannot be trusted to contain ourselves within a five mile radius of a shopping centre? Don’t our Depression-era forefathers look down upon us from the heavens and shake their head at our profligacy?

Actually no. We just need more debt to buy into the property market. All the banks ask is that you pledge your lifetime earnings in advance.

Banks of course get a higher return on property loans than they do on business loans because the regulatory rules state they have to hold less capital against a property loan. The study the Economist referencessays banks actually resemble ‘real estate funds’ who borrow short (deposits) to lend long (property loans).

That is to say, our money on deposit is hostage to the banks’ property portfolios. That’s ok for now; it’s when the boom really gets going that the worries will start to kick in…

We’ve all become slaves to the banks. The ruling elite don’t want you to know this of course. It should actually be the other way around. Banks should work for society. But where’s the free ride in that?


Callum Newman
for The Daily Reckoning

Join The Daily Reckoning on Google+

Leave a Reply