Adam Schwab on Why Housing Incentives Keep Lifting Prices

In this episode, we tackle one of the more polarising takes in the Australian property conversation, and we do it with someone who isn't a property insider, but has plenty to say about the system's perverse incentives.

Adam Schwab is best known for building luxury escapes into the global success story that it is, but he's also an unfiltered commentator on corporate behaviour, inflation and what he sees as the structural failings driving Australia's housing mess. His vocal contrarian, we do like that,

and not afraid to call property the devil, which makes him exactly the kind of guest worth interrogating here. We dig into why someone outside the property industry feels compelled to sound the alarm, where his arguments align with economic reality, and where they may fall apart under scrutiny.

We explore his critiques of the RBA, inflation management and government market interventions like the 5% deposit schemes, and what these policies actually do to prices, incentives and long-term affordability. For listeners who appreciate robust debate, this one promises to be lively, we have no doubt.

welcome to the elephant in the room this is the podcast where we love to talk about the big things in property that never usually get talked about i'm veronica morgan real estate agent buyer's agent and buyer's agent mentor co-host of foxtel's location location location australia author of auction ready and co-host of your first home buyer guide

Hi, I'm Chris Bates, ex-financial planner and mortgage broker, currently ranked number three in the annual MPA Top 100 Mortgage Broker Awards. Before we get started, everything we talk about today is not personal advice, and we recommend you engage the services of a licensed and experienced professional.

Our guest today is Adam Schwab, a founder who's built a billion dollar global business while maintaining a parallel career as a financial journalist and corporate governance commentator. He also co-hosts the Contrarians podcast, where his contrarian takes on markets, policy and economics have earned him the reputation of cutting against the narrative.

Together, these threads make him a provocative outsider to interrogate some of the most entrenched assumptions in Australia's property landscape. We are very much looking forward to this conversation. Thank you for joining us, Adam, and welcome to The Elephant in the Room.

Thanks, Hermie. That was an amazing intro. I don't think I've had an intro that long.

Adam, thanks for coming on. I mean, you know, I have looked at some of your content and, you know, so I don't disagree with it. And I think, you know, just let's start there with property being the devil. I mean, why do you think that?

I mean, because, you know, there's definitely a side you can take.

I was probably being provocative. I actually don't really think it's the devil. But I think there's some elements to property that are certainly very troubling in Australia, especially. And Australia is not the only jurisdiction. But if you look at our property prices, and when you look at prices in absolute terms, forget that.

It's relative to incomes, which is really how you judge property prices. I think outside of Hong Kong and Monaco, tax havens may be to buy. And remember, tax havens are different because tax havens inevitably lead to higher property prices because that's where the tax gets capitalized. We're the highest in the world.

And Sydney is absolutely the highest in the world. So you've got the most expensive property. Now, I've been calling a property bust for 20 years. So if you've ignored me, you've done very well, obviously, investing in property. But that doesn't mean that the valuations we're seeing are sustainable in the long term.

So when I say it's the devil, I think it's all a matter of timing. I think property can be incredibly investment. We have invested in property in our very first business. We bought a bunch of apartments as part of that.

We had very little capital and we were able to parlay that into a great windfall. So at the right time, in the right conditions, property is an incredible investment. I just haven't seen those conditions for probably 15 years. That said, you would have made a fortune ignoring me for 15 years.

I just like to sort of prize open something there about, you know, we do, that's a common metric, you know, property related to incomes. However, roughly 5% of our property changes hands every year. So that's really what determines the price or the value, if you like.

And the rest of it doesn't change hands, which means that sort of it comes down to how much equity you've already got in property that that allows you then to continue to trade the market.

So I guess that's one of the problems with the system in that it's very difficult for new people to get in. But if you only look at it as a metric of incomes, that does forget that really important factor though, doesn't it?

That people say, oh, look in Sydney is unaffordable because how could anyone possibly afford, how could any first home buyer possibly afford a $2 million house, for example, but most people buying $2 million houses aren't first home buyers or they're in some way funded by existing property holdings.

So that's sort of, you call it a Ponzi scheme because of all that, I guess. You could as well, but that's an important part of it, don't you think?

Less of a Ponzi. You actually made a bunch of really interesting observations there. Let me try and pick a few. You talked about price and value and you use them interchangeably. And I think that's the core of the problem here. Price and value aren't the same thing.

As Benjamin Graham said, in the short term, the market's a voting machine. In the long term, it's a weighing machine. We've had a lot of voting machine dynamics around the property market. Essentially, okay, you're right in that income isn't the only metric to use.

Another one is look at the gross yield or the net yield even better. So look at what yield am I getting? I can rent a property or I can buy a property. And yeah, there's definitely benefits to buying a property. There's also detriments because properties depreciate a lot.

So, it's the land that appreciates, it's the dwelling that depreciates, as you guys obviously very well know. So, if you call that sort of a draw, in that you've got some benefits and some detritus, you don't get booted out and the laws generally favor tenants over owners.

Well, that's changed a little bit in Victoria lately, but I think if you boil down to rental yields, like you're getting a gross yield of what, 2%, 2.5% in most cities.

Yeah, regions maybe you can get a bit more here and there, but let's say you're getting a 2% gross yield, you're probably getting a barely 0.1% net yield, depending on the state of the property.

That's what you got to base the value of an asset is the present value of its future cash flows. And as I say, the problem with bubbles is it makes morons look smart. And your point on 5% of property changing hands is the point to make.

You can have 5% of the population being morons and continually bidding up the price of this asset, and then you've got moron banks lending to them who are basically insolvent, and you've got this perpetual stupidity machine. Flywheel. going, yeah, but it's a ridiculous, it's a moron flywheel.

So this continues over and over again. So that's essentially the problem we've had for 15 years and that we've lost so much touch with rationality that people just forget about any kind of rational measures. Let's ignore rents because that rent is what you earn from property. Let's forget about rents.

Let's just say, oh, someone else is willing to pay $4 million for a one bedroom in Darling Point. So that's what it's worth. Well, that's not what it's worth. That's what some moron's willing to pay. There's a big difference.

We're not all investors. Like, you know, 70% are owner occupiers. So the yield doesn't matter to them, you know.

No, but it does matter because you can rent or you can buy. Like it's, you're assuming that there's some other great value in buying and Yeah, but other assets have capital growth. So you're not getting the cash and putting it on your bed and leaving it.

You can invest in the share market, invest in gold, you invest in crypto, whatever. You invest in the business. There's lots of different stuff that you can invest in.

The absolute best thing about property, and Paul Clifford wrote this in his book like 25 years ago, and it sticks with me to this day and it's a great point, is that property is a great force saving mechanism for a lot of people. So in that respect, I really like it.

And if you can invest in a market that's paying a gross yield of 5% or 6%. It can be a bit less than a bank, but whatever, you're going to get some benefits from the inflation adjusted growth. And essentially, property has pretty much tracked M2 money supply over the last 20 years.

So as we've printed more and more money, that money gets capitalized in property. We can talk about government spending later as well.

So the reason why I've been wrong and property has been a good investment for 15 or 20 years is because we've had this inflationary environment of assets, the great moderation post-GFC, and that's capitalized in asset prices, especially houses, especially residential houses.

So that's why it's been a decent investment, although certainly crypto's outperformed it, gold's outperformed it materially. Gold's almost doubled property, even Sydney property. So there's been a lot of assets that have been better than property.

So you actually would have had a much better financial result if in 2007 you'd bought gold and levered up gold with the same leverage you had in property. That's the easiest thing to have done. So when you say only 30% of people are renting or 30% of people are investing, what do you

doesn't really matter because you can rent or buy. You can rent a similar-ish kind of place you can live in. It doesn't mean that it is or isn't undervalued, but for reasons that I just said, probably could continue to be overvalued forever. It's not unthinkable.

Yeah, I guess the whole rent versus buy thing, I think if there's this real liquid rental market, you can get longer leases. If you get kicked out, that's fine. I can move somewhere else. If you didn't have school zones, if you didn't want community and want to have stability with your neighbors.

So it's kind of like the system's structurally broken from a rental point of view. And then that forces, and that's been really, the valve's been lifted on that post COVID, you know, and it's going to get worse, right? Because a lot of new investors are going where the old investors aren't investors.

They used to buy the capital cities. Now they're buying Townsville or Bendigo or et cetera. And so it's just getting harder and harder to rent. I think the bigger thing that as an entrepreneur yourself, right? You've built a business, you've taken risks, you've employed staff, you've you've grown the economy, I guess.

How do you think that just the failings of having a very expensive property market is really going to bite Australia in the bum longer term?

That's a great question. Let me just talk about the renting versus buying thing just quickly, just show how out of whack it is. So we're renovating our place. So we're renting as well as obviously renovating and renting in a place called Middle Park in Melbourne, which is a pretty nice suburb.

And we're paying $3,000 a week rental, which is Certainly not cheap, but it's not like when you think about how much people are paying a muted mortgage, it's actually not that much.

But so look, we're paying 150 grand a year and that's for everything versus I think the house next door sold for like 7 million bucks. Maybe it's a little bit better than our house, but our house would sell for roughly the same.

And let's say, let's assume a 5% expected yield you get in the bank. Roughly, you maybe get a little bit less, but let's assume 5%. So you can take that 7 million bucks and pop it in the bank and you get 350 grand a year.

or you could rent it to me and you get 150 less the costs. And bear in mind, there's like 10 grand rates. There's all the other stuff there. So there's a maintenance all the time because this place is falling apart.

So you're probably getting a net of after property management and all that kind of stuff, maybe best case 100K. And that's not really including property depreciation. Let's be a bit generous, say 100K. So that's 250K difference a year after tax.

This is not, okay, it's not quite a fax because you've got capital gains. It's not principal, but caught $250,000 after most tax by renting. That's a massive difference. What can you do with that $250,000?

I guess I would argue though, the person who owns a house you're living in, it's unlikely that they bought that with the intention of just holding it as an investment property. There's very few investors are buying that type of asset now. They've probably owned it for a long time.

They may well have lived in it before. Maybe they moved overseas and so they want to live there.

Whatever their reasons are for having it, we're finding, and you probably found this when you were trying to find something to rent, that type of property is diminishing in terms of its availability for exactly all of those reasons. They are not the sort of property.

So the reason somebody would hold that, and whether you're in Melbourne or not, land tax on a property like that would be sizable. And so the reasons for that being in the market is not investment reasons. They would have a bunch of other reasons, you know, for having that particular asset.

But if you compared it, say you had a three bedroom apartment that was bought with that pure intention, and you would see a bunch of different metrics. I agree with you though, if you're buying any property just for yield, well, you are a moron personally. I mean, I'll use your word there, right?

So I think that, and we don't encourage that. Anyway, we can go on about that. We don't need to go on about that. All our audience knows what we think about that sort of thing. But that's cherry picking a really bad example. Yeah.

Yeah, that's funny that it's like the, you know, at particularly your end, right? Like that renting versus owning and it doesn't defies belief, right? When you think about it, you're like, why wouldn't I just rent that, you know, $7 million house versus own it?

And it's just the availability of those $7 million house is getting tighter and tighter every year to rent.

I think you're right. My house is an unusual example for sure. But my point was that there is, even if you're looking at a two bedroom house, it's still significantly cheaper to rent than buy. And there's some disadvantages of renting.

But so what you're essentially saying, and there's some truth in that, that, okay, we'll break even off the property and we'll use it as inflation hedge, which I have some sympathy for, but I think there are also better inflation hedges than property.

And I think you're right that there's a lot of people that don't really think about renting versus buying, right?

And they'll go and sign up to a, particularly in Melbourne or Brisbane, they've got themselves an off the plant apartment or, you know, first home buyers are getting stitched up by this all the time. It's like, hang on a sec, interest is dead money, rent's dead money. You know, if this asset doesn't,

when you're adding all the costs on top of interest, and it's easy to rent those things, right? Because there's heaps of apartments. If you get kicked out of one, you just go rent another.

And so unless this thing goes up in value, then you're actually going to be, you know, you're just tying yourself up. You might be paying stamp duty, you might be selling costs, you've got maintenance, you've got

building issues and i think you know a lot of people just don't consider the viable alternative okay well i'm just going to rent and i'm going to put my money also whether it goes in a property or shares or you start a business etc a lot of people aren't doing that math that like you say they're just being a moron they're following just what the system they're going on but um

I mean, the bigger issue, which I think, you know, you're in a world place to answer, is that sort of the danger of just this ever, you know, increasing property values and just our wealth just constantly flowing back into resi, back into resi.

You know, you do well in business, you put it back into resi, you know, like, so what's that really going to cause us down the line where, you know, we're basically going to really reduce a lot of risk in our economy, right?

And it's going to productivity issues and you might have more, right? Obviously.

Yeah, I think that's a really good point. So my view is housing is an unproductive asset and people might take the counter view to that, but I think overall compared to investing in a business, it's highly unproductive. So you're not creating, you're not improving productivity in the economy.

So you're not, effectively what causes economic growth, which is two things, improve productivity and increase population growth. So take out population growth in one side, you're not going to get improved productivity by building houses. It's the opposite of that.

You're sucking capital out, you're crowding out capital and putting it in an unproductive asset. So I think you're totally right. Like it's not productive.

And Australia has sort of survived on the back of increased government spending, really loose monetary policies, and a lot of luck with things like iron ore and coal prices going through the roof in the last sort of 20 years. Take out that extraordinary luck we've had.

We've got a bit of a Dutch disease at the moment, but take out extraordinary luck. And we've got governments, both state and federal level, who are addicted to running deficits, are addicted to paying, bribing voters with young people and future generations' savings, because this debt has to be repaid in summer.

If it gets inflated or repaid, either way, it destroys living standards. And a big reason for that is the way the tax system, and again, this is an argument in favor of buying property, is the tax system is so biased in favor of property, especially principal residents, but

even not even investment as well, that it gerrymanders investment into an unproductive asset away from productive assets, which is just insane.

Well, that's right. I mean, they will lend 95%. You walk into a bank with a job, even on probation, they'll lend you 95%, your 5% deposit that you've saved up, which could have gone into a business, right? You could have started, you know, maybe invested in your career,

maybe got into business with a mate, maybe started something, you know, like you go, oh, no, no, no, I don't want to rent, right? Because renting is not secure and I don't want to not own because I don't want to get to retire without owning any property.

And that's usually a good, because I can leverage it five, you know, 20 times. Why would I try to risk that going in, starting a business? And I'm worried about renting. My rent's gone through the roof. I need that security. I've been booted out a few times.

Why would I risk starting a business when I can potentially leverage it 20 times into property? And that's unfortunately what people think. Why would I leave a high paying job that I'm doing really well, I've invested in my career, but I've got a big mortgage.

If I leave the job, start a business and fail, I don't just lose my job, I lose my house. and my family and might get a divorce. And so, I think there's like a, there's all these other issues. Does that frustrate you, I guess? There's a, these are the things you see.

Oh, I think, and starting business isn't for everyone as well. Like, I think ultimately, if you want to start a business, you can always use equity in your house. Like, you can sort of withdraw. So, I think that itself isn't necessarily the problem.

I think the alternative probably is putting money in like an ETF or a next fund. That's probably the alternative to purchasing a house. What can you do with that equity? Like, I think if you look at, even as well as property is done,

The market has out, certainly the market with dividends reinvested has outperformed property. Gold's absolutely outperformed property. Obviously crypto has, but forget that. So property is as good as an asset has been in the last 20 years, has generally been outperformed by the other big asset classes.

I think your own business is a tricky one because for 90% plus of people, maybe they shouldn't start their own business because it's hard. And as you said, it's risky. You can lose everything. It's not for everyone. Obviously the upside's great, but the downside's real.

But that 10% that potentially should start a business, it just kills innovation, right? It kills taking risk.

The person who's got all the assets that they could, they've got the industry expertise, they've got the knowledge, they're a great, you know, they are an entrepreneur, but they've got stuck in a corporate job earning good income because they can't take the risk of starting a business because they've tied themselves up with a mortgage.

Isn't the issue more that really it's about what we invest in? I mean, I don't think we should be encouraging too many people to set their own businesses up. I mean, there's a high proportion that fail. I'm in the buyer's agent space.

Everybody wants to be their entrepreneur and it's screwing up the whole industry, to be quite frank. So let's talk about what else you could invest in, because I think that's really what would, you know, investing existing businesses to grow existing businesses. I mean, isn't that really the missed opportunity?

So there's two questions. One is the general economic question, like how much are we as a country suffering from this Dutch disease of just investing our windfalls in property? I think that's totally right. The other question is, what should you invest in? There's two quite separate questions.

Initially, my co-founder at Luxury Escapes, who lives in London now, he also had similar views to me on property. We both eventually begrudgingly bought properties over the last five or six years. And he paid whatever for his place.

He ended up selling, I don't know, a million bucks worth of Bitcoin to fund it. So his place has cost him like 30 million bucks in opportunity costs because Bitcoin's 30x over that time.

So the cost can be many multiples if you, the opportunity cost, if you get out of the wrong asset and into the wrong asset. So that's obviously an extreme case. But even if you just compare, look what Warren Buffett says is most people should just simply just buying a market ETF.

or a market buying an index, don't try and outperform. You're not going to outperform the index almost certainly. And with much lower fees, you just buy an ETF and be done or buy an index fund and be done. So that's, I think, what the comparison is.

And you can pretty easily leverage ETFs as well. So buy a leveraged ETF, get the similar leverage you're getting in property. You probably make a better return, but you don't have the security of having your place, but you're also not having to rebuild it every 30 years. So there's sort of

Pros and cons on both sides.

The biggest problem with Australia is, leaving aside the massive unfairness in our sort of monetary and fiscal systems, is there's this great, terrible view that unless you own your property and send your kids to private schools, you failed in this country, which is like the worst possible view because both Neither are good.

And the last thing we should be judging people on is owning your house or what school you went to. It should be what you contribute to society in the form of all sorts of things, in the form of community and charity and business and all that kind of stuff.

Not what house you own, but in Australia, it's all that matters is what house you own and which suburb you live in and how much the rent I cost and all this stuff. So that's...

sort of order problem is we've got the wrong priorities in this country, which then leads to politicians favoring housing as an asset over pretty much anything else, which leads to this bubble. So it's sort of a cycle of ill effects have led to where we are.

It's interesting too, because I anecdotally know a lot of people who really dig into the equity of their home in order to pay for those private school fees as well. So then they get even doubly bogged down with, you know, bigger repayments over a longer period of time.

But you talk a lot about inflation and the RBA's role in fueling asset bubbles. Where do you think monetary policy has fundamentally misfired?

Where it started really going wrong here is probably three or four years post-GFC, where I think we went from these rates of, I'll call it 4% or 5% down to basically just over zero, obviously hit zero, just over zero in GFC.

Well, that was COVID, yeah.

But even before COVID, we were pretty low. I think we were like 1.75% or 2% pre-COVID, which is ridiculously low and unnecessarily low because all basically what happened is as soon as property prices started stagnating, the RBA would drop rates.

And it was if the RBA's sole role, and Glenn Stephens and then Phil Lowe were running it, was how do we maintain this housing bubble? And that was all they cared about. And then, so you saw during COVID, the whole ridiculousness of inflation is transitory when clearly it wasn't.

Then we had everything got out of hand. I had to start hiking rates. We saw rates being hiked to what, to five, five-ish, not even 5%, 4.75% or 4.5% of whatever it was. And that was considered high. It wasn't high. It was historically low.

Yet then the first sight of house prices plateauing or dropping, suddenly they're dropping rates again, which has caused another house bubble. So it will reinflate the house bubble to record levels. So you've had 15 years of monetary policy. The sole goal has been to pump up house prices.

Since COVID, prices, this is probably understanding, is 25% up. Someone who doesn't own inflation-adjusted assets is a quarter poorer, which is significant.

Obviously, that wouldn't be the reason they were saying the RBA, right? They were saying, you know, unemployment's a bit too high, you know, GDP growth's, you know, not really taking off. It was plateauing, right? Obviously, but you've got GDP per capita, right? Like, you know, like, we can't import more people.

You know, we want to keep growing the economy. We're already... So, like, you know, and obviously it was a global problem, right? Every country around the world had low interest rates and there's issues with, you know, exchange rates as well.

So, like, it would have been really hard for them to just sort of have a much higher rate as well. And, you know, obviously they're judged on such short-term basis, the politicians, and their votes are driven by often property prices as well.

Plus, so do you think that they should have just had a much higher rate through that period and...

The RBA, obviously the Treasury Secretary is on the board, but the RBA management board is meant to be separate from the government. It hasn't been because Chalmers has had his foot on that throat, which is why we had 75 bips of cuts, which is actually going to cost Labor.

This could cost Labor government. We saw it cost Joe Biden government in the States having high inflation. And Inflation is now 3.8% and 3.3% core. This is huge inflation. This is prices doubling every 18 years. This is significant inflation that is going to absolutely smash the lower middle classes.

The upper class is fine because they own assets, they're inflation adjusted. But we live in a world where all the RBA cares about is maintaining this property bubble and the slightest chance of property prices going down, they'll drop rates. And this is exactly what we saw in the last year.

And we've seen the impact of it. The impact is really quick inflation. And it happens straight away. Inflation in both goods and services as well as asset prices. And then you've got ridiculous policies.

And there's been 17 years of this since Kevin Rudd first brought in the first homeowners grant, which all that does is It was famously called the first vendor's grant.

And I'd said in 2008, when Rudd announced his policy, I said, all this will do is increase property prices and took everybody else like five years to catch on. Now people know that's what happens, yet they still do it. This is outrageous.

The point where we're allowing people to buy properties on 5% deposit, no insurance. It's so irresponsible for these people who are basically entering a lifelong debt relationship now, a result of entering the property market at its highest on the basis of government incentives. Yeah.

Well, the first incentive was, I think, in 2003, maybe 2002, because I was actually selling real estate back then. And it was $7,000. Yeah, it was before Rudd. It was $7,000. And I remember first homebuyers holding off until July 1. And then there was one particular property. It was a classic.

These people wouldn't make an offer because they wanted to get their seven grand. They waited. So did everybody else. And they had to pay 20 grand more. A few weeks later.

Yeah, I think Rudd may have doubled it. That's right. I think he supercharged it.

Yeah. So this is, you know, the impact, it was obvious that it basically just pushed up prices from day one. But yes, politically, it's so fabulous, isn't it? It's like we're giving first home buyers something because we keep screwing up.

But you know, it's funny because a lot of people, Alan Kohler, you know, wrote his monthly essay around house prices, pinned it, oh, it was the capital gains tax and the negative gearing that Howard, well, the change to capital gains tax that Howard brought in in about 2001, 2000, whenever it was.

And at that exact point is when prices started taking off. You could argue if you're going to pin it down to one thing, maybe it was the first homebuyer incentives. We also have it at the same time. I mean, there's obviously a lot of things that have conspired to continue this crazy growth.

And we can see, or let's not call it crazy. It's wonderful if you're in the market.

Well, I actually challenge you on that. I think there's this great myth that high prices are great. And it's certainly great if you're an investor with multiple properties, no doubt, because you ask what's going on. But unless you own at least one investment property, I'd argue that high prices are bad. Yeah.

I was being actually a bit facetious there, I will say. We talk a lot about the social consequences of this continued growth, but it's a runaway train. I mean, do we just have to accept it? Because governments are now coming out with shared equity schemes.

There's more and more ways to help people get in because we're not going to deal with prices. All we have to do is deal with helping you get in some way.

I think at the end of the day, policy is also a voting machine, weighing machines. I think at the end, bad policy eventually gets, where you'd hope, gets flushed out of the system. But you're right, it's been a bad policy for 23 years now. So who knows how long that'll...

I think when I talk about high house prices being bad, clearly it's very bad for that social contract, which you talk about. I think it's also bad if you own a house. If I own a house that's $5 million and the house goes to $7 million, well, big deal.

I've got to buy a new house in the same market anyway. I'm paying more stamp duty. I'm paying more everything. I'm paying more like everything's percentage-based, more Asian fees. And then my kids can't afford to buy in. So like how is high house prices helping anybody but investors? That's all it helps.

I'm on a personal mission to help more people make better property decisions. You know, most people don't realise that they can cost themselves hundreds of thousands of dollars over the medium to long term when they make property decisions without all of the information that they need.

And what I do is help people with tricky real estate problems, which often masquerade as simple questions like, should I sell my investment property because the interest repayments are hurting? Or should I buy before I sell? Or the other way around.

You can connect with me and access all of the tools that I've created to help you make better property decisions at VeronicaMorgan.com.au. And there you will find resources for first home buyers, details about my buyer's agent mentoring program.

You can connect with my Sydney-based property management and buyer's agency teams, Australia-wide vendor advocacy, or ask me for introduction to the small group of buyer's agents that I would personally recommend across the country. That's VeronicaMorgan.com.au.

If you're considering a property move such as buying your first home, upgrading, renovating or investing, the team here at Alcove would love to help you think through your decision and get the finance right. Please go to alcove.com.au to reach out.

Well, I think there's been, if you have done quite well, right, you get to your 60s, your kids have moved out. you know, you've got into the housing market, right? Not the apartment market, right?

You know, you've bought with something that's quite scarce, you know, inflation's written your debt away, you know, and then you finally get to that point and you want it to sort of live a different life. You can take that money out, right?

You can cash in, you can put it all in the bank, you can rent, you could travel. Like there is a tangible wealth there that, you know, is actually being built. You could downsize to a much smaller place.

Well, the problem is when you downsize, like a lot of people downsize from a house, house to a townhouse or apartment, they're paying basically the same, maybe a downsize from an $8 million house to a $6 million apartment.

Or I think more people should be doing reverse mortgages, but nobody ever does, or very rarely do. I think that actually does make sense.

But the other problem is- What's the last thing we want though, right? Like what we'll see, and this is happening. So reverse mortgages, the government's even got a reverse mortgage. Like they've got a, and at super ridiculous rates, it's like super.

So the government's got their own, then there's all these new lenders coming in because this is my sort of space.

what you'll always do is just slow down people downsizing because like i don't need that equity i could just pull it out and that'll just reduce the turnover rate of property right and so more and more people stay in their homes listings will get tighter so instead of five percent of like you said morons having to buy in it now drops to four percent because our turnover rate and it actually if anything it actually supply will decrease because it's not actual amount of dwellings it's amount of listings

It also creates problems in aged care because then people have less money to actually fund their own aged care. So there's knock-on effects of reverse mortgages.

But you can only reverse mortgage up to a certain point. There are relatively strict rules on how much you can reverse.

There were. They got tired. All the banks pulled out of it, right? Brian Hart secured it at Westpac and they all pulled out. And now they're like, hang on a sec, we need to keep increasing credit growth. Actually, we can't do these things.

Oh, why don't we go back full circle and start offering these remittances? Now, the banks aren't doing it. Non-banks are doing it and... self-managed super fund loans are in here. And I think that's one of those things that naturally will come. So will 40-year loans.

I mean, they're already started the last few years. There'll be 50, 60 years.

I think 40, 50-year loans are way worse than reverse mortgage. Reverse mortgage is a way just to get equity out of the house, effectively spending inheritance earlier, call it what it is. Versus 40 or 50-year loans, which are a horrendous lifetime of a jail of debt for someone for their entire life.

There's nothing worse than the Trump 50-year loan suggestion, especially for young people. After making houses that are inaccessible, we're going to lump your 50 years of debt and triple the price of the property. That's the worst thing. I'm much more bullish on reverse mortgages than you guys for various reasons.

Like that said, it's kind of a side issue. I don't think it's even worth dwelling on. But more of my point was like, even if my property goes from 5 million to 10 million or whatever, like it sounds like I've won the lottery. Well, my kids can't afford to buy a house.

So what's the point? Like I got to sell it and give it to them. You don't want your kids living with you for your whole life. So I'm just not sure anybody benefits from high property other than the investor class.

I agree with you on that one. You argue that government incentives, we talked about that, you know, the 5% deposit scheme that has been increased in its availability, shall we say, make things worse rather than better. And we've already talked about that.

But what's your, I guess, you know, we get the economic logic behind that view, we've spoken about it here, but what's the counter argument you think that policy makers are ignoring?

As in what argument are they making to justify the schemes?

Yeah. Like, other than pure votes. Like, I mean.

Oh, that's, no, that's exactly what it is. There's no, there's no economic or fairness rationale behind this policy, isn't it? It's helping vendors and making it harder for young people to avoid, to get out of debt.

Like there's, I can't see a single possible good reason to have this policy other than selfishly getting votes at the expense of young people.

I have to add something here. The taxpayer is going to fund the shortfall for people who do default on their loans and the property's worth- Almost the worst part of it.

But also, there is a lot of, and there has been for a long time, incentives to get first home buyers into brand new properties as well, which statistically is evidence abounding about the riskiest asset you can buy in terms of property. The highest proportion of loss-making resales, all that sort of stuff.

So we've actually got a government, in my mind, that seems to have no awareness of the riskiness of property. And so there's no sort of caveats or no guardrails on the type of asset that people are buying that can reduce their insurance risk effectively. So that bothers me.

It just seems to be completely blind to it.

Well, I think the good thing is they're not doing just new property, right? So that's the, they used to do that. They used, that would have been worse, right?

And then you would have all these first time buyers stitched up, buying new apartments, buying new townhouses, and then funding our development industry, creating jobs, which is great, but then stitching up the people who least afford making a property loss.

The big issue with this 5% is they've just expanded the scheme to basically anyone.

And that means that when someone who's got access to intergenerational wealth, who's got on a high income, is likely to be okay financially, is just getting a massive kick up rather than the person who's probably on a key worker job. There's no family wealth. They're struggling.

And saving a 20% deposit and playing LMI would have been really hard for them and renting is really hard and they've got kids. So it was targeted, I feel, to the right segment. And then they've just said, hang on a sec, this is great for property prices. Let's just let it loose.

And you're right. That money just transfers straight into the investor that bought the apartment that wasn't performing that well is now getting a better price so he can cash out. But they're all votes, right? They're all votes. Whether you're buying or whether you own property,

property prices going up is still in your mind, good thing, right?

If you saw, I'm sure you guys would have, maybe three weeks ago, APRA announced the tightening rules and the banks got annoyed and the rules essentially regarded like the income ratios, I think they were talking about predominantly, which whatever, like a bit of this, the biggest issue isn't so much the income ratio.

Like ultimately, funny enough, when I went to get a mortgage for Renault, I was doing like, I really struggled to get a mortgage. My income's pretty low and obviously we have dividends or whatever here. Because tax-wise, it doesn't make sense to get paid a big salary. And the banks didn't care about that.

All they care about is my income. So I actually found it hard to get a loan on a really low LVR, which is fine. So that's up to the banks. But if I was earning a million bucks a year as a lawyer like I used to be, I could get a massive loan.

I could borrow three million or four million, whatever it is. And no questions asked because they assume that I'll have a job, my same job forever. Yet that's a hugely risky lend because ultimately I lose my job and I can't repay the property.

The bigger problem is what APRA should have been demanding is effectively higher or lower LVRs. So you can buy a maximum of 50% or 60% LVRs. Instead, we've got the government doing the exact opposite.

So APRA and the federal government are doing exactly the opposite of what they should be doing and worrying about the wrong thing, worrying about a wage which can go tomorrow, people get fired and the economy turns around, while not caring about LVRs, which is the most important thing.

We're removing that buffer that people can have.

What's your thoughts on the, unfortunately, the economy still has to run, right? So you've got banking system, that's property. You've got a property system, just people who build, builders, trades, et cetera, developers.

There's so many people that are invested in the property market who, and our economy is not that big really in terms of the diversity. And then we've got, you know, the private schools, a lot of consumer and retails build off more people, right?

You know, if you want to sell more woolies, you need more people, right? So what's your thoughts about the Australian economy when you break it down? I mean, even your business is sort of wrapped up in this as well, right?

More people taking luxury holidays is a good thing if there's more people here. What's your thoughts on that? Like we're just stuck on a system of just keep importing more people and then that's good because we'll keep building more houses, which supports that, which keeps lending more money.

So like there's not a viable option because it's so hard to just shift an economy at all really.

pro-immigration, preferably skilled, but I've historically been pro-immigration, which does lead to obviously higher GDP per capita, but higher property prices inevitably because you're getting more demand. But clearly there are issues on the supplier side of property, like the council restrictiveness. And so there clearly are issues there.

And I hate the whole NIMBYism stuff and I take that as rare, but I think the main issue with housing is willingness of banks to lend. If banks didn't lend so much, we wouldn't have this housing bubble.

If you look at the Austrian School of Economics, it's really clear, and Austrian School of Economics has been right for 100 years, and that bubbles are caused by excess debt, and that's all that ever causes bubbles. Otherwise, equity is not going to cause a bubble.

It's debt that causes a bubble, and debt's what's caused our housing bubble. Debt continues to inflate this housing bubble, and you see this with interest rates and all this other stuff. And the problem around this economy is all the banks, Chris, you talk about, completely leveraged to residential housing.

And you've got banks that could very well be insolvent. And we know that the way fractionalized banking works, that you have runs on banks. And we saw it at Silicon Valley Bank a couple of years ago in the US.

And we saw it with the Australian banking system and they got GFC almost going under. The taxpayer had to save a bunch of these banks. Macquarie had to get saved and a bunch of other banks. And we saw it in 1993 with Westpac almost going under.

We've had 30 years of multiple near bank collapses, yet everybody assumes our banking system's sort of solid for centuries when inevitably it won't. So I'm not saying the banks will collapse tomorrow.

It could be 50 years, but eventually these highly leveraged to residential property banks almost can't survive because they're leveraged to a bubble-like asset.

I've definitely disagree on this one. So the, I mean, I started as Broker back in 2013. So I was a financial advisor before. And, you know, when I joined, when I started doing like borrowing capacities on clients, you know, I was like, what the hell?

I can leverage this client at 12, 14 times. I can get interest only for 15 years. If I split it up across different banks, I can take it further. That bank doesn't check that. Like it was, it was huge issues. Like I just couldn't believe.

And you can leverage up say six to eight times on homes and maybe 10 to 15 times on investments. And so APRA came in 2015 to 2020 and said, hey, and they tied up all their borrowing capacities. And basically every year since then, lending's been getting tied up.

And so now, like you can only probably borrow about five times your income.

Like there was this real issue in the last two years with trust lending and the banks have all been shut down over the last couple of months on that because that was becoming a real issue where people could just keep on lending.

Basically, if you had the deposit, you could just, and even people were doing dodgy stuff around that, but Generally speaking, our lending is getting tight. I mean, over in the UK, it would say four and a half times your income. And, you know, we were just so much higher, but I don't know.

I just don't think there's, and when you look at the LVR, right? So like the housing markets were 12 trillion, the debt in the system, say two and a half trillion. So that, you know, if they have it and the arrears rates like under 2%, so like,

You can't say that we've got this really highly leveraged housing market because the reality is it's only leveraged in a small number of buyers that are bought in recent years. Most people have got ridiculous equity. So if they get into financial problems, they just sell because they've got equity.

They didn't buy in the last two, three years. And so the banks haven't got this margin call because whenever someone struggles, they're like, I've lost my job, can't afford my mortgage, in arrears, I'll just sell. So what's your sort of thought on that?

I agree with you on the first point that clearly the absolute cowboy days of pro-GFC have thankfully been past us. So it's not that bad. That doesn't mean it's not bad. It just means it's less bad. So yes, I do agree with you, but I think...

So your scenario of people essentially losing jobs and having to sell their house, yep, that happens and you probably got some equity there, so you're not going to be on the street. But that causes a significant drop in property prices across the board if that's happening.

And we haven't seen unemployment above like 4% in like a decade. So let's say we had unemployment of 10% or 11%, which is not like, I think depression was at 30%, but let's say we went to 10% unemployment, genuine unemployment. Then you've got house prices potentially down 20, 30, 40%.

Suddenly you've got bank balance sheets being smashed.

What would interest rates be though in that scenario?

Who knows? It happens if inflation peaks up and they can't drop interest rates. So you could have stagflation. We've lived in this great moderation of 25 years. We've been able to just drop rates and be able to be pumping up property prices as much as we can.

But there is a world where you can't do that. and where unemployment spikes up and where house prices adjust from 13 times income to six times or five times income. Suddenly everybody's house has been cut in half.

I'm not saying this is likely to happen, but I'm not saying there's a non-zero chance this happens. And then suddenly you've got banks with far more liabilities and assets on their books and they're insolvent. So the notion that's impossible is clearly not right. The notion it's unlikely, sure, but

If we thought that GFC was never going to happen in 2007, I was short the stock market and people were laughing at me. And then it dropped 40%. So you're wrong till you're right is the problem. And as I said, in bubble periods, the price is set by the marginal moron. Yeah.

It's the biggest danger though, betting on that scenario that's not likely. You know, like if you think about Martin North, good friend of ours, right? One of the, you know, very well-known property bearer in Australia. And, you know, just recently he came on here.

I've been on his podcast for like seven, eight years or whatever. And, you know, he kind of waved his little white sort of flag and said, look, you know, I just didn't misunderstand how invested the government is, how whenever things are looking like all the cards are going to fall down.

And, you know, you think about everyone who's been listening to Martin. This is Martin, if you're listening to this, it's nothing towards you. But everyone's been listening to Martin for the last 10 years, right?

who have delayed their property decisions, delayed their life decisions, have, you know, and have basically jumped off, have really hurt themselves, right? Because, you know, they basically haven't, they've just avoided it. And then they end up having to buy a house anyway, right?

Because they're having kids, they can't rent, and they end up having to enter, they just enter at a later point for a much higher price. And so, is there a danger? Yeah, because there's always a contrarian argument of, you know, scenario one, two, three, four, if that happens.

But with property, you can't just like sit on the fence and just play a little bit and hedge it. It's just like you've either got to be in with a big mortgage and with all your cash or you've got to be out.

It's like you can't short and get in at the same time.

I'm not saying that every bank's going to be destroyed tomorrow. I'm saying there's a chance this could happen. And ultimately... I think like Martin could well be proven right in one, two, three, four, five years. Like the famous saying, the market stays irrational longer than you can stay solvent.

So I'm not suggesting everybody go out and short the property market. I own a property. So it's not, and properties overseas as well. So it's not as if I'm like saying never invest in property. It's the worst thing in the world.

I'm saying, I think it's a huge bubble and it's problematic for our, our society, but I'm not saying that it's going to collapse in half tomorrow because ultimately it stays a rational ogle and can be proven right or wrong.

So like I'm not saying like no one should buy properties ever and it's the worst thing in the world and blah, blah, blah. Like I think there's a lot of people who make great money. I think if the government continues printing money and M2 continues to increase, then property probably does okay.

I think gold probably does better, but I think property does okay. So I'm not sitting here as like a perma property, like you never do well from property. I'm saying property is a generational highs and this is a bad thing.

We 100% agree. We can see that there's issues. It's just when you've got people, Australians making decisions with their own lives, right? Like, so, you know, they've got jobs, they've got families and they're just getting this.

Unfortunately, the alternative strategy of not buying and renting and buying other assets classes is just really hard to justify. You kind of have to It's just, I'm not going to do that because I don't believe in it.

And then, okay, the second strategy of just saving, renting, you know, putting it into an ETF. And if property gets a certain type of, even a small return, unfortunately, just because of the leverage in the system, it's very hard to outrun. And I think this is causing massive issues. And I do think-

I think where you're right is in the ability to easily use leverage and that that's where property can win. But if you look at shares, gold, crypto have all significantly outperformed. I'm not saying invest in crypto.

I've never bought crypto in my life, but all those three asset classes have significantly outperformed property in the last 20 years, notwithstanding the dream run properties had. This is on a net basis. This is after your property costs and after your dividends with shares and everything.

The problem is, and where I think I agree with you is, for a lot of people, it's not practical. It's not practical to lever up gold. It's not practical. You don't want to lever up crypto. It's too risky.

And yeah, it's actually a bit easier to lever up an ETF because you get two and three Xs. But there is a safety around property in that it's not, you're not being margin called. It's a great form of force saving.

If you can buy in the not super, like a not overly bubbly suburb, then it's less bad. So there's, there's definitely pockets that like, if you were to buy in Melbourne now, for example, it's actually maybe not that bad compared to buying in Sydney because Melbourne prices are so much less than Sydney.

So there's probably places you can buy and not be completely ripped off, but then, it's hard to, I find it hard to justify Sydney pricing. Like it just, it's completely irrational.

I don't live in Sydney, but it's completely irrational, really hard to justify versus a, and you guys know much more about the New Zealand versus even just Melbourne for me, which isn't that bad.

I know you're renting in Middle Clark, Middle Park. I'm not sure if you own in Middle Park and that's where you're renovating, but I don't know, Middle Park, Albert Park, Pretty much Sydney prices, they're a pretty X-y part of Melbourne there, a very lovely part of Melbourne.

I think, you know, when we sort of have these conversations and you're comparing property and performance to gold and Bitcoin and crypto and shares, it's hard not to bring back in that we live in property. And, you know, so therefore there's just so many other issues that we need to consider.

And there is that, well, A, shelter. We need to live somewhere. Like we did talk about the trade-off that you could rent somewhere cheaper than buying. That's one thing. But there's status. There's that sense of security that you have when you've got kids. You know, we see it a lot when people that...

It's like the renvestors that don't have kids. Suddenly when they get kids, their whole attitude changes as to why property becomes important. There's so much.

And that's sort of tied into our national psyche as well in terms of how we, like you said, you know, where do you live and what school do your kids go to?

But, you know, even if you're going to take out that pure snobbery, there's intrinsic value in property that it's very difficult to tease that out. I live in Sydney, you know, like to me, Sydney property prices just are Sydney property prices.

I don't see them as expensive, but, you know, obviously the relativity is quite insane. And I do talk to a lot of people about If you can actually afford to buy into Sydney now, you know, we've decoupled from the rest of the country.

And so, like, do you want to miss out on that opportunity? So it is definitely a market. So you've got to have these conversations at the same time. You're sort of thinking about investment fundamentals and talking from that lens. And then you're also thinking this, and that's where the value comes in.

You know what I mean? You talk about value versus price. I mean, there's value in those other things as well. So how do you price the intrinsic value?

You're right to a point. I think if you're paying, I'll use my example, $250,000 a year, that's a lot of intrinsic value you need. $250,000 after tax is a lot of money. If I can do this for five or six years, I'm saving up post pre-tax $2 million.

That's a lot of earnings that I can then use to invest in a property at that time or something else. But yeah, there's clearly, there's benefit in not being booted out as a renter. There's benefit in effectively being able to do stuff.

Like you can't do stuff to your house if you're a renter. On the flip side, and there's obviously benefit in principal capital gains tax exemption, which is the biggest one.

But on flip side, properties, like how many horror property stories have you heard where someone's got termites and you have to rebuild the house and So, there's good and bad. Like, I pay $15,000 in rates a year. Like, that's not public corp. That's actual rates to a council for taking my rubbish away.

That's a lot of cash. That's after tax. That's 30 grand before tax. So, yes, there's definitely benefits of owning a property, but there's detriments as well.

But again, so you're assigning monetary value to those things because, you know, you can. The rates are a fact, but it's the stuff that you can't put a price on that makes the argument difficult.

Well, everything's got a price. You can say, you want to avoid being booted out? We'll take a longer lease and pay a premium to the owner. Everybody's got a price. If I give the owner a 50% kicker on rent, they'll agree to a five-year lease, for sure.

Maybe it takes a 20, but you can negotiate that. You can negotiate stuff. Everything's got a price in this world. The question is what that price is. Most of those risks can be negotiated. No, very few people do initially.

My first business, our first business was we subleased apartments and rented them out to backpackers and corporates. And that was our business. We would take risks and absorb those risks and make a margin. So we rented 200 properties, we bought a bunch of them. We understand, you said I wasn't in the property.

I'm not now, but I was as much as anyone when I was 26, 27. And we bought six properties with 5% down. Like we understand that we made a million bucks and that was a lot for 28 year olds.

And so that was a different, that was when property was a lot less expensive than it is now. I'm not sure you could do that now.

Adam, I want to hit with the property Dumbo, but just, you've got a business, you've got a lot of staff, you need a lot of talent to grow businesses, right? What's your thoughts on, you know, we're competing for global talent, right?

You know, like whether it's tech or whether it's whatever it might be, right? That might not be in Australia, right? And we do want that talent, you know, like you said, qualified to move to Australia. Do you think that, you know, just the issues with a high property price, right?

It doesn't make it attractive, right? You know, hard to rent. So are you seeing issues in terms of that? I mean, obviously the prices around property have actually gone up a lot of places around the world. This isn't just an...

Australian problem, you could easily go look at global property values and it's a similar story to be honest. So, I mean, but do you think that's an issue that Australia's just maybe got to be careful on, right? Because if talent can't afford to live here, then they won't move here.

And so I think we've got to be a little bit concerned about that.

Yeah. I'm not sure that's like, ultimately, because we talked about the rental market, like

Well, even owning. They want to sort of move here and they kind of want to own.

I don't think people are thinking about that, to be honest. I think in the short term, you think, can I get a rental? And rentals are relatively cheap, certainly compared to owning.

Particularly in Melbourne.

Yeah. Compared to New York, London, it's cheap. People say rentals are high and it's easy for me to say my privileged position. But globally speaking, our rents are super cheap. Coming to the global cities, Tokyo, Hong Kong, Singapore, Melbourne, Singapore, London, New York. We're really cheap and transport's cheap.

And like London, you pay 50 bucks a day to get the train, get the trip. So I think in that sense, that's not, I think the issue with immigration is government policy doesn't necessarily favor immigration.

Like certain types, like great if you're a uni student, great if you're a hairdresser, not great if I want to bring in a technologist. So we focus on bringing in the wrong types of migrants. We should be focusing on skilled migrants and less on less skilled migrants, less beholden to the university sector.

That's a whole nother argument. I don't think property prices are necessarily a barrier there in the short term anyway. I think most people, I think we're still a really popular destination. I think a lot of people would love to move here. I think the issue is more legal and getting in.

Okay. So property Dumbo for us. It's a story we could just have a bit of a laugh at the end.

Oh, I think it's just like, I've been saying not to buy property for 20 years and then look where that would have gotten everybody. So I think that like people, when people remind me of that, Adam, you've been saying property has been, I actually started writing a book.

I wrote two chapters in probably 2000. I wrote a book on the GFC in 2009 that published and I was writing a follow-up, which was Australia's impending property crash. That was 2014. So thankfully I never finished it because it would have, I wouldn't have looked great had that published.

But as I said, the market stays irrational longer than I can stay solvent. So I'm not shorting the property market. I own a property. So I sort of speak against my own interests in this sense.

And you're investing in it because you're renovating it.

Yeah, absolutely. And it'd be a chunk of my net wealth at the end of this. But ultimately, I'm lucky enough to have a business that Spins off cash and all that kind of stuff. But both me and Jez have been property bears forever. We both bought properties in different cities.

And my property's done very well. But at the time, I thought I overpaid a couple million bucks for this. And that's just the price I have to pay for whatever. It wasn't that impactful at the time. It wasn't that impactful to me. And it's probably whatever it has been priced since then.

But I still think it was overvalued versus what I paid for it, even though it's doubled since then. But ultimately, I've been wrong for a long time. And hopefully, for everyone's sake, including mine, I stay wrong.

One of the other issues right now, like you can't, I mean, the big tech stocks, are they overvalued? Is gold overvalued? Is crypto overvalued?

Like, is it, you know, like it's just the story right now, just due to that inflation of the money supply has not just gone into resi, it's gone into lots of other...

I'm not a buyer of the share market either for that matter. So at the moment, despite what I've just told you, I think you're right. I think most assets are in bubble territory, if not all.

Gold, I said, I thought I liked gold a couple of years ago and that's now doubled since that's sort of gone. So yeah, it's hard to find. So I think, yeah, ironically, Melbourne property, it probably isn't that bad in the scheme. Like Sydney, yes. Gold coast, probably not great.

But yeah, they're probably pockets that aren't that bad. And look, if you can get a yield of 4% gross, it's not terrible. Like it's not amazing, but it's not terrible.

Adam, it's been a good chat.

Lovely chat. Really appreciate you coming on, and I love a lively chat, and I know our listeners will too. So thank you again for your time today. Thanks for having me, guys.

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