Martin North on a Property Market Held Up by Policy

The property market across the country continues to defy the odds and the recent series of lockdowns in our biggest cities appears to be spurring a second wave of demand in regional areas. Where is all the money coming from? How long can this really go on for?

Today we're having a chat with Martin North because we want to get a contrarian perspective. We'll be uncovering the dark underbelly of what's driving this property market and seeking his perspective on these crazy times we live in.

For those of you who haven't yet come across Martin, he is the founder of Digital Finance Analytics, a boutique research, analysis and consulting firm who specialises in offering insight into the dynamics of the mortgage, lending, savings, payments and superannuation sectors.

Now, we have spoken with Martin three episodes previously, and if you like what you hear today, go back and check out 123, 143 and 178. Thank you again for joining us today, Martin. It is so great to see you.

It's good to be back on the show. And look, you know, we spoke some weeks ago, but things have just morphed and changed and it's got even more stupid.

And this is our first episode on video, Martin. So it's good to have a seasoned professional here to laugh at our performance, to be honest. So we hope that our listeners can now start to watch us on video, which gets some snippets.

I mean, you're right, Martin, there's so much going on at the moment. And I feel like we, you know, Australians thought they're out of the woods, right? We're sort of cruising, you know, we're through this COVID thing, we're never going to have a lockdown.

And then we're being hit with this, you know, huge wave. But my question is, has the government run out of stimulus? Because There's been nothing really, I've heard them mentioning, no JobKeeper, no real bank deferrals. It's really, but they used all their sort of cannons last year and they've got nothing left.

What do you think? Has the Australian government got much left in the tank?

They've got tons in the tank if they want to use it.

There is no limit to how much money a government can print if they need to print.

But what are the consequences?

So there's an ideological question and there's an economic question. Ideologically, they don't like to do it, right? Because they still believe that they've got a debt problem that ultimately they've got to solve. And around the world, of course, central banks have been printing money.

governments have been essentially just you know lifting the the two sides so you know they print and they issue more money they print and there's there's no theoretical limit to what they can do now the problem is of course there are consequences and there was a recent house of lords report that came out looking at the quantitative easing program in the uk and the house of lords basically

included a bunch of people who were the central bankers from 2007-2008, Mervyn King, for example. And the report said the Bank of England is actually in a situation that it can't get out of.

It's got its quantitative easing program, it's printing all this money, but it's more to do with supporting government finances and keeping government finances low from an interest rate perspective

Rather than actually helping the broader economy So there's a fundamental philosophical ideological question as to whether all this money printing is actually going to lead anywhere sensible Or is it simply going to create more of a problem down the track but the consequence of it is

The consequence of it is that there's plenty of money sloshing around the system. The banks are very happy to lend more for properties. And CBA results that came out last week were really interesting because they declared a 19 point something percent rise in profit. But they also showed that.

The term funding facility, which is another facility provided by the Reserve Bank to the banks, very cheap money, 51 billion of money of that term funding facility went to CBA. That lifted their margin essentially by four basis points.

In other words, the bank's profitability was directly supported by CBA. the quantitative easing programs and the term funding facility. So we're in a situation now where the central bank is directly supporting the profitability of the banks.

The banks are being encouraged to lend more and more and more for property. And that is precisely why property prices are going through the roof. But none of this is hitting the real economy and none of this is hitting real households and businesses.

In my small and medium enterprise surveys, I'm seeing more and more SMEs falling over.

because the current support processes are completely wrongly orientated right rather than actually supporting smes and you know real households all it's going to the top end of the town it's going to the banks and of course we saw last time around job keeper a lot of that money went to firms that didn't need it particularly big firms and they've not given it back

So we've got the situation where the easy creation of money has created loose policy, misdirected policy, completely weird phenomenons then in terms of actually asset value prices. So we're seeing stock prices through the roof. We're seeing property prices through the roof. And we're seeing real people...

being effectively tightened down because, of course, they don't have the income anymore. And cost, by the way, look at inflation. Inflation is a lot higher than the officially reported numbers, particularly if you look at food and those sorts of things. So we've got this pincer movement going on amongst real households. So...

The bottom line is this. If you are actually in the fortunate position where you can work from home and where your income is secure and everything is fine, then you can go and spend all of that extra money that you're saving on extra more property, right?

But if you're actually in the other 50% to 60% of households who are under the pump at the moment, whose income is being compressed, who are finding it really tough to make those mortgage repayments or those rental repayments... You've got no hope at the moment. And that is the problem.

And here's the final little kicker, right? If you look at my mortgage stress data, which is a map, right? Guess where the hotspots are? Fairfield, southwestern Sydney. Sounds familiar? Sure.

Because where COVID is raging is precisely in those areas of higher density, lower wealth, and just more mortgage stress. So unfortunately, all of these things are linked.

Would there be a – there's got to be a come to Jesus moment, right? I mean, because, you know, you hear – and everyone who's listened to this podcast knows that I'm not an economist.

But my understanding is one of the ideas of pumping stimulus at the lower end of the market, you know, $1,000 grants and that sort of stuff, just is basically because people who are hand-to-mouth, who really are living –

tight or close to the poverty line or under it, are going to spend every dollar that's sent their way. So that's sort of the theory that you put money in that end of the market, that then fuels the fire of the whole economy, right?

But if only the rich can get richer and those people are actually getting worse off, then yes, all the money they get still goes into the economy, but is that enough to keep the rich getting richer? Is there a point where the gap, we all just fall in the same sinkhole? Yeah.

Well, at the moment, the situation is that the rich are getting very much richer. So, for example, CBA is going to do a share buyback scheme. It's going to buy back 3.5% of its shares, which means if you're a shareholder in CBA, you'll get a value increase in your shares, right?

So if you are in the fortune position of the haves, right, and that could be property, it could be shares, it could be other things, then actually you're doing very well at the moment. So, unfortunately...

the problem is that the others are now you're asking exactly the right question how sustainable is this and the answer is it's not very sustainable at all because what you do know is that if you actually really want to drive broader economic results out of the economy you need three things firstly you need people to be able to survive

through working, in other words, a working income that's enough to actually live off. Well, a lot of people don't have that at the moment. The second is that you have got to get small businesses to fire because it's the small business engine, which is the engine of growth.

Unfortunately, most small businesses at the moment are aligned more to the construction sector, which is actually, if you think about it, just turning the same dollar again. It's not creating new things. So where is the investment in small business, right? And the third thing is you can't avoid the climate

discussions right the ipcc report last week highlighted that we've got a very limited runway now to tackle some of these broader issues there's no policy for that right so essentially what we're doing is i've got this picture of politicians sitting you know in a circle with

with their fingers in their ears, la, la, la, la, la, we don't know about this, we'll just go on doing what we've always done, which is basically pump money at the top end, we'll cascade it down through the system, so hopefully a few crumbs will filter down to the bottom.

It's not working, right? And that's the problem that we've actually now got, not just here, but in a lot of Western countries. This is an unsustainable thing that we're going through at the moment, right?

This will not end well, and it will either end because essentially governments come to their senses and say, we can't go on pumping the economy up, or it will go on the other way, which is they'll go on pumping it, and ultimately the balloon will burst, and the financial system and property will then actually get devalued considerably, right?

The issue is... it's very hard to see how that can be controllable, right? So if you look at all the bubbles in history, they've always burst. They've never been actually deflated comfortably, right? And, you know, if you look at the Federal Reserve in the US, well, they've got very much the same story.

And here's the other thing people need to think about, right? The assumption was that COVID was going to be over last year. Right. So we get into this year and everything will be fine. Well, here we are in August, September time with the Delta variant raging. Right.

With no prospect of unlocking for several months. And there was an interesting article just yesterday from Bloomberg saying, look, even if you get 95 percent.

vaccination, you will not get herd immunity. So this whole concept of getting to 80% and then unlocking, that is just a political spin. That is not reality. We have not got this under control and it won't be under control for some time.

So as well as those economic drivers, which were already taking us up a blind alley previously, we've now got the COVID thing over the top. And unfortunately, I think people are being misled about what is likely to happen, right?

So all of these factors, this is a bit of a gloomy start to this conversation, but I think it's important to get a reality check, right? Because I'm not a bear on this. I'm just trying to give you a real read as to what I'm seeing going on.

I mean, it's hard to know right now is what small businesses are really surviving, right? Because, you know, their doors are shut anyway. And so whether they reopen, we don't know because that's three, four months away at best.

And, you know, we don't know who's lost their job because they're all working from home. And so it's really sort of, you know, undercover at the moment. And where are you seeing the early signs of...

You know, you spoke about those LGAs, but, you know, is that where it's sort of stuck or is it sort of spread all over the country?

It's much broader. So the tourism sector is completely cactus, basically. A lot of people in the education sector are now at the point where, you know, they've got no... They've got no chance of getting back into employment because the university sectors dialing down the international students are unlikely to come back anytime soon.

And of course, a lot of the flow from China ideologically was already turned off from China in any case because China's basically saying, oh, don't send people to Australia. That's not a good thing anymore, right? It is quite broad-based. What I can tell you is that it's the smallest businesses.

It's the sole trader, it's the two or three or four businesses, people businesses that are actually the ones that are really finite because they don't have the depth of of financial support to fall back on. And the other point is that it's very hard for them to get support from the banks.

So whilst the banks are saying, sure, we'll give you a three-month holiday on your mortgage, right, my surveys show me that the SMEs aren't getting anything like the level of support they got last time. A lot of SMEs just have no cash flow. They've got no way of dealing with this.

The very limited support that is available is insufficient in a number of areas. And so... Down the East Coast, from Queensland at the top, right all the way down to Victoria, this is a really, really crushing blow for many small businesses.

And unfortunately, it's going to take time for this to work through, Chris. You're dead right. We're not going to see all the results immediately. So the unemployment rate, which will come out later in the week, will be a little higher.

But that's a very artificial number, the true unemployment rate, which is probably closer to 9%, which is what the Roy Morgan number suggests here. is probably what we should be looking at.

And then you've got all of the questions about those people who are just working an hour or two rather than actually what they were working previously. So when I measure cash flow for households, I look at the actual income coming in, right?

And that's the thing that people are actually getting crushed on because their incomes are being destroyed in many places. So they might be working a few hours. And some of those people who are actually in multiple part-time jobs, you know, have to travel around.

They're in those postcodes where they've got some issues now with high infection rates. So there's a lot to unpick in terms of trying to decode what is going on. So with all that, now let's come back to property, right?

So property is still being pushed as the place to invest and property prices are going to go up, et cetera, et cetera. It's like, okay, welcome to the real world. Which is the real world of those two, right? And how do you marry the two?

Well, I mean, if you want to break those worlds, I mean, you sort of said, look, if you're at work from home, your business is fine, you've got a corporate job that can work from home, cash flows, savings, all the properties that they want are the ones that are probably a bit more sustainable, assuming their jobs are still there.

And they're all competing over a fewer number of properties, but it's the other lot, right, that have been pushed up because of low interest rates. And you've seen massive growth in the middle and outer suburbs, not just in the top end of the market.

And that's potentially where you've got this building problem with, you know, unemployment and businesses and things like that. So are you going to, do you think the market's going to really split in two and this market's going to go this way and this market's going to go that way?

Well, you know, I keep saying it's a micro set of markets, right? Different markets behave differently. But what I can say is the standalone house on a large plot, and particularly in some of the more regional areas, absolute high demand, and there are lots of people who can afford them.

People coming back from overseas, by the way, as well. Some migrants are still getting back, you know, who come back with a lot of money. On the urban fringe, those home and land packages, a lot of people got...

cajoled into buying those with the home builder last year a lot of those are now finding that the contracts are going up because the construction costs are going up and the extensions are actually happening in terms of the time to deliver because they they can't get their parts and they can't get the resources to build them so that's another factor and quite so quite often if you look in the small print of the contract the contract actually allows for variations relating to the cost of materials

So people are actually finding that what they contracted to is not what the price will be ultimately. That's a big deal, right? And then you've got another issue, which is units versus the rest, right? So if you look at the unit markets, it's still a disaster.

There's still many people who can't find people to rent those apartments close into town. A lot of people sitting in apartments where they've got, those construction issues as well. So you have to tease the market out between high-rise and low-rise apartments and all of those things. So again, it's very fragmented.

So there are pockets that are doing really well. So regional areas, some regional areas are doing extremely well and prices are still rising fast for houses down in the Illawarra here when prices have gone completely ridiculous, right?

um that's because it's a nice quiet area down here we've got less covid here and you know you can get to the city if you need to but you don't have to right i mean that's the sort of thing that's going on now the issue of course is where does this lead us to it leads us to a situation where you've got significant price rises in some areas you've got significant price falls still in other areas so this is not a universal price rise it's

It varies where you look, right? And then if you look across states, well, there's huge price booms in Queensland because a lot of people want to move away from Sydney and Melbourne up to Queensland and investment properties in Queensland have better returns at the moment than... than in New South Wales.

Although, did you notice that they've just brought in some, or are talking about bringing in new rules to tighten tenancy controls to allow tenants to have pets and those things. So there'll be interesting things going on there. So, yeah, that's pretty much the story.

And it's interesting in WA, right, where they had significant price rises. Those price rises are now easing back and they're not necessarily seeing the boom that they thought. So this is a really, really complicated picture.

It is interesting, and I have to say, like for instance, if you look at unit data, and this is one of my ongoing bugbears, you would have heard me saying this before, that lumped into units is units, villas, townhouses, old units, new units, recently built units, all of it chucked into high-rise, low-rise, small double strata of two versus hundreds and thousands.

And of course, interestingly enough, in CoreLogic Sydney data, unit prices have been, there was a slight fall in values in January, but since then has been unit prices been increasing every single month this year. And yet within that, there are whole chunks of the market losing money, substantial losses.

So that data is being polluted. bolstered by those that are actually increasing in value. And so that's a real, basically makes using data to make your decisions on really dangerous. Or it's an illustration of why it's dangerous.

But we have seen in my business, we've seen on a sort of back to that micro level versus macro level, we've seen some unit, the prices of some individual units just going through the roof because people have given up on houses.

So there's just an interesting knock-on effect, but I have to say it hasn't knocked on into the high-rise market.

The high-rise market is absolutely disastrous at the moment. And of course, there are still new high-rise developments happening, right? So there's about 250,000 new units of high-rise coming through on the pipeline, right?

And as well as that, you've got a lot of people, probably investors, who bought into high-rise some time ago, right, who can't let them.

It is an absolute disaster. And now what we're seeing, of course, is people talking about building high-rise specifically under corporate structures to allow accommodation. There's going to be more and more of this. Now, the planning processes are just completely all over the place here.

And I'm afraid that the construction sector, particularly the high-rise sector, are calling the shots, I think, to a lot of the local authorities here

but the fact of the matter is that I wouldn't touch high rise I can't see any justification for it at all at the moment unless you go for the really really top end you know the penthouse things at 4, 5, 6 million a few of those but the bulk of it is not that the bulk of it is cheaply built high rise rabbit hutches

that is designed to just be the minimum standards to pass whatever standards are there, right? They're gonna deteriorate much more quickly. You can't get the tenancies, you can't get the tenants. And with the international borders now definitely locked down for a lot longer than previously thought, there's no international migration coming back.

So, you know, this is a, it's a real area of concern. So, again, people need, if you're thinking of buying in a particular area, right, you've got to look at that area closely. You've got to segment it. Exactly right, Verona.

You've got to segment it into the different types of property, right, whether it's high-rise, low-rise, because any of the average aggregate data completely masks

What is going on the other point of course is there's very low listing volumes of some types of property, too so people are getting desperate and jumping on to Frankly compromise property because that's all that's available right because the stuff that's really good goes quick The stuff that hangs around and you know is less good is still available, but that's a mistake That's a real big mistake

I mean, I think it's the ABS building data that's a bit delayed, but there's been a bit of an uptick in high-rises selling, right? And not selling, but development approvals, basically. I mean, house and land packages have always been staying really steady, but they've actually had a huge uptick last year with COVID.

No, no, no, it was HomeBuilder.

Yeah, home builder. Yeah, exactly.

Home builder was the thing because basically you saw this ramp up and then fall again, right?

Yeah, exactly. I mean, when I said COVID linked into the policy, which was home builder, which caused the boom in sort of house and land. But I was surprised when I saw the high rises start to go up.

And interestingly, it makes a lot of sense because we're seeing clients that are so desperate. So they've missed out on a house. They've missed out on apartments. They've gone to go regionally. They can't do that. They don't want to move to the suburbs regionally.

And so they want to go and buy a brand new build. And we've had multiple clients in the last couple of months come to us. And that's been their story. Their explanation was I was desperate.

And we've sort of unpicked that or they've gone and bought something just because they think it's unachievable to get something to live in. So I'll just go buy an investment. But what they don't know is that all the things that have been built aren't renting, have lost money in resales.

That's the first thing I've noticed. The second thing is with the house and land packages, there's going to be no stop of release. You can see Stockland, you know, 40 kilometres north of Melbourne.

I follow all the sort of purchases they do, and they've been out there on a, you know, spending spree, buying these farms to release house and land packages, in particular in regional areas. You think about just south of Geelong, you know, hundreds of thousands of houses could be built there.

And they've been buying, you know, farms for $40 million. And so I'm really worried at the moment because there's so much desperation in the market. You know, first home buyers, you know, upgraders, et cetera.

And they're making rash decisions and they're moving into this new space, which are paying a premium for because the land prices have gone up because there's so much desperation out there.

And if things do sort of cool off, unemployment, et cetera, or rise of rates, whatever direction it goes, they're the ones who get burnt, right? The last ones to the party, I guess.

No, well, that's right. So the last ones to the party, but also bear this in mind, New Zealand is likely to lift interest rates tomorrow, right?

Okay, so we're recording this. When are we recording this? On the 17th. So we're saying on the 18th of August. And then what?

Well, they're talking maybe even a 50 basis point rise. Now, that's a bit speculative, right? But think about this. We've had very low interest rates. We saw what happened in New Zealand. Prices went hugely high. The Reserve Bank in New Zealand was then given more direct accountability for thinking about house price.

consequences of the monetary policy right and there were other interventions and now they're talking about lifting interest rates to try and tame the property market so their argument will be well we're over the worst of Covid etc well maybe that's right maybe it's wrong maybe they won't lift rates but the fact that people need to be thinking not just about the current low interest rates right but where interest rates are going to go

But it's human nature. We only think about now, you know. Well, that's a mistake when you think. It is. We all know it's a mistake, but it's human bias, you know, recency bias. And I love that saying from Homer Simpson, that's a problem for future Homer. I sure don't envy that guy.

But, you know, we look at the property market here and it's like, oh, it can't go down. It's like, yes, it can. It went down not that long ago, you know.

But it's like all the same people that were refusing to buy in 2018 and beginning of 2019 now can't wait to dive in the market and buy whatever.

So let me just go back. When I lived in the UK, this was some years ago, I bought a property for £125,000 in St Albans, which is just north of London, 20 miles north. Very good place, good property.

I was forced to sell it about three years later, and it had dropped from £127,000, I think it was, down to £85,000.

Now, why? That was because there's been an economic shift, they changed some policy measures, and prices just plummeted. Now, I want to make the point, that wasn't the first time in the UK that we've seen properties drop, right? There's a consistent pattern of properties can go down.

Now, unfortunately in Australia, people have this fixation that property prices double every seven years or even ten years, right? Now, I can tell you from my analysis that that is not universally true. There are some places where you could be in a particular 10-year period, see that, right?

But if you go back 100 years and look at price values, they roughly move in line with inflation over the long term. Now, you get aberrations. But the concept that prices can never fall is just so deceptive

as to be criminal, but yet I reckon most people, you know, in the property sector will preach that and I reckon most people on the receiving end believe it.

And look, there's a lot of, I shouldn't say this, I wasn't going to say it, there are a lot of YouTube channels now in Australia. run by people who are deceptive in the way that they present their information about property and how to actually make money without putting money in in property.

I get so cross.

That's one of my... So I yell at the screen, and I'm sure you do too, Martin. You know, I was watching one the other day, mainly because I don't spend a lot of time on YouTube actually looking at stuff like that. I know Chris does, and you probably do too, Martin.

But there was this one that I was... brought to my attention and I watch and it was like this young guy and, you know, he's supposedly done really well for himself and then he sort of says, and I want to bring my seven years of experience to help you. I was like, seven?

What? Did I hear that correct? Did you mean 17? Did you mean seven? You haven't even gone through an entire cycle yet, you know? Just laughing at him going, oh, my God, talk about, you know.

And, you know, we've had some people write in to us to, oh, can you get some young people on the show because we would like to be inspired by other young investors like us in their 20s that have maybe got a few properties.

And I'm like, no, because the proof is in the pudding and those people are yet to find out whether they've succeeded or not. I'd rather be talking to people after they've succeeded and work out what are the secrets of their success. You know, having these properties is not the success. Yeah.

It's just like... And they never actually admit the amount of debt they've got and the amount of leverage they've got and the risks that they face if interest rates move in the wrong direction. I'll tell you another thing. It's quite interesting that some of them have been targeting my channel, right?

So, you know, they can pay to advertise on YouTube. So quite often now you get a property spruiker who comes on before my shows. Oh, that's hilarious. I have a big chuckle.

And so you could almost target your message and go, right, that ad you just saw, well.

And look, people should understand, I am not anti-property, right? I believe that there is a very important place for property. And if you are careful, you can definitely increase your wealth off the back of property and property investment. But it's not something where it's just turnkey, it always happens.

It's not something where if you make, you know, wrong decisions, you're not going to be hit over the head later. And, you know, the average time period over which you should be thinking about this is not 12 months or 18 months or two years. It's 10, 15, 20 years.

It's a long-term thing, right? 30 even. Yeah. Well, maybe 30. I mean, I can claim even more years than that. I think there is unfortunately a mirroring of what's going on in crypto land with what's going on in property land, right?

Where there are lots of people spruiking, get rich quick, you can't fail. This is once in a million time to make a killing, right? And unfortunately, that is not investing. That is speculating. It is not actually a calculated view of risk.

It is just putting your fingers in the air and saying, oh, well, that'll be fine, right? Unfortunately, a lot of people lose their shirts ultimately in this situation, right? And what I'm trying to do is help people understand what they need to do to land on the right side of the fence, right?

Because... remember three things firstly it's really really important to understand what your cash flow looks like now and what it will look like down the track right what happens if interest rates rise what happened when you actually have to maintain the property etc etc right second point

If you've actually got a leverage situation, in other words, if you're using equity in one property to buy another property to buy another property, right, then you magnify, sure, the growth if things go up, but you also magnify the losses if things go down, right? And people forget that.

It's not a one-way street, right? The third is... The banks only make decisions based on the risk to them, not on the risks to the individuals and households. It's not the same thing. The bank's only asking, am I going to lose on the loan? No.

can that household really afford it right and unfortunately the banks from what we said earlier on are being given there's all this cheap money from the reserve bank and just basically lending more and more and more so you will be cajoled into buying if you listen to the banks and of course the governments also through their stimulus programs have been encouraging people to get into the market through the home loan grants and the first home

uh programs as well as the home builder but that's more to support the construction sector than it is to really help individuals to get in right so that you've got to understand the difference between the political narrative and what's really going on right because the political narrative is well of course we're helping more people to afford their first home which is a great thing

Of course, affording a first home is a great thing, but if in so doing what you're doing is you're building all these economic pressures and social pressures, which is what's happening, then unfortunately people are making decisions on the wrong basis.

I think you're so right about the bank responsibility one, Martin, because I think that's what they've tried to legislate, right? That's the motivation behind the changes to responsible lending. It's sort of waking up society and saying, right, we're now making sure that you're aware that you're the one who's taking the risk.

It's buyer beware. The bank's taking no responsibility for this. all the responsibility falls back to you, the borrower, and you can never sue the bank.

And that's what the responsible lending change is trying to do, because I think a lot of consumers thought, oh, well, if it all goes wrong, I could sue the bank, or I lied on the application form and they still lent me the money, so I should be protected, et cetera.

And so what's your thoughts on this sort of responsible lending change? And it was all meant to happen in March, and look, we're in August, and it still hasn't happened. So what's happening there?

Okay, so the responsible lending legislation came in after the global financial crisis, right? Because it was clear that what was happening was that people were effectively getting loans they shouldn't have got. And of course, the Royal Commission revealed the same thing. People got loans. Now, there were three things going on.

Firstly, some people lied on their applications. Secondly, in some cases, the information was tweaked and cajoled by mortgage brokers. And thirdly, the underwriting standards within the banks were probably looser than they should have been. All those things were in force, right?

Now, there was very major concern amongst the banks that there could be class actions based on those phenomenons, right? And of course, the responsible lending obligations were never clearly defined by ASIC originally.

And they've always sort of morphed a bit and, you know, on what basis is responsible versus not responsible. And they have to, it's basically said, well, you've got to calibrate it based on the knowledge of the individual and the financial profile of the individual. of the individual, right?

And it's very hard, therefore, to know when you're actually in and outside the responsible lending obligations. But to my mind, it's an unequal relationship.

So if you are a lender and you are talking to a prospective borrower, particularly a first-time borrower, they do not have enough knowledge to know all the things they need to know without the bank helping them.

so you can't just put it all back on the individual to say ah look you know providing that uh we know we've ticked our boxes it's all down to you mate if you want to borrow that's up to you right that's um that's an unfair contract in my view and this is why my own view is that the responsible lending obligation should not be um taken away i think it's a critical protection but the other point is this back in april

Wayne Byers, who's the head of APRA, right, was giving evidence to one of the Senate inquiries that sort of sits from time to time, right, specifically about responsible learning. And he said, in his view, you know, there wasn't anything... wrong with the lending standards in Australia.

Everything was fine and really responsibility probably wasn't that useful, right? At precisely the same time, he was writing privately to all the major banks saying, you need to tighten your lending standards because with low interest rates, et cetera, et cetera, you want to be absolutely really careful about what you're doing now, right?

So there was a sort of words and figures differ moment. Now that didn't come out until a freedom of information request

which was released a few weeks ago, showed those private letters that APRA had written to the banks in April, which was around the time responsible lending was actually due to debate. Now that responsible lending legislation passed the lower house, but didn't go to the Senate. The Senate refused to pass it.

And so it's in a holding pattern at the moment. And my own view is it's quite unlikely now that that will get passed muster. Of course, it was interestingly because it was associated with the COVID economic plan, right? So they basically tried to mask it.

as something which was actually to do with the economic restructuring. But can you really believe that banks would lend even more than they've been lending recently? Look at the growth in credit, right? To my mind, even within the responsible lending obligations they've got, they're probably lending more than they should.

I'm seeing the average first-time buyer 15% bigger than a year ago if you look at the loan, right? I don't think it's a problem. I think that protection for consumers is critical. But the final point is this.

My own theory was, and I can't prove it, but it's just a theory, but I like putting it out there. Maybe last year when the banks were being very, very helpful to borrowers, maybe there was a bit of horse trading going off.

with the government saying, well, look, if we give all the support to people through COVID, right, would you please attend to the responsible lending obligation?

Because the banks are still very worried that there's a class action coming because a lot of people are going to get a hell of a shock when rates start to go up and then they discover that essentially those loans are unserviceable, right? And remember this, mortgage stress is higher than it's ever been.

More than 41% of households at the moment, it went down a little, it's come up again. And with the current lockdowns and everything else, I'm expecting it to continue to rise. We have a lot of households with mortgages they should never have got, in my view.

And they're being forced into those big mortgages because prices are so strong and because the bank's lending standards are still pretty weak. And I have seen in the last month or two, some lenders tightening the screws a little on what they're prepared to lend, but others... are still lending extremely freely.

So the bottom line is responsible lending must stay. It's the only piece of protection that consumers really have. And frankly, taking it away from ASIC and just passing it across to APRA to say, well, APRA can worry about that now. All APRA is worried about is the structural stability of the banks.

They're not interested in individual loans. The only protection people have there is the responsible lending obligations.

I mean, you mentioned APRA, which is the other big conversation, really. I mean, there was prior to last few months ago, everyone was saying, you know, APRA's got to come in. They've got to slow down bank lending. They did this letter to the banks. And that's what's going to slow the market down.

So not... There's going to be more supply. There's going to be reduction in demand. It's going to be APRA that's going to save the property price growth. But what's your thoughts on APRA and what they can and can't do?

And really, they can't cause a mini crash like they did last time because that was really the responsible lending direction again that they don't want to go down, right? So that whole tightening of credit and quarter credit crisis. So what do you think APRA is going to do?

Well, let's stand back slightly. There is a new inquiry about housing affordability coming out from government, right? They are focusing on supply side issues, right? Because they always blame the states and land release, et cetera. That's easy, right? It's not their problem, it's somebody else's problem, right?

The real connection between house price growth is credit availability, right? And yet neither the RBA nor APRA claims to have any responsibility for house price momentum or growth. It's nuts stupid. It's completely illogical. Look at New Zealand.

Remember I mentioned earlier on New Zealand Reserve Bank now has been given a direct accountability to consider

the impact of monetary policy and how on house prices right because they recognize that there is a strong connection if you cut interest rates house prices rise you know peter tulips research from some years ago said cut interest rates by 100 basis points one percent over the medium term prices will go up by 30 percent wow but think about this if interest rates rise by one percent

prices will drop by 30%. It goes both ways. So there is a very, very strong correlation between interest rate movements and credit availability and house prices. We have a problem at the moment where our economy is so reliant on

Credit for housing and all of this stuff and the construction sector. This is not a well-balanced economy. And there was a very good quote I saw from New Zealand quite recently that said, this is in New Zealand, we have a housing market with a small economy bolted on the side.

I would say we've got precisely the same problem. Sure, we have another resources nodule bolded on too, but really, this is a completely skewed position we have in Australia. But it's policy, right? This is not just a happenstance.

This is policy that has been executed for at least 30 years here in Australia, right? There are people who should be accountable for it, but nobody wants to take accountability for it. Everybody wants to blame somebody else. And in the meantime,

Ordinary Australians have to make the scary decision of committing ever more of their salary to buying a property in a stupid market, or effectively missing out potentially of not getting into the property market. Neither of those are good options. But the point is, this is a controlled market.

This is a government-led set of initiatives. They can't stop meddling. And my own view is we haven't got a natural market at all. You know, it isn't really a property market. It's a property Ponzi scheme, but it's controlled by government policy.

And it's too big to fail, right? But we'll go back to the come to Jesus moment. This is how you got the reputation of being a doomsayer. And do you notice how I introduced you as a contrarian, not as a bear?

I know. I was very impressed. I've changed. I should frame that. Yes.

But, you know, back to the come to Jesus moment, you know, it's too big to fail but is it too big to fail or are we just going to keep propping it up?

Like you say, governments can't even print money and is this something, is this an industry, is this a market, is this…

You know, the fact that construction employees, what, 5% of our workers, the banks that dominate our share market, and then the banks, you know, obviously very preoccupied with lending money to people to buy houses, and the housing market is, what, $8 trillion, valued at $8 trillion now, which is how much bigger than the share market.

I mean, you know, like, is it too big to fail?

It is certainly the largest single element within the economy, and yet it is the least productive element in the economy. That is the problem. So if you think productivity is falling through the floor, right? in Australia at the moment. That's because what we're doing is shifting the same dollar around the system.

We're flooding the system with more dollars so in fact my argument would be rather than property prices rising, the value of your dollar is falling. So you need more dollars to buy that same property. So there is massive price value devaluation happening, which is why prices are so high. It's not real, right?

It's property inflation, or it's the devaluation of the dollar, right? So the value of the dollar in your pocket is just being eroded and eroded. It's getting smaller and smaller and smaller and smaller, which is why you need more of them to buy things, right?

Now, that is one definition of inflation, not the only one. Another one is actually inflation is relating to incomes. Well, incomes aren't growing. That's the key pressure, right?

So you need more dollars to do the same things you had previously, but those dollars are not actually coming into your pocket more because incomes aren't going up.

There's an article on the Herald today about the RBA coming out and saying, well, actually, it's immigration that is actually the cause of low price growth. Yeah.

What are your thoughts on that?

Oh, they've gone all over the place. They're trying to blame everything but themselves, right? So a few months ago they said, well, actually, of course, if we actually keep migration at bay, that means that there's more chance of income rising, right?

So it was actually all those migrants coming in and actually taking our jobs and, you know, we can pay them less. Actually, if you look at the statistics, that's not true. In fact, a lot of migrants are coming in and getting very well-paid jobs now. So I'm not sure that's true.

But the other side of it is, yeah, I think that migration isn't the critical issue with regards to income that they were talking about. It's a policy set of settings that have been there.

It's more to do with the types of work that people have, the insecure work, it's the part-time work, it's the multiple gig jobs, all of those things. Over 50% of Australians now don't have a permanent single job. They have multiple part-time jobs, right?

Over 50%. Over 50%, yeah.

Wow.

doing multiple jobs to try and bring enough income in to pay the mortgage and pay everything else, right? I mean, that, it's a pretty hellish existence from many, many people, right? At the top end, incomes are still rising, property values are rising, share prices are rising. So you've got this huge duality

being created in the Australian economy. I think migration is an excuse. Personally, I would not encourage massive migration, but that's more to do with the fact that we have not got the infrastructure built in Australia to cope with yet more people. I mean, if you drive around Sydney or Melbourne,

I mean, it's crazy. Well, less crazy now because of the lockdowns, but in a normal week, right? I mean, the traffic is just ridiculous, right? Because we haven't invested in the infrastructure, which is one reason why people would choose to live further out.

Have you got any research on early warning signs or any data on migration coming back? You know, obviously, you know, we've got an expat financial advisor that's got a lot of Aussies all over the world coming on the podcast next week.

And it's going to be interesting to see what he says, you know, in terms of the conversations he's having with people who thought they were always going to stay overseas. But have you got any information about Aussies returning? But also what the government's going to do around opening the borders? I mean...

it really is the ticket they're going to want to use, right? Whether it's this education, whether it's the professional jobs to stimulate the economy and stimulate housing, what do you think they're going to do around migration? What have you seen?

I'm pretty sure that they will want to open the borders, but of course they'll have to get to the minimum vaccination levels. I'm sure there will be the need to be double jabbed and show tests on the way in. And frankly, those tests, well, how good are they? It's an interesting question.

You can catch it on the plane.

You can catch it anywhere, unfortunately.

Just walking past somebody in the street.

It's interesting talking to some experts on this that, in fact, the transmissibility period is potentially 28 days rather than 14 days. So, you know, you aren't in lockdown long enough to be able to actually be clear.

So there's a bunch of questions around how you... And look, the Delta virus variant is actually raging in many other countries now. So, you know... When's that going to get cleared up? It's probably not going to be for another year or two, right? So how early can you then start opening the borders?

Now, in New Zealand, of course, they've pretty much said, well, we'll hopefully open next year sometime if we actually continue the path. And they've been quite clever, I think, in the way they've done it. I think we've been less clever here and our borders are more porous.

But what I can tell you is there are already expats coming back. There's been a steady flow. There's more coming. There's more who want to come. A lot of them are coming back from other parts of the world with lots of money and they'll be able to buy top end property.

And so that's going to stimulate the top end of the market. Right. I see much less momentum from other parts of the world at the moment, and that's partly because of policy. China, for example, you know, the whole China thing has turned very sour, so that's perhaps different from where it was.

I think Hong Kong is an interesting area. There may be some from there. So I think there will be some changes in the mix of...

of migration i expect to see more affluent more well educated people coming as well as more expats coming back and that will have a significant and continually distortive impact on the top end of the markets particularly in the major markets

um i think it's not going to have the same impact on the jobs market that we had in the previous five to eight years but bear in mind the first quantitative easing programs in australia weren't financial they were actually migrant we pumped the economy up by bringing more people in which meant the productivity at a macro level increased but the productivity per per capita didn't increase right

And we've still got that productivity problem. So productivity is not going to be addressed, in my view, by more migration. The numbers might look better from some measures, but then it comes back to, well, if you measure GDP, you're probably not measuring the right thing anyway.

Well, I mean, that's why we've never had a recession in 30 years, and they always bang on about that. But at a per capita recession, we've had them for a long time, right?

And we can keep on making a bigger economy, but it's not mean that on the ground level, it's making the society better. And that's the philosophical question. I mean, Martin, you've made lots of comparisons to New Zealand, but is it a fair comparison to Australia and New Zealand? Because

of things like resources and migration etc and land available I mean are we more like for example the UK economy where the UK's got stuck at low interest rates they keep printing money for the last 15 years are we going to see more likely that to happen where you know it's so easy to reduce rates and you know cut interest rates as it's quick decision on that Tuesday and

And then, you know, two weeks later, interest rates had dropped at all the banks and everyone's happy. But when you start scaring people with rising interest rates, even the talk of rising interest rates is deflationary because people are like, well, I've seen that in the news. They're talking about increasing rates.

Maybe we should not buy that car or maybe we shouldn't go on the holiday. Maybe we should prepare ourselves. And do you think that, you know, that that itself and maybe a couple of small increases in interest rates is going to be enough to potentially slow down and asset prices?

Or do you think that they're going to realistically have to increase interest rates dramatically because it's Unless interest rates increase dramatically, we've still got low rates and we're still going to see people willing to take on a lot of debt at low rates. And so what do you think is going to happen?

Well, I think it depends because some people are highly leveraged now at the current low interest rates and an interest rate of 50 basis points higher would actually cause them huge pain even now. Other people have a bit more leeway. But the psychology is...

an expectation. If expectations are that rates could be starting to rise, that will be enough to, I think, turn the market down a little. I'm pretty sure that we will see interest rates in Australia staying low, and they might even go lower.

I still think negative rates at the wholesale level are quite probable in Australia, and I think we're going to follow more the Japanese path

than actually the New Zealand path. Now, we do have some differences to Japan. We have the resource sector, but look at the iron ore price, right? It's come back strongly from where it was. It was over 220. Now it's about 160, 170, right? The iron ore price is coming back.

That means that the value of our resources could also be coming off as well. Now, that might be short-term, might be long-term, but it could be a policy decision in China. So I think we're going to see very, very generous monetary policy in terms of very low rates for a long time.

I expect to see a term funding facility too from the Reserve Bank, in other words, throwing yet more money into the banks, right, particularly if COVID continues. I expect to see the bond printing program, which is running at, what, $5 billion a month, I think it is at the

They're talking about taking it to $4 billion. That might actually not happen. We'll see. I think they'll go on printing, so more quantitative easing, more funny money, right? More inflationary pressures being created then in terms of asset prices because it's the only game in town they've got.

But at the end of the day, it comes back to Veronica's earlier question, right? Where is that...

point right and i run different scenarios right and i've always got this scenario that says at some point this whole edifice hiccups dramatically and we get a reset right and i still think a reset is probably the most likely outcome but it won't happen for a long time because the banks

and the central bank and the government will do all they can to keep the current bubble bubbling away for a bit longer. And so it's very difficult for people because I can't pick the time.

I've said, well, maybe September, October this year looks quite wobbly from a stock market perspective because traditionally when markets correct, they tend to correct in September, October, and we're absolutely due for a correction because asset prices and markets are way overvalued.

But it may not happen because of all the quantitative easing, because every time you quantitative ease, you basically give another injection of liquidity into the system. Even it doesn't help real people, right? So we've got this sort of fixation on saving the financial system rather than the real economy.

And I'm not sure that anybody... in politics, either Liberal or Labour, really wants to deal with the critical social and economic issues that we've been talking about here. They all want to just turn the handle and get voted back in. And nobody loses votes from house prices going up.

Everybody loses votes when house prices drop. So there's an election next year, right? You know, they're not going to do anything to try and actually deal with that. Now, the Reserve Bank, how objective and independent are they? I don't think they are at all. They're part of the Council of Financial Regulators.

They sit with the Treasury. They sit with APRA. They sit around the table. They all chat about this together. They've got this neoliberal view of the world. All of that is driving their behaviour. There's a whole bunch of reasons why I don't think rates are going to change in the short term.

And I mean, that's why we can't really do the New Zealand comparison, right? You know, you've got, you know, a prime minister over there. Basically, you know, climate change, house prices, you know, very much in that camp.

And when you look at Australia, we're nowhere near, right, in terms of how we look at these things. So, you know, to assume that the government's, even the Labor government have given up on their capital gains tax and their, you know, negative gearing.

They're like, well, we went there last election to attack property. Didn't work. And so when are they going to even look at that in the future? They're not going back there for decades. Small target.

Small target. They're going to be a small target. They're going to follow on. They're going to put as little light as they can between them and the other guys.

Yeah.

Hopefully it's enough to win the election. Martin, we'd love to get another property Dumbo from you. I know you've probably got thousands of them, but have you got another story you can share?

This is about a granny flat.

Oh, I love a granny flat story, do tell.

Okay, so I was talking to someone the other day, and again, I had their approval to share this, right? They were quite chuffed, right? Because they decided that they would actually get a granny flat built in the back garden for their granny, right?

Oh, not as an investment.

Well, I'll tell you the story, right? So basically they built it for their granny. Unfortunately, the granny died, right? Not long afterwards. So they then decided to figure out what to do, right? And they actually got a valuation on the granny flat and on their original property.

And the granny flat was valued at a higher amount, despite the fact that it was a lot smaller because it was modern and et cetera, et cetera, than their main house. So they ended up moving into the granny flat, right, subdividing and sold off the original property.

How's about that?

That's bizarre. I wonder what it would have been worth without the whole property, without the granny flat.

Well, what they should have done, of course, was to actually done a bit more thinking before they built the granny flat and thought about it. Because it was a large property with a significant space. They didn't maximise the assets that they had.

So they potentially could have knocked down the original house and subdivided it in a better way.

Correct, exactly.

Oh, my God.

Maybe just done nothing, you know. Maybe supported the granny in other ways, gave her a rent. you know, subsidy rather than them take a capital opportunity cost. You can just support someone. You don't need to butcher yourself financially.

And granny flats are absolutely anything with dual income, I think, is a concern to me. I mean, a client sent me one yesterday. They said, oh, you know, young couple, lovely. They're like, I want to buy this. It's a terrace split in two.

And I'm like, we'll just rent downstairs and we'll live upstairs. And I'm just like, I know that suits you, but that is not what the main market wants. The main market, that aspirational young family that really want that terrace are never going to want your terrace because it's split in two.

And the only way you're ever going to get a good price is if you convert it back.

to what you should have bought in the first place and the cost to do that yeah spend all the money that you you received as income after you paid tax on that and the capital gains tax is a big thing actually because you're right because once you start to cut up your block and you make it income producing rather than a primary place of residence then you start opening yourself up to capital gains tax same thing as renting your property out on airbnb when you go away over summer and

And then you've got to start contributing some of that capital gains tax. And people don't do these things and they just think, oh, a bit of extra income in the pocket's a good thing. But what's the opportunity cost?

And most of the time building granny flats or duplexes, all these things is you're butchering your asset. And I absolutely hate this strategy.

And only time it could work is if you potentially have a great block of land and you are confident that you're going to be able to keep that block of land for 30 or 40 years. And you can put another dwelling on it that it doesn't matter if it depreciates.

And you can take the income on it. It's a high income. And you're confident you're going to get a good rent.

And you can't see it from the main house.

Yep. And when you sort of get 30 years down the line, you knock it down. And then you basically create that big block of land again. So you basically just use the land, like put a piece of cattle on it.

And then, you know, get your milk the cow, basically, and then you get rid of the cow at the end of it. So, yeah, good story, Martin, because they wind me up granny flats because I get it all the time.

People say, I'm going to buy it and I'm going to put a granny flat. No, no, no, wrong thinking. Just buy it and leave the land.

Here's my analogy on that. Putting a granny flat in most blocks is akin to actually sewing an extra leg onto the horse and thinking that with five legs it's going to run faster than one with four legs.

Great analogy, so true.

Yeah, that's all our farming analogies for the day, Martin. So thanks for having us on. It's always a pleasure. And I hope everyone likes the video. We're going to give these things a go, but there are teething as everything we try first.

So much so is when Chris thanked you for having us on. He said, no, not just that, yes.

Well, it was always like the Martin North Show, wasn't it?

It does feel like it because he's the only one with branding behind it. So for those of you who aren't watching the video, you need to watch it now and go back, listen to the whole thing all over again or just fast forward to this bit.

Thanks for having us on, Martin.

Thank you very much.

Yes, you've got to look at the macro data. You sure understand what's going on, but lift the lid and look at the detail. Look at actually what your decisions are, you know, as they affect you, but also the areas in which you're making them and et cetera, et cetera, et cetera.

You can bang that drum until it's got a hole in it.

Absolutely. And if I may, can I just do one quick plug? We've also launched recently a charity called Asbestos Awareness Australia.

Now, we have some very personal issues with regard to asbestos, but I just want people to understand that 4,000 people a year in Australia die from asbestos-related disease. 4,000, right? A lot of them are doing DIY work.

So I just want to point people towards that charity, asbestosawarenessaustralia.com.au, and to say to people, if you're going anywhere near asbestos, be cautious and be careful. It's a killer.

Martin, you know, we are very sorry to hear that there's a personal reason for behind that. And we will put the link in the show notes. And potentially, I think what we need to do is another episode on that as a topic.

Because what you're saying is absolutely right, that there is a lot of asbestos in our houses, in houses that are built pre, you know, when they were phased out of building materials. And, you know, we've got a renovation boom going, particularly at the moment. So there is some very serious risks there.

And thank you for sharing that with us.

Great. Thank you.

Absolutely. It's a whole episode. We need to do this because it's a huge problem, you know, and personal stories. And everyone's probably got personal stories as well here, Martin, as well. So 4,000 is a lot of people who know a lot of people. And, you know, that's every year.

So it's not just 4,000.

And just to say that more than one third of properties in Australia have asbestos related issues.

right so the chances are you could be living in a property with asbestos and you only need just a few exposures or an exposure to a few fibers to potentially get a disease that kills and the average life expectancy is just two years yeah absolutely thanks having you on martin we'll definitely book in an episode on that soon

No, great to talk to you both and always good to have a really good deep dive into property and what's going on. And as you say, you know, I'm not just a property bearer, hopefully a property realist.

Thank you, Martin.

See you.