2021: The Unexpected Is Expected

OPINION

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For savvy investors, including property and mortgage investors, the new year traditionally starts by reading bold economic and property predictions penned by favourite fund managers and economists attempting to predict what lies ahead.

If 2020 taught us anything, it was to expect the unexpected. And while 2021 will be a continuation of the emotional roller coaster ride experienced the past 12 months, the difference is that the unexpected is now the expected.

It took me over a decade to truly appreciate and understand a quote from an old economics professor: “Economic forecasting is like trying to predict tomorrow’s weather whilst taking into account how people will collectively feel on that day”. There’s a big difference between economic forecasting and commentating, and those who are bold enough to forecast are (sadly) rarely right.

Despite uncertainty, Australia continues to earn its title as the The Lucky Country via leading virus control and a stable economy. The IMF’s latest predictions claim our economy will be powering towards 5.2% GDP growth this year and 4.1% GDP in 2022, much to the envy for the rest of the world. Despite what can be seen as one of the most significant trade wars in Australia’s history, the ongoing stoush with China, our aggregate exports are steadily growing, predominately off the back of mining.

Remarkably, there’s been no government support for continuing immigration during the pandemic — which traditionally is a significant economic driver— and my mind truly boggles as to how this is playing out.

When it comes to the Australian property market, we need to remember it was less than eight months ago that the general consensus of most respected economists and property commentators was that property would fall in excess of 10% – 20%. Some banks even predicted declines of up to 30%. Today, the RBA believes house values could increase by up to 30% over the next three years (so much for expert economic commentators).

Despite the overall positive property euphoria, we must not become complacent with the apparent advent of continued unabated growth and unwittingly underestimate the ‘iceberg effect’ – because we still don’t know what else could be lurking below the surface.

Iceberg Effect

No one can be quite sure of the quantum of zombie companies still feeding off the Government’s life support which is due to abruptly end this March. Moreover, once the bank moratorium is over, banks will surely begin recovering on delinquent loans. And we are yet to see the full ramifications of both of these unfolding events.

We believe that the possible negative aspects of the aforementioned events have been significantly mitigated due to the Government’s generous support measures and swift actions enabling us to enjoy our current and favourable set of economic circumstances.

Prime Minister Scott Morrison last week announced that 90% of the jobs lost during the darkest hour of the pandemic have been clawed back — thus allowing our free markets to take over the economic recovery without further government support. Interestingly, we are now experiencing a tsunami of capital flow through our financial markets.

Despite current rhetoric, as a commercial mortgage fund manager, we need to look deeper than the high-level property headlines. For commercial mortgage funds managers to engage longterm success, they need to be consistent and disciplined in their risk and credit assessments.This ensures maximisation of capital preservation can be maintained and our investors (including SMSF trustees) can rely upon the consistency of regular stable monthly income distributions.

And so to some quick fire market insights …

Regional Property

Despite a large spike in local migration from Sydney and Melbourne to regional areas, our view has not changed on the risk in lending in regional areas. Just as quickly as the prices and demand have gone up, they can as easily revert due to an exodus of people back to the metropo areas once the COVID-19 crisis abates and the physiological desire to work face-to-face, rather than through Zoom, may once again prevail. The second reason is linked to regional areas having lower restrictions on creating new housing supply. In regional areas, undersupply of properties could turn to oversupply in a relatively short period of time as it doesn’t have the same land constrains as the metro areas of Sydney, Melbourne and Brisbane.

Commercial and Industrial

According to this week’s data, the inner-city vacancy rates are 8.6% — essentially double last quarter’s figures with the delivery of further supply expected in 2021. This was not unexpected due to the additional restrictions on both businesses and landlords as well as the weakening, but still prevailing, negative stigma of working in the city. To add insult to injury, many multi-national corporations have loosened work from home policies and are slowly giving up commercial space in the city. Despite this negative trend, we remain optimistic that this will reverse over time, however as it might take years, investors should be prudent on the gearing of investments secured against this asset class.

House v Unit

Most of the positive property headlines focus on houses prices rather than the entire residential property market, which prompts a question about price trends for units? Corelogic recently published that the difference between house and unit prices has never been wider with this gap only continuing to expand.

In saying this, there are a number of contributing factors to consider:

Most units are concentrated in close proximity to the city and highly populated areas, which proved to be less desirable during COVID-19.

Investors make up the largest segment of unit purchases as they favour apartments over houses, due to ease of management and cost. Property Investment activity is at one of the lowest levels for over 10 years.

Due to Covid-19 we’re short approximately 500,000 people who are normally short to medium term renters — a direct correlation to the lack of overseas students and tourists.

Owner-occupiers are the predominate buyers in the current market and their requirements are different to those of the investor set, that is, they want larger apartments. Due to the lack of supply of this specific product, owner-occupier buyers are turning to houses as an alternative.

The Federal Government’s current $2billion Home Builder scheme is artificially increasing demand for houses through generous incentives on offer, the take up of which has far exceeded expectations.

Despite all the odds, including decreasing demand, unit prices remain resilient. We believe that unit prices, which normally lag behind house prices, will catch up in the long term and eventually the gap will shorten.

Mortgage Investment Opportunity

Msquared Capital has identified a number of emerging gaps in the commercial lending market which has enabled us to introduce investors to unique opportunities.

Business owners who’ve been temporally impacted by COVID-19 are now requiring commercial funding and banks have been slow to adapt and are still trying to wrap their heads around how to provide businesses with the right access to cashflow during COVID-19. These business operators typically have quality real estate to offer as security and this creates a specific opportunity for our investors right now.

With the RBA recently making a strong public commitment that interest rates will remain unchanged until 2024, both business and consumer confidence around obtaining appropriate finance is high. On the flip side, those investors who have historically relied upon bank term deposits to provide them with a good regular income stream are losing out with TD rates hovering around a meagre 0.75%pa.. Accordingly, it’s a great time for those investors to look at alternate investments, including a registered first mortgage loan to a small business borrower (with target rates of return currently between 6.50%p.a. and 8.00% p.a).

Paul Miron has more than 20 years experience in banking and commercial finance. After rising to senior positions for various Big Four banks, he started his own financial services business in 2004.

msquaredcapital.com.au

Former President Donald Trump said he would ban undocumented immigrants from obtaining home mortgages, a move he indicated would help ease home prices even though these buyers account for a tiny fraction of U.S. home sales.

Home loans to undocumented people living in the U.S. are legal but they aren’t especially common. Between 5,000 and 6,000 mortgages of this kind were issued last year, according to estimates from researchers at the Urban Institute in Washington.

Overall, lenders issued more than 3.4 million mortgages to all home purchasers in 2023, federal government data show.

Trump, the Republican presidential nominee, made his comments Thursday during a policy speech to the Economic Club of New York in Manhattan.

Housing remains a top economic issue for voters during this presidential election. Rent and home prices grew at historic rates during the pandemic and mortgage rates climbed to levels not seen in more than two decades. A July Wall Street Journal poll showed that voters rank housing as their second-biggest inflation concern after groceries.

Both major candidates for the 2024 presidential election have made appeals to voters on housing during recent campaign stops, though the issue has so far featured more prominently in Vice President Kamala Harris ’s campaign.

Trump has blamed immigrants for many of the nation’s woes, including crime and unemployment. Now, he is pointing to immigrants as a cause of the nation’s housing-affordability crisis. Yet some affordable-housing advocates and real-estate professionals said Trump’s mortgage proposal would fail to bring relief to priced-out home buyers.

“It’s unfortunate that given the significant housing affordability crisis that is widely acknowledged across most partisan lines, we are arguing about a minuscule segment of the market,” said David Dworkin, president of the National Housing Conference, an affordable-housing advocacy group.

Gary Acosta, chief executive of the National Association of Hispanic Real Estate Professionals, a trade organization, said, “It’s just another effort to vilify immigrants and to continue to scapegoat them for any issues that we have here in the United States.”

A Trump campaign spokeswoman didn’t immediately respond to a request for comment.

Undocumented immigrants in the U.S. can obtain an obscure type of mortgage designed for taxpayers without Social Security numbers, most of whom are Hispanic. The passage of the USA Patriot Act of 2001 allowed banks to use identification numbers from the Internal Revenue Service as an alternative to Social Security, extending a number of financial services to people without legal status for the first time.

Mortgage loans for undocumented immigrants are typically higher interest and borrowers include legal residents who have undocumented spouses, Acosta said. Lenders include regional credit unions and community-development financial institutions.

In his speech, Trump said that “the flood” of undocumented immigrants is driving up housing costs. “That’s why my plan will ban mortgages for illegal aliens,” he said.

Trump didn’t elaborate on how he would enact a ban on such loans.

Though mortgages for undocumented people living in the U.S. are relatively rare, residential real-estate purchases by foreign nationals are big business , especially in expensive coastal cities such as New York and Los Angeles. These sales have declined in recent years, however.

Close to half of foreign purchases are made by people residing abroad, while the other half are made by recent immigrants or residents on nonimmigrant visas, according to an annual survey by the National Association of Realtors. Many affluent foreigners buy U.S. homes with cash instead of obtaining mortgage financing.

In his Thursday speech, which focused mostly on other economic matters such as energy and taxation, Trump proposed other measures to bring down housing costs, including cutting regulations for builders and allowing more building on federal land. Similar ideas appeared in the housing policy outline Harris released in August .

The former president has spoken on housing-related issues in speeches at other recent campaign stops, including in Michigan last month, where he touted his administration’s 2020 overturn of a policy that had encouraged cities to reduce racial segregation .

“I keep the suburbs safe,” Trump said. “I stopped low-income towers from rising right alongside of their house. And I’m keeping the illegal aliens away from the suburbs.”