The Reserve Bank has been issuing warnings about the overheating property market for almost a year. It has been driven by low interest rates, the government's First Home Owners Scheme, money coming off the stockmarket, the deregulation associated with urban consolidation, and typical bubble plays. Now following a 60% jump in apartment approvals (yes - 60%) they are becoming truly worried and are warning about the deposit bond game. I have been wondering why local apartment developments were selling 90% off the plan - why would you buy something you havent seen - and now all is revealed.
Inner city prices in Melbourne and Sydney are triple what they were 10 years ago and incomes have not moved much. Gross rental returns are 4% (compared with traditional 7% to 10%) and vacancy rates are at all time highs. I am getting 2 to 3 calls a week from call centres for various operators' who purport to be "investment advisors" paid by the government to train us for retirement. I went along to one of their seminars of about 400 people last week and followed through with an appointment.
It is all very reminiscent of encyclopedia salesman training 30 years ago. They get a nice couple to get up and perform and explain how they have bought 10 apartments in the past year and made heaps. Then young Henry comes up on the video screen and explains how he has made a zillion rolling money he doesnt have around in a circle. There are two basic products - 1. buying apartments off the plan using deposit bonds (i.e. with about $800) and selling them as soon as they are constructed, and 2. mezzanine finance. Their literature horrified me - a pensioner single Mum on $20k has just bought $1 million worth of property etc etc.
The advisor at the personal meeting had no qualifications but was quite frank. This show appears to be led by a 34 year old called Henry who claims to be worth $100 million and owns (in part) 10 000 houses over the past 3 years. He set up training to supply him with a ready source of deposit fodder - I gather he comes in as co-owner on a lot of these. The training costs $14 000 in one year, and if you don't make $50k in 5 years they refund it (in the unlikely event they are still around). I gather they give you a two-day Forum/Landmark style empowerment indoctrination, a monthly meeting to see how you are going, access to assorted facilities including lawyers etc (presumably fee for service), introductions, and a 3 day industry conference. They teach you how to get a 15% discount from developers, how to add $60k to the price of a house on sale, and how to talk a bank into promising you large sums of money that in a blue fit they should not be doing. You cant lose, they say, who ever heard of property prices going down, the current dip is a buying opportunity. (Sound familiar?)
Also they will show you how to do second mortgages at 25% return which they assure you is "much safer than first mortgages".
They have trained 5000 people who are snapping up apartments all over the place. And then - there are all the other "training" firms and developers.
To me the whole thing looks like a Ponzi pyramid scheme with Henry at the apex. I gather the government is continually on their backs to justify their claims as Registered Training Organization; but you cant stop people being greedy. I would have been severely tempted myself two years ago - I watched colleague make millions by rolling over properties and deposits in the boom of the late 1970s - and watched others lose hundreds of thousands when it popped. This one is much bigger.
A good time to sell, not to buy, I would guess. But the stockmarket only topped here 6 months ago and they say the property boom is good for 18 months or so - hm. But when this one blows, it is going to make dotcom look like a pimple.
