Implications of crisis on property outlook

There are no revelations to date which have changed my view of the outlook for the market. This collapse was expected. If you read over my market commentary blog that will be evident enough. I did actually expect the derivatives market to require the bail out, but actually that aspect of the financial market has been secondary.
So what is coming. In my last 'market commentary' post I stated that the US Congress will approve the bail out. Some commentators are expecting less than $700 billion because of a reluctant Republican Congress. I would however argue that that is mostly political posturing and the $700 billion figure will be required to preserve confidence. The other option is making a smaller commitment with the possibility of more if required.
The property market in the USA is falling because its highly leveraged. The same is true in a number of Western countries. This is not the case in a number of Asian countries. With the prospect of inflation, and low debt levels as a percentage of GDP, places like the Philippines make a lot of sense for investors. Japan is already in recession, has high public debt, but its domestic debt, not foreign debt. We can expect a subdued market in Japan but yields on non-CBD property are still good. In the countryside yields on foreclosed property are very good.
The Philippines can expect a lot of support from OFWs, though some of those will be returning home. At the end of the day, higher interest rates and inflation are not going to undermine the market significantly because most property buyers/holders paid cash, or are supported by OFWs. That spells little downside for Philippines property.
In contrast, the US property market has more downside then several years of consolidation as taxes and interest rates rise to reflect the higher inflation. A serious and protracted recession for the USA, but not a depression unless the Fed does something silly. There is also the prospect of some countries with surpluses stimulating the global economy, eg. EU, China, South Korea and Australia with increased domestic spending. Japan would need to increase taxes to justify increased spending. One would expect energy taxes to be the principal target for tax because its discretionary cost (at least directly speaking) and it helps achieve greenhouse gas objectives.
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Andrew Sheldon www.sheldonthinks.com

New centres for condo development

The Western Australian government is considering the development of high rise condominium developments in the north of the state. The concept arose as a political football, the argument being, if the Arab states can do it, why can't Australia. That argument can of course be extended to many countries in Asia which are a lot more central than the Middle East. There are some major problems. The most important being:
1. The lack of an international airport - this is a critical issue
2. The remoteness of the area - the region is far remote from any significant commercial centre
3. The isolation from markets - places like Malaysia, the Philippines and Indonesia are closer to Japan, China, South Korea.

One could take the argument that Australia does offer some advantages over these other countries because it offers more secure Torrens title. But does anyone seriously worry that they won't have a chance to sell property before any threat of property expropriation could arise. If you wait for a dictator to say 'we are nationalising all property' then you have waited too long. But you are not entirely safe in Australia. State governments (say NSW) are prone to place taxes on property because of its value. For this reason I tend to think the sovereign risk concerns are overstated. Also foreign holders of Asian property are not so large, so there will be no mass exodus. There is on the contrary, a seeming consensus on the direction of economic policy.

So where is the best location for high rise condominiums? I can suggest several locations in Asia that are more attractive than the NW of Australia. These include:
1. Davao City, Mindanao, in the Philippines
2. Laoag City, Luzon, in the Philippines

Laoag is particularly attractive because its on the doorstep to China, it has an international airport, with a growing number of connections. It is remote from Manila, but I don't see that as a problem since the regions have a lot to offer.
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Andrew Sheldon www.sheldonthinks.com

Is the proposed train line in Sydney a political scam

Life really does require being a critical analyst of all things. Vested interests are really in the game of deception in order to get what they want. There was an advertisement on the television in Sydney today which strikes me as nothing more than a media stunt by the NSW State Labor Party. The reason I say this is because they are proposing to develop a train line at a cost of $A16 billion from St James (City) to Rouse Hill 6 years in the future. Property investors would be inclined to get excited about such a line because of its potential to push up property prices, but ultimately the political will depends on its economic justification, particularly since they are looking at a private partnership. There are of course some things to note about the line:
1. A line costing $16 billion is going to require $500 million in earnings to make it worthwhile
2. This part of Sydney is not the most populated area
3. The line will include 14 new stations - however only about 5 of these areas have significantly dense populations. It could be argued the outer areas could have carparks to service a wider area.
4. This is a new line so there is the opportunity for the line to be a much faster service than existing lines. We can therefore expect this line to be more expensive, particularly since it will be servicing some high wealth suburbs. I would expect the tickets to be 30-50% higher than other train services in the city, with some justification.
5. It will be interesting to know what the government will be doing to capture some of the value from property development in these areas. Think of the cost recovery from property development where the government owns land, as well as the additional taxes it can make because of the higher property prices. These factors need to be considered.
Nevertheless one would have to be skeptical about this plan given the political value of the news in the next election, since the area skirts safe Liberal seats. I would not be surprised to see this line reduced to a shorter line to Epping, with development of the outer line (Epping to Rouse Hill) pushed back a number of years.

We cannot however overlook the political opportunism of advocating and promoting a project which stretches beyond the term of this government. For further details see the Sydlink website. The issue here is determining whether these projects are going to go ahead. There can be a whole raft of issues preventing them, so one has to be careful anticipating and actually buying property on the basis of such 'proposals'.
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Andrew Sheldon www.sheldonthinks.com