Finance Market Update - 6 December 19

With only three Saturdays of auctions left until Christmas we will continue to see strong demand for property until the end of the year and into next, in this fortnights update we talk about how this will keep the property price momentum up as we ascend our way back to the peak values.

Listings

This time last year the key issue with property was that there was too much being sold at once as sellers rushed to auction as the boom ended. There were too many property listings.

By October 2018 prices in Sydney had slid down 9.5% from the peak of the boom in late 2017.

In contrast this year we have a property shortage, or more accurately a shortage of property listings, and that is driving up prices to record levels as buyers try to get a deal done before prices run away again.

Over November new listings increased by 6.3% according to SQM Research, however the total number of listings is down that same percent point compared to this time last year.

Also during November property prices in Sydney surged 2.2% according to CoreLogic. That is an annualised growth rate in the mid twenty percentile and more than even during the recent boom.

When people see prices boost so high so quick it might entice them to sell.

Since the bottom of the market in late 2018 the cash rate has had three cuts and the banking regulator has eased assessment benchmarks banks use which have both led to lower mortgage rates, and unsurprisingly more home buying and therefore price increases.

Yet as we talked about earlier this year the “endowment effect” still prevails.

Meaning the amount people are willing to pay for an object is less than they are willing to accept.

From a psychological perspective it helps to explain the behaviour of people not listing their property. They don’t think they would get the amount they would accept, but in reality it is unlikely they would pay that amount if they were to buy the same asset.

People inherently overvalue what they already have.

This shortage of property listing is spurring on a sense of urgency for buyers and resulting in a short-term supply driven spike in prices. This short-term momentum could be dampened as advertisings pick up as sellers get confidence.

We are seeing a seasonally low number of advertised properties come to the market but that could change in early 2020 as selling conditions remain favourable which could bring people to market to sell. That would start to unwind part of the urgent tension from the buyside and normalise growth rates.

We asked the question a few updates ago if we were at the start of a bounce or boom, it is starting to look like a boom.

Whether or not it will end well is a different question though.

Follow the money

Another bank CEO has lost the top job.

Westpac’s Brian Hartzer stepped down from the role after a 29 million money laundering and counter-terrorism breaches were reported.

Hartzer took over as CEO on February 2nd 2015 and finished on 2nd December 2019. In terms of stock performance over that period Westpac returned 8.7% while the S&P ASX200 returned 59%. You could say he underperformed in that way, in many ways, but we shouldn’t forget how complex these big banks are and changing them is proving to be near impossible.

There is a stack of compliance requirements placed on banks, who are mammoth bureaucracies, plagued with outdated computer infrastructure, stuck together with red tape, trying to manage and report millions of data points all day everyday and simply put, they are not doing well at it, not well at all.

Recently we have seen the countries two largest banks (by mortgage book size and market share) CBA and Westpac both be embroiled in money laundering and financial crime.

It is astonishing that our biggest banks could let this happen and at the same time that so people just shrug their shoulders like it doesn’t surprise them.

The big banks have a real reputational issue.

In CBA’s case it was that the ‘smart’ tellers after receiving an upgrade to the software stopped automatically reporting cash deposits of over $10,000, which should be reported for AUSTRAC to watch and verify. The case cost the bank around $800 million to resolve with the government.

For Westpac the issue as that they did not report micro payments being made by suspicious individuals, to known crime spots for certain explicit services. The money should have been able to be followed, tracked and reported. In the end this tech blunder cost the bank its CEO, Chairman and probably close to a billion dollars.

In both cases they blamed technology.

There is probably truth to that claim, but we could also guess human error was involved.