U.S.A. Property – An Opportunity or a Swindle?
by John Hopkins, Executive Chairman
Ten politicians. One long table. Questions being fired from left, right and centre; and occasionally under the belt.
There were many serious faces on this day, each determined to get to the bottom of the deliberations at hand.
The occasion was a Federal Government enquiry.
The topic was ‘Property Investment for Retail Property Investors’. Retail property investors, for this purpose and as defined by government, were ‘those individuals or family businesses with tenants’.
I was called, on this day, to attend and give evidence as a formal witness. The people responsible for the Politicians assembling this enquiry, as the explanatory papers explained, were ‘Property Spruikers’.
Property Spruikers
As a witness at this enquiry, my first discussion with these Politicians was to question the appropriateness of the terminology ‘Property Spruikers’. I explained that the practice of ‘spruiking,’ per say, is generally an accepted and widely used activity. If you look at our very own Politicians, religious leaders, entrepreneurs or countless other areas of activity, we can see ‘spruiking’ everywhere in our day to day lives. Now, if you then relate this word to ‘property,’ why is it suddenly unacceptable to be a ‘property spruiker’?
At the enquiry, I explained it’s not the ‘property spruikers’ Government regulators and industry members need to be eradicating, rather those deceitful individuals or organisations who coerce members of the public into believing they can become “millionaires in a minute with no money and no risk.”
These ‘get rich quick’ ideas have been, and always will be impossible. And further, there are many areas, in addition to property, where these deceptive individuals try to sell the impossible and swindle the naive.
Therefore, taking all of the above into consideration, in my opinion, it’s a great wonder people can’t see the warning signs when they’re being presented dirt cheap property to purchase, such as the current situation in the U.S.A., with a promise of great returns.
U.S.A. Property
It never fails to amaze me that sometimes, even savvy property investors, when presented with “cheap” property, such as that currently being presented in the U.S.A., don’t first question “why is this property so cheap in the first place?” For if they did ask themselves this pertinent question, they would surely come to the obvious answer that the reason behind such inexpensive values is because the current property market in certain parts of the U.S.A. is volatile and insecure; there is no market for property there right now, these markets are carrying a huge over supply of property, there are no purchasers and it’s impossible to get finance. So, the question of whether you should invest in the USA right now seems obvious, doesn’t it?
U.S.A. Sub Prime Loan Debacle
To be specific, it was the sub-prime loan debacle that caused the problems in the U.S.A. residential property markets.
In a nutshell, U.S.A. banks lent money to millions of individuals to buy houses. Those loans today are fondly referred to as “NINJA” loans; an acronym derived from the circumstances of a lot of people who acquired such loans, i.e: Nil Income, No Job, or Assets. There was another issue in regard to these loans, and that was in U.S.A., if the borrower could not afford to continue to pay the loan, fundamentally they could just hand the key back to the lender with no further responsibility.
Thousands and millions of homes were developed and sold to individuals in America who took advantage of these loans. The so called “smart” financial manipulators packaged them and termed them as “solid financial instruments” and sold them as quality finance books backed with property security to unsuspecting world banks and other investors; billions and billions of dollars worth of them.
Talk about houses built on sand.
The Aftermath
The result for the U.S.A. was millions of houses, most of them new, in undesirable cities and states with no-one to live in them and no one to buy them.
The extent of this huge over supply nearly bought the world to its knees, creating what we know as the GFC (Global Financial Crisis).
Now, of course that apartment on Manhattan Island over looking Central park, or some of those lovely houses and apartments in quality locations in San Francisco or Washington, have continuing value, are in demand and the markets have not fallen in such areas like stones in a deep pond. So, we ought to be discerning with our statements and judgements.
The Reality
However, those ‘bargains’ that are being flogged are in market places with huge huge oversupply, where their owners have defaulted and there is no one to buy them or occupy them.
And they are currently being promoted to Australian and other buyers as a “great opportunity.”
The so called “opportunity” that naive property investors are being spun is that the U.S.A. market is at an all time low, their economy is about to bottom, and the only way is up. They are being told that there are strong rental demands with high yields (quoted to be as high as 16%), and with the AUD at its present level, ”how can you go wrong?”
Please be aware, this whole “opportunity” is nothing more than a huge speculation. And to quote Michal Park, a very experienced Financial Planning friend of ours, it is a “contrarian speculation.”
There is nothing on the horizon that would have anyone believe the U.S.A. economy has turned the corner. There are continuing questions as to whether or not the U.S.A. government will pass the bills required to continue on. U.S.A. is host to trillions of dollars of national debt, huge overseas military commitments and a 9% unemployment rate (which may create a competitive employment market, however it also tells us there is a ‘lack’ of activity and for property, this does not go well for people paying mortgages or rent). One would have to be a foolish to believe the way is necessarily up for the U.S.A. from here.
And as for a high yield, 16% is being peddled as a great advantage, but why is it 16%? Because there are no buyers in those particular markets to compete when purchasing this type of property; because when there’s competition in property, it ensures the prices go up and the yield comes down.
A high yield, fundamentally, tells you there is certainly no market.
In an effort to get some of their funds back, the banks and lenders are selling; and at almost any price. Don’t think this occurrence is over either, because it’s said there are another 4 to 5 million foreclosures to come.
In certain substandard locations, certain unethical individuals are buying these properties in the U.S.A. at low prices, and then flogging them after adding huge margins to unsuspecting international purchasers at substantially inflated prices. Just ask yourself - if the market was reasonable, and the price was right, why do they have to come to Australia, or other countries, to sell these properties?
This phenomenon is now considered so prolific that the City of Buffalo, New York, has established a taskforce to crack down on the promoters of these activities.
It is estimated by the National Association of Realtors (Washington U.S.A.) that Australians spent about $600 million through 2010 on these so called “opportunities” in the U.S.A.
The ACCC (Australian Competition and Consumer Commission) would call it ‘unconscionable conduct.’
It’s not an opportunity; it’s a swindle.
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