Dow Jones Newswires

Sales of previously owned homes slipped for the second consecutive month in October, the latest sign that increased interest rates are weighing on the housing recovery. 

Existing-home sales declined 3.2 per cent in October to a seasonally adjusted annual rate of 5.12 million, the National Association of Realtors said Wednesday. The results were the slowest sales pace since June and were down from 5.29 million in September. 

Sales of previously owned properties reached a recent peak in July but have eased somewhat since, reflecting increased interest rates. Rates for a 30-year mortgage jumped in June and stayed near 4.5 per cent through mid-September, according to Freddie Mac. A year ago, buyers were paying a rate of 3.4 per cent for the same loan. 

October's sales data reflects offers made in August and September because it typically takes one or two months for a buyer to close on a home. 

Mortgage rates did ease a bit in late September after the Federal Reserve said it would not start to pull back on the pace of its $US85 billion a month in bond purchases. 

Increased interest rates make mortgage payments more expensive for many buyers. Roughly, every one percentage point increase in mortgage rates makes homes about 10 per cent more expensive for buyers by increasing the monthly mortgage payments. 

The federal government shutdown last month also delayed some sales, said Realtors economist Lawrence Yun. The Realtors group reported that 13 per cent of closings during the month were delayed either because buyers couldn't obtain a government-backed loan or the Internal Revenue Service couldn't verify income. 

Existing home sales had trended up from the midpoint of 2010 until this summer. That was a positive sign for the broader economy because those large purchases indicate buyers' confidence and are often followed by additional spending on furnishings and improvements. 

At the same time home prices are rising, making homes less affordable. 

In October, the median price of an existing home was $199,500, up 12.8 per cent from a year earlier. 

Meanwhile, the number of unsold homes on the market declined 1.8 per cent from a month earlier to 2.13 million at the end of October. Compared to a year ago, inventories are up slightly. The inventory level represents a five month supply at the current sales pace. 

The figures on existing-home sales match other indications of cooling in the housing market. Home builders' confidence level slipped this fall from post-recession highs reached during the summer, but remains in positive territory. 

The government's September data on newly built homes has been delayed due to the shutdown. Those figures will be released next week and in early December. 

By a staff reporter

Dexus Property Group says it will use its existing interest in takeover target the Commonwealth Property Office Fund (CPA) to block a rival bid from GPT Group.

In a statement to the Australian Stock Exchange, Dexus noted its 14.9 per cent interest in CPA under a forward contract with Deutsche Bank.

Dexus, in consortium with the Canada Pension Plan Investment Board, said it does not intend to accept the GPT bid, meaning the group will not be able to proceed to compulsory acquisition.

Dexus reserves its rights to change its intention if new information about the GPT bid is released, or the terms of the bid change.

CPA's responsible entity, Commonwealth Managed Investments Ltd, earlier backed a sweetened takeover bid from Dexus and the Canadian pension fund, valuing the target's stock at $2.42 billion.

GPT this week made a surprise $3 billion bid, after Dexus had gone into due diligence.

By a staff reporter

Australand Property Group's major shareholder has sold a 20 per cent chunk of the group to a range of existing and new institutional investors.

In a statement to the Australian Securities Exchange, Capitaland Ltd said when the placement is completed, its interest in Australand will be reduced from 59.1 per cent to 39.1 per cent.

The placement was priced at $3.685 per security, a 1.7 per cent discount to Australand's closing price yesterday, when the shares were sold in an aftermarket book build conducted by Citi.

Australand will now become an associated company of Capitaland, which will remain its largest shareholder.

Australand managing director Bob Johnston said the support from new and existing investors "significantly increases the group's free float".

"This should provide longer term benefits for investors," Mr Johnston said.

Capitaland said its remaining interest in Australand will still be its single largest key investment outside its core markets of Singapore and China.

By a staff reporter

Mirvac Group has priced a long-term US private placement note issue totalling $A506 million.

In a statement to the Australian Securities Exchange, Mirvac said the issue will comprise three tranches of notes across nine, 11 and 12 years.

The transaction was four times oversubscribed from the initial $150 million target.

The issue will see the group's weighted average margin and line fees increase by approximately four basis points, Mirvac said.

Mirvac said its average borrowing cost for fiscal 2014 will remain at or slightly below the average cost reported at June 30 of 5.7 per cent.

Mirvac chief executive officer Susan Lloyd-Hurwitz said the issue extends the group's debt maturity profile and diversifies its sources of funding.

"This transaction improves our capital position and will see our overall weighted average debt maturity profile increase to approximately 4.8 years at December 31, 2013," Ms Lloyd-Hurwitz said.

"Since the S&P credit rating upgrade to BBB+ in September 2013, the group has raised over $700 million of long-term debt and as a result has achieved our target to increase the proportion of debt provided by debt capital markets to greater than 60 per cent."

SCA Property Group has refinanced $600 million of its debt through Australia's four major banks, reducing the average-weighted cost of its debt to 4.8 per cent from 5.3 per cent.

The property trust, which owns shopping centres at 76 locations in Australia and New Zealand, has increased the weighted-average debt maturity of the loans to 4.1 years from 3.6 years.

Mark Fleming, SCA’s chief financial officer, says the property trust’s refinancing was for three loans: a three year, $150 million debt, a four year, $225 million loan and a five year, $225 million loan.

“We’re a very safe and secure credit,” Fleming told DataRoom, adding that 60 per cent of SCA’s tenants are supermarket operators Woolworths and Coles. The weighted average lease period of its tenants is 15 years.

Australia & New Zealand Banking Group Ltd, Commonwealth Bank of Australia Ltd, National Australia Bank Ltd and Westpac Banking Corp are SCA’s lenders.

IT was taken somewhat as a given that should CapitaLand embark on a block trade of its major holding in Australand, the bankers working on the deal would be JPMorgan.

CapitaLand, which until yesterday held 60 per cent in Australand, however, was advised by Citigroup.

It surprised some in the market, because JPMorgan was CapitaLand's adviser last year when GPT Group launched a takeover bid for Australand.

JPMorgan had been working on the deal until recently, sources said. One source said the stock did not look cheap and there could be some funds that did not participate.

However, Citi has also been working with the company for months, according to some sources, and has worked on some of the biggest equity raisings in the real estate sector in recent years.

The bank is underwriting CapitaLand's selldown of Australand, which is expected to reap $426 million for the Singaporean giant.

One source close to the deal said JPMorgan shunned the work for CapitaLand because the investment bank did not believe that it was possible to sell the shares in the company at that price and questioned where the demand would come from.

CapitaLand declined to comment.

The Singaporean company will sell 115.66 million shares in Australand at between $3.685 to $3.75 each. The shares are being sold at a 1.7 per cent discount to the last traded price of $3.75 and at a 4.2 per cent discount to the average price over the past five days.

However, the take-up of the offer by fund managers will be known today, with sources saying the selldown was restricted to 20 per cent because the market would not be able to absorb more.

There’s plenty of action in the real estate sector, with a 20 per cent block trade in Australand proceeding as planned and Dexus Property Group staring down a stalemate with GPT Group for control of the Commonwealth Property Office Fund. A stalemate is not really an option for either party, which means something is likely to give soon.

Elsewhere, Woodside Petroleum may soon finalise an entry into the mammoth Leviathan gas field, BHP Billiton continues to mull opportunities for non-core divestments and more details emerge about a few big December floats.

Dexus Property Group, GPT Group, Commonwealth Property Office Fund, Mirvac Group, CapitaLand, Australand, Stockland

Dexus Property Group has responded aggressively to GPT Group’s $3 billion rival bid for control of the Commonwealth Property Office Fund (CPA), informing the market it will not sell its 14.9 per cent stake in CPA to GPT.

The announcement, which came as little surprise, tees up the prospect of a stalemate, with GPT consequently unable to reach the 90 per cent acceptances it is after to assume full control.

There are concerns about GPT being left overloaded with debt if it gets stuck in the 50-90 per cent acceptances range as it will be unable to on-sell $1.1 billion of office towers to a related fund.

Such a circumstance, however, helps neither Dexus nor GPT and means, unlike the possible stalemate in the frenzied bidding for Warrnambool Cheese and Butter, a long-running stand-off is not likely.

Instead, either Dexus – which is pushing ahead with due diligence on CPA – will raise its offer one last time to trump GPT, or the two parties will come to an agreement to split the CPA assets.

The likelihood of the former is high, though Dexus and joint venture partner Canada Pension Plan Investment Board have already raised their bid once and are already pushing toward the upper limit of their valuation. The latter option of splitting assets would likely be a challenge between two rivals – especially given they are both looking to claim the position of largest office landlord in the country through this deal.

Still, Dexus insists it is keeping its options open for now.

“Dexus reserves its rights to change its intention if new information about the GPT bid is released to the market or the terms of the GPT bid change,” the group said in a statement.

In the meantime, the share prices of GPT and Dexus are falling, which leaves both their cash-and-scrip bids on a downward spiral.

Elsewhere, the sale of 20 per cent in Australand by major shareholder CapitaLand has been received with limited enthusiasm.

Some reports suggested that Citigroup, which ran the $426 million sale, was left hanging onto stock, though The Australian believes this was in fact not the case.

The block trade priced at $3.685, which was at the lower end of the range, though still a minimal 1.7 per cent discount from the price of Australand securities at the time the sale was announced. But already it is out of the money for those institutions who bought into it, with Australand shares drifting 4 per cent lower to $3.60 yesterday.

Also in property, Mirvac Group has priced a $506 million notes issue, with the transaction heavily oversubscribed beyond the $150 million target. The company has been taking advantage of a recent upgrade in its credit rating by Standard & Poor’s to tap global debt markets.

Woodside Petroleum

Things are looking up for Woodside Petroleum’s interest in the massive Leviathan oil and gas project in Israel, with reports that a deal could finally be signed this week.

It has been a long process for the Western Australian-based firm after it first signed a memorandum of understanding to acquire a 30 per cent stake in December last year in what chief executive Peter Coleman has dubbed a “once-in-a-decade opportunity”.

Since then the company has waited patiently for a final decision on Israel’s gas export policy, and after receiving clearance a few weeks ago, sought to finalise the deal.

However, the JV partners in the project – Delek Group (45 per cent), Noble Energy (40 per cent) and Ratio Oil Exploration (15 per cent) – have been holding out for more cash given the increased reserves shored up over the year. Crucially, a plan to build a pipeline to Turkey also put Woodside’s position in doubt, with its expertise in floating LNG less valuable to the project’s development.

According to the Israeli-based Haaretz, the deal hasn’t gone cold, with executives of the firms, including Coleman, meeting in New York this week. The report suggests a formal contract is likely to be signed before week’s end, though it could see Woodside fork out as much as 30 per cent as it had originally agreed to. Given the price gap and the slow-and-steady approach of Woodside, that timeline may be on the optimistic side of the ledger.

The news comes after reports that plans to drill for oil at the project have been delayed indefinitely.

As it stands, Woodside is set to pay $US1.3 billion ($1.38 billion) plus royalty payments of up to $US1 billion.

Pact Group, Cover-More, Bis Industries, Veda, Vocation, IPO market

Packaging company Pact Group will list on December 17 in a float that is expected to raise $649 million.

The Raphael Geminder-run group will price at $3.80 per share, which will deliver a market capitalisation of $1.12 billion and an enterprise value of $1.72 billion, toward the low end of expectations. When the float was first mooted valuations ran around the $2 billion mark.

Geminder will retain a 40 per cent stake in the business once listed.

In other IPO news, a float of insurance firm Cover-More is still possible before Christmas, with The Australian reporting that analysts may start marketing the company next week. Owner Crescent Capital Partners has reportedly hired UBS and Macquarie Group to pursue the listing, which has been rumoured to raise as much as $700 million.

It would be a quick turnaround for the investment banks, meaning there is every chance the IPO could still not be seen this side of the New Year.

Elsewhere, credit bureaux Veda Group and education and training provider Vocation closed their IPOs early amid robust demand.

It is the latest sign of a strong IPO market, with the Pacific Equity Partners-owned Veda to raise $341 million and Vocation to raise $253 million.

Both companies will hit ASX boards in early-mid December.

BHP Billiton

BHP Billiton, like close rival Rio Tinto, appears far from over its divestment spree.

In the past year the company has offloaded assets worth around $7.5 billion and BHP Billiton chairman Jacques Nasser yesterday told investors at the miner’s Australian AGM that more asset sales were on the agenda, though they will be “patient and disciplined” to ensure nothing is sold on the cheap.

Noting that the group had received a “substantial premium” on recent non-core asset sales, Nasser said the very diverse BHP Billiton portfolio would be simplified over time.

Earlier this year it was reported that around 10 assets could be up for grabs and that as much as $25 billion worth of non-core assets shed by the time the simplification program is finished.

Among deals already completed by the miner are the sale of its Pinto Valley copper mine in Arizona and the auction of its stake in the Browse LNG joint venture to PetroChina, which combined reaped around $2.5 billion.

Among the options for BHP Billiton are the continued sell-off of non-core oil and gas acreage as well as the divestment of its aluminium, manganese and nickel assets.

Wrapping up

Macquarie Bank is set to sell its stake in Regis Aged Care back to the group’s founders, according to The Australian. The deal could be worth around $150 million and comes as there’s been plenty of movement within the aged care sector, the latest being rumours this week of a $500 million float of Japara Holdings.

In media, it appears any plans News Corp Australia may harbour to acquire Ten Network Holdings wouldn’t be shot down by media regulators after Jennifer McNeill, a senior executive at the Australian Communications and Media Authority, told a Senate hearing that a hypothetical deal between the two would “not necessarily be problematic”. While there has been plenty of media speculation about the prospect, News so far has not shown any concrete interest.

In the seafood sector, Ervin Vidor is looking to offload Seafarm, reportedly the largest prawn farm in the country, for $20 to $30 million. The news comes on the back of reports of the auction of leading Victorian seafood distributor Clamms as well as the country’s largest abalone farm, Jade Tiger Abalone. Boutique investment bank Kidder Williams, which is assisting Bega Cheese in the WCB fight, is advising on the sales of all three business.

In resources, Uranium miner Paladin Resources has again stoked expectations of a sale of a minority stake in its flagship mine. The seemingly stalled process to offload part of the Langer Heinrich development in Namibia has been “rejuvenated”, according to the group’s chairman Rick Crabb.

Finally, ASX-listed gold miner Stonewall Resources will offload its key Stonewall Mining subsidiary to China-based Shandong Qixing Iron Tower Co, according to the Wall Street Journal. The $141.5 million deal is likely to see shareholders receive almost twice the 13 cent share price the company was trading at prior to requesting a halt on its shares.

The $567.6 million float of GDI Property Group closed on strong demand last night after sole lead manager Credit Suisse achieved its target $310 million in equity and existing investors piled into the float.

GDI is Australia's largest real estate IPO of the year and forms part of a rush into property REITs this week, with investors pouring more than $1.3 billion into the sector.

Existing investors were allocated about $256.7 million of the float’s total equity, along with management.

Credit Suisse successfully tapped the market for 310 million stapled securities at $1.00 a share, after opening the bookbuild on Wednesday morning. 

About 80 per cent of existing unit holders in the GDI syndicates chose to stay in and their purchase of additional stock put the effective rollover rate at 85 to 90 per cent.

The rollover rate can be seen as a ringing endorsement of GDI’s management.

GDI executive chairman Tony Veale and managing director Steve Gillard took a combined 10.5 per cent of the $567.6 million float.

The prospectus for GDI will be lodged on Monday.

GDI will list on 17 December, the same day as PACT group, which Credit Suisse is also running.

The trust will use the proceeds of the raising to form the new listed vehicle and bankroll two acquisitions, including an office tower on Queen Street in Brisbane, valued at $120 million.

The GDI Property Group will control about $867 million in assets at listing, including directly owned assets of about $680 million.

Other properties include 233 Castlereagh Street in Sydney, 197 St Georges Terrace and the Mill Green complex in Perth, and 25 Grenfell Street in Adelaide.

AAP

Home builder AV Jennings Ltd believes Australia's housing market is improving as consumer confidence belatedly recovers.

But the house and land packages group, which has made a loss for two years running, says sales growth is coming off a low base.

"Whilst we remain careful in our response to the improvement in conditions, we look to the current year with a much more positive outlook for the sector," AV Jennings managing director Peter Summers told its annual general meeting in Melbourne.

Mr Summers said consumer confidence was also starting to recover.

"The missing ingredient in recent years was consumer confidence," he said.

"This crucial factor has now finally started to emerge."

The start of the 2013/14 financial year has been promising, with the number of new contracts from July to October standing at 479, compared with 215 during the corresponding period in 2012/13.

"These may not all contribute to revenues during the year as generally revenues are recognised on settlement and weather and other interruptions can affect the timing of settlements," Mr Summers said.

"However contract signings do provide a good indication of production and sales performance throughout the year."

Historically low interest rates and benign economic conditions are also helping.

"The population continues to grow at relatively high rates, the gap in underlying demand remains as a result of underbuilding particularly in New South Wales and Queensland, ... affordability continues to improve and household incomes remain ahead of house price growth," Mr Summers said.

The builder has enjoyed sales growth in NSW and Queensland, with "solid performances" in Victoria and South Australia.

By a staff reporter

Charter Hall Retail REIT has completed its fully underwritten $80 million institutional placement to partially fund the acquisition of Melbourne shopping centre Rosebud Plaza.

In a statement to the Australian Securities Exchange, Charter Hall said approximately 21.1 million new units were issued to institutional investors at a fixed price of $3.80 per unit.

The placement was fully underwritten by Citigroup Global Markets Australia Pty Ltd and Macquarie Capital (Australia) Ltd who acted as joint lead managers, underwriters and bookrunners, Charter Hall said.

Units issued will settle on November 27, with allotment to occur on November 28.

The trust also intends to offer the opportunity to subscribe to its units under a unit purchase plan.

Charter Hall last week entered an agreement to buy Rosebud Plaza for $100 million, excluding transaction costs, and entered a trading halt pending the release on an announcement about the capital raising.

By a staff reporter

Commonwealth Property Office Fund Ltd (CPA) has terminated a takeover bid from Dexus Property Group Ltd and Canada Pension Plan Investment Board (CPPIB) after the consortium failed to match a rival bid from GPT Group Ltd, launched last week, in the specified time.

In a statement to the Australian Securities Exchange, Dexus said while it remained "strongly committed" to its bid to take over all remaining CPA shares, the competing proposals had a "significant scrip component" and it was "too early to respond".

In a separate statement, GPT Group welcomed the announcement, and said that its own bid was a "significant growth opportunity" for GPT and that it would "create significant value for both groups of investors".

Commonwealth Managed Investments Ltd (CMIL), CPA's responsible entity, said the Dexus-CPPIB consortium could continue due diligence on CPA until December 9.

Last week Dexus said it intended to block the rival $3 billion GPT Group offer, made after Dexus had gone into due diligence.

CMIL earlier backed a sweetened takeover bid from the Dexus-CPPIB consortium which valued the target's stock at $2.42 billion.

In the first entry of a Japanese bank into the Australian mortgage market, Bank of Tokyo-Mitsubishi has announced it will provide AMP Ltd with a $500 million one-year mortgaged-backed facility, The Australian Financial Review reports.

According to the newspaper, the new warehouse loan will give the Australian financial services firm access to competitive financing and at the same time the Japanese bank will gain exposure to Australia’s high-performing home loans.

AMP frequently issues residential mortgage-backed bonds, recently raising $660 million through a securitisation transaction.

Bank of Tokyo-Mitsubishi move into the Australian home loan market was first reported by Reuters, according to the AFR.

Policymakers around the world often worry about decreases in real-estate prices and other asset prices, and take measures to prevent them. For example, in the aftermath of the financial crisis, the Federal Reserve has engaged in large-scale asset purchases – especially of mortgage-backed assets – to support the housing market and, in turn, the overall economy.

The reasoning behind this policy stems from a large literature in financial economics and macroeconomics that studies the positive effects of increases in asset prices on productive real investment. The idea is that firms can borrow and invest more when their assets are worth more, because they can provide more valuable collateral, and also because they have more ‘skin in the game’, which reduces moral-hazard concerns. This is the so-called 'balance-sheet channel’.

There is also a ‘lending channel’ operating through the banking system – when assets on a bank’s balance sheet are worth more, the bank should be able to lend more, thus amplifying a positive initial asset-price shock. Finally, an increase in the value of consumers’ assets creates a positive wealth effect, leading to higher demand and higher consumption. This demand effect has a further positive impact on productive real investment, as firms respond to higher consumer demand with more investment.

Over the years, empirical evidence has been provided to support an optimistic view about housing-price appreciations. Recently, research has shown that firms are able to borrow and invest more when the value of their real-estate collateral increases. Others have shown that a decrease in housing prices hurts banks’ balance sheets, leading to a decrease in real investment.

The crowding-out effect of housing-price appreciation

Are housing price appreciations always desirable for the real economy? Unfortunately, the answer to this question is negative. As discussed in the theory of rational bubbles, an increase in housing market activity may crowd out commercial and industrial lending through increased interest rates. As a result, one sector of the economy that is receiving liquidity and experiencing bubbles may overheat, and crowd out other sectors of the economy.

In our new paper, we provide the first empirical evidence on the crowding out effect of housing price appreciation. Looking at the period from 1988 to 2006, we find that firms that borrowed from banks located in stronger housing markets paid higher interest rates, received lower loan amounts, and ultimately invested less compared to similar firms that borrowed from banks located in weaker housing markets.

The normative implications for the economy are significant – if monetary policymakers are actively supporting one sector of the economy, such as the housing market, they are causing a detrimental effect for other productive sectors.

Empirical results

To begin the empirical analysis, we need to find a proxy for banks’ exposure to real estate prices – not an easy task, given the opacity of banks’ balance sheets. We obtain our proxy using data on the geography of banks’ branches. By weighting the housing prices in each state with bank branch deposit data, we generate a bank-specific housing-price exposure variable.

Figures 1 and 2 show the relationships between bank assets and housing prices. Figure 1 shows that as housing prices increase, banks on average invest more in real estate-related loans. However, Figure 2 shows that as housing prices increase, banks on average reduce their commercial and industrial loan portfolios as a percentage of assets. It appears that in reaction to housing-price appreciations, banks increase real estate lending and decrease commercial lending.

Figure 1. Housing prices and real estate loans

Figure 2. Housing prices and commercial and industrial loans

This decrease in commercial lending is interesting if it is caused by a reduction in the supply of capital, as opposed to a reduction in firms’ demand for capital. We estimate that a one standard-deviation increase in housing prices (about $79,700 in year 2000 dollars) that a bank is exposed to decreases investment by firms related to that bank by almost 6.3 percentage points, which is approximately 12 per cent of a standard deviation for firm investment. Banks also increase the interest rate charged by 9 basis points, reduce outstanding loans by approximately 9 per cent, and reduce loan size by approximately 4.5 per cent. These results are consistent with banks reducing the supply of capital to firms in response to increased housing prices.

An important endogeneity concern is that housing-price changes may be picking up unobserved changes in economic growth prospects in a certain area. If this bias is present, it should weaken our estimates – an unobserved positive economic shock will both increase housing prices and firm investment opportunities, giving a positive bias to the relation between bank housing prices and firm investment. To address this concern more rigorously, we instrument the banks’ housing price exposure using the percentage of land unavailable for development in the bank’s area, the state-level mortgage interest rate, and their interaction. These instruments are relevant because for a given increase in housing demand (potentially driven by a drop in mortgage interest rates), areas with less developable land should see larger changes in housing prices. Importantly, geographic constraints to housing supply elasticity are unrelated to changing economic conditions. With instrumentation, our estimates of the housing price effect on firms’ investment are consistently more negative.

Digging deeper, we find that the negative investment effect is stronger for firms that borrow from smaller, more regional banks, and for firms that have limited sources of external financing (e.g. no access to bond markets). This finding is intuitive because larger banks are presumably able to obtain sufficient capital to allocate in all productive sectors, while smaller banks may have to substitute capital between sectors. Likewise, unconstrained firms should be better able to maintain investment using internal reserves, or to obtain financing from other capital sources (e.g. public debt and equity markets), as they have greater access compared to constrained firms.

It is important to note that our results do not contradict those of past research in this area. They show that firms are able to borrow and invest more when their own real estate collateral increases in value. We confirm their result, but find that the overall effect of housing price appreciation is more complex. The bank lending channel that we document generates an opposite effect, and in fact we show that our bank lending channel is of a similar order of magnitude. Thus, the positive effects of the collateral channel may be completely mitigated by the negative effects of the bank lending channel.

While prior research has investigated the effects of a contraction of bank balance sheets on firm activity, our paper is the first to investigate the role of banks in capital allocation when asset prices are rising in a specific sector of the economy. We find that it is incorrect to assume that an expanding balance sheet leads to positive spillover effects across all sectors of the economy. There is a crowding out effect in which banks divert resources across sectors – in the case studied in our paper, rising real-estate prices lead banks to cut commercial loans and increase real-estate loans.

If the change in relative prices is market-driven, then banks can be seen as reallocating resources across sectors to support the growing sector. However, if the price change is policy-driven, then the channelling of assets to one overheated sector of the economy at the expense of other (potentially more productive) sectors may not be the consequence policymakers have in mind.

Given the early walloping the Abbott government has taken in the polls thanks to its ‘stop the votes’ policy, the Coalition is going to have to find some good news to win back voters (Abbott’s plan to ‘stop the votes’ is working, November 21).

And given that its mandate is, essentially, ‘undo everything Labor did’, it would be wise to dream up a few positive reforms of its own to take to the 2016 election.

It can't mail out cheques to voters as John Howard did, or grant hefty tax cuts as Peter Costello did while drunk on the revenue surge of mining boom mark-I.

In fact, it'll be lucky to have delivered even one tiny surplus in the federal budget.

So what to do? A root and branch review of the tax system won't produce any joy, will it?

Actually, it could. The federal budget is in crisis on the revenue side, and one of the unexamined holes in the budget is the $5 billion a year used to fund negative-gearing tax concessions.

"Whoa!" I hear you say. "That's too hot to touch!"

Well yes and no. When the various groups affected by negative gearing are seen clearly, political opportunities in this difficult area of tax reform become apparent. But first, the changing nature of our housing market must be understood.

Australians love to own their own homes, unlike many of our European cousins who are happy to rent the same dwelling for years, or even generations.

It's a difficult idea to adjust to, but just who owns a property is not very important. What matters is the security and autonomy of the resident. Germans, 60 per cent of whom are renters, have long-term leases and protections against capricious landlords.

As a result, and unlike younger Australians, they don't spend large amounts of time wondering 'how to get into the market'. They pay their rent, and invest their savings in whatever asset class is offering the best returns (possibly including housing).

There have been two major long-term structural shifts in Australia recently that are making us more German.

The first is a maturing (or over-maturing) of the industry that finances our houses. From around 2000 to the present day, the real price of houses in Australia has doubled, which means effectively that people will borrow twice as much in real terms to buy them.

Put another way, we don't earn twice as much but are happy to set aside twice as much of our earnings to pay for housing. Those hoping for extended gains, henceforth, in house prices relative to incomes are forgetting that we have pushed buyers and renters virtually to the limit.

The finance industry, that wasn't lending nearly hard enough, has now done its job and we're at the outer limits of how much debt we are prepared to service.

And that is leading us to become more German. First-home buyers are walking away from the market and resigning themselves to a long-term future as renters. Around 25 per cent of Australian homes are rented, compared to 60 per cent in the land of lederhosen. 

So there's a lot further for that trend to go.

Over time, it's likely that the 25 per cent figure will go higher. The first political selling point for a reform to negative gearing is, therefore, for the government to say it doesn't want to go as high as Germany.

That's an entirely irrational position – as noted above, Australians place too much importance on who owns a dwelling – but then we can't all be as rational as the Germans. And voters would cheer.

At present, there is a financial anomaly created by negative gearing. The sale-price of dwellings is higher than it should be, as investors bid up prices knowing they'll get a large tax write-off by renting them out. And rents, as a consequence, are lower than they should be.

Proposing to scrap negative gearing sometime in the future – most likely removing it in a tapered way – would avoid a tax shock for older investors, but start to bring rents and sale-prices back into kilter.

That does not mean the rental sector would stop increasing as a proportion of dwellings, but it would not grow as quickly as at present.

But there is a second enormous selling point that could be used to get voters on-side. At present, negative gearing is dramatically skewing the tax system in a largely invisible way. The politician that makes it visible could become a reformer, and a popular reformer at that.

To make it visible, let's take the example of two hypothetical youngsters, Bill and Tony.

Bills' parents choose, at age 50, to buy an investment flat. Tony's parents instead spend their money travelling around Australia to watch their son compete in triathlons.

Bill's parents rent out their flat at a small loss (playing their part in pushing rental prices down across the economy) and are refunded 45c by the tax office for each dollar lost. Meanwhile they accrue capital gains and, long term, have a lovely nest egg to bequeath to Bill, partly funded by other tax payers.

Tony's parents, meanwhile, pay 45 cents in the dollar on their income and spend the rest on 'consumption' that keeps many businesses thriving. For example, they spend a fair bit on Speedos every Christmas time ("He does go through them!").

If the transfer of wealth between these two families (Tony's parents subsidise the investment made by Bill's parents) led to a greater supply of housing stock, it might seem worthwhile. But it doesn't.

The only effect of negative gearing today is to push an increasing proportion of housing stock into the hands of older Australians, and force more young Australians to rent at subsidised prices.

The great inequity begins when Bill and Tony's parents pass on – Bill gets a capital-gains-tax-free windfall that Tony's parents' taxes helped create.

All that is required for the Coalition to benefit electorally from this tangled tax situation is to:

(a) promise to remove negative gearing a point well into the future – taper it away over, say, 15 years; and

(b) to let Australians know that it's a tax arrangement that means some taxpayers are subsidising others in an inequitable way, and that it is forcing more young Australians than is 'natural' to rent for the rest of their lives.

Treasurer Joe Hockey and Finance Minister Mathias Cormann complain constantly about a 'budget crisis'. Reforming negative gearing would remove around $5 billion a year of structural deficit.

And it might even give them a much-needed popularity boost.

Dow Jones Newswires

Demand in the United States for housing permits surged in October to the highest level in more than five years, a sign US home construction could gain traction as the year ends. 

The number of building permits issued in October rose 6.2 per cent from a month earlier to a seasonally adjusted annual rate of 1.034 million, after rising by 5.2 per cent in September, the Commerce Department said Tuesday. October's pace was the strongest since June 2008, during the last recession. 

Economists surveyed by Dow Jones expected permits for October would rise to a 930,000 pace. Permits are considered an indication of future construction. Year over year, the pace of issued permits was up 13.9 per cent in October. 

The Commerce Department did not release figures for the more closely watched housing starts because "accurate data" couldn't be collected in time, according to the Census Bureau, a division of the Commerce Department. That was due to the partial government shutdown in October. The closure also meant permit figures for September and October were released simultaneously. 

Full residential construction data for September, October and November will be released on Dec. 18, the department said. 

Economists forecast housing starts would have risen to an annualized rate of 910,000 in September and then to 915,000 in October, according to a survey conducted by Dow Jones. 

"Industry sources suggest that builders are finally beginning to stir a bit, hoping to get some new houses built in time for the spring selling season next year," said Pierpont Securities chief economist Stephen Stanley in a note ahead of the release. 

Tuesday's partial report showed strength for a sector that has been a key driver of the recovery. But rising mortgage rates and home prices in recent months have stifled affordability and weakened the industry. 

Last week, home builders said they were feeling less confident about the housing market in November than they were over the summer, according to a survey by the National Association of Home Builders. People are showing interest in purchasing new homes, but rising costs are holding them back, the industry trade group said. 

On Monday, the National Association of Realtors said its pending-home sales index, which measures contract signings, fell for the fifth straight month in October to the lowest level in nearly a year. Last week, the Realtors trade group said its measure of closed transactions--sales of previously owned homes--fell for the second consecutive month in October. 

The average rate on a 30-year fixed-rate mortgage was 4.22 per cent last week, up from 3.35 per cent in May, according to Freddie Mac. 

Everyone can learn from Woolworths’ successes and mistakes.

On the positive side, Australia’s largest retailer is throwing itself into the online space and can clearly see that this is where there is significant growth. Every retailer in the country will need to get its online trading right. Many will fail. My guess is that Woolworths will set the success benchmark.

On the negative side, in the last four years Woolworths has spent $3 billion on property development – with almost half of it developing the Masters home improvement chain. After investing almost $1.5 billion on Masters’ property development over four years and losing almost $250 million over the last two years, Woolworths expects to treble its number of stores by 2016 and make a profit in that year.

Investment will not treble because the sites have been purchased but by 2016 investment will soar way beyond $2 billion. I can smell massive writedowns because, while there may be profits in 2016, they will not be at a level to justify the property investment. And, in any event, Masters will become more and more an online operation – that’s how it can win. Woolworths will not be the only retailer/retail centre owner facing writedowns. The growth of online shopping will affect many retail operations because many Australian bricks and mortar retailers will be among the hardest hit in the world. On July 1, 2014 our unique, big rises in retail shift allowances and penalty rates will erode the economics of those retail stores that are sub-economic. To justify the higher staff costs, retailers need greater turnover (Australia faces a humiliating retail calamity, November 12).

Woolworths went into Masters for all the wrong reasons. Stephen Bartholomeusz explains some of the things that went wrong (A jack of all trades but a Masters of none?, November 26).

It was conceived as a project to hit Wesfarmers’ Bunnings, so as to prevent Wesfarmers developing Coles. But that attack started a massive investment in bricks and mortar by both sides. Bunnings won hands down and gained great returns from its investment. But I suspect Masters will do much better in the next round, not via its stores but via online trading.

One of the weaknesses in Australian business is that too few show courage and develop into new fields. The Qantas-Jetstar operation in Asia is one of the few.

Woolworths’ Masters experience will deter others. The good news for Woolworths’ shareholders is that the $3 billion spent on bricks and mortar has not stopped them going into the growth arena with gusto.

But imagine what Woolworths could have done had the company attacked Bunnings online rather than getting into a property development race.

All Woolworth’s executives should travel from Melbourne airport to the Melbourne CBD at least once in the next 12 months. As you head into the city look to the left and you will see the massive The Age newspaper printing press building. It was the last major broadsheet classified press erected in the world. It is closing and has been written down.

The Masters chain will also be the last major new bricks and mortar chain built in the developed world. It won’t close down but in 10 years’ time it will have to have succeeded in online trading and the property investment will need to have been reduced to a level that can be serviced.

Malcolm Jackman’s five-year tenure at the helm of the much-diminished rural services group Elders ended abruptly today. No doubt he has mixed feelings, but at one level there will inevitably be a sense of relief.

Elders didn’t explain why Jackman was departing immediately. He had been expected to remain CEO until Elders had dealt with its recapitalisation and the final dregs of a traumatic five-year restructuring program.

It did say there had been informal discussions about his retirement early in 2014 and that the decision to bring forward the retirement was reached after “further discussions” in the past week.

Elders’ chairman Mark Allison plans to chair a senior executive committee that will manage the business until a new CEO has been found, which he expects to occur in the first quarter of 2014.

Whatever the plural of ‘annus horribilis’ is, Jackman has had five of them. Having come off an extraordinarily successful term as chief executive of Coates Hire before that group was bought out for $2.9 billion, by Carlyle Group and Kerry Stokes’  National Hire, he joined Elders just as the financial crisis was about to envelop it.

Elders had fallen under the control of Futuris Corporation’s Les Wozniczka. It was stuffed full of a diverse range of assets of dubious quality – forestry, financial services, automotive parts, aquaculture and property, among others – and about $1.2 billion of debt.

The Elders share price had begun to dive even before he took on the role in late September 2008. Having traded at more than $24 a share in 2007 pre-crisis, the share price had halved by the time Jackman accepted the job. As the crisis deepened a year later, its shares were valued at about $2.30. Today they trade at 11.5 cents.

It’s been five thankless years of struggling to keep the venerable pastoral house alive – selling off assets, absorbing massive losses and write-downs – to keep the bankers from stepping in.

Last financial year, Elders lost more than $500 million, including impairments of $442.2 million, as it finally cleared the decks of the legacy assets outside its re-established core of rural services.

In a demonstration of Murphy’s Law, for most of the five years that Jackman spent trying to carve Elders back to its core and its debt back to less destabilising levels, conditions in the agricultural sector have been challenging. Drought, a high dollar and weak commodity prices have affected the rural services business.

More recently, Elders has been hit by the discovery of ‘discrepancies’ in the carrying value of live cattle on its balance sheet, which are now being investigated with the help of forensic accountants and lawyers.

Over the past five years, Elders’ banks have been monitoring its condition intensely, but Jackman has been able to convince them not to act. Indeed, he was able to convince them to extend their facilities out to December next year.  The group’s core bank debt is now down to about $150 million, which is still about three times its decimated market capitalisation.

The fact that Elders has any market value at all is near-remarkable.

The five years at Elders won’t add any lustre to Jackman’s corporate CV. But Elders’ survival and return to its 174-year-old roots, albeit in vastly diminished and still-fragile condition, has been a significant achievement given the magnitude and nature of the odds that were stacked against him.

It’s a lucky family hotel owner who has six boys: weekend penalty rates are for others, not you.

Rosario (Ross) Colosimo, now 66, was blessed with six boys and now owns one-seventh of a sprawling $40 million hotel and brewery business based in Sydney’s Hills District.

Marcello, his oldest, is CEO, Sergio runs the Australian Brewery and Hotel at Rouse Hill, Vince the Hillside Hotel, Leon the Bella Vista Hotel, Julius operates the property development division and Ricky, the youngest, was in the business and is now doing some travelling. Oh happy days.

All except Ricky are married and they have nine future workers, err, I mean children, with two more on the way.

The Colosimos have no external directors or managers (don’t need them) and the seven of them have a formal board meeting once a month and family gatherings every week. They are a close Italian family that operates on consensus; if there’s a deadlock, Ross is the boss.

They also have a family constitution with two significant provisions: that third generation children need to go to university before coming into the business and are “encouraged” to work somewhere else first; and second, partners don’t get involved in the business, which is the first time I’ve seen that rule.

Says Marcello: “We watched other family businesses, and realised that’s when complications and arguments arise. You have to keep each person’s own family and business involvement separate. If you don’t, and your partner comes into the business with you, you tend to start looking at the business from a micro perspective – just from the point of view of your own family.”

Ross’s wife Pamela didn’t have time to work in the business in the early years: she was too busy producing staff. All the boys worked weekends in his hotels as soon they could hold a tray of glasses. All of them finished school and went to uni and then joined the business full time.

Rosario, as he was then, emigrated from Calabria at the age of 13. His father Marcello had a fairly traditional work history for Italian migrants: first the Snowy Hydro scheme and then the Queensland sugar cane farms, before settling around Baulkham Hills.

The young Rosario started working in hotels in the area and eventually built a bottle shop in Baulkham Hills (Crestwood Cellars – it’s still there). He and Pamela lived in a caravan at the back of the shop and worked seven days a week.

He also had a talent for property development and made decent money developing a block of industrial units in the area, before building the Castle Hill Hotel which, with the help of his six sons, became one of New South Wales’ three biggest hotels.

He then moved into the city and developed the Retro nightclub and restaurant in Sussex Street, and then to the Hunter Valley where he developed a big tourist centre and brewery on 11 acres just outside Cessnock. That gave the Colosimos a taste for brewing.

They sold Crestwood Cellars, the Castle Hill tavern and Retro as well, and in fact developed and sold a few hotels along the way, hanging onto Hillside and Bell Vista, and then developed the huge Australian Brewery and Hotel at Rouse Hill.

Australian Brewery’s three types of beer and one cider are the first craft beers to be sold in cans. They won prizes at the Beer and Brewery Awards last year and the pub in Rouse Hill won the Best Traditional Bar and Best Boutique Beer Venue at the AHA awards. In 2004 they were named Family Business of the Year.

The family’s ambition now is to be the biggest craft brewer in the country. They have just signed a national distribution deal with the Kollaras Group, another big family business, and have an export distribution deal with Konishi Brewing in Japan.

Ross and the six boys are all equal shareholders and they haven’t yet discussed the third generation succession (the oldest is 12, so it’s a few years off). There are no dividends, just salaries, and all profits are ploughed back into the business.

From “humble beginnings”, as the website says, they now employ 300 people, serve 4000 meals a week and turn over $40 million a year.

It’s one of the many stories that gives immigration a good name.

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By a staff reporter

Charter Hall Group has entered a conditional agreement with TA Global Development Pty Ltd to sell its 50 per cent stake in the Little Bay Cove project.

In a statement to the Australian Securities Exchange, Charter Hall said conditions for settlement include Foreign Investment Review Board approval and further extensions of the senior debt facility from the financier.

Charter Hall says the transaction has no material impact for it and is set to be completed in early to mid-2014.

AAP

Sales of new homes have fallen, after reaching their highest level in two years in September, a survey shows.

New home sales fell by 3.8 per cent in October, seasonally adjusted, following a 6.4 per cent rise the previous month, the Housing Industry Association (HIA) said.

But HIA chief economist Harley Dale says the fall is nothing to worry about.

"We shouldn't make too much of one monthly fall in new home sales, following on as it does from two strong results which led to the highest volume since June 2011," he said.

"Over the three months to October 2013, the volume of detached house sales increased in all five surveyed states, while the downward trend evident in multi-unit sales since late last year looks to be reversing.

"That's a good profile for a leading indicator of new home building activity heading into the end of the year."

Sales of new detached houses fell 4.6 per cent in October, after two consecutive months of gains.

Sales of flats, townhouses and semi-detached houses were up 1.4 per cent in the month, following a 19.9 per cent jump in September.