Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory & buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Invest in Sydney/Brisbane property markets, or for media/public speaking requests, email pete@allenwargent.com

Sunday, 31 March 2013

Property Update: The rise of Sydney's Inner West

I write for Property Update on the subject of Sydney's hottest property market sector.

You can read the article here.




Property Update: articles of the week

Property Update summarises the best articles of the week here, including one from yours truly.

With more than 60,000 subscribers, it's one of the leading investor resources in Australia - subscribe for free here.

Happy Easter!


Friday, 29 March 2013

Dow, S&P 500 crunch out all-time highs

Another all-time high for the Dow Jones up 0.36% to 14,578 before the Easter weekend as economic growth slowed less than had been anticipated and optimism spread about Europe's debt crisis (or should that be fears eased?).

It was also an all-time high for the S&P 500 up another 0.41%

The respective indices added ~10% in the first quarter of the year as the outlook has continued to brighten.

Losses from the financial crisis have finally been erased in the US.


Source: Yahoo Finance

Thursday, 28 March 2013

Interest rates are going nowhere fast

Nowhere fast

It occurs all too infrequently but for once everyone seems agreed on something: interest rates are going nowhere for some time yet.

Sure, some have a glass half full view of the Australian economy and others see it as a glass half empty, but it seems unlikely that the current cash rate of 3.00% will be altered for a little while to come.

With the futures markets more than 90% certain that interest rates are staying on hold in April’s RBA meeting on Tuesday, attention will focus on the rhetoric coming forth from the Reserve in order to assess how the outlook is being viewed from Martin Place.

Glass half empty?

On the one hand, it is widely agreed that it is too early to be talking about hiking interest rates.

Year-on-year Australia’s GDP may be tracking at a reasonable 2.9%, but the last two quarters of growth have not been strong and the ex-mining sectors of the economy remain below trend.

The 'glass half empty’ view is represented by Westpac, who believe that as the imminent peak of the mining construction boom passes the remainder of the economy will struggle gainfully to plug the ensuing the gap, but will require record low interest rates so as to stimulate it.


Source: Westpac

Glass half full?

The mini-shocks keep on coming from Europe (Cyprus being the latest candidate) and other parts but the world hasn't ended yet and the US has tentatively begun to believe in its easing unemployment rate and improving housing markets. Stock valuations have boomed by around 120% since their 2009 nadir.

Despite fears of a forthcoming implosion the iron ore spot price has held firm to date at around $137/tonne, which has been a welcome relief.

Australia's Labour Force data for February was nothing short of stunning with the economy adding no fewer than 71,000 jobs blasting away expectations of 10,000 and arousing hopes that the great rotation (i.e. away from the mining construction boom) is finally up and running.

However, there is more than a prevailing suspicion that the February survey results were too good to be true and there will be heightened interest in the March data.

Dwelling prices have been reported as rebounding strongly over the past 10 months, although there is much to suggest that the resurgence has largely been investor-led to date.


Source: RP Data

The glass half full view is held by the likes of Paul Bloxham and HSBC, who forecast no further rate cuts (with the next move being upwards, perhaps later in 2013), GDP returning to 3%+ growth and continued low unemployment.


Source: HSBC
Wait and see

Which view is the more accurate remains to be seen, but absent any shocks it seems likely on balance that the cash rate will be staying right where it is for now.

Despite a spreading feeling that the next rate movement could be upwards, the TD Securities monthly inflation gauge remained benign in March and suggested only a 2.1% year-on-year pace, which helped to reinvigorate the inversion of the interest rate yield curve ahead of the Easter weekend.

The implied expectation prices in one full interest rate cut in the latter half of the year.


Source: ASX

ABS confirms staggering population growth

The Australian Bureau of Statistics released its Demographic Statistics today.

And the numbers confirm that, as suspected, the population growth in Australia has continued its increases shown over recent years.

The increase in the number of persons over the last 12 months was a huge 382,500 or 1.7% which is the highest rate of growth we have seen in several years.

Graph: Population growth

The states which saw the greatest absolute growth were Victoria (+94,800), New South Wales (+86,000), Western Australia (+81,700) and Queensland (+91,400).

Other states such as South Australia (+16,400), ACT (+7,400) and Tasmania (+500) showed far smaller numbers.


The Northern Territory population showed a small absolute increase (+4,200) but as the state has a smaller base then this represents above average growth of +1.8% on the previous year.

The greatest growth on a percentage basis was comfortably the mining state of Western Australia at +3.4%.

Graph: Population Growth Rate, Year ended current quarter

I don't know about anyone else but I am very, very glad I don't drive in Sydney any more.

The train will do me just fine!

Source: Australian Bureau of Statistics

Switching off the noise

Testing times…

As a long-suffering English cricket fan, it’s been amazingly gratifying to see the team’s resurgence in recent years under the captaincy of my old friend and team-mate Alastair Cook. They have been struggling the last week or so in New Zealand, though, and on Tuesday the final Test Match of the series went right down to the wire.

I raced across to the local club in Timor to watch the last couple of hours and it was truly horrible, nail-biting stuff. Could England survive? It looked as though they might just make it, but nobody seemed to be sure.

And then…as tends to happen in the tropics at this time of year, there was a tremendous rainstorm and we lost satellite coverage! Only an hour or two later did I discover that all was well and the match and series were drawn to England’s huge relief.

By all accounts, the last half hour was some of the most nerve-wracking cricket-watching imaginable, yet as the coverage was switched off, I was none the wiser and everything turned out OK in the end.

Now if only we were able to do that with the financial markets and commentary!

“Hey Cramer…boo ya!”

There was another huge storm two nights ago and I couldn’t sleep because of the noise of the rain on the roof, so I gave up on snoozing and went and watched the ever-entertaining Jim Cramer on CNBC’s Mad Money.

Cramer showed a recent survey that had been undertaken by CNBC showing a list of a dozen financial crises that the world had faced over the past year or two: the fiscal cliff, the Cyprus bailout, the Greek Crisis, the sequester, the debt ceiling crisis…and so on.

The survey revealed that the overwhelming majority of people had heard of all of the crises, and a significant percentage had heard “a great deal” about most of the crises.

Here is a graph of the Dow’s performance since 2009 from Yahoo Finance:


If you had read too much of the media you would be forgiven for thinking that the world was on the brink of actually ending, yet the Dow (DJIA) has moved up a staggering 120% on where it was four ago. The Aussie market has not been as prolific, but has still recovered very strongly from its nadir.

This piece from Chris Joye today in the AFR again highlighted the tremendous difficulty facing investors in picking their own individual stocks. Financial statements are challenging enough for sophisticated investors to interpret, but when they are falsified, inaccurate or incomplete the task becomes impossible.

The older I get, the more I become convinced that an automated or averaging strategy is the best choice for the average investor because they can then relax and ‘switch off’ the market noise.

Property

It’s a similar story in the property world. Given that we now have a Daily Home Value Index from RP Data, I can envisage a time when people tune in daily and begin to assess the strength or otherwise of the property market based upon movements on a day-to-day basis.


The reality, however, is always somewhat different.

Here’s a great example: the RBA warned yesterday that in the Melbourne market house prices could fall in the short-term due to the recent price boom and an oversupply.

This may indeed be true in parts of the market: many inner city high rise units have fallen vacant and the oversupply will make them devilishly difficult to sell. And some of the fringe suburb house-and-land packages look destined for a dreadfully painful run.

Yet in some of the established markets quality properties in good suburbs look likely to continue to perform very strongly as homebuyers and investors squabble over a limited supply of well-located, quality and desirable dwellings.

Property is such a granular market that it is all too easy at times to fallen into grandiose sweeping statements about the existence or otherwise of a bubble, price movements, house price-to-income ratios and a range of other subjects.

The key to success in property is largely about being able to find and acquire quality properties for which there will be strong and increasing demand for decades to come. And then…’switch off’ the market noise.
The debate about affordability and commentary will continue as it has for the last few decades but at some as yet undefined point in the future we will have prices that are far higher again…and, of course, all the same debates.

Incidentally, HSBC's Paul Bloxham released the bank's main forecast today and everything appears rosy in their world, particularly with regards to Australia’s return to stronger growth and ongoing low unemployment.


Source: HSBC

Logic and reasoning

It was Warren Buffett who said the key for achieving investors is to establish a framework for investment success and then be able to prevent your emotions from corroding that framework.

As he so sagely said: “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

There can’t be many more truthful quotes about investing than that.

---

I went to a screening of the gripping Balibo movie in Dili last night, with some of the cast members present. Fairly depressing content, but a superbly shot movie.

Keep an eye out for the forthcoming movie Alias Ruby Blade which had its London premiere last night: it charts the remarkable story of Australian Human Right Activist Kirsty Sword who eventually married the Timorese Prime Minister Xanana Gusmao.

Today Kirsty heads up the Alola Foundation in East Timor. 

Property Update: Is Aussie property in a bull trap phase?

I write for Property Update today on whether Australian property is in a "bull trap" phase.

You can read the article here.



Wednesday, 27 March 2013

Murphy's Law

Oops...

An acquaintance of mine in Dili confidently announced on Friday that it was “good to see the back of the wet season” and she was very much looking forward to the forthcoming dry.

Sure enough, I went for lunch at 12.30 yesterday, by 12.45 the heavens had opened to reveal a momentous tropical storm. By 1.00pm the local kids were gleefully playing on the steps outside (which had turned into some kind of waterfall) and by 3pm Dili looked like this:


Some would say that that my acquaintance jinxed the weather with her comment, or if we were being colloquial we might say that this is “Sod’s Law”: that being the “humorous or facetious precept stating that if something can go wrong or turn out inconveniently it will”. Slightly more scientifically, but in a similar vein, this concept is also known as…

Murphy’s Law.

The exact source of the term is a little disputed, but the idea of Murphy's Law has some merit. In a report by Alfred Holt at an 1877 meeting of an engineering society, it was found that:

“Anything that can go wrong at sea generally does go wrong sooner or later, so it is not to be wondered that owners prefer the safe to the scientific. Sufficient stress can hardly be laid on the advantages of simplicity. The human factor cannot be safely neglected in planning machinery.”

So true. If something can go wrong, it eventually will, so simple is better than complicated. And for this reason, in personal finance it makes sense therefore to have a…

Rainy day fund

Well, given the tropical rain I saw yesterday, it was an obvious analogy wasn’t it? It’s often said in personal finance that you should have a “rainy day fund” of savings to cover unforeseen events on unbudgeted costs, and two months of salary is a commonly quoted figure.

While I wouldn’t recommend it, what many people elect to do these days is retain a spare credit card which acts as their rainy day fund. How does that work? Because when an individual or for a company is bankrupted it is not usually the diminished value of their net assets which sends them broke, it is illiquidity: the inability of the person or company to pay for a debt or obligation as it falls due.

We saw this plenty during the financial crisis where certain banks and financial institutions had balance sheets which stated that technically they were not insolvent, yet they ran out of readily available cash and required a bailout (or in some cases were allowed to go under).

Defence from Murphy’s Law

It’s an interesting fact that under International Financial Reporting Standards (IFRS) it is possible for auditors to sign a clean opinion of a set of accounts which shows a balance sheet valuing a company at double (or more than double) what the market believes a company to be worth.

Remember Murphy’s Law when it comes to investing: if something can go wrong, eventually it will, and particularly if it is complex (think Enron). It might seem unthinkable that by picking out the shares of a very large, a firmly-established or a highly profitable company to invest in that it could never go bust, but what truly amazes is when you look back at the top companies from 40, 30, or even 20 years ago, and see how many of them no longer exist.

This is one of the great benefits of buying an instantly diversified product such as an index fund. Short of a global catastrophe on an almost unimaginable scale every company on the index will not be worth zero. And if one does go under then it won’t hurt too much because you hold a widely diversified good spread of companies.

You will also own every stock worth owning in the index, for even the next Microsoft will enter the index as it is rebalanced each quarter, so you don’t even have to worry about missing out on “the next big thing” or the next “10,000% return stock”.

Murphy’s Law in property

I apply similar but slightly different principles in investment property. Now, I don’t have a problem with the idea that individually property hotspots can outperform over certain periods of time. However, after a decade-and-a-half in the world of finance one of the observations which strikes me most often is how I have a few examples of people and companies timing decisions very well and thousands upon thousands of examples of terrible timing.

The benefit of hindsight makes decision-making and timing markets appear very easy, but in reality it is very difficult to time investments extremely well. One company I worked for took out a hefty convertible bond debt denominated in US dollars at a rate of 65 cents in 2008 (largely forced upon the company by its own illiquidity at that time) – it may seem incredibly dumb now, but at the time I don’t recall many forecasters tipping the dollar booming to 110 cents!

Murphy’s Law applies to the world of property too: although property investment books will still promote the idea of prices always going up ahead of inflation, at some point there will be a correction, and at that time you only want to be holding quality property in a high-demand location.

That’s why in property investment I only want to own properties (and some of them debt-free) located on land within a reasonably close distance of the centre of cities like Sydney where the population increased from 3.6 million in 1991, to 4.1 million in 2001, to 4.6 million in 2011. The population is forecast to boom to a scarcely believable 7 million in the coming decades.

A good time horizon for holding investment property is two to three decades, or preferably longer. There will be ups and downs over that kind of timescale but with a monetary policy which aims to devalue our currency every year, only a limited supply of land available and 7 million people competing for it, one thing you can be sure of is that prices won't ever be cheap. As we saw recently in parts of the US that is by no means always the case in remote locations.

Tuesday, 26 March 2013

Is it a good time to buy stocks?

Is it a good time to buy stocks?

Probably the one question I am asked more than any other: "Is it a good time to buy stocks?". Of course, it is not a simple yes/no answer, and investors are not helped by the interminable daily market mumbo-jumbo which is spouted forth from the television each day. 

It rather depends on your strategy, your risk tolerance and, to some extent, your ability to predict the future (which most people find rather tricky).

Are stocks cheap at the moment?


The All Ordinaries (XAO) closed down 36.8 points today or 0.74% to 4,964 as the market absorbed the Cyprus bailout news from Europe. Still, the market is up by nearly a quarter over the past 9 months. So clearly stocks have been in a cyclical bull market and are not quite as cheap as they were. 

It's one of the great curiosities of stock markets (and other markets) how even the greatest crashes in history begin to appear less important in the rear view mirror as time moves on. But even so, the great crash caused by the financial crisis still looks very painful from this relatively close distance.


Source: ASX


Historical PE ratios in Australia

As for whether they are cheap on a historical basis, the short answer is: not particularly so. The Price-Earnings (PE) ratio for Australia’s All Ordinaries over the past four decades has averaged just below 15, so many Australian stocks are trading a little below their average over that that timescale and dividend yields look reasonable. 

On some occasions the average PE’s for the All Ordinaries have risen well above 20 (notably in the period preceding the 1987 crash and again before the collapse of the tech stock bubble after the turn of the century). On other more pessimistic occasions, such as during the financial crisis of 2008-2009 they fell into single digits.

Today, many of the major stocks in Australia are trading in the 11-15 range, so we sit between those two extremes. Of course, it’s never quite that simple. To determine if prevailing valuations are cheap you also need to assess whether you think we are in a cyclical bull market phase but a secular bear market i.e. a market which is in a longer term downtrend which could last for some decades. 

Many commentators remain convinced that due to high levels of (global) government debt and excesses of the past, in spite of the recent upturn in sentiment stocks remain in a secular bear market.

Cyclical bear markets

Every so often comes along a bear market where stocks lose more than 50% of their value. In the US, for example the following periods saw stocks dive and lose more than half of their value - 1937-1938, 1973-1974, 1981-1984 and 2007-2009. Sometimes, there are unusual bear markets where company earnings are growing but stock valuations are moving down.

As highlighted by Bell Direct in a recent article, in the 1973-1974 bear market, for example, company earnings grew for eight consecutive quarters but stock valuation fell by a punishing 56%. It's small wonder that investors get so confused!

Secular bear markets


A secular bear market is one which is a longer term downtrend but could encompass some small bull markets within it. A good example has been seen in Japan where the stock market lost some 80% of its value between 1992 and 2011. Yet within that time there was still a very strong bull market between 2003 and 2007 where the market climbed by well over 100%. 

During a secular bear market the average PE ratio, as you might expect, tends to be lower. So while you might say some of Australia’s major stocks are trading below a long term market average, you might also argue that they are no longer particularly cheap.

Where else to put your money?

With interest rates at half-century lows of just 3.00%, cash and fixed-interest investment are tending to yieldi very low returns at present. 

And while the next move in interest rates could theoretically be an upwards one, Westpac's report today showed why they are still expecting rates to go lower later in 2013 - because dwelling construction and housing investment has not yet picked up to fill the hole which will be left by as the mining construction boom peak passes (perhaps imminently as the chart below shows, although it is impossible to predict exactly when):

Source: Westpac

It’s become popular for those who fear long-term global inflation to say: “buy gold”, but even in spite of the recent correction, it’s hard to argue that gold is anything other than expensive on a historical basis.


Source: Kitco

Besides, buying gold is all well and good, but gold bullion doesn’t pay you an income (if you prefer bullion, gold stocks or a gold fund might perform better over time). I prefer for the long term continuing to acquire assets which pay an increasing income (property and index funds) as well as those which represent an inflation hedge. It’s nigh on impossible to predict where prices are heading in the short-term, but over the long run continuing to acquire quality assets prevails.

RP Data's weekly stats

RP Data records auction clearance rates as continuing to rise through 2013.



RP Data's index records Sydney's property prices as 6.1% higher than they were in mid-May 2012. Apartments in Sydney are spending less and less time on the market with each and every passing week (now only 32 days on average).


Apartments are generally less impacted by affordability issues than the expensive housing in the city, particularly with mortgage rates currently so cheap. In any case, a large percentage of buyers in the inner suburbs at present appear to be investors who look to tenants to service most of their debt, thereby allowing them to force prices skyward.

Property Update: the roles of fear and greed

I write for Property Update today: the roles of fear and greed in our property markets.

You can read the full article here.


Monday, 25 March 2013

Groundhog day for Aussie dollar

Crumbs, here we go again...AUD buying 104.6 US cents today.


Source: Yahoo Finance

Property Observer: median price growth

I write for Property Observer today about calculating actual capital growth in property investment...

You can read the full article here.


Sunday, 24 March 2013

Weekend wrap

It was a strong finish to the week for the US as the markets anticipated a bailout deal for Cyprus and its ailing banks.

The Dow closed back above 14,500 gaining 90 points or 0.63%, so it's likely to be a reasonable start to next week's trading  in Australia.

The Aussie market has been gyrating for a few consecutive trades after its tremendous run over the last 6 months, which is sometimes perceived to be an indication that a correction might be due, but nothing significant has been triggered yet - keep an eye on news from Europe's debt crisis and anything adverse from China's property market issues (which seems to have gone a little quiet in the news)..


Source: ASX

There appear to be few such concerns in Australia's capital city property markets at present, as provisional auction clearance rates proved strong on 'Super Saturday', one of the biggest auction weekends of the year (Sydney 70.5%, Melbourne 68%).

Sydney has recorded six consecutive weeks of strong provisional clearance rates of above 70%, although there is often debate about revisions and the measurement criteria.

Unsurprisingly Sydney and Perth have been the strongest major capital city markets over the past 12 months, and all four of the major markets have recorded gains over the past quarter, while Adelaide is struggling.


Source: RP Data

Saturday, 23 March 2013

Is the interest rate easing cycle over?

So, no further interest rate cuts then? 

Certainly a lot of forecasters have been saying so this week..

And, on balance, they may well be right. 

It's a curiosity how these things can be to some extent self-fulfilling - we are told that things are 'getting better' so we start spending again (did we really ever stop?), and as a result the economy does indeed 'get better'.

It's not quite cut and dried just yet, however.

There remains a lingering suspicion that the February Labour Force data was rather too good to be true, so it will be interesting to see whether the March figures are anything like as rosy.

Similarly, I imagine the RBA would want to see a healthy quarter or two of GDP growth across the non-mining sectors of the economy before anyone gets too excited.

There have been a few noises that perhaps construction is beginning to pick up spurred along by a generous 175bps of interest rate cuts already delivered, but there has been nothing spectacular to report.

Inflation remains relatively benign so the RBA has mentioned in its Meeting Minutes that there is still 'room' for further easing if it is required.

The one sticking point for another interest rate cut in 2013 could be dwelling prices. 

Over the last quarter, RP Data records home values as having moved up in Sydney (+3.26%), Melbourne (+2.82%), Perth (+2.13%) and Brisbane (2.26%). 

Adelaide's prices have fallen over the same time period (-1.39%) in spite of the half century low cash rate of just 3.00%.

It's hard to envision an interest rate cut to a record low of 2.75% if dwelling prices really are increasing at more than double digit pace in the major city markets, but don't forget how quickly things can change. 

Heck, it was only 6 weeks ago people were talking about dwelling prices being in the process of crashing!

There is one other point to note on the housing market and that is that banks may (or may not!) elect to shift mortgage rates independently of the Reserve Bank if competition for business hots up.

Weighing it all up, the futures markets are pricing in a possible further interest rate cut over the next 9 months, but rates actually going up seems unlikely for quite some time yet.


Property Update: Articles of the week

Summarised by Michael Yardney here.


Friday, 22 March 2013

Should we treat life as a competition?

Competing with yourself

When I was a teenager I played my best ever round of competition golf, 'schlepping' it around my local course in 75 shots, surprising a few of the more senior members by shooting the lowest score in the Monthly Medal competition.

I didn’t win the competition, though, because the handicapping system in golf means that a 28-handicapper who goes around in 95 shots can beat a low handicapper who shoots 75.

In such events golfers are in essence largely in competition with themselves as much as they are the rest of the field.

No matter, I was obviously very proud of my round, as is evident by the fact I am still mentioning it in my blog today nearly two decades later!

Golf can be a cruel game, however

In the 1986 US Open, Australian Greg Norman yet again led the field after the first three rounds – incredibly he did so in all four of the major tournaments that year - but in the final round he shot a 75 and yet again he was devastated to finish just off the pace.

It’s interesting to consider that while shooting a 75 on a pretty easy golf course made me tremendously happy, the same number of shots on an incredibly tough course is destined to haunt Greg Norman for all his years.

Greg Norman won two major tournaments and finished second on no fewer than seven occasions in the major tournaments.

It’s slightly ridiculous to think that some consider Norman to have been a failure, for he is one of the most talented (and wealthiest) sportsmen Australia has ever produced.

Yet Greg Norman set his standards so high, that to him, 2nd place was not good enough.

Paradoxically, it was this tremendous drive and self-belief that enabled him to be such a great golfer in the first place.

Life as a competition

There can be few more liberating feelings than resolving to stop competing with your peers for the highest paid job, the best house, the flashiest car, the biggest plasma screen TV and the most extravagant holiday.

I can barely think of anything worse than lumbering myself with a colossal mortgage for a home and cars (mortgage: ‘death contract’) to pay off over the next 30 years.

It’s always down to personal choice of course, but if you must live in the most exclusive suburbs of the world’s most desirable and expensive cities, why not rent and save yourself the massive pain of a mortgage? (the same can apply to cars, of course!).

The great ‘display of wealth’ is a competition you can never win. There will always be someone who earns more than you or others who inherit plenty more than you do.

The only person you need to be in competition with is…yourself.

Setting big goals

This is not to say that setting huge goals cannot be a great thing. And I really wish I had known this when I was 23 instead of 33!

Humans need inspiring and exciting goals to motivate themselves into taking decisive action.

I’ll share with you a few goals I have set for myself to reach by the age of 40: to build an internationally recognised brand through co-owning a business, to present my own TV show, to write a regular column for a national newspaper and to become a best-selling author internationally as well as in Australia.

Some outlandish goals? You bet!

But at least they are inspiring and exciting to me. The key in life, I suppose, is to set yourself huge and exciting targets but not to beat yourself up if you don’t achieve them all quickly or in totality.

As the old saying goes: “Aim for the stars and you might hit the moon.”

Investment goals – get rich slowly

It’s also good to set yourself a big goal in investment. However, there is a trap here, and the trap is trying to get rich too quickly.

The route to building wealth is both remarkably and deceptively simple, and if you follow the principles of building and compounding a portfolio of assets, you can achieve great things over time.

But you do need to allow yourself the time for investments to grow and compound so that you can turn $1 into $2.

If you have a plan which relies upon you timing the market with unerring accuracy in order to $1 into $2 overnight, you will probably fail to succeed over time.

It was Berkshire Hathaway’s Charlie Munger, Warren Buffett’s sidekick, who said: “Someone will always be getter richer faster than you. This is not a tragedy.”

And he’s absolutely right. Sadly my golfing talents have fallen by the wayside over the years. I guess in life you always have to prioritise! 

The key to success in investment is to build wealth slowly but surely over time and over the long term the power of compound growth can produce surprisingly outstanding results.

Thursday, 21 March 2013

US unemployment falls to a 4 year low

Good news this week as US unemployment continues to fall from its horrible crisis 2009 peak of 10% unemployed to 7.7% reports the US Bureau of Labor Statistics here.

The FOMC projects that the headline rate of unemployment will fall to 6.0-6.5% by 2015. 

This would obviously be a tremendous boost for confidence if it eventuates.

If something looks too good to be true...challenge it

“As if…”

As someone previously employed in the mining sector, I’ve spent far too much of the past 13 years writing Annual Reports and ASX stock market releases for listed companies, and if there’s one thing you learn very quickly as a Group FC it’s that you're often the only person who understands the company financials (and often you're one of very few people who appears to even care).

This is one of the many reasons people invest in stocks so badly, for if you don’t fully understand the  detailed financials, how on earth can you know what a company is worth? Opaquely, some companies report “normalised earnings” almost every year, which sceptics now refer to as “as if earnings” as in: “Here are our earnings as if we didn’t have our loss-making operations…”

From writing stock exchange releases I also know only too well that if you manipulate statistics (especially from small sample sizes) hard enough and often enough, you can prove just about anything by “torturing the figures until they confess". Nowhere are statistics manipulated harder or tortured more often than in residential real estate. Always challenge what you are told, and remember this key rule of investment…

“If something looks too good to be true, it probably is”

A fine case in point was the February Labour Force data released last week which showed that the Australian economy seemingly added an unbelievable 71,500 jobs in a month. That statistic is definitely too good to be true, but it nevertheless raised the ire of Hotspotting’s Terry Ryder: 

“They [economists] told us the jobless rate would rise, with only 10,000 new jobs created. The outcome was 70,000 new jobs created and the jobless rate steady at 5.4%. Do we get our money back? Or an apology at least?”

If you understand how the samples are collated, rotated and extrapolated, you would know that forecasting jobs growth accurately month-on-month is impossible. The February numbers were too good to be true and next month’s figures will be correspondingly weaker.

Real estate myths

It’s been a busy week for Ryder with him again taking aim at investors in capital city properties:

“The fossils of real estate are creatures known as Mythosaurus. They’re the relics who cling to ancient folklore such as “the inner-city suburbs provide the best growth” and “Sydney’s good suburbs are the strongest in the nation”. The factor that all myths have in common is that they are unsupported by research evidence. But Mythosaurus does not concern him or herself with inconveniences like statistics.”

Instead, Ryder tips Bowen in Queensland in spite of its 17-18% vacancy rate, puts Cairns back on the watchlist after its desperately miserable run and went on to highlight that: Port Augusta has a median house price of $175,000, despite annual growth averaging 12% over the past 10 years.

Naturally enough Ryder has picked out a town with outstanding growth, but...whoa! "Growth" of 12% per annum and houses still only cost $175,000? 12%! Mr. Mythosaurus may not like to concern himself with the inconvenience of statistics, but he may wish to look a little more closely at that.

Why don’t we all invest in small towns like Port Augusta? Firstly, because of gearing into an illiquid asset in low demand (by definition something that is cheap must be in low demand) in these times of elevated household leverage can be dangerous as property owners across Europe and the US have discovered to their cost. And secondly, because quoting median suburb “growth” figures over a carefully selected timeframe is a commonly employed spruik, for as experienced investors well know "growth" can be distorted by a range of factors.

How to calculate ACTUAL capital growth

Go back a reasonable period of time of, say, 20 years to 1993, a time horizon which incorporates the greatest boom in the history of Australian household debt and property values, and see what houses in Port Augusta were selling for in that year, which was typically between $40,000 and $80,000 (with an outlying few selling for significantly more).

With your dusted off compound interest tables to hand you'll discover that the implied growth over 20 years for most houses appears to track remarkably consistently at around 6% per annum or sometimes a little below. Interestingly the cheapest properties in their growth infancy tended to fare the best, perhaps partly due to the ability of owners to add value through improvements - the premium properties which sold for as much as $150,000 or more two decades ago by and large have shown diabolical growth. 

Sure there are some outliers and some properties displayed woeful growth at times, but one assumes that as an investor you would have avoided these. 6% p.a. is materially lower capital growth than an experienced investor in the closest major city market of Melbourne would have expected to achieve over a corresponding time period, and it is also lower than the returns you would have expected from an equivalently resources-focussed city such as Perth.

Now you might say that 6% is solid enough capital growth, and you’d be absolutely right. Remember though, that in the preceding days of higher inflation interest rates tumbled from an eye-watering 17.50% in 1990 to just 4.75% in 1993 and the result of this structural shift was the greatest leveraging up by households in Australia’s history.

Graph 13: Housing Price-to-Income Ratio

The RBA warned Australians last week that this borrowing bonanza plateaued in 2006 and its like will not be seen again. In fact, if you have owned a property in Port Augusta since 2008, you would be aware that many houses have declined in price since that time, doubtless not helped by BHP's shelving of its proposed Olympic Dam expansion.

Graph 4: Household Indebtedness

Actual capital growth in capital cities

In recent years, prices in some capital cities have increased (Melbourne, Sydney, Canberra) but have been weak in cities such as Adelaide and Brisbane. Of course, median price growth in capital cities gets distorted too, with the average capital growth dragged down by the dross and the remote under-performers, but investors in quality properties reasonably close to the centres of the cities aim for far higher actual capital growth over the long term than is generally attained in the regions.

Dwelling Prices graph

Can Mr. Mythosaurus give you an example of actual capital growth in the closest major metropolis to Port Augusta? Well, here's just one example of many: we've just seen a villa unit in Camberwell (9km to the east of Melbourne's CBD) sell for $585,000 - it last changed hands in the same condition in July 2000 for $186,000 - a comfortably compounding growth of ~9.25% per annum over nearly 13 years since it was last sold. No data distortion there, purely a huge demand in that suburb for a quality medium-density property.

How does median price growth become so distorted?

Through 2011 and 2012 I went on the road for 15 months and travelled to virtually every significant town and city in Australia. If you stroll around Port Augusta what you find is a significant number of newer houses on titles which last changed hands between 1997 and 2003 for somewhere between $8,000 and $30,000.

You don’t need me to tell you that a house bought for well under $10,000 in 2003 (which is now worth more than $220,000) wouldn't have resembled Kirribilli House when acquired, and it has not simply magically appreciated to more than 22 times its previous value. It's exactly the same principle as empty plots of land selling in Port Augusta for just $6,000 in 2004 the titles of which are valued today at more than $220,000...that's "growth" of more than 92% per annum because they have now been built on.

Such gross distortions in suburb median prices commonly represent developers paying land value (or land value less demolition value) for an old house in order to improve the site with a new property. The result is an abnormally depressed median price in the years the old houses are bought followed by an outrageous spike in the following years when newer or greatly improved houses hit the market.

Source: APM

Suburb life-cycles

This is all fairly typical of the life-cycle of a small town or a fringe suburb where land values are extremely low and a building boost can massively distort median prices in the short term. Extremely cheap properties in the infancy of growth can certainly experience a “catch-up phase”, and if population and employment growth ignite the initial flame then the median price can produce a fairly consistent growth trend in existing homes as wages increase.

However, a boost in new builds can also subsequently disguise a significant lull in median prices. As land is released to facilitate new accommodation existing homes may plateau in price and stagnate or decline as those moving in are attracted to the newer builds. Thus consistently outperforming growth in actual house prices can only be expected if land is not released or zoning approvals are not granted to accommodate the increasing population.

Future median price growth will be lower

Although it is mentioned inappropriately rarely (or never) by promoters of real estate, leveraging up into an illiquid asset if you don’t know what you are doing is risky. All of this is not to say that you can’t do OK by investing in a small town if you pick the right one and buy a good property, but merely to highlight two things. 

Firstly, quoted suburb median price growth can be misleading and it is certainly no guarantee of future returns. And secondly, given that the Reserve has a targeted CPI range of just 2-3%, absent an unlikely return to the days of rampant inflation median future capital growth in property must be lower than that experienced in the past. Property prices in Australia are high and if you use debt to speculate in the wrong asset type you could experience severe financial loss.