Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory, 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

Tuesday, 31 December 2013

A fantastic year...for income-producing assets

One of the main themes of this blog has been to continue to acquire assets which produce an income: an income which increases each year. 

If you buy well - such as a diversified industrial LIC with a proven track record of delivering results over decades or a well-located property - over time you will benefit from a growing income stream and the capital value will generally take care of itself.

Try to time your entry as well as you can, and then hold for the long term, rather than trying to be smarter than the market by dipping in and out at random intervals. 

2013 has been a stonking year for shareholders. 

In the US, the Dow has surged on to record highs of above 16,500, while the S&P 500 added an amazing 28% in 2013.

Plenty of bearish commentators advised shorting the Aussie market this year.

Fair enough if that's your game, but over time most speculators will achieve very little with that strategy, since it fails to recognise the need for income and relies upon a lot of guesswork.

As an aside, tuning into the US business channels at this time of year is always a good laugh as they will interview dozens of fund managers, each of which weigh in with their guesses as to when the next share market correction will come. No two answers will be the same, of course. 

Our share markets in Australia have been a little hampered by the strong dollar in recent times, although as noted yesterday, our currency has come back nicely to below 90 US cents towards the end of the year. 

But even so, it's been a corker of a year for shareholders. Throw in the dividend income and returns of over 20% have been easy enough to come by.


Source: ASX

And, for another year, they said "don't buy property" citing the usual "headwinds"...and 2013 was a corker in Australian property too.

Prices in Sydney increased by 15% which is not a bad return for those who sensibly owned well-located capital city stock. Prices will likely keep going up next year too.

Perth and Melbourne weren't too far behind showing 10% and 9% capital growth. 

Brisbane and Adelaide were latecomers to the party, but those markets are on the up now and look set for a very healthy 2014.

You'd do well to exercise caution, though, because plenty of Australian property markets do bring risk. Just as in the share markets, you have to acquire the right assets to get the good returns. 

Perhaps a subject for another post, but there are plenty of so-called 'hotspots' which have abjectly failed to deliver as new supply comes online. Parts of the north-west of the country and in particular the New South Wales south coast spring to mind.

And what about gold?

The problem with gold and silver is that they don't produce any income, so each year you fall further behind shareholders who receive tax-advantaged dividend streams which increases and compounds over time.

And what a year it has been for gold (and, for that matter, silver) in 2013: the worst in decades.

With the Fed looking set to taper off its stimulus in 2014, personally I wouldn't bet on 2014 being much better for gold either.


"Gold futures for February delivery on Monday fell $US10.20, or 0.8 per cent, to settle at $1,203.80 on the Comex in New York amid quiet Christmas holiday trading. Trading was 49 per cent below the average for the past 100 days for this time of day, data compiled by Bloomberg showed.

The precious metal is set for its biggest annual loss in three decades, Bloomberg said. It has tumbled 28 per cent this year and is set for the worst annual plunge since 1981.

Some investors lost faith in the metal as a store of value amid a rally in equities and an improving economy, which prompted the Federal Reserve to pare its monthly bond purchases by $US10 billion, to $US85 billion, starting in January.

Many economists expect the Fed will probably reduce its bond purchases in $US10 billion increments over the next seven meetings before ending the program in December 2014, Bloomberg said on Monday.

Holdings in exchange-traded products backed by bullion have dropped 33 per cent this year to the least since 2009, data compiled by Bloomberg show.

"The market is fearing the impact of tapering," Peter Fertig, the owner of Quantitative Commodity Research in Hainburg, Germany, said.

"You have firmer equity markets. There's currently no crisis and nothing that would induce investors to rush into gold."

Silver futures for March delivery on Monday dropped 2.2 per cent, or US43¢, to $US19.615 an ounce on the Comex. The metal has lost 35 per cent this year, on course for the biggest annual slump since 1981."

Monday, 30 December 2013

Aussie dollar declines for 10 straight weeks

The Aussie dollar sliding down to 88.5 US cents is not so great for overseas holidays of course, but this is what Australia's economy needs. 

Australian dollar vs US dollar for 2013

Some see the Aussie dollar going right the way down to 80 cents as interest rates are cut yet further in order to stimulate growth. From the SMH:

"The world’s biggest money manager BlackRock sees Australia’s dollar falling 10 per cent as disappointing economic growth forces the Reserve Bank of Australia to cut its benchmark rate to as low as 2 per cent.

The Aussie will drop toward US80¢ from US88.85¢ last week, said Stephen Miller, a money manager in Sydney at BlackRock, which oversees $US4.1 trillion worldwide. The Reserve Bank of Australia may lower its cash target from an already record low 2.5 per cent in April and cut again in August as the economic expansion stalls at a below-trend pace, he said.

BlackRock joins Pacific Investment Management in predicting a weaker currency and sluggish growth for Australia as the economy struggles to adjust to a drop in mining investment."

Time Revolution - 80/20 style

Internet age

It seems almost hard to imagine now, but not so long ago there was no internet and no email. People communicated face-to-face, over the phone, sometimes by fax. Imagine the difference this has made to the way we do business and the way, for example, in which people trade shares so much more frenetically.

In my profession (Chartered Accountancy), book-keeping was done in actual books. The ledgers were handwritten. When complex consolidated group accounts were prepared the auditors pored over worksheets which folded outwards...and outwards...today the journal entries would easily be encompassed in a simple spreadsheet.

There seemed to be a widespread general assumption that the advent of electronic communication would make the profession more efficient and free up more time for accountants to focus on other things.

Naturally, it never happened. Certainly ever more information and data got emailed or 'pinged' around and data travelled with previously unthinkable velocity.

A whole new mini-industry grew up - Time Management - which aimed to help middle managers utilise their time more effectively. "Prioritise the key tasks" was one of the suggestions. "Think marginally about your time" was another. I can't remember any others, but I'm sure there were plenty of them, which we learned about in lengthy training sessions that took up lots of valuable...well...time.

Yet, for many today, there seems to be less and less time in the week. The world is seemingly becoming polarised between those who earn decent money yet have no free time in which to enjoy it, and those who are unemployed and thus have all the time in the world to do stuff, but no money with which to do it. 

Pareto Principle

Businessman Richard Koch wrote a book based around what has variously been called Pareto's Law, the Pareto Principle or the 80/20 Principle, which held that in many facets of life and the universe, 80% of effects or outputs are derived from around only 20% of the causes or inputs.

The idea originated from Italian sociologist and economist Vilfredo Pareto's observation that 80% of a country's wealth is often held by only 20% of the population. In business, it's often true that around 80% of a company's turnover is represented by only 20% of clients, 80% of complaints come from 20% of customers, 20% of products account for 80% of sales, and so on.


There is much that we can learn from this. In business, focussing on the 20% of your key customers is one strategy. If you want to resolve 80% of complaints, you can probably stem them by finding and addressing the 20% of problems which cause them.

But we can take the 80/20 principle a step further still.

Find out in life what we are interested in, what makes us happy and in what area we have a natural advantage, and double down on it. Do even more of what we excel at and what excites us: this will bring us greater results and more happiness.

Time Revolution

Koch devoted one full chapter of his book to the idea of a Time Revolution, where he suggests that traditional time management is all wrong. We spend most of our time - most likely 80% of it - on matters which achieve very little of any importance and bring us little happiness.

Instead he advocates grasping the 80/20 principle and using it to your advantage. There is little point, he argues, in tinkering around at the edges with the management of our time ("thinking marginally" as the management training sessions put it). Instead, we need to consider how and where we achieve results and happiness and apply time to it with gusto. You can read more about Koch's suggestions here.

The 80/20 rule can be applied across so many areas of life: business, career, investing, exercise, family life, leisure and so on. 

I read and enjoyed Koch's book on the flight back from Melbourne. Well, actually, in the true spirit of the Pareto principle, I read the 20% of sections that I felt were most useful and skimmed the rest...Richard Koch would be proud of me.

The shape of Sydney to come

Pretty interesting read here from Inner Sydney Voice.

Central Sydney areas need more homes.

A lot more:
6 Randwick UAP_councillor_ workshop_august_slide 26_high rez

"Driving this change is Sydney’s growth. According to the Draft Metro Strategy the Central area subregion of 17 LGAs needs to provide 138,000 more homes for 242,000 more people between 2011 and 2031 and provide places for 230,000 more people to work.

The Metro Strategy exhibition had only just finished when the Department of Planning released its Preliminary 2013 Population Projections which increased the Central sub­region’s projected population growth between 2011 and 2031 to 371,900. This would require a further 63,000 homes in the subregion on top of those in the Metro Strategy.
The main driver for the increasing population in the inner city is overseas migration. The population growth will occur across all the sub-region but the main increases in the projections are in the following LGAs: City of Sydney (106,000); Ryde (33,600); Randwick (33,500); Canada Bay (28,200); Willoughby (20,100); Strathfield (19,400) and; Botany Bay (18,000).
Much of the recent development in the inner city has been from redeveloping old buildings and industrial sites such as the ACI site, former CUB site or Ashmore estate. Large sites are beginning to dry up and a point will be reached where more difficult urban consolidation of smaller private lots will need to take place to allow for growth. Currently the approach is to up-zone areas where government would like to see increased density and let the market work. But this can be a slow process."

This is all part of the great challenge facing Sydney. I've posted before about the housing affordability plan to provide 30,000 more homes around key transport hubs: today it came to light that it has been suspended indefinitely.

With the city experiencing booming population growth, this is all part of why I don't believe Sydney's housing will ever become cheap. Sydney is a thriving and extremely popular city - people will always want to live here, but when plans are put in place to provide housing in locations that people actually want to live in (near to the city) they will immediately hit upon council and community backlash. The well-located supply will not keep pace with the demand.

Sunday, 29 December 2013

2013 a bad year for housing market bears

Right back at the beginning of 2013, a few commentators, notably including economist Stephen Koukoulas, suggested that the low interest rates could result in property prices growing by as much as 10% in 2013.

The prediction was met with widespread derision, yet with only a couple of days remaining in the year prices nationwide across Australia over the past 12 months have risen by 9.91% according to RP Data's Daily Home Value Index.


Source: RP Data

As RP Data's chart above shows, prices rose everywhere. 

Sydney led the way with 15% capital growth over 2013, with Perth (+10%) and Melbourne (+8%) next up. 

Brisbane recorded just under 5% growth while Adelaide was the worst performing capital city market.

If you drop the daily movements in prices into a chart, it's clear to see that prices remain in a strong uptrend in Sydney and Perth, with Brisbane now also starting to come to life.


Source: RP Data

Thursday, 26 December 2013

Retail chaos in Melbourne

Brutal day of Boxing Day sales today down in Melbourne (I'm here for the cricket really, but the stores were utterly chaotic).

Of course, this kind of manic shopping is fully expected on Boxing Day, but it's an important year ahead for consumption.

Y = C + I + G + (X − M)

Forecasts suggest that Australia's GDP (Y) will be below its long-term average in 2014.

If low interest rates are to do their thing and help growth to bounce back then consumption (C) will have a key role to play in the next year.

Exports (X) look set to increase nicely (and a lower dollar should certainly help) but all the evidence suggests that investment (I) - and in particular mining investment - will begin to tumble in 2014, and government spending (G) won't be enough to plug the gap.

The other thing to watch out for is a boom in housing construction. It always looks to be happening to me but then I spend most of my time in Sydney and around the CBD. There also seems to be a fair amount going on around Melbourne, but word has it that Queensland is a different story.

Interest rates have been sliding for more than two years, so Aussies should on average have plenty of cash to spend in 2014.

Anyway, back to the cricket. England 4/174...


Wednesday, 25 December 2013

Australian housing recovery "should last for at least three more years"

An interesting few points from Mark Steinert, CEO of Stockland.

From the AFR:

"Australia’s housing recovery should last for at least another three years says Mark Steinert, the chief executive of the nation’s largest housing developer, Stockland.

Driven by rising confidence and the underlying population dynamics, the improvement in housing will not be stopped by a rise in mortgage rates.

“To some degree, it is how long until there is major recession or a major shock,” said Mr Steinert.

“The driving factor is not interest rates; it is confidence. Interest rates were stimulatory at the beginning of the year but markets were flat.”

“The economic growth that we are seeing is broadening out because the dollar is lower.

“If interest rates were to back up 100 basis points, or 150 basis points, you would see some volatility but you would not affect the overall demand.

“You cannot get away from the fundamentals. Look at the demand supply equation and at migration. We will have population growth of 1.5 per cent.

“The recovery should last for the foreseeable future.”

Enjoy cheap mortgages in 2014

Merry Xmas all, and thanks for following in 2013.

It's been quite some year, as much notable for what didn't happen rather than what did.

Flying down to Melbourne tomorrow for a few days of cricket.

England can only improve...surely...


Source: ASX

Tuesday, 24 December 2013

2013 a bad year for pessimists (Wall St hits record high)

Overnight, global stocks have climbed to a 6 year high as the outlook for the US improves.

Worldwide stocks have added 2.5% in just the last four days taking gains for 2013 as high as 19%.

2013 has been a great year for owners of stocks and property, with stock markets recording huge gains, and many of Australia's property markets (Sydney, Perth, Melbourne in particular) doing the same.

Economies are still in recovery mode and there are still plenty of challenges ahead, no doubt.

But investors who tried to be clever by shorting the market or buying gold got walloped hard and often this year.


It's better for most average investors to follow the long-term trend of markets (upwards) and be an accumulator of assets which have increasing income streams. 

Market prices tend to follow suit too over time.

Is it actually true that an investor with a positive attitude will do better over the long term than one with a negative attitude? 

For most, average investors, probably yes, because they are more likely to follow the long-term upward trend in markets.

Certainly those with a negative attitude who give up hope after making a mistake are more likely to be failures.

And if you spend all your time focussing on your one or two bad investments, instead of acknowledging the good ones, that's unlikely to result in a healthy outcome either. 

It helps if you can accept that you are not always right (none of us are) and that sometimes investments just don't work out. 

There is little benefit to carrying forward anger or desperation to future investment decisions.

Investors with a positive attitude who tend to do the best over time are those who can demonstrate discipline and patience, as well as accepting that they won't be right all of the time. 

And it's vital, of course, to commit to learning from the inevitable mistakes. Perhaps this, and a vow to never, ever give up are the two most defining traits of a successful investor.

Pessimists are perhaps also more likely to listen to what is probably the most worthless investment advice of all: that which comes from somebody who will never invest in anything. 

It's right to be fearful some of the time - that's what protects you from getting hurt. But never investing in anything is also the surest route to achieving nothing, and someone who has never experienced the emotions of winning and losing investments is rarely well placed to advise you.

And what about 2014? 

Well, I guess that depends on your outlook. Optimists will see opportunities, and pessimists will see risks. Same as every year.

Monday, 23 December 2013

Stocks finishing 2013 on a roll

Three nice trades in the black as Xmas is almost upon us.

XJO closing at 5,291 up 0.51% today.

12 months ago the index was well below 4,500, so it's been a year of happy hunting for holders (not so much for shorters).



Source: ASX

Real Estate Talk

Catch me on the last Real Estate Talk show of 2014 here, where a dozen experts offer some end-of-year advice.

Economists look ahead to 2014

A lot of things which were supposedly going to happen in 2013 did not: the US didn't take a swan dive of the fiscal cliff, debt problems in Cyprus didn't cause the implosion of Europe, and China's mysterious property bubble did not burst (there are still 8 days left in the year, mind) causing its growth to plummet.

It was very interesting to read over the weekend how economists are reading 2014. After a bumper year for stocks (with a mid-year blip), opinions are a little divided, but with interest rates remaining at low levels, nobody seems to be forecasting that the market will go down next year. AMP is notably bullish, predicting another 12% growth next year, with others taking a slightly more moderate view.


Source: ASX

As for interest rates themselves, the consensus seems to be that we'll likely be stuck in a range of between 2.25% and 3.00% which is historically very low.


Source: ASX -  RBA Rate Tracker

Most see unemployment ticking up a little from 5.8% to 6.0% although there are some optimists out there who see the headline rate of unemployment starting to come back down.

Graph: Unemployment Rate

Source: ABS

Forecasts for the dollar are understandably a little diverse, but somewhere between 80 cents and where we are today at 89 cents seems to be a reasonable consensus. Inflation is likely to remain contained and Australian GDP growth is likely to be below the long-term trend at somewhere close to 2.5%.


Source: Reserve Bank of Australia

And, on property prices, most see the recovery continuing with AMP again on the bullish side, seeing 8% price growth for 2014.


Source: AMP Capital

I wrote my own piece on 2014 property prices for Property Update here, where I'm looking for a more moderate market than seemingly almost everyone else next year. In that context, I'd expect the first half of the year to be more buoyant than the second. I also think that if the market starts to get away, then the Reserve Bank may be inclined to pull a handbrake.

Remember that Sydney's dwelling prices have performed strongly in 2013, rising by around 15% as I anticipated on this blog. Positive cashflow investors tipped Adelaide for yet another year, and for yet another year prices went nowhere, underperforming both inflation and income growth. In fact, you'd have done better pretty much anywhere other than there.

2013 was a bad year for housing market bears as prices rose almost everywhere, and fairly sharply in some cases. With interest rates not appearing set to stand in the road, it's rather a question for the Australian property markets of how long confidence and momentum can be maintained.


Source: RP Data

Here are my 2014 forecasts for Australia - as noted, they are fairly muted, as I believe that, on balance, the second half of 2014 is likely to see dwelling price growth stall:

Hobart -1% to 2%
Canberra -1% to -4%
Perth 0% to 3%
Adelaide 0% to 3%
Brisbane 2% to 5%
Melbourne 2% to 5%
Sydney 6% to 9%
Now the UK property markets are another matter entirely, particularly those located in the traditional high capital growth areas within easy reach of London. Mortgage lending is now clearly accelerating at a tremendous pace as I charted below, and we could be entering problem territory by the second half of 2014 if the rate of acceleration continues. Away from the City, prices in many areas remain well below their 2007 levels.

Most UK forecasters see growth of 5-10% in 2014 and more of the same in 2015.


Source: Council of Mortgage Lending

Saturday, 21 December 2013

A rational look at household debt

I've looked at this chart a few times, to show why I don't think households in Australia will leverage up much further.

Household Finances graph

Naturally, the increase in household debt levels since the late 1980s is largely a result of more mortgage debt, the trigger for which was low interest rates as well as banking deregulation.

150% - one of the highest levels of household debt in the world! 

It sounds like such a shocking number, I guess, simply because it is a number which is higher than 100%. 

In many ways, though, the real surprise is that the number is not so much higher.

If you think about it, household debt of 150% of disposable income would be the equivalent of a couple with $60,000 in disposable income taking on a mortgage of $90,000 (and that's ignoring all other household debt). 

Given that mortgages tend to run for 25 or 30 years, how come the number isn't so much higher than 1.5 years of disposable income?

One of the reasons is that so many homes have no debt against them at all. 

The figure used to be around half of homes, and today it's still more than a third of them in the two most populous states, as well as in smaller states such as SA and Tasmania.

With most of the household debt secured against housing, the Reserve Bank remains comfortable enough with the above chart (provided it does not start rising again).

Regulatory authorities will place far more emphasis on non-performing loans and the percentage of income which is spent on housing, which has fallen sharply along with interest rates.

The most important thing of all for Australia is that lending standards are maintained, for if lending standards fall then things can begin to unravel. 

The US had its subprime loans, and in Britain it was far too easy to get a 100% mortgage in days gone by. 

Not many lessons seem to have been learned though - in the UK, the government has introduced new schemes to encourage people with no track record of saving to buy housing. 

We know how that ends, don't we?

UK and US growing faster than expected (S&P500 flying +28%)


"The UK economy is growing faster than previously estimated, according to the latest official figures.

The Office for National Statistics (ONS) said gross domestic product was up 0.8% in the July-to-September period compared with the previous quarter, confirming its previous estimate.
But it revised its growth figures for earlier quarters.
This means the estimated annual growth rate has now risen from 1.5% to 1.9%, a revision that has surprised economists.
A Treasury spokesman said: "Today's data show that the recovery has been stronger than previously thought and that the government's long-term economic plan is working."
And from Bloomberg:
"Data today showed the rate of expansion in the third quarter was faster than previously estimated as consumers stepped up spending on services such as health care and companies invested more in software. Gross domestic product climbed at a 4.1 percent annualized rate, the strongest since the final three months of 2011 and up from a previous estimate of 3.6 percent, Commerce Department figures showed.
“This revised GDP number was really positive,” Colleen Supran, a principal at San Francisco-based Bingham, Osborn & Scarborough, which manages about $3 billion, said in a phone interview. “It helps completes the story on what the Fed did this week and that is, the Fed has some belief that the economy is getting close to be able to stand on its own.”
The Dow’s rally today pushed it past its inflation-adjusted record of 16,237.72 set in January 2000, according to data compiled by Bloomberg. The S&P 500 has rallied 28 percent so far in 2013, on course for its best performance since 1997. Three rounds of central-bank bond purchases have helped propel the equity benchmark 169 percent higher from a 12-year low in 2009."
---
Went to watch the Hunger Games 2: Catching Fire yesterday. It was alright, I suppose, but the plot has more holes in it than a Swiss cheese. Very confusing. 

Friday, 20 December 2013

The spectacular demise of gold

Precious metals are having one heck of a time of it.

The gold price has fallen close to US$1,190/oz from above $1,920.

That's a huge decline of 38% since early September 2011. 

Since gold pays no income, the real decline is significantly worse than even that over the past two years.

This is why I suggest income-producing assets like proven diversified LICs - you can focus on the growing income stream each year rather than watching every uptick and downtick in the quoted daily prices.


Source: kitco

The story for silver isn't a whole lot happier either.


Source: kitco

Why haven't Aussie house prices corrected yet?

Dwelling prices rising?

Why haven't property prices retraced in 2013? We've seen the charts which show house prices and a raft of other data stretching all the way back to the 1800s which proved to us that a property correction was both inevitable and coming Australia's way, so why hasn't it happened?

A material correction could still be imminent, of course, but at least a  meaningful part of the reason is that the market conditions are not the same as they were only a quarter of a century ago. It's common but incorrect to blame the big run-up in Australian house prices on investors. In reality a far more significant reason for the change was completely unintentional and absolutely led by homeowners.

As households decided to 'get ahead' in the housing status stakes by taking advantage of using two incomes instead of one, the early adopters got ahead. For a while. But when a husband and wife working became the new norm, any relative advantage was eroded, and the rather unhappy end result was higher house prices all round. 

And there was an even bigger reason than this still: specifically, Australia's return to low inflation, which continued after the introduction of inflation target in 1993 and ultimately saw mortgage rates effectively halved. Of course, this represented a once-only downward adjustment, yet the impact has been colossal. 


The increase in household debt was not completely irrational in one sense. When mortgage repayments plummeted, homeowning couples essentially had three pivotal choices. 

(1) Continue to pay the same mortgage repayment figure and be debt-free more quickly;

(2) Pay the now lower mortgage requirement and spend or invest the extra cash on other stuff; or 

(3) Trade up to a more expensive house.

No prizes for guessing which choice the housing-obsessed Aussies went for (it was '3' by the way). Australia, a country largely built upon poor immigrants from the United Kingdom, the Mediterranean and Eastern Europe, has seemingly forever attached status to the ownership of resplendent housing. Aussies who had previously been unable to afford it were granted a ticket to play in the guise of the structural adjustment to low interest rates, so they traded up.

Unfortunately, the extraordinary drop in interest rates didn't prove to be quite so extraordinary for first homebuyers as existing owners stampeded the market in their drive to get ahead. In plain English, home ownership rates did not increase as a result of the lower mortgage repayments.

Of course, for all the talk of 'higher net worth' and housing wealth, as a country we're no better off. As a general rule, we just have more debt. Buying and selling existing properties from and to each other adds nothing to a country's wealth, only to our own perception of it. And indeed, there is little gain in making a profit on the sale of property if your next move on the ladder is to a more expensive property - which itself has likely increased in price. 

The obvious beneficiaries from housing booms are speculators who own multiple properties (and potentially those approaching retirement who plan to downsize) but there weren't so many of them in Australia in decades gone by. 

What about the role of investors?

I alluded to the role of investors above, and investment property did have its part to play in the last great housing boom through to the end of 2003. The concept of investment in property was a relatively new phenomenon for everyday Aussies since banks had been previously been reluctant to lend for speculative purposes. These days, of course, the banks can't get enough of interest-only products to boost their bottom lines and returns-on-equity.

One consequence of the last great boom was that by the end of 2003 average yields became pitiful on residential housing at around 3.5% - and nearer to 2.5% after costs - as the number of willing landlords began to exceed the demand from renters. The Reserve Bank began to jawbone the market highlighting exactly this point - professional investors demanded yields at least twice as high as this, they lamented, so what on earth were Mum-and-Dad investors doing? 

Interestingly, however, it wasn't high interest rates which killed off the last great Aussie housing boom, and nor is it likely to be so in this cyclical upturn. Recall that the cash rate was hiked only to 5.25% in December 2003 and did not move again until March 2005 (to 5.50%), and then not again until May 2006 (to 5.75%). The last boom just ran out of puff.

The present upswing in Australian house prices is also unlikely to be throttled by interest rate hikes as the cash rate sits at just 2.50%, and even now the yield curve remains inverted. In my opinion, it's more likely to the 'QANTAS effect' which eventually turns us off housing this time around: we hear about others losing their jobs and start to worry about losing ours. That, and residential property yields falling to miserable levels again, which is already beginning to happen in Sydney in certain cases where properties are bid up miles over the reserve.

It remains to be seen how long this upturn lasts for and it depends on your viewpoint - housing bears say 6 months, and bulls think that the market will peak in 2016 with a downturn in 2017. In truth, I don't have a clue and nor does anyone else - when you begin to consider the number of variables involved, it's silly to suggest otherwise.

From the perspective of the powers that be, it's likely better that a property cycle ends with a tapering in demand, rather than a stampeded for the exits caused by a nosebleed cost of borrowing (cf. the early 1990s when the cash rate spiralled well above 15% leading to a horror show). High interest rates can lead to recessions. 

Closer to the city

I have to laugh when reading property books that can't wait to tear into people like me (the term "self-proclaimed 'experts'..." inevitably features - oh, the sarcasm) - and indeed most economists and commentators - who have the temerity to suggest that the great long-term trend in property markets is that people increasingly want to live in the lifestyle suburbs, closer to the centre of the major cities and their beaches. We're "stuck in the past" apparently, "spouting the same old lines" from years ago. Heaven forbid, suggesting that investors stick to where people want to live and work!

We've been hearing for at least two decades now that everyone is going to be working from home and moving out to regional towns. LOL - don't let the facts get in the way of a good story!

Check out what the latest demographic statistics show, which show that Australia's population increased by a massive 407,000 persons in the year to June 2013, with 70% of people heading to the main five capital cities. Matusik delves into the time series spreadsheets and carves it up nicely here, where he highlights that 80% of the population growth is occurring in only the capital cities plus the Gold Coast/Sunshine Coast, Townsville, Newcastle and Cairns. So much for everyone moving out to the regions.

Now what is the case is that a good portion of the capital city population growth is happening in new and outer suburbs. Apparently, so the yield-chasing theory went, superior capital growth returns will also be found in the outer suburbs and the regions. However, this is patently not so.

It doesn't especially bother me what people choose to believe after starting with their conclusion and grappling for any evidence, no matter how feeble, to support it later - a textbook case of confirmation bias if ever there was one. But if you're interested here is what yet another independent review by AHURI found, which is that capital growth has been consistently better in suburbs closer to the CBD over more than three decades. Note that I said "closer to the CBD", not "within the CBD"...one of the great old favourite misquotes.

And, notably, the trend has very obviously continued beyond the financial crisis as well. Meanwhile those suburbs located out on the outer in "growth zones" are sold for a loss a "staggering" percentage of the time. For more on this, refer to RP Data's 'pain and gain' report and note what percentage properties have been sold a loss in Adelaide and particularly in regional South Australia in the past half decade.

For a full dissection of the actual facts, read this article here at The Conversation. The conclusions are somewhat disturbing, showing that we are in the process of busily building 'cones of wealth' around the cities while simultaneously trapping buyers in remote suburbs and areas out of these markets perhaps forever, while condemning them to low capital growth. 

For example, here is what has happened in Melbourne's south-eastern corridor, which is quite depressingly conclusive:


I'm not cherry-picking, incidentally. Here's the southern corridor (same story):


And the eastern corridor (same again):


And the northern corridor (repeat dose):


And the western corridor (ditto):


What about the theory that regional centres will outperform capital cities like Sydney and Melbourne? Wrong again, as the RBA's latest chart pack clearly shows, regional prices in aggregate have flattened out as household debt levels have levelled off, while cities like Sydney are rocketing in response to the ultra-low interest rate environment. The latest RBA chart pack only runs to November, future releases will show Sydney scaling new heights.

 Dwelling Prices graph

I also note that house price growth has fairly well stalled as we expected in Adelaide over the last six years since that city was supposedly going to be the ringer, so it looks as though we 'self-proclaimed experts' lucked in on that one as well.

I was down in Adelaide last week and the dynamic is so far removed from our major capital cities. I suppose that sharp capital growth could happen again one day, but it would only result from draconian supply-side planning restrictions rather than booming demand (refer to the latest employment data to see why - jobs are being added in all the major states, but are being lost in South Australia, where the existing unemployment rate is also higher).


Many of Sydney's inner- and middle-ring suburbs have boomed by more than 30% since 2009. Our nominated favourite sector of the market (Sydney's inner west) is on track for an absolute corker of a year, with prices rising by 20% in 2013 and still going strong. Note that this represents actual capital growth in established dwellings, not merely a distortion of median prices caused by new stock.

Meanwhile in another lucky win for the self-proclaimed experts, well-located London properties are performing incredibly well, which is great news for capital growth investors (heck, don't mention the regions though - prices in the UK regions have crashed by 30-40% in plenty of areas since 2007 and have quite simply never recovered).



All of this isn't particularly surprising by the way. The vast leveraging up of Australian households flattened out around 2006.

Hate to break it you, but it ain't going much higher either - not with debt levels at 150% of household disposable incomes - and therefore most property types in Australia can only increase on average in line with income growth over time. And that's in the best case scenario. More likely, we'll get a housing market day of reckoning some time over the coming decade, and when the tide goes out, we'll surely see who's really swimming naked while speculating in remote markets.

Household Finances graph

The current property market upturn to date is largely an investor-led story (and perhaps a foreign money story, depending upon who you believe - note that our dollar is sliding too...) which is largely why Sydney has been leading the way.

First homebuyer malaise?

Appreciating house prices seem remarkably unfair to potential first homebuyers since rising prices clearly benefit existing owners who tend to be older and earn more. One piece of good news is that the Baby Boomers who have benefited from the housing boom should be able to pass on some of their spoils to help their kids onto the housing ladder. Perhaps we will also see a rise in second-generation wills.

This isn't a whole lot of use to those of us from broken families, those of us with lots of siblings, or for that matter, those of us with deceased grandparents (admittedly, by luck as much as anything, I've been one of the fortunate beneficiaries of the housing boom sine the mid 1990s). So, it's clear that this passing on of family wealth this may benefit the younger generations iniquitously.

But if you've been a long-time follower of housing markets, it's probable that you don't worry quite as much about housing affordability and the intergenerational wealth divide. Why? Because markets are ultimately self-correcting. If people cannot afford property, then prices must and will fall eventually.

The timings are forever uncertain, but the end result for unaffordable housing markets, where they truly exist, is inevitable. Quite simply, if prices cannot be afforded, then they won't be. As the older generations move on and pop their clogs, by definition the only buyers left will be the younger crowd, and they will only pay what they can afford to pay.

Price action

As someone who is an advocate of long-term investment strategies, I don't get too excited by daily price movements too often, but the last 24 hours has been interesting.

Good news all round really as the US moves towards recovery.

The Aussie dollar fell to around 88.5 cents which is helpful for our economy.

Share prices roared up in Australia yesterday.


The XJO added 2.08%.



Source: ASX

And, yes, gold did indeed fall through the support level.

In fact the gold price has, for want of a better phrase, crapped itself, all the way down by more than 3.2% to just US$1,190/oz.

The gold price has fallen by 29% in 2013 so far.

Live 24 hours gold chart [Kitco Inc.]

Source: Kitco

Thursday, 19 December 2013

Taper

Again, not a lot to add that hasn't been said elsewhere. The Federal Reserve is to begin its taper in the US, bringing back its bond-buying program from $85bn/month to $75bn/month, the idea being that the amounts will be tapered back over tine. 

The two key words from the statement was that the Fed will not begin hiking interest rates until unemployment has fallen "well past" 6.5%. 

What does that wording mean for investors?

Interest rates in the US staying lower for longer.

Stocks went on a field day, the Dow (DJIA) adding 1.84% and up to a new record high, now at 16,188. Aussie stocks will go on a run today.

It's a headline writer's dream: "Stocks to go on a Santa rally", "Santa Bernanke" blah blah.

The Aussie dollar tanked to below 88.4 cents (go you good thing), which is great for those of us who have tirelessly been short through 2013 (in my case, only effectively so, through holding USD, like many other Aussies who have earned money overseas).

And I continue to be very glad that I don't own any gold, which is getting clobbered again - note how the chart is about to test the support level at just above US$1,210. 

Look out below...


Source: kitco

Wednesday, 18 December 2013

Poms to introduce plastic banknotes

Well, "polymer", which is tougher, announces the Bank of England guv'nor.

Not a bad idea as the existing notes in the UK are very feeble.

Governor Carney introduced the polymer notes in Canada a couple of years back.

The £5 will feature Sir Winston Churchill and the £10 Jane Austen.

Embedded image permalink

Getting there! UK unemployment down to 7.4% (2.39 million)

Lowest rate of UK unemployment in 4.5 years.

Interest rates could at last move up if the unemployment rate drops to 7%.

From the Beeb:

"UK unemployment fell by 99,000 in the three months to October, with 2.39 million now out of work, official figures show.

The unemployment rate fell to 7.4%, the Office for National Statistics (ONS) said.
This is its lowest rate since the February-to-April period in 2009, the ONS said.
This compares with a figure of 7.6% for the three months to September, and is below the rate analysts had expected.
The ONS data also showed that the number of people claiming Jobseeker's Allowance in November fell by 36,700 to 1.27 million.
The Bank of England has said it will not consider raising interest rates from their record low of 0.5% until the unemployment rate falls to 7%.
But even then, governor Mark Carney has said an interest rate increase is not guaranteed."

WTF

Not a bad day today. Not too shabby at all.



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Not such a great day for Wotif (WTF), with its market update showing an expected fall in half year NPAT from $27.5m to around $21.9m-$22.6m. Revenues were up but so were marketing costs as the sector appears to have become far more competitive.

The market wasn't at all happy about the fall in earnings, the share price collapsing by 31.82% as questions are raised about the company's ability to grow profits to support its (previously quite high) PE ratio.

I find Wotif (WTF) to be the second most amusing stock code, after Focus Minerals (FML). You may have to look that one up, but perhaps not if you're easily offended. 



Source: ASX

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If I could think of anything good to say about the cricket I would. Still can't. Heading to Melbourne on Boxing Day to watch the dead rubber...

Property Observer: Best and worst investments since the financial crisis

Read my article on Property Observer today here.


My article on Sydney's investor boom is the most read article on Property Observer this week.

You can read it here.

2013/14 commodities export earnings forecast +17%

Reserve Bank Governor Stevens noted in his speech that Australia's mining capital investment is set to fall - slowly at first and then more quickly.

As a result, we would want to be seeing a major uplift in both dwelling construction and commodity export earnings to compensate for the drag on GDP growth:

"Looking ahead, resource sector investment will decline – gradually at first but more quickly thereafter. It will most likely fall considerably over the next few years. There is therefore scope for other forms of private demand to grow more quickly, the more so as government spending is scheduled to be subdued. Investment in dwellings shows clear signs of a significant increase, and exports of resources will continue to rise strongly."

In this context, some good news from BREE (Bureau of Resource and Energy Economics) today, with it forecasting a massive 17% in export earnings for FY2013-14.

"In 2013–14, total export earnings for mineral and energy commodities are forecast to increase 
17 per cent, supported by robust growth in both mineral and energy commodity export volumes and a lower Australian dollar exchange rate".


Source: BREE

Unsurprisingly, the main driver is a tremendous increase in iron ore expected volumes (+23.3% y/y for the 2013-14 forecast) and value.


Source: BREE

If you've wondered why Australia spends so much time worrying about the iron ore price and the exchange rate, BREE's chart below explains why. 

Let's hope the commodity prices continue to hold up and the dollar continues to slide. Oh, and China continues to grow at 7.5% too.


Source: BREE