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

Monday, 30 June 2014

RP Data - June prices

It's the end of financial year, and here's how RP Data's much loved Daily Home Value Index finished up very strongly for the month of June, after 'falling' in May.

The best performing major capital city market over FY14 was, unsurprisingly, Sydney (+15.5pc), actually tracking just a shade ahead of our forecasts for the calendar YTD.. 

The weakest performing capital city market of those covered by the index was Adelaide (+2.9pc), where prices were recorded as being down over Q2, despite interest rates near record lows. 

And the rest of the cities, erm, well, somewhere in between (click chart):


RP's index is a useful enough indicator over time, but not a reporting tool to take too literally on a day-to-day basis, or even month-to-month basis.

Over the past quarter, the index has shown moderate gains for Sydney (+1.14pc), Brisbane (+0.83pc) and Perth (+0.62pc), and declines in Melbourne and Adelaide.

The most likely outcome for H2 appears to be continued moderate price increases in all of the major capital cities, with ongoing headwinds in Canberra, and perhaps Hobart.

Great wall of foreign capital hits Sydney & Melbourne

Some years ago when I wrote my first book, I noted that one day in the not too distant future, the Aussie dollar would depreciate again and certain parts of our property markets would likely be hit by a great wall of foreign capital.

It's all part of a global shift towards storing wealth in real estate which I discussed in more detail here, and which we have seen playing out in London over the past two decades with ever-widening eyes. 

However, as I noted in my book, foreign buyers generally aren't interested in smaller cities and regional centres.

Instead, they will be predominantly interested in buying medium-density properties in the areas they are generally most familiar with - that is to say, inner Sydney and inner Melbourne. 

Credit growth in Australia is only just rebounding from 40 year lows and yet prices are surging, with Sydney prices up by 15.4pc in the last 12 months alone.

Well, that unprecedented great wall of foreign capital is now here.

There has been a lot of debate about foreign buyers purchasing illegally, but even approved annualised spending is up by a whopping 93pc to an annualised equivalent of more than $33 billion.

The always-excellent Chris Joye highlighted today in the AFR how foreign buyers are buying up to 40% of newly constructed homes in Sydney and Melbourne (while simultaneously completely disregarding the southern states):

"Foreign investors are likely key drivers of the Sydney and Melbourne housing booms, according to new UBS data, potentially buying up to 40 per cent of all newly constructed homes, and accounting for up to one in eight Australian sales overall.

Unprecedented levels of foreign buyer activity, combined with the ability of the $559 billion self-managed super fund sector to leverage its cash five times when making property purchases, could be two reasons why this Australian housing cycle is different to anything we’ve seen before."


There is much more besides - read the rest of Joye's enlightening article here

Lucky 888 Visas take-off

An interest sub-plot which has not received much airtime in the mainstream media is that the controversial "Significant Investor Visas" are being issued overwhelmingly in New South Wales and Victoria too - 85% of them.

The investor "Golden Ticket" or "Lucky 888" visas (doubtless that subclass was chosen as they will be mainly issued to Chinese immigrants) require a minimum $5 million of investment in qualifying assets in exchange for a visa, and the rules allow them to be processed very rapidly.

Another 81 visas were issued in April and May taking the tally to date up to 255, but the big story is that another 928 applications for Golden Ticket visas have been lodged.

Tally all of that up and that's another $5 billion of investment coming overwhelmingly into the two major states, not to mention the additional wealth that the new visa holders will bring with them.

And this is doubtless only the beginning. 

Canada recently shut down its equivalent visa scheme with there still being a staggering 59,000 shut out in the waiting lists, most of them wealthy Chinese. 

Throw in all of that together with another new advent - SMSF lending for property investment -
mixed in with record low interest rates, and I continue to see little prospect of dwindling prices in inner Sydney any time soon.

RBA shows investors lead

New home sales plateau

New home sales slipped in May for the first time in 2014, down by 4% on the month, suggesting that investment in new housing may be set to plateau.

Sales of detached new houses were still up by a very healthy +5.7 q/q, but this was offset by falls in multi-unit sales in the month, which declined quite sharply to be down by -5.2% q/q.

Notably, and concerningly, the HIA cited a "shortage of titled land in Sydney and Perth", which will continue to put upwards pressure on those two housing markets, especially since they both have very heavy population growth numbers (click image):


Source: HIA

New dwelling sales fell again by another 6% this month in South Australia, down to just 490 in the month of May.

A weak market, where city dwelling prices declined in Q2.

Today's release from the Housing Industry Association (HIA) appears to be consistent other recent data sets - including softening building approvals, and construction finance for owner occupiers which seemingly hit a peak back in March 2014 (click chart):


Housing finance for construction investment actually peaked in February 2014 (click chart):


Established stock under pressure from investors

However, a closer look at today's more timely Financial Aggregates data from the Reserve Bank, tells a slightly different story (click image):


Housing credit growth is tracking at +6.2% year-on-year, having increased by +0.5% m/m in May.

More notably, drilling into the data shows that investor credit for housing jumped by another +0.8% m/m in May to be up a scorching +8.3% y/y.

Why? 

Because domestic investors are focusing on established dwellings which offer far superior bang for the buck.

A large percentage of new housing stock is presently being sold offshore, perhaps as much as 40% of it in Sydney and Melbourne according to a UBS report today.

The new housing market may be hitting a plateau, but the established market certainly has not done so.

Housing credit for investment as recorded by the RBA's Financial Aggregates has now increased for an incredible 66 consecutive months, and with interest rates stuck down at record lows the trend look set to continue.

Inflation to soften

On a related note, the TD-MI inflation gauge was stuck dead flat at 0.0% m/m in June to be +3.0% y/y.

While the 3.0% reading sits at the top of the Reserve Bank's 2-3% target range, the inflation seen previously was largely a result of the falling Aussie dollar as opposed to labour market pressures or wages growth, and thus is likely to soften again in the 2nd half of 2014. 

In fact, this month's 0.0% m/m reading may just be the start of that very softening.

Interest rates on hold for ages yet; established dwelling prices to keep rising.

Property versus shares - 10 & 20 year returns

Read me on Property Observer today discussing this very subject here.


Kouk sees house price rebound

Stephen "The Kouk" Koukoulas - Australia's Foremost Economist

Nice piece from former Economics Advisor to Prime Minister Gillard, Stephen Koukoulas:


"So the smart people like Louis Christopher from SQM Research and Pete Wargent from AllenWargent property buyers were right – the dip in house prices in the 6 week people around May was seasonal. The housing market was still strong and prices were still robust even though the RPData was showing what at face value were notable price falls.

The RPData house price series now shows that prices are up 1.3 per cent so far in June (just one day to go) to largely reverse the 1.9 per cent price drop in May. In recent weeks, the price rises have been solid which suggests further seasonal increases are likely in the near term, especially with interest rates remaining near record lows.

Even the RBA was caught up, a little, with the house price fall discussion, when it noted after the June Board meeting that "dwelling prices have increased significantly over the past year, though there have been some signs of a moderation in the pace of increase recently".

Read the rest here.

We won't be right all the time, of course, and since property markets are illiquid, the timings of market movements are much harder to predict than they may appear.

But we'll never be wrong through lack of research.

Our extensive chart packs which track hundreds of metrics and are updated daily (and not only for Australia, but also for the US, UK, Europe and China) would not allow it.


For example, we could never have predicted an Adelaide property boom over the last 5 or 6 years as many experts have, because every metric - population growth, jobs growth, the unemployment rate, household formation, interstate migration, GSP, State Final Demand, private new capex, real wages growth, building approvals, housing finance, investor loan finance...everything - told a different story.

And that still continues. 

When RP Data releases its June 2014 figures later this week, it will record dwelling price declines of around -0.5% for Adelaide in Q2.

On the flip side, I was comfortable calling out Sydney as the standout capital city market in my book, even after Keen had predicted a 40% crash, because the data suggested that the market fundamentals were strong.

Today being 30 June, if market consensus is right, the ABS series will confirm that Sydney dwelling prices are up by around +47pc over the past five years (click chart).


Part of the problem with a lot of (most) Aussie property market commentary is that it comes from the point of vested interest i.e. "I own a property here, so it must always be referred to as a great location to invest."

We've seen a lot of this with regards to some very ordinary regional centres and even some capital cities over the past half decade, and it appears likely that there will be more of it to come with regards to several mining towns as the resources construction boom turns to bust.

The awesome thing about comprehensive chart packs which are updated daily is that, whether you like it or not, they force you to change your opinions as the outlook shifts. 

You can't easily ignore reversing trends when the daily data sets give it to you straight between the eyes.

Sunday, 29 June 2014

Week ahead

The past two weeks have been slow for news, but not so the next fortnight with a whole raft of data heading our way.

Of particular interest will be retail trade release, the monthly labour force data as always, and the building approvals (+8pc for the year expected here) and housing finance figures.

One thing to watch out for this week will be the Engineering Construction Activity data, which is set to be released on Wednesday.

To me, this appears likely to reveal more detail on the challenges facing Western Australia and Queensland as mining construction activity passes its peak in the March quarter (click chart):


After a huge run-up in the value of construction activity during the past decade, which kept Australia's economy happily afloat through the financial crisis and beyond, mining construction looks set to wane quite dramatically in the years ahead as the resources boom transitions to the production phase. 

If you look at the thunderous increase in activity since the turn of the century, you can see why the mining states face a tricky transition period (click chart):


There hasn't been a lot to say on share markets of late as they have simply been ticking along nicely, but we will probably take a look at what's been going on there in a bit more detail too.

In terms of the broader economy in Q2, it appears likely that net exports will continue to contribute to growth, but with iron ore prices having declined sharply, the contribution should be plenty less than the thumping 1.4% growth contributed in Q1.

Meanwhile, neither household consumption nor dwelling construction appear likely to deliver thrilling results.

With the usual caveats around the impossibility of forecasting GDP, one might expect to see the economy growing by perhaps ~0.5pc in the second quarter (and thus ~3.1pc over the past year). 

Slowly but surely, the hawkish calls for rate hikes have been dropping off as growth appears likely to dwindle this quarter. 

With wages growth and hence inflation expectations remaining soft, the next interest rate hike seems to be as far away as it ever was (click chart):

UK demographics

Interesting data from the Office for National Statistics in the UK shows that the UK population is forecast to expand to above 70 million by 2037.

In the decade to 2022, the UK population is forecast to increase by a troublesome 3.8 million (+7.2pc).

Given that Britain has not even been able to keep pace with housing the existing population of 64 million effectively, this appears very likely to result in a housing market crisis.

The great bulk of population growth is now being driven by international migration as much as it is natural increase.

Unsurprisingly London and the South East are seeing population growth accelerating at well above the average for England, with on average 7pc growth forecast for England over the 10 years to mid 2022.

The population is expected to growth by more than 15pc in Cambridgeshire and London over the coming decade, which can surely only result in increased pressure on those housing markets.


Source: ONS

The fastest growing boroughs in and around London are expected to include Tower Hamlets, Barking & Dagenham, Redbridge, Islington, Kingston upon Thames and Barnet, which all join Cambridgeshire in having a population growth forecast of well above +15pc.

However, the population is expected to grow by only 3% in the north-east, and in Barrow-in-Furness the population is expected to decline further over the next decade, as it is too in Blackpool.

One of the biggest challenges for Britain is that the fastest growing demographic over the next decade will be the over 65s (+22pc). 

Indeed, this demographic is expected to increase by between one quarter and one fifth across every British region in the next decade.

For those thinking ahead, as I considered here, the property type in shortest supply is likely to be what the Poms call 'bungalows', i.e. single storey dwellings.

For obvious reasons, this property type will be in high demand from the over 65s, but while bungalows were previously built extensively across East Anglia, new brownfield site developments are far more likely to be of the medium-density/multi-storey type, in order for developers to maximise profit per square metre.

"The fastest growing section of the population and as such the one which will be a major driver of the coming housing crisis, is the over 65s, the number of who is expected to increase by 50% in the next couple of decades, to 15.5 million by 2030.

There is a chronic shortage of appropriate housing stock for downsizing in old age. 


"Survey after survey has shown that the preferred home for pensioners would be a bungalow - indeed it would be the home of choice for around a third of the population. However, bungalows constitute just one in 50 British houses".

It appears that developers are unwilling to build more single-storey homes due to the land space they take up which does not fit well with the developers' preferred density of 35-50 dwellings per hectare."


Summary

To me the data continues to imply that if you want capital growth, keep owning properties in London, Cambridge and parts of the south-east, and if you want value for money, look for a house elsewhere.

In particular, the regions around London are likely to descend into a deeper housing crisis for these reasons:


-growing population as noted above



-population migration towards one part of the country (south-east of England)



-population choosing to live in different property types



-diabolical planning and endless political wrangling



-widespread NIMBYism and environmental concerns about population spread into the green belt land



-expensive demolition and construction costs



-difficulties obtaining construction finance.

Saturday, 28 June 2014

Winter

After recording the hottest May since approximately the beginning of the Dreamtime, the month of June in Sydney has seen a distinct chill in the air.

The good news is that Friday saw us through the shortest day in Sydney on 21 June. Henceforth, we are officially underway on the countdown to spring.

This week sees the "Cool Yule" Xmas festival hosted down our way at Darling Harbour where you can 'get your skates on' if that sort of thing takes your fancy.

For some reason, the iceberg on the harbour was deflated this week, but I noticed last night that it has been reflated - perhaps a metaphor, for...


Property cooling?

It's no wonder there is such a property obsession in this country.

The BRW Rich 200 2014 released this week showed that no fewer than 53 of the richest 200 persons in Australia had sourced their wealth through property.

And doubtless most of the other 147 invest much of their wealth into real estate.


There has been a lot of talk about the cooling of the Sydney property market in recent weeks.

Is it so? 

Our view is that we think that it is, to a certain extent.

In short, there are so many more properties coming onto the market that buyer interest has been dispersed a little. 

In fact, the Sydney market broke the record for the highest number of listings in June ever, and this was likely matched today with a record number of sales for the month of June too.

Some vendors have brought properties to the market with unrealistic expectations, of course, which always happens at this stage in the cycle, and this plays its part in driving down auction clearance rates a little.

APM recorded its preliminary auction clearance rate at 74.1%, which still represents a very strong market, and consistent with prices continuing to rise, but at a slower pace.

Indeed, make no mistake, the market is still in fine nick, with the median Sydney auction sales price today coming at a thumping $935,000.

In short, the Sydney market is still burgeoning, as next month's mortgage finance figures on July 11 appear likely to confirm, but the winter market is certainly of a less frantic nature than we were seeing in December last year.

Erko still hot

One location where the market has certainly not cooled is one of our old favourite suburbs, Erskineville.

Now known as "Erko", but previously referred to as "Irksomeville", the suburb has been the gift which simply keeps on giving for property owners, with unit values up yet again by another stinking 26pc over the past year.

Today saw a 2 bedroom apartment sell for $803,000, a truly unthinkable figure when we were buying in the suburb just 5 or 6 years ago. 

Apartment prices in the suburbs are up by more than 55% since that time.


"The faint hum of planes overhead did not dampen the competition at the auction of 3219/2 Nassau Lane, Erskineville. All six registered bidders battled for the pet-friendly, designer courtyard apartment that sold in less than 10 minutes and $43,000 over reserve for $803,000.

The sale at the award-winning Motto complex is indicative of Saturday's Domain story that showed Sydney suburbs under the flight path have yielded the highest growth in the past 20 years.
Pre- and post-auction, no one mentioned the words ''flight path'' or ''noisy''. ''Convenient'', ''affordable'' and ''friendly'' were more commonly used by the potential buyers, mostly downsizers, first-home buyers and investors."
The highest sustained capital growth in Sydney's inner western suburbs...whoever would have thought?

To be straight, however, the time to buy such apartments in Erskineville has long since past.

We are buying equivalent properties for $100,000 less in superior and more desirable locations, showing just how far out of whack certain parts of the inner west market are threatening to get.

---

Alas, no cheap movie tickets this weekend, so had to pay the full fare (an indeed irksome $18.50) to visit Opera Dendy Quays down on Circular Quay.

Watched The Trip to Italy starring the brill Steve Coogan. Loved it, but then as a long time fan of both Coogan and Italy in general, I would...8/10.

Regeneration

Darling Harbour and Barangaroo are two monster developments I am keeping an eye on, and not only because I own property in the area at Darling Harbour.

The sheer scale of the projects mean that they are important to the city economy, with a projected spend of $8.5 billion from Lend Lease alone.

Last week, I took a detailed look at Barangaroo here, having spent a day down on the construction site. 

This week, a quick look at Darling Harbour's regeneration, which Lend Lease are expecting to set them back the small matter of $2.5 billion.

The demolition phase is now complete, and the foundations are being laid for the new structures.



These massive projects have are still at the lower end of their S-curve and the big project spending is yet to come.

At Barangaroo for example, only 900 workers are presently on site per day.

This figure will increase to 2000 per day when the project really hits its straps.

Personally, I believe that construction work done in New South Wales will hit a record high at some point in the next year, which is excellent news for the state, and Sydney in particular.

Construction work done in chain volume measures terms has rebounded by around 40% in NSW since 2012 and looks set to hit record heights (click chart). 


Darling Harbour is being reinvented as a world class location for tourists and city residents. 

I, for one, can't wait to see the finished article. 

AFR: Rezoning in Sydney

Read me in today's Australian Financial Review here where I discuss rezoning in Sydney:



A number of Sydney suburbs close to transport hubs have been earmarked as Urban Activation Precincts (UAPs) as Sydney desperately tries to address its dwelling shortage. 

Reported the SMH:

Bill Randolph, from the University of NSW's City Futures Research Centre, said the precincts were located in the right areas. "If this doesn't work then we're really stuck as a city," he said.

In these precincts, high rise blocks should begin to spring up, but predictably, in suburbs such as Randwick - which will benefit from the new light rail, with an anticipated completion date of 2019 - there will be huge community backlash and an avalanche of good, old-fashioned eastern suburbs NIMBYism.

Areas earmarked included parts of North Ryde, Macquarie Park, Epping, Wentworth Point, Homebush, Mascot, Randwick itself and along Anzac Parade from Maroubra to Phillip Bay.

Note how developers have been mopping up entire streets making instant millionaires of homeowners whose plots have been rezoned for high density residential development.

Friday, 27 June 2014

Financial year in review

It's been a great year for creating wealth, largely thanks to ongoing low interest rates which continue to drive capital away from fixed interest products and into shares and property.

As usual, of course, some people would have lost money on the share markets through chasing fast returns.

But had you simply held the XJO (ASX 200) index you'd be on track for a very smart +14% annual return even before dividend payments are thrown in. 

Adding in the dividend component, annual returns would be approaching +19%.

As it transpired, all of the share market uplift was in the first half of the financial year.


All of which, by the way, all comes off the back of a romping +20% gain in the 2013 financial year.

These are the best back to back gains that have been seen since the heady pre-financial crisis days.

Meanwhile, Australian property prices are up by around +10% in the past year too, with Sydney comfortably leading the way as we predicted here.

BIS Shrapnel recently came out with a paper which stated that the Sydney apartment market boom has plenty of gas left in the tank, predicting another +15% of capital gains in the next two years.

We tend to agree that certain parts of the Sydney market will likely keep rising in price until interest rates do.

This is partly related to years of undersupply, as I detailed recently here on Property Update.

Dwelling prices up 10.2%

Expect RP Data to report dwelling price gains early next week for the month of June of around +1%.

This only partly reverses the "seasonal dips" of -1.9% reported in May (click chart):


Realistically prices weren't actually falling so sharply in May, simply, rather this was reflective of a lag in the data.

For what it's worth, the June figures will show big gains of +1.2% to +1.3% or so for Sydney, Brisbane and Perth, and slightly lesser gains for Melbourne, perhaps around +0.7%.

However, the index will show declines of around -0.6% for Adelaide.

Of course, month to month figures on a price index don't mean a great deal, however the broader picture appears to be that prices are increasing steadily on a national basis, but at a somewhat slower pace than may have been seen in late 2013.

It is instructive to note that while prices nationally are up by 10.2% over the past 12 months, Adelaide's market has failed to keep pace with inflation. 

This appears likely to be reflective of the weak labour market in South Australia.

Super changes

A quick reminder that from 1 July 2014, the compulsory employer superannuation contribution rate increases to 9.50%.

The percentage is being ratcheted up in the coming years to help address the pension shortfall.


The standard concessional cap also changes on July 1, 2014 to $30,000...or $35,000 for those closer to the retirement age...


If you aren't sure whether to take advantage of the concession, it's best to speak to a financial planner and your accountant.

Net worth

Average Aussie net worth to reach new records in 2014...


[h/t @BullionBaron]

Thursday, 26 June 2014

Job vacancies data strong for NSW

A nice bounce in the Jobs Vacancies data today from the ABS, consistent with a stronger New South Wales economy ahead.

Jobs vacancies nationally recorded a nice 2.1% seasonally adjusted bounce in the May quarter, implying better times ahead for the economy (click image):


As ever, though, I'd implore readers to consider the data at a more localised level.

Doing so reveals a continuing strong upturn in the New South Wales market, but certain challenges in the mining states, in Queensland and WA in particular.

Jobs vacancies are up by more than a third since May 2013 in New South Wales after having dived in 2012/13, which suggests to me that the state's economy is starting to fire up (click chart):


The chart essentially shows the total number of job vacancies recovering steadily after confidence took a bit of a shellacking 2011-2013 as debt crises shook global markets.

Incidentally, the gap in the chart is not an error - at least, it isn't on my part.

The Australian Bureau of Statistics suspended the Jobs Vacancies surveys in FY09/10 due to funding being slashed.

Overall, another small piece of the jigsaw which adds a little further weight to my case of NSW being Australia's star economy of the decade.

Wednesday, 25 June 2014

MYOB Pulse: When business expenditure is mixed with personal

Read my latest MYOB piece here, where I consider those tricky blurred lines between your business expenditure and your personal...


Consumer confidence rebounds +6% in 4 weeks

After being utterly crucified by the Federal Budget, consumer confidence has rebounded by around 6% over the past four weeks according to Roy Morgan research.

Always felt it as though it would be a temporary hit, but nevertheless it could be viewed as something of a relief to see consumer confidence levels rebounding towards their long-term averages after what was an absolute pounding.

From Roy Morgan:

"ANZ-Roy Morgan Consumer Confidence rose a further 2.4% to 105.7 in the week ending June 22. Consumer Confidence has now clawed back some of its earlier weakness, having risen around 6% over the past four weeks, which coincides with the recent recovery in house prices."

Tuesday, 24 June 2014

Apartments

Sometimes, units can be better investments than houses, provided, of course, that you buy the right one of the right type. 

In particular, you might want to buy this type of unit:
  • 2 bedroom, 1 bathroom, 1 parking space, with a balcony
  • with owner-occupier appeal
  • in a sought after area of very high demand
  • walking distance to transport links for the city centre employment hubs
  • walking distance to shops and entertainment
Also look for:

  • where there are effective height restrictions on building new developments and constrained supply
  • a quiet street with park space or water/beach nearby
  • a boutique unit block of 4-12 units with scarcity value and high land value content
  • low strata fees - no gyms, pools, lifts or 24 hour concierge! - and a decent sinking/admin fund

Perhaps also consider:
  • potential to add capital value and increase rental income via a renovation

Obviously there are many more points beside only these to consider, but those are just a few of the key ones.

Read some more of my thoughts in this article on Property Update here.



One matter which I didn't note is that average household sizes can gently increase when unemployment rises, and we did see an element of this occurring in the period during and after the financial crisis. 

The long term trend, however, is that average household sizes are likely to be locked down somewhere close to 2.5, which fits in with the trend towards medium-density living in Australia's capital cities.

2014a vs 2014f

The next two weeks are absolutely corkers for economic data. However, this week is relatively slow on the domestic front, despite a string of very strong US data overnight which bodes well for the ongoing US recovery.

To fill in for today in the absence of much interesting local news of note, I'll take a look at how Aussie property prices are tracking against our 2014 forecasts, by benchmarking against RP Data's Daily Home Value Index for the year-to-date.

Forecasters often back off from their previous predictions, but there's not really too much point in that. The very concept of accurately forecasting dwelling prices is flawed, since it is not possible to anticipate all future events which impact the economy.

Nevertheless, below is what we came up with for 2014. It may also be worth reading here the rationale behind our predictions, in particular why we came in lower than most, if not all, other forecasters.

2014 forecasts

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%

The year to date...

The RP Data Daily Home Value Index does not cover daily figures for Hobart or Canberra, but we note that according to Residex prices have been flat or falling moderately, in line with expectations.

Sydney

Our strongest 2014 forecast was for 6% to 9% capital growth in Sydney.

The home value index has historically recorded seasonal dips in May, the reasons for which have been well documented elsewhere.

We should now be through that seasonal dip and the outlook for Sydney suggests further price growth in 2014, 2015 and 2016 according to BIS Shrapnel.

I tend to agree that we'll likely ongoing growth for Sydney but at a slower pace than has been seen in the last 12 months (click chart).


Melbourne

Melbourne is a tricky one, the data always seems to imply higher vacancy rates and plenty of stock, and yet dwelling prices have often defied the data in this regard, presumably due to much of the new stock being less sought after.

We opted for 2% to 5% capital growth on the grounds that the market has already been heated for some years now. Our prediction was lower than what others expected. 

The daily home index has been a wild ride for Melbourne, first "booming" and then "busting" in 2014.

The net position is that the market is tracking at around a 2% annualised pace in 2014, which is consistent with the bottom end of our forecast range. 

Some talk of the Melbourne market having peaked around in media circles. Watch this space (click chart).


Brisbane

The market with the strongest 3 year prospects according to BIS Shrapnel who forecasts 17% capital growth over that time.

For similar reasons we plumped for 2% to 5% growth in 2014 for Brisbane and Gold Coast.

Tracking quite nicely (click chart).


Adelaide

It's been a recurring theme in Australia that every year the experts predict a "boom" in Adelaide but it never comes to pass.

To be blunt, I'm not a fan myself due to the weak and faltering local economy, a brain drain to other states, weak state population growth and rising unemployment, as documented here many times.

In fact, I will always be wary of experts recommending that you invest into an economy where unemployment is rising towards 7%, particularly if they are vested interests in that market.

If net jobs growth returns then fair enough, but until that time...pass.

For these reasons, our forecast was only for 0% to 3% capital growth, which may have been unpopular, but with the local press reporting an increasing number of foreclosures, I doubt we'll be too far off track with that prediction (click chart).


Perth

2013 was a great year for Perth, driven by the strongest rate of population growth in Australian capital cities. 

We see 2014 as being a flatter year as the mining boom reinvents itself as an export boom from a construction boom.

Over the longer term there will be opportunities in Perth, particularly for houses located near transport hubs as the city population swells (click chart).

Monday, 23 June 2014

Threat

Never a dull moment down at Barangaroo, with a bomb threat today causing the site to be evacuated.

Nothing came of it in the end but Hickson Road and other streets were closed off for some time causing some "downtown" disruption. 


BIS: Property prices to grow in Sydney (14pc) & Brisbane (17pc)

BIS Shrapnel reports that it forecasts property prices to rise in Brisbane and Sydney by 17pc and 14pc respectively, with the Sydney market to cool again next in 2017.

BIS also forecasts declines "in real terms" in Adelaide, Melbourne, Canberra, Perth, Hobart and Darwin.

Translated, that means prices are still forecast to grow elsewhere over the next three years, but slower than the rate of inflation.

Still no joy for Adelaide with the local press reporting that higher unemployment rates have led to foreclosures in the South Australian capital.

BIS doesn't have a stellar track record of forecasting, it's true, but nevertheless, still worth a read.

Reports the Australian:

"Housing oversupply and muted economic conditions will mean flat or falling home prices in Australian cities over the next few years, a BIS Shrapnel report has forecast.
But Sydney and Brisbane could escape some of the weakness because housing supply in those cities is limited and vacancies lower.
“By June 2017, only the Brisbane and Sydney markets are expected to have experienced any growth in house prices in real terms (adjusted for inflation) over the previous three years, with all remaining capital cities expected to have recorded real price declines,” the Residential Property Prospects 2014 — 2017 report warns.
While there is significant construction activity in Sydney, it will take some time for the high levels of apartment projects to be completed and impact vacancy rates, according to Angie Zigomanis, head of BIS Shrapnel’s residential research unit.
“We are forecasting total price growth in Sydney over the three years to June 2017 to be 10 per cent, with all of the growth concentrated over the next two years, followed by a decline in the third year,” Mr Zigomanis said.
Despite the gloomy forecast, Lend Lease’s substantial Darling Square development in Sydney’s CBD sold its initial release early on Saturday morning this weekend.
All 350 apartments, which were priced between $700,000 and $3.5 million, sold out, with more than 600 prospective buyers attending the sales launch.
In Melbourne, prices are forecast to fall by 1 per cent when adjusted for inflation in the three years to June 2017, as more homes come on to the market and weakness continues in the state’s key manufacturing sector.
Adelaide “remains a challenge”, with total growth of 5 per cent to June 2017, representing “a 4 per cent decline in real terms.” Perth is also forecast to see a drop in real terms of six per cent in that time.
Similarly, Hobart and Darwin will decline by 5 per cent and Canberra by 6 per cent in real terms, according to BIS Shrapnel.
The economy’s transition from one driven by resource investment to domestic demand is one of the complicating factors, Mr Zigomanis said.
“The RBA is expected to enter a tightening phase towards the end of 2015,” he said.
“Initial rises are likely to have a limited effect with the economy strengthening, although further rises will more significantly impact on affordability and prices through calendar 2016, while also eventually having the desired effect of slowing economic growth and inflationary pressures.”
Last week investment management firm Morgan Stanley said investors shouldn’t expect the unusually large home price growth seen over the last two decades to continue."

China manufacturing 7 month high

Some long overdue and long-awaited good news out of Asia today with data from both China and Japan printing strong.

The Aussie dollar jumped all the way to 94.4 cents on the news, Aussie stocks are up by 0.6% (big gains for miners such as RIO +2.7%, BHP +1.4%) and iron ore future reverted some 3% higher sending Fortescue (FMG) up another 24 cents or 5.7% as its rollercoaster ride continues.

Japan's flash manufacturing reading printed at 51.1 - expansion, for the first time in 3 months - while China's HSBC manufacturing PMI beat expectations coming in at 50.8 and well above May's 49.4 reading as orders surge.

Expansion for China manufacturing and its best result in 7 months.

From Reuters:

"Asian stocks and the Australian dollar rose on Monday as upbeat news from China's factory sector and fresh highs on Wall Street fueled appetite for riskier assets, while crude oil held near nine-month highs as fighting in Iraq intensified.

MSCI's broadest index of Asia-Pacific shares outside Japan gained 0.7 percent by mid-morning. Tokyo's Nikkei rose 0.4 percent, shaking off early weakness.
The MSCI index hit intraday highs after the June HSBC/Markit Flash China PMI showed China's factory sector activity expanded for the first time in six months, offering new signs the economy is stabilising thanks to Beijing's measures to shore up growth.
"This month's improvement is consistent with data suggesting that the authorities' mini-stimulus are filtering through to the real economy," said Qu Hongbin, chief economist for China at HSBC, referring to a series of measures announced by the government in recent months to spur activity."

Sunday, 22 June 2014

Hanging gardens of Barangaroo

Bonanza weekend

Following on from the theme of the earlier post - the great swathe of construction that is underway in New South Wales - it's been a huge weekend for Lend Lease.

At one end of Darling Harbour, the $2.5 billion Darling Harbour Live development is well underway, with the old SCC having now been demolished as I photographed myself here.

Indeed, 357 off-the-plan apartments went on sale for the Darling Square tower development yesterday morning (they call it Darling Harbour but it looks more like Haymarket to me) and every apartment sold in just a few hours.

Sydney Morning Herald estimated that the value of those sales was $650 million, but one suspects that the number was closer to half a billion. Either way, that's a massive day of sales. Interesting to hear that a partner at PwC spent $2.6 million of flats for his 8 and 10 year old kids to stay in when they go to Uni...

Barangaroo

Meanwhile, down the other end of the harbour this morning Lend Lease put on a site tour for the $6 billion Barangaroo project. I went down for a few hours to do the tour and here is what I saw...

Below is "T2", the second of the commercial towers (there will be three vast commercial towers, two smaller residential blocks and a huge hotel development). The below "T2" tower is only currently constructed up to half of its full height, and even this won't be the largest of the three towers.

That should give some idea of the sheer scale of the Barangaroo: it's an absolute monster project, Australia's largest ever. Note that the result of this will be a significant oversupply of commercial office space in the Sydney CBD, which is already evident in elevated vacancy rates and softening yields. Some 23,000 office workers will work in the international towers.



Some of the landscaping is underway. The underlying idea is to recreate the 1788 shoreline, the 'Hungry Mile' having been flattened decades ago and used as a shipping terminal. The guy in the suit is Andrew Wilson, the Barangaroo project's MD - I just managed to 'pap' the top of his head. 

The chap being interview on the right was the 24th Aussie Prime Minister - Mr. Paul Keating.

The Barangaroo name was selected via a competition, for which there were some 1600 entries. I think from memory half a dozen people chose the same inning name, being that of of Bennelong's wife (Bennelong Point is the name now given to the site upon which Sydney Opera House sits).


More landscaping down at the Harbour Bridge end of the project. The suburbs in the distance are McMahaons Point to the left and Lavender Bay, and Milsons Point, home to the famous Luna Park grin and amusement park attractions.


Thousand of tonnes of earth to be shifted. There will be 75 stores lining the frontage including restaurants, cafes and bars, and retail and health stores.


Note how the shoreline which was previously straight, has now been re-sculpted back to its 1788 contours. More than 2000 construction workers are to be on site at peak times, so it's happening quickly. The prject is bigger than London's Canary Wharf, but will be built in half the time. More than 500 indigenous persons will be involved in the creation of the project.


Controversially, the park area on the headland now comprises less space than had been implied by the original plans. An "iconic, luxury hotel" is proposed; and wait until Packer's casino plans finally get the full nod for the real community uproar. According to the planning documents, more than 50% of Barangaroo South will be zoned as "public space". 100% of the waterfront will be accessible to the public.


75,000 plants in total are to be shipped in, grown off site especially for the project, including native eucalypts.


The press hasn't gotten a hold of this yet, but planning permission has been lodged to have the shipping control tower demolished. "Not viable" to retain it is the word, problems with the lifts 'n' that...would cost too much to fix it etc. 

The development will be Australia's first large scale "carbon neutral" project - renewable energy solar power plants will be created off site which will generate power for 5000 homes, but not in Sydney...in regional New South Wales.


Looking back towards King Street Wharf - "T2" tower in the far distance under construction. Pyrmont wharves off to the right.


Quiz question for history geeks. I took this photo at 12.59pm. I took another photo two minutes later at 1.01pm and something had changed...what was it? Answer at the end of the blog post. 

Note in the backdrop to the left, the row of a couple of dozen housing commission dwellings at Miller's Point which are to be sold off and the residents relocated to previously vacant public housing land in Glebe. 


The back of the Miller's Point strip. Signs are up in protest of the relocation to new public housing.


And the front of the Miller's Point row, which overlooks the harbour and the entire Barangaroo project.


The answer to the poser, is that at 1pm every day, the golden globe on Sydney Obervatory Hill is 'dropped'. It was used as an accurate standard timepiece for the city from 1858, originally accompanied by a 1pm canon blast. I think it was also used for shipping purposes, but don't quote me on that.

The first building at Barangaroo will be coming online in 2015, with the entire $6 billion Barangaroo South project to be completed by 2020.