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

Sunday, 15 April 2012

Should we be in shares or property right now? Or both?

Property and the CPI result

The key indicator for the property market, as ever, will be the inflation print for the quarter which will be released by the Australian Bureau of Statistics (ABS) on April 24.

Should the CPI result come in at 0.5% or below, we can be fairly sure that the Reserve Bank of Australia will cut interest rates in May for the third time since November 2011, in the face of otherwise uninspiring economic data (though unemployment remained steady at 5.2%, a figure that is the envy of the developed world).

If the CPI result is very low at, say, 0.3% or lower, there is even talk of there being a 50 basis points (0.50%) interest rate cut, but that seems rather unlikely to me, the RBA preferring to promote a smooth interest rate policy.

As the vast majority of mortgages in Australia are variable rate loans, the property market tends to be particularly sensitive to the direction (and implied future direction) of interest rates.

Property in 2012 to date

Despite widespread predictions of a property super-crash, according to RP Data, Sydney’s property values have increased by a surprisingly robust 1.8% or so in the first 3.5 months of 2012. 

This implies annual growth of around 6.25%, and while I’m not at all sure that will happen, the market confidence does appear to have picked up in 2012.

Of course, dedicated share investors snicker about these seemingly moderate returns, claiming that the stock market has always outperformed over the long term, which in percentage terms, it has indeed tended to do.
But this overlooks the fact that property investors tend to use far greater leverage than their share-investing counterparts.

The benefits of a diversified portfolio

Over the last couple of days I read A Million is not Enough by Michael K. Farr, a US financial analyst who proclaims that when it comes to investing: “the stock market is the only game in town”.

This is far from an uncommon view (especially in the US) but I’ve always felt that it is safer to have a balance of shares, property and cash in a portfolio (and if you are approaching retirement, fixed interest investments such as bonds too). Why? Well…

Farr says that a 35 year old should be 100% invested in shares, moving this percentage down to around 85%-90% as you approach retirement, the theory being that the stock market will deliver the highest percentage returns over time.

That’s fine, but unfortunately he released his book in 2008, immediately prior to one of the greatest stock market crashes in the history of the world, precipitated by a proliferation of toxic sub-prime debt.

Farr also selected a list of “core holdings” stocks – there were some good ‘uns in there, but the list did include AIG, which the sub-prime fallout caused to go bust almost as soon as the book went to print.

A key lesson is that we must looking beyond company earnings and also consider cash flows – even if a company is making great profits, if it cannot service its debts as they fall due, they will be insolvent.

So if you went 100% into stocks as specifically advised by Farr, even if you dared to hold tight through 2008, 2009, 2010, 2011 and 2012 to date, you still would not have recovered the massive losses from the global financial crisis – and you would still be no closer to building anything like a retirement portfolio.

Far from it, in fact, you would be way behind where you started. So that’s why a more balanced portfolio might be preferable.

The ol’ property v. shares debate

It’s worth noting here, that property investors don’t actually need to make the 10%, 15% or 20% annual returns to build wealth due to the leverage they can employ.

A long-term investor in property is more than happy with even the most moderate gains above inflation as demonstrated in the table below.

A theoretical $4 million portfolio that attains, say, a 4.5% annual gain, builds significant equity over a decade due to the combination of leverage and compound (i.e. snowballing) growth.
Of course, despite what they may try to tell you, nobody knows what will happen to property over the next 1, 2, 3 or 5 years. 

The only thing we can be certain of is that with rapidly growing household incomes, an inflationary economic environment and a booming population (particularly in Sydney and South-East Queensland), values will be higher at some point in the future.

Year
Portfolio value ($)
Cumulative gain @ 4.5% growth
0
4,000,000
-
1
4,180,000
180,000
2
4,368,100
368,100
3
4,564,665
564,664
4
4,770,074
770,074
5
4,984,728
984,728
6
5,209,040
1,209,040
7
5,443,447
1,443,447
8
5,688,402
1,688,402
9
5,944,381
1,944,381
10
6,211,878
2,211,878

Note that even 3.5% capital growth per annum builds a decent pot of equity over 10 years:

Year
Portfolio value ($)
Cumulative gain @ 3.5% growth
0
4,000,000
-
1
4,140,000
140,000
2
4,284,900
284,900
3
4,434,872
434,871
4
4,590,092
590,092
5
4,750,745
750,745
6
4,917,021
917,021
7
5,089,117
1,089,117
8
5,267,236
1,267,236
9
5,451,589
1,451,589
10
5,642,395
1,642,395

***

Went in to Sharm-el-Sheikh yesterday.  It’s just a beach and casino desert resort really, nothing much to distinguish it from a thousand other beach resorts, except that this one perhaps has a greater volume of plastic bags blowing around it than most. It’s a bit like Las Vegas with litter.

Far more interestingly, as I write this we are transiting through the Suez Canal, which you can see on the Cunard Queen Elizabeth webcam.

As the ship passes through the canal, my old mucker Arabist and camel expert Eamonn Gearon (author of the excellent and recently-released book The Sahara) is providing entertaining on-board commentary for the passenger - in his own irreverent style, of course.