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.
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Wednesday, 27 June 2012
The Ascent of Money (and leveraged property plays)
My long meeting with Motivated Money’s Peter Thornhill yesterday caused me to question why we involve ourselves in leveraged property plays at all. After all, as he advocates, we could solely invest in an industrial index of profit-making, dividend-paying stocks for the next 30 years with very little risk. It is no bad thing to question our motives and viewpoints: it serves us well to continually view ourselves critically.
As Niall Ferguson* points out in his brilliant book The Ascent of Money, it is well known that a low-risk approach to investment should include a substantially diversified portfolio of assets, and yet conventional knowledge (that we should buy our own home) causes us ‘to bet the house on, well, the house’. In the US, two-thirds of the average portfolio consists of the place of residence. The ratio is still higher elsewhere.
The answer I came to is that, ultimately, we all have our own perceptions and world-views, and we feel compelled to invest accordingly. Soros believed the pound would fall so he shorted the pound. Trump believed in the future of New York real estate and so he built huge projects in Manhattan.
Modern history also shows us that while property is by no means a uniquely safe asset class, it does behave very differently to a ‘pure’ investment asset class such as equities. Home ownership rates are high in Australia at around 70%, and we are encouraged to become owners of property. For this and other reasons, real estate prices can often be higher than a multiple of rental income would seem to justify.
Historical evidence for the ‘safe as houses’ theory
Governments have long had an interest in property markets and see the idea of a ‘property-owning democracy’ as a useful way to promote their own popularity. We have also become familiar with the idea of a ‘stakeholder economy’.
In the United Kingdom, Margaret Thatcher promoted the idea of Mortgage Interest Relief at Source (MIRAS), before selling off many of the public housing projects cheaply and turning 1.5 million residents in to home-owners. This move increased Britain’s home-ownership rate through the 1980s from 54% to 67%.
In the US, the tax deductibility of mortgage interest is seen by many as sacrosanct, and George W. Bush famously declared that ‘we want everybody in America to own their own home.’
Housing is not uniquely safe
Australian property has been a less volatile asset class than Australian shares, in part due to its illiquidity and in part due to high ownership rates. There is a twist, however, and that is that over the last couple of decades governments and central banks now aim for price stability and low inflation. The cost of this can sometimes be high interest rates which put pressure on leveraged property owners.
We are all familiar with the events of the bursting of the sub-prime bubble. Earlier still in the US, the Savings and Loan crisis caused enormous distress in areas where property supply had run rampant (such as Dallas, Texas). In Britain, too, property values fell by nearly one fifth between 1989 and 1995.
With the Australian property market currently in a correction phase, this makes it vitally important that investors do not stray far from areas that are in continual high demand.
A ‘Stevens put’?
Share traders in the US in the latter half of the 1990s joked that they lived in the age of the ‘Greenspan put’ – meaning that having Alan Greenspan in the Fed presented them with the option to sell stocks at a higher price in the future (Greenspan having only raised interest rates once between 1995 and 1999).
Some have argued that the Reserve Bank in Australia (RBA) is doing more than one might reasonably expect towards supporting property values. Certainly, RBA rhetoric in its releases regularly refers to weak housing prices, but it is probably unfair and overstating the case to say that we have a ‘Stevens put’ in place.
To the great consternation of dedicated equities investors, some government policies do specifically target supporting home ownership, such as the First Home Owners Grant.
Humans are notoriously poor at learning from history. What we should have learned is that in difficult times such as these, we should steer well clear of areas where housing developments and rapidly increasing supply are rampant, and stay well away from those in which outright speculation is the order of the day.
This is where our ‘global real estate analyst’ friends in the US have got it wrong. There is no one property market in any city, let alone any country. Property prices in the lowest quartile behave markedly differently to those in the premium sector. Anticipating the future price movements of real estate is definitely not as simple as dividing a median property price by a median income figure.
While the NSW population continues to grow at around 80,000 people each year and dwelling approvals remain so weak, and, crucially, while credit markets continue to make funds so readily available to property buyers, the inner/middle-ring Sydney apartment market in the close-to-median-price range will not collapse. With vacancy rates so low in supply-constrained inner- and middle-ring suburbs, any fall in unit values will be quickly leapt upon by opportunistic buyers.
The fall in Sydney’s unit prices in the last 12 months according to RP Data is…oh, prices went up? Right. Well, that’s my point encapsulated. I'll leave it there for today.
*I met Niall Ferguson back in my dishevelled youth when he interviewed and - quite correctly - rejected me from a place on his Oxford University history course.
They were three good reasons for my failed application. Firstly, I had long hair (which is by no means a black-ball offence for Oxford, but is probably a yellow card). Secondly, I was an opinionated little twit (ditto). Thirdly, and most pertinently, I had ticked the incorrect box on the application form and thus applied for the wrong course, which above all else demonstrates why I was not a suitable candidate for Britain’s most prestigious faculty of learning.
If I do meet Ferguson again, I will tell him this though: his writing is fabulous.