Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

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.

Thursday, 30 August 2012

Desperately seeking approval(s)

ABS shows stymied dwelling approvals
Interesting figures from the Australian Bureau of Statistics today showing a huge drop in the number of dwelling approvals. In particular, note the massive 40%+ drop in approvals for apartments, which increasingly represent the dwelling type that the population demands.

While this appears to be an alarming drop, drilling further into the numbers reveals that the fall is largely due to a drop in approvals in Melbourne, which may be no bad thing itself. Even so, the overall level of approvals remains a little low at 11,306 seasonally adjusted.

Are we building the 'right types' of property?
Housing bears almost pathologically continue to refer to the housing bubble in southern California in the USA as irrefutable evidence for why dwelling prices can drop by 40%.
I, for one, have never even been to California, let alone the southern part thereof, but I’m starting to feel as though I have given how many times I’ve been pilloried with the evidence of the housing bubble that occurred there.
I could waste an awful lot of time and space here listing differences between inner-suburban real estate in Australia and the property dynamics of California (e.g. unemployment as close to zero as we are likely to see in Australia as compared to ≈12.5% in California around the point of the downturn). However, life is short and that would be as close to dead time as…well, being dead actually.

Much of this rather misses the point anyway. Part of the reason that Australian property in desirable locations is expensive, as noted by a number of commentators lately, is the abject failure of developers to build the types and quality of properties that buyers seek.
Population growth

Much of the affordability issue boils down to the sheer weight of increase in the population, which tends to flock to the capital cities. The recent Census showed that the population of NSW increased to 7.30 million in 2011 from 6.82 million in 2006, a staggering increase over five years of close to half a million extra heads (*resist temptation to insert quip here*).
Here are the prevailing and ongoing level of approvals; of particular importance being the approvals of new apartments:
Graph: Dwelling units approved - NSW
It's very difficult to pin down statistics from a macro level to a micro level, but I have the definite sense that the supply of appropriate dwellings is not keeping track with the billowing demand in inner- and middle-ring suburbs of Sydney, as is borne out by the very low (near-zero) vacancy rates of quality property.

Even these statistics only score a glancing hit on the point. Pessimistic commentators furiously post about there being no housing shortage in Australia, citing super-specific examples of individual streets with empty houses on them, or else reams of national statistics which 'empirically prove' there is no such shortage. It's largely balderdash.
If there was a genuine over-supply of appropriate and available dwellings property prices would surely be easing as demanded by that most commonly referenced of study modules, Economics 101.
You don’t buy the market; you buy a property
What we actually have in Australia is a dearth of the right type of property in desirable locations. Property home-buyers and investors need to see past all of this market noise and the associated hogwash.
Those who buy property in Sydney and acquired the type of in-demand property generating strong yields (apartments) in the right areas (the more desirable supply-constrained suburbs of the inner-west) will have seen their property prices appreciate by around a third over the past few years. It's a clear-cut case of appropriate supply failing to track increasing demand.
Property owners don’t 'buy the property market’ in the same way that an equities investor might buy an index, instead they buy individual properties therein. Smart property buyers therefore outperform the market at large every time.
Location, location...location
For a time around a decade ago it became trendy to say that you should not let the location of a property affect your purchasing or investment decision, that "negative gearing should never be accepted" and the only thing that really mattered was a property’s rental yield.
Argh! To paraphrase Margaret Thatcher: “No. No. No.” - I have to disagree with all three of those statements, and very strongly with the first of them.
When it comes to buying property, to paraphrase a second Brit (Welsh social worker and poet David Hughes): location is critical. Don’t even for one second ever think otherwise!
And a moderately negative cash-flow can be accepted by some if it means you are investing in area and property type that will secure outstanding capital growth. While most will sit on the sidelines fretting about an Australia-wide property crash, experienced investors know that while some sectors of the market may ease, there will always be those that are growing appreciably too.
There you go: I’ve disagreed without being disagreeable. I think.

Demand for apartments

Every real estate commentator ought to be known for having at least one hare-brained theory. Here's mine: in a decade's time the median value of an apartment will be higher than that of a house in Australia's major capital cities.

Yes, you read that right: it will become more expensive to own a flat than a house. That's not quite as wacky as it sounds. Demand for medium-density dwellings is growing ever stronger, and as apartments tend to be located more centrally and conveniently than many houses, their median prices are outperforming those of most housing stock at this time.

Check the dwelling price stats later today and you'll begin to see the angle I'm coming from.
Just a wonderful day in Sydney today, spent most of it in cafĂ©’s around the harbour. Busier day tomorrow, as I need to get yet more vaccinations and yet more anti-malarials for my trip up north.

Wednesday, 29 August 2012

Apple iPhone 4S Launch

Thought I would just quickly post a link to this article to add some balance to what seems to be becoming a consensus in Australia: that the cost of living has become unbearable and that we are faced with a dreadful life of austerity.

Australia has become unquestionably expensive, but from reading thousands upon thousands of comments every week about how unfair life is for young people today - dare I say it? - we seem to be turning into a nation of whingers!

It's my own belief that earlier generations never had things much easier than we do today; that's merely a convenient excuse that many of us use to justify our extravagant spending.

Note the 700 metre queue outside the Apple store in Perth where punters happily shelled out $2,000 cash a time for a pair of shiny new i-Phones.

Being a resident of Sydney CBD, I simply could not believe the melee that snaked all the way down George Street and round the corner down York Street (for those not familiar with the terrain, that is a queue of truly epic proportions).

If life really is unsustainably expensive in this country, consumers have a very twisted way of showing it.

Note: the Apple and Samsung launches were by no means exceptional cases. Pitt St. Mall is an absolute consumer-fest every week.

Might interest rates be cut yet again?

You'd better believe it. Perhaps at least three more times in the next 9 months or so if the futures implied yield curve proves to be accurate.

The futures markets have turned more pessimistic on the global outlook of late, with particular concerns over a possible slowdown in China and impact on commodity prices (and today, a growing feeling that Ben Bernanke is likely to desist from undertaking the so-called 'QE3' quantitative easing campaign in the US).

Of course, I am forever one for noting the fallacy of making predictions, for "forecasting is very difficult. Particularly about the future."

But if I had to guess at a likely course of progress, it would be:
  • The Reserve Bank to hold fire until the next inflation print on 24 October
  • If CPI prints at below 0.6% for the quarter for the trimmed mean and weighted median readings, the cash rate to be cut by 0.25% before Xmas to 3.25%.
There you are: I'll tag the post as a reminder.

Saturday, 25 August 2012

Sydney results

Sydney Swans gave up another huge lead to lose a nailbiter in the last few seconds to Hawthorn Hawks, going down by 102-95. The Hawks displace the Swans at the top of the ladder and look all set to claim the minor premiership. 

Sydney auction clearance rate was a solid if not spectacular at 63%.

Just a beautiful afternoon, though.

Reporting season: would you like to see some scary 5 year charts?

Just a quick and slightly eclectic post from me today. After a great-value dinner at Jamie Oliver's Italian in Sydney last night, I've just returned from a breakfast in Bondi at Easts Leagues Club and a stroll down Woollahra's Queens St - if there's a better way to spend a Saturday morning after getting up early then I haven't found it.

It's been a really fascinating week on the stock markets as we move through reporting season. Check out these lemons:

-BlueScope Steel (BSL) giving back recent gains and falling back by around 10% back to a pitiful 36.5 cents (from around $8.00 before the financial crisis) - BSL is being hurt by the strong Australian dollar and tales of paying "silly money" to employees and contractors alike;

-Qantas (QAN) head honcho Alan Joyce bravely reporting "an underlying net profit" but actually reporting a diabolical net loss after tax of around $250million - due to a record fuel bill, restructuring costs and a major industrial dispute that cost the company around $200 million - share price down to $1.16 from well above $5.50 before the GFC;

-Fairfax Media (FXJ) shares being hammered by nearly 20%, down to an utterly desperate 46 cents from above $4.00 before the GFC.

Cost of employment in Australia

All of these companies at various times have been market darlings, but have all found the high cost of being an Australian-domiciled business very tough.

Personally, I think this will see the future of employment in Australia move to one of there being many more contractors (including myself), more outsourcing and a lower percentage of full time employees as companies look to cut back on the level of their on-costs.

Who wants to be (inherit) a billionaire?

The Fairfax Media (FXJ) story has been a particularly interesting one, with iron ore magnate Georgina 'Gina' Rinehart reportedly attempting unsuccessfully trying to offload a 5% stake yesterday (after FXJ announced a painful $2.8 billion write-down), precipitating a 12% fall in the FXJ share price to a record low of 44.5 cents at one stage.

There is more than a little speculation that this may have been a ruse to drive down the share price prior to a takeover bid by the mining billionairess, who presently owns a strategic 14.99% holding, deliberately under the 15% threshold as demanded by FXJ's corporate insurance policy (Rinehart previously held a 18.75% stake). 

The 5 year share price history of FXJ tells its own story, newspaper owners and media companies face a tough road ahead as the world moves increasingly towards electronic forms of media and communication.

Ask an 'intelligent' adult to look at these charts and they are likely to say: "the prices have gone down loads, great time to buy!". Ask a 5 year old child and they will say: "those graphs are going down!". Guess who is right most often?

Will be very interesting to see what auction clearance rates come out of today's wonderful weather. It should give us a clear indicator of confidence in the property markets.

Heading to the SCG myself now to watch the AFL...Sydney are currently top of the ladder, though I have probably just jinxed that...Go Swannies!

While on the subject of media, it's a busy week ahead for me: you can read me in Good Reading Magazine, Wealth Professional Magazine (Financial Planners mag) and Australian Broker Magazine. I will post versions on this Blog page so you can read them easily in one place. I'm a nice guy like that. Enjoy the weekend all!

Friday, 24 August 2012

Reserve Bank Guv tells us to cheer up: again (& notes that the "gentle decline" in dwelling prices may be over)

You have to laugh. With some of the press you read today, you would think that we were living through some kind of Armageddon.

Yet, as has been the pattern over recent months, when Reserve Bank Governor Glenn Stevens addressed the House of Representatives he once again took on a positive outlook.

In particular I noted this comment, which implies that the peak of the mining investment boom might be a couple of years away yet:

"Looking ahead, the peak of the resource investment boom as share of GDP – the highest such peak in at least a century – will occur within the next year or two. After that the rate of resource investment is likely to decline, while the export shipments of the resources themselves will pick up. By then we might expect that some other sectors that have been weak of late, like residential and non-residential construction, might be starting to pick up."

Also, I picked out this comment:

"...the Chinese economy looks like it has slowed to a pace of growth that is likely to be more sustainable. This is, though, clearly below the pace seen for much of the recent past and the implications of this new pace of growth for the trajectory of demand for various commodities are still being worked through in the relevant markets. Commodity prices have declined. Australia's terms of trade peaked about a year ago. However, they remain high in comparison with most of the past century."

And for those interested in the property markets, Stevens had this to say:

"It is too early to tell how much difference the sequence of decisions to lower interest rates late last year and in the middle of this year has made to the economy, though we can observe that dwelling prices may have stopped their earlier gentle decline, and business credit has been growing at its fastest pace for three years."

Read that again. "Dwelling prices may have stopped their gentle decline". Now doesn't that wording sound a million miles away from the scaremongering we read in various forums?! (or 'fora' depending on your Latin preferences with regards to plurals).

Overall, while there were naturally some cautionary notes, Stevens tends to highlight the positives such as increased consumer spending, expansion of GDP, moderate inflation and benign unemployment.

It feels as though he is encouraging us not to 'talk ourselves into' a recession. If interested, you can read his full speech here.

The stock market looks set for a weak close to the week's trading, but even so the market is approaching the peak that it reached back at the start of May, it having experienced quite a wobble (of ≈10%) in the intervening period reflecting a "bout of anxiety" over the Euro.

Rosier climes ahead? We certainly hope so!

Thursday, 23 August 2012

3 year fixed rate mortgages from 5.5% - lowest since the GFC

Down, down, deeper and down for those fixed rate mortgages on offer.

It now seems uncertain which way interest rates will move next. Futures markets are still pricing in a couple of rate cuts over the next 6 months but positive retail data, strong GDP growth (mainly fuelled by mining investment it would seem) and low unemployment all suggest the next rate move might be upwards.

On the other side of the coin the Aussie dollar was as high as 105.46 cents at one point today and inflation is still trending low.

While most are still opting for variable rate mortgages as is the norm in Australia, many investors and homebuyers will become tempted to fix a mortgage at those kind of rates, the banks dropping rates as competition for business hots up.

API reports here that while the average fixed rate is below 6%, there are deals out there as low at 5.5%.


Unseasonably warm in Sydney today, hitting 30 degrees which is most unusual for the middle of winter. Paying for it now though, a tremendous electrical storm has just come in from the west.

Economic Refugees flooding Australia! (from NZ)

I've long argued that the number of asylum seekers that actually arrive in Australia receive a hugely disproportionate amount of press airtime and national debate.

Interestingly, though, as the Closer Economic Relations agreement that Australia hold with New Zealand means Australia is unable to control its trans-Tasman border - there are more than five times as many Kiwis coming in each year as there are asylum seekers!

Due to an agreement with New Zealand, Australia is actually required to accept as permanent or long-term residents as many of NZ’s 4.4 million residents as want to move here.

If the present trends persist Australia’s annual intake from New Zealand will exceed 100,000 within half a decade!
As Economic journo Peter Martin notes in his blog:

An extraordinary 53,900 New Zealanders moved to Australia in the year to July - around the entire population of New Plymouth, New Zealand’s eleventh biggest city.

The number dwarfs the 9,607 asylum seekers who arrived in Australian waters by boat.

The record emigration of 53,900 is a dramatic increase from the same period a year before when 46,450 New Zealanders moved to Australia - itself a record at the time.

“These are economic refugees,” New Zealand Council of Trade Unions secretary Peter Conway told The Age.

New Zealand’s unemployment rate is 6.8 per cent, little changed since the economic crisis. Australia’s is 5.2 per cent, well down on the peak of 5.9 per cent reached during the crisis.

“New Zealand was hit much harder than Australia,” Mr Conway said. “We didn’t have the big boost in government spending you had that pushed unemployment back down. Before the crisis our unemployment rate was briefly the best in the OECD. It is now mid-range, much worse than yours.”

New Zealand wages are around 20 per cent lower than Australia's when measured in terms of purchasing power."

I sometimes feel like a lone voice on the subject, but if the world has 43.7 million refugees as estimated by the UNHCR, then perhaps it isn't quite so unreasonable that a country of the size and wealth of Australia can find a home for 9,000 of them.

We sometimes seem to forget that without immigration, Australia as we know it would not exist.


Struggling not to sign off the post with #justsayin - obviously been spending too much time on Twitter.

Wednesday, 22 August 2012

Reading the charts left to right

Read the chart left to right
Two reasons that are often given for not investing now are:
1 – “But prices are at all-time highs!”
2 – “But prices have been falling!”
The trouble is that you could pick almost any time in history and either (1) or (2) would be the case.
One of the problems for investors is that prices in charts trend upwards over time, they nearly always appear to be expensive if you use a historical chart as your basis for measurement.
Stock markets crashed in 1987 and were haemorrhaged again in 1994 – and yet had we loaded up on an index of shares at any given point around that time and held on them until today we would be very happy.

The same is true of property meltdowns experienced in the 1890s, the early 1930s and early 1940s.
We would all dearly love the opportunity to buy at those prices today.
Instead of reading the chart from right to left – looking back at what has gone before – we should be reading the chart from left to right, and assessing what is likely to come.
We should also consider that although the language used in respect of market corrections often makes them sound disastrous and as though the world is ending, this may only be the case depending on your expected time horizon for success.
Time horizons
The biggest problem, then, for investors seems to be the selecting of appropriate time horizons.
The best time horizon for an investment in income producing assets is your lifetime. If that is too big a picture to paint then somewhere around 30-40 years might be better.
Yet today’s news stories seem destined to focus on ever-shorter time horizons: what will happen next year? What will happen next month? What will happen tomorrow?
The fallacy of predictions
Humans are notoriously bad at making predictions, yet we all seem to enjoy making them. But the truth is that we have no real hope of making an accurate market prediction over a short-term time horizon.
That’s not to say that there is any harm in trying, but if we build an investment strategy about what might happen in the next year or three, then we are introducing so much luck into the equation that we are effectively punting or gambling rather than investing.
The language used by market analysts can be deceiving and the level of supposed accuracy can mislead us.
Property market analysts are notorious in this regard: “We forecast the regional property markets of Western Australia to grow by 17.5% over the next three years”.
If you consider the number of factors that must be rolled into such a prediction, the whole exercise becomes slightly ludicrous. The effect of economic growth in China and the USA? The outcome of the Eurozone crisis?
Even the world’s leading economists have no idea how these events will play out, so it’s interesting when property market analysts seem to believe that they can factor them in.
What can we do?
We need to be able to move beyond the fear of what might happen tomorrow or next month.
Over the short-term share markets are notoriously unpredictable yet they tend to return to the mean – average valuations – over the longer term.
In property, based upon projected population growth, likely supply and the target range of inflation, we might make a reasonable assessment that prices will be a decade or two's time, but shorter-term predictions…well, I wouldn’t bet the house on them that's all.

Tuesday, 21 August 2012

...but futures markets less sure

Yield curve still implies a couple more interest rate cuts expected though.

Reserve Bank minutes - more rate cuts unlikely for a while at least...

The Reserve Bank (RBA) released its August board meeting minutes today here.

Everything is pointing towards interest rates staying right where they are for now (a little stability may be no bad thing for confidence).

The RBA notes how the economy outside of resources remains a little subdued, while noting on housing that:

"...there were tentative signs that housing market conditions and residential building activity were starting to pick up after being weak for some time. Prices had increased a little in recent months, but remained somewhat lower than a year ago. Demand for housing finance was broadly unchanged over the year...earlier falls in interest rates and rising rental yields were likely to have increased the attractiveness of housing investment."

Monday, 20 August 2012

Property holding costs

Neat article by my buddy Emma Challands here on the associated costs of holding investment property.


Spent many hours on Sydney harbourside and in The Rocks yesterday with broker Timothy Cutler of FP Marine. Residents of Sydney can rest assured that the world has been put to rights on most subjects!

What a fabulous city we are lucky to live in.

Saturday, 18 August 2012

Dow Jones bounces back to near all-time highs

Interesting screen-grab from Yahoo finance.

Worthy of note that the Aussie market has fared nowhere near as well, partly reflective of the strength of the dollar which discourages investors from overseas.


All set to go and watch the rugby. Go Wallabies!

Friday, 17 August 2012

The Yield Trap

The Yield Trap
People often tell me they have found a good investment because of its high yield or income. Today I explode a few myths about why yield can be a very misleading indicator of the quality of an investment.
We need to understand the dimensions of yield and growth and how they interact with each other. This is beautifully illustrated by Peter Thornhill in his share investment book Motivated Money.
Back in 1980, he notes, term deposits were paying around 10% interest, so on the face of it were far more attractive investments than, for example, a portfolio of industrial shares, which were yielding only around half of this percentage. High yield (and supposedly low risk) investments tend to attract retirees who seek certainty of income.
There is a hidden trap, however, and it is this: a high yield is not the same thing as a high income.
High yield does not mean high income
A yield is simply a spot figure calculated at a point in time. Income of $100 on an investment of $1,000 gives a yield of 10%. Superficially attractive. Income is the dollar figure that the investment pays you over time.
Suppose a retiree invested $100,000 in term deposits in 1980. Income of $10,000 in the first year may seem more attractive than the lower dividend yield of shares.
By 1993, however, an initial $100,000 portfolio of industrial shares, whilst still paying a ‘weaker’ dividend yield of around 5%, was paying income of closer to $20,000, and by 2006 a huge dividend income of around $75,000 on a portfolio value of a massive $1.75 million.
What happens to the capital value and income of a term deposit over that time? Oh dear.

So much for the high yield!
Investing in high yielding investments upon retirement such as term deposits might only be a good investment if you plan on dying quickly. What we actually want, rather than high yield, is high income over time.
The percentage yields on shares over the long term tends to fluctuate with prevailing sentiment and prices, so yields do become comparatively higher when share prices crash (and lower when prices boom). Thus a stock market meltdown is a great time to buy both for yield and future capital growth.
The yield trap in property
There is much talk of the benefits of investing in properties which generate a high yield too. We do need to note, however, that high yields tend to exist where capital growth has been restricted due to uninspiring levels of demand.
Very similar principles apply to property as they do to shares. When prices are high, yields tend to be lower (and vice versa), but over a long time horizon we might expect rental yields to revert to a mean or average, and therefore what we actually want is properties which experience great capital growth. The rental yields will generally follow over time.
Counter-cyclical property investors get great yields anyway!
If you elect to invest counter-cyclically in property when sentiment is low, you can attain excellent yields on prime location property – just as share investors who invest after a crash get great dividend yields on blue chip shares.
The chart shows the phenomenal increase in dwelling prices in Melbourne experienced since 2007 as compared to other capital cities.
Obtaining higher yields counter-cyclically
Depending upon which provider you source the data from, the average rental yields you might expect to see on apartments range from a mediocre 4.5% for Melbourne to somewhere around 5%-5.4% for Sydney, and higher still for Brisbane at 5.5%.
In other words, by electing to invest in property which has recently experienced sharply rising rents but not capital growth, just like share investors, counter-cyclical property investors expect to receive both future capital growth and a solid yield too.
Smart investors look for rental yields above the quoted average and manufacture higher yields too by adding value to properties through cosmetic renovation.
Thus if average properties in prestige suburbs can easily attain 5.5% yields we should question how much value  there may be in seeking out yields of 6% if this involves investing in an area which over the long term will not experience as great a level of demand?
Apartments in the inner suburbs of Sydney, for example, will over the coming decades experience a phenomenal increase in demand due to population growth, while construction remains inadequate and costly.
What does this mean in real life?
OK, so I may have bored you with the theory. What does it mean in practice? What can growth do for us as investors?
Being an Anglo-Aussie I frequently refer back to what is happening in England for clues, as some of the property markets there are more developed. While many property investors in the UK regions who bought in the period after 2005 are owners of property with negative equity, prices in London continue to surge to the highest they have ever been.
Ask people who bought a house back in the 1980s and 1990s in Britain how they've fared and they say: “I have done well”. Why? Because the property is worth more in dollar terms than they paid for it.
Buy have they really done well? Most likely they have no idea because mostly they have few other investments and no worthwhile benchmark against which to measure performance.
Typically, house prices moved upwards through the inflationary 1980s and somewhat further as credit growth expanded in the 1990s, but have tailed off in most areas outside London over recent years.
The winners
I know of people, though, including some Aussies, who many years ago bought only one or two properties in prestige areas of London such as Mayfair and the West End, who now have little interest in paid employment because the price of their properties has increased so substantially.

As you might expect, whilst their yields remain relatively low on a spot figure percentage of property price, their rental income is staggering. A 3 bedroom flat in Mayfair today tends to rent for somewhere between £125,000 and £350,000 per annum (≃$200,000-$500,000).

So much for those lower yields!
Expect to see similar trends unfolding in Australia, with properties in prestige suburbs of the major capital cities over time being massive outperformers both in terms of rental income and capital growth. Lower yields, maybe, but far, far higher income. Understand this fundamental difference and you can be a winner too.

Australian housing affordability improves over past year

Interesting article from MacroBusiness here, which shows that Australian housing affordability has improved on a year earlier.

The Economist's measure of house prices - with reference to deviation of prices from long-term average rents and disposable incomes per capita - has scored Australia particularly high for some years now (which you would indeed expect given the very strong rise in house prices over time in Australia).

The Economist still lists Australia as significantly overvalued though variously now less so on its measurement criteria than Canada, Hong Kong, France, Singapore, Netherlands, New Zealand and Belgium.

It was suggested by our own Reserve Bank yesterday that property prices are unlikely to fall significantly with Australia's unemployment level so low. Mortgage rates too remain at historically low levels with the cash rate on hold at just 3.50% which brings affordability to the party.

As is usually the case, house price movements have not been uniform across Australia, with Sydney lagging siginificantly over the last decade.

Personally, I would look towards apartments rather than houses for future growth in the capital cities, though houses can show great performance in some areas too.

Wednesday, 15 August 2012

Wages firing up, surprisingly so

Huh, shows what I know!

I was fairly convinced that wages growth would be pretty ordinary today, and yet the ABS tells us that growth was a very healthy 3.7% for the past 12 months year-on-year.

Now admittedly, my world view for the past few months has been regrettably Sydney-centric in its formation - on a good day I might make it down to the far end of Pitt St Mall, and rare is the occasion that I venture into postcodes numbering higher than '2000' - but my good old friend the apocryphal evidence (i.e. chatting to mates on the phone and at the AFL) suggested that wages growth would be much weaker than this.

What do I read into the numbers? Well, it's mining driving the growth, right?

The graph below backs me up on this view as it is the resources-rich state of Western Australia that is absolutely roaring ahead with respect to private sector wages prices growth at 5% per annum.

Come to think of it, those I know who have seen little or no pay rises work in the industrials, and those who are making a motza work in mining.

So it does make sense overall, in a two-speed kind of way.

Graph: WPI—Annual change: original, Total hourly rates of pay excluding bonuses—States/Territories, by sector, Jun Qtr 2012

So much for the margin squeeze! (CBA slam-dunks a $7 billion profit - after tax)

In spite of muchos talk of higher funding costs, Commonwealth Bank today announced a full year cash profit after tax of a shade over $7.1 billion. That's the highest ever reported in Australia by a non-mining company.

While embittered mortgage holders remain morose that banks are not passing on the full rate cuts announced by the Reserve Bank, Commonwealth and the rest of the gang continue to do exactly what they are compelled to do by their constitutions: maximise profits and returns for their owners, the shareholders.

This is the downside to only having four major banks. The restrictions on mergers, takeovers and indeed, any significant change in the banking system at all, all make for more stability, but the banks do operate a form of hegemony, so mortgage holders have little direct defence if they get stiffed on mortgage rates by the majors. They may simply have to look outside of the big banks in search of better rates.

The Reserve Bank stats warn us that on a price-to-book-value ratio measurement at least, major Aussie banks are the among the highest valued in world. Perhaps so, but $7 billion after tax is one heck of an earnings report (and the price/earnings ratios the banks trade at are by no means spectacular, from around just 9.7 times for NAB to approximately 12.4 for Commonwealth).

The earnings were pretty much in line with what analysts expected, but shares in CommBank (CBA) still crept by more than 1% to above $56 per share.

CBA is still very popular with investors due to its healthy dividend yields, its full year dividend paying a whopping $3.34 per share. That's very nice. Compare and contrast to the weak dividend yields of our resources stocks.
Note: CommBank serves up one quarter of Australia's housing loans. Commonwealth announced today that its loan impairment expenses dropped by 15% in 2012.

They instead elect to report here on a minor and inconsequential rise in mortgage delinquincies between Q1 and Q2 2012, despite them actually being stable for the first half of the year.

I suppose we all find what we are looking for if we look hard enough. 'DYOR'!

RT: Kochie on US population

Great stat from Kochie online:

By way of comparison,  the Australian population is relatively tiny but growing rapidly.

As recorded in the Census the Aussie population increased sharply by 8.3% from 20,061,646 in 2006 to 21,727,158 in 2011.

At this moment in time the population clock reads: 22,700,268, though in the few minutes it takes me to publish this post it will have ticked up by a few more.

Monday, 13 August 2012

Q: Where are property investors hitting the market?

You have to drill well into today's ABS numbers to find the answer (well actually you don't, as I have kindly done the drilling for you).

And besides, if you read this Blog regularly you should already know the answer...

Q: Where are property investors hitting the market?

A: NSW and Queensland, where lending finance for investment has shown strong year-on-year growth.

This is in contrast to Victoria, where, as we might expect, investor sentiment is now low following a boom in prices.

Read me in The Week magazine

You can read my piece in the fantastic The Week magazine...well, this week. I've previewed it for you below.

My longer 5 page article in The Wanderer magazine's August issue is out on and sale now, and in the September issues of Good Reading magazine and Australian Broker magazine you will be able to read exactly what they have to say about my book.

You can also read my writing in the usual places, such as Property Update, which is Australia's leading property website and newsletter, with 50,000 subscribers.

Reversion to the mean

Mean reversion
‘Reversion to the mean’ – you may have heard the phrase, but what does it refer to?
Mean reversion is a mathematical concept which notes that while the prevailing price of an asset is sometimes overvalued and sometimes undervalued, over time it will tend to revert towards a long-term average.

The idea is often used by traders in the stock markets so that when a share price is considered to be below its long-term average or intrinsic value then it is deemed to be a ‘buy’ and if it is above its long-term average it is marked as a ‘sell’.
If we buy when prices are attractive then theory says that eventually the price is likely to revert to the average valuation and we will profit.
The concept can easily be applied to other asset classes to include including exchange rates, commodities or real estate.
The flaw in mean reversion for stock prices
There is one fatal flaw in the mean reversion concept for the behaviour of share prices. If you stop to think about it, you might be able to work out what it is.
The flaw is that the mathematics takes no account of the legal status of a company which is able to file for bankruptcy. In other words, if a company becomes insolvent, a stock price can hit zero and stay there forever: it will never return to an average price.
While property prices can rise and then fall sharply as we have seen in the United States, they will never hit zero as the land will always retain value, particularly if it is land which is in continual high demand.
Long-term trends
If we look at the long-term trend of market prices we can begin to make some useful observations.
Firstly, we can note that the trend for both stocks and property is an upwards one. Secondly, that while at times prices become speculatively high or demoralisingly low, prices do tend to revert to an average over time.

We can also see that while market crashes seem devastating when they are occurring (2008-2009 still currently looks extremely painful in the rear-view mirror), experienced investors wisely consider that ‘this too shall pass’.
Observe the bursting of the technology stock bubble in 2002, which now appears to be of less consequence. The sheer terror of the 1987 Black Monday crash unravelling now begins to resemble a minor blip in the chart.
Seasoned investors sometimes delete sections of price charts and ask those who are less experienced to consider what would happen to their investing psyche if they were able to ‘switch off' the market noise for long periods (something which property investors are usually better able to do than share investors due to the historic lack of a daily quoted market price).
History shows us that while prices can crash sharply, the crashes often follow a period of irrational exuberance. The ‘huge’ stock market crashes of 1929 (Dow Jones falling from 380 to 200) and 1987 (the Dow again falling by approximately 500 points to around 1,750), for example, were both immediately preceded by irrational appreciation in market valuations.

Despite crashes continuing to occur cyclically, today the Dow Jones sits far higher at around 13,200 points.
Speed limits
While prices can at various times steam far ahead of intrinsic values, market prices ultimately do have a speed limit.
The natural speed limit for real estate prices is ultimately our ability to service mortgage repayments. Periodically dwelling price-to-income ratios may become very high indeed (Hong Kong being a prime contemporary example) but with property prices sensitive to interest rates, there may come a critical point where property ceases to be affordable.
In this context, the easing of property values and the slicing of the cash interest rate to 3.50% in Australia has delivered a welcome affordability dividend through 2011 and 2012 to date.
Of course, it is very difficult to calculate an intrinsic value for residential property, because values (perhaps one should say prices) tend to be based as much around what property is worth to emotion-driven homeowners as much as they are by imputed rents or yields for investors.

What we can observe from price history charts and from falling interest rates is that affordability is better than it has been, and in some cities (e.g. Sydney) affordability of certain properties has increased dramatically since early 2004.
The natural speed limit for stock prices is governed by the ability of companies to generate cash.
The technology stock bubble showed that prices can become hugely irrational for a period of time, but ultimately a company must start to generate cash to justify its valuation (the rational valuation of a company is the sum of its future cash-generating ability adjusted for risk and discounted back to today's value).

The companies that never generated any cash or profits during and after the tech stock boom eventually became valued at somehwere close to $nil. No cash-generating ability ultimately equals no value.
Conclusion: three lessons
There are three things that we should learn from this.
1 - Firstly, it can be hugely beneficial to attempt to time the market.
In property, this means we should look to invest in cities which are due to experience a boom in population and growing household incomes which will allow values to increase in the future by increasing the speed limit for prices. We should also look to cities which have not recently experienced booming values.
In stocks, this means we should look to buy when price-earnings ratios are below their long-term average.
2 - Secondly, as share prices do not always revert to the mean (i.e. companies can go bust, Enron-style) we should not risk all of our investment capital in a handful of company stocks – some diversification is preferable, whether it is through investing in a more diversified portfolio of stocks or into other asset classes such as property or fixed interest investments such as bonds.
3 - Thirdly, history shows us that is actually impossible to consistently time the market perfectly, but if we allow ourselves time in the market, growth asset classes tend to be forgiving of imperfect timing.
What a wonderful Olympics it has been, it will be very sad when there is nothing for us to watch over the next week!
Still recovering from City2Surf, but don’t feel too stiff today. Sydney Marathon is in five weeks – I did the Marathon here a few years ago and vowed never to do it again…now I’m thinking, should I...could I…?

Sunday, 12 August 2012

Saturday, 11 August 2012

Perception and reality

Ask around about the current climate for investors and what kind of words might you hear?

Volatile, dangerous, uncertain, double dip, global depression, Eurozone crisis, debt contagion, asset price bubbles...

I'm not saying any of those words are wrong, but we do need to strike a balance between what we believe is happening and reality. The media loves to focus on short-term shocks rather than long term reality.

If you believe it is a bad time to invest it probably is: for you. Your belief becomes your reality.

Here's what has actually happened to the Dow Jones since 2009 (even just by buying the index you would have doubled your money).


Some seriously wild weather in Sydney last 48 hours. Could be quite an impact on tomorrow's charity run and the number of competitors unless it lightens up.

Friday, 10 August 2012

RP Data figures

Interesting reading from RP Data's relatively new daily home value index!


I'm running Sydney's City2Surf bright and early on Sunday morning in a rather fetching yellow T-Shirt for OzHarvest. Wish me luck (I will need it).

Although I've done the City2Surf a number of times before I have still never managed to run the whole course; I can just never manage Heartbreak Hill! See you down at Bondi Beach after the event.

Thursday, 9 August 2012

The Aussie 'scorecard'

Pretty darned good, all up.

GDP Growth
Dwelling prices
Underlying inflation
Cash rate
106.1 US cents