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.

Wednesday, 31 October 2012

Jargon-busting: Goodwill

Let's say a computing company called Computersoft has net assets in its accounts (cash, fixed assets and amounts due from customers etc. less its liabilities) of $10 million.

But a bigger business called XYZ Inc.  might deem Computersoft to be worth, say, $100 million, because of its intangible assets: its amazing computer products, its huge and loyal customer base and its brand name.

If XYZ then pays $100 million to buy Computersoft but only gets $10 million in tangible net assets, this gives the bean-counters (accountants) a bit of a problem.

Double-entry book-keeping requires that every accounting entry puts a balancing debit and a credit into the books or 'general ledger', but here we have a mismatch.

The answer is to lob the balancing figure of $90 million on to XYZ's balance sheet under the heading "goodwill" which is classified as an intangible asset.

From an audit perspective the auditor will review the goodwill balance at the reporting date (e.g. 30 June) for impairment - in other words, to see whether the intangible assets to be included in the financial statements or Annual Report are still worth as much as when the goodwill journal entry was initially posted.

So there you go: next time someone says that a company has had to write off or impair its goodwill, you'll know what this means. The most likely reason this happens is that the company paid a lot of money for something that, ultimately, was not worth that much.

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Just to really bend your mind, what happens in the unlikely event of an acquiring company paying less than the net assets of the business it buys?

Under the old UK accounting standards "negative goodwill" was created and amortised (depreciated) through to the profit and loss account or income statement over time - a nonsense accounting entry if ever there was one.

These days, both Australia and the UK are governed by International Accounting Standards and the new IFRS rules say that you have to expense (immediately dump to the income statement) any negative goodwill rather than carry it on the balance sheet. Much more sensible.

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My birthday tomorrow. And Lordy, I've thrashed out a few words today. Expect a couple of photos tomorrow but not so many words!
Two more public holidays (again!) in East Timor so there's a general air of relaxation in Dili in any case.

NSW stuffs up its accounts by...errrm...$1 BILLION

After all of that tax stuff I think I deserve a 'LOL'. So, thanks to the government and Sydney Morning Herald for providing it here:
“NSW has moved from deficit to surplus due to "totally unacceptable" errors in its accounts, the Auditor-General says.
The government had allowed the budget deficit to bounce around "like a pinball machine", said Peter Achterstraat as he announced a budget result that was $1 billion better than predicted in the 2012-13 budget papers published in June 2012.
Total revenues were close to $600 million higher and total expenses were over $400 million lower than forecast. An expected deficit of $337 million in the middle of June became a surplus of $680 million by the end of June.
Mr Achterstraat was critical of government departments, saying they needed to tighten up their budget predictions and financial reporting. He said he was not satisfied with the quality of financial accounts, saying they were "all over the shop".
There were 37 errors of over $20 million each in accounts the Auditor-General's office identified and corrected. "I would say that a $1 million error is unfortunate, a $10 million error is undesirable but a $100 million error is totally unacceptable," he said.
"There is a lack of effective financial management capability in this state and it must improve. The state needs better systems, better processes and appropriately skilled and qualified people to produce the financial information it needs to properly manage public resources."
The Auditor General said Treasury should take steps to improve the accuracy of information it uses to prepare government reports."

Tuesday, 30 October 2012

Jargon-busting: tradeables inflation

A lot of talk around at the moment about the rebound in inflation being caused by the Aussie dollar finally having stopped appreciating and thus increasing tradeables inflation.

That's cool. But what are tradeables?

The Reserve Bank kindly explains:

"Tradable items are things whose prices are largely determined on the world market like oil, motor vehicles and clothing. As such, the prices of tradable items are heavily influenced by exchange rate movements.

By comparison, non-tradables refers to things that are not readily exported or imported, like medical services, housing and haircuts. As such, their prices are largely determined domestically."

With regard to whether it should be tradeable or tradable - my spelling being the former...

Well, the Reserve Bank has adopted the American spelling, which now seems to have been accepted as the normalized* spelling by most dictionaries. Mine's better.

*(argh).

$80 billion of New York Real Estate threatened by Hurricane

Not convinced this is fair dinkum, but it would be a fantastic photo if it was.

This is an amazing shot of New York today with the Frankenstorm bearing down. Nature is so powerful, yet so beautiful.

...but implied yield curve still inverted

But, the implied yield curve is still pricing in a nadir in the cash rate of just 2.50%, finally troughing out by September next year.

Pessimistic times...

Rate cut less likely due to positive China news...

At COB yesterday the markets were pricing in a 63% chance of interest rates being cut to just 3.00% on November 6.

However, overnight it was reported that Chinese industrial profits are rebounding - expecting those odds to shorten fairly dramatically today.



Monday, 29 October 2012

Hurricane closes New York Stock Exchange

From Motley Fool:

"... a massive hurricane is rapidly descending onto the east coast of the US, resulting in mandatory evacuations of 375,000 people in low-lying areas of New York City and the shutdown of public transport, including the subway.

Grocery stores have seen people lining up to stock up on emergency supplies, like tinned food, batteries, water and candles. Drug (chemist) stores and liquor retailers are apparently doing a roaring trade.

Hurricane Sandy is expected to collide with two other cold weather systems to create a giant super storm. Waves of up to 3 metres and extremely high winds are expected.

The New York Stock Exchange (NYSE) will be closed tonight our time, and possibly tomorrow night, with the exchange stating that the safety of its employees must be its priority.

All NYSE markets will be closed, including electronic trading, not just the floor trading operations. The Nasdaq stock market will also be closed on Monday."

Currency issues

Currency issues
I post on this Blog fairly often about the issues facing the Australian dollar, it having appreciated from around 65 US cents in the financial crisis to well above parity in recent times.
In East Timor, currency issues of a different nature are faced.
Here, one of the major issues facing the Government and the Central Bank is how much of the sizeable Petroleum Fund should be distributed and spent by the Government in any given year.
While the Government wants to spend to stimulate growth the fund should not distribute so much capital that the Estimated Sustainable Income (ESI) of the fund is adversely impacted.
And secondly, if too much money is pumped into the economy then this introduces an inflation risk as more currency chases a similar level of goods.
Dirty money
On a more practical level, there is another currency problem of a different nature.
Timor now uses US dollars as its currency (though the country still uses its own centavos coins) which deflects hyperinflation risk as the US currency is considered to be relatively stable and instils confidence in its value.
Unfortunately, some of the notes in Timor have been in circulation for a number of proverbial donkey-years, are limp and utterly filthy, and indeed are often barely recognisable as greenback notes at all.
Many of the $1 notes in particular you would hardly deem worthy for use as toilet tissue (though, that said, you might on occasion consider it as most restrooms do not provide this luxury).
Some forward-thinking expat bars refuse to accept tender of more than 20 years old, but mostly we just pass around very dirty old notes.

As locals might say: “La diak!” - not good.

Sunday, 28 October 2012

Public transport issues

I mentioned a while back I would post of photo of a local Mikrolet in Dili (and this ain't even a busy one!).

Fancy a ride for 20 cents?

Joye on November's coin flip interest rate decision

Neat summary of where Australia stands on the November interest rate decision from Christopher Joye (my bold).

Read the full article here.

"Most economists were expecting a very weak core inflation result for the September quarter. Instead, the weighted median printed at 0.8%, the trimmed mean came in at 0.7%, and the CPI ex volatile items was a very high 1.3%. Carbon effects were arguably much lower than the RBA and Treasury were anticipating, although we will never really know.

To make matters worse, the second quarter trimmed mean and weighted median revised up to 0.6% and 0.7%, respectively. In year-ended terms, the weighted median and trimmed mean, even with the new CPI method (including new seasonal adjustments and expenditure class weights) have now been revised up to 2.6% and 2.4%, respectively. Did somebody say Australia had really low underlying inflation? If they did, they were wrong.

Notwithstanding the above, and a recent slump in market pricing for a November rate cut from a confident 85% to a coin toss, Westpac and UBS have retained their cut call alongside 18 other economists polled by Bloomberg on Friday. I note that many economists changed their October call from no move to a cut after a clear signal from media commentators in early September.

Following the upside inflation surprise, ANZ, Barclays, Citigroup, TDS, Capital Economics, Goldman Sachs, and JP Morgan are now are predicting no move in November. This makes sense to me given the RBA has already pre-emptively cut 100 basis points since May, partly on the basis of the questionable supposition that core inflation in Australia was going to be very benign.

We now have a large amount of monetary stimulus just starting to work its way through the economy with core inflation over the last six months having been officially expanding in the top half of the RBA's target band. As I've predicted several times here before, the rebound in core inflation has been correlated with a bounce back in tradeables inflation as the Aussie dollar has stopped appreciating.

I also note, with interest, the very firm auction clearance rates this weekend despite the big increase in the volume of sales held."

Saturday, 27 October 2012

The Granularity of Growth

Companies need to grow
We know that companies need to grow to survive and thrive. Growth is healthy and it inspires employees towards pursuing great goals.
Companies which do not pursue growth can become stagnant or complacent and may eventually become obsolete.
Listed companies are compelled to seek growth and expand revenues and profits in order to maximise shareholder returns.
The Granularity of Growth
In 2008, three authors released a book entitled The Granularity of Growth which revealed some surprising conclusions.
The authors analysed some 400 of the world’s largest global companies to determine where growth is sourced from.
One of their conclusions was that simply increasing market share is seldom a driver of growth for the major companies.
Instead, they determined that where companies choose to compete is key. That is to say, their choice of markets and segments is more important than how much of it they control.
The key, argue the authors, is to focus on granularity – to break down the big picture into smaller parts and focus on the outstanding markets.
A second factor highlighted is that the level of M&A (merger and acquisition activity) transactions undertaken plays a key role in determining the level of growth of a company.
How management needs to think to source growth
The authors determined the following key factors that management seeking growth should follow:
·         Research markets thoroughly
·         Don’t focus only on the big picture – dig deeper and down to a granular level
·         Allocate time as appropriate
·         Don’t overcomplicate the strategy
Granularity in investment
There are a number of clear parallels between how the management of a company needs to think and an individual investor should act.
In fact, the smartest investors do treat their investing as a business.
Picture yourself as the CEO and Chairman of Your Personal Wealth Pty Ltd and aim to manage your business as diligently as Warren Buffett does at Berkshire Hathaway or Marius Kloppers does at BHP Billiton.
We should already intuitively know that different market segments can behave differently.
Of course, we do still want to attempt to time our investments by buying when there is value to be found in the market at large. But to outperform and thrive we too need to research thoroughly and find the growing segments.
This is not necessarily as hard to do as you might think.
In the Australian stock market there is clear evidence to show that the Industrials index has paid stronger dividends and delivered better returns than both the Resources index and the wider All Ordinaries index over many decades.
In the property markets, it is straightforward to seek out suburbs and property types which have a proven track record of delivering strong capital growth. Some parts of cities are seeing very strong auction clearance rates while others are dragging the market percentages down.
Find in-demand property types which you can add value to in addition, and suddenly you can leave the median price growth so beloved of the financial press in your wake.
The challenge of granularity
For investors, the challenge is to take this level of research down to the next level. To dig deeper and find those market segments that will truly outperform, for they do exist.
The wider investment markets will continue to hit peaks and troughs as they always have. But beneath these broader trends outstanding opportunities will always exist.
Allocate some time. Research thoroughly. Don’t over-complicate the strategy and keep the number of transactions down (hold outstanding assets for longer and don't trade too frequently).

Delve deeper into the granularity of growth and get ready to outperform.

Super Saturday - preliminary clearance rates strong

Sydney recorded a strong preliminary auction clearance rate of 67.4% according to APM.

Melbourne's clearance rate was not far behind from a huge number of properties auctioned (more than 1,050 today).

It does pay to be wary with these initial assessments as a large number of properties go unreported and the percentages can later be revised.

I did note one interesting thing in the stats though - the median price of Sydney properties auctioned today was $880,000.

If ever you needed any evidence of the magnitude of the property market correction in Sydney (or lack of one) then that is it.

We have been hearing for half a decade now about an imminent price collapse, and yet prices are significantly higher than they were five years ago.

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According to the Commerce Department, the US economy grew at a 2.0% annualised rate in the July-September quarter following the second quarter's slump to 1.3% per cent.

This is positive news to a point, though a 2% rate of growth is still fairly modest.

A number of the major US companies are projecting disappointing earnings which kept the stock market fairly directionless overall.

Aussie dollar chart - worrying...

A chart worth watching for the next 10 days is that of the Aussie dollar versus the greenback.

The AUD is buying more than 103.7 US cents again this morning as currency speculators factor in the possibility that interest rates might stay on hold on November 6.

The strong currency has been a real pain for the Reserve Bank. They have cut interest rates again and again yet the dollar refuses to sit down.

Meanwhile exporting companies are going to the wall, one of the latest casualties being Gunns Limited (GNS) which has gone into administration.

Gunns is one of the oldest companies in Australia having been established in 1875, but operating in the US dollar-denominated woodchip industry the Tasmania-based enterprise stood little chance in the face of an ever-appreciating dollar since 2009.

So what happens next? The futures markets say that there is a 57% chance that interest rates get dropped to a historic low of just 3.00% on Melbourne Cup Day.

And if they stay on hold? Well, presumably the trend in the chart below would continue its climb.


Big auction day in Australia

A huge day for Australian property markets with more than 2,300 properties going to auction, including some 518 in Sydney alone.
Different data providers will show slightly different results due to their methodologies, but the important thing to note is the trend.
RP Data recently produced an interesting chart to show the clearance rates since May 2008.
To see rapid price appreciation I would expect to see auction clearance rates closer to 70% than 55%.
I have circled where we last saw a boom in property values through the financial crisis – clearly Australia-wide auction clearance rates were materially higher than they are now.
The thing to watch will be whether the trend towards steadily improving auction rates continues, fuelled by lower interest rates, or whether buyers become a little spooked by media reports and low confidence in the economy.

One matter that is worthy of note, though, is that some sub-markets have continued to achieve ≈70% auction clearance rates and these have demonstrated strong growth.
Sydney’s inner-west has been a stand-out example in NSW. I’ve been following other markets less closely but low vacancy rates in some parts of other capital cities suggest that similar patterns exist.
Australian Property Monitors will release their preliminary auction results this evening which should give an early indication.
RP Data will release their preliminary results on Monday, but you can check out Tim Lawless on his blog on Sunday for early indicators.
My best guess is solid but not spectacular…
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Not much news from Dili – I got bitten by some kind of ant or spider yesterday, which saw my hand swelling up quite remarkably, but against my expectations I still woke up alive this morning.
Storms forecast for tomorrow as the 'Big Wet' rolls into gear so planning to brave the humidity and head over to Meti-Aut for some lunch today.

Friday, 26 October 2012

The other side of the negative gearing debate

What is negative gearing?
Negative gearing is leveraged speculation whereby a speculator borrows funds to buy an asset, but the income from the asset fails to cover the interest repayable on the loan.
In Australia, the interest on the loan may currently be offset against other income thus facilitating a tax deduction.
Punters may therefore be compelled to speculate in assets which generate a cash-flow loss in the hope of a future capital gain. This is true in shares and particularly the case in residential property.
Negative gearing under siege
It is very fashionable at the moment to blame high property prices in Australia squarely upon the practice of negative gearing.
The theory is that the prevailing laws should be scrapped, speculators would exit the property market and the values of properties would decline markedly.
This may or may not be the case. Today, let’s take a look at the other side of this argument, and particularly why the Government has not simply pressed ahead with this course of action.
Why doesn’t the Government simply scrap these tax laws?
Well, they tried to.
In 1985, the Labor Government rescinded the negative gearing tax laws and yet was forced to reintroduce them just two years later in 1987 (Labor then suggesting that the new capital gains tax rules should instead act as a deterrent to speculators).
Booming rents
The main problem facing the Government, so the argument goes, was a shortage of available rental properties.
Some commentators like to cherry-pick numbers and suggest that in some cities rents did not increase between 1985 and 1987. That may indeed be true, but also in some cities (namely Perth and Sydney) rents absolutely sky-rocketed.
It is easy to blame incessant lobbying from the real estate industry for the re-introduction of the negative gearing incentives, but the counter-argument is that much of the backlash actually came from tenants in those cities who were shocked by the spiralling rents.
Public housing funding
The other argument for scrapping negative gearing rules is that the Government could save itself billions in tax revenues. Again, this is partly true, but there is a flip side, and this is that public housing funding would presumably be increased.
Between 1985 and 1987 the numbers on the NSW public housing waiting list increased alarmingly by around 40% from fewer than 110,000 to 140,000, a trend that was immediately reversed upon the re-introduction of the previous ruling on interest deductions.

Of course, many other countries do not have equivalent negative gearing tax laws, but in some cases this may equate to a higher percentage of the population (particularly in certain socialist countries) becoming reliant upon the state for social housing, an outcome which brings with it its own hefty costs.
4 reasons property investors don’t fear the gear
So why aren’t property investors more worried about the incentives being abolished? Here are 4 reasons:
1 – Lack of retrospective application
In 1985, the new laws were not made retrospective so existing property investors were not impacted.
2 - Compensating laws?
At the time of the scrapping of the negative gearing rules, the Government was seemingly aware of a need to introduce other incentives and thus introduced a 4% capital allowance on the construction cost of new buildings to be offset against new income.
The idea was to encourage investors to invest in new properties to alleviate the rental property shortage, but overall, it would probably be fair to say that the allowance was ineffective.
3 – Lower interest rates
Negative gearing in property became very popular in the 1980s when interest rates were significantly higher than they are today.
Whether the structural shift to lower interest rates since 1990 proves to be a permanent one remains to be seen, but negative gearing rules are of diminished importance to investors when interest rates are lower as they are now.
4 – Increasing rents
If negative gearing laws are abolished, rents would probably increase, which would act as some compensation for property investors.
Summary
Periodically, the negative gearing tax laws will come under review.
It seems unlikely that they would be scrapped outright and overnight, but they may well be phased out over time.
Smart investors do not worry unduly about changes in political and tax regimes but instead align themselves to the shifting markets.
There will always be underperforming and outperforming assets, and educated investors simply aim to move with the changing times.  

XAO to test level of support?

I mentioned at the back end of July that the All Ords (XAO) seemed to be showing a technical buy signal having broken through a sticky point of resistance after several failed attempts.

It will be an interesting week ahead for the XAO, for it it falls back through below 4,500 there would appear to be a risk of retracement.

If on the other hand it bounces from 4,500 this may represent a new level of support and therefore traders might be more inclined to stay the course.

The market is fairly directionless today and absolutely stone dead flat, the XAO at 4,535 as I write this.


Thursday, 25 October 2012

Inflation worries diminish the odds of a rate cut

The Q3 inflation print has had a significant impact on the market's interest rate expectations.

In spite of this, 3 year fixed rate mortgages are now available from a very cheap 5.13%.

Wednesday, 24 October 2012

Property Update: 6 rules of wealth creation

Read my latest article on Property Update here.


Amusing CPI debate

An amusing little debate today between the former economic adviser to our Prime Minister Julia Gillard, Stephen Koukoulas, and leading financial economist Christopher Joye on whether the core CPI numbers should be read as 0.75% rounded, 0.70% rounded or 0.74%  weighted.

Here's the rub: it doesn't matter!

The Australian Bureau of Statistics (ABS) is not able to report to this level of accuracy in real time.

We know this as they have previously pushed through monumental revisions to their inflation figures - most notably in Q2, 2011 when the print was sensationally revised from a worryingly high 0.9% to a more comfortably benign 0.6% for the quarter.

I don't blame the ABS. I used to prepare CPI numbers for them myself back in yesteryear, and like many other contributors, the numbers I presented were near enough but not necessarily completely accurate. We should place more emphasis on annual trends than quarterly spikes.

Koukoulas thinks we should take 0.70% by rounding down which would support his assertion for another interest rate cut. I think 0.75% will do as a the mid-point of the core measures (and Chris Joye agrees with me evidently). 

No matter, my point stands, the figures simply aren't that precise. Interest rates will probably be cut in November but it will be a line-ball call.



Dollar jumps on inflation news

A bit more life breathed into the Aussie dollar again, jumping above 103 US cents as the markets feel that interest rates might possibly stay on hold after the inflation data was a little strong.

Futures markets are now expecting around a 2 in 3 chance of rates being dropped on Melbourne Cup Day.

Stocks are down around 0.7% today as the carping about the Carbon Tax impact predictably cranks into gear...


Inflation prints...quite high

Inflation figures turned out to be a little higher than expected.

The headline figure was very high at 1.4% for the 3 months to September bringing headline inflation to 2.0% for the year.

The carbon tax will have had some impact here and electricity costs jumped by more than 15% as the cost of energy increases.

The core inflation figures were a little more moderate as the figures are trimmed and weighted (see the bottom of the first table below), the average of which come to 2.5% for the year, which is smack in the middle of the 2-3% target range.

And this means?

My initial reaction - it will definitely be tight but it looks to me as though the Reserve Bank might just still have room to cut interest rates in November to 3.00% should it so wish, but that might easily be all we get. The core CPI numbers are, after all, sneaking up towards the top of the target range over the last two quarters.

The Aussie dollar strengthened on the news back to around 102.9 cents against the US dollar as I write this.



Graph: Contribution to quarterly change

Tuesday, 23 October 2012

Geeky interest rate stuff

As at close of business today the ASX 30 Day Interbank Cash Rate Futures November 2012 contract is trading at 96.920.

Jolly good, you might say, but what the heck does that mean?

With both the bid (buy) and the ask (sell) price of futures contracts expiring in November trading at well below 100, what this implies is that the markets are now very much expecting interest rates to fall in November.

An ask price of 96.920 as I have circled below indicates an 85% expectation of a rate decrease to 3.00% at the next Reserve Bank Board meeting on Melbourne Cup Day, in the first week of November.

The cash rate reached 3.00% in April 2009, but some economists now expect the interest rate to fall lower still to 2.75% which would be the lowest rate seen since the 1950s.

The small margin between the bid and ask prices below is known as the bid-ask spread.




Is property a good investment when inflation is low?

Changing times
On the eve of the announcement of the latest round of inflation data, now is a great time to consider the following question: is property still a good investment in times of low inflation?
This question was addressed in 1994 in an excellent book entitled Building Wealth in Changing Times by Jan Somers.
Some things have not changed since that time – finance journalism was and is still a mile wide and an inch thick – and as interest rates finally dropped from their sky-high climes of 17 per cent as we entered the 1990s, the press rolled out the predictable headlines. Negative gearing is dead! Property is buried as an investment class!
Somers’ book was a swift and effective rebuttal to the journalists. And over time, her arguments were proven to be exactly right.
Annual Averages
1960s
1970s
1980s
Inflation (CPI)
3.0%
11.0%
8.0%
Capital Growth
6.5%
14.5%
11.5%
Interest rate
4.5%
7.5%
13.5%

Source: Building Wealth in Changing Times, Jan Somers
As Somers points out, the 1960s and 1970s offered a unique opportunity for those who invested in residential property.
In theory, you could easily obtain a capital growth rate in excess of the interest rate and “create wealth from thin air”.
The catch, of course, was that banks were not keen to lend for property investment and thus available capital was scarce.
The 1980s presented an altogether different dynamic. High inflation persisted in tandem with high capital growth, but with this came the pain of very high holding costs as interest rates averaged 13.5% across the decade.
Equities-only investors love to argue that owners of property do not move ahead, as when they sell and re-buy property the new acquisition has increased in price as much as the property just sold.
There may be an element of truth in that for homeowners, but not so for property investors.
After all, who wouldn’t want to own properties which were bought at last century’s prices? I’m sure that any long-term owner of property would agree that the best properties in any portfolio are those that were bought for a five-figure sum.
Property in times of lower inflation
While the journos declared the idea of borrowing to invest in property to be dead in the early 1990s, Jan Somers, being a mathematician by training, ran some numbers through a model and presented some compelling evidence to show that, in spite of the headlines, property can still be a fabulous investment in times of lower inflation.
What her figures showed was that in times of lower CPI (inflation) and lower interest rates, the internal rate of return (IRR) on a residential investment property could be remarkably similar to the rates of return achieved when interest rates and inflation are high.
Of course, in the 1980s property investors enjoyed their debt being devalued by high inflation. But offsetting this were high interest rates and holding costs.
The real net returns (after accounting for inflation) after holding costs on investment in a less inflationary environment can end up being very similar and equally appealing.
Outperforming
The one caveat I will add here is that whether inflation is high or low, it is still important to seek investment properties which outperform inflation and the median price growth of the asset class.

This is not necessarily hard to do. By investing counter-cyclically in cities which have not recently experienced great growth (Sydney) then you can begin to move ahead of the pack.
In fact, the longer I am in the real estate game, the more convinced I become that for the average investor residential investment properties close to the median price present the best opportunity for financial freedom.
A major reason this is that, rightly or wrongly, most investors seem far more attuned to the idea of buying and holding an investment property for the duration of a mortgage than they do riding out manic depressive stock market gyrations.
And while those of us of a more academic bent like to debate the pros and cons of asset classes and risk versus return, residential property remains a fantastic long-term proposition as Australia's population swells. 
Food and shelter form the base of our hierarchy of needs and while some will maintain to the death that the only place to build wealth is in share markets, what really counts is taking decisive action.
Owning a portfolio of capital city investment properties for the long haul seems likely to be a great option for investors.

Monday, 22 October 2012

Interest rates 85% likely to be dropped again in November

According to the ASX target rate tracker today, interest rates are 85% likely to be cut yet again to just 3.00% in November.

This is great news, of course, for those of us with variable rate mortgages, as our repayments are getting ever lower with every passing interest rate cut.

Spare a thought for our retirees, though, who have diligently built retirement balances and some of whom have put their funds into 'safe' cash products such as term deposits, which are now returning very low rates of return indeed.

If inflation reverts to trend there is a real risk of retirees losing the purchasing power of their cash which in turn can lead to risk-taking as higher returns are sought (for those who are often not comfortable with taking on risk).




GNC jumps 40% on takeover bid

Well, well.

So Graincorp (GNC) came out of trading halt today after the announcement last week that US crop giant Archer Daniels Midland (ADM) had made an initial bid to take over the company at $11.75 per share.

Speculation that this was only an initial low-ball offer to start negotiations saw Graincorp shares repriced at $12.30 today, up some 40% on last week's final traded price.

The market seems to be pricing in a final takeover price of around $13 with a small risk factored in for any possible failure in the bid (this could arise from monopoly issues or the takeover bid simply being rejected).

The inital bid price represents around 8.5 times EBITDA, making GNC worth $2.7 billion, while other takeovers in the sector, such as Viterra's acquisition of ABB grain, were priced somewhere close to double-digit EBITDA.

Given that Graincorp represents Australia's last crop play available for takeover in the grain sector, it isn't out of the question that another bidder will enter the fray.

Business has been improving, mainly for the simple reason that Australia has finally had a decent amount of rain in the wheat belt, which wasn't the case for a number of years.

Disclosure: Since you ask, yes I did own shares in Graincorp previously. And no, I haven't still got them. And no, I don't want to talk about it!


***

The hot morning in Darwin has given way to the customary afternoon downpour. It's great to watch the clouds rolling in at this time of year.

Lowest interest rates in half a century...?

Dwelling prices appear to have taken a breather in October, with RP Data suggesting that we might see in the first falls in 5 months.

Meanwhile, the latest Bloomberg survey reveals that 9 of 27 surveyed economists expect interest rates to be slashed by 0.50% to just 2.75% on Melbourne Cup Day.

What's the risk for property? That even half century low interest rates don't kick-start the market. That would be a worry.

A different perspective on the 1987 crash

25 years ago this week, one of the most shocking 'crashes' in stock market history. The Dow Jones lost more than 500 points in a single day of panic back to 1,738, a terrifying day for traders.

Here is another way of looking at it:

-the 1987 crash was merely a correction of the irrational exuberance that had gone before

-if you invest for the long term the crash resembles a minor blip on the chart

-a diversified portfolio of stocks can move up or down...but over the long run they will move up strongly

Sunday, 21 October 2012

Property Update: Volatility Risk in Property

Read my article on Property Update here.


A plan for a great start to the day

Had a great, sun-filled morning today in Darwin, going to Salvatore's for an omelette and thick-cut toast plus a couple of coffees, before heading off to watch the new Bruce Willis movie at Casuarina.

That's a great way to start a weekend but it's not really a sustainable way to start every day - partly because Bruce Willis doesn't make that many movies, but mainly because it's neither cheap nor that healthy to eat fried breakfasts too often!

So, what if you aren't a morning person?

Good article from Andrew Jobling here which talks about how you can be a morning person.



Black Monday: 25 years on

Friday marked the 25 year anniversary of the infamous 1987 stock market crash.
On October 19, 1987, the Dow Jones plummeted by a staggering 23 percent in one day.
Friday didn’t market a great day of trade in 2012, in fact, the Dow Jones dropping by more than 200 points.
However, as the market is so much higher these days 200 points represents a fall of around 1.5%.
I was reading a book the other day by Tony Robbins (Awaken the Giant Within) which talked about the Dow “plummeting” by 20 points in one day.
There is a hidden message in that for investors, and that is that over the long term these crashes seem to become less significant.
That wasn’t the case on ‘Black Monday’ itself, though, when sheer panic set in.
It took seven years but the market did eventually recover to where it was before the crash before moving on to new heights.
The stock market had been climbing the familiar ‘wall of worry’ in the months preceding the 1987 crash. Investors had stopped looking at fundamental valuations in favour of chasing a fast buck.
But the reason Black Monday will be remembered in particular was that it was the first time that algorithmic trading played a significant part in a one-day crash.
As computerised stop-loss orders were triggered hundreds of millions of shares were sold automatically which only exacerbated the severity of the crash.