Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory & buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Invest in Sydney/Brisbane property markets, or for media/public speaking requests, email pete@allenwargent.com

Monday, 19 November 2012

The trouble with doom and gloom

Recessions come in cycles
“There will be seven to ten recessions over the next 50 years. Don’t act surprised when they come.”
There are a number of blogs and commentators on the internet who take a huge amount of time and effort to chronicle every risk that faces Australia’s economy.
There’s no problem with that. After all, we are indeed living through volatile and uncertain times (though quite what would constitute a ‘certain time’ I’m not really sure).
The problem with doom
As you have no doubt noticed, there will be those who predict doom and gloom at every stage of the economic cycle.
The trouble is that predicting gloomy times ahead in itself does not help to secure your financial future. It is very easy indeed to sit on the sidelines and predict that we will soon face a recession.

Statistically, if you do so for long enough (and my goodness, haven't we heard some incredibly gloomy yet wildly inaccurate predictions over the past half decade!) you will surely be proven correct.
Experienced investors are aware that while asset prices tend to move in cycles, at the equivalent stage of each recurring cycle they do tend increase from one cycle to the next.
One of the most common reasons that people give for not investing is that asset prices are at all-time highs or they are falling.
The small problem with that is that because we tend to look at a chart’s history – reading it from right to left – then prices are actually always at an all-time high or falling.
How long might a cycle last?
The most brutal cyclical downturn in modern history occurred in 1929 in the guise of the famous Wall Street Crash.


Source: www.stockcharts.com/freecharts

Asset prices took around a quarter of a century to return to where they were before the crash.
If you look a little more closely at the chart, though, you will notice that in the period immediately preceding the crash, there was a tremendous appreciation in values.
For around 7 full years preceding the crash, the market climbed a so-called “wall of worry”. Investors piled into the market fearful of missing out on the booming prices, thus fuelling the inevitable crash.
For this reason, it is important for investors to attempt to avoid buying at the peak of a boom or during a period of irrational exuberance.

Other 'devastating crashes' such as the Black Monday 1987 crash look practically laughable when considered in the context of a longer time-horizon. No more than an annoying blip in an otherwise upwards-trending chart, and once again was as much related to the preceding irrational appreciation as it was the downturn.
Real estate valuations
Similarly, over time, property prices show a long-term uptrend. Property prices tend to move in a slightly different manner to share prices for a number of reasons – at least in part because property is more illiquid, and partly because residential property is not a pure investment asset class.
The long-term percentage growth rate of property is likely to be less than that of the share markets (i.e. the 'productive asset class'), although the use of leverage tends to see property investors see outstanding returns over the long haul.
The desire to own tangible, prime-location real estate often drives capital city property prices to the very limits of affordability, until some kind of short-circuit or affordability limit (e.g. increasing interest rates, credit markets seizing up or high rates of unemployment) reverses sentiment for a time.
If you went to buy property today in New York, Hong Kong or London today you would see expensive prices everywhere you looked. Regional markets can see a somewhat different dynamic, again as evidenced by falling prices in the US or the UK.
Property prices can be impacted by recessionary periods and for this reason it is important to attempt to avoid buying at the peak of a boom.

Economic downturns

As you can see in the chart below, Australia has not to date experienced a significant downturn in property valuations, but then, Australia's "miracle economy" has also not experienced a recession for two decades.

While the performance of regional markets may appear weak in the chart below, this is partly a trick of the brain. On a percentage basis, regional markets have performed incredibly strongly over a prolonged period of time.

As always, however, do be aware of the risk of deleveraging in our illiquid property markets. Just like any economy, we will experience a recession one day in the not-too-distant future.

When that happens, if you are a property investor as opposed to a homeowner, you want to ensure that you are owning only property in areas with:

i) very low vacancy rates;

ii) limited land available for release or likelihood of large new developments being approved; and

iii) very high and increasing demand, fuelled by strong wages and population growth.