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.

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Thursday, 22 November 2012

What can property investors learn from Dutch canals?

Another fine common sense article here from the very wonderful Catherine Cashmore over at Property Observer:
“As shown by some of the oldest housing indexes in the world, house prices that consistently exceed the rate of inflation typically undergo a period of “correction” and remain the same in real terms when viewed over the longer trajectory.
The Herngracht Index shows a series of repeat sales figures for a small but significant strip of real estate that is relatively stable in type and located in what has remained a premium pocket of Amsterdam. However, in real terms the increase in values are largely insignificant – after 345 years of “market cycles,” the inflation-adjusted cost of housing only increased 3.2% – leaving the “real” value broadly the same.”
From my exceedingly hazy memory the correct spelling is Herengracht, though in truth my youthful and laddish dalliances with the city of canals were not legion for their clear-thinking sobriety, still less for their sophisticated analysis of real estate indices.
The Herengracht Index is reflective of what is sometimes known as reversion to the mean – that asset valuations over time will revert to an average or mean level.
I absolutely agree with Catherine on this principle, though even the most hardened property doomsayers would agree with me that projected growth in Australian household income is a more appropriate measure than inflation when deeming rational proxies for property price growth (for the more people have to spend, the more they tend to spend).
The further out into the future you draw the line, the more statistically meaningful the link is likely to become.
Growth at 4% per annum?
Household income has been fairly charging along in Australia fuelled by periods of high inflation and a massive increase in two-income households. It is reasonable therefore to suggest that household income in the future will be much, much lower than it has in the past, perhaps closer to 4-5% per annum.
Using a conservative growth rate of 4% per annum, then all other things being equal (particularly the widespread use of household debt) this implies that property prices might quadruple in price over the next 35 years, which is a sensible time horizon for a property investment. That’s not a clever maths trick. It is merely the effect of compounding growth.
The much-overused ‘Rule of 72’ shows that a 4% growth rate sees an asset double in value every 18 years (72/4 = 18 years). Of course, I’d never suggest that a property investor tries to just buy an average property and attain a median rate of growth. The collapse in regional US real estate prices demonstrates precisely why high demand is vital.
“Houses should cost 3 times income
A peculiar argument this. After all, why should a house cost 3 times income? Why not 1 times income? Why not 0.5 times income? Why should we even have to borrow funds to buy property at all?
The truth is that greedy property investors did not invent the dynamic of people paying to the very limits of their affordability for prime location real estate. People did. The same types of people who pray daily for price collapses so they themselves can buy property. 
House prices do not even have to cost 3 times income as the US regional property example aptly demonstrates. In fact, where there is no demand for land and property, prices fall to $nil.
Australians can and do travel to the US in order to buy properties in some regions for prices that are very close to $nil. The investment risk of buying property for a few hundred dollars is also close to nil; but the risk to your personal safety of being a landlord in outer Detroit might be very high indeed. Return and risk are indelibly and inextricably linked.
I’ve looked before at why housing in Australia became so expensive: population growth, the increase in two-income households, a relaxation in lending criteria…but the biggest factor has been the structural shift to lower interest rates:

Perhaps an inevitable consequence of interest rates dropping from 17% to 3% was that the populace borrowed more to buy prime-location real estate. Interest rates will move higher again one day, though, don’t worry about that!
We as humans are very much more like each other than we care to admit. A huge percentage of the growing population is heading to only four places: Sydney, Melbourne, Perth and south-east Queensland.
We like to live in the same suburbs and we think that where we choose to live says something about us: Bellevue Hill or Brighton (sophisticated), Bondi or Bronte (fun, successful!), Brunswick Street or Newtown (edgy, bohemian, cool).
30 years from now the population of Australia will have increased massively from 22.6 million to around 35 million assuming the present growth rate of 1.5% per annum. Here are the projections of the ABS:

The challenge for politicians is to keep the price of land affordable while finding dwellings for 12.5 million more people. Will they manage it? In regional areas they might well. But in the capital cities where there is no prime location land available for release?
I don’t think I’m sticking my head too far above the parapet in saying that in my opinion - Turnbull aside - Australian politics is not a thriving hotbed of inspiring and dynamic leadership.
Call property investment a bet on political incompetence. Call it whatever you like. It’s very hard to see land in our major capital cities becoming cheap over the next three decades.