Pete Wargent blogspot

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

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

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

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

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

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

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

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

Friday, 30 November 2012

Stocks up but interest rate cut to just 3% looking all but certain

ASX 30 Day Interbank Cash Rate Futures December 2012 contract trading at 96.930, indicating a stonking 83% expectation of a rate decrease to 3.00% at the RBA Board meeting.

The futures markets have been wrong before, but 83% likely...and 19 of 28 surveyed economists are now predicting a cut, so...

Property owners will be starting to pencil in yet cheaper mortgage repayments for next year.







Hear me on the great Real Estate Talk show today!



If you didn't catch it on the radio, you can hear me on the latest show here!

Also on the show this week are Hotspotting's Terry Ryder, and Metropole's Michael Yardney.

Thursday, 29 November 2012

Q: How much can a city's home values move in 24 hours?

A: More than 3%...


Source: RP Data

Game on for December interest rate cut

An amendment to my ballpark estimate of an increase  to a 2 in 3 chance of rates being cut on December 4. Make that an increase to almost a 3 in 4 chance with futures markets immediately jumping up to a 74% likelihood...now priced in.

The rationale is that while mining capex is roaring on, capex in other sectors is not picking up to fill the gap which will be left after the mining boom peaks.

A half-century-low cash rate of just 3.00% from next week would of course be wonderful news for those punting on real estate growth through 2013-14. Concerning, however, if you are relying on fixed interest products generating a return.

The odds...

The ASX 30 Day Interbank Cash Rate Futures December 2012 contract is now trading as high as 96.910, which in turn suggests a 74% expectation of a rate decrease to 3.00% at the next RBA Board meeting.






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As for the odds of interest rates being moved significantly upwards any time soon? They are zero.



How's the end of that mining boom lookin'?

From the ABS release just out:

"Estimate 4 for Mining for 2012-13 is $109,353 million. This is 17.1% higher than the corresponding estimate for 2011-12."

As someone so wittily noted in the Twittersphere..."Crikey, it's lucky that pesky mining boom is over - imagine how much we would have spent!"

I'm unsure as yet how the gloomers will put the negative spin on this one. My guess is something along the lines of: "It'll never last!" - which is naturally true, but then, nor would one expect it to - no boom lasts forever, after all.

Of course, you could argue that the boom is losing some of its momentum which is possibly true. But I still suggest that Aussies are better served to consider the benefits of our growing economy instead of continually trying to point out how things can't get better at the same rate forever (ever heard of a place called Europe?).

Mining capex is still expected to grow by more than a whopping 17% next year to easily the highest level it has ever been. Ergo, the capex phase boom is definitely not over.

The fun part is guessing when the mining capex boom will peak. BIS reckons two years (but their forecasting record is woeful). Stevo reckons the investment boom has "several years to run".  Using my own sophisticated analysis techniques (drawing a neat curve on the back of a fag packet) I reckon the mining boom peak might come around December 2015.

As for what happens in 2016, well, Australia will gradually transition into the production phase of the boom, but I think I'll worry more about that nearer the time, personally.

Perversely, as the overall rate of capex growth is somewhat below expectations, this data is likely to actually slightly increase the rate of an interest rate cut next week to somewhere around a 2 in 3 chance.
Note that these figures only go back to 2007-2008. If you drag the graph back to three or four more years you can hardly see the bars.


HIA: New unit sales boom by 31.4% in October

A trend I've talked about a few times. New houses are expensive and sales thereof have now declined for 5 of the past 6 months. New unit sales on the other hand, are absolutely booming, fuelled no doubt  by very low interest rates and investors looking for somewhere to put their cash.

The HIA explains that the nationwide figures are dragged down by very weak results in Victoria (where buyers are understandably staying away following a massive boom in dwelling prices):

"A 3.4 per cent increase in new home sales in October is a modest result, but at least it is a move in the right direction,” said HIA Chief Economist, Harley Dale.

The HIA New Home Sales report, a survey of Australia’s largest volume builders, showed a substantial 31.4 per cent increase in the sale of multi-units in October and this delivered the headline rise for the month. Detached house sales fell by 2.0 per cent in October, a disappointing result which marked the fifth decline in six months.

“Scratching below the surface, new home sales in October were a mixed bag. Within the weak headline result for detached houses there were modest increases for New South Wales, South Australia, and Western Australia, albeit from very low bases,” Harley Dale said.

“Detached house sales in Victoria were a big drag on the aggregate result in October, slumping by 12.1 per cent. If you take that result out of the mix then detached house sales actually posted a rise of 2.4 per cent.”

Some worthwhile analysis of the data from MacroBusiness here.

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Share markets are ekeing out more gains. ASX200 up 0.42% so far today...

10 risks to managed by Aussie property investors

Today, I look at 10 of the traditionally pre-eminent guises of investment risk but specifically as they apply to Australian property investors.
1 Market risk (or systematic risk)
Market risk may affect all investments in an asset class in a similar manner, such as in the event of a market-wide price crash. As such, market risk that cannot easily be mitigated through diversification. While buying properties in different states might diversify market risk to a partial extent, if the wider property market crashes diversification is unlikely to assuage the systematic risk successfully.
Property investors should additionally invest in other asset classes which tend to move in a non-correlated manner to real estate. Property investors can also focus upon a longer investment time horizon which allows correcting markets greater opportunity to recover.
2 Liquidity risk
Equates to the possibility that an investor may be unable to buy or sell an investment when desired (or in sufficient quantities) due to limited opportunities.
Illiquidity is a salient risk in real estate. It is difficult to sell a property quickly should the need arise, which is not the case for large-cap stocks or government bonds. Liquidity risk in Australian property is best mitigated through investing in landlocked capital city suburbs with eminent demand and constrained supply.
3 Specific risk (or unsystematic/business risk)
Equities investors and fund managers talk much of specific or business risk, being the measure of risk associated with a particular stock or security. Also known as unsystematic risk, this typically refers to the risk associated with a specific issuer of a security. Businesses in the same industry may have similar types of business risk, and issuers of stocks or bonds may become insolvent or lack ability to pay the interest and principal in the case of bonds.
Specific risk in property investment is somewhat different, and rather relates to the risk of acquiring a loss-making property or one which delivers sub-optimal returns giving rise to opportunity cost. Specific risk can be mitigated through diversification, although this can represent a challenging proposition in property as dwellings tend to be expensive.
One frequently invoked strategy of property investors is to acquire different types of property in different states. Careful, detailed due diligence and research of any property purchase also tends to reduce (if not eliminate) specific risk.
4 Interest rate risk
Normally refers to the possibility that a fixed-rate debt instrument will decline in value as a result of a rise in interest rates. Where an investor buys a security offering a fixed rate of return, they introduce an exposure to interest rate risk, examples thereof including bonds and preference shares (preferred stocks).
In Australian investment property, the interest rate risk instead lies in variable rate mortgages as the cost of debt capital can materially increase when the Reserve Bank ratchets up the cash rate. The risk can be mitigated through the use of fixed rate mortgages and prudent cash-flow management.
5 Foreign exchange risk (or currency risk)
Arises from a movement in the price of one currency against another. When the Australian dollar appreciates, the value of foreign investments declines. Conversely, if the dollar weakens the value of foreign investments effectively increase.
Presently the strong Aussie dollar attracts investors to overseas investments, in particular to US real estate. A good strategy? Maybe. Our dollar may depreciate and regional US property markets have corrected. But is there a foreign exchange risk in investing overseas? Absolutely, for exchange rates are inherently unpredictable. Few commentators in 2008 opined that the Aussie dollar could ever be worth 110 US cents, and yet it indeed became so. 
Currency risk tends to be greater for shorter term overseas investments, which have insufficient time to revert to a mean valuation in the same manner as longer term equivalent ventures.
6 Sovereign risk (or social/political/legislative risk)
Sovereign risk is associated with the possibility of unfavourable government action or social upheaval resulting in investment losses. Governments retain the power to amend laws affecting investments, and rulings which result in an adverse investment outcome are representative of legislative risk. One frequently highlighted legislation risk in Australian property investment is the possible phasing out of the negative gearing tax rules.
Investing in developing or unstable countries variously offers opportunities for substantial returns but, reflecting the principles of the risk-return trade-off (of the CAPM model) may bring a heightened associated sovereign risk.
7 Credit risk
Credit risk normally refers to the possibility that a bond issuer becomes unable to service expected interest rate payments or a principal repayment. Typically, the higher the credit risk is, the higher the interest rate on the bond.
In property investment, credit risk often lies in the investor rather than the lender, although there is of course a possibility that lending institutions can become insolvent as was seen in the US as the subprime crisis played out. Property investors should retain a liquid buffer in order to mitigate the risk of mortgage default.
8 Call risk
Also usually refers to bond issues and the possibility that a debt security will be ‘called’ prior to maturity. In bonds, call risk prevails when interest rates fall, as companies redeem bond issues with higher coupons and replace them on the bond market with lower interest rate issues to save cash.
Can call risk impact Australian property investors? Indeed, but conversely when interest rates run higher. Investors with high exposure to adverse interest rate movements may be considered risky by mortgage providers cyclically. Investors in Australian commercial property have periodically been subjected to the real estate equivalent of a margin call, being forced to reduce debt exposure through the redemption of assets.
9 Reinvestment risk
Usually refers to the risk that future coupons from a fixed-interest investment will not be reinvested at the interest rate prevailing when it was initially purchased, a risk that increases in likelihood when interest rates decline. Zero coupon bonds are the only fixed-income instrument to eliminate reinvestment risk due to having no interim coupon payments.
The most straightforward strategy for property investors to avert reinvestment risk is simple: never sell.
10 Inflation risk
Also known as purchasing power risk, the possibility that the value of an asset or income stream will be eroded as inflation diminishes the value of a currency. The risk is the potential for future inflation to cause the purchasing power of cash inflows from an investment to decline.
Inflation risk is best countered through investing in appreciating assets such as real estate, dividend-paying stocks or convertible bonds, each of which has a growth component allowing them to outperform inflation over the long term. The uplifting news for property investors is that favourably-located Australian real estate is well recognised as a tremendously effective inflation hedge over time.

Wednesday, 28 November 2012

The Economist: "Australia is the 2nd best place to be born"

After Switzerland! Or Norway, depending on your criteria...

Full article here.

-- 

Richard 
Hughes 
National 
Chief Of Staff, Business Day 
The 
Age
-- 

L2, Media 
House, 655 Collins St, Docklands, VIC 3008 
T 03 
8667 3138 | M 0401 489 849 
richardhughes@fairfaxmedia.com.au 
| www.theage.com.au

"Indicators used include geography, demography, social and cultural characteristics, government policies and the state of the world economy.

The list was dominated by smaller economies, with larger European economics such as Great Britain (27th), France (26th) and Germany (16th) languishing further down the list. The US, which topped the 1998 list, came in 16th.

Australia was ranked 18th on the 1998 index.

Last year, Australia was ranked second behind Norway in the annual United Nations Human Development Index.

It was the second year in a row that Australia was ranked second to Norway on the UN index, which looked at indicators including education, health, per-capita income and life expectancy."

Very interesting construction figures from ABS

Confirmation bias

You have to chuckle sometimes. The economic bears try desperately to put a pessimistic twist or spin on every piece of data that is released.

We can all be guilty of it at times, and confirmation bias is one the risks which investors must overcome. There is simply no value on only seeking out information which supports your pre-conceived viewpoints or investment decisions.

As the old saying goes: "there are two sides to every story". But that said, there should only be one way to acknowledge today's construction figures and that is to note that...

Engineering construction is booming!

Fuelled by Australia's mining boom, the ABS has just reported that engineering contruction increased by a phenomenal 14% over the 12 months to September 2012, with a quite incredible $32,241.6 million of engineering construction 'work done' for the quarter.

That is 14% annual growth, by the way!

To put that incomprehensible figure into some kind of perspective, look at the first chart below and see how engineering construction growth in Australia has increased over the past 8 years. That is to say, it's gone through the proverbial roof. Did someone say "Lucky Country"?

Talk about it any way you want: quarterly engineering construction growth of 4% and total annual construction growth of 14% is huge.

Naturally this will contribute to a continued strong GDP growth for Australia which is nothing less than wonderful news for the country.

As other parts of the world lurch from debt crises to recession fears, Australia's immediate future is a very bright one as the mining boom gradually makes its transition from construction to production.

But, look a little more closely...

Unfortunately, there is a downside here, and, let's face it, it's not a particularly surprising one.

In a country where the population is increasing by more than 300,000 people per annum - and where there are already woryingly low residential property vacancy rates in certain landlocked capital city areas (for example, in Perth, in virtually all of Darwin, in certain parts of Sydney...need I continue?) - residential construction has actually declined markedly over the past 2 years.

There are a number of key drivers for this, but not much seems to improve in this regard. It seems to be human nature that we do not respond to problems until they become out-and-out crises.

You can interpret these figures any way you so choose, of course, it's a free country after all, but I know what my approach will be.

The Reserve Bank's plan for other construction to step up and fill the gap which will be left by engineering construction clearly isn't working yet. It will need to address this problem over the next couple of years as mining construction ascends to its expected peak.


Graph: Value of construction work done, Chain volume measures—Trend estimatesGraph: Value of building work done, Chain volume measures—Trend estimates

OECD: Interest rates will be cut twice further

Great article from Peter Martin here:

"The Reserve Bank is set to cut interest rates two more times - once in December and once near the start of next year - taking its cash rate to 2.75 per cent, a new all-time low.

The new forecast from the Organisation for Economic Co-operation and Development has the cash rate staying at the new floor until
halfway through 2014. If fully passed on the cuts would bring the standard variable mortgage rate to near 6 per cent, slicing a further $90 from the monthly cost of servicing a $300,000 mortgage.

The OECD credits budget cuts with its forecast of two further rate cuts, saying the government’s determination to achieve a surplus will “dampen demand”, forcing the Reserve Bank to act to shore up the economy.

It says the Bank will be able to act in December because inflation is “contained”, an achievement reached “despite the introduction of a carbon tax in July”."

Catch me on 4BC's Real Estate Show

I just recorded another cracking show contribution with Kevin Turner on his great Brisbane 4BC Saturday Real Estate show which goes out Saturday mornings 8am-9am in the sunshine state (also on regional stations in NSW and Vic).

You will also be able to catch the show later online on the fabulous Real Estate Talk.

Will keep you posted as always...



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Proclamation of Independence Day in East Timor today commemorating 28/11/1975.

Excerpt from my book on Property Observer

...take a sneak peek here.


Tuesday, 27 November 2012

The 8 financial stages of relationships

Today I’ll take a -hearted look at the 8 financial stages of relationships, starting with…
1 Singledom
Let’s face it, for most of us singledom is a time of money being earned and money promptly being spent. It would of course be great if you could put some money aside for the future, and some do indeed manage to do this. But this can be undeniably very difficult, particularly as people tend to like to go out and socialise. If the socialising goes well, and you are the dating type, then next up comes…
2 Courting
Thankfully, I haven’t had to do this stage for a few years now, as it can be darned costly. People often want to create a great early impression so Shangri-La, Bennelong and Louis Vuitton may well be the order of the day. Thankfully, the urge to spend like Elton John on vacation doesn’t usually last too long. At some point you tend to find out if the expensive gifts worked and progress to…
3 Cohabiting
8 in 10 couples now cohabit before marriage as compared to just over half of couples 20 years ago. For many, this represents the stage of greatest affluence in their lives. Two incomes and few outgoings can lead a strong monthly cash-flow.
This is a great time to start saving and then investing in a portfolio of shares as you might have the available cash to do so, and in property because lenders love double-income households. Of course, the trap here is that the two incomes are instead spent on having two very flash cars and regular luxurious holidays! Easily done, after all.
If you can still stand the sight of each other after a year or three, the ability to save and invest then often becomes balanced off with the need to save for…
4 Wedding-honeymooning
A wedding used to be a time of giving couples a great start in life. Today is a little different as the average age of a marrying couple is significantly higher than was once the case…but what do you think the average wedding costs in Australia today? Well, that depends on which source you consult, but somewhere between $36,000 and $48,500 is the average.
According to the Australian Bureau of Statistics (ABS), the average age of marriage in 1990 was just 26.5 years of age for men and 24.3! By 2010, these numbers had increased to 29.6 years for men and 27.9 years for women. If you’ve made this far, eventually you will probably run out of things to talk about and thus are faced with…
5 Parenting
According to the ABS, Australia’s total fertility rate barely moved between 1990 and 2010 (1.90 babies per woman in 1990, and about the same in 2010), but the age at which women have their first baby has changed.
In 1990, the median age of first-time mothers was 27.5 years and by 2010, this had increased to 28.9 years. Since 2000, women aged 30-34 years have continued to record the highest fertility rate of all age groups. Even more surprisingly since 2005 the fertility rate for women aged 35-39 years exceeded that of women aged 20-24 years.
The implication of this is that couples tend to have longer as DINKs (two incomes, no kids) before having children and therefore have more opportunity to build a portfolio of assets before the two incomes might become one and two cars are needed for work and school-runs. Parenting takes a long time – a couple of decades, no less! – before you are finally free to the joys of…
6 Empty-nesting
Refers to the period after the offspring have flown the nest – the kids have gone off to Uni or off to work. It can take longer to get rid of the kids these days due to houses being expensive and it being hard for youngsters to save deposits. Empty-nesters are often to be found on cruise ships, an experience which hopefully does not lead to…
7 Divorcing
This stage may or may not apply of course!  According to the ABS, although more divorces were granted in 2010 (50,200) than in 1990 (42,600), the crude divorce rate was relatively lower at 2.3 divorces per 1,000 of the population, down from 2.5. The median age for divorcing in 2010 was 44 for men and 41 for women, with separation on average occurring a few years earlier than that.
Divorces tend not be great for personal finances. Finally, after all the trials and tribulations you have reached the grand old stage of…
8 Retiring
Usually a good financial plan would be to aim to own a property outright by the time you retire as you would therefore not have rent or a mortgage to pay. At this stage of your life it may be beneficial to be in a couple as a single person’s Age Pension at around $385 per week, is obviously far less than the likely equivalent for a couple.
A better financial plan, of course, would be to build a portfolio of assets which generate you the income so you don’t need the Age Pension at all.

Australian "housing as affordable as in 1994"?

I wouldn't have thought so, but nevertheless, some good news on affordability reported in MacroBusiness article here.

The chart printed below doesn't really seem to fit with the ├╝ber-bearish MacroBusiness and its 'most obscene asset price bubble in the history of the world' weltanschau (if we want to keep up the German lingo). But why actually is the index reading this way?

The reason is explained by the methodology of the index. Specifically, the key variable is the...erm...variable rate of interest that the HIA uses:

"The discounted variable rate of all banks is used as the applicable interest rate."

So, yes, property should indeed be affordable while interest rates remain so very low (which is forecast to be the case for at least the next 18 months and beyond). However, when interest rates finally get back to a "normal" level, then affordability on this measurement index will deteroriate.

Much rests in the hands, therefore, of the Reserve Bank and its interest rate policy.

"C Cashmore@CCASHMORE_BUYER
and to add a sentence to the end ' & whether the banks will pass it on" ...


Market responds to Greece debt deal

Well, 'tis what the share markets wanted to hear: international lenders coming to an agreement on Greece debt.

Another patch-up job, of course, but it keeps everyone happy...until the next time this surfaces anyway. The ASX200 (XJO)  immediately jumped by 0.75%.

Unfortunately, in keeping with Newton's third law* of action and reaction, so did the Aussie dollar - now buying all but 105 US cents. How's that interest rate decision looking? 

Ouch.

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*I originally posted this as "Newtown's third law", and for any confusion arising therefrom I humbly apologise. I don't know if Newtown has a third law (or indeed any laws at all), but I'm pretty sure they hold no relevance here. Must try harder.

Most read articles on Property Observer

You can read my latest here.



Monday, 26 November 2012

Rents spiralling in Perth, Darwin, Sydney and Brisbane

A closer look at the Residex figures reveals some worrying trends.

In particular, the cost of renting an apartment in Perth (+27%), Darwin (+20%) and Sydney (+17%) is booming. The cost of renting a house is also booming in Perth (+20%), Brisbane (+18%) and Sydney (+12%).

Across Australia, the average cost of renting an apartment increased by more than 18% over the past 12 months. The very low vacancy rates in those cities listed above suggested that this might happen. Australia urgently needs to construct some dwellings in these locations or else risk re-inflating the property markets undesirably.

Residex's numbers below show that the price of a house in Sydney is now the highest it has ever been.




Aussie military departing East Timor

Although these photos are actually the American military at the US Embassy. Choppers and warships always draw a sizeable crowd in Dili. I felt as though I needed a change-up from writing, so just a few pictures.

The Timorese PM said a thank you last week and held a small ceremony for the Aussie military who returned to East Timor in 2006 following unrest.








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Thank you to my friend LittleMissMoi for the camera handiwork and letting my nab the photos from her marvellous and currently Dili-based Blog. My unsteady expat hand would never have captured the action.

Interest rate expectations (and yet more public hols for Timor)

Two more interest rate cuts by September next year implied by today's yield curve...



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Cracking win for England in the cricket, by 10 wickets over India. It was close, but not quite close enough for Australia versus South Africa in Adelaide. Can't wait for the next Tests!

The Government in East Timor announced today that both tomorrow and Thursday will both now be public holidays (Wednesday already was one for the Proclamation of Independence Day). Naturally people won't turn up to work on Friday either after 3 days off - so effectively it's now the weekend.

Can you imagine if developed nations had so many holidays and the impact on GDP? It might sound uncharitable but if Timor genuinely desires to become a mid-tier country in terms of its per capita wealth, granting the population ad hoc weeks off is not really going to help.

Shares tick up cautiously pending Greece deal outcome (again!)

I seem to be posting all about property at the moment. Not intentionally, I might add. In fact, after a prolonged absence (mainly due to be being busy doing other stuff), I'm looking to trade the share markets this week, though only if there is a positive outcome from Greece.

The Aussie XJO (ASX 200) ticked up by a quarter of a percent of so today, but progress was very circumspect. Dow futures are down as all eyes are on Europe's "merry-go-round"...yet again! Reports SMH:

"The sharemarket has finished marginally higher today as investors awaited the outcome of a meeting between European finance ministers to determine the next move on Greece’s debt. The benchmark S&P/ASX200 index rose 11.2 points, or 0.3 per cent, to 4424.2, while the broader All Ords gained 12 points, or 0.3 per cent, to 4443.5.

‘‘It was quite a positive week last week and that just seems to have flowed over, with risk assets like stocks, commodities and currencies performing pretty well, so I guess just a shift from the defensive assets into the growth assets,’’ said Darryl Conroy, markets analyst at Suncorp.

Investors were generally cautious as eurozone finance ministers are set to meet for the third time in two weeks to discuss Greece’s aid program.

Greece, after a €130 billion bailout was approved earlier this year, is waiting on several loan instalments to help ease its crippling debt, but so far European leaders have failed to come to an agreement on the details of the plan.

‘‘It’s an absolute merry-go-around [in Europe], it just seems to come up every couple of months. Once again, don’t expect any real, long-lasting solutions. Hopefully markets are just hanging out for what they want to hear,’’ said Mr Conroy"

Residex reports property price growth in 2012

After all the hype about "spectacular and humiliating" corrections and the like, Residex reports that in 2012, house prices just moved up by 3% and unit prices moved up by 3.7%. Here's John Edwards:

"Overall, Australian detached dwellings provided an improved result of around 3% while the improvement in unit market was in the order of 3.7%.

Consumer sentiment is improving. The Westpac Melbourne Institute Index of Consumer Sentiment posted a rise of 5.2% from October in November, finally bringing it above the 100 point mark to 104.3. At last it seems RBA interest rate reductions may be having an impact.

However, I suspect that the reduced negative press about the problems in Europe may also be playing an important role. I also have a suspicion that the number could have been even better if the coverage of the potential that the mining boom is coming to an end had not been so prominent in the media."

Perth and Darwin were the clear standout performers, although Sydney has shown very strong 8-10% annualised growth over the last 3 months, at least, it has according to the Residex figures below. Overall, the wider Australian property markets just seem to be consolidating rather than capitulating spectacularly as was so joyfully proclaimed by the resident blogs of doom.

Interest rates are deemed to be 57% likely to be cut next Tuesday according to the implications of the futures markets. A further drop in rates may well see further growth through 2013.

Residex predicts growth through 2013 and 2014, before the market retreating again in 2015. That's a fairly likely outcome to my mind, as it would mirror the expected movements in interest rates per the implied yield curve (with the effects thereof taking up to 18 months to flow through fully to the housing market).

Mind you, if the Residex numbers show anything, the one thing they do demonstrate is how totally and utterly pointless 12 months market forecasts are. It's simply uncanny how often and how spectacularly wrong they can be, the huge margins of error proving how futile the whole forecasting exercise really is.

Always better to focus on the long term!


My latest Property Observer article: 10 risks facing Aussie property investors

You can read it here.


Sunday, 25 November 2012

Property Update: The 80:20 rule in investing

How excited do people in Australia get about the prospect of a housing market crash? Take a read - extremely excited! And often extremely vindictive too!

It was widely stated that "anyone" who bought property in the lead-up to the financial crisis was extremely "stupid". Yet over the following years dwelling prices in Melbourne jumped by well over 50% and prices also boomed in Adelaide, Perth, Canberra, Brisbane, Sydney,  Darwin, Hobart and regional Australia. In other words, everywhere.

This was extremely unfortunate for those who sold their homes based upon infamous predictions that prices would fall by 40%.



Does that mean that property prices can't fall? Of course not. Anyone who tells you otherwise, I'd suggest you direct to the nearest available funny farm. Any asset which can increase in value sharply can also fall in value just as sharply, if not more so.

In fact, property prices did fall through 2011 and early 2012.

RP Data reports that dwelling prices over the past 12 months in Melbourne have fallen by 4.4% and in Brisbane they have fallen slightly by 0.8% (although year on year, RP Data reports price increases of similar magnitudes in Perth and Sydney).

And prices could retreat further, although I suspect that it may be wishful thinking on behalf of the doomsayers that they will fall back to where they were before the last boom.

Michael Yardney, whose property investment website I write for, says that "property investment is simple, but it's not easy". He's right. Articles such as the one I referenced above present perhaps one of the biggest hurdles for budding investors.

Every year for decades there have been those who say that prices are too high and that they will soon come down. And indeed, prices do come down periodically - it's what is known as a market cycle.

If you are to survive and thrive in the game of property investment, you need to be able to focus on where prices will be in 20, 30 or 40 years time - with increasing household incomes and population growth - and disregard to the market noise in the meantime. Easier to say than it is to do, mind, but that is what a successful property investor must be able to do.

The 80/20 rule

See this attached link for my latest article on Property Update on the subject of the 80/20 rule in investment.




What does "the end of the mining boom" really mean for Australia?

An awful lot of scaremongering going on at present from the resident purveyors of doom. Here's a more realistic viewpoint of what the "end" of the mining boom actually means is noted by HSBC's Paul Bloxham as reported by Sydney Morning Herald:

"Officials at Treasury and the Reserve Bank think that talk of the mining boom ''ending'' misses the point. Instead, they say the payoff will continue for years, due to a surge in the volume of exports, as a many mines and energy projects come on-stream.

HSBC's chief economist and a former Reserve official, Paul Bloxham, sums it up like this: "When you do see the peak in investment, the exports start to ramp up. We get the export volumes that will come out of Australia. It means we are producing more output, the companies pay tax here and employ people here.''

For all [the] challenges that have come with the boom, the mass injection of mining capital is set to fundamentally transform the shape of the economy. The number of jobs in mining, many well paid, has tripled in the past decade to 270,000 - most of them in Western Australia and Queensland.

The sum of money invested in advanced mining projects in the west has grown by a staggering 1335 per cent in the past decade, the Bureau of Resources and Energy Economics says. Much of this wealth has trickled into other states through channels such as spending on other services linked to mining, federal tax collections and dividend payments.

HSBC's Bloxham says the country will be left with a ''very productive'' stock of capital and, in all likelihood, a dollar than stays stronger for longer: ''The larger capital stock and continued growth in demand for commodities is likely to see support for the Australian dollar, which is ultimately a way of spreading the benefits of the resources boom.''

While mining capital investment may peak in 2014, many projects will begin to move into the production phase which will bring revenues, profits and tax income into government coffers. The world doesn't just stop dead in its tracks in 2014 or whenever exactly the phenomenal boom in investment hits its peak.

There will certainly be challenges ahead of course, as there always are, but the constant chirruping of the incessant pessimists has been well over-played. Australia will still be seeing the benefits of the mining boom long after most us have popped our clogs.

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Another awesome day of Test Match Cricket in India (and in Adelaide for the Aussies). My old friend Alastair Cook was on sparkling form again with a sublime 122 in awkward conditions in Mumbai, equalling the most Test Match centuries in the history of English cricket (22).

He's 27 years old.  

Saturday, 24 November 2012

Whoa! The little Aussie battler is BACK.

Crikey.

This sure ain't a happy-lookin' chart for the RBA, for whom the usual tough balancing act looms.

The Aussie dollar is again buying 104.6 US cents and beyond. A positive week in the US...so currency markets starting to price out a December interest rate cut methinks.

Must be all that Thanksgiving cheer stateside flowing across to our phenomenal Aussie battler.


Auction clearance rate reversal

Interesting to see the preliminary auction clearance rates this weekend from Australian Property Monitors.

Sydney's clearance rates dipped below 60% for the first time in 9 weeks (59.7%) but Melbourne's rates raced up to 65%.

Truthfully, Sydney's is a weak result considering the already very low interest rates, probably reflecting affordability concerns and constraints.

I've been looking at the price of apartments in the inner west in Sydney and my word they have shown some outstanding growth through the financial crisis right up until today. That particular sector of the market must surely be reaching some kind of plateau so better opportunities must now exist elsewhere in the city.

Melbourne's property market resilience continues to amaze, previous booming performance considered.

These preliminary auction clearance rate figures do tend to get revised somewhat due to the number of unreported results, but can sometimes offer a useful leading indicator as to sentiment.

10 forces which can make prices move

Oscillation around a fair value
A great number of commodities increase with inflation over time. Sometimes they become very expensive and at other times they become tantalisingly cheap, although they often oscillate around a median or fair value.
Some asset classes are liquid, such as shares or equities and therefore are very volatile. Residential property prices tend to be less volatile as even during a recession most people elect to remain in their homes rather than selling up.
Ultimately, the underlying forces which move asset prices tend to be the same regardless of the asset class. Today, I’ll look at what the 10 of those forces are but, for a change, will look at a brief history of the price of crude oil to do so.


1 Inflation (1948-1957)
Prices of commodities tend to increase over time as the currency gradually becomes worth less. From 1948-1957 the price of crude increased steadily from $2.50 per barrel to $3 per barrel (the above chart is inflation-adjusted to 2008 dollars) broadly tracking inflation during that period. There then followed a period of…
2 Flat prices (1958-1972 - decline in real values)
When prices become a little high, they can sometimes ‘take a breather’ such as they did between 1958 and 1972, the real price remaining at around $3 per barrel. The nominal price of crude remained flat which represented a fall in real cost while the purchasing power of currency caught up. Unfortunately the outbreak of war then caused a major…
3 Undersupply (1973 - Yom Kippur War)
In 1973 Egypt and Syria invaded Israel which saw the supply of oil being cut off and the price of crude more than doubling. Fortunately, normal service was resumed and this allowed a period of gently declining prices until the impact of further…
4 Political instability (1980-1981 - problems in Iran and Iraq)
Political instability in Iran and Iraq caused the price of oil to increase very sharply again from $14 to $35, which eventually introduced a risk of…
5 Weak demand! (1981)
As prices soared ever higher, Saudi Arabia warned the other oil-producing countries (OPEC) that if nothing was done about spiralling prices then demand would drop off as consumers sought alternative energy sources and methods of using less oil. This is indeed what happened as consumer nations introduced energy efficiencies such as better insulated buildings, more streamlined industrial processes and cars which used less fuel per mile. And problems were then exacerbated by…
6 Government legislation (1981-1985 - Saudi relaxes controls)
Saudi Arabia finally lost patience and relaxed its controls on production. The oil supply was ramped up in its production from 2 million barrels per day to a massive 5 million barrels per day. The price of crude went into freefall until the world reached a state of major…
7 Oversupply! (1986)
The price of crude dipped alarmingly to below $10 per barrel by 1986. A period of relatively moderate price action and then a steady recovery followed until the world experienced a…
8 'Black swan event' (2001 – 9/11 terrorist attacks)
The effect of the 9/11 terrorist attacks on the price of crude was short and sharp seeing a plunge in prices before the commodity was rescued by…
9 Growing demand (2002-2007 - boom)
A period of uninhibited global growth combined with further problems in oil-producing countries sent prices soaring above $90 per barrel, until eventually the exuberance was reversed by...
10 Recession! (2008-2009 - financial crisis)
The global financial crisis hit many commodity prices incredibly hard and the price of crude almost halved in a remarkably short space of time as fear set in.
Reversion to the mean
The price of crude today again sits proudly at $88 per barrel. While markets flip between exuberance and despondence, the long-term trend is an upwards one driven by growing demand and inflation. Between 1948 and today prices have hit some extreme highs and critical lows, but the net result is that they have increased from $3 to around $90.
Personally I don’t invest directly in physical commodities as they do not generate income. There is usually much greater longer-term value in investing in those assets which create income (which can include the companies which mine commodities) and have the opportunity to grow in price in addition.
If you can develop a plan which focusses on acquiring quality assets at reasonable prices and can learn to ignore the short-term gyrations in sentiment, your long-term outcome will be a wealthy one.
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I enjoyed my contribution to Kevin Turner’s Great Real Estate show on Brisbane’s 4BC Radio this morning.
If you missed it you can catch it online in a week’s time on Real Estate Talk.

Stocks jump because of, erm...something or other

Always amusing when there are are no apparent reasons for a jump or drop in share valuations.

SMH went with "US shares higher amid on bargain hunting" - which doesn't make sense from a market perspective...or even grammatically.

In truth, it was the thinnest trade of the year with volumes exceptionally light so the market was probably just retracing - going back to where it was before the fiscal cliff jitters began.

The Dow finished the week up 3.3%. Hmm, share markets gaining 3.3% in a week and positive talk - doesn't sound like an interest rate cut environment.

When journos can't explain a movement they usually revert to: 'profit taking leads to sell-off' or 'bargain-hunting leads to bullish signals.'

Friday, 23 November 2012

Catch me on 4BC tomorrow morning

Don't forget to turn in to the Real Estate show on Brisbane's 4BC Radio with Kevin Turner tomorrow morning, where we discuss the economic doom and gloom in the press and what investors should do about it.


Shane Oliver says...buy shares!

Fascinating to read Shane Oliver's insights in AMP Capital's report yesterday.

If you'd like to know where to get a copy, please email me:



“We don’t think that a return to global recession or even a sharp further slowdown is probable next year. While it’s hard to see Europe strengthening much next year it’s hard to see it getting significantly worse.

Thanks to the ECB, Europe finally seems to have a decent program to bring bond yields under control in troubled countries. While Spain has yet to apply for assistance thet hreat that the ECB will aggressively buy its bonds if it does has led to a distinct calming in bond markets across Europe.

This, plus the ECB’s provision of cheap funding to banks, seems to have completely headed off a re-run of the global financial crisis and has left Europe with a mild recession.

However, the ECB is likely to provide more monetary stimulus if growth doesn’t pick up and the Eurozone seems to be relaxing the pace of fiscal austerity granting Greece another two years to meet its targets and indicating that Spain could be granted assistance without having to undertake further austerity.

While the US “fiscal cliff” is unlikely to be resolved until December, the most likely outcome is that a compromise will be reached.”