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.
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Thursday, 31 January 2013
A few musings on affordability in Sydney
A Pommie migrant, I first set foot on Aussie shores in Sydney in 1999, and the hot topics of the day were the invasion of East Timor and…housing affordability. A lot has changed in that time, for me especially as I’m currently living in East Timor. But Sydney’s housing affordability debate drags on in its predictable manner.
One unwelcome change for residents during that time is that property located close to the city, as well as being expensive to buy, is now also expensive to rent. The debate has worn so depressingly thin that it was a welcome change to see some levity breathed into it by SQM’s Louis Christopher this week.
Of course, there is a serious underlying point here, and Christopher impressed by delivering some decisive but well-chosen words, quoted in this Property Update article here.
Sydney market sectors
Economists are forever guilty of taking a necessarily top-down approach to their studies and continually overlook the primacy of the individual. I’m been guilty of the same thing myself as I’ve spent much of my time overseas over the past year or two.
The Sydney premium property sector will continue to march to its own drum, little affected by wages growth, rather by swings in confidence in the economy and the extent or otherwise of the share market recovery – buyers in this sector tend to have material levels of equity and investment assets.
The median-priced sector of the market continues to suffer from a shortage of quality, well-located dwellings. Every time I’ve let any of my properties around the eastern suburbs, the city or the inner-west in recent years they've been re-let instantly and sometimes even before being advertised. In such a tight market, it’s small wonder that rents have jumped upwards over the last half decade.
The sector of the market which is inevitably struggling is that of first homebuyers. I wouldn’t want to generalise too much but statistics of late seem to imply that first homebuyers are increasingly opting out of buying, or simply can’t afford to opt in.
Housing affordability issues in popular capital cities are nothing new. I remember when I went to train as a Chartered Accountant in London’s West End on the princely trainee salary of £18,000pa. I rented a flat for £400pcm located precisely 96.4km from the office, condemning me to 3 hours+ a day of travel.
Worse, even after the government swiped its share of my salary, I had to hand over £3,600 of my net pay to Great Eastern Rail and the London Underground just to get me to work! If you’re familiar with the Tube I don’t need to tell you about the 'pleasures' of the Central Line from the City to Bond Street in rush hour…
On the day I qualified as a CA, my salary doubled to £35,000 and of course I’d dearly have loved to buy myself a 1 bedroom flat in Marylebone W1 so I could walk to the office
I might just as well have wished to go for tea with the Queen at Buckingham Palace (actually that’s a terrible example, as I did end up doing that – rather, I might just as well have wished to fly myself to the Milky Way or Planet Zog). Clearly it was never going to happen so when I could afford to do so, I invested my money elsewhere.
The role of immigration
Yesterday, Britain’s Daily Telegraph ran an article which stated that London has become a city only for immigrants and the very wealthy.
Through a case study, the article noted that whites are being forced out of the city due to the 1 million Muslims and many other races having “taken over” the traditional working class suburbs. Although the ‘locals’ have tried to mix with immigrants, the immigrants’ refusal to change their culture (particularly when wearing the niqāb or burqa) has led to racial tensions, the article reports.
Is Sydney heading down a similar route (assuming the article is accurate and in some way reflective of wider trends, that is)? One hopes not, although some of the internet forum comments have been worrying of late.
What I do think is likely is that the Census-reported home ownership rates in Sydney of 67% will fall closer to the significantly lower ownership rates seen in other developed cities such as London and New York.
Embracing the outer suburbs
I’m no town planner and I don’t pretend to have all of the answers to these things, but it's obvious that the city needs more affordable supply and equally obvious that middle-income Sydneysiders are not keen to embrace the western suburbs, which exacerbates the affordability issue.
This is exactly what was alluded to in the tweet to Louis Christopher where he was asked if he would live in Fairfield thereby risking “getting shot”. If we continue to think of the western suburbs in that way, well, yes, the affordability level of Sydney’s inner-suburb housing market is doomed.
The dangers and hardship of living ‘out west’ in Sydney are wildly overstated. Currently I’m living smack in the middle of the Comoro community, one of East Timor’s notorious distrito, and I walk to Timor Plaza through the shacks every day. Sure I could live on a hotel-style resort next to the US Embassy, but I moved to Timor to experience East Timorese culture not to mix with the US paramilitary, decent blokes though they are.
In the past year, we’ve had civil unrest and uprisings, some brutal knife attacks by the beach and slashings, terrifying off-shore earthquakes and, occasionally, people do indeed get shot. Even Nobel Peace Prize winner Prime Minister Ramos Horta was shot in the stomach. But I’m not going to add much by simply avoiding living in the local community, so I live in the heart of the community and take care late at night.
I’m not unsympathetic to the plight of first homebuyers. In fact, I still rent myself and I’m in my mid 30s. I’ll probably buy a residence in the next year or two, but I'm unlikely to be buying in Sydney.
People ask me about shortcuts to home ownership. There aren’t any - unless you are gifted a deposit. There are so many two-income household these days that prices have been forced northwards by other self-interested homebuyers. Capitalism is characterised by individualism and self-interest; we've known that for centuries now.
If you earn the median Sydney household income of $75,000 then to save a deposit you need to find a way to save $13,000 of it per annum to have a chance of save a 10% deposit over 3 years (by no means an easy feat the way rents have been going). That means no holidays to Hawaii. No plasma screen TVs. No Foxtel. No i-Tunes or i-Phone apps. It’s not easy, but since when has life ever been easy?
Even if the much-vaunted house price crash eventuates and Sydney’s prices drop by 20%, 30% or 40%, first homebuyer problems and the housing affordability debate will never – and I do mean never - go away. If a correction does happen, banks won’t be dishing out 100% mortgages: that’s one certainty you can bank on.
Australia versus the world
In East Timor, we’ve experienced a nasty bout of inflation which has pushed prices up sharply, although around half of the population of 1.2 million continues to earn US $1 per day.
I’m certainly no Michael Palin but was lucky enough to travel to 25 countries last year, including Egypt (revolution, violence, massive civil unrest), India (countless millions slum-dwelling), Portugal and Greece (25% unemployment), China (incredible poverty, no freedom of speech under Communist regime), Sri Lanka (human rights abuses, Tamils, too many guns), Vietnam (wide-scale post-Communist impoverishment), Malaysia (seemed quite nice), Thailand (although still mainly agricultural, recovering reasonably well from the Asian crisis and the collapse of its currency - despite illegal immigration issues) and Hong Kong ($1 million+ for an apartment in the sky), among others.
Australia has an amazing quality of life with capital cities that are expensive. I’ve seen a lot of the alternatives, and without exception, they've all been worse. I’ll leave the final word today to none other than Mr. David Koch and wife Libby:
“We’re sick of the whingers. This is the best country in which to live, work and play. Financially and economically, we are the envy of the world.
Think about it; no economic recession for 21 years, avoided Asian Financial Crisis in the '90s, avoided Global Financial Crisis in 2008-12, low unemployment, low inflation, solid economic growth and strong financial system.”