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.
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Monday, 21 January 2013
Australia's investment markets are starting to bite
Interest rates still heading down, down...
I blogged the other day about the economic clock and the interest rate cycle. Today I'll look in a little more detail about where we can expect investment markets to head next.
The ASX 30 Day Interbank Cash Rate Futures February contract is trading at 97.075, indicating a 37% expectation of a cash rate decrease to just 2.75% at the next Reserve Bank Board meeting.
The interest rate easing cycle began a little over a year ago now on my birthday - 1 November 2011 - when the cash rate was dropped from 4.75% to 4.50% and it has been falling fairly consistently ever since to historic lows of just 3.00%.
When interest rates fall, it is hoped that some capital flows back into the investment markets and consumer spending and confidence starts to rise.
There is a strong historical link, of course, between consumer confidence and property price movements.
It's taken more than a year but there is finally some solid evidence of investors returning to the markets as reported of late.
The chart below shows the effect of the steady reduction in the cash rate on interbank rates through 2012 as the Reserve Bank attempts to stimulate confidence in the face of some mining investment headwinds anticipated ahead.
Slowly but surely there are signs that investment markets are starting to bite.
The Aussie share market (All Ords) has been on a fine run for some time now as investors are gradually wrenched away from term deposits and fixed interest investments which are presently yielding only dismal returns.
It was also reported today that superannuation returns in the low double digits for 2012 have seen super fund balances back to the highs of where they were before the financial crisis some half decade ago.
While the share markets still have some way to recover, as the population grows and a greater percentage of us contribute to our super throughout our working lives the superannuation balances are likely to continue to snowball.
This will be compounded by a substantial increase in the employers compulsory contribution from 9% to 12% over the coming years.
While it seems common for most to focus on the negative outlook these days, 2012 was a good year for equities and household wealth increased.
As I discussed here there will be a growing trend towards self-management of super funds (SMSFs) which will see more property-loving Aussies looking to investment real estate in the future.
The superannuation story is an underestimated one. There is some $1.5 trillion locked up in Australian superannuation funds. To put that figure in context our entire housing market is only said to be worth $4-5 trillion.
However, lenders to super funds are relatively risk averse when it comes to granting mortgage debt so it is likely to be the more affordable apartment market which sees most of the action from SMSFs - with substantial deposits required most super balances are inadequate to hit the expensive housing markets in the major capital cities.
As for interest rates movements for the rest of the year, the yield curve shows that while a February cut may only be around a one-in-three shot (37%) following the very significant bounce in iron ore prices, it is still deemed more likely than not that rates will be cut to just 2.75% over the next couple of months as denoted by the second arrow below.
The futures markets imply that rates could bottom out at just 2.50% around the middle part of this year.
As for the direction of property markets over the next year or two...is there a more hotly debated subject in Australia these days?
The reality is that - as is often the case - different property markets will behave in different ways. A number of cities have shown moderate growth over the past 12 months but if you really want to outperform you need to seek out the properties in the highest demand.
The broad middle markets of Sydney, Perth and Brisbane look as though they may have opportunities for investors. And Darwin too, if you are that way inclined...
Source: RP Data.com
While many continue to highlight the affordability issues of well-located housing, with mortgage rates falling in some cases to just 5.00% per annum, there is evidence of mortgage approvals rebounding.
There tends to be a lag between mortgage approvals and property price movements but we may well start to see some price action movement in the first half of 2013.
While it is true that some of our prime location property - particularly housing as opposed to apartment stock - is unaffordable, with interest rates falling so low and looking likely to fall further it appears likely that there will something of a rebound in Australian property in 2013.
There are good arguments on both sides of the affordability debate. On the one hand lenders in Australia have been (relatively speaking) disinclined over recent years to grant buyers mortgage debt that will induce severe mortgage stress and the spread of household debt in the country is deemed by analysts to be relatively sustainable.
The flip side is that interest rates are unlikely to stay so low forever so there is likely to be some pain for today's buyers down the track.
There does appear to be a worrying trend of first home-buyers staying away, but with the population of the country continuing to grow at a fantastical pace, there is little sign of the much-vaunted major price correction in the figures presented above.
Lessons from overseas
If there is one lesson Aussies should learn in property corrections in England, Ireland, the US and other markets which saw substantial falls in prices, it is that there is often significantly more risk in investing in assets which are in lower demand in outer or regional markets.
Ben Graham said it best in the Intelligent Investor - there is a greater risk of substantial loss through buying a second-rate asset at a tempting price than paying a fair price for a high-quality asset.
The logic behind the statement is faultless. As investors we tend to be far worse at timing investment markets than we believe ourselves to be. Consequently the odds of success are greatly enhanced through acquiring assets which will be in strong demand for years and decades to come.