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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Monday, 28 January 2013

Some Australian property markets are over-priced and could correct sharply


OK, I have got a confession to make so here goes....

It's true in life that if you are persistent enough eventually you may well succeed.

And after the barrage of messages and people telling me that Australian residential property markets have corrected massively (or alternatively, that they are way over-priced and are about to correct massively - I do get most confused as people are continually advising me of both, and they surely can't all be correct) I am forced to admit that you may well be right.

Now I don't have a crystal ball, and as far as I know at least, neither do you.

I do agree, though, that some regional markets are inflated and overpriced, and further that some regional markets where demand is low could possibly suffer a correction of 25% or even more just as was experienced in Britain and some other overseas markets.

For this reason, I would not recommend buying property in those areas, and certainly not as an investor.

And the major city markets?

I'll go even further than this and admit that our major property markets such as Sydney - although the population is growing at a furious pace, at around 60,000 heads in 2012 - could stumble if confidence falls or if inflation jumps and then subsequently interest rates revert to the mean.

As noted, I can't predict the immediate future any more than the next fellow, although it appears that today many believe that they carry this mystical innate ability.

There is little sign of a major correction happening to date with Sydney's broad middle property market now at all time highs, but it is certainly a possibility.

And if confidence does take a tumble the correction could be every bit as severe as the one seen in London. 

Everyone keeps repeatedly telling me what a major crash there was in the UK, so let's take a closer look at real numbers rather than relying on conjecture, inference, hearsay, internet forum trolls, blokes down the pub and the Twitterverse rumour mill.

Here is a website that shows very specifically a range of data on London property prices: average prices, median prices, sales volumes and in particular the way in which the different sectors of the market have behaved markedly differently.

The reason I reference this site is because it shows a range of data rather than one single chart which would naturally be open to all kinds of interpretation.

The great London property crash

What the figures show is that due to the major correction in the London detached housing market the average price of a house in London is now only up +122% as compared to where it was in April 2000 (semis and terraces +130% and +135% respectively).

If median prices are your preferred barometer then the correction was even more severe, the median price of a detached house having only increased by +97% over the same time period.

The other property types (semis, terraces, flats) were notably more responsive to the interest rate being slashed close to the zero bound between October 2008 (official Bank of England bank rate dropped from 5.00% to 4.50% on the 8th of that month) and March 2009 (official bank rate finally dropped from 1.00% to 0.50%) and after very quickly bouncing back they variously show gains of +79% to +127%.

Sales volumes are still well down on where they were during the boom periods, but after a major lull have picked up substantially since around August 2009.

Land shortage

Sydney, much like London, has a shortage of affordable, well-located land. 

It is rarely mentioned, but it is possible to pick up 3 bedroom houses on spacious plots in Sydney for under $400,000, but you will need to live 30 minutes or so west of the central business district in order to acquire one. It's a discussion I've had with friends and work colleagues many times, but one which invariably ends with: "But we don't want to live west of the city, we want to live in the eastern suburbs, close to the city and by the no."

This will be all rather familiar to those who lived in London 20 years ago - there was plenty of affordable housing close to the city, but mostly it lay to the east of Bishopsgate which was not seen to be a desirable or preferred option for City and West End employees. Gradually however, a number of the East End suburbs and districts did become gentrified.

So, overall, I am forced by the sheer weight and persistence of messages and emails to admit that our major property markets such as Sydney could suffer a correction every bit as severe as the one shown in these London figures.

The average price of a detached house in London, for example, is now some 20% or so below its peak and clocks in at £1,077,151 ($1,631,819) as at October 2012 - the median price of detached houses also dropping sharply down to £700,000 ($1,060,458).

Of course, the Australian dollar figures appear artificially low due to the present phenomenal strength of the Aussie over the Great British Pound sterling (1 GBP: 1.51494 AUD). Historically, the figures would be likely to come in at around average $2m-$2.5m and median $1.4m-$1.75m respectively.

You might tell me that these figures are outrageous, perhaps even ridiculous, and I wouldn't disagree with you. Nevertheless, these are the statistics after "the great UK crash".

Semis, terraced houses and flats in London have barely budged in absolute terms and sit at or around all-time highs both in terms of average and median prices, although thanks to the UK's long-standing ZIRP and the steady march of wages inflation, affordability has improved somewhat over the past half decade

At least, affordability has improved for those Brits who have escaped the perils of a 7.7% unemployment  rate (Australia 5.4%).

Economic and unemployment outlook

Fortunately for Australians, we don't expect our unemployment rate to run nearly as high as the rates seen in Europe. Bloomberg's recent survey of major economists showed that consensus expects Australian unemployment to top out between Q1 and Q3, 2013 at 5.6% before it falling back to 5.5% in 2014.

It was interesting to note that in the internet forums of doom this projection of unemployment topping out at 5.6% did not attract one single solitary comment. Not a single one (as compared to several hundred in response to a projected hope of moderate property price falls). And there I was thinking that us having the choice of a job to go to was pretty darned good news for us as a country. Silly me.

The Bloomberg survey of major economists (please note: this is the Bloomberg survey of major economists, it is not the Bloomberg survey of non-financial armchair pundits - to my knowledge they don't yet run one) also sees the interest rate easing cycle finishing in 2013 at 2.75% in Q3 and Q4 2013, before ticking up to 3.25% by Q3, 2014. This is excellent news.

The consensus GDP forecasts came in at 2.7% for 2013 and 3.1% for 2014 with CPI (inflation) forecast to remain well within the targeted 2-3% range through 2013 and 2014. Thus forecasts are for Australian to avert recession by a comfortably wide margin.

All of which reflects favourably on the wider Australian economic outlook. Jolly good then and bravo.