Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

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.

Monday, 28 January 2013

Where will property prices be in 10 years time?

I received predictable earache aplenty the other day for daring to suggest in an article that - over the long run - Australian residential property prices would be likely to be to some extent correlated to the growth in household incomes.

I've never subscribed to the theory that over time property should significantly outperform income on a median price growth basis.

In keeping with the general spirit of the Herengracht index and Dutch canal-side housing, it is my opinion that overall the most rational proxy for median residential property price growth over time is household income growth.

That said, I do think that we need to make some allowance for the structural shift towards lower interest rates in recent times, which has naturally led to an increase in household debt levels. It's been often argued that debt levels are unsustainable, yet they have been sustained for many years now.

In the previous decade as highlighted in this article here by Christopher Joye, household income growth was fairly flying along at 5.8% per annum.

However, much of the previous strong growth in Australia has been due to a sizeable increase in the number of two-income households.

For this reason, it is expected over the next decade that household income growth will be materially lower, perhaps at around 4.5% per annum or so, which is close to the 4.4% per annum growth seen in wages since 1990.

Consequently, expect lower property price growth in the future too, particularly as we will see no repeat of the growth spurt caused by the structural shift to lower interest rates.

Of course, if you are an investor in property, then you will look to outperform any median price growth quoted in the media by investing against the cycle and by only buying when sentiment is low.

Take a read of this Business Spectator article where Christopher Joye introduces some interesting arguments - and a couple of interesting charts:

A couple things to note here. One is the relative under-performance of Sydney. Although in the period through to Q1, 2004 Sydney prices skyrocketed, the market has been relatively soft in the 9 years since that time - and over two decades Sydney's prices have significantly under-performed those of other cities.

Secondly, that 21 surveyed economists' average and median projections for residential property price growth over the forthcoming decade are 4.41% and 5.00% per annum respectively, which due to compounding growth would see prices in the region of 50-60% higher 10 years from now.

Of course the figures won't be accurate for there are simply far, far too many variables for anyone to know.

It is worth noting the difference here, though, between real and nominal prices.

I suspect that Professor Steven Keen's initial erroneous 2008 prediction that "prices would fall by 40% over the next few years" (ditto his prediction of a great depression and 20% unemployment) was an off-the-cuff remark which gained him surprising levels of press attention. 

But he subsequently subtly revised his prediction, saying that prices could fall in real terms by a similar figure over the next 10-15 years.

Of course we can't know accurately what this means for property prices in absolute terms. It depends to a large extent upon whether we deflate by inflation or by household incomes (which are likely to be higher than CPI), but it is worth noting that over that timescale even Australia's most ardent doomsayer is predicting no kind of material absolute price falls at all.

Although it is popular to talk of "property investment", the near-total reliance on capital appreciation by most investors in residential property means that for most part we are really talking about price speculation. 

If you are in property for anything less than Keen's 15 year time horizon, you are to some extent taking a punt on a whole host of unknown outcomes (which is fair enough, but should nevertheless be acknowledged).