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.

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

Tuesday, 30 April 2013

RP Data weekly report

Auction clearance rates strengthening nationwide.


Sydney auction clearance rates going from strength to strength. Strong in Melbourne too.


Fastest selling property type is apartments in Sydney at just 32 days, followed by houses in Canberra.

Source: RP Data

ASX200 to its highest level since July 2008

Monetary policy doing its thing as the XJO adds another 1.2% today up above 5190.

No rate cut in May, I'd say, though the market is still pricing in a 42% chance.

RBA to wait and see for another month at least is my best guess at this stage.



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Have had a very cool few days in Singapore (actually, 'cool' is a poor choice of word for it is incredibly humid at this time of year).

Off here tonight...



Public holiday in Singapore tomorrow, so will be heading to Sentosa Beach to play a bit of beach volleyball.

Back to reality on Friday (flying back to Timor-Leste)...

Property Observer: Metropolitan versus country investing

I write for Property Observer today here.


In the property world, APM reported another strong weekend of auctions in Sydney in their article "More strong auction results and record house prices". Unsurprisingly, it's the inner-west which is outperforming:

"Sydney’s auction market recorded yet another strong result at the weekend as home buyers and sellers continue to drive the housing market to its highest levels in years.
The weekend auction clearance rate of 74 percent followed last weekend’s 75.6 percent and was significantly higher than the 49 percent recorded over the same weekend last year. Sydney’s weekend auction clearance rates have been remarkable for their consistency and strength so far this year. 
Rates have exceeded 70 percent on 9 of the 12 auction weekends with 69 percent recorded on two others. Weekend rates have averaged 72 percent this year which is 15 percent higher than the 57 percent averaged over the same period a year ago and clearly the best start to a year since the strong market conditions of 2010.
Sydney’s auction market has shown no signs of waning since the Easter holiday break with auction clearance rates continuing to trend upwards despite higher listing numbers. 378 properties were offered for auction in Sydney at the weekend which was over 100 more than last weekend and the same weekend last year.
This is a clear indication that seller confidence is on the rise driven by the significant increase in buyer competition for properties.
It is no surprise that surge in auction market activity so far this year is translating into house price growth. APM reports that Sydney’s median house price rose by 1.6 percent over the March quarter to a second consecutive quarterly record of $672,681. Sydney’s median house price has soared by nearly $30,000 over the past 6 months.
Sydney’s inner west is consistently the most popular region for auctions and produced another solid 77 percent clearance rate at the weekend at an average sale price of $1,013,390."

Saturday, 27 April 2013

RP Data on regional price growth...

Some fascinating studies have been carried out into the human tendency towards confirmation bias.

We tend to gather information selectively in order to support our preconceived notions and tend to frame our questions accordingly.

An interesting property report was released by RP Data this week which stated that:

"The majority of suburbs that have recorded annual average value growth of 7.2% or greater are situated in regional areas of the country (55.7%) rather than capital cities (44.3%). 

Across most states this same trend has been replicated with only Melbourne (55.9%), Adelaide (77.8%), Darwin (90.9%) and Canberra (100%) recording a greater proportion of suburbs listed within the capital city."

There's no question that this will be cited by promoters of regional property as 'proof' that investing out in the sticks represents a superior investment choice.

This is what is known as confirmation bias. That is, the tendency of persons to favour information which supports their hypotheses.

There are a number of reasons why the above stats don't tell the full story.

Firstly, there is risk.

My shares in BHP Billiton are perhaps less likely to double in market price overnight than, say, shares in Buccaneer Energy. 

That doesn't in itself mean that speculating in Buccanneer Energy is a smarter idea than investing in BHP Billiton. Why? Because returns should be risk-adjusted and shares in Buccanneer are illiquid. 

If the price starts to tumble there may be no willing buyer of your shares available.


And secondly, as I explained in some detail here, the rising costs of construction of new dwellings can drag median prices higher in small regional towns, but the actual prices of existing dwellings frequently demonstrate weak growth.

Take the example of Victoria as mentioned by RP Data above.

I lay down the challenge. Show me an existing regional property which has grown in actual price over the last 10 years and I will show you a property in Melbourne which has appreciated more.

It's fairly obvious when you think about it. A town where houses sell for less than $200,000 has almost no land value, only the costs of construction.

At the end of the day, property investment is about owning properties where people actually want to live and need to live. 

Median prices can be terribly misleading.

The cost of living in Australia

Interesting read from SMH here.

Why do we even have price inflation at all? Ross Gittins explains in plain English in his article today here.

No paywall!

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After much to-ing and fro-ing Graincorp (GNC) finally looks set to be taken over by Archer Daniels Midland for $2.8bn - the initial offer of $12.20 per share was extended to include a $1 per share dividend to shareholders.

GNC shares were trading up around 8% yesterday in anticipation of the finalisation of the deal.

Friday, 26 April 2013

Gold strikes back!

Gold price continues to fight back after its recent traumas...



Source: kitco

Eddie Everywhere...

Read me in a few places today.

Here on Property Observer.



Here on Property Update...


And some other places...

Thursday, 25 April 2013

Property Observer: most read articles

Check out my latest here.


RBA paves the way for steadier dwelling price growth

The Reserve Bank is certainly going to town on its housing market speeches at the moment, as I previously noted here. This week, the head of Financial Stability, Luci Ellis, gave a speech in Sydney, they key themes of which I summarise below.

Make no mistake, when the RBA prepares charts it does so with an underlying message in mind. Let's see what we can decipher.

Firstly, Australia is no longer the high-inflation country that it was in the 1970s and 1980s, but note how house prices did continue to rise even as inflation slowed.

Graph 1: Consumer Prices and Housing Prices

Why? Because inflation acts as a 'credit constraint'. In other words, interest rates include an inflation compensation component. So, as inflation fell, so did the inflation compensation component of mortgage rates.

Therefore, estimates the RBA, due to lower inflation, we might expect the borrowing ratio roughly to have doubled as measured against income multiples.

Graph 2: Maximum Loan-to-income Ratio

Says the RBA, they would have expected household debt to rise. And it has. However, the transition period ended way back in 2005. Since then, the debt-income ratio flattened, in their own words, "to a new, higher average"...

Graph 3: Household Finances

And, in recent years, households have begun to save again.

Graph 4: Household Saving Activity

Expect on average national future dwelling price growth and credit growth to be slower in the future, says the RBA.

The population continues to boom, by around 380,000 persons per annum at the current rate of expansion, and the number of persons per dwelling has fallen dramatically over the decades. Therefore we need tens of thousands of new dwellings each year to house the rapidly growing population.

Graph 5: Dwelling and Population Growth

The urban population of Australia is massively focussed on the two largest cities, with nearly 40% of us living in those two metropolises. We have a lot of land, but most people only want to live in a very small part of it: the "acceptable range of locations is limited."

Graph 6: Urban Population

Why the problems with constraints on supply? Largely, because individually we use so darned much of the desirable land. We live on enormous plots and have the least dense population of any country with cities of a comparable size. Only NZ is anywhere remotely close to Australia in this regard.

Graph 7: Urban Population Density

Land cost isn't the real problem, says the RBA, and it isn't government charges either, which make up a small component of property prices.

It's overwhelmingly the construction costs of our shiny new dwellings that makes new property an increasingly expensive proposition.

Graph 8: Construction Costs

Key quote: 

"...the price of our low-density life has become unaffordable for some. 

It therefore seems likely that our cities will become denser over time.

If so, the mix of residential construction will be tilted more towards medium-density and high-density dwellings than in past decades."


Graph 9: Apartment and Medium-density Housing

Prices are rising in some cities, notably Sydney and Perth. Flat for many years now in others such as Brisbane and Adelaide, and also very little house price growth in regional Australia.

Graph 10: Dwelling Prices

I noted that the RBA prepares charts with a message behind them. We have seen the below chart before, intended to demonstrate that with lower interest rates, repayments on new housing loans aren't nearly as high as a percentage of household disposable income as the popular consensus would have you believe.

Graph 11: Repayments on New Housing Loans

Note how the RBA has added a second (blue) line now. The message being delivered here: not only are repayments now more affordable on new housing loans they are also considerably cheaper on existing housing loans.

The underlying point, with interest rates set to fall even further, appears to be: "Stop complaining about property prices, because your repayments are lower."

As noted above, we'll have more higher-density dwellings in the future, and fewer detached houses:

Graph 12: Private Residential Building Approvals

But, the RBA highlights that it takes longer to build a block of apartments than it does houses in fringe suburbs.

The undersupply is set to become a major problem in some urban areas: "It might well be that construction lags – and concerns about supply – will become even more acute."

It's a worrying trend of appropriate supply failing to meet demand, certainly in my part of the world (Sydney).

Rental yields have been rising. Bond yields have been smoked.

Graph 14: Rental and Indexed Bond Yields

Lending standards have become much tougher - fewer low-doc loans, for example. This is good for market stability.

Graph 15: Banks' Housing Loan Characteristics

Summary: on average price growth and credit growth will be slower than we have seen in the past, but I am expecting the construction lag to cause a major undersupply of desirable dwellings in inner- and middle-ring Sydney suburbs and some other supply-constrained regions.

A further cut in interest rates on June 4 or perhaps a little later in 2013 may see median dwelling prices markedly higher by 2014 and payments on new housing loans revert upwards.

ANZAC Day

ANZAC Day is Australia's most important national occasion.

It marks the anniversary of the first military action fought by the Australian and New Zealand forces during the First World War.

Australia was only founded as a Commonwealth 13 years prior (New Zealand only 7), and, keen to establish itself among the nations of the world became involved in the Allied campaign to capture the Gallipoli Peninsula in Turkey.

The ANZAC forces landed at Gallipoli on 25 April 1915.

By the end of that year, the Allies were forced to evacuate with both sides suffering heavy losses and 8,000 Australian soldiers killed.

After World War II, ANZAC Day became the day that commemorated the lives of Australians and New Zealanders lost in both World Wars. 

Today, ANZAC Day has been broadened to remember all of those killed in all military operations in which the two countries have been involved.

It is rare that two countries share a Remembrance Day, but this morning, Australians and New Zealanders will remember the fallen. 

The Ode to Remembrance is one of the verses of the poem 'For the Fallen' by Robert Laurence Binyon.

They shall grow not old, as we that are left grow old:
Age shall not weary them, nor the years condemn.
At the going down of the sun and in the morning,
We will remember them.


Lest we forget.

Wednesday, 24 April 2013

Markets anticipate rate cuts and go on a field day

Bumper trade for stocks

A bumper day for stocks, then!

The market jumped upwards (XJO by +1.72%) in response to what was perceived to be a favourable (i.e. benign) inflation report which I detailed here.

The market anticipates a further interest rate cut - in fact it now anticipates two cuts or 50bps - to just 2.50%.

Happy days indeed for owners of shares in Commonwealth Bank (CBA) which jumped up by more than 2% up to a new high of $71.73. CommBank is now the largest company in Australia by market capitalisation, even bigger than the mighty BHP Billiton.

Pharmaceuticals company CSL also blasted on to new highs of more than $62, way up from $27 in mid-2011.

Meanwhile, low interest rates have also stimulated some property markets. 

Perth prices have been growing rapidly, while Sydney's prices, as expected, have driven on to all-time highs.

Unfortunately for Adelaide, prices are still below where they were a year ago and are below their previous peak, in spite of the record low stimulatory interest rates. As I noted here, South Australia has been hit by a number of project cancellations following a correction in certain commodity prices.

Source: APM
Metropolitan vs Country

I'm often asked why I prefer markets like inner- and middle-ring Sydney and properties in and around London to regional property markets, such small towns or those located 100-500+km from the cities where rental yields might be a little higher.

The answer, in one word, is: risk.

If you pick a hot regional market or mining town to invest in you might do well in the short-term.

Property is not a short-term investment, however, and you should aim to own property in markets with a diversified range of industries and forms of employment. There is absolutely no point in picking a market which is hot for 6 months while a mine is being constructed if prices then ease again immediately thereafter.

Property is a long-term investment and you need to own quality, desirable properties where the population and demand is growing rapidly but the supply of land for release is constrained.

If you speculate in cheap regional markets at today's elevated levels of leverage, you are introducing  a significant risk - in my opinion.

Towns with few industries

When I was growing up, Stoke-on-Trent in the middle of England was known as the home of pottery in the UK, although Britain's manufacturing industry has died a long, slow death in truth.

Before that, however, Stoke was a genuine boomtown setting all kinds of records for coal production, with the famous Chatterley Colliery becoming the first in Britain to mine more than 1 million tonnes of the black stuff. As late as 1992 the awesome Trentham Superpit was still churning out the last of its 2.5 million tonnes of coal.

The coal industry once employed more than 20,000 men in the town.

In 1994, the last of the pits was closed down and today all that remains today is the ugly slag-heaps which you can still see on the skyline. The steel industry in the town, sadly, went the same way.

Today, despite a rapidly growing wider UK population over the decades, the BBC reports that houses in Stoke are selling for one pound.

Meanwhile in London prices are reportedly some 17% above their previous peak.

I can't tell you what will happen to regional markets in Australia over the next few decades, but it appears doubtful that the desirable suburbs in capital city markets will ever become significantly cheaper given the massive population growth being experienced.

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Read me on Property Observer today here.



Inflation soft - interest rates to fall to record low

An interesting CPI print today as reported by the ABS here.

The headline rate of inflation was just 0.4%, with the favoured measures of the trimmed mean (0.3%) and weighted median (0.5%) coming in at the same level.

Year on year then, underlying inflation sits close to the middle of the target 2-3% range.

Strip out the estimated effect of the Carbon Tax, however, and underlying inflation is right 'down there' at around 2%.

Electricity costs were up 17.1% y/y and household fuels 16.8%.

Will this otherwise benign print lead to an interest rate cut to a record low of just 2.75%?

It's probable.

However, in my opinion, it is also probable that the RBA will wait for more data including the Labour Force survey on May 9 before committing to further monetary policy action.

A May cut is priced as a 44% chance for this reason.

Graph: All Groups CPI, Quarterly change

Graph: Contribution to quarterly change

Source: ABS

Tuesday, 23 April 2013

Why do economists think property prices will jump 10-15% higher?

Bass sees gains brewing

David Bassanese of the Australian Financial Review recently suggested that he believes the prices of established properties may jump by 10-15% by early 2014, and he’s not the only economist who thinks so:

“As I’ve argued since last year, rising established house prices are exactly what we should be expecting at this stage. 

After all, measures of home mortgage affordability are below long-run average levels. My call has been that a 10% to 15% pop higher in nationwide house prices is possible by early 2014.”

Bassanese suggests that with the non-mining sectors of the economy picking up house price growth will be more pronounced in Sydney and Melbourne. 

Today I’ll take a brief look at why some economists hold this view.

The coming slide in GDP

Let’s go right back to basics and look at what John Maynard Keynes felt to be the most useful equation in economics:

GDP = C + I + G + (X - M)

That is, Gross Domestic Product (GDP) is equal to (C)onsumer spending + (I)nvestment + (G)overnment spending + e(X)ports - i(M)ports.

With the structural shift to lower inflation and lower interest rates through the mid-1990s and beyond, we’re now into what is perhaps uncharted territory for Australia. 

On the one hand, we have a seemingly healthy GDP and yet on the other hand we have record low interest rates.

In the year to December 2012, Australia’s GDP was a healthy-looking 3.1%

With benign inflation, consumer spending improving in recent months and relatively low unemployment, what’s the great worry all about?

Well, the worry is that Australia’s GDP has been propped up to date by an unprecedented boom in mining capital (I)nvestment which we know is likely to fall sharply in the coming years.



Source: ABS

Something needs to step up and take the place of the mining construction activity, and relatively quickly.

(C)onsumer spending in the first quarter of 2013 has picked up from a low base, but the hope is that housing (I)nvestment and construction will step up to plug the gap (or crater, depending on your viewpoint) that will be left in GDP.

Dwelling construction certainly needs to ramp up as the population of Australia increased by a further 382,500 people in the 12 months to September 2012.

Bassanese: “In terms of the housing sector, the upturn in home building demand remains reasonably modest and is not yet destined to provide major growth offset from the downturn in mining investment.

So far, it hasn’t really eventuated.

The great fear

The fear for Australia is that as mining (I)nvestment begins to fall, unemployment may rise to 6% or above, which will in turn hamper (C)onsumer spending and GDP will spiral downwards towards…RECESSION.

At which point we may have to turn to (G)overnment spending together with (I)nvestment in the public sector to drag us back out of the quagmire.

Although the usual dismal commentators continue to chirp that they are "hoping for a recession", Australians have perhaps forgotten how painful unemployment and recession can be over the two decades since we last had one.

The plan

Bassanese’s call is that unemployment will reach 6% by year end, which should be enough to “goad” the RBA into cutting interest rates again. 

One problem with a blunt tool such as monetary policy is that it often must meet a range of conflicting needs.

The ASX cash rate futures implied yield curve certainly agrees with Bassanese, pricing in a 25bps cut (0.25%) and perhaps more, and Australia's longer-dated bond yields suggest that the interest next rate hike could yet be forever-and-a-day away.
















Source: ASX

The Reserve Bank hopes that stimulatory interest rates will see the non-mining sectors of the economy gradually come  to life.

Housing affordability

News article after news article discusses the unaffordability of Australian property, but the issue is not quite so clear-cut.

Australia has expensive housing in the inner suburbs of Sydney and Melbourne, but on a nationwide basis, the Reserve Bank believes that repayments on new housing loans are very comfortable at present levels:

Graph 1: Payments on New Housing Loans

As alluded to by Bassanese above, affordability of property has improved to below its long-run levels at this point in the cycle because interest rates are at historic lows and appear likely to fall by 25bps or perhaps more.

Of course, any property price gains are unlikely to be uniform but with auction clearance rates at their highest levels since mid-2010, it looks likely that some established property types in areas of high demand and constrained supply will record gains over the next year.

Woodside rockets

The share price of Woodside Petroleum (WPL) rocketed today by 10% as it declared a special dividend reports SMH:

"Oil and gas giant Woodside has declared a special dividend of 63 US cents (61 cents) a share following its decision to shelf its controversial $40-billion-plus Browse venture earlier this month.

The plan to return additional cash to shareholders was appropriate "given the lead times involved with the growth projects and forecast reductions in the company’s debt levels".

This is all a part of the argument for holding diversified LICs. 

You may not pick the big winning stocks very well (or even at all), but if you own every major stock worth owning via an LIC, then you can breathe a large sigh of relief and get on with the rest of your life...

Disc: I hold a financial interest in WPL.

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Major news tomorrow will be the CPI (inflation) release. It will determine the next move for interest rates. If it prints at 0.5% (or below) an interest rate cut will soon be on the cards.

Jobs blow for Whyalla, SA

From Adelaide Now here:

"WHYALLA residents will be resilient in the face of another blow to its economy after Arafura's decision to scrap plans for a $1 billion minerals processing plant, its mayor says.

It's another major blow for the region following BHP Billiton's decision to defer its Olympic Dam expansion and the decision by Deepak Fertilisers to withdraw plans for an ammonia nitrate processing complex - all worth billions and with major economic spin-offs.
Whyalla Mayor Jim Pollock said it was time the State Government got more involved in the needs of the regional South Australia.
"Arafura's announcement is disappointing," he said. "I know our community is resilient, but it is going to be hard to build confidence after major projects get either deferred or scrapped".
Adelaide Now reports in a second article that the state of SA could be left behind as it underperforms economically:
SOUTH Australia continues to underperform economically as a three-speed economy taking hold across the country threatens to leave the state behind, a key quarterly report has warned.
The latest CommSec State of the States report says the gap between Australia's best and worst performing states has grown as WA and the Northern Territory outperform the ACT and the eastern states.
There is a further gap back to an "underperfoming" South Australia and Tasmania.
Released today, the report warns that without concerted action to boost economic activity this gap will widen and may entrench long-term inequality.
The report measures state-by-state performance on eight key indicators against decade averages. It says South Australian retail spending last quarter was 0.9 per cent lower than a year ago, the jobless rate was almost 10 per cent above the decade average, and dwelling starts were 18.5 per cent down."

Gold rally?

Wild morning on the stock markets, with the XJO (ASX 200) up more than 1.1%.

The gold price rallied a little overnight.



Source: kitco

Annoyingly, I got stopped out of Newcrest (NCM) at break-even as it announced it was considering a review of its mines. I would have done better in this instance just to trade gold itself...

RP Data Weekly Property Report

RP Data's excellent reports make for interesting reading as always. RP Data reports the fastest-selling property type in capital cities as being apartments in Sydney at just 32 days. 


There is perhaps some evidence on a nationwide basis that we might see a slowdown in Q2, but meanwhile Sydney leads the way in the capital cities with strong auction clearance rates. Auctions are less popular outside the two major city markets of MEL-SYD.

Source: RP Data

As reported on Property Observer by Terry Ryder this has been reflected in price growth in Sydney in the lower/middle sectors of suburbs such as Randwick, Maroubra and a number of northern suburbs. The inner and middle radius suburbs are the hottest sector, according to the article.

Australia 23,000,000

At 10pm tonight, we will welcome our 23 millionth Aussie, according to the ever-active ABS population clock.

I wonder if it will be a Pom?


Monday, 22 April 2013

Challenging days ahead for mining towns

Increasing vacancy rates

Louis Christopher of SQM Research has highlighted a worrying trend towards increasing vacancy rates in a number of mining towns. In this article on Property Observer and also here on Bloomberg, some of the larger recent rises were identified in Port Hedland, Karratha, Gladstone and Roma.

Investors in property are usually wise to seek out areas where vacancy rates are low as this can drive up rents and property prices. Interestingly, while Melbourne (2.6%) and Hobart (2.0%) recorded higher than the national average vacancy rates in March, other capital cities showed lower than average vacancy rates which in part explains why prices have been forced up a little since the middle of 2012.

Terry Ryder of Hotspotting highlighted on Property Observer how vacancy rates in Queensland's Bowen, which he tipped for growth in 2011, 2012 and a few times in 2013, have leapt alarmingly, up to 18% according to local reports.

Bowen, although in a region influenced by coal mining, is not a pure mining town per se. I haven't visited the land of the Big Mango since 2011 so any observation from me is valueless, but one assumes that the vacancy rates are largely related to seasonal agricultural work and fruit-picking, and so may only be temporary.

It's all too easy to generalise when it comes to mining towns; rather they are to be assessed on a case-by-case basis.

As someone who grew up in South Yorkshire where mine closure after mine closure devastated our pit villages mining towns are not for me,  but if you're going to invest in mining towns here are three of the risks to watch out for:

Risk 1 - Transition to production

In the resources sector it is often the case that the construction of a project is a highly labour-intensive business. But the operational phase is often a significantly less labour-intensive affair than the construction, and thus the property market dynamics duly shift.

Consequently, property investors need to be vigilant regarding projects approaching construction completion and be certain that demand for rental property will remain high. This is particularly pertinent at this point in time as the mining construction boom is finally reaching (or possibly has reached) its peak, with capital expenditure looking set to decline markedly in the 2013/2014 financial year and beyond.

A number of planned major projects or extensions have not received green ticks and therefore the decline in capex investment may accelerate faster than previously expected. Paradoxically, it is this very data set below which dictates that the next move in interest rates will be down, which in turn is likely to lure further property investors into the markets.

Throw in a benign CPI print on Wednesday and another weak Labour Force report on May 9 and the cash rate cut to a record low 2.75% could even be as soon as June 4...


Source: ABS

Risk 2 - Commodity price collapse

Where a town is reliant on a single project which is highly exposed to one commodity price, be very wary. Certain commodity prices have been slammed over recent months, so you must tread only with precision. 

As a former Group FC in the wonderful world of South Australian copper mining, I often cocked half an eyebrow at pundits promoting Adelaide property by talking up BHP's ambitious Olympic Dam open-cut expansion. Sure enough, it was postponed indefinitely in August 2012.

Some experts have been tipping Adelaide for years now, particularly the cheapest quartile of the market, but RP Data reports that prices in the most affordable sector of that market are miles off where they were back in 2010, down some 10%. In fact, of the capital city markets only Sydney's middle market has pushed on to new heights by around 2.4%, in particular unit prices which reached a new peak way back, almost a year ago.

To be fair, vacancy rates have fallen to just 1.3% in Adelaide so perhaps better times lie ahead, I don't know. But as I note here, South Australia is treading through some very choppy waters right now.

Now for sure, there is more to South Australia than Olympic Dam (and indeed resources - healthcare and defence, for example), but be mindful and remember to be healthily sceptical of areas with land potentially available for release.

The manic-depressive Dr. Copper is looking borderline suicidal at the moment (we call him Dr. Copper because he is the only commodity whose price reflects a Ph.D. in economics for predicting turning points in the global economy).

Is the copper spot mooching around down at US$3.12/lb partly reflective of increased warehouse stocks? Hmm, possible, but unlikely. Or is the market price reflecting an expected substantial weakening in demand? Much more probable.

As for investing in property in a uranium mining town...well, if that's your life's calling and that commodity gives you a warm glow, then that's your lookout. Personally, I (literally) wouldn't touch it.



Source: Kitco

Risk 3 - Land release

Another area that sees much press is the Pilbara region with its sky-high rental high yields and stratospheric  median unit and house prices. I don't pretend to be able to predict the future, and again I haven't visited the region in two years, but there is an inherent risk in such regions of land release (South Hedland, Karratha...) impacting prices. 

With regards to the Pilbara and manic-depressive commodity prices, refer to Risk 2 above. If you buy property where median prices are already very high, then this must surely elevate investment risk, for a key element of the return on any investment is the entry price.

There is perhaps no more manic-depressive commodity price at presents than iron ore, and while Fortescue might tell you that the outlook for the commodity is bright enough (well, they would - FMG is one mightily-leveraged iron ore play after all) most commentators forecast that the price will recede.

In my opinion, the very point at which Australians sail merrily over the crest of the mining investment wave (cliff?) is a poor time to borrow other people's money for speculating in a mining town property.

You've been warned.

Sunday, 21 April 2013

The Diffusion of Innovations

The Diffusion of Innovations

Variously referred to as lighthouse customers and trendsetters, early adopters are consumers who, behind innovators, move with the times quickly and are among the first to buy innovative products when they come to market.

Eventually, as products become commonplace on the market, the early majority join the stampede, followed by the late majority and eventually the laggards accept that they too must join the crowd.

We were never early adopters in my family. While fancy package holidays in the Spanish islands became increasingly available, we camped in the rain in Wales. While school friends showed off their lavish, alphabetically-sorted CD collections, we struggled on with a cassette player which relentlessly mangled C90 tapes. Painful!

Advantages of not being an early adopter

Despite initial appearances, there are advantages to being in the early or late majority, however. New products, particularly white goods, tend to be very expensive yet can become markedly cheaper as the market latches on.

Early adopters can also be caught out if they buy the wrong product which is superseded or becomes obsolete. Some school friends had Betamax recorders, a clever home video system developed by Sony, the tape of which looked like the Greek letter Beta as it ran through the transport.

But there were some problems with Betamax. There was no guard across the tape, for example. The format was quickly replaced by the rival VHS which had longer play time of up to four hours and more than one speed. Betamax attempted to dictate the market standard format, but by 1980, 70% of the North American market was using VHS. The triumph of VHS over Betamax is now a standard marketing case study at business schools.

So, it's well known that those who bought Betamax lost out. Interestingly, though, as times move on, the VHS format has also become obsolete. So while it can pay not to rush into the latest “big thing”, eventually we all have to move with the times. Early adopters may get the benefit of early use of a product or idea, but the price they pay for their head start is that are also effectively a “guinea pig”.

We learn more from mistakes than successes

In a quiet business park near Ann Arbor, Michigan, there exists an odd type of supermarket, known as the 'Museum of Failed Products'. It is home to just one sample of all manner of consumer items which never caught on, such as Pepsi AM Breakfast Cola, caffeinated beer (!), Clairol's yoghurt shampoo, Gillette's similarly unpopular "For oily hair only!" and the ingenious 'toaster eggs'.

The founders of the Museum realised in 1998 that product developers spend so much time focussing on their success stories, that they forget to look at what can lead a strategy to fail. Companies visiting the 'museum' are often flabbergasted to discover some of their own failed products on the shelves of which they had retained not one sample!

Just as weightlifters 'training to failure' do not see this as an admission of defeat, those who have the flexibility to incrementally learn from failures rather than simply throwing good money after bad tend to be winners over time. 

Investment – finding quality

It’s true that the principles of investment and wealth creation remain the same over time, which is why there a number of fable-type books on the shelves showing how people reap what they sow. But the specifics of investment do subtly shift over time. The trap to avoid is being the guinea pig, the early adopter of the latest fad who gets caught out.

The examples are too numerous to list, of course, but I’ll throw you a couple.

Before the early 1990s it was possible to buy stocks on the London Stock Exchange and pay for them (settle) up to 10 days later. Naturally, people bought in the hope of a stock price rise in the intervening period.

As the internet and brokerage sites became freely available this evolved into day-trading, and a glut of books became available to teach you that by trading the big telco stocks and taking one sixteenth (or ‘tick’) out of each trade you could beat the commissions and grind out a few dollars each day. Most didn’t succeed.

Then came the tech stock bubble of 1997-2000, when all you needed was a stock code, a few bucks and a brokerage site and anyone could get rich. The old rules could be thrown out! We all know how that ended for the early adopters.

Interestingly, the fallout from the tech stock crash saw the Reserve Bank’s cash rate tumble from its very high levels of the 1990s to just 4.25% by 2001 and the new fad here in Australia became 'positive cash flow property'.

The idea was that by finding property in remote locations or tourist areas you could force residential property to become an income asset, making a few dollars each month from the tax rebates. The new angle was that the search for capital growth as the key element of returns was not only guesswork, it was also a myth. All you needed was to buy in far flung parts of the country and live off the few dollars of income stream.

Then there were property options, and flipping strategies, and buying off-the-plan in North Queensland, and...

What for the future?

As someone who doesn’t eat meat or fish, I like to think that in the coming decades further food product scandals and a recognition of the destructive effects of the animal industry on the environment, vegetarianism will become commonplace. That doesn’t make me an early adopter, of course. Veggies have been around for centuries, but slowly there will be more of us in Western nations.

I also think we are likely to see businesses which embrace green energy and technology flourish.

Successful investors will be those who identify the emerging demographic trends and allocate capital accordingly.

There have been too many fads come and go in the world of stock trading, but you’ll never be able to go past investing in a reasonably well diversified portfolio of quality, sustainable and profitable industrial companies.

Industries that will grow? We’re ageing as a nation, so try healthcare. I don’t spend too much time trying to identify which companies to buy, though some are better than others - through LICs and index funds I own every Australian and British healthcare company worth owning.

As for property, well, as interest rates increased between 2002 and 2008, the positive cash flow brainwave lost popularity as investors understood that it is capital growth which creates wealth in property investment. It always has been.

There will be severe headwinds ahead for a number of mining towns as vacancy rates increase and the mining construction boom passes its peak. How much better to be invested in a part of the country where the population increases by the population of a mining town every year? As an investor for the long term rather than one trying to latch onto the latest fad, you can sleep very soundly at night as demand increases in perpetuity.

In respect of demographic trends, the average household size has fallen dramatically over the past century. Look for the property types that are increasingly in demand with younger homebuyers and downsizing Baby Boomers, and listen to the radio news reports of 2-hour traffic delays in the capital cities. Own quality, prime location properties for the long term near train links and transport hubs and you will have adopted a wise investment plan.

Graph: 7.43 Average household size

Source: ABS

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A quieter auction day in Sydney yesterday, but auction clearance rates are approaching record levels at 76%.

Saturday, 20 April 2013

Saturday Summary: Best articles of the week

The best articles of the week summarised in one easy place by Metropole's Michael Yardney over at Property Update here.

Includes contributions from Michael Matusik and RP Data's Cameron Kusher.


Friday, 19 April 2013

Weekend...

Have a good weekend all ;-)

Good finish to the week for stocks

A reasonable enough finish to the week for the shares, the All Ords finishing the week up 11 points or 0.24% at 4,923. The chart still looks rather fragile, though. If the index breaks below 4,900...



Source: ASX

It will  be interesting to see how the gold price fares over the coming month after a volatile trade yesterday. Spot price looking to thrust its way back above $1,400/oz (green line).

Live 24 hour Gold Chart

Source: kitco

Catch me on Real Estate Talk this week

Catch me on this week's Real Estate Talk show here.

Other guests this week include Michael Yardney of Metropole, real estate guru Tom Panos and Stuart Wemyss of Pro Solutions (who is also the author of several top books on smart borrowing and property investment). 



D-Day approaching - interest rates to fall further

Both NAB and ANZ have now released reports suggesting what we intuitively already suspected, that major mining projects and planned expansions not getting green ticks means that the peak of the mining construction boom could well be right upon us.

As mining capital expenditure begins to taper off, this will place a significant drag on Australia's GDP growth, and other sectors of the economy must step up to plug the gap.

There are genuine concerns as to whether this is happening. 

The RBA needs housing construction to pick up very significantly, partly to plug that gap in GDP and partly to house Australia's rapidly growing population.

While it seems more likely than not that rates will be on hold in May, it is becoming increasingly likely that the next movement is down to 2.75%.

Another rocky overnight trade sees markets pricing in a 44% chance of a cut on May 7 to just 2.75%.

Over at the Australian Financial Review, David Bassanese expects property prices to react to the low interest rate environment by growing at double digit pace this year by recording 10% gains.

Bassanese states that given that we may be approaching the most affordable stage of the interest rate cycle, he would be unsurprised to see prices "pop 10 to 15% higher" over the next 18 months.

Thursday, 18 April 2013

How much might you earn in a lifetime (and how leaky is your bucket?)?

There's a hole in my bucket...

One of the jobs we used to earn pocket money for as kids was from car washing. 

That might not sound too bad if you grew up on the Sunshine Coast or by the beach in Noosa, but if you grew up in Yorkshire you would know that for most of the year it's not a particularly pleasant task. The general goal was to get the job done as quickly was possible before your hands froze.

We had a nearly naff old bucket at our house with a couple of small holes in it which only re-emphasised the need for demonstrating great speed between the tap in the garage and the car - you had to get to the car before all of the water leaked from the bucket.

Naturally, a huge amount of water was wasted and by the time you reached the car you'd only have a small amount of water left. The net result was making many more trips back and forth than should strictly have been necessary.

Deep down, I guess it was pretty obvious that if just a little time and effort had been spent at the outset plugging the gaps, then the whole enterprise would have been far more efficient and the entire car could have been washed 'spick and span' with the use of only a few buckets of water.

Lifetime earnings

How much do you think you might earn in a lifetime? Thanks to inflation, it's much more than you might think.

NAB provide a lifetime earnings calculator here. If you type in your age today as 21 and weekly earnings of, say, $17 an hour or $650 per week, you will see that NAB's tool shows that with a 5% per annum salary increase, your lifetime earnings will be more than $5 million!

So, when people wonder "can anyone be a millionaire?", it's not really so much a question of whether you can earn $1 million, it's rather a case of whether you can keep $1 million.

The trouble in today's consumer-focussed world, that most of us have personal finances and an investment plan which resembles a hole-filled bucket. By the time the end of the month comes around, most people don't seem to have enough money left to do anything at all, let alone invest in a portfolio of wealth-producing assets.

If you want to see how productive your investment plan has been to date, first calculate your net worth (all assets minus all debts and liabilities). Then divide that number by the number of years you have been in the workforce. If the number is substantially less than your salary, where did the rest go? Tax would be some. What about the rest?

I've read some fascinating case studies where effective investors have used the power of compound growth to earn more money from investment in a few years of retirement than they did from the entire working lifetimes. An arresting thought!

Compounding

As a child, on really long and dull car journeys (essentially anything more than about 20 minutes) I would sometimes amuse myself by asking my Dad how much money he earned. 

The amounts seemed huge to me then (like most children, the real yardstick of money for me was how many lollies it could theoretically buy) and yet today those sums represent a salary that would be illegal as they would not even remotely constitute a legal minimum wage.

The NAB figures we looked at above show that a 21 year old who earns $650 a week might expect to be pulling in nearly $300,000 per annum by retirement age thanks to the compounding effect of the assumed salary increases.

It's exactly the same principle which investors use. Compounding growth accelerates wealth creation, which each increase in value being greater than its preceding equivalent.

The challenge

The great challenge today is to maintain the discipline to invest a healthy portion of earnings into assets that produce a wealth-producing rate of return before you spend. 

The first step is to plug the holes in the bucket. After you have done that you'll be ready to invest. You might even be able to splash out a few bucks for a coffee at the Car Wash Café while someone else does the car washing for you!