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.

Friday, 31 May 2013

Commodities weaker

Chart which sums up the slide in sentiment pretty well.

Ugly trend from early 2013...



Source: kitco

Sell in May...and GO AWAY!

Well, if you stuck to the old motto for end of the Aussie tax year, well played!

We finished the month pretty much stone dead flat today, the banks dragging down the day's result.

In fact, Australia's share market was very poor and down ~5% in the month, its worst monthly performance since...you guessed it - May last year again!

Huge week of data next week, starting with ABS Retail Trade on Monday followed hard upon by RBA Board Meeting on Tuesday. 

Never a dull moment in the Lucky Country, so join me for more FUN next week!


Source: ASX

I'm off coffee-picking in the East Timorese mountains at 6.30am tomorrow at Ermera, as one does. I might upload a photo if I make it back in one piece (sleeping out)...

Housing credit +4.5% y/y

From the RBA's financial aggregates this mornin':

"Housing credit increased by 0.4 per cent over April following an increase of 0.4 per cent over March. Over the year to April, housing credit rose by 4.5 per cent."

This is the first annual growth in housing credit since March 2010. 

Steady if unspectacular improvement on the lows seen in the previous month. 

Don't forget that these figures only run to 30 April so take no account of a further cut in the cash rate to just 2.75% in May: we'll have a much better idea of the impact in a few months' time.

The basic characteristics of property as an investment

Back to basics

I sometimes get so engrossed in analysing ABS figures, like the nerdy CA that I am, that I forget that some blog readers are new to the idea of property as an investment.

Let’s take a look today at 6 of the basic characteristics of property as an investment and what causes prices to move in the simplest terms.

6 basic characteristics of property

1 - Immobile – most (though not all) properties are immobile. If you like your house but not your suburb, chances are you will have to move suburb and leave your house behind.

Lenders like this. You can't easily disappear and take your house with you, and even if you could manage this, the land will still be there.

This tends to make lenders more comfortable and as a result they can offer very long mortgage terms, at low interest rates and often require only relatively small deposits.

This is a unique triumvirate of lending conditions and as such it makes real estate unique as an investment. 

Every day Mum and Dad investors can use significantly more leverage – they can borrow more capital – to invest than is the case in other asset classes. Leverage is a double edged sword, however, for it magnifies both capital gains and losses so it must only ever be used wisely.

2 – Durable – it is often said that because buildings can stand for centuries then real estate is durable.

While this may be true to a point, one disadvantage of property as compared to, say, a parcel of shares in a self-sustaining, dividend-paying industrial company, is that if you don’t re-invest money in repairs and maintenance, your property will tend to deteriorate, and eventually it may even fall down.

This may not always be a problem. Some investors buy property for its land value and as noted above, the land itself is virtually indestructible – it will always be there and if it is in a prime location land often appreciates in value. Nevertheless, property which is rented out to tenants tends to require some maintenance expenditure.

Because real estate can be durable, in most markets sales tend to consist primarily of existing stock rather than new builds.

3 – Illiquid – it can take a long time to buy or sell a property. This makes it extremely important where real estate is bought as an investment that there is a continual high demand for the type of property that you buy.

The worst case scenario in an illiquid market is owning an asset which is sliding in value with no buyers available.

4 – High transaction costs – buying a parcel of shares is simple. You might pay a few dollars as a brokerage fee with GST tacked on top, but there is presently no stamp duty to pay.

Not so in property. 

In Australia, transaction costs when buying property can be hefty: stamp duty, legal fees, lenders mortgage insurance, mortgage transfer fees and more. There can be other costs when selling too: agents’ fees and capital gains taxes, for example.

The implication of this is that property as an asset class is nearly always better suited to long term ownership than short term flipping or trading.

5 – Consumption and investment good – as I noted above, property is a unique investment proposition, for it serves both as an investment and as a consumption good.

Sometimes people buy property as an investment, others buy it purely to have a roof over their head. Others still buy property for both purposes.

People will always need somewhere to live, so a well-located property investment which is in strong demand should generate a growing income stream in the form of rental income.

6 – Heteregenous – every individual property is different, so ascertaining a fair market value can be difficult. Thus some level of experience is important.

Market values can be easier to determine where there is a block of similar apartments with recent sales which can be used as a guideline. At the top end of the market in the premium sector, a fair market value can be very subjective and much more difficult to determine.

What makes prices move?

Of course, there are many things which can shift the market value of real estate, such as the availability of mortgage financing, the prevailing level of interest rates and so on.

In the very simplest terms, prices are dictated by supply (the properties available) and demand (how many people are willing and able to buy those available properties).

Demand in Australia

So, who buys residential property? There are a number of categories of buyer: owner-occupiers, investors, developers and renovators.

Demand is drive by demographics the size and location of the population - and also its ability and willingness to pay for real estate.

Consequently, investors in property should invest where the population is growing in wealth (generally, quality suburbs of the capital cities are a good bet) and where the population is growing in size.

Here is where the population is forecast to grow in Australia:


Source: ABS

Wow. I read yesterday that Britain is expected to have some half a million centegenerians (100 year olds) by 2066. A similar trend will develop in Australia – we are living longer than ever before.

Imagine the wealth you could create as a young investor in quality real estate over 80 years...provided that you buy property where the population is growing apace! That is: Perth, Melbourne, Sydney and certain parts of SE Queensland, including Brisbane.

Of course, as I alluded to above, demand for real estate is not quite that simple, and is also driven by a myriad of other factors such as availability of mortgage financing and the existing price of financing play a role.

As importantly, so does consumer preference. As our capital cities become ever denser, the type of property that people increasingly choose to live in is changing too, with the number of persons per household have fallen dramatically over the past century:

Graph: 7.43 Average household size

Source: ABS

It makes sense to own the type of property that people want to live in. If the average number of persons per household looks set to remain somewhere close to where the figure is today, medium density properties look like a good bet to me, such as townhouses and 2 bedroom apartments.

Supply

Investors only have limited control over the new supply that comes to market.

The cost of new property is determined by land prices as well as the costs of building materials and construction.

If prices are to move higher, as investors hope, then it makes sense to invest only in areas with a growing population but a limited supply of new land available for development.

In the case of medium density dwellings such as apartments, oversupply can be a risk, so look towards areas where huge new tower blocks cannot be built due to planning restrictions. City centres and CBDs have few such restrictions and therefore oversupply in these areas can be a risk.

Summary

Property is a great long-term investment, particularly if you can buy the types of property in the highest demand, in the suburbs where there is no land for release and the population (and the wealth of the population) is growing very rapidly. Then hold on to it for as long as you possibly can.

Iron ore $111.60/tonne

That's (reportedly - I currently have no live iron ore chart access myself - I need to get on to that!) down another $1.10/tonne overnight and now down by 25% from its most recent peak. 

Some have argued that this recent sell-off should result in a more stable next quarter.

OK that's good, but any further falls and things begin to get messy for Australia.

Warning lights flashing...

For what it's worth, Shane Oliver, Chief Economist of AMP, thinks the spot price will hold up above last year's low...and hopefully he is right!


Thursday, 30 May 2013

2.50% here we come...

The market believes that the capex report was good enough to preclude a rate cut in June, pricing in only an 18% chance of a cut on June 4.

Not everyone believes this, by the way - I've counted four economists so far, including Shane Oliver of AMP who are looking for a cut next week.

But either way, it looks as though we are heading to 2.50% by September, and, if commodity prices fall, perhaps lower still in 2013.

RBA running a little low on ammunition...next big data set is the GDP result on June 5. We're currently tracking at a not too shabby 3.1%, but plenty are expecting that to slide.



Source: ASX

Mixed bag for stocks...

Another funny old day on the markets.

The banks Westpac (+0.49%) and Commonwealth (+1.08%) made up some lost ground.

But there were some big losers, including the iron ore players such as Fortescue (-5.1%) and Rio (-1.35%). Telstra (-2.85%) and retailers Westfield Group (-2.79%) and Wesfarmers (-2.14%) all copped it a bit too.

All Ords (XAO) closed down 42 points or 0.85% and seems to be all set to test that support line at 4,900...



Source: ASX

Capex...cliff or plateau?

Fascinating data set, this.

This is the total capital expenditure chart below. Estimate 2 for next year, while 9.8% lower than estimate 2 in 2012/2013, remains strong at $156,467 million as compared to estimate 6 for 2012/13 of $163,018 million (red circles).

In terms of actuals for Q3, a disappointing print for the quarter, and yet still up on the prior year actual year-to-date Q3 figures (orange circles).

The question is, will the estimates be accurate?

Interest rates on hold in June for mine.


Source: ABS

Gloom-mongers put jubilation on hold

Very interesting data sets today, indeed!

Firstly, capital expenditure for the quarter was weak (total seasonally adjusted capex of $38,510 million - down 4.7% on the previous quarter), which initially saw the Aussie dollar tumble to a '95 handle' as the headline numbers were digested by currency markets.

Graph: Total asset, total industry

Source: ABS

However, you will remember that I noted here Westpac's forecast range for 2013/14 expected expenditure of $145 billion (weak) to $157 billion (positive). Well, we hit right at the top end of the range:

"Estimate 2 for total capital expenditure for 2013-14 is $156,467 million."

The market latched on to this and the dollar did an immediate about face and headed back up. 

The shaded bars represent full year expectations. You will see that the forecast for 2013/2014 is lower than 2012/13, but given the phenomenal boom in capex over the past half decade leaves it at a high level, (disclaimer: only should it prove to be in any way accurate, which is by no means a given):

Financial year actual and expected expenditure - Total Capital Expenditure

Source: ABS

Given the planned jubilation of the recessionists, if the forecasts are accurate, this would be excellent news for those who want Australia to prosper. 

Then the building approvals report smashed expectations of a 4% increase and showed an increase of 9.1% on the month, which equates to a seasonally adjusted 27.3% increase on the prior year (18.9% y/y for houses, and a significant 37.2% y/y for other private sector dwellings excluding houses). Though again, it makes more sense to place emphasis on actual construction rather than approvals:


Source: ABS

This fired the dollar all the way back up to 96.7 cents before it eased back a little.

So in summary, combined with a lower Aussie dollar, this is potentially very good news for Australia, but we do need the actuals to match the estimates in the pipeline.

If the capex estimates for 2013/2014 proves to be approximately right then the rest of the economy, including household consumption, has at least another year to start swinging into action. The building approvals data was one step in the right direction.

Caveat emptor: Let the buyer beware!

Caveat emptor in property

Caveat emptor: let the buyer beware!

A key principle which property buyers would be very wise to take heed of.

Caveat emptor is the principle of property law which controls the sale of property after the date of a deal closing.

Back where I grew up in the Old Dart (that’s England, by the way, if you are English and don’t know what the heck I’m on about…), caveat emptor was one of the key consumer laws, although it has since been superseded for the purchase of most consumer goods by the Sale of Goods Act 1979, whereby a consumer has the right to a full refund for faulty or damaged goods in most circumstances.

Regardless of all that, any buyer of property should pay great heed to the principle.

If you buy, for example, a house which has structural issues or an apartment which has a strata fund plummeting towards deficit and you have failed to do your due diligence, you may have no legal right of redress.

Property purchases are often the most material transactions we undertake in our lifetimes and therefore undertaking full due diligence ahead of any purchase is of the utmost importance.

Caveat emptor: Let the buyer beware!

Caveat emptor in shares

Although you may only hear of the big glossy brochure offers like the Queensland Rails and the Myers of the world, replete with their Jen Hawkins photos and colourful charts and graphs, every month listed companies make announcements to the markets that they are to undertake capital raisings by offering shares at a discount “to sophisticated investors” which dilute the existing stock.

The very term “sophisticated investors” enrages those who are not offered to partake in the capital raisings and results in all kinds of anger, fury and abuse on the stock market chat forums.

The term isn’t meant to be derisory, however, it’s simply investment terminology which requires investors to have a certain gross income ($250,000 over the previous 2 years) or level of net assets ($2.5 million) under Corporations Law, these figures being certified by an accountant.

Once certified, sophisticated investors are able to evaluate offers of securities without the requirement for a regulated disclosure document.

Why?

Well, ultimately, why do securities exchanges exist? It’s an exchange or market where companies can raise capital and a place for securities to be traded.

So with no costly and time-consuming disclosure document to prepare, brokers can flog shares to sophisticated investors more quickly and more efficiently. It gets things moving without the need for the laborious process of preparing a long-winded prospectus.

Caveat emptor: Let the buyer beware!

Looking at it differently

There was an amusing passage in one of the Rich Dad book series (I can’t recall which one), whereby the mythical ‘Rich Dad’ character and his son, describe to a woebegone young Robert Kiyosaki that because ‘Rich Dad’ is a sophisticated investor he is offered ALL the best investments and it is ILLEGAL for poor people like Robert to participate.

He’s a very clever writer is old Kiyosaki, and he knows exactly how to push people’s buttons!

Those who don’t qualify as sophisticated investors shouldn’t necessarily be upset, however – the sophisticated investor Corporations Law is there to protect them from risky investments, not to exclude the everyday Mum and Dad ordinary shareholders.

In fact, you could argue that it is the sophisticated investors who should be wary! Your rich, ‘sophisticated investor’ tagline could see you become a market whale – a target for hungry brokers to sell to you any old investment they can!

In my professional career I was involved in the preparation of a lot of these regulated disclosure documents and prospectuses. And I also was involved in plenty of capital raisings without prospectuses to sophisticated investors.

Looking back, it’s interesting how, especially as we have lived through a major financial crisis, plenty of the ‘amazing’ investments that were offered to sophisticated investors ended in heavy financial loss for the participants.

As for the open capital raisings, the real winners from disclosure documents tend to be the lawyers, the investment bankers, the bean-counters and auditors and the printing companies...

At the end of the day, being a ‘sophisticated investor’ means you will be offered plenty of investments by your broker. But you need to be careful that you actually are sophisticated and not just wealthy, or you could end of being badly burned and 'relieved' of your hard-earned capital.

Caveat emptor: Let the buyer beware!

Short-term thinking

The biggest mistake I see people making on a day-to-day basis is short-term thinking.

People seem to almost exclusively focus on a plan which involves an asset going up in price in the short term which very much smacks of weather forecasting and often ends in failure with the investor (speculator) being back send back to square one.

Instead, the odds of success are improved immeasurably if you have a plan which involves continuing to acquire quality, income-producing, appreciating assets which you can hold for the long term…preferably forever.

Always due your due diligence before buying an investment and remember...

Caveat emptor: Let the buyer beware!

Property Update articles

Read me a couple of times on Property Update today.

Here on employing a buy and hold strategy.

And here on the merits of investing in metropolitan or the regions.

Oh, and while you're there, join more than 60,000 other investors and sign up for the fortnightly newsletter!



Iron ore drops 4.3%

Yesterday I mused: how long before the iron price slips back into the mainstream media headlines?

Probably about 24 hours by the looks of it as it plummeted by 4.3% overnight to $112.90/tonne.

Ouch.

Stay tuned for capex shortly!

Wednesday, 29 May 2013

Where are new house sales taking off?

New South Wales. From HIA here:

"Total seasonal adjusted detached home sales in NSW increased by 8.1% in April 2013, which follows on from a strong 16.3 percent lift in March."


Source: Housing Industry Association

Stock switcheroo

Share markets fairly flat today but that result masks an interesting switch in fortunes.

Great day for the miners, and particularly the iron ore plays, with BHP (+2.6%), RIO (+3.4%), FMG (+4.13%)...

On the flip side, the banks got pasted today as dollars flipped out towards the miners - CBA (-2.5%) and WBC (-2.5%) leading the losses with 2.5% falls.

On the wider market it all netted out to a small gain of 0.174% for the All Ords (XAO).

...but construction remains soft

Dollar falls to 95.55c. Remember it is construction that the RBA is hoping to stimulate. 

Indicates that capex report tomorrow may be soft, so pencil in another interest rate cut to 2.50%. 

Are rates getting too low now and beginning to erode confidence rather than build it? Interesting times...


Source: ABS

HIA: New home sales recovery continues...

Well, there you go. From the Housing Industry Association:

"The HIA New Home Sales Report for April 2013 shows the trend of recovery since late 2012 is continuing in 2013.

The HIA New Home Sales report, a survey of Australia’s largest volume builders, showed that total seasonally adjusted new home sales increased by 3.9 per cent in April 2013, taking monthly sales back to a level not seen in over a year. The headline result was driven by a 6.7 per cent lift in detached house sales, which was experienced across all states covered by the survey, bar Queensland. In contrast, multi-unit sales fell by 9.4 per cent.

“Overall, recent developments in new home sales are encouraging. In particular, the important detached house segment of the market continues to climb out recent record lows, and this improvement has largely been broad-based across the states,” said HIA Senior Economist, Shane Garrett.

“While multi-unit sales have softened over recent months, the gains made over the course of 2012 have not been eroded. A broader look at the situation shows that the volume of sales in the three months to April this year is still 51.7 higher than trough experienced a year earlier,” added Shane Garrett.


In the month of April 2013 detached house sales increased by 9.1 per cent in Victoria, 9.0 per cent in Western Australia, 8.1 per cent in New South Wales, and 2.7 per cent in South Australia. Detached house sales fell by 1.8 per cent in Queensland."

Signs then, that monetary policy is working as the impacts of the interest rate cuts flow through. The trend since September 2012 is now clearly an upwards one nationally with strong recent results for NSW, VIC and WA. 

Note below in the second chart that new house sales are recovering, which is good to see - the story is not all about apartment sales here.



Source: Housing Industry Association (HIA)

AUD stumbles to 95.62c

The positive economic data in the US has sent the Aussie dollar lower again, touching 95.6c this morning.

This is a "7 cent decline from its 2 year trading average of 103.5 cents" - a nice summary of the implications here by Christopher Joye at the AFR.

Don't forget, we have the capital expenditure data out tomorrow, and if that prints weak, the dollar (and interest rates) will be heading lower still.

Capex report cheat sheet for tomorrow

Here’s how Westpac see it, via three scenarios:

1 - Positive

Scenario 1, 2013/14: – a positive result
Est 2 of $157bn.
Implies $173bn, +5.5% on 2012/13

Mining, +2%; manufacturing, –3%; services, +12%.

2 - Soft

Scenario 2, 2013/14: – a soft result
Est 2 of $151bn.
Implies $166bn, +1%

Mining, flat; manufacturing, –3%; services, +3%.

3 - Weak

Scenario 3, 2013/14: a weak result
Est 2 of $145bn.
Implies $159bn, –3%

Mining, –3%; manufacturing, –3%; services, –3%.

Dow to record highs; consumer confidence, home prices jump

You know, I wish had a buck for every time someone had called the end of this bull market the last few years - I'd never need to invest again!

Overnight the Dow added 106 points or 0.69% to close at a new record 15,409 and the S&P 500 also rallied 0.6% to close at 1,660.

Here's Bloomie:


"U.S. stocks rose, with the Dow Jones Industrial Average returning to a record, after data showed consumer confidence climbed to the highest level since 2008 and home values jumped the most in seven years.
“The bottom line is there’s been a lot of chatter about how the market’s going to respond when the Fed tapers, but home prices are rising, jobless claims are coming down, and the stock market keeps going up,” James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees $325 billion, said by telephone. “People are feeling better. They’re noticing this recovery broadening out and firing on more cylinders on a regular basis. They know they’re under-allocated to risk assets.”
The S&P 500 rebounded from its first weekly decline since April 19. The gauge fell 1.1 percent last week as Federal Reserve Chairman Ben S. Bernanke said the central bank could reduce monetary stimulus if economic conditions continue to improve. Investors weighed the prospect of slower Fed bond-buying with data showing that existing home sales climbed and jobless claims topped estimates. U.S. markets were closed yesterday for a holiday."
Happy days indeed for investors in stocks.
Clearly investors believe that the "Bernanke put" is still going to push the market higher, as from a fundamental perspective stocks are now trading at some fairly elevated PE ratios given the fragile state of the economic recovery. 4 year returns from the index are now staggering:


Source: Yahoo finance
***
I wonder how long before the iron ore price sneaks back into the news? 

The correction has taken some time to play out, but the trend is clear enough: the spot price has eased all the way back to US$117/tonne after the exuberant levels we saw in January and February...

Tuesday, 28 May 2013

What's really happening with first homebuyers?

A lot of talk at the moment about what is (or isn't) happening to the first homebuyer (FHB) market at the moment.

Now naturally I stand a chance of making myself look like a total dill, but I've been suggesting for a couple of months that first homebuyers may start coming back into the market as interest rate cuts bite and prices turn upwards. I hope. 

And we have had 2 months of upturn in the FHB market...but it's only been very moderate to date to say the least.

The March 2013 figures showed some promising news with FHB commitments rising by 11% in the month. Which is great. And we've had another interest rate cut since then. 

Naturally enough the percentage of FHB loans fell as investors come flooding back into certain markets such as Sydney.

However, the total commitments figure is still low and it is still down 16% on where it was 12 months ago. Which is not so great at all, and we still have a long way to go to get back to anything approaching a historic 'norm'.

To save me a whole lot of work (navigating around the ABS spreadsheets is a right royal pain in the butt IMO), Michael Matusik has analysed the March Housing Finance data in some detail on Property Update here:

Matusik's key findings relating to FHBs (and it's not particularly great news):

  • "The proportion of first home buyers in the New South Wales & Queensland markets is very low, at 4% & 5% respectively.  They were 13% & 16% just a year ago.  First home buyer activity has increased in Victoria (18% market share) as well as in South Australia (14%) and even in Western Australia (23%, up from 20% the year before).
  • In terms of actual numbers, there were 92,700 first home buyers (who took out a loan) across Australia for the year ending March 2013; this is down 4% on the year before.
  • Based on annualised results – the number of first home buyers in New South Wales is down 39% or by 12,000 on the year before.  Queensland numbers are down 750 or 4% on the previous year, but down 21,000 (yes 21,000 buyers) from the 2010 market peak.  They are up 30% in Western Australia (4,200 more this year versus last); up 15% in South Australia (up 760) & up 13% in Victoria (up 3,200).
The figures also show that something is broken in Queensland & New South Wales when it comes to first home buyers.  Newman & Co. need to implement whatever has been done in Western Australia, South Australia & Victoria, as things for first home buyers seem to be working there.  The recent changes in New South Wales & Queensland (i.e. removing the first home assistance from second-hand property & refocusing it solely on new property) are working wonders.  Not!"

What about new dwellings?

Is there any good news out there?


Source: RBA

The first observation from the above chart related to new dwellings is that all is not equal across the states. 

There has been a decent pick-up in the number of FHBs buying new dwellings in WA, and the trend is moderately up in NSW, SA and QLD.

Victoria saw a large spike in those buying new dwellings back in 2009 but numbers are now falling again (but will pick up again after 1 July when the grant shifts from existing to new dwellings), and the numbers in TAS remain very low. 

In fact, the Tassie market isn't looking too flash at all right now, particularly as the population growth at 500 persons in the last 12 month period recorded is a lot flatter than the Bass Strait.

Grants

Naturally, these numbers are distorted by different rules for grants in different states.

The NSW government provides $15k to FHBs purchasing a new home up to the value of $650,000 but has removed its previous $7,000 grant available for both new and existing FHBs.

Property Observer reported today that Tasmania has joined NSW, Queensland and South Australia by announcing plans to axe the $7,000 first-home owner grant (FHOG) for established homes on June 30, 2014.

It will coincide with the end of Tasmania's First Home Builder Boost (FHBB) - a payment of $8,000 - on June 30.

From July 1, Tasmanian first-home buyers who build or buy a new home (including off-the-plan) will be entitled to a $7,000 FHOG. Those buying an existing home will receive no grant.

For the details of all grant rule changes by state, see here.

Summary

The ABS housing finance number in total showed a sharp pick up from 2012:

Graph: Value of dwelling commitments, Total dwellings

Source: ABS

In particular, a 21.1% rise in commitments for the purchase of new dwellings:


Source: ABS

At this stage, the number of first homebuyers remains very low and although there has been a small pick-up in the last two months, NSW and QLD had FHB finance commitments at record lows in January and they haven't picked up much from those levels to date.

Since Victoria took away its subsidies for newly constructed dwellings in 2012, FHB mortgage demand has fallen in aggregate. 

So only WA currently paints a reasonable picture in this sector, where FHB commitments are rising strongly, which is excellent news.

Let's hope as the recovery gathers pace, the FHBs return in greater numbers to the market.

Steady as she goes for ASX

Up 0.24% or 12 points for the XAO at the close.

The gain was largely due to the major banks clawing a bit back today: WBC +0.86%, CBA +0.6% and ANZ +0.83% (NAB fell 0.38%).



Source: ASX

Crowded House(s)

As if to underscore the point I was making...here's RP Data's Cameron Kusher:



Pascoe puts the boot in (again)

Michael Pascoe in SMH again today:

"It's no surprise that Australia again tops the OECD happiness survey on objective counts – health, education, economic opportunity and such. It's in the subjective area of happiness and confidence that we drag the chain.

But then consider how small that margin is and how miserable life is right now in most of the OECD and, yes, we don't really appreciate our good fortune.


And that comes back to the old problem of Australians having had it so good for so long that they've lost perspective about the ways of the world in an uncaring universe.

For those at the front line of industries undergoing painful restructuring, the cry “it's never been this tough” is common and indicates either the youth of the person making the statement or their inability to remember very far back.

As we head well into our third decade without a recession, the vast majority of us have forgotten or never knew what one is like.

So we'll keep feeling sorry for ourselves, hankering for an imaginary past of unsustainable boom prior to 2008, and claim to be miserable consumers, when all the while we really wouldn't want to be anywhere else on earth.

This is country so relatively good that people don't even realise it."

Occam's Razor: is there a God, a property bubble (and other big questions)?

Is there a God?

Is there a God? It’s a big question for a Tuesday!

Two main schools of thought here. In his controversial book ‘God is not Great’, Christopher Hitchens concluded: ‘What can be asserted without evidence, can be dismissed without evidence’. His logic is that until someone proves there is a God, the burden of proof suggests that he need not take a leap of faith which opposes reason.

Others argue that there are many things in the universe which cannot be explained and therefore logically there is likely to be a higher power which has created those things which we cannot understand.

Luckily I mainly write about personal finance so I can leave those big questions to people with appropriately-sized brains.

Occam’s razor

There are a few ideas which keep on popping up in various guises through history, and Occam’s razor is one of them. The theory states that we should ‘cut away’ the more complex theories until we reach a level of simplicity which best explains a problem or conundrum. The theory is not irrefutable in scientific terms, yet probability theory dictates that the simplest and most logical explanations are often the most accurate.

All other things being equal, simpler explanations are better than more complicated theories.

While the concept is sometimes referred to by different names, at its core the idea of Occam’s razor has variously been used by Sir Isaac Newton and Bertrand Russell.

Australian Property Bubble

You don’t need me to tell you that there has been a lot of talk about an Australian property bubble over the past dozen years or so. A bubble is a scenario where prices rise dramatically above their true value and continue to do so until prices go into freefall and the bubble bursts.

The supposed property bubble didn’t burst after the last great boom period, however. And nor did it burst through the global financial crisis as credit markets remained liquid. And it hasn't burst in the half decade since, despite a moderate downturn in 2011 and early 2012.

Some market commentators like to say that we are in a bubble, but there are no forthcoming signals that it is about to pop, and perhaps therefore it will not burst for decades into the future.

I hate to be the harbinger of unhappy tidings for housing market bears, but a bubble within which prices corrected moderately and which hasn’t burst for a dozen years, appears unlikely to burst, and may not burst for decades to come…well, I'm afraid that isn’t meeting any of the obvious criteria for a bubble.

Occam’s razor: a bubble which ain’t bursting…probably just ain’t a bubble.

“Generation Rent”?

Of course, I’m well aware that prices are high in some parts of Australia. I hail from a part of the world, after all, where you can buy a reasonable enough house for 50,000 quid (Sheffield, Yorkshire).

Lest you thought there was any danger, however, of the affordability debate ever going away, be assured that in Britain – even where prices have corrected by a third in many parts of the nation since 2007 (!!) and interest rates have been at absolute rock bottom for years – it’s still fashionable to talk of “Generation Rent”.

How so? Generally, because during market downturns, lenders tend to require higher percentage deposits which many young people are not capable of saving today.

We'll still be discussing housing affordability 50 and 100 years from now.

Multi-speed markets and affordability

Commonwealth Bank recently released its affordability report which I considered yesterday, and it shows that in terms of loan repayments affordability in Australia is rapidly heading towards its best levels in many years.


Source: CBA

But it’s not as simple as all that. Residex’s latest price movements show that house prices are unaffordable in some cities and are easing, while apartments, which are popular with investors, are rising in price.

Stephen Koukoulas of Market Economics dared to highlight the CBA report yesterday and was met with the predictable howls of protest. But Koukoulas has been on fire with his Tweets of late and his response was another belter:

“Australia could register massive budget surpluses if we had a carping tax.”

Very droll, and also correct.

In truth, it’s long been known that Australia has a problem with way too many of the 23 million of us wanting to live in a handful of popular locations, particularly in Sydney and Melbourne.

Some commentators seem besotted with the idea of Australia’s “uniquely monocentric” cities. This is all rather odd because the last time I checked Sydney has a main CBD, a huge business district in North Sydney and another one at Parramatta to name but three. But it’s true that as a nation we are obsessed with living in just a few tiny parts of a gigantic landmass.

Brisbane, Adelaide, Hobart and regional Australia don’t seem to meet any of the criteria for a bubble given that prices have not increased materially for years and in many cases remain significantly below previous peaks.

Dwelling Prices graph

Parts of the Melbourne market are steaming along, however. They sure seem to love their real estate down in Victoria, and a roaring annual population growth of 94,800 people in the state may explain part of the phenomena.

In Sydney, dwelling prices have under-performed household income growth quite substantially since the early months of 2004, so there’s a reasonable argument for a ‘slow melt’ in certain parts of that market. The price action of detached dwellings in some suburbs is generally looking a little soft, while the broad middle market of the inner/middle ring suburbs presently looks very strong.

Five correction risks

Whether or not we meet the criteria for a speculative bubble, where prices are high there must exist in parrallel a risk of a market price correction. Here are five of the main property market risks:

Black swan events are by their very nature unforeseeable, so we, um, can’t predict them.

If you’re interested in black swan events read Nassim Nicholas Taleb’s book of that name, where you will plough through reams of material to discover that (a) if you play a game of heads and tails, someone actually has to win (can’t argue with that logic), and (b) economic models are flawed because some things aren’t predictable (well yeah, obviously…but anyone got any smarter ideas?).

Interest rate risk is basically off the table for now, and policy change risk doesn’t appear likely in election year either, especially given that both major parties have distanced themselves from the ubiquitous negative gearing debate.

Oversupply may be a risk if you buy property in some of the regional markets which periodically capture attention and space in print. Not if you own property in supply-constrained capital city suburbs where vacancy rates remain very tight.

The key risk at this point in the cycle is recession/unemployment risk.

The good news is that unemployment is presently relatively low at 5.5%. Two key dates for your diary, though:

(1) Thursday’s new and expected capital expenditure report from the ABS – are we heading off a mining construction and investment cliff? And if so does Australia have the tenacity and dexterity to pull off the ‘Great Rotation’ into other areas of economic growth?

(2) the next labour force survey on June 13. Australia’s economy has been adding a promising number of jobs over the past 12 months.

However, with due respect to the ABS, the labour force reports are like a monthly game of employment Russian Roulette and the numbers are all over the shop…let’s just hope that the jobs growth trend is our friend and the headline unemployment rate remains reasonable, eh?

Watch this space.

To come back to the initial question. Is there a God? Not sure, but it's safer to believe, right? Think about it! 

That's Pascal's Wager...investors tend to take a similar view on the ongoing survival of capitalism.