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.

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"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'.

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Wednesday, 15 May 2013

Buyers Strike Philip Soos' chart pack

Soos - part deux

Yesterday we got the second part of the chart pack and article from Deakin Uni's Philip Soos on the ‘Great Australian Land Bubble’. It’s an interesting read from Soos and he presents some charts from ABS data, though he’d do well to let the numbers do the talking rather than resorting to malevolence against property owners, which to some extent undermines the more important aspects of his arguments:

“This is the “recovery” the spruikers are foaming about: housing prices tracking the rate of inflation.”

Whether or not you are "foaming" about it - or indeed, whether you consider yourself to be a "spruiker" or simply a homeowner - housing market prices have been increasing across all Australian capital city markets since around the middle of 2012 in response to the now stimulatory level of lending rates. And for the past two months, ABS and other lending finance data and increasing auction clearance results imply that capital city prices are likely to increase further over the coming months in the lead-up to the election.

Discussing housing prices in 'inflation-adjusted' terms is futile and to some extent not relevant as mortgage balances are not adjusted by lenders for inflation. Instead the present value of debt is steadily inflated away. 

Given that we might expect to live in adulthood for perhaps six or seven decades in the modern era, the amount of rent payable over such a timescale could be scarcely believable to us today when considered in dollar terms. If you assumed that rent inflation remains reasonably benign at around 3%, a rent of, say $500 per week would increase to $3,000-$4,000 per week over such a timeline.

A mortgage could be paid off in 25 years (or considerably less) allowing owner-residents the choice to live rent free or trade up, while benefiting from future price appreciation over the duration of their lifetime. Whatever figures you prefer to use, living rent free is a worthwhile retirement goal, however you plan to achieve to arrive at that point.

Property price movement risks

Do I mean to say that property prices won’t fall? Well, of course they might correct. Anyone who suggests that prices only move in one direction presumably has a screw loose, for anything which goes up can certainly also come down.

Of course, if you can’t afford to buy because you are unable to save a 5% deposit - which might be anything up to $20,000 less any applicable first homebuyer grants - that’s a different matter, and I completely understand why you’d want prices to crash. It wasn’t a thousand years ago I was a renter myself after all. That said, if you aren't presently in a position to save, you shouldn't go near debt at all, let alone  be thinking of taking out a 25 year mortgage contract.


Soos’ chart packs make for interesting reading, but I wouldn’t necessarily take them all at face value.

“That 26% of all loans on offer had a loan to value ratio of 100% and above in 2008 illustrates the reckless nature of the banking and non-banking financial lenders.”

This is doubtless designed to be an inflammatory data set, but, moving back into the real world for a moment, this chart represents loan products advertised by Rate City, not actual mortgages wildly dished out to rampant speculators as is the implication. 

100%+ LVR products can be disproportionately advertised by financial comparison websites. Why? Because by definition they are the bulkiest loans on offer, they attract extortionate Lenders Mortgage Insurance (LMI) which is often tacked onto the loan principal (lenders love this) and can attract higher interest rates to compensate for the higher counterparty default risk.

“The price to earnings ratio for residential property indicates severe overvaluation. Just as economists and the “experts” ignored this fundamental metric during the Dot-Com bubble in 2000, it is treated the same today.”

PE ratios normally refer to stock price valuations but assuming that Soos is comparing detached house prices to rental incomes here, which I think he is given that he uses ABS data, he’s right that historically they are relatively high and yields on houses are somewhat low in Australia. But to say that direct comparisons with the dot-com bubble are dubious would be a gargantuan exercise in understatement. 

The quintessential dot-com-bubbler typically had an astronomically high 'P' and frequently no 'E' at all (or indeed any realistic prospect of ever having any 'E') - resulting in a preposterous ratio of infinity - thus making an immediate nonsense of any assumed parrallel which is apparently being ignored by economists and "experts". 

Moreover, as well as an increasing annual rental income for landlords, housing serves the very real purpose of shelter for most Australians. This is most unlike the speculative mania seen in the NASDAQ's too oft-cited 'theoretically this wheeze might one day generate revenue' doomed IPOs and ill-fated micro-caps of the 1997-2000 tech bubble.

This is another reason why the so-termed 'Buyers Strike' ruse failed to launch and why first homebuyers are now returning to the market as will be proven by forthcoming data releases, in spite of regular claims to the contrary. Australians will always need homes to live and shelter in and homes to rent; one might as well try to organise a strike on breathing as one on housing.

Below is how HSBC view Australian housing prices i.e. at the same level for more than a decade. I acknowledge here that these being nationwide figures which quite rightly incorporate the price of apartments as well as detached houses, in desirable parts of some capital cities the ratio will naturally enough be higher, as is the way of the unequal world we live in:

The Reserve Bank assumes a very similar view:

“Utter drivel…public foreign debt is likewise at low and manageable levels, unlike private debt.

Again, the RBA holds precisely the opposite viewpoint to Soos here. Private debt levels may have increased, but they have been eminently manageable as the agreeably low level of loan defaults in Australia has continually demonstrated. 

In fact, a significant proportion of households in Australia have no debt at all against them (more than a third of them in the two most populous states, as well as in smaller states such as SA and Tasmania) which tends to make serviceability a fairly comfortable proposition. With falling repayments on both existing and new housing loans in recent years many Australians have taken the welcome opportunity to get months ahead on their repayments:

A couple of charts you won’t see from Soos

Soos' chart packs date back to 1880 (more than 30 years before the Commonwealth Bank had even been thought of) when the population of what we now know as Australia’s capital cities made them essentially small towns in today’s terms. Even the one 'major' metropolis of that time, Sydney, which experienced a phenomenal population boom of the 19th century, only saw its population increase from 56,000 at the 1861 Census to 221,000 by 1881's equivalent headcount.

While prices have surely increased, so too has the competition for the prime-location land...and massively so. By 1900, Sydney had a population of 481,000. By 1921 it had reached 981,000 and by 1950 it was almost 1.7 million. By 1975 Sydney had a population of nearly 3 million, and today it is more than 4.6 million. That's the level of demand increase pushes the price of inner- and middle-ring suburban land up.

As for the ‘adjustments for quality’ of housing stock from the pre-War era, that is another matter of considerable contention entirely given that 1900 was a period of widespread slum-dwelling, not to mention the minor inconvenience of a Bubonic Plague. In a country with a growing population, the inflating cost of new constructing new housing drags up median prices in addition to land value appreciation. Slum housing in The Rocks in 1900 was cheap for a very good reason: it was downright dangerous and was not desirable  accommodation in any sense of the words.

While again I would stress that I don’t believe that dwelling prices are pre-destined to appreciate interminably, I’m also far from convinced that capital city prices will suddenly magically become cheap  or revert to some notional mean as Soos seems to be implying given the country’s proposed policy of continuing with its colossal capital city population boom:

Source: ABS

This is more so the case given the structural shift to lower inflation and low interest rates two decades ago which has resulted in vastly increased loan serviceability with the cash rate falling all the way from 17.50% in January 1990 to just 2.75% today. I'm not sure how Soos draws the conclusion that private debt is "unmanageable" - debt serviceability is rapidly heading towards its best level in years.


Overall, not a bad read from Soos. Ultimately, whether they believe it themselves or not the forthcoming direction and movements of the property market  are beyond the influence of a small handful of market commentators, both bullish and bearish. It's far more important to make smart and credible decisions for your own long-term financial wellbeing.