Real-time thoughts & analysis of the markets, economy & more...
Co-founder & CEO of AllenWargent property market & hedge fund advisory.
Check us out here www.allenwargent.com - to invest in Sydney/Brisbane property or for media/public speaking requests email email@example.com
Pete Wargent blogspot
Co-founder & CEO of AllenWargent property advisory, 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 firstname.lastname@example.org
Tuesday, 28 May 2013
Occam's Razor: is there a God, a property bubble (and other big questions)?
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
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
Luckily I mainly write about personal
finance so I can leave those big questions to people with appropriately-sized
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.
other things being equal, simpler explanations are better than more complicated
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.
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 sountil prices go into freefall and the
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.
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.
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.
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:
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 areobsessed 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.
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.
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
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?).
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
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.