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.

Sunday, 30 June 2013

What will happen to stocks in 2014?

The 2013 financial year was one of ups and downs - but mainly ups - for the Australian stock market and therefore most super funds, closing up more than 17%.

Will next year demonstrate similar results? 

Well, stock markets are unpredictable beasts, so, unlike many commentators, I'm not going to pretend that I have any better idea than the next bloke. 

But if we work on the (flawed) assumption that fundamentals actually determine valuations, you'd have to say that prices aren't particularly attractive right now. 

The major banks have PE ratios is the low-to-mid teens with Commonwealth Bank hovering around 15. 

Some (Wesfarmers, Telstra, QBE) are priced rather more optimistically in the 15-20 range, while others (Rio Tinto) have receded.

With interest rates at record lows and yield-seeking investors pumping up prices, there may well be some upside potential.

Much will hang on the ability or otherwise of the Aussie economy to handle the unwinding of the mining construction boom without unemployment spiking and economic growth receding.

As ever in the stock markets, the trend is your friend and momentum is everything.

Remember that the XJO feel to around 3,500 as the global financial crisis crucified market confidence, yet we didn't actually experience a recession in this country. 

So, if things don't go as planned there is also plenty of potential downside given that the ASX 200 closed out 2013 at a significantly higher level at 4,802.

Obviously if you are a stock market investor, you need an investment plan that suits your own needs. 

My strategy has been very boring, simply using an averaging plan - I hold index funds in the UK and buy the industrials-focussed, low-cost LICs and banks in Australia. 

If the XJO fell to levels starting with a '3' I would be looking to start buying more heavily.

Source: ASX

Sydney dwelling prices +2.7% in June

The month draws to a close and RP Data's index shows that Sydney dwelling prices are up more than 2.7% in the month of June alone, increasing substantially from $649,000 to more than $667,000.

While I'm not a fan on monthly figures due to their inherent volatility, this should at least put an end to the flawed discussions of prices falling (or more properties being sold into a falling market) - they aren't.

While futures markets have priced in a one-in-five chance of an interest rate cut on Tuesday, particularly in light of the below figures, interest rates must surely be kept on hold in July. 

The futures yield curve still expects interest rates to hit 2.50% by October 2013, but any signals of rapid dwelling price appreciation certainly won't encourage further cuts.

The next round of inflation data for the June quarter will be released on 24 July which will play a key role in determining future interest rate movements.

Over the past 12 months all of the main capital cities except for Adelaide have demonstrated capital growth, with Sydney (+5.6%) and Perth (+6.0%) leading the way.

The 5 city capital aggregate has consequently increased (+3.9%) over the period.

Source: RP Data

Will property prices appreciate at 10% per annum?

I was surprised to learn that reputable buyers agents are still promoting the idea that property prices will appreciate at 10% per annum at their seminars and home-buying shows.

We've come to expect nothing less from property 'clubs', of course, as they tend to be somewhat evangelical in their approach, promoting property as a magical risk-free asset class which always goes up 10% per annum.

And besides, it seems that sometimes people almost want to hear that prices will boom interminably - they find the phrase "property always goes up" soothing to the ears.

The tired old phrase "property goes up 10% per annum" was spawned from the days when inflation was very high, and the cost of almost everything was going up rapidly.

And then a combination of factors including plummeting interest rates, deregulation of lending standards and a boom in the number of two income households allowed rapid price growth to continue through the 1990s and beyond.

Over the past decade, while some parts of Australia have forged ahead with very rapid price growth, others have by and large tracked the growth in household incomes.

If we take a look at the today's economy, we find that:

-Inflation is currently tracking at 2.5%, which is comfortably in the middle of the target 2-3% range;

-Interest rates are sitting at 2.75%, which is way lower than the double digit rates which were seen two decades ago - so these cannot fall much further; and

-wages are growing at 3.2%.

The speed limit for the price growth of property is ultimately our ability to pay for it.  So unless you have an IQ which is diminishing at 10% per annum, you can see quite clearly that long-term property price growth of 10% per annum will not eventuate.

Let's be generous and say that household income growth in the future continues to grow in perpetuity at 4% per annum.

And let's take the example of a capital city suburb where a dwelling costs $500,000 and household incomes are around $100,000 (these aren't the national averages, but its a reasonable enough representation for the purposes of this exercise).

Here is how the incomes, dwelling prices and the dwelling price to income ratios would pan out over the years if prices grow at 10% per annum:

Household income
Property price
Price/income ratio

As you can see, it is a nonsense.

A dwelling will not cost $58 million in 50 years time and prices most certainly won't reach 83 times incomes. 

So if a buyers agent tells you that property prices will continue to go up at 10% per annum, they either aren't very clever, in which case you probably shouldn't hire them, or they are lying to you, in which case you definitely shouldn't hire them.

It's pretty obvious that this kind of price growth isn't going to eventuate absent a return to rampant inflation. 

10% growth didn't happen in 2011 and nor did it occur in 2012. And even in the past 12 months with interest rates now at record lows, none of the major capital cities has achieved 10% growth.

Of course, it's a possibility in any given year, but even if we allowed the introduction of Singapore-style 40 year mortgages and abandoned all pretence of macroprudential restrictions, it's still a huge call to say that it could continue for long.

Naturally enough markets don't tend to move smoothly, Instead they jump ahead before falling back, and this happens in cycles. In Britain I recall prices storming along at double digit levels for year after year until Gordon Ramsay sounded the death knell.

Gordon Ramsay, you ask? I'm serious! There's often a point in bull markets when "taxi drivers and shoe-shine boys" (in other words, every man and his dog) start to talk up the asset class as a sure thing, and in his 2007 book Humble Pie Michelin-starred chef Gordon Ramsay said that when young chefs came to him for advice he told them to buy a property to live in and then invest in more property.

Cue the property crash.

In most areas outside London, prices are still behind where they were in 2007, so the "10% per annum growth" theory doesn't seem to quite tally in the UK.

In Ireland, it wasn't a chef who sounded the death knell, it was some other comedian. Again, I'm serious! In July 2007, Irish independent journalist and comedian Brendan O'Connor urged people to buy property, even though there was clear evidence that the huge price appreciation of the preceding years was in the process of bursting.

Cue the property meltdown.

Does this mean I am bearish on Australian property? No. We did have a moderate downturn through 2011 and 2012, which on balance was a good thing for our markets. But lower interest rates have reduced the repayment levels on new and existing mortgages, the markets have stabilised and capital cities are showing moderate growth. 

We've avoided recession, to date at least, with a GDP growth of 2.6% and unemployment has remained low at around 5.5%. 

There will be very challenging times ahead no doubt as the mining construction boom tapers off, but monetary policy can stimulate other sectors of the economy and with Australian population growth surging to a crunching 392,500 persons per annum, it's my contention that property investors who are smart and stick to quality properties in supply-constrained capital city suburbs will do well over the longer term.

But property price growth of 10% per annum? Send for the men in white coats!

Saturday, 29 June 2013

Melbourne "solid"; Sydney "stunning"

Reports the ever-entertaining Dr. Andrew Wilson of APM.

Sydney recorded a 77.4% auction clearance rate with a surge in listings this weekend:

APM: Sydney property firing

Prices on to all-time highs for both houses and units in Sydney with auction clearance rates moving back into 'very strong' territory.

Meanwhile, RP Data looks set to report an astonishing 2.7% price growth in Sydney for just the past month. Not sure what's going on there.

The contrast with the plummeting gold price chart (which has collapsed from US$1,900/oz to below US$1,200/oz this week in spite of its supposedly 'strong fundamentals) is now very stark.

Interesting that an asset class which was apparently 'not in a bubble' according to some commentators in 2012 can lose 40% of its value, while Australian property, has continued to rise broadly in line with household incomes for the past decade.

This is precisely the problem with gold for me - it pays no yield, so what, really, is its fair value? 

Source: APM

Gold miners "trading like junk"

Reports Bloomie:

[Gold mining companies]..."are trading as if they’ve lost their investment-grade ratings after the price of the metal plunged 28 percent this year to the lowest since August 2010.
Gold futures in New York yesterday dropped below $1,200 for the first time since August 2010, as signs of improving U.S. economic growth boosted speculation the Federal Reserve will wind down its asset-purchase program.
After rising to a record $1,923.70 an ounce in September 2011, gold futures for August delivery fell 1.6 percent to $1,192.20 at 8:47 a.m. today on the Comex in New York."

Real Estate Talk

Tune into the excellent Real Estate Talk show this week here.

On this week's show Catherine Cashmore discusses the challenges facing first homebuyers and the role of government incentives such as first home owners grants.

Lauren Day from API magazine discusses a glut of properties coming online in Port Hedland which is likely to negatively impact prices. 

This reinforces the fact that investing in remote areas where new dwellings can also flood onto the market is a bad idea, although yield-focussed investors will of course continue to recommend the strategy.

Look out for me featuring on the Real Estate Talk show in coming weeks...

Friday, 28 June 2013

Australian personal wealth hits record highs

The last share market trade of the financial year finished fairly flat as Aussies undertook their final chunks of pre-tax return selling.

November, March and May all saw wobbles of various magnitudes during the financial year, yet the market finished the 12 month period up in value by more than 17%.

After a huge drop in share values through the financial crisis, today's trade completes the best financial year for Aussie stocks in six years since the very healthy 20%+ return in 2007.

Despite the material fall in the index during the last quarter, this is outstanding news for Australian superannuation funds and, together with a resurgent housing market, sees Australian household wealth at new record highs.

I doubt it will get reported too much, of course, given our tendency in the modern world to focus on what we don't have rather than being grateful for what we do, but you can read about it here

Household wealth now sits on average at $76,000, so on that measure at least, Australians have never had it so good - we are as well off as any other country on the planet, which is rather an amazing place to be.

And when you consider the levels of unemployment and negative equity that people have endured in Europe and elsewhere, not to mention how countries not an hour from our coast struggle to feed their populations let alone house them, things in Australia are good.

You might feel that if you aren't a stock market investor then you have not benefited from the strong market appreciation, but is that actually true? Most super funds have heavy exposure to stocks and therefore should show very strong returns for the year even net of management fees and transaction costs.

Rising asset prices during bull markets can sometimes lead to something of a virtuous circle (at least, from the perspective of participants), increasing consumer confidence and therefore benefiting economic growth. Not dissimilarly, rising property prices can lead to a 'wealth effect' as consumers feel more inclined to spend as a result of their increased net worth.

It has been said many times that Australian property prices cannot increase too dramatically in this cycle as credit growth should be capped in line with deposit growth (not that there is much evidence of regulatory controls holding back property prices in New Zealand).

This may be true to a point, although Australians have been saving more in recent years. According to the ABS, 22% of Australian assets are now held in cash and deposits which is comfortably ahead of the 10 year average.

Furthermore, as the chart below suggests, Australians are significantly wealthier than they were a year ago (and indeed, they are now wealthier in absolute terms than they were before the financial crisis, taking our average personal wealth to unprecedented levels).

And while much of the increased wealth is locked in super funds, self-managed superannuation funds can now elect to buy investment property too.

As housing finance figures improve it now appears likely that there will be further price gains in this property cycle.

Source: ASX

What next for the great China boom...and for capitalism?

The world has come a long way since the 16th century, when the feudal system revolved around agricultural labourers in Europe reliant upon nobility for a meagre income. As trade routes opened up, this gave way to mercantilism and new wealth being created through trade, and then the industrial revolution spawned the earliest versions of capitalism.

The very term capitalism was meant to be a derogatory one used by Marxists, highlighting its exploitation of workers. Free markets thrived to the great benefit of factory owners and the means of production were privately owned through private companies. In a capitalist system it is the public who own the companies through share ownership, rather than the state. This has led to great wealth being created but also great inequality, which to some extent persists today.

Capitalists can have too much of a good thing though, and as wealth became concentrated in too few hands government intervention began to increase and states such as Germany and Britain pioneered the development of the welfare state, which had a great impact on the economies of the more developed countries.

Before the Great Depression of the 1930s, only around a tenth of output in the US was from government expenditure. In developed countries today, you might expect that figure to be closer to one third.

Capitalist countries with their emphasis on free market competition and push for profits have tended to be wealthier than their communist counterparts, and eventually a number of the communist regimes fell, symbolised by the collapse of the Berlin Wall and the German wiedervereinigung of 1990.

Chindia boom

The biggest story unfolding right now is the Chindia boom - the phenomenal growth being experienced in China and India. This is of particular relevance to us in Australia, as exporters of vast quantities of resources which help to fuel the great construction boom. 

Of course, the best case scenario for Aussies is that China's growth continues on a level of massive but reasonably smooth growth of perhaps somewhere close to 7% per annum. We hope that commodity prices will remain robust - in particular the iron ore spot, at its current level of ~$115/tonne - we'll keep digging it up and flogging it to the Chinese, and we'll all live happily ever after. Nice.

The great worry is that China will develop into a monstrous credit bubble - and there are those who fear this has already happened to a greater extent than is even being reported. To this end, I'd recommend watching Channel Nine's 60 Minutes on Sunday, which will screen an investigation into China's ghost cities.

China is apparently building 12 to 24 new cities every year, but some reportedly remain completely empty!

"...with the apartments snapped up as investments by the nation's wealthy middle class, then sitting empty as the owners fail to find tenants who can meet the rent.

Financial experts fear the ghost town explosion will lead to a housing bubble burst, following China's real estate boom which came after the government changed its policy 15 years ago and allowed people to buy their homes.

The middle class saw real estate as a solid investment, more stable than the sharemarket and offering better returns than the banks."

The reason I find this so fascinating is that it is such an unknown. Sure we've had construction booms before and some of them ended disastrously, such as in parts of Florida in the USA. But nothing on such a vast scale has been witnessed.

While it's hard to envisage such a growth in credit ending well, the real questions are how long it will last and how badly it will end?...and whether the fallout will impact the ongoing growth in China adversely?

What for the future?

As for the future of Chinese politics, it will be very interesting to see the impact of the boom on the political system. Non-capitalist countries have normally been dictatorships, but capitalism, which promotes freedom and competition, tends to be democratic by its very nature. Therefore, as China moves towards a free market system, it seems likely to me that China will see a gradual shift towards a more democratic system over the coming decades.

Closer to home, capitalism will likely continue to re-invent itself, but in a slightly different guise. The global financial crisis was a stark warning as to what can happen when free markets are left alone (laissez faire) to do their own thing, and for this reason we can expect a good deal more regulation and state interference in the future.

Our capitalist system is far from perfect, but most economists agree that it's the best we've got.


Gold down 40%...

Hitting as low as $1,183/oz today.

Watch out for a bull trap in coming weeks as the gold spot continues its diabolical performance...

Source: kitco

RBA shows moderately increasing housing credit

From the Reserve Bank today:

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

A lot of panicked articles doing the rounds today as the RP Data index shows colossal gains in June, particularly for Sydney where prices have apparently increased by 3% in the past month alone.

I wouldn't get too excited. Just like last month when prices were apparently falling.

It all just goes to show the silliness of relying one daily movements in one data source, with all the data collection issues it faces.

Over 12 months prices are up ~5.5% in Sydney and ~7% in Perth, and are only up marginally in other capital cities. 

But I haven't seen any indicators of prices surging at the levels being reported this month.

Keep an eye on the ABS credit growth figures over coming months.

Oops - stocks roar back

Ah. There endeth the coming bear market which had been predicted by chartists who had identified a level of support being broken. Doh.

The S&P 500 in the US has set a cracking pace in the 3 day rally which was the best in 6 months.

The Dow also stormed up another 142 points to above 15,050.

There's a lot of talk about stimulus being given and stimulus being taken away, but another reason for the substantial rally in stock valuations is a lot simpler: the US economy is improving.

From Bloomie:

"Central bank stimulus has helped fuel a rally in stocks worldwide, with the benchmark U.S. index surging as much as 147 percent from its March 2009 low. Despite this month’s decline, the S&P 500 is up 2.8 percent for the quarter and has soared 13 percent for 2013.
Consumer spending in the U.S. rebounded in May following the largest drop in more than three years. Household purchases, which account for about 70 percent of the economy, rose 0.3 percent after a 0.3 percent decline the prior month, Commerce Department figures showed today in Washington. Incomes advanced 0.5 percent, more than projected.
More Americans signed contracts in May to buy previously owned homes than at any time in more than six years. Claims for unemployment benefits decreased by 9,000 to 346,000 last week, indicating employers are slowing the pace of firings."

Thursday, 27 June 2013

Could one of Australia's main lenders fail? (and what would happen if they did?)

The Big Four

Australia's four major banks were named this week as being the most profitable in the whole world...for the third year in a row! Big bank profits appear likely to come it at well in excess of a combined $25 billion, and probably some way higher than that.

Why? It's partly because the Australian banks have wider interest margins than most, and lower equivalent costs. 

It's also because of a lack of competition worthy of the name. After a number of smaller lenders went to the wall during the global financial crisis, the 'big four' banks (Commonwealth, Westpac, ANZ, National Australia Bank) control a massive 83% of the mortgage market in Australia. 

Last year, as cuts in the cash rate were relentlessly delivered by the Reserve Bank of Australia (RBA), the major lenders consistently failed to pass on the full cuts to borrowers citing 'higher funding costs". It's laughable really, given the profits which will now again be reported, but the truth is that the banks get away with it because of the "feeble competition". It's an oligopoly.

Sure, there's talk of introducing more competition, and perhaps Macquarie will step in to become a fifth major player, but it all feels rather half-hearted given the monstrous profits which have once again been generated.

Some are more equal than others

Under Corporations Law, you might be forgiving for thinking that all companies are created equal. In theory, maybe businesses are in many ways equal, but in reality some are far more equal than others. If a retail company becomes insolvent and goes under it would be sad news for the owners and the employees, but the sun would likely come up tomorrow and the world would continue as before. 

There are some industries which the government might elect to support, such as car manufacturing. And then there are some businesses without who out entire financial system would implode: namely, the banks.

Without the banks to transfer money between borrowers and lenders, for want of a better word, we'd be well and truly stuffed. How would we even survive on a day-to-day basis with no cash cards, credit cards,  internet banking, ATMs? Undeveloped countries manage to run cash economies reasonably enough, but for the Australia of today, we'd be faced with almost unthinkable turmoil.

What do the banks DO?

At the simplest level, banks make their colossal profits through charging a higher rate of interest on their loans than they pay out on the money we bank as deposits.

If you've ever tried to buy a property with a deposit of less than 20% of the purchase price (an 'LVR' of more than 80%) you'll be aware that the bank can charge you a higher rate of interest as well as hit you up for Lenders Mortgage Insurance (LMI) as compensation for the higher perceived risk.

Investment banks also generate profits from issuing financial advice or from engaging in transactional activities such as capital raisings or takeovers.

Of course, under the modern system of banking, banks are not required to hold enough money to pay all of its depositors. It's known as fractional reserve banking. If we simultaneously all demanded our cash, the banks would not have the funds available to pay us, so much rests on our collective confidence in the institutions. Sometimes governments therefore choose to guarantee deposits up to a certain level in order to shore up confidence.

In fact, where I am today - in England - we saw a modern version of an old-fashioned 'run on the bank' in 2007 after rumours spread of the Northern Rock bank being in financial strife. The result was that the Bank of England had to step in as the 'lender of last resort' to provide emergency funding. The UK Treasury ultimately intervened and nationalised the bank.

Last resort

And that is the key point. 

There is simply no way Australia could allow one of its major lenders to fail because the fallout would be catastrophic beyond belief. For this reason the banks receive what is known as an implicit guarantee from the government.

The paradox of an implicit guarantee is that it can cause the largest banks to become larger still. They are seen as more creditworthy which can attract more business, and the very act of becoming larger reassures banks that they will become 'too big to fail'. An implicit guarantee could therefore the theory be seen to encourage reckless management.

However, banks will quite rightly be subject to increased regulation in the form of BASEL III and stress testing. 

What would happen if a major bank failed?

Overall, it is unlikely but certainly possible that with massive exposure to residential property one of our major banks could fall into difficulties. Take a look at the typical capital structure of a bank's balance sheet - you will notice that the net asset positions are surprisingly low given the vast loan balances on the books. 

However, a bank collapse would have the most diabolical and far-reaching consequences for the Australian economy. 

What would happen? Well, consumer confidence would instantly evaporate, the money supply would be annihilated as the insolvent or failed bank ceased lending funds to instead shore up their reserves...and we would likely end up in a deflationary economy with disastrous outcomes for the entire country.

So, it is for all these reasons that hell would probably freeze over before one of our major lenders would be allowed to fail. In business and economics, some are indeed created more equal than others.


A bit of talk of 'Ruddmentum' in the press - on a two party preferred basis Labor might have gained as much as five points in the polls! I'm not sure how thorough the polls were, though. Business leaders, who hate uncertainty, will push for an early election to be called.

ASX 200 - largest two day gain since December 2011

XJO up 1.68% today following yesterday's big gains of 1.63% - two of the largest gains in 2013 back-to-back.

If there's anything to learn from this it's that chartists often have as little clue as anyone else what often-irrational share markets will do next, however cleverly they try to word their predictions.

Source: ASX

Dwelling prices surge in June

Reports of the death of the housing market recovery in May seem to have been greatly exaggerated.

In truth, as I noted at the time, plenty of commentators and agents 'at the coalface' suggested that prices had not eased in May, it was likely a blip in the data, which has now reversed in June.

RP Data's index for June shows dwelling prices up an exceptionally strong 1.7% for the month to date.

Prices in Sydney seem to have gone bananas, up more than 2.5% in the last 19 days to a new record high of $664,290 - although I suspect the likelihood is that prices have rather been on a reasonable uptrend for a year (rather than the oscillating results implied through charting daily prices).

Source: RP Data

In the last 12 months prices are up in all major capital cities, although prices in Adelaide have been essentially flat. The strongest capital city markets have been Perth (+7.26%) and Sydney (+5.22%), with Melbourne also recording solid gains (+3.26%).

Source: RP Data

Property Update: Caveat emptor!

My latest article on Property Update here.

Spillard (again) ends in Kevenge

So, Labor has another leadership spill (again) and Australia will get another Prime Minister (again).

Well, kind of, we'll be reverting back to Kevin Rudd (again), for now at least.

It's all a bit deja vu.

This is only a politics blog to the extent that politics impacts the economy, and I think that, regardless of whether the Coalition or Labor get voted back in in the coming few months, it will be a challenging period ahead.

I doubt there will be many immediate game-changing shifts in economic policy. 

Both parties have pledged to steer clear of reform on the negative gearing tax rules, for example. Will we see any major shifts on the Carbon Tax or the MRRT? 

Whether or not Rudd returning the favour on Julia Gillard by stabbing her in the back will be enough to save Labor in the forthcoming election is highly doubtful.

The bookies certainly don't seem to think so with Labor priced at odds of $5.00 as compared to Abbott's Coalition quoted at $1.15.

It's all very well changing leaders on the basis that politics is "about personality", but is Australia really going to re-elect a party which can/t seem to get its own house in order?

It was only a matter of three months ago that after Rudd's most recent failure to challenge for the leadership that he said he "was a man of his word" and he would "never" partake in a leadership spill.

Sure, we have short memories but not that short.

Rudd's election campaign will doubtless be run along the lines of portraying Labor as the "proven" or known quantity which has steered Australia away from recession through a challenging period. Abbott will be portrayed as the "risky unknown quantity" (not without some reason, it must be said).

In Rudd's own words, talking of Labor's tiresome leadership squabbles and internal wranglings: "All this now has to stop".

Well, yep, I guess it will - in two or three months when the whole debacle will finally be ended by an election and a leadership contest which we're actually allowed to vote in.


Too easy a win for Queensland in Origin II at Suncorp stadium - sends the Aussie dollar back up to 92.9 cents...


Wednesday, 26 June 2013

Gold capitulation continues

A big bounce for Aussie stocks today up around more than 1.6% following positive US economic data.

But gold shed another 3.3% to just $1,228/oz. 

In the second half of 2011, prices had stormed up to $1,900/oz but this year alone the precious metal has lost a quarter of its value.

Source: kitco

Nudge economics

My paternal grandfather fought for Britain in the War, and on his return took up business as a shopkeeper. He always seemed like a fairly rational fellow. And indeed, rationed! - for food and petrol rationing continued for half a decade after the War ended. The wartime generation was fairly conservative and risk averse in its attitude to private debt.

His wife (my grandmother) was a successful dentist (imagine - a dentist in a country of Brits with all those bad teeth!) and when she retired she deposited 75 pounds in a Post Office Savings account for me and an equivalent amount for each of my brothers.

75 pounds was a heck of a lot of money back then and it seemed an unthinkably large sum for a child. My brothers and I used to calculate how many lollies we could theoretically buy with it when we were old enough (hmm, what was I saying about bad teeth?).

When we were teenagers my father allowed us to spend the money as we saw fit (libertarian), on the proviso that we bought something of lasting value and not just lollies (paternalism). He let us do what we wanted with it but just gave us a nudge in the right direction. My older brother went inter-railing around Europe with his windfall. I bought some new cricket gear with mine.

Irrational decisions

Economics for many years suffered from one glaring shortcoming: its underlying assumption that we as humans act rationally. But we don't. We all learned at school that fatty foods are bad for us, cigarettes can cause illnesses, alcohol is bad for our livers and so on. We should all exercise daily and eat our five fruit and veg. In a rational world, if we put on weight, you'd think that we would take immediate corrective action, but as a nation, it seems to be otherwise.

I previously blogged about Adam Smith's invisible hand theory which was based largely on the assumption that people act as rational profiteers, and neoclassical economics was founded on the principals of rational human behaviour.

Behavioural economics

Over recent decades, these failings were gradually realised, and a new field of behavioural economics sprung up in the 1970s, which studied the relationship between mind and body and what drives us to act as we do.

The pioneers of behavioural economics understood that humans do not act rationally and instead frequently use mental shortcuts in order to make decisions, perhaps at various times based upon past experiences, a bias towards favouring the status quo, following a herd mentaility or sometimes based upon how a situation is 'framed'. We can be influenced by many biases.

Anchoring bias

Anchoring is a cognitive bias which causes us to rely heavily upon the first piece of information we encounter when making decisions. The first piece of information is known as “the anchor”.

For example, in one test a group of people was asked to write the last two digits over their social security numbers. And then they were asked how much they would pay for a bottle of wine. Those with higher digits on their social security cards indicated that they would pay more, on average, for the bottle of wine. Similar tests continued to yield similar results.

The initial price offered for a car tends to have an unnatural bearing on the remainder of the negotiation, regardless of what the seller initially believed a fair market value for the car to be.

The most common anchor in share investment is the price which investors buy a parcel of shares at. Logically, once you own a parcel of shares intended for a long-term investment – tax issues aside – the price you paid for the shares should be irrelevant. Instead, periodically the investor should consider the future prospects for the company and determine whether the shares held still represent good value by comparing to the market price last traded to the calculated value of the company.

Does this happen? Not often enough. Instead, most amateur investors become transfixed with the price which they paid for the shares. If the share price has gone down since they bought in, they swear blind that they will not sell until the parcel of shares is showing an investment profit.

Unfortunately this is very often what catches amateur investors out. They allow the market value to fall and fall…and fall, until finally they can take it no more and sell out at the very bottom of the market. By anchoring themselves to the price paid for the shares, they stop looking at the investment rationally by asking “would I buy shares in this company today?” and instead say “I’ll sell when I’ve made my money back”. They delude themselves that a loss is not real until it is crystalised and thus jeopardise their entire investment account through this one act.

Think back to the example of the car I referred to earlier. It’s very similar when it comes to property negotiations. The first offer made for the property very often becomes the anchor for the remainder of the negotiation process.

Nudge economics

The realisation that people do not act rationally is vitally important. It is no good for governments and central banks to set policies which work on assumptions of rational behaviour, such as, for example, allowing individuals to take on as much debt as possible. A rational person would not take on more debt than they could afford to pay back, and yet, people are not rational.

The implication of this is that we can expect policy makers to gently nudge us in a certain direction. Free markets are a great idea in theory, but in reality, policies will be put in place to manage consumer and individual behaviour.

The posh phrase for this is 'libertarian paternalism', more commonly known as 'nudge economics'. An example? Through the 1980s it was gradually realised that Australia was undergoing a major demographic shift and that our pension system was in need of reform. In 1992, Keating's Labor government introduced the Superannuation Guarantee legislation, which made contributions to pensions compulsory. It was considered to be in the best interests of the population to force contributions to be made.

Nudge economics is a delicate balancing act and dangerous in the wrong hands - where should governning bodies stop? Should they tell us how to spend our income and how much to save? Should they tell us when and where we should buy a house? Should we be allowed to decide whether to give blood or should healthy individuals be compelled to do do? Should organ donation be compulsory? What about our health? Marriage? Our education?

Market manipulation

Our investment markets will be heavily impacted by policy decisions in the coming decades so it will pay to understand the motivations behind and the consequences of policy-making. Central banks overseas have been engaged in heavy 'printing' of money which distorts share and commodity markets.

Australia's property markets will be manipulated by central bank policies. The RBA will use low interest rates to stimulate dwelling construction, yet the Reserve will not turn a blind eye to asset price bubbles. Meanwhile, APRA will keep a close eye on deposit growth and bank lending practices and ensure than standards are maintained. At the state level, first home owners grants will be used to 'help' buyers into the market. When markets next weaken once more, rules restricting foreign ownership may be relaxed, and so on.

All of these issues distort the markets and 'nudge' vested interests and individuals in the desired direction. Now, if you'll excuse me I'm off to calculate how many lollies I could buy for $10,000...

Tuesday, 25 June 2013

Dollar-exposed industrials holding up

It's been a messy few weeks for the Aussie stock market with the miners and the major banks falling back, as one might have expected given what has played out overseas.

With the dollar weakening substantially, industrial stocks with exposure to the currency have done far better.

Consequently some LICs which are focussed on a balance of industrials have done reasonably well too.



But the real winners over the past six months have been those with a heavy dollar exposure.


Source: ASX

RP Data: Property Market Indicators

Fastest selling property types are units in Sydney at only 33 days, followed by houses in Sydney at 35 days. Houses in Canberra and Melbourne are also selling fairly quickly:

Auction clearance rates remain very strong in Sydney, but perhaps will now ease a little as the winter months fully set in:

Mortgage index? Hard to say, but may also be slowing up a little - it will be interesting to follow the ABS figures in coming months for further evidence:

Source: RP Data

Markets pricing in the end of the easing cycle

The credit union group (CUA) announced that it has cut its fixed rate mortgages for 1,2 and 3 years to just 4.89% p.a.

And yet, the futures markets seem to finally be turning a little more optimistic on the Australian economy.

The ASX implied yield curve of the 30 Day Interbank Cash Rate Futures suggests one more 25bps cut to a record low cash rate of 2.50% by the end of the 2013.

But the yield curve implies that monetary policy should by then be starting to bite, and perhaps a weaker Australian currency may see some inflation back on our shores.

Meanwhile the RBA also takes the optimistic view in forecasting that for the year ended December 2014, GDP growth will be trending up again to 2.5%-3.5% following a potential preceding dip.

Futures markets have now priced in interest rates rising back up to 3.00% by November 2014. 

Source: ASX

Property Update: Population growth underpinning the capital city markets

Read my latest Property Update article here.

The nature of growth

Greetings from bright but rather brisk England where I've been hanging out for the past week. Busy as ever, I've been taking in a bit of culture, being the history buff that I am. 

In the last week, I've visited the ruins of the 6th century fort of Bolingbroke Castle, which was once one of the most important sites in Britain, being the birthplace of Henry IV. Today, it's essentially a mound of earth and a pile of stones in the countryside, but tremendously interesting nonetheless!

This morning I also visited the magnificent Kings College in Cambridge which was founded by Henry VI in 1441, and the restoration of which - a bit like the unending painting of the Sydney Harbour Bridge - seems to be an ongoing, 365-day-a-year job.

And, just in case all that wasn't tiring enough, I've also been spending some time with my three nieces.

Not having children of my own, I forget just how darned noisy and energetic kids can be, and I'm also amazed at how they seemingly eat round the clock: breakfast at 7am, sausage sandwiches by 9am, morning snacks by 10.30..."Well, they're growing kids, y'know..." - and it's true enough, they definitely are growing!

Physical growth and price appreciation

So, what have I missed in the world of Aussie real estate this week? Prices are on the move in some cities, it seems, with data provider indices showing some "growth".

A couple of commentators have again highlighted the risks inherent in mining towns, noting the possibility of land being released. I wholeheartedly agree with this assessment, although I note that this risk extends to many regional towns in general: land being available for release introduces a risk of very weak real long-term price appreciation.

Over here in the chilly south-east of England, it's very noticeable how so many former greenfield sites have been developed on the fringes of provincial towns and the smaller satellite cities in recent years. New property developments are sprouting up all over the place in fringe suburbs, with the UK Government and Bank of England pushing things along with its 'Help to Buy' scheme and ZIRP respectively.

While UK median prices have shown a very moderate uptick (this can happen when new builds come online), in many areas outside London the prices of existing properties remain way below where they were in 2007.

Remember that the physical growth of a town or city does not necessarily equate to price growth in existing properties, and this is especially the case where new land is being released.

In London, the dynamic is markedly different. Not only is there a massive, growing population and almost no prime land available for release, investors from Britain and overseas who were spooked by share market crashes during and after the financial crisis are simply throwing money at the property market, pushing prices up to unheard of levels, way ahead of their previous peaks.

"Room to grow"?

Some commentators say that investors should buy in the cheapest quartile of the market where properties have "more room to grow". 

But properties do not "grow", unless of course you are investing in building them to make them bigger. No. Instead, properties, just, well...kind of sit there.

Plants grow. Trees grow (though, as the saying goes, trees don't grow to the sky). My nieces grow. 

But properties do not grow.

And besides, why on earth should each successive generation pay more for property than its immediate predecessor? Particularly now that the deregulation of lending standards and products is well in the past and interest rates have fallen to as close to the 'zero bound' as they hopefully ever will be in Australia. 

If you want investments to grow - like my nieces - they need to be fed. You need to re-invest in them.

If you want a term deposit to grow, re-invest the interest.

How do companies grow? Because companies tend to only pay out a small portion of their net earnings as dividends and they retain sufficient capital to re-invest in the business. 

This is why value investors and Buffett-types seek businesses with strong and growing owner earnings (reported earnings with depreciation and amortisation added back, less capital expenditure for plant and equipment) - they want companies which can be self-perpetuating and are able to re-invest in their own futures.

If you want to grow your own share portfolio, re-invest your dividends via a dividend re-investment plan (DRP).

But, I'm afraid to say, properties do not "grow", especially if you take the approach recommended by some pundits of not maintaining properties to a reasonable standard.

In fact, if you don't re-invest in a property regularly through paying for repairs and maintenance (as the chaps do at Kings College in Cambridge nigh on continually) then eventually the property will fall down and you will be left with a pile of rubble and some earth (such as exists at Bolingbroke Castle in rural Lincolnshire).

Price growth

It's common to talk of "market value" or "intrinsic value" in the world of real estate. 

But what is market value? It's really only what another individual or entity will pay for the title at a given point in time.

Imputed rents don't make for a great measure of 'fair value' in residential property for they take little account of the emotional factors impacting homebuyers. In property, price is perhaps a far more appropriate word to use than value.

All things being equal, the price of a property should only move in line with inflation: as the currency becomes gradually worth less over time, the price of property should slowly tick up accordingly, but no faster than inflation.

A property in strong demand might potentially move rather in tandem with the growth in household incomes over time, with the effective speed limit for price growth being the ability of the populace to service mortgage repayments.

So how does an investor source price growth which outperforms inflation over the long term? Ultimately, unless you are a skilled renovator (and, let's face it, most property investors definitely aren't) there's only one way that it is possible to do this, by finding a property which:

(1) is in an area with a strongly increasing population, with real wages appreciation and booming demand;

(2) is in an area where there is little or no land available for development or release and thus supply does not keep pace; and

(3) where investors are pushing up prices through seeking returns on their capital.

This discounts most regional markets and fringe suburbs where land is available for release, demand is very low and price-to-income ratios remain subdued.

The markets which are fitting the criteria for price growth at present are Perth, Sydney and Darwin and prices are increasing accordingly.

Investors tend to prefer capital cities and the combination of land-locked suburbs and growing populations tend to be a happy one for investors and an unhappy one for homebuyers, pushing the price of the prime-location land ever higher. 

Monday, 24 June 2013

AUD touches 91.58 cents

Its lowest level since September 2010.

Amazing falls given that on April 10 the Aussie dollar was buying 105.4 US cents.

It's been a long, long time coming for those of us short the Aussie dollar, but at last it has eased back somewhere close to a fair value. 

Will it drop yet further? Plenty forecasting further falls....

Markets price out July rate cut

There will almost certainly be no interest rate cut in July as the RBA will look to take a breather and assess another month of data.

Meanwhile, Sydney's property markets look to be demonstrating very strong growth as expected following a series of interest rate cuts.

RP Data is showing very sharp appreciation in its index over recent weeks (more than 2.2% over the past fortnight, if you're a believer in such short timeframes).

Meanwhile Australian Property Monitors reported that (not unexpectedly) it is the inner west which is outperforming the wider market. 

Regular readers will know that Sydney's inner west has long been my favoured sector of the Australian property market.

"Sydney’s auction market continues to track considerably higher than at the same time last year both for clearance rates and listing numbers. Last year’s clearance rate over the same weekend was just 56 percent from 371 auctions.
This weekend’s result closely follows last weekend’s 76.9 percent and reflects the remarkable consistency of the market over the past three months since Easter with weekend clearance rates averaging 75 percent over that period.
The ever popular inner west produced another stunning result on the weekend with an 84 percent clearance rate despite having the highest number of auctions of any of Sydney’s regions. The average auction sale price for a house in the inner west at the weekend was $1,183,167 with the average unit auction sale price $579,467."

Share market slide continues

Source: ASX

Sunday, 23 June 2013

Prices set to soar as dollar falls to 33 month low

Inflation in the pipeline as the dollar falls, reports SMH here:

The days of cheap overseas travel and attractive online prices are over, leading economists say. With the Australian dollar falling to a 33-month low on Thursday, travel and online retail prices are expected to soar immediately.

Petrol, whitegoods and electronic equipment prices are expected to rise by up to 10 per cent.
Mr Harvey said if the dollar dropped below 80 cents compared with the US dollar, consumers should expect a 25 per cent increase 
"Anything in a foreign price will go up straight away," AMP Capital's chief economist Shane Oliver said. "It's the same with online suppliers. That price, when translated, will be higher than it was six week ago."

Also, expect travel costs to increase.

Property Update: Fisher's Money Illusion

I write for Property Update today - you can read the article here.