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.

Wednesday, 31 July 2013

AUD hits 89.36 cents

And, there it is...

The resilient Aussie dollar finally cracks and drops below 90 cents hitting 89.36 cents down from 106.24 cents in just a few short months, before bouncing a little.

That's great news for the economy and the lowest level we have seen since September 2010, nearly three years ago.

Perhaps the market is anticipating more than one interest rate cut yet...

It's been a long, long time coming, but this is welcome and excellent news for Australia's exporting economy.

Dr. Copper morose...

Truly dreadful looking 6 month chart for copper, the spot price deteriorating from above US$3.75/lb to below US$3.05/lb as sentiment has declined.

If I was a technical analyst, I'd be tempted call a bounce off these levels, in the hope of a breakout above $3.20.

Source: kitco

Investment risk - warts and all

In Australia, although the tabloids sometimes venture into unsavoury and intrusive reporting, we don't have the extreme gutter press that has plagued Britain over recent decades. 

Sometimes, of course, our press oversteps the mark, but nothing in comparison to UK newspapers such as the now-defunct News of the World, which was found to have pulled all kinds of despicable stunts including the appalling disruption of a high-profile murder investigation and numerous other odious practices.

Sometimes, it might legitimately be argued, tabloid expos├ęs have served in the public interest, highlighted ill deeds which may otherwise may never have come to our attention. But equally, articles which exist only to defame often amount to nothing more than slurs and smears which serve little purpose.

Media sometimes sways in other direction, orchestrating what is known as 'puff piece' journalism. 

A puff piece documentary is one which exists only to "puff up" or exaggerate the positive angles of its subject, offering no balance and only subjective views. A puff piece might sometimes  be entertaining or reassuring, and pander to the ego of its subject, but tends to add little objective value in the manner that a 'warts and all' documentary might attempt to do.

Bias in investing

It's no coincidence that the greatest investors of the 20th century such as Benjamin Graham devoted a great deal of time to espousing the importance of forming an objective view of an investment, rather than being swayed by prejudice and bias.

In the preface to Graham's classic work The Intelligent Investor, Buffett says:

"What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework".

Buffett also said:

"You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right."

Share market biases

There once was a time where everyday investors spoke to brokers only once or twice per year and took the advice of brokers as read. But the advent of online commentary has introduced an interesting new facet to the investing world, that being the airing of views of average investors.

Investors have always suffered from biases, as identified by Graham all those decades ago, but the online fraternity has perhaps shown them to be even more deeply ingrained than perhaps we ever believed. So many investors only want to hear positive news and views about their chosen investments as a means of validation.

Stock market forums demonstrate this perfectly. Take a look at chat forums discussing the merits of otherwise of speculative mining stocks. 

Even the penny dreadfuls which have seen 90% or more of their market cap obliterated by capital raisings and other dilutions can see a positive comment met with a chorus of 'thumbs up' responses and favourable comments. Meanwhile anyone daring to point out the shocking performance of a stock versus the wider resources index, the failings of executive management or any kind of dismal outlook at all is met with widespread derision and dismissed out of hand.

Investors love to hear positive news about their prospects, but will only become intelligent investors in the mould of a Graham or a Buffett if they can learn to adopt a balanced view while considering the risks and failings of investment selections as well as the positive aspects.

Property prejudices

Nowhere are these prejudices better illustrated than in the world of Aussie real estate. Market commentators are quickly and conveniently carved up between bears and bulls. Market crash advocates highlight only negative angles, whereas so-called 'perma-bulls' persist with viewpoints which imply that prices only ever head north. Neither adds much value, because their viewpoints have already been jaundiced before pen is put to paper (or fingers are put to the keyboard).

Biases in real estate are often swayed by ownership status, of course. Those of bullish tendencies of are often property owners or work in the real estate industry, while those who only look at downside risk tend to be renters who want prices to crash so that they can buy (sometimes proving to have been latent bulls once they clamber aboard the property ladder) and sometimes they are those who stand to gain in some way from promoting the idea of a market crash. 

There is little value added in promoting only one side of an argument. In fact, if there is no balance in reporting, then it adds nothing.

Overall, I've been 'optimistic' (if that's the right word for appreciating dwelling prices) about the Sydney housing market since around 2006 because I felt that appropriate dwelling construction in the popular suburbs close to the city would fail to match the rapidly growing demand.

But that's not to say I'll always remain that way, and I can equally name any number of markets including many fringe city suburbs, holiday locations and regional markets (and even some capital cities) where I consider the risks to be unduly high and not worthy of investment at this stage in the cycle. 

And besides, continuing to remain optimistic when evidence starts points in another direction introduces an increased likelihood of looking like a prize goose.

Sometimes, I've just been plain wrong (a whole other subject for another day: commentators who never admit to being wrong), and I've admittedly been taken aback by the resilience of Melbourne's dwelling prices in the last 12 months or so, with prices gaining a surprising 7.5% since their trough according to RP Data. I'd felt that the best case scenario would be something close to flat prices in that time, and a base case would have included a small drop in prices.

Residential real estate is not a pure investment asset class, and ultimately markets which experience jobs growth will see growing demand, whereas those markets which are heavily reliant on one or two industries must entail a higher risk. It's approaching madness to suggest that certain remote markets where people often live through necessity rather than choice are going to outperform income growth after a decade-and-a-half boom in household leverage.

That's why I felt that parts of the south coast of NSW was a risky selection nominated by yield-focussed investors in 2010 due to its heavy reliance one one industry. In my opinion at the time, it was a poor risk-adjusted bet because of the possibility of redundancies in exporting industries in an era of a rapidly rebounding Australian dollar and thus it proved. Regional markets which are heavily reliant on the automotive industry will likely now face stiff headwinds too.

ABS: Household incomes recovering after global financial crisis

Today's release from the ABS revealed some interesting trends on household income growth.

"Income in low and middle income households grew by over four per cent between 2009-10 and 2011-12, according to a report released today by the Australian Bureau of Statistics (ABS).

"Growth in household income stalled after the global financial crisis," said Stephanie Cornes, Director of Household Economic Resource Surveys at the ABS, "but figures from 2011-12 released today show that household incomes are recovering."

"Low income households have seen an increase of five per cent from 2009-10, and middle income households have seen an increase of four per cent. High income households have been fairly stable, with no significant growth."

"Overall, the share of total household income received by low and middle income households has grown since 2007-08, while the share received by high income households has fallen. These results are reflected in more equal incomes across Australian households since 2007-08," Ms Cornes said."

The ABS found that real equivalised disposable income increased by 49% between 1994/5 and 2011/12, despite a break in the trend during the global financial crisis.



Source: ABS

Notably, disposable income was very high in some states, but low in South Australia and Tasmania.

Data data data...

Lots happening today!

The Aussie dollar fell to just 90.1 cents at one stage before returning to 90.3 cents. T

Futures markets have all but priced in an interest rate cut for August 6, it now being considered at 96% likelihood i.e. a done deal.

The stock market closed out a bonanza month with moderate gains, finishing the month up by 5.2%.

RP Data's housing market data for the month of July shows that prices gained a very strong 1.6% in the month.

As expected, over the year to date, the best performing cities have easily been Sydney (+6.75%) and Perth (+6.14%).

The worst performing major capital city over the year to date has easily been Adelaide. 

The South Australian capital is the only city to record price declines, with RP Data showing prices to have dropped by more than 3% over the past 3 months.

Prices in the cycle since the previous trough are up strongly to record highs in Sydney (+9.6%) and Perth (+10.3%) but remain well below previous peaks in Adelaide and Brisbane.

Meanwhile, US house prices are up by 12.1% on a year ago according to the Case-Shiller 20 city house price index.

The Reserve Bank also released its financial aggregates, showing a slow but steady recovery in the housing market continuing, with credit growth rising by 4.6% over the year to June:

"Over the year to June, total credit rose by 3.1 per cent.
Housing credit increased by 0.4 per cent over June following an increase of 0.4 per cent over May. Over the year to June, housing credit rose by 4.6 per cent.
Other personal credit increased by 0.2 per cent over June after decreasing by 0.1 per cent over May. Over the year to June, other personal credit increased by 0.2 per cent.
Business credit rose by 0.5 per cent over June after increasing by 0.2 per cent over May. Over the year to June, business credit rose by 0.9 per cent.
Over the month of June, M3 grew by 0.4 per cent and broad money grew by 0.4 per cent. Over the year to June, broad money grew by 5.4 per cent."

Property Update: the great delevering begins?

I write for Property Update today here.

Tuesday, 30 July 2013

Stevens drops his cards - rate cut coming

Interesting speech from Glenn Stevens today which you can read here:

I've copied a key excerpt below.

In summary, the soft inflation data leaves room for another interest rate cut and the RBA is not so concerned about dwelling price growth at this stage to preclude them from cutting again.

The markets have made up their mind: the Aussie dollar has fallen by 2 cents in the last couple of days to 90.7 cents, and future markets believe that another cut is all but a done deal (pricing in a massive 91% chance of a rate cut next week).

"We have been saying recently that the inflation outlook may afford some scope to ease policy further if needed to support demand. The recent inflation data do not appear to have shifted that assessment.

One's assessment of prospects for consumption will be driven mainly by one's assessment of the outlook for income, but will also be affected by expectations about asset values and in particular one's view on whether housing prices are overvalued. 
Those who think they are will be drawn to the conclusion that a number of additional years of flat or declining real per capita asset values lie ahead, for non-financial assets at least; those who are not so worried about housing prices may expect that stronger growth, in real per capita terms, might occur.
Either way, however, it would seem unlikely that we could bank on a resumption of sustained growth in assets, in real per person terms, of 7 per cent per year over the next few years. It follows that the saving rate is unlikely, any time soon, to decline back to where it was in 2005.
Implications that might flow from these observations would include the following.
First, some strengthening in consumption from recent rather subdued growth rates is a reasonable expectation, but we should not expect a return to the sorts of growth seen in the 1995–2007 period. 
Nor, surely, should we try to engineer one, at least on the back of borrowing. Households continue to service their borrowings well – the household arrears rate is low and has fallen slightly over the past year – but we would be risking future problems were we to see a big run-up in debt from here. 
This does not preclude prudent levels of borrowing by new entrants to the housing market, or by investors, nor does it preclude gains to consumers as costs are squeezed out of the system."

Will interest rates hit a record low 2.50% next week?

It looks like it, and 22 of 28 economists surveyed by Bloomberg think so.

And so do the futures markets.

The next RBA Board meeting and Official Cash Rate announcement will be on August 6.

ASX 30 Day Interbank Cash Rate Futures August 2013 contracts are trading at 97.410 which indicates a 79% expectation of an interest rate decrease to 2.50% at the next Board meeting.

It seems that with the benign inflation print (particularly with the effect of the carbon price stripped out), the RBA has room to go again.

The market has become gradually more convinced over the last 4 trading days, with the implied likelihood of a cut creeping up from 62% to 79%...

Source: ASX

Swimming against the tide...

Surfing safari

Back in the 1990s, along with two Aussie cricketing pals I set off on a surfing trip, driving up the east coast from our eastern suburbs base in Sydney to the sunny climes of Queensland. Being excitable youths glad to have finished an arduous season of grade cricket, we drank a lot of beer and embarked upon three weeks of Olympic-standard larking around, which, of course, was exactly what we'd had in mind all along.

Amazingly enough, in between all the hooning and the high-jinx, we did actually find some time to surf. My two buddies, one of whom was (and is) a surf coach, hailed from Bondi and Bronte respectively, so it all came easily enough to them. Having grown up myself in a freezing cold climate and possibly the most centrally-located city in England, surfing was not one of my strongest suits, and I struggled gamely, much to the amusement of my unsympathetic young colleagues.

As we reached the most northerly point of our trip at Noosa, we ventured out to tackle some horrible-looking surf. Predictably enough, I was completely wiped out and flailed desperately in my bid to get back to shore (cue more amusement from my Antipodean friends). I later learned the golden rule that all Aussies are taught from birth: don't panic and try to swim directly to shore against a rip current. Instead, swim parallel to the shore until outside the rip. Then return calmly to the safety of the beach.

The stock market tides

Why does Warren Buffett look to buy shares in quality companies and hold them for as long as possible? Simply, because, over time quality companies can generate larger profits, pay larger dividends and increase their valuations.

Stock markets are often perceived to be risky, but risk is related to the specific investments which you choose and the time horizon which you elect to hold them for. While acknowledging the effect survivorship bias can have upon index data, below is copied a chart of the Dow Jones index (DJIA) from 1900 to July 2013. There were ebbs and flows...and even some famous 50 year storms! But the crashes often followed periods of irrational exuberance and tend to look less dramatic as they fade into the rear-view mirror. 


The long-term trend is clear: upwards. It's possible to make money with skilful market timing by shorting the market, but on average, the market spends more time moving upwards than it does falling, and the longer-term investor will immediately benefit from a significant head start through receiving a regular and growing dividend stream. Those who sit out of investing in the stock market for long periods are swimming against the current.

The property vortex

In Australia, it is generally cheaper to rent property than it is to buy, so those who elect to sit out of the market instead of buying are not swimming against a tide of dividends. Although renters may not be paying off a mortgage, at least their monthly cash outflows should be lower than those who have recently purchased an equivalent property (although recent interest rate cuts have delivered a welcome affordability dividend to mortgaged owners on variable rather than fixed rates).

Renters, therefore, are only swimming against the ebb of the market if nominal property prices are increasing, in regions where they are being eased higher by demand from homeowners and investors outstripping supply. Investors too, generally experience cash outflows in the early days of property ownership in Australia, so they only move ahead if prices are increasing.

The tides which can push prices higher in a region include: a booming population and therefore a demand which the supply of dwellings is not meeting, a real and sustained increase in household incomes (in particular, where significant jobs growth is being experienced) and an in-flux of speculative investment capital. Where these factors are not in evidence, renters may gently swim across any real or perceived rip, and drift gently back to shore: there is no tide for them to swim against.

City cycles

Property market cycles do not move in lockstep in Australia; some cities experience rising prices while in others they are falling. Certain experts have been saying for around half a decade now that prices in Adelaide will boom. When I started writing my first book back in 2010, I detailed the reasons why I disagreed (and still do) with this viewpoint. 

Although Adelaide has a gentle drift of population growth, the absolute numbers are relatively small, there is plenty of scope for new development, a number of planned mining projects or extensions have been shelved, and I see no reason why the city cannot house its growing population relatively affordably. Renters don't appear to be caught in a rip, because in real terms prices have been becoming more affordable - they are gently drifting back to within reach of some previously excluded younger buyers.

Sydney to outperform

While some cities will continue to see easing prices, Sydney looks set to outperform. 

Although the latest round of unemployment figures from the ABS showed that the Australian economy added a seemingly impressive 160,400 jobs over the past 12 months, it is notable that 81,900 of those were in NSW and 31,700 were in VIC. Jobs growth was weak in QLD and all but non-existent in SA and TAS. These figures help to explain why Sydney and Melbourne have thriving property markets while Adelaide has failed to deliver the long-promised price growth in spite of the lowest interest rates in a generation.

Sydney is a different kettle of fish entirely from Adelaide. Those waiting on the sidelines for a price crash in the harbour city aren't swimming against a gentle undercurrent of population growth, they are facing a full-blown demographic tsunami. Estimated annual population growth may be a touch volatile but the population growing from around 4.1 million at the time of the 2001 Census to above 4.6 million by the time of the 2011 equivalent headcount, suggests a very strong longer-term average of around 50,000 persons per annum.

A higher population does not automatically equate to higher dwelling prices, but last time I was in my apartment on Pitt Street, I took a long, hard look at the vast semi-circular area of Sydney visible from the balcony, and as far as I could tell there were only 3 ongoing residential developments of any stature. 

In truth, there are a few projects coming online such as the expensive-looking new apartments on previously unfashionable Broadway, and indeed a new suburb is being constructed at Barangaroo (not that the $2 million+ price tag for the 100 two bedroom apartments is going to solve any affordability issues). The problem is that few seem to want to venture out to the fringe suburbs, creating high land prices and affordability pressures in suburbs close to the city.

A material fall in prices might or might not be triggered at any given point in time, but with each passing year in the decade since a crash was being called after the turn of the century, the competition for prime-location real estate has been increasing, as wave after wave of immigration hits the city.

The other tide that renters are swimming against is the raging torrent of speculative capital which is flowing into Sydney. Prices do not seem to have faded in Melbourne as had been widely predicted in part because investors have returned to the market in droves, lured in by lower interest rates. Plenty of commentators have also been forecasting price falls in Sydney for years, but these predictions were drowned by the appetite of investors for Sydney real estate. 

According to the ABS, loans for investment purposes with investor lending in NSW increased by nearly 24% on a year ago and NSW made up some 40% of the value of all investor loans approved in Australia in the month of May. Investors  presently account for more than 50% of total home loan activity in the state. With record levels of investor capital washing over the established housing stock and auction clearance rates consistently topping a boomtime 80%, dwelling prices have reached a new high tide level, and increases look likely to continue to be reported over coming months.

Monday, 29 July 2013

Barbecue of the shorters

An ongoing complete shocker continues for those who have continued to advocate shorting Australia's banks.

There has been a long-held theory from bearish commentators that in order to effectively short the Australian property market, 'investors' should instead short the major banks.

How has that played out? Well, in a nutshell, it could barely have gone any worse.

Commonwealth Bank (CBA) hit a record high share price today of $73.86.

Since the recently renewed call to short the banks, CBA's share price is up nearly 8% this month and almost 20% this year alone. The stock valuation has continued an astonishing trend, tripling in price since a low of around $24 during the global financial crisis.

Not only have the banks continued to deliver outstanding dividends, the capital growth has been electric too.

Even at today's elevated share prices, with a market cap of nearly $120 billion, the bank is delivering a dividend yield of close to 5%.

But as I discussed in a recent post, there is not much defensive value in the banks at these prices for new investors.

And, for those trading the stock rather than holding for the long haul, market signals from Japan (the Nikkei being on a miserable losing streak) are concerning.

Source: ASX

[Disc: I'm a long-term holder of CBA and two other major banks]

APM: Sydney property market "hot"

From Australian Property Monitors:

"Another set of extraordinary results for Sydney’s hotter than hot home auction market was recorded at the weekend. The auction clearance rate of 80.8 percent was the third consecutive weekend of clearance rates above 80 percent. Auction clearance rates continue to track at levels not recorded for over ten years at this time of the year.
With auction clearance rates at their highest levels for years it’s no surprise that Sydney house prices are also growing at their fastest rates for years. The Sydney median house price increased by 2.7 percent over the June quarter which was the fastest rate of quarterly growth recorded since March 2010 during the previous house price boom.
With Sydney houses prices having increased by 6.7 percent over the 2013 financial year it’s also no surprise given almost historically low interest rates for both borrowers and depositors that investors are flooding into the Sydney housing market at record levels.
The best regional result in Sydney this weekend was recorded in the north west with an outstanding auction clearance rate of 93 percent. Another strong result was recorded by the consistently popular inner west region which despite providing clearly the highest number of auction listings at the weekend recorded an auction clearance rate of 90 percent.
With weekend auction clearance rates showing no signs of slowing down expect house prices to continue to surge with real the prospect that before years end, the median prices for Sydney houses to exceed $700,000 and the median price for Sydney units to exceed $500,000."
Most economists, 22 of 28 surveyed by Bloomberg, expect interest rates to be dropped again in August.
With auction clearance rates already at sky high levels in Sydney, the predictions of a slow decline in Sydney's housing market look to have been very wrong. 
While some new supply has hit the market in recent years, the population is growing at such a rate that the desirable stock is quickly absorbed, and Sydney properties have become among the fastest-selling in Australia.

Could the touted recession get revised away?

It's well known that some commentators have been going on and on (and on) about the risk that Australia will sink into recession. Australia's GDP growth is bumbling along at a trend of 2.6% per annum or a seasonally adjusted 2.5% p.a. The bearish excitement reached fever pitch when in the last quarter Australia's GDP was again reported at just 0.6% for the 3 months to March, suggesting a possible forthcoming downward trend.

GDP growth

Graph: GDP growth rates, Volume measures, quarterly change

Source: ABS

Not a great result, but monetary policy takes time to see its full results, and, after all, 0.6% is still growth, even if it is not considered to be strong growth.

The March GDP result of 0.6% was quite some way lower than had been initially forecast, but I remarked at the time that there remains every chance that the figure could be revised upwards. And if that were to be combined with a half-decent result for the June quarter, we could yet come in at closer to 3% per annum than 2.5% for the year to June 2013, thus leaving us wondering what all the fuss was about.

Further, last week's inflation figures revealed one piece of gratifying news - the mining construction boom has not left Australia with an inflation problem, such as has been the case when booms have been experienced. Strip out the effect of the carbon price, and annualised inflation actually sits below the targeted 2-3% range (and thus ultra-low interest rates may be maintained).

Building activity

And so to the building activity figures released this month. Again, not a great set of results, although dwelling units commenced increased over the past year for both houses (+5%) and units (+21%) implying that the Reserve Bank's stated plan to stimulate dwelling construction may be beginning to take some sort of shape.

Dwelling units commenced

Graph: Dwelling units commenced

Source: ABS

In all the excitement of highlighting the soft year-on-year building activity figures, very little weight was given to the following note in the Building Activity release.

Significant revisions to this issue
  • the total value of work done in Australia during December quarter 2012 has been revised upwards by $582.1m or 2.8%.
  • the total value of work commenced in Australia during December quarter 2012 has been revised upwards by $1,790.9m or 8.8%. This was driven by revisions to non-residential commencements ($844.4m) and new other residential commencements ($621.5m).
  • the number of dwelling unit commencements in the December quarter 2012 has been revised upwards by 3326 dwellings or 8.4%.
All revisions to the December 2012 quarter's figures and all of them in one direction: upwards. It's also interesting to note that actual capital expenditure undershot expectations in the March quarter in falling by 4.4%, so it will be very interesting to see what is reported for the June quarter on August 29. 

There may be implications for GDP growth which could result in upward revisions.

The Reserve Bank will have been heartened by a major correction to the currency, with the Aussie dollar having devalued markedly against the US dollar since the middle of April, as well as a decent rebound in the iron ore price.

GDP revisions

Detailed research by the Reserve Bank shows that over the past 15 years, Australia, just like our buddies from across the Tasman, has a tendency to revise its GDP figures in an upwards direction. 

Source: RBA

While the biggest absolute revisions to GDP tend to be driven by the highly unpredictable inputs such as change in inventories (by its very nature an "extremely volatile series") and corporate profits (ditto), the RBA's research shows that drivers of revisions in the past have also included household consumption, dwelling investment, engineering and construction, and non-residential building.


The RBA has highlighted that its real time GDP prints can be subject to significant revisions and that early estimates of GDP tend to undershoot the 'final' results to some degree.

"Revisions to early estimates of GDP growth have tended to be sizeable and in an upwards direction, though these characteristics are not unusual by international standards."

Of course, some will continue to highlight every risk facing our economy and every negative angle they can possibly find until the day they drop off: it's their job, after all, gloom-peddling being a mini-industry in itself these days. 

But keep any eye out for what happens over the next six weeks, especially now that we have seen building activity figures for previous periods revised upwards. Could we end up with GDP for the financial year of closer to 3% than 2.5% when the National Accounts are released in early September? There may yet be a surprise to the upside.


Played two games of cricket in the last two days, a full 200 overs of cricket in 48 hours. 

I used to do that sort of thing without batting an eyelid when I was 21 years of age, but today I feel closer to 121. Retained some form of old with the bat, a nice little 70-odd with a few lusty blows, and even rolled out 13 overs of military-medium pace, but the less said about my ground-fielding the better ('Tufnellesque' - could barely bend my knees by close of play yesterday).

I also got sledged several dozen times for "looking like Jesus", "don't give this bloke two lives", "the batter's been resurrected", "he's their saviour..." etc etc. Youngsters respect (not that I had any either when I was a young pup, to be fair).

Truly a struggle to get out of bed this morning. Ouch.

Sunday, 28 July 2013

Saturday, 27 July 2013

Sydney auctions point to further price gains

The REIV reported a solid enough 72% auction clearance rate for Melbourne on Saturday.

In Sydney, APM reported an "extraordinary" 81% clearance rate, the third consecutive week in which the 80% barrier has been exceeded.

The activity levels continue to point to an ongoing price boom in the hot sectors of the market in Sydney.

Earlier in the week, APM reported that house prices in Sydney, Perth and Canberra are now at record highs with Melbourne only a shade below its all-time highs, although Brisbane and Adelaide still have a way to go if they are to follow suit.

Perth and Sydney have recorded gains of around 10% since their respective troughs of a little over a year ago and prices have increased reasonably well everywhere except for Adelaide.

But it's Sydney that is the real embarrassment for the chorus of voices predicting a "40% crash" half a decade ago, with prices well above all previous peaks.

Not only did dwelling prices increase by more than 20% as household incomes grew, the price gains actually now appear to be accelerating with properties selling remarkably quickly and a swathe of speculative investment capital flowing into the city.

If you're a follower of the weird obsession with daily house prices, RP Data has Sydney prices up around 5% in less than 50 days, and looks set to report increases of around 2% in July alone at the end of this month.

I'm not sure how those who called a crash so hopelessly wrong will explain that one away.

Gold miners slammed

There has been a reasonable bounce in the gold price in recent weeks, but much of the pain has already been felt by the gold miners.

Share prices had been pumped up across the sector as forward earnings estimates were modelled based upon a continuing high gold spot price, but as institutional investors pulled funds out of the sector the gold price collapsed.

And while ever-bullish brokers had rated a swathe of Australian miners as 'buy' recommendations based upon a copper price of around US$5.00/lb, nervous global sentiment has failed to see this happy position materialise with the copper spot languishing at a decidedly pessimistic ~US$3.10/lb.

US gold miner Newmont has been forced to take a large write-down totalling US $1.5 billion as well as laying off staff.

Gold and copper miner Newcrest Mining (ASX: NCM) has already been hit with impairment write-offs totalling a whopping A$6 billion and has a correspondingly ugly share price chart, the company having lost almost three-quarters of its market capitalisation in the past 2 years.

Similar pain was felt by Goldcorp, who booked a $2 billion write-down after recording losses highlighting potential impairments.

This highlights the potential volatility of companies which are exposed heavily to one metric such as a commodity price or an exchange rate.

While larger mining companies hedge forward their revenue streams, lower commodity prices will ultimately be reflected in the bottom line and lower earnings.

As mining companies deplete their resources over time, they tend to retain capital for thepruposes of re-investment, rather than distributing strong dividends back to shareholders.

This makes it especially important to be wary of buying resources stocks when they are trading at high price-earnings multiples based upon unpredictable commodity price forecasts.

Source; ASX

Saturday Summary: articles of the week

Summarised by Michael Yardney over at Property Update here.

Friday, 26 July 2013

Banks rally


Source: ASX

UK growth confirmed at 0.6% in Q2

As forecast for Q2. From the Pommie Guardian:

"Britain's recovery picked up pace in the second quarter, official figures have confirmed, with GDP expanding by 0.6%.

The 0.6% quarterly rate of growth was twice the pace of the first three months of 2013, and exactly as predicted by economists, after signs of a pickup in retail sales and strong readings in business surveys.
"The economy is coming out of the shadows, with a doubling in its quarterly growth rate from 0.3% in Q1 to 0.6% in Q2. The recovery is not quite on dry land yet, but at least it is a step in the right direction," said David Brown, of consultancy New View Economics."
The result follows growth of 0.3% in Q1, while house prices in the south-east of the UK also look set for lift-off recording new highs recently. 

An economic recovery is underway in Britain, which will raise questions as to whether the Bank of England needs to fire up further monetary stimulus next month.

Meanwhile, surveys from Germany show that growth is expected there too

Forget the doom and gloom - the storm clouds are lifting for 2014.


RP Data records property price growth yet again for Australia, making it 7 consecutive weeks of gains.

Sydney prices have already obliterated previous peaks and are up by 9.2% since their trough.

The worst performing capital city is easily Adelaide. In fact, Adelaide is the only capital city to see prices fall in 2013. 

Thursday, 25 July 2013

Why inflation will slump below 2% (leaving room for a rate cut)

There have been some interesting assessments of Wednesday's inflation print. As a quick reminder, here are the figures:

Source: ABS

Headline CPI came in at 0.4% for the quarter and 2.4% for the past year.

The Reserve Bank's preferred measures (the so-called trimmed mean and the weighted median, which I've circled) came in at 2.2% and 2.6% for the past year respectively. While, the RBA looks at both readings, its job is to maintain price stability and is perhaps therefore more inclined to place emphasis on the trimmed mean which negates the impact of outlying results.

Here are the recent quarterly headline inflation figures in a chart:

Graph: All Groups CPI, Quarterly change

Source: ABS

The important thing to note is that there was a very large spike in the September 2012 quarter, caused by the introduction of the carbon price.

In particular, we have seen a huge increase in the price of electricity, up by more than 17% over the past year. Being British by birth, I can't say I'm shocked: in the UK electricity prices jumped by more than 20% at the end of 2011, so perhaps it was only a matter of time before Australia copped it too. I expect the prices of electricity and energy, petrol, alcohol and tobacco to continue to be slugged in the future.

Moderate readings

However, the recent inflation data has shown moderate readings for the past three releases, and thus next quarter, when the 2012 effect of the carbon price 'drops off', in the absence of a sizeable increase in inflation next time around, the CPI rate will likely slump to below 2%.

Seasonally adjusted, the last three readings have been 0.5%, 0.1% and 0.5% - so some simple maths dictates that a reading of 0.8% or lower would see inflation drop below the 2-3% target range.

As I noted previously, it's likely that there will be an increase in petrol prices next quarter, and the falling Aussie dollar could also send certain readings higher, but it's doubtful whether this would be enough to see inflation of above 2%.

Inflation of below 2% rarely signifies a booming economy, it has to be said, and what this means is that the Reserve Bank probably retains the room to cut interest rates again should it so wish.

It seems as though the market has gradually come around to this point of view too after initially seeming uncertain, probably having been spooked by the higher-than-expected weighted median reading of 0.7% for the quarter.

The ASX 30 Day Interbank Cash Rate Futures August contract is trading at 97.395, which indicates a 72% expectation of an interest rate decrease to 2.50% at the next RBA Board meeting on August 6: a cut in August is now deemed to be significantly more likely to be delivered than not.

The Aussie dollar also now seems to be pricing in a potential cut, having fallen all the way back to around 91.5 cents after initially having headed north.

Futures markets imply that the interest rate easing cycle is not quite done yet. The yield curve remains inverted, suggesting one more interest rate cut to 2.50%, before the cycle at long last reversing later in 2014.

Source: ASX

SMH: Sydney dwelling prices to new all-time highs

SMH reports the same, which is what I've been expecting to happen since long before I started blogging: record new prices in Sydney, forced by a booming population, and a supply which fails to meet demand adequately:

"Australia's most expensive city just got more expensive with the median house price fast approaching $700,000.
Sydney house prices have risen 2.7 per cent over the June quarter to reach an all-time high of $690,064, figures from Australian Property Monitors show.
Sydney continues to tower above the national house price median, which grew 2.8 per cent to a new peak of $564,325.
The senior economist at APM, Andrew Wilson, said the property market had been "jet-propelled by the lowest interest rates in decades, rising confidence and continued generally solid economic performances".
Year-on-year house prices in Sydney have jumped by 6.7 per cent – three times the rate of inflation.
Apartment prices are also on the up, rising by 2.4 per cent in Sydney over the June quarter to a new high of $491,845."

APM: House prices rise by 5.4%

APM reports that house prices have increased...well, everywhere, over the 12 months to June.

While gains have been predictably weak in Adelaide and Hobart, house prices have increased very strongly in Perth (+7.5%), Sydney (+6.7%), Darwin (+5.7%) and Melbourne (+6.1%).

Median house prices are now at record highs in Sydney, Perth and Canberra, and even Melbourne is now only a fraction (-1.4%) below its previous peak. 

Therefore, the 'bull trap' theory - that prices would fade before returning to previous heights, thereby suckering new buyers - has failed to materialise in these cities.

Prices in Sydney look likely to continue growing with properties selling very quickly on average and the city recording scorching auction clearance rates in July.

Source: APM

APM also shows unit prices up strongly in Sydney (+4.9%), Perth (+9.3%), Melbourne (+4.2%) and Darwin (+10.3%) over the 12 months - but down in Adelaide and Hobart.

Sydney unit prices are also at new record highs this quarter.

This leaves the "Don't Buy Now" campaign which has been ongoing over the past few years in something of a sticky spot - how long are prospective buyers to be instructed to boycott buying a home while waiting for the promised major house price correction? 

Of course, prices can always fall, but second-guessing markets in this manner can be a dangerous game to play.

Is Australia's cost of living spiralling out of control?

I've heard it said fairly often over the last few years that the cost of living in Australia is a "dead set joke". We've certainly become a high cost country, although having visited Britain over the past month I can attest that the costs of some goods are worse elsewhere.

Is the cost of living in Australia spiralling out of control? 

Ask a macro-economist and they will tell you: "Definitely not". They would say that we as Australians are collectively suffering from Fisher's Money Illusion and highlight that since 2003 the poorest fifth of households are $42 better off and the richest fifth $576. The 'Money Illusion' concept dictates that we instinctively focus on nominal price increases rather than real price movements after accounting for inflation.

The latest round of inflation data lends support to this argument, showing inflation to be tracking comfortably in the middle of the targeted 2-3% range, which is well below the 3%+ wages growth reported for the past 12 months.

Source: ASX

I suspect however, that if you asked the average ex-mining single-income earner outside of Western Australia, they would tell you that their wages are not growing and that the cost of living has outpaced incomes.

The ABS is an independent body and has no reason to distort results deliberately, rather the reality is that looking at average figures gives you an average result. 

Wages growth has been weak for some time now in retail trade, real estate services and healthcare, for example, while it has been considerably stronger in mining, wholesale trade and, to a lesser extent construction.

As we might expect, wages growth has been very strong in Western Australia, with very high wages being paid to those completing the construction of new mining projects, but wages growth has been consistently notably weaker in South Australia than in other states for some years now.

Naturally the CPI figures show that the cost of some goods has increased more than for others. We might expect to see the weaker Aussie dollar introducing a new bout of inflation in the coming quarters. 

Don't forget that yesterdays figures are retrospective and some of the figures relate back to what was happening at the beginning of April. Petrol prices, for example, will be reported as significantly higher next quarter, barring surprises.

Good news?

The good news for Australians is that personal wealth has increased considerably over the past year.

Stock markets have been flying, with valuations moving up by close to 20%, which correspondingly has increased the value of pension pots. Property market prices have increased strongly in most capital cities which benefits owners, although not renters (rents were reported as having increased by 1.1% this quarter).


The stark reality is that developed economies have a policy of promoting inflationary economies and it is important to have a financial plan to protect yourself from the silent thief.

Over time owners of property are likely to fare better than renters. Those who own quality share portfolios consisting of profitable, dividend-paying companies which which can grow returns on equity will see their income and wealth outpace inflation. Others will look to A-REITS or farmland as assets which can represent an inflation hedge.

A point I raised back in 2011 when I wrote my book was that with a growing awareness of and concern about the impact of pollution on the environment, any leniency which Australian governments had towards the taxing of petrol in past will disappear. My suggestions included owning properties in locations close to key transport hubs and links and to find ways to avoid driving.

This may be already unfolding: petrol prices are now at their highest level since 2008, with no signs of the increases abating. 

I also expect to see the prices of alcohol and tobacco (smokes +3% in this quarter alone) increase over time too due to the related costs of healthcare.

Wednesday, 24 July 2013

Inflation remains soft

The inflation data today did not reveal any horrors, so the Reserve Bank has the 'room' to cut interest rates should it so wish.

The headline rate of CPI was only 0.4% for the quarter, leading to a year-on-year figure of 2.4%, or 2.3% seasonally adjusted.

This is broadly in the middle of the targeted range of 2-3%.

Graph: All Groups CPI, Quarterly change

Source: ABS

When the one-off effect of the carbon tax is stripped out, the headline result might be considered to be at the bottom of the target range at close to 2%, which might imply that an interest rate cut is in the pipeline.

However, an interest rate cut is not a done deal.

The weighted median and trimmed mean readings, which are the Reserve Bank's preferred measures as those which look to strip out the impact of outlying readings and thus provide a more balanced result, showed a slightly different picture.

Source: ABS

Year-on year, these measures came in at 2.2% and 2.6%.

While these figures also suggest that there is room for a cut, some exercise might be cautioned as so-called 'tradeables inflation' may be expected to increase as a result of the Australian dollar having fallen from above 106 cents towards the bottom of the 90 cent range.

The other news which may have a bearing on the August interest rate decision today was a weaker-than-expected flash PMI reading from China.

On balance, futures markets remain undecided, and price in a cut as around a 6 in 10 chance, while the dollar took a while to make its own mind up, before settling on something of an each way bet sitting at around 92.5 cents.


The two-speed nature of the housing market continues to be emphasised with dwelling prices in Adelaide falling by 2.9% over the last quarter, while those in Sydney increased by 3.5% according to RP Data.

Yield-chasing investors have been tipping Adelaide for half a decade, but they got it wrong. 

In fact, throwing a pin at an Australian property dart board would on average have scored a much better result.

Some thoughts on investment strategy

Stocks up yet again in the US overnight. We've heard nothing but doom and gloom from some quarters for the past half decade and yet all you needed to do to generate returns of well over 100% since 2009 was to hold the Dow Jones index, a price-weighted index of 30 blue chip industrials.

Warren Buffett once said that being out of the market introduces a different risk to being in the market, and over the history of stock markets, it has indeed been a costly one. Here's the Dow 5 year chart, courtesy of Bloomie:

Source: Bloomberg

A huge deal was made at the time about the blips in the chart, such as the corrections caused by the US debt ceiling crisis and the European debt crises, yet over time corrections tend to take on a decreased significance as share index values run higher.

The stock market recovery has not been as pronounced in Australia, but you would have done very well had you focussed on the industrials and financials, as opposed to resources.

Australian Share Price Indices graph

Indeed, over the decades in Australia, profit-making industrials have tended to outperform resources stocks and listed property trusts, tending to be more self-perpetuating businesses which pay strong dividends, while mining companies re-invest capital in further projects and have often paid weaker dividends in downturns.

Property trusts (once known as LPTs, now as A-REITS) have paid out high dividend ratios but demonstrated weak capital growth, sometimes diluting values through capital raisings for new projects.

Resources stocks have had a poor run since the onset of the global financial crisis. The 5 year chart of Rio Tinto (RIO) is an example of this under-performance, until its recent upturn which was buoyed by a bounce in the iron ore spot price.

Source: ASX

Generic advice

There is a worrying trend towards generic advice being issued from a wide range of sources on the internet. Each person has different financial goals, needs and risk tolerance levels, so generic advice is often misleading and could result in capital loss.

Even more worryingly, an awful lot of generic advice is dished out about investing (or very often not investing for whatever reason) by people who have never built an investment portfolio of their own.

Free advice is usually worth what you pay for it, as the old saying goes.

Ben Graham once said that if you have an amount available to invest regularly, then the only sensible investment strategy is to write yourself a contract committing to buying shares in good times and in bad on a regular basis.

This strategy is even more straightforward today because instead of having to buy a cross-section of the index to diversify your specific investment risk, you can simply invest regularly in a diversified product (such as an ETF or, my preferred option, an Australian LIC with heavy exposure to industrial stocks) which mirrors the balance of investments and risk profile you require.

My wife's index fund has just entered its 17th year of existence; that's nearly 200 consecutive months of share market acquisitions. This investment approach offers great peace of mind and requires very little skill other than discipline - you don't need to fret about how the market is performing on a day-to-day basis (if you are doing so, this maybe an indication that you have adopted the wrong investment strategy).

If the market falls, your money will just buy more stocks. And if it rises, your net worth increases and you buy fewer shares while the market is high. In the meantime, you can enjoy the growing dividend streams.

The only calibrating this investment approach might need is to learn to buy more heavily when the market suffers a major correction, such as it did through the financial crisis.

Most developed world economies are not like Japan and do not fall into a long spiral of deflation. Indeed, even in Japan, lessons have now been learned and stimulatory monetary policy has seen stock valuations surge by an astonishing 74% in the past year.


Investment strategy in Australian property is a different beast for most average investors.

Statistics show that most Aussies do not ever invest in more than a handful of properties and therefore are unlikely to benefit from the averaging approach which so benefits share market investors.

The leverage involved can also mean that even when only buying a small number of property investments, the balance of a portfolio can be skewed towards this asset class, increasing the portfolio's risk.

Further, yields are so low on residential investment property that the asset class only becomes worthwhile for most if the investor can source reasonable capital growth. Cash flows can be reasonable on some commercial property types, but mostly this is not the case on residential stock.

For these twin reasons, it is important to invest only in areas where the population is forecast to increase for decades to come and there is little land available for release.

Commentators will continue to give the impression that they can forecast short-term market movements, despite the not-so-secret truth that they can't.

When you are granted a mortgage, the lender tends to give you a handy hint as to the appropriate time horizon for limiting risk in property investment in the terms of the loan: banks are comfortable that real estate is of an acceptable risk over 25 years.

Historically, this has been true, but investors would be wise to exercise care when selecting property investments and stick to those which suit their own risk profile.


CPI (inflation data) today, which will determine whether interest rates are cut again in August.

Property Update: an economics lesson

I write for Property Update here, where I discuss the problems of making generalisations in investing and the confidence (or otherwise!) that should be applied to making forecasts.

Read me on PO today on the Aussie housing market

I write for Property Observer today here.

Monday, 22 July 2013

APM Sydney property wrap (boom)

An extract below from the weekly property wrap from APM below, as winter auction clearance rates hit record levels.

Back in mid-2012, the commentators who'd forecast a price crash were saying that property owners in Sydney should be panicking because prices were flat and hadn't responded to interest rates (they rarely respond immediately). 

Now they will instead report that owners should panic because prices are going to boom and rise too fast.

I'm not sure I follow the logic, while prices in Sydney in income-adjusted terms remain below where they were a decade ago, yet the population is growing at an astonishing rate (yes, I've heard the argument that population growth doesn't lead to dwelling price for another day).

Property owners would be wise to consider property as a 20-30 year investment rather than the housing bust predictions which will continue to surface every year. 

Assuming that you chose to buy in Sydney in the first place because the population is booming more quickly than our collective ability to construct appropriate dwellings and infrastructure, then nowt has changed as far as I can tell.

We could do a lot better in this regard, but not while we maintain the ridiculous focus on affordability in inner-ring suburbs instead of how to promote better affordability, transport links and infrastructure in other parts of this vast country.

The inner west of Sydney is no longer recording the highest auction clearance rates which the low north shore and the city and east sectors now hitting sky-high levels which are likely to be reflected in price growth. 

Based on the small sample of properties I've looked up, this is probably in part due to vendor expectations having jumped in the inner west...and perhaps some speculative sellers hoping for unrealistic prices.

Benign CPI forecasts imply that there is another interest rate cut in the pipeline which will do nothing to dampen investor activity.

Dr. Andrew Wilson of APM:

"The Sydney weekend auction market continues to strengthen towards record levels with Saturday clocking another year-high auction clearance rate.
After last weekend's 81 per cent rate, the Sydney market reached new heights on Saturday with an 81.4 per cent of properties sold at auction.
The Sydney property market is tracking at levels not experienced at this time of the year since the house price boom of 2002.
Listing numbers this weekend were similar to last weekend's with 306 properties auctioned compared to just 268 the same weekend last year.
The best regional result in Sydney this weekend was recorded on the lower north shore with a clearance rate of 92 per cent. The city and east and the south each recorded exceptionally strong 88 per cent clearance rates at the weekend with the northern beaches clearing 83 per cent of properties listed at auction.
Investors are an important ingredient of rising buyer activity in Sydney's housing market. Last week the ABS reported an all-time monthly record of $3.9 billion in residential investor loans approved over May for NSW. Investor activity in the state currently accounts for nearly 52 per cent of all loans for house purchases.
Good news on the local economic front also last week with the ABS unemployment rate for Sydney remaining stable at a solid 5.1 per cent over June.
Sydney's housing market continues to move from strength to strength with strong house price growth set to follow the best clearance rates for years."