Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Invest in Sydney/Brisbane property markets, or for media/public speaking requests, email pete@allenwargent.com

Thursday, 1 August 2013

Prosper's 15-20% crash forecast fail

More fun and games from the world of Aussie property with David Collyer of Prosper having a jolly old chirp at my expense over at the Don't Buy Now! campaign, predictably enough describing me as a "incoherent spruiker" and my output as "bilge" in an attempt to "shred my credibility", while also labelling me a "breathless auto-publicist" among other taunts. 

Fair enough. In cricketing parlance I fully expected to be 'sledged' and never believed that everyone would agree with me that the share markets would be a great long-term bet and that property prices in Sydney would likely increase to record highs when my book was released on 31 May 2012 (although in truth I've never believed that certain Australian cities and regional property markets would be a particularly good bet). 

Ever since the 1990s, I've always been of the view that property should be seen as a 25 year investment and that over that timeline prices will likely increase in certain locations including Sydney (and certain areas in and around London) where the population is booming and there is little land available for release. Averarge investors are notoriously desperately poor at timing markets so I place emphasis on long-term outcomes.

Stock markets have been on a bonanza run since May 2012 and delivered great capital growth and dividend streams. 

If you've read my book, you'll know that I'm a strong advocate of heavily diversifying risk across a number of asset classes, but felt that some exposure to Sydney property would result in a good long-term outcome. 

My own approach has been to spread risk widely by holding hundreds of (predominantly industrial and financial) stocks and investing in different property markets, with a bias towards 'growth' asset classes. 

As disclosed on my blog, I've owned a number of diversified (industrials-focussed) Australian LICs, the major Aussie bank stocks and a couple of major resources companies, a couple of UK index funds, a number of inner-Sydney residential properties as well as residential properties located close to London, and a healthy cash buffer in a cash management account.

More than anything, my message was to do something by spending less than you earn and investing in a diversified portfolio of assets rather than to fail conventionally by doing nothing.

I also felt that Australia's property markets would likely steadily rebound from that time at May 2012 rather than crashing dramatically.

David Collyer took exactly the opposite view to me, specifically advising potential homebuyers and renters to steer clear of the property market at all costs for the past few years, as once again stressed in this February 2012 article which you can read here:

“It is difficult to foresee anything that could derail the current downward trend – a trend we see accelerating strongly.

“The RBA is gradually, cautiously lowering interest rates. It is extremely sensitive to suggestions its activities may hasten or brake the deflating housing bubble. The other obvious tool available to government, a First Home Buyers Grant, has been utterly discredited,” Collyer said.
“We expect property prices to wilt under these combined pressures, with prices at end December 2012 between 15 and 20 per cent less than today. 

We renew and repeat our warning to potential home buyers to stay out of the property market. Falling prices erase equity while buyers’ mortgage liabilities remain payable in full.
“Don’t Buy Now.” Collyer concluded."

Since the property market troughs in mid-2012, unfortunately, prices have not fallen by 20%, or even 15%.
In fact, they have increased to new highs in Perth (+10.3%) and Sydney (+9.6%), are close to previous highs in Melbourne (+7.5%) and Canberra, and even Adelaide (+1.6%) and Brisbane (+2.1%) have seen prices rebounding.
Unlike David Collyer of Prosper, I don't view the property market as a homogenous commodity; I'm instead of the view that prices will perform strongly in some areas and badly in others. As is obvious by the fact that I've owned Sydney properties, I've long felt that this represents the best long-term risk-adjusted bet, but I don't rate the prospects of certain other cities, as my regular blog readers will no doubt be aware.
If you took Collyer's specific advice to sit back and wait for a 15-20% crash in Sydney, Melbourne or Perth, you've already cost yourself a year's salary as prices have rebounded materially, leaving yourself in an even more awkward position: whether to wait yet again risking further price gains, or buy now at a significantly higher price than you could have done in 2012?

Futures markets now see interest rates remaining at 2.50% or below right through until early 2015. With auction clearance rates repeatedly topping 80%, I expect to see prices increasing even further in Sydney, though I'm far less certain about the prospects for some other cities.
My problem with the Don't Buy Now campaign has not been that prices won't fall - of course they always might recede (or they might not). My problem with it has been the seriously flawed underlying assumption that people can predict short-term market movements with unerring accuracy.

What if prices continue to increase as has been predicted by the mainstream forecasters including BIS Shrapnel, Australian Property Monitors, RP Data, SQM Research, McGrath, and ANZ Bank, to name but a few?

HSBC has long been vociferous and specific in why they believe that there is no bubble and that prices will likely increase. Even the globally bearish Fitch included Australia in its three most favoured markets of 2013 expecting prices to turn a corner and head up a little.

SQM Research predicted in its base case scenario 2013 price gains in Darwin (+6% to +14%), Perth (+6 to +12%), Sydney (+5% to 9%), Adelaide (+2% to +5%), Melbourne (+2% to +4%), Canberra (+1% to +4%) and Hobart (+2% to +5%).

Australian Property Monitors predicted national price gains of +5 to +7% through 2014.

BIS Shrapnel forecast median house price gains of 19% in Sydney in the 3 years to June 2016, as well as gains of 17% in Brisbane, 15% in Perth and 10% in Darwin. BIS also forecasts lower gains over the same time period of 5% in Melbourne, 3% in Canberra, 6% in Adelaide and 4% in Hobart.

Personally, I've often found BIS forecasts to be overly optimistic and frequently on the bullish side.

But given that 2016 will be the sixth calendar year of the Don't Buy Now campaign, what if the mainstream market forecasters prove to be right? What if prices continue to go up instead of the 15-20% crash which has continually been promised by David Collyer for the last 3 years? How long will Prosper continue to issue the specific financial advice to potential homebuyers to sit out of the market if that base case scenario plays out?

I'm not saying that Collyer will definitely be proven wrong. My question has rather been: what happens if the market forecasters are right?

One other thing: if Australians are "disleveraging with surprising vigor" as Collyer claims, then why have prices jumped by 10% in Sydney, by 10% in Perth and by 7.5% in Melbourne?