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.

Thursday, 31 October 2013

"Stocks the only game in town"

With the Fed Reserve 'taper' of stimulus looking to be months away yet still, stock markets are now really firing again.

In the US, it's been said that "stocks are the only game in town" with fixed interest investments generating such low yields and the Fed continuing with its bond-buying program.

We'll likely see some moderate losses on the ASX today following falls in the US overnight (from US all-time highs in the previous trade - the S&P 500 remains over 1,760 and the DJIA above 15,600).

Nevertheless, the Aussie stock market is now back on track and enjoying another tremendous run since late June, the XJO (ASX 200) having broken through the 5,400 barrier.

The Aussie bank shares have to date ignored the "bubble" calls and have moved up to around all-time highs, but price-to-book ratios are now just starting to look a little elevated again based upon historical averages. 

And if those P/B ratios move above 3...look out.

Traders will be getting increasingly nervous as stocks climb the "wall of worry" but will also be concerned about missing out. 

Long-term holders and regular buyers should focus on their growing dividend streams. Traders, of course, should keep close stops in place!

Source: ASX

Negative and positive gearing - real life examples

It occurred to me that while most people seem to have an opinion on Australia's negative gearing debate (usually based upon their current status as a landlord, homeowner or renter, which is natural enough), few seem have a grasp of what the numbers involved might look like for an individual taxpayer.

In fact, when numbers become involved in almost any debate the eyes of a fair percentage of people slowly glaze over before you are met with a blank stare, and, if you are particularly unfortunate, some drool. Since you can't possibly even pretend to be able to predict how changing rules would impact our property markets without first understanding the motivations of investors, below are some actual examples (I've rounded off the numbers for the sake of simplicity).

1 - Positive gearing - large deposit

Although property gurus try to sell the idea that positively geared property - where the rental income covers all costs of ownership - is somehow mystical and complicated, it's actually a simple concept which is often largely related to how a deal is financed. An institutional resi fund might undertake a major renovation or subdivision and renegotiate leases in order to achieve the outcome, but there are simpler ways in which a private investor might secure a positively geared property.

One is to use a very large deposit. Here are is an actual example of a $200,000 regional 1 bedroom unit which generates a 6.25% gross rental yield. The purchaser uses a sizeable 50% deposit and an interest only mortgage fixed at a rate of 5%, and thus receives an income each year before tax.

Rental income - 6.25% yield                     $12,500
Mortgage - interest only @ 5%                 $(5,000)
Repairs, management, strata fees etc         $(3,250)
Net cash flow per annum before tax     $4,250

The downside to this approach is that the landlord needs a very large deposit (when the use of leverage is diminished so too are the projected returns, and thus residential property becomes considerably less appealing as an investment).

Further, regional properties have historically achieved significantly lower capital growth rates, which accounts for the higher percentage rental yield. Of course over any given time period capital growth might be solid, but over the long term capital growth rates are highest where the demand is strongest and supply constrained, a real estate trend that is easy to witness all over the globe.

2 - Positive gearing - cheap cost of capital

When mortgages rates are cheap then it's also easily possible to positively gear property. Here's a property bought for £200,000, a 1 bedroom flat in London using a 25% deposit and which generates a 5.2% gross yield. Mortgage rates are presently very cheap in Britain and therefore the net cash flow before tax in this example is instantly positive, even before any allowances which might be claimable on furnished properties.

Rental income - 5.2% yield                         £10,400
Mortgage - interest only @ 3.5%               £(6,125)
Repairs, management, service charge etc     £(3,000)
Net cash flow before tax per annum        £1,275

3- Positive cash flow in Australia

In Australia, we have the so-termed 'negative gearing' tax legislation whereby certain losses on investment property can be offset against other forms of income on an individual's tax return (or claimed sooner through the submission of a PAYG variation). In some circumstances this can turn a cash flow loss into an effective positive cash flow after depreciation allowances and associated tax savings are factored in.

Let's use the regional 1 bedroom unit property in example 1 again, but this time the buyer has only used a 10% deposit and has claimed depreciation allowances on the property of $2,000. The mortgage remains an interest only product at an annual percentage rate of 5%.

Rental income - 6.25% yield                     $12,500
Mortgage - interest only @ 5%                 $(9,500)
Repairs, management, strata fees etc          $(3,250)
Net cash flow per annum                        $(250)
Add back allowances                                $(2,000)
Loss on tax return                                       $(2,250)
Tax saving at 37% marginal rate                  $833
Cash flow after tax                                   $533

In this instance, the depreciation allowance and the prevailing tax rules have turned a small net loss into a small positive cash flow, assuming that the taxpayer is paying PAYG income tax at the 37% marginal rate (I've disregarded the 1.5% Medicare Levy here).

4 - Negatively geared property

OK, so penultimately onto an example of a typical negatively geared property as things stand today. In this example, a higher rate taxpayer bought a $650,000, 2 bedroom capital city unit, which generates a 5% yield, using a 10% deposit. The mortgage is once again interest only at 5%.

Rental income - 5% yield                        $32,500
Mortgage - interest only @ 5%               $(29,250)
Repairs, management, strata fees etc       $(10,000)
Net cash flow per annum                     $(6,750)
Add back depreciation                            $(3,000)
Loss on tax return                                   $(9,750)
Tax saving at 45% marginal rate               $4,388
Cash flow after tax                                $(2,363)

The negative gearing tax legislation has turned what might otherwise be a fairly significant loss in the early years of ownership into a less substantial loss, and a less painful scenario for the taxpayer. The landlord also feels pretty good but he has 'saved' paying some income tax due to the on-paper allowances and negative gearing rules.

5 - Malinvestment?

So, what's the big deal, you may ask? In the example above, the taxpayer made a net cash flow loss - although not a chronic one - and saved a bit of tax. So what?

Well, one issue is that we currently have a cash rate which is sitting at generational lows of 2.50%. What happens when mortgage rates are at, say, 10%, and a higher rate taxpayer buys an expensive property which generates only a low gross yield, predominantly for the purposes of saving tax?

This is not an actual example, so we can perm any numbers we like here. But let's use an invented scenario of a $1 million apartment property which generates a weak 3% gross rental yield, has high strata fees and sundry holding costs and being a slightly older property only has a small amount of depreciation claimable. It's financed at some time in the future using an 10% deposit and an interest only mortgage at a rate fixed at, say, 10% per annum.

Rental income - 3% yield                        $30,000
Mortgage - interest only @ 10%             $(90,000)
Repairs, management, strata fees etc        $(20,000)
Net cash flow per annum                     $(80,000)
Add back depreciation                            $(2,000)
Loss on tax return                                   $(82,000)
Tax saving at 45% marginal rate               $(36,900)
Cash flow after tax                                $(43,100)

Arguably the landlord is making this purchase largely for the purposes of saving tax, for without the negative gearing rulings the property would generate a huge annual cash flow loss, as much as $80,000 in year 1. Although the property will generate a positive cash flow eventually (as rental income tends to increase over time in an inflationary economy) this could take many, many years to eventuate and thus the owner is largely speculating on capital gains rather than the growing income stream.

Will negative gearing tax legislation be abolished?

The debate rumbles on, with both sides tending to highlight the issues which suit their own side of the argument. When the rules were amended and losses quarantined in 1985 for a short period of time, the REIA argues that "rents rose 37% across Australia and 57% in Sydney".

Those in favour of scrapping the legislation retort that if you deflate rental increases by the CPI (inflation) rate then the increases were only real and significant in Sydney and Perth. A fair point, although the 'basket' of CPI goods itself includes rental costs, so to some extent that could be something of a circular argument. In any case, renters don't adjust rent increases (or the cost of anything else for that matter) for CPI; they simply look at their actual rent payments.

What happened in 1985 is less relevant than might happen today if losses were once again quarantined. Intuition tells me that landlords would use the shift to the new environment as an excuse to attempt to jack up rents immediately. Whether or not they would be successful in so doing is harder to judge. Common sense dictates that the odds of 'success' for the landlord would be higher where rental vacancy rates are low, such as in certain middle-ring Sydney suburbs or in Darwin, and lower where there is an over-supply of stock such as in Melbourne's Docklands or in a number of regional areas.

We should also be wary of trying to rewrite history. Read books which touch on the subject written in the first half of the 1990s and the increase in Sydney and Perth rents is only cited as a secondary reason for the reinstatement of the negative gearing rules. The principal reason cited was a jump in housing waiting lists (in New South Wales the numbers increased "from under 110,000 to above 140,000" during the period for which the rules were changed, a worrying "trend which was immediately reversed" upon their reinstatement.

It's also possibly an over-simplification to say that governments will simply save dollars by scrapping the existing rules. I believe his numbers on housing lists may be inaccurate ("the waiting lists for public housing increased by 50% in 1985") but tax accountant Ed Chan highlights why he believes government costs and impacts on the wider economy would escalate if more public housing was required in this article here.


Clearly from 1987 to date the government has steered away from the risk of crashing the housing market (and the Aussie economy?) by again altering the tax legislation, but that does not mean that it will never do so. Personally, I think it's unrealistic to expect that the rules will be amended in one fell swoop due to the potentially destabilising effect: it's hard to envisage risk-averse politicians taking that chance.

The most sensible viewpoints I've heard are from property expert Catherine Cashmore, who suggests that the existing rules might be slowly unpicked while other strategies are implemented to attack Australia's supply-side issues - take a read here. There are a number of ways in which this might be kick-started - one might be to limit the number of properties which a landlord can claim losses on.

"I have no doubt if the policy were removed, or even scaled down, there would be less demand for established stock and a subsequent dampening in prices.  I agree that a sudden and complete retraction of negative gearing in its current form would be foolish - favouring a slow wind-down whilst other policies are implemented such as strategies to aid development and increase supply." 

While landlords often seem to want property prices to grow to the sky and renters want to see an instantaneous property crash, neither of these outcomes is desirable for our wider society or for our economy. Far better, in my opinion at least, would be a prolonged period of moderate property price growth which is somewhat slower than the rate of household income growth (thus making real prices more affordable over time). The problem facing us is that humans are irrational beings and thus tend towards boom and bust, but that doesn't mean that we shouldn't try.

Wednesday, 30 October 2013

Major new transport links impacting London's property markets

There's a silent change occurring across London that has the potential to have a significant impact on London life and the property market. Given the go-ahead in 2008, Crossrail is one of the largest transport infrastructure projects that many of us will see in a lifetime. 

Creating new underground links across London from Maidenhead in the west to Shenfield and Abbeywood in the East, the new line will revolutionise the commute to work for many increasing the London's transport capacity by 10%, as well as creating new property hot-spots across London. 

Back in 2008, cynics would dismissed Crossrail as a project too big for London to handle, which would ultimately fall foul of political or financial issues. However, five years on, if you take a walk around London, the landscape is changing. 

Huge areas around Canary Wharf, Liverpool Street, Moorgate, Farringdon, Tottenham Court Road, Bond Street and Paddington are changing under our noses. This project is all of a sudden becoming real. 

The impact on property prices in the areas affected has also become real. 

According to Knight Frank, property prices in areas within a 10 minute walk of Crossrail stations have increased by 30% since 2008, and in some areas could increase by "up to a further 43% by 2018" when Crossrail opens. 

London residential property prices are already forecast to continue growing strongly in the next five years, however properties in the vicinity of Crossrail stations are likely to see superior growth. This is due to the reduced commuting times but also the improving infrastructure in the surrounding areas. 

Some of the new stations will be completed prior to 2016 and Crossrail is developing circa 3 million sq ft of office, retail and residential space across London. New residents, businesses and visitors will be coming into areas previously blighted by a lack of regeneration, creating positive investment credentials.

Recently we have been working with clients to identify investment opportunities in areas of  London, directly on to the Crossrail network or linked to it via the London overground or underground network. Areas such as Whitechapel, Farringdon and Canary Wharf are areas where we believe there will be further significant growth in the next five years as rental demand increases and more households look to buy in these areas. 

A report for Crossrail prepared by GVA, forecasts that there would be "£5.5bn of added value to the property market" between 2012 and 2021 as a result of Crossrail. The matrix below highlights some of the areas that are likely to be most impacted by value change.

Source: GVA - Crossrail Property Impact Study - October 2012

Australian property buyers should also take due note, for as our capital cities become ever more crowded, the important of transport hubs and links will take on ever more importance - particularly when it comes to locations in the highest demand for property. In Sydney, for example, the $1.6 billion proposed light rail extensions commencing in 2014 are likely to impact property markets in key suburbs in due course.

Tuesday, 29 October 2013

Low interest rates starting to bite on house prices

Clearly the Sydney housing markets have been firing for some time with price growth close to 13% in 2013 alone.

But now there are some signs of life in Brisbane too, which has been expected given the reports from those 'on the ground' in Queensland. Dwelling prices in Brisbane are reported as being up by 1.84% q/q.

Not sure what happened in Melbourne today - prices recorded as being up by more than $2,000 in only the last 24 hours...?!

RP Data has Perth seeming to have slowed a little after a strong uplift in prices.

The slowest growth of the major capital cities has been in Adelaide where prices are up by 1.55% y/y, which is a slower rate of growth than the national inflation rate.

Source: RP Data


More bad news for those who shorted the Big 4 banks today.

ANZ reported cash profits of a whopping $6.5 billion (+11%) and raised its fully franked full year payout all the way up to $1.64 (+13%) following the final dividend announcement.

And the share price is up by some 33% in a year.

All four banks are now at or around record high shares prices.

RBA's Stevens chilled out about house prices

Excerpt from the Reserve Bank's Glenn Stevens' speech in Sydney below. The RBA is clearly more relaxed than people seem to think about the pick up in house prices. If anything, they positively seem to be embracing the uplift. Stevens does take due note of the pick-up in investor activity in Sydney, which is something I've written a lot about in recent years:

"The median price of a dwelling in Australia has risen by about 8 per cent over the past 18 months, reversing a previous decline. Overall, the net worth of Australians has increased by around 15 per cent, or more than $800 billion, since the end of 2011.

It is not yet clear to what extent, or when, these more favourable trends in ‘confidence’ will translate into intentions to spend, invest and employ. The pace of new dwelling construction is starting to respond to higher prices in the established property market, as we need it to. But at this stage, the available information suggests that broader investment intentions in the business community remain subdued. It may be a while yet before we can expect to see conclusive evidence of a change here.
In the interim, some commentators have taken the view that the property market dynamics are worrying. My own view, thus far, has been that some rise in housing prices is part of the normal cyclical dynamic, that it improves the incentive to build, and that a price rise reversing an earlier decline probably isn't something to complain about too quickly. Moreover, credit growth, at between 4 and 5 per cent per annum to households, and less than that for business, does not suggest that rising leverage is so far feeding the price rise. Hence it has been a little too early to signal great concern.
There are, however, two caveats. The first is that, notwithstanding the above comment, credit growth may pick up somewhat over the period ahead. So this is an area to which we will, naturally, pay close attention.
Secondly, while overall credit growth remains low at present, borrowing is increasing quite quickly in some pockets. Investor participation in housing in Sydney, in particular, is becoming noticeably stronger. Over the past year, the rate of finance approvals for this purpose has increased by 40 per cent."

Aussie population to be 10% higher in only 5 years time?

At 9.07am today, Australia's population clock ticked up to 23,262,710 according to the Australian Bureau of Statistics (ABS), and by the time I get around to posting this blog it will be around 25 persons higher still.

Source: ABS

If you're thinking quietly to yourself that it wasn't so very long ago that we welcomed our 23 millionth Aussie, you'd be absolutely right. The population is increasing on average by 1 person every 79 seconds which is more than 1,000 extra persons each day. Annually Australia is adding close to 400,000 persons each year to its population, a growth rate of somewhere in the region of 1.8% per annum.

The Reserve Banks's Philip Lowe noted in a speech that the "steady growth in the Australian population...remains considerably faster than in almost all other advanced countries."

Tempting though it is to think of all of the increase as being related to immigration, there are of course a range of factors at play, including:
  • one birth every 1 minute and 42 seconds;
  • one death every 3 minutes and 31 seconds; and
  • a net gain of one international migration every 2 minutes and 12 seconds.
The sum of which means that we have one extra member of the Australian population every one minute and nineteen seconds.

Population growth can lead to economic growth, although GDP per capita may slide. The demographic shifts are not all good news for the Australian economy, however. Far from it, in fact. Indeed, the very reason Australia aims to persist with this super-strong level of population growth is that we have an ageing population, and lately a declining employment participation rate.

For this reason, our work visas and permanent residency criteria are skewed towards those aged between 20 and 40. It's not that Australia simply wants more younger people, we actually need more younger people who will remain in the workforce and be taxpayers for 25 or more years.

A couple of articles at the weekend touched some of the major reasons why, which include spiralling medical and social security/pension costs. It is now expected that we might live for nearly two full decades in retirement and some of us live for far longer still. Without a new generation of taxpayers to continue to fill government coffers, our budgets would buckle.

You can call it 'Ponzi finance' or indeed whatever you like, but that is where Australia is at. When you start to thing of the building, construction, dwelling, public transport and infrastructure challenges facing the country right now, the mind begins to boggle. Michael Pascoe had a game stab at doing so in this article in the Sydney Morning Herald:

"Despite all the headlines, it's not the boat people we need to worry about – it's the other 2.3 million arriving tomorrow just when public investment in the nation is at an all-time low. That's the investment necessary to accommodate the increased population and maintain our quality of life. Or not.

OK, it's a slight exaggeration to say they're turning up tomorrow, but it's a bit like that from a historical perspective. And it may as well be tomorrow as far as our public preparedness goes. The nation's infrastructure, especially public transport, is groaning under its present load yet we're adding 2.3 million over the next five years, roughly 40 per cent by birth, 60 per cent by immigration. (The actual new arrivals figure is bigger than that – this is the net population growth after some of us shuffle off.)

That's far from a shocking discovery, but the reality of our population base and growth rate has crept up on us. It's just mathematics that a population of 23 million growing at our present rate of 1.8 per cent means about 10 per cent more people in five years – 2.3 million."

These are awesome statistics and it is very, very difficult to visualise today how the Australia of tomorrow will look. 2.3 million people over the next five years: that is one heck of a challenge. Are we prepared?

Monday, 28 October 2013

Stocks making hay

The "bank bubble" hasn't really work out too well to date, with all of the big four going great guns and leading the market to new 5 year highs.

Commonwealth Bank (CBA) added nearly 1.5% to close at a towering $77.40 today. With a price-to-book ratio of above 2.7 and a PE ratio creeping up to 16, there is not much value left to be had at these prices.

BHP has also been making up for some lost time, back up to $38 today.

Markets are very much enjoying low interest rates.

Source: ASX


It's set to be a strong start to the week for the Aussie stock market and we'll likely see fresh five year highs today, with a nice bounce expected at the open.

The Sydney media is only interested in one asset class at the moment, though: two of the Sydney Morning Herald's seven lead articles for the week concern the Sydney property market boom.

Not only are property prices going "ballistic", they are also to be forced ever higher by the exponential number of wealthy Chinese buyers.

When property news such as this hits the mainstream headlines, it can obviously have a self-fulfilling impact as buyers fear 'missing out'.

There are always other properties to live or invest in, however, so getting involved in frenied bidding wars is not to be advised. Buyer beware.

Sunday, 27 October 2013


Just finished the 27km Seven Bridges Walk today, an event run by the Cancer Council in NSW. We got a pretty good day for it (unlike a few years back when it absolutely hosed it down on the day of the event).

You can't fail to notice the amount of new development and construction going on around Sydney, including below at Barangaroo, where the construction of a whole new suburb of commercial and residential on the site of the old 'Hungry Mile' and shipping terminal is well underway.

It is also very noticeable that Sydneysiders are very much enjoying their mortgage affordability dividend and lower repayments - the casino, shopping malls and bars are packed out today. How long will it be before this begins to be reflected in stronger retail sales numbers (the next data for September is due on November 4)?

Handy charts from RP Data show low interest rates are working

Since 2011, we've heard a lot of opinions which suggest that "low interest rates don't work any more" and such like. However, slowly but surely low interest rates are indeed starting to work as these three charts from RP Data show.

It's certainly been a slow burn but gradually dwellings are being approved and constructed, with total approvals now moving 1.9% above the 20 year average according to RP Data.

Low interest rates necessarily take time to work, and this is particularly the case when it comes to dwelling construction as new projects can take many years to make it through the approval and financing stages.

Source: RP Data

I've said to a few people of late that if anyone truly and honestly believes that dwelling construction is not happening in Sydney then they should pop around to my place for a cuppa on a Saturday morning and listen to the awesome racket going on outside.

A huge amount of building is underway around inner Sydney with many thousands of new apartments due to come online over the next five years, particularly around the CBD and the inner south (where an apartment boom sees some 25,000 units planned for the next five years).

I can see the upturn with my own eyes, but you can also see it in the NSW line on the chart below with the number of dwelling approvals increasing dramatically over the past four years.

Source: RP Data

Only Victoria has a chart which is moving in a downwards direction, but this is to be expected after a huge spike in approvals after the financial crisis 'emergency low' interest rates which led to something of an oversupply of certain types of stock on the market in that state.

The monthly figures are volatile but y/y the trend is clearly up, particularly in NSW (+22.6%), Queenesland (+12.2%) and Western Australia (+31.8%). In Victoria, approvals slipped by 3% while South Australia saw a moderate upturn (+9.6%).

Note that the new building in Australia will be heavily focussed upon units and medium-density dwellings as opposed to detached houses, with 41.6% of approvals for that type of property (2012: 33.2%).

This trend is to be expected with our denser cities today and demographic shift towards living close to the Central Business District in medium-density dwellings.

Household sizes are also smaller today than in decades past, and while there will remain a high demand for well-located detached housing, the higher cost of city land will ensure that most new builds in the future will be unit stock.

Source: RP Data

The Reserve Bank of Australia (RBA) will be happy with the unfolding trends as mining construction capital expenditure looks set to drop off through 2014 and beyond.

The RBA hopes that the inevitable fall in mining capex will be offset by an increase in dwelling construction. The charts above show that we are slowly but surely moving in the right direction.

Fine trend analysis from RP Data.

Saturday, 26 October 2013

The week that was...

Another busy week in Australian finance and investment markets, briefly summarised below.

Share markets

As the US debt ceiling again loses its hard edge and recedes into the rear view mirror (for now at least) the share markets are off and running again, capturing new five year highs. 

However, the XJO has yet to crack the psychological 5,400 barrier which could then see the market heading back towards its record highs of before the global financial crisis.

Source: ASX


In the property markets, we are starting to see it reported fairly widely that the housing recovery is largely a Sydney-centric phenomenon, which has been a primary theme and prediction of this blog over the last 12-18 months. 

Although RP Data is set to record price gains Australia-wide of over 1% again in October, in truth the figure is largely driven by the heavy weighting of the Sydney property market, which has added another 2.4% in October alone. 

Sydney dwelling prices have increased by 12.7% in 2013 to date (as compared to, say, 0.8% in Adelaide, and relatively soft figures in certain other locations).

Interest rates

The CPI print this week at a headline rate of 1.2% for the quarter showed that there are some signs of inflation around, although on an annual basis the favoured trimmed and weighted measurements remain comfortably within the 2-3% range.

Despite sporadic reports of that elusive 'confidence' picking up around the country, there is clearly still much work to be done. 

Property prices are on the up, but it's predominantly a Sydney thing. Dwelling construction is really starting to take off in Sydney, but elsewhere progress is demonstrably slower. Business confidence keeps threatening to take off without really ever delivering to date.

The Reserve Bank's (RBA) Deputy Governor Philip Lowe delivered this speech this week to the Australian Investment Conference, in which he highlighted the forthcoming drop-off in mining capital investment, which the RBA hopes will be offset by a boom in dwelling construction.

Lowe variously discussed non-mining investment, household debt, business confidence, the weaker Aussie dollar and consumption growth and - crucially, for my money - concluded:

"Together, a lower value of the Australian dollar, an improvement in business confidence and low interest rates provide the basis for our outlook of a gradual lift in the non-mining economy over the next couple of years."

The RBA appears to view the housing market rebound as a favourable development (while it will be keeping a close eye on speculative behaviour Sydney where according to figures released by APRA for the June 2013 quarter much of the price action is clearly being driven by investors using interest only loans) and has a far lower level of concern about household debt than many seem to believe.

Note, therefore, that we might reasonably expect to see low interest rates for perhaps as long as the next couple of years in order to encourage a boost to non-mining investment. The futures markets get this and anticipate the very same, with the futures market yield curve implying that the cash rate could remain below 3.00% well into 2015.

Source: ASX

Property Update: articles of the week

Michael Yardney summarises the key property articles of the week over at Property Update here.

Friday, 25 October 2013

Is it a bubble...?

Sculpture by the Sea at Bondi this week - one of the many great free events in Sydney.

Thursday, 24 October 2013

CommBank hits record heights

No stopping Commonwealth Bank (CBA) then in spite of the warnings of over-valuation!

I spent some time here analysing the CBA share price in June to explain why although I was a holder of CBA, a traditional value investor would see the share price as too high for their liking. 

It's been quite some 5 years for the stock after the financial crisis saw the price fall below $30.

The annual dividend stumbled from $2.66 in 2008 to $2.27 in 2009, yet by 2013 had increased all the way to $3.63. 

Happy days for holders.

Source: ASX


Super innings of 197 by David Warner at North Sydney Oval today. Wow.

A new Crane Count index

Rider Levett Bucknall now prepares a Crane Count Index which records how many cranes are visible on the skyline of each capital city. The AFR noted this week that Sydney is easily top of the charts with a great deal of construction presently underway as compared to elsewhere around Australia.

And it's true. Anyone who says otherwise needs to come for a walk around. There is a huge amount on construction now happening in Sydney, such as is desired by the RBA, with new developments coming online in the inner south and close to the Central Business District.

As a highly scientific test I just took a ten minute stroll from my pad towards Broadway and back, and counted 12 cranes. I can confirm that seemingly every available plot is being developed apace, some of them with monster developments. Most of the 2,000 apartments at Central Park, for example, have already been sold (the price tags are a story for another day - gulp). In Sydney's inner south, 25,000 new apartments are planned in the next five years.

Note that had I walked towards the CBD I could also include the new suburb being constructed at Barangaroo and many other cranes on the city skyline.

I can officially reveal that I'm now thinking of patenting a new 'Cranes out the back of my place index'. 

As a benchmark I believe it has the potential to rank alongside my old man's 'Wolves used to get 60,000 people at Molineux, ergo football is less popular today' hypothesis, or indeed my own 'I can afford to live at Darling Harbour and thus property is affordable' premise.

I'll keep you posted with progress. Anyway, a few snaps from my ten minute stroll...

Sydney house prices +4.2% in September quarter

Reports SMH:

"In the September quarter the median house price jumped 4.2 per cent to  $722,718. 

‘‘Sydney is ... head and shoulders above the rest,’’  Australian Property Monitors senior economist Andrew Wilson said. 

‘‘We are in uncharted territory now.’’ 

Apartment prices in the harbour city have also skyrocketed, APM quarterly data shows. 

The median price surpassed $500,000 for the first time, growing 3.3 per cent to $515,035."

This is bad news for first homebuyers and also for those who have been campaigning hard for some years for a 'strike' against buying housing, as Dr. Andrew Wilson of APM notes:

"While it is further grim news for first home buyers, Dr Wilson said those who bought 18 months ago had done well. ‘‘House prices are now $90,000 more expensive than they were at the start of 2012,’’ he said. ‘‘And apartment prices are nearly $65,000 higher.’’
Adelaide and Perth house prices were reported as flat in the quarter.

Meanwhile, prices in Canberra fell (refer to the Canberra chapter in my book for why this was an easily identifiable risk: falling public sector employment is reducing demand in the ACT).
It's true that Sydney is "uncharted territory" insomuch as prices have continued to all-time highs as I and many others have long expected.
But only insofar as, say, GDP moves into "uncharted territory" every single year in Australia - it's pretty much what you'd expect in an economy with an inflation target.

Annoyingly, at 36, my age has also now surged into uncharted territory, as have average Sydneysider earnings and, for that matter, the extortionate price of a schooner at Ryans Bar at $10.70 (forget ten pound Poms, this summer will see the first ten dollar schooner Poms).

The obvious underlying point here is that while affordability waxes and wanes, over time prices will break new highs.
The present cycle in Sydney looks to have some way to run yet before affordability constraints eventually reign the market in just as they did in early 2004.

When it comes to favoured locations in real estate, people tend to spend whatever they can afford to buy (and then some) until the rubber band can be stretched no further.

RP Data's home value index now has Sydney's home prices up by $64,210 or 9.9% in the last 137 days - that's $468 per day.

Source: RP Data

In secondary locations which by there very nature are in lower demand, other factors can bite harder, especially in a downturn.
Cycles do broadly tend to repeat although the specifics tend to differ.
There is a huge proportion of investor capital this time around, with around 50% of housing finance being for the investor class of late.
As usual other sources go on to cite Chinese buyers as a major influence on house prices, although few actual statistics are available as evidence.

Expect to see an all-too-predictable witch-hunt in the coming days as news stories highlight the role of Asian buyers, many of whom, of course, are as Australian as you or I, but have a different skin colour.
Another thing that is different this time around is that the city is denser, with the population of the city continuing to grow very rapidly each year.

There is some better news for buyers, however, and that is that more previously reluctant sellers are coming to the fore aiming to capitalise on stronger market conditions.

With so many auctions taking place on Saturday mornings in the popular suburbs and potential bidders only able to be in one place at once, more opportunities to avoid the dreaded bidding frenzy should open up.

Vendors do need to be realistic in their expectations, however.

Some have been reading the "property boom" headlines and are destined to be disappointed when their lofty reserve prices remain unmet by buyers who have done their due diligence on comparable sales.

Wednesday, 23 October 2013

Property boom, bubble or bust?

Regular readers will know that I have for some time expected the Sydney property market to outperform based largely upon its strong fundamentals as compared to other Australian capitals combined with the harbour city's relative under-performance since the first quarter of 2004.

This is evidently now playing out fairly dramatically with reported dwelling prices up by ~10% in the matter of only a few months.

At the same time, various other real estate markets are not firing in anything like the same way.

In fact, when adjusted for inflation - as RP Data does in their enlightening chart below - most other property markets are some way below their previous peaks in 'real terms'.

In other words, certain markets may be experiencing what some have described, aptly, as a "slow melt".

That is, they may be gradually increasing in terms of actual dwelling prices over time, but capital growth on average could remain lower than the rate of income growth. 

In doing so, such markets may well become more affordable over time as household incomes increase.

Hobart and Brisbane are two good examples of where current prices are comfortably 'more affordable' than they were at the previous market peak (at least, on a city-wide basis).

Embedded image permalink

Source: RP Data

I'm aware that some people argue that not everyone is receiving pay rises right now. This is undoubtedly true. In fact, that is always the case. 

But as the Australian Bureau of Statistics (ABS) data has shown, incomes have continued to rise in recent times on a national basis. Some industries - notably the mining and resources sector - have naturally fared better than others in terms of salary growth.

In any event, the current property market upturn is demonstrably largely a Sydney affair. 

Interestingly, as recently as June of this year there were various misguided reports of a "weak" Sydney market (see the mid-year dip in RP Data's chart below), whereas now only a few short months later the pitchforks are out blaming Chinese buyers for forcing up our property prices.

Such are the pitfalls of daily home value indices and a greatly increased volume of reported data.

Source: RP Data

In other news, there were signs of inflation in this week's consumer price index (CPI) release for the quarter (the headline reading jumped to 1.2% for the quarter, although the trimmed mean and weighted median prints were sitting back in the desirable range) including in the housing and transport categories, although the ABS data was once again something of a mixed bag of messages.

Although inflation remains well under control on an annual basis, further interest rate cuts look to be doubtful at this stage. The data tumbling out of Sydney's housing market may represent one factor in the equation; the interesting movements in the Australian dollar this week are another.

Tuesday, 22 October 2013

Major bushfires joined

Another warm and dry day in Sydney, which is not at all what we need.

Major bushfires are joining together this morning reports SMH.

62 fires are burning around the state; 12 of them are not contained.

The latest NASA satellite image of fires and smoke over Sydney.

BHP production surges

BHP Billiton production is ramping up, just as for Rio Tinto. The trend for 2014 is declining capital expenditure and increasing production. SMH:

"Global miner BHP Billiton's third-quarter output of iron ore surged 23 per cent year-on-year to 48.8 million tonnes, while other key products reported strong growth too.

Petroleum product output rose 2 per cent year on year to 62.7 million barrels of oil equivalent, the miner said in a release this morning.

Output of coking coal rose by 14 per cent year-on-year to 10.2 million tonnes as steaming coal output rose a more modest 3 per cent to 19.6 million tonnes.

Copper production rose by 6 per cent to 403,300 tonnes.

BHP said the ongoing optimisation of production systems in the Pilbara region of Western Australia has helped it to raise forecast 2014 production of iron ore to 212 million tonnes."

Property Update: Aussies are the world's richest people (but not happiest)

I write for Property Update here on why Australians are the world's richest people (it's not just what you might think), but also I consider why we are less happy than we used to be.

Monday, 21 October 2013

Up and away

The ASX has really regained its mojo as the US gets its act together, up for five straight days in a row and now also up to a five year high.

Another 30 points added today and the chart turning vertical...

Source: ASX

HIA: Residential land sales +18.2% in June quarter

A handsome-looking trend is emerging in residential land sales in this week's Housing Industry Association (HIA) release for the June 2013 quarter, which should be a precursor to a desired pick-up in dwelling construction. 

Source: HIA

Residential land sales volumes are on the up now for several consecutive quarters and now sit at their highest level since March 2010.

This is what the Reserve Bank of Australia (RBA) has been hoping for, the favoured outcome being a strong increase in dwelling construction to offset the mining construction boom moving over its hump.

Plenty have written off a material increase in dwelling construction coming to the fore, but low interest rates necessarily must take time to work and for their full effect to be seen, and therefore it is often difficult (or simply nigh on impossible) to predict outcomes in advance.

Clearly land sales are up from a low base over the past few years as the HIA chart above shows, but the trend is incontrovertibly an upwards one.

Nationwide, land sales are now 21% below their historical average, but that said, they were up by more than 18% in the last quarter alone.

Notably residential land sales are up very strongly by 33% over the past year in Sydney.

This is perhaps unsurprising as Sydney has an under-supply of appropriate dwellings and a very strong population growth.

And still further, the harbour city is seeing very strong dwelling price gains, up by more than 12% already in 2013 with more than two months of the calendar year left to run.

There certainly looks to be unit construction aplenty underway: Barangaroo, Broadway and the inner south being stand-out examples.

It's certainly looking to be all on around Sydney, my eyes tell me, although there is of course commonly a lag between construction becoming visible around the city and units becoming inhabited.

This will represent positive news for the Australian economy as and when increasing residential land sales are ultimately reflected in dwelling construction.

The corresponding test will be to gauge whether mining construction capital expenditure drops off quickly as some have feared or whether a somewhat brighter global outlook and stabilising growth in China (and potentially some resources project overruns or cost blowouts - anecdotal evidence suggests that there may be plenty of these ongoing) mean that the mining cliff is rather a gentler tailing off than a capex apocalypse.

The impact to date of 'actual' declining mining construction has been limited in its scope but the 'expected' level of capital expenditure surely looks set to tail off. 

This will begin to represent a headwind for the Australian economy through 2014 and beyond, but so far the RBA appears to remain confident of its stance.

A favourable inflation (CPI) print this week may help to strengthen its position.

Chart: Financial year actual and expected expenditure- Mining Capital Expenditure

Source: ABS

Sydney dwellings selling faster still

Sydney dwellings are selling yet more quickly, resulting in prices rising by some 12.2% so far in 2013 according to RP Data.

Elsewhere, property markets have responded far more moderately to low interest rates.

We're expecting to see a fairly moderate or benign inflation reading on Wednesday, which, should it come to pass, may result in lower interest rates for longer.

Source: RP Data

Sunday, 20 October 2013

The Zulu Principle

About 20 years ago now, a Pommie accountant and investor named Jim Slater published a book called The Zulu Principle: Making Extraordinary Profits from Ordinary Shares.

Slater's premise was that becoming a leading expert in one specific field could help investors to secure outstanding returns, echoing the ideas of focus investing.

He came up with the idea of the 'Zulu Principle' after his wife read a book on Zulus and having done so was able to demonstrate a superior knowledge to him on that very subject of Zulus.

He rationalised that if his wife read every book she could find on Zulus and then spent some time in Africa studying the subject in detail she could quick quickly become a leading authority thereon.

Slater's point is that through identfying a "narrow and clearly defined area of knowledge" then applying the knowledge learned in your area of expertise you can profit from what you have learned.

This is very much true. 

I'm often asked questions about stock markets and property markets I know very little about and have learned that when you don't know an answer, it's much better to say so! 

How many times in the corporate world do people seemingly have an answer for every question which is full of buzzwords and management mumbo-jumbo that doesn't actually mean anything? Far too often.

Much better to become an expert in a few areas in which you can excel and then apply your knowledge directly to those markets.

I'm not convinced that most average investors have anything like the skill-set to properly analyse a company and its financials and then apply those skills consistently. It might sometimes be better to be well diversified via a Listed Investment Company or index fund and spread your risk by not trying to time the market too much and acquiring shares over time.

I sometimes also worry about investors venturing into property in remote locations because of supposedly attractive rental yields. 

Yield isn't the most important part of a property investment - long-term demand for the property is. 

Investing in another state which has outstanding growth prospects can be fine, of course, but make sure you do your due diligence and research or else use a professional to help you. 

Investing overseas can also sometimes be OK, but do remember to consider foreign exchange risk and whether you may be missing out on tax benefits at home.