Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory & buyer's agents, 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

Wednesday, 16 October 2013

Is it a good time to buy property?

Hold the line, caller...

I've often been confused by those TV shows where a caller dials in and asks: "Should I buy shares in this company?" or "should I buy a property in this suburb?", particularly when the panellist immeditaley fires back "No, but what you should be doing is...". The obvious problem with this type of financial advice is that there is no consideration of personal needs, financial goals or circumstances. And so it is with the present debate about whether it is a good time to buy a house. 

In Australia, renting is usually 'cheaper' than buying in terms of monthly cashflow, so it can definitely make sense to rent where you live and invest your dollars elsewhere. I've long been a strong advocate of this idea, particularly in an age where people are changing jobs and careers far more often than ever before.

One problem is that plenty of people rent and then never invest in anything at all. It would be helpful in Australia if we moved towards longer lease terms or commercial style leases to allow renters more stability and certainty. Another common problem is that, as I specifically warned on this blog, it's all well and good to say that you will simply wait for prices to become cheap before buying somewhere to live, but what if prices don't behave themselves? Markets are rarely as predictable as people seem to believe.

And for Sydneysiders, so it is. By the time this cycle is over prices could easily be 40% higher than where they were five years or so ago, pricing many out of our market forever.

Is it a good time to buy if you are likely to have to move in a couple of years, though? Possibly not. Stamp duty, legal fees and agent fees are material transaction costs that will likely see you fail to benefit from a short ownership period. Sure, you can retain a first property as an investment and some do this well - including my wife in fact, who still owns her first house bought aged 21. This can be great if you're able to buy in a well-located suburb, but the prospects for capital growth in outer and fringe suburbs, in my opinion, are often highly questionable.

The contrast with, say, a 35 year old buying a pure investment property via an SMSF, is stark. Knowing full well that the investment is likely to entail a multi-decade time horizon, the buyer is far less likely to be concerned with short-term market fluctuations. It's not that they would be completely emotionless if there was a sharp market correction, but they would likely be as close to that state as it would be possible to be.

Buying regularly, and buying more in the sales

On one TV panel investment show, the author of Motivated Money (I probably learned more useful information on Aussie share market investment from this one short 130 page book than from many years of reading other information) Peter Thornhill was asked what he hoped for the share markets in coming months. The other pannellists had variously offered the usual platitudes such as "cautiously optimistic for moderate gains", "a stabilising economy" or "firming growth".

Thornhill said simply: "Another GFC" (Aussie acronym terminology for the global financial crisis). The presenter of the chuckled nervously. Thornhill re-iterated: "I'm serious". He was never invited back on the show.

What Thornhill was getting at, albeit in his usual controversial and confrontational manner, is that market downturns can represent fabulous buying opportunities. His favoured strategy includes buying shares regularly (in particular, in low cost diversified LICs with exposure to financials and industrials, which tend to pay strong dividends and outperform the resources index and REITs over time) rather than obsessing over trying to time the market. 

Thornhill warns very strongly that people tend to massively over-estimate their abilities in weather forecasting: "Market timing, for most of us, is no better than genuine guesswork".

Notably, property investors engage in far fewer and generally far larger transactions, so correspondingly buying well becomes far more important. Share investors can more easily average or smooth their results through regular purchases which buy more units when the markets are despondent and PE ratios are low and vice-versa.

And when the market does really tank, Thornhill will simply have some money set aside or in reserve for buying much more heavily, engaging sensioble and considered leverage via margin loans at favourable rates, in order to to buy very hard into 'old favourite' stocks like Wesfarmers (WES) and Commonwealth Bank (CBA) when they are 'on sale' at $15 and $30 as the were in 2008/2009. 

Thornhill stresses the importance of focussing on the growing income stream from a share portfolio - resulting in an investment strategy rather than price speculation - as opposed to the day-to-say share price fluctuations and unending market commentary. And imagine the dividends yielded from those 2008/2009 purchases today - 10-15% depending on your entry price, not to mention supersonic capital growth.

Dealing with market downturns

Always keen to learn whatever I possibly can about investment pyschology, I felt that this must be a man worth looking up, and over a coffee in Woollahra (actually, over several coffees in Woollahra) I was keen to explore whether Thornhill really dealt with market crashes in such a relaxed manner. His response was that, truthfully, "you would not be human if you did not feel the impact of a market crash". But, rationally, markets do recover over the long term, and after a crash when markets are despondent is often a great time to buy quality investments.

Does it bother me than Thornhill is 100% a shares man and essentially anti-property? Not at all. I've always preferred a balance, and believe that if you are prepared to research property markets thoroughly and buy counter-cyclically (such as in Sydney in 2007 or around London in the 1990s) you will also get great results over the long term.

Dwelling Prices graph

I tend to agree that if you're starting out with several million dollars then the great appeal (yet double-edged sword) of property market leverage is greatly diminished. However, so many of us (including me) started out with absolutely nothing, which is why property markets and the associated leverage available can seem more attractive.

Note the importance of focussing on income-generating ownership assets, such as shares and property. There are plenty espousing the benefits of shorting the market in recent times, yet they are getting their timing badly wrong and getting badly burned time and time again. 

Just as bad are the usual swathe of broker "buy recommendations" in speculative mining shares resulting in woeful erosion of capital over a period of several years where simply owning the index has been generating fabulous returns. Before considering broker recommendations, look at what exactly same brokerage firms were tipping over the last 24 months - if you find more than half a dozen 'Buys' which have collapsed in price, look elsewhere for advice.

As for gold, which pays no income, how badly is that strategy faring since its peak as compared to Thornhill's outstanding income-generating portfolio? Assets with growing income streams will always dominate over the long haul.