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

Monday, 30 September 2013

Interest rates on hold say futures markets

We don't need to waste too much time and too many words this month as markets have made up their mind retaining only a slender chance of an interest rate cut, with the odds stacked heavily in favour of the RBA on hold at 2.30pm.

Indeed, we may potentially at last be close to the end of the easing cycle.

Source: ASX

Rates are thought likely to be kept on hold today for the very simple reason that not enough has changed since last month to warrant a move.

In terms of global growth, China's feared "hard landing" has not eventuated to date and growth looks set to hit around a very healthy 7.5%. 

The Eurozone is recovering in several of its stronger economies, although some countries remain in a right royal mess. And the US may steadily be making progress, although of course the threat of a pending government shutdown has the potential to throw a rather sizeable spanner in the works.

Commodity prices: the RBA's index has fallen since its peak, but iron ore has been holding up at above US$130/tonne.

Graph: RBA Index of Commodity Prices

Domestic demand remains fairly weak. Not much doing in terms of consumption (retail sales figures have been mostly crap, although there is a feeling that the election result may have helped prospects a little going forward - the latest data is due to be released this morning) and the outlook for investment not great. 

The labour market is still soft and unemployment is threatening to tick up further into 2014 into the more worrying 6-7% range.

Graph: Unemployment Rate

Source: ABS

Financial markets - not enough has changed from what the RBA said in September about financial markets to warrant a change in monetary policy stance.

Inflation is presently contained at 2.4% - the RBA will have noted the TD monthly inflation gauge yesterday, but the next ABS inflation data isn't due until 23 October. There is some talk of inflation moving up towards problem levels, but this seems a little unlikely while the labour market remains so soft.

The Aussie dollar is still stronger than would ideally be the case, but at least it is down from where is was to around 93 cents against the US dollar. 

Australian Dollar Against US Dollar, Euro and Yen graph

As for interest rate sensitive sectors, property market commentators are continually guilty of placing way too much emphasis on the housing market (and particularly movements in median house prices) and its influence on monetary policy, but dwelling values may indeed have a significant role to play in the coming months. 

Further cuts could be seen as unlikely if dwelling prices keep rising in Sydney and Melbourne at the pace they seem to have been doing of late. Still more growth in dwelling construction is needed, though.

Source: RP Data


Interest rates to stay on hold today at 2.50% to allow the impact of the recently delivered cuts in May (to 2.75%) and August 2013 (to just 2.50%) to work their way through. 

The next labour force data from the ABS will be out next Thursday, and the Reserve will be hoping for an improving outlook, but is has to be said that other indicators do not look strong. Apocryphal evidence suggests to me that the unemployment will probably have some way higher to run - there appear to increasing numbers in the mining industry at the end of their contracts as the mining construction boom falls away.

A very special week!

Have to laugh - back in 2009 I watched the mighty Sydney Roosters lose seven or eight consecutive matches at the Sydney footie stadium as the Easts Tricolours went on to claim the comp's dreaded wooden spoon.

This season I've been away overseas and not seen a single game live, and we make the NRL Grand Final.

Luckily ANZ Stadium (the old Olympic Park) out at Homebush is a behemoth venue so I was able to snare a ticket in the true spirit of a glory-hunting part time fan.

Opponents will be Manly Sea Eagles, roll on Sunday...and go Chooks!


Very glad to have gotten out of the stock market at the start of trade today as stocks got smoked, the ASX 200 (XJO) down by 1.7%. 

And we haven't even heard the latest news or developments from the US yet. We'll know plenty more by tomorrow...a first US government shutdown in 17 years now being reported as "probable" by Bloomberg


RBA: credit growth strengthening

"Total credit provided to the private sector by financial intermediaries grew by 0.3 per cent over August 2013 after increasing by 0.4 per cent over July. Over the year to August, total credit rose by 3.4 per cent.

Housing credit increased by 0.4 per cent over August following an increase of 0.4 per cent over July. Over the year to August, housing credit rose by 4.7 per cent.
Other personal credit increased by 0.2 per cent over August after being unchanged over July. Over the year to August, other personal credit increased by 0.9 per cent.
Business credit rose by 0.2 per cent over August after increasing by 0.4 per cent over July. Over the year to August, business credit rose by 1.4 per cent.
Over the month of August, M3 declined by 0.4 per cent and broad money declined by 0.3 per cent. Over the year to August, broad money grew by 4.9 per cent."
Note the increase in housing credit growth - now at 4.9% y/y and the fastest rate of growth since September 2012. 
Personal credit growth at 0.9% y/y is also the fastest rate of growth since May 2011.

APM Sydney auction market wrap

As I've noted on this blog for a long time, Sydney's inner west remains a remarkably strong property market sector with clearance rates still hitting at above 90% from the highest number of listings. A definite risk of over-paying in that sector now and better value is to be found elsewhere. From APM's auction market report here:

"Sydney’s weekend auction market has concluded its strongest ever September performance with a clearance rate at the weekend of 81.5 percent. That result makes it 11 weekends out of the last 12 that Sydney has recorded a weekend auction clearance rate above 80 percent.

Sydney’s weekend auction clearance rate has averaged  a phenomenal 84.8 percent over September which is the highest result ever recorded for that month.
Sydney’s record September auction results have been achieved despite a surge in listings over the month. Auction stock numbers have continued to increase over recent months as sellers have become more confident and enthusiastic about the strength of buyer activity in the local market.
Over the past 4 weeks 2003 properties have been listed to go under the hammer in Sydney which is  419 more or 26.5 percent higher than were listed over the same four weeks a year ago.
Sydney’s inner west continues to produce  exceptional clearance rates with this weekend recording 91 percent from 85 reported auctions. Next best was the northern beaches with a clearance rate of 83 percent followed by the city and east and Canterbury Bankstown each with 79 percent clearance rates.
Sydney’s weekend auction market continued at record-breaking pace over September with strong houses prices growth certain to emerge as a consequence.
This week the Reserve Bank will meet for its usual monthly meeting to determine the future direction of interest rates. The bank will likely leave rates on hold despite signs of a weakening economy. The lowest rates in 60 years will regardless continue to drive a strengthening  Sydney housing market."
Interesting to note Christopher Joye at the AFR amending his viewpoint on the risk of an Australian property bubble forming over the coming year.
I expect he's been looking very closely at the RP Data index figures in detail and come to the conclusion that the major capital city markets are now moving rapidly upwards and appear set to continue doing so.
On a day-to-day basis the RP Data Daily Home Value Index appears to move relatively smoothly, but nevertheless q/q and YTD gains have been very strong in Sydney and Melbourne. 
Based on what seems to be happening down at street level in Sydney, I expect there is plenty more of the same to come in Sydney (I've heard people say the same about Melbourne).


Aussie stock market holding up pretty well this morning, the XJO only down 0.9% so far.

I'm reducing my exposure, however - just have no idea what the next 48 hours will bring so I'm just going to sit it out as there appears to to greater downside potential than I'm comfortable with right now.

The mid-term outlook for share markets seems to remain reasonable, but there is a chance that stocks could go into a short-term tailspin or correction thanks to the US political bickering. After all, we have been on a strong bull run.

Watch this space!!

Could the US default on its debts? Risk off

Stand by for a rocky period of asset markets, with investor exposure being decreased.

From SMH, full article here:

"As a last-minute deal to resolve tense spending negotiations in Washington appeared less and less likely, US stock investors braced for an outcome that had previously seemed thinkable: a shutdown of the US government.

While a deal could be reached before the government's fiscal year ends at midnight on Monday, the unanimous passage of a bill to continue paying US soldiers in the event the government runs out of money was viewed as a sign that there would be no agreement between Republicans, who hold a majority in the House, and the Democrats, who control the White House and Senate.

A shutdown is expected to have a catastrophic impact on markets, injecting massive amounts of uncertainty into major asset classes. If the shutdown is prolonged, it could also have significant implications for economic growth. Many government employees will be furloughed, and the Labor Department said it would not issue its monthly employment report scheduled for next Friday."

What is a housing bubble?

A lot of debate at the moment about what a housing bubble actually is.

I guess it is one of the terms that is open to debate.

Here is what Investopedia says:

"A run-up in housing prices fueled by demand, speculation and the belief that recent history is an infallible forecast of the future. Housing bubbles usually start with an increase in demand (a shift to the right in the demand curve), in the face of limited supply which takes a relatively long period of time to replenish and increase. Speculators enter the market, believing that profits can be made through short-term buying and selling. This further drives demand. At some point, demand decreases (a shift to the left in the demand curve), or stagnates at the same time supply increases, resulting in a sharp drop in prices - and the bubble bursts.

Traditionally, housing markets are not as prone to bubbles as other financial markets due to large transaction and carrying costs associated with owning a house. However, a combination of very low interest rates and a loosening of credit underwriting standards can bring borrowers into the market, fueling demand. A rise in interest rates and a tightening of credit standards can lessen demand, causing a housing bubble to burst. Other general economic and demographic trends can also fuel and burst a housing bubble."


Note the highlighted text (my bold) which suggests that a housing bubble must involve a sharp drop in prices resulting in a bubble bursting. 

Does it follow, therefore, that a market which does not burst, cannot by definition be a bubble (and therefore we can only identify a housing bubble in retrospect)?

There are plenty who say that Australia is in a housing bubble, but the bubble won't burst, rather it will just stagnate, or gently rise slower than incomes. 

Is that a bubble then? 

A debate which will no doubt continue (and how)...

Sunday, 29 September 2013

US government shutdown nears

What a crazy situation. Keep a close eye on stock futures...


"The House of Representatives early on Sunday brought the federal government closer to a shutdown as it voted to delay President Barack Obama's landmark healthcare law for a year as part of an emergency spending bill.

By a mostly partisan vote of 231-192, the Republican-controlled House approved the "Obamacare" amendment, despite a veto threat from the White House.
It also voted 248-174 to repeal a medical device tax that aims to help fund healthcare programs under the 2010 law.
And in a sign that lawmakers might be resigned to a government shutdown beginning Tuesday, the House unanimously approved a bill to keep paying U.S. soldiers in the event the government runs out of money to run many programs."

$700k for a dwelling

Sydney dwelling prices up to $700k according to RP Data's index and prices increasing almost everywhere in response to the low cash rate and low borrowing rates (except Adelaide - where unemployment is above 7% and the state's 12 month jobs growth is negative at -10,000, by far the weakest of the main states).

Source: RP Data

The RBA's employment chart 2010-2013 tells its own story.

You can draw your own conclusions on the prospects for each state to sustain property price growth going forward (or otherwise in certain cases).

Graph 3.20: Employment by State

Australian property lift-off - what it all means

A balanced assessment of what is actually happening in the Aussie real estate markets here at MacroBusiness radio. 

Includes an interesting discussion of what actually constitutes "a bubble" and how Australian capital cities currently fit into that framework, as well as a consideration of the role of regulatory bodies such as APRA and the RBA.

MacroBusiness promote a strong argument in favour of macroprudential measures in order to keep an effective lid on real estate markets.

Importantly, also considered is the impact of the end of the mining construction boom and how that may result in unemployment in parts of Australia - perhaps heading towards 6.5%-7% next year. 

Note the points around 28 minutes about the potential for a correction to damage the wider economy if Australia lets its house prices run too high.

A good listen, if you can spare 30 minutes.


US government lurching towards partial shutdown on October 1? Bloomberg:

"The U.S. government lurched toward a partial shutdown Oct. 1 as House Republicans planned to attach a delay of Obamacare to a bill to keep the government open and Senate Democrats said they will reject the proposal."

Saturday, 28 September 2013

APM: Sydney auction clearance rate strong at 81.5%

Despite the high number of listings, Australian Property Monitors reported yet another very high auction clearance rate at 81.5%.

The Sydney property frenzy looks well set to continue through 2014 as the Reserve Bank remains stuck between a rock and a hard place. 

Interest rates will not be hiked any time soon due to the lacklustre economy, yet property markets - at least in Sydney and Melbourne - are strong.

Source: RP Data

In fact, was a case of high temperatures and high prices in Sydney today as the mercury nudged 31 and several houses fetched well above reserve.

How's the below for an example in Kirribilli on the lower north shore?

Quote from a chap who attended: "On Kirribilli's busiest road and in the shadow of Greenway housing estate".

Agent estimate - $870,000.

Sold for - $1,189,000.

As you can see from the photo, there is plenty of interest in the Sydney housing market right now, and no wonder given the forecast price gains for 2014.

However, buyers need to be wary of becoming involved in irrational bidding wars and paying too much. 

Instaweather photo and sales data via Thomas Bodger - cheers Bodge!

In stores now...

My book is for sale in Aussie bookstores now.


What the experts are saying about it...

‘Writing something new and different about personal investment, yet appropriate to our changing times, is a tough gig. But Pete Wargent, one of Australia’s leading young financial commentators, has mastered this in his latest book. 

It contains an incredible wealth of real world insights from someone who has actually achieved what most readers will want to accomplish.I have been investing for over 40 years and read almost every book written on property investment in Australia yet I still learned new concepts in this book. 

I recommend it for beginning investors to get a good grounding and for experienced investors to receive a fresh perspective.‘- Michael Yardney, bestselling author and voted Australia's leading property investment adviser.

‘It's hard to find a balanced voice that paints a common sense picture of our property markets. Peter is one such voice - his extensive expertise and experience in both finance and property is clearly evident as he takes us on a tour of Australia's real estate terrain imparting valuable lessons including holding for the long term and staying well diversified. I have no hesitation in recommending his book to anyone interested in real estate investment.' – Catherine Cashmore, Real Estate Expert on The Circle (Channel Ten)

‘'I’ve had the privilege of interviewing Pete on a number of occasions for our various real estate investing shows. I thoroughly recommend his new book. It is a great read!’ - Kevin Turner, Fairfax Radio real estate expert, Sky Television property commentator and host of Real Estate Talk and 4BC’s Real Estate Show

‘I’ve always had a great deal of respect for Pete Wargent’s thorough and entertaining market commentary. His book shares a wealth of state-by-state knowledge and experience for those interested in success through property. He delivers a common sense approach to investing in a manner that makes sense for every reader.’ – Iggy Damiani, Real Estate News (Sky News Business), Managing Director of Equilibrium Property

‘This book is the one stop shop of buying property in Australia. Peter teaches the how and the where to buy. Combined with great resources you can put in place today a strategy to build your own wealth through property. This book gives you the rules so you can get on the board, roll the dice and start growing a successful property portfolio without leaving anything to chance!’ - Jane Slack-Smith, Director, Investors Choice Mortgages and author of Your Property Success with Renovation: 2 properties, 1 renovation, $1 million in the bank.


And what a glorious weekend to arrive back in Sydney.

No rest for the wicked, however - straight back out there to look at properties.  

Real estate is selling very fast in this city right now.

Boom time

As is usually the case in a market cycle, the media joins the party a year or so late, with one of Sydney's main newspapers leading this weekend with the headline: "It's Boom Time!".

Dwelling prices in Sydney are up by more than 9.5% in 2013 according to RP Data, and by 12.5% since their trough.

Price action in other cities has been rather more modest.

Today is a huge test for the Sydney housing market, with nealy 600 properties to go under the hammer.

It's AFL Grand Final day in Melbourne so only 46 properties being auctioned today - compared to 865 last weekend!


In other news,  Barack Obama sounded mighty cheesed off in his speech which I caught (jet-lagged) last night, which an only mean it is that time again...debt ceiling.

Stocks fell in the US on Friday as the government faces a possible shutdown with the usual partisan squabbling taking place.

Ultimately, stock markets appear to believe that the debt ceiling issue will be resolved - failure to achieve a resolution would lead to the US economic recovery being kyboshed which is in nobody's interest (including the Republicans who doubtless have plenty invested in the share markets themselves).

Real Estate Talk

Catch me on the Real Estate Talk show this week along with Louis Christopher of SQM Research and Michael Yardney of Metrople as well as a few other guests.

Tune in here.

Thursday, 26 September 2013

Australian population growth is flying

OK, let's ignore the smoke and mirrors for a moment and take a considered look at the numbers.

ABS numbers tend to fluctuate quite a bit m/m and q/q...but over a year you tend to get a reasonable picture of what is going on.

And look at the population growth across Australia over the past 12 months - a staggering 397,400 extra heads.

So, where are they all heading?

Source: ABS

The quick and dirty answer is: not to Tasmania (600 more people), NT (+4,100), Canberra and the ACT (+8,100) or South Australia (+15,600).

The booming states in absolute terms are Victoria (+101,900), Queensland (+92,300), New South Wales (+92,300) and Western Australia (+82,600).

When viewed on a percentage basis, WA is the clear standout, thanks to its mining construction boom:

Graph: Population Growth Rate, Year ended March 2013
Source: ABS

And, the trend nationally? It remains very, very strong.

Graph: Population growth, Quarterly

Source: ABS

397,400 extra persons per annum, is it any wonder Australian property prices didn't fall dramatically during and after the global financial crisis as so many confidently but falsely predicted?

For a decade now we have been swamped with 'Australian property bubble' articles, which must be a little bemusing for inhabitants of Hobart, Adelaide and Brisbane, where prices have not gone anywhere for years. 

Meanwhile wages have increased (thus decreasing prices in real terms) and interest rates have dropped to generational lows, improving the affordability of repayments.

Even in Sydney property prices have comfortably underperformed household incomes since the last 'irrational peak' in Q1,2004. 

That will no doubt change through 2014 when prices boom in response to low interest rates, massive demand from Asian and domestic buyers and investors, and an undersupply of appropriate dwellings.

Melbourne dwelling prices are a somewhat different story and have absolutely boomed by well over 50% since 2006.

Dwelling Prices graph

But the authors of these neverending property bubble articles should maybe stop to consider: are we talking about a purely speculative property bubble as is forever the implication? 

Or a we to some extent talking about a country where every year we are pouring 400,000 more people into a handful of popular locations, which has prevented land prices in those locations falling to the level that people who rent where they live desire?

Taking a longer-term perspective, if we continue down the route we are presently taking, we'll no doubt get a correction at some point, but a decade on we'll still be having the same old discussions.


Flying in from Kuala Lumpur, back on deck as a Sydneysider tomorrow.

Wednesday, 25 September 2013

RBA notes that NSW property market leads

RBA in its September Financial Stability Review:

"Over the past year or so there has been an increase in property market activity. This is not surprising 
given the reductions in interest rates. The pick-up in demand, which has been sharper in New South 
Wales and from investors more generally, has been associated with recent increases in housing prices. It is important that those purchasing property do so with realistic expectations of future dwelling price growth."

Coalition to get spending

Those who are continually hoping for a recession won't like it, of course, but the Abbott government will quite correctly spend heavily on infrastructure while the economy remains relatively slow in order to boost economic growth. 

It's what a government should do when the economy is slowing.

We've already seen that the Coalition looks set to push for mining projects to go ahead, and roads will also be a key point of focus as the government looks to get spending.

Reports The Australian:

"Protest groups that stymie major infrastructure projects will be targeted as the Coalition seeks to speed up and $11.5 billion roads program and fight off fears of an economic slowdown.

A level of public borrowing to fund infrastructure and stave off an economic slowdown is seen to make good sense.

Tony Abbott has unveiled billions in spending on roads this year.

Beware of Sydney unit oversupply in some sectors

Terry Ryder of Hotspotting and I don't always sing from the same hymn-sheet, but his article on Property Observer today is spot on.

While there is a lot of talk of the Sydney housing market taking off - and I believe that it will continue to do so through 2014 - you certainly can't just buy any property in today's expensive Sydney market and expect to see a happy outcome.

In particular, Ryder highlights the risk of an oversupply of units in the Sydney Central Business District, which is often a risk of CBDs, and particularly at this stage of a property cycle when developers are becoming more active.

Perhaps even more concerning is how the mainstream media is trying to get 'ahead of the curve' by highlighting the inner south as the new hotspot to replace the inner west.

Inner west exuberance

As I've always said, the inner west has been where the key action would be since 2008 and 2009 when I was buying there myself. 

The best suburbs of the inner west have benefited from being located close to the city without the eastern suburbs price tags, and there has never been any such risk of oversupply in the key suburbs.

However, if you try to buy in the inner west today you will likely find yourself up against a dozen other investors and become involved in a dreaded bidding frenzy. 

The inner west ship has mostly now set sail and there are better alternatives in other parts of the city, particularly to the north of the coathanger.

Inner south risks

What the mainstream media has got wrong about units in the inner south is a classic mistake - confusing high levels of dwelling approvals, new developments under construction and an increasing volume of sales with what actually makes a good investment.

What makes for a good investment is very high demand and scarcity value. 

We might see some demand in the inner south, particularly from the immigrant population, but if you are buying an apartment, scarcity value will likely be...scarce.

Just as in early 2004 we saw investors suckered into paying too much for the wrong type of property (and still seeing no gains a decade on), so it might be for many who buy in certain developments in these sectors in 2014. 

Caveat emptor.

Adelaide property boom powers on

We have the lowest interest rates in a generation and yet the Adelaide market is still failing to launch.

Source: RP Data

For what it's worth, my best guess is that there will now be the start of a modest upturn in the Adelaide.

If you were being optimistic, there might be median price gains in the 2-4% region in 2014, but what happens after that?

The economic recovery still looks to be a slow one, but cash rate futures markets imply that we might still see an interest rate rise by March 2015 - and rising rates could easily kill off any momentum before the market has even recovered its previous peaks.

Source: ASX

It could be the perfect bull trap in Adelaide, which I've consistently warned about forever and a day now.

On the other hand, as I've also long predicted, the Sydney market is heading through the roof.

SQM Research's base case is gains of 15-20% in 2014 or a staggering 20-30% if the economy recovers.

I'm not pegging myself to such a bullish prediction, but on the other hand I would not be at all surprised either if the base case proved to be on the money.

Cash flow investors will continue to point towards Adelaide. 

My position continue to be unequivocally that Sydney remains a far, far stronger market.


I'm spending a couple of days helping a friend move house.

Back in my Uni days I spent a week doing removal work for a bit of cash in hand, and found it be one of the toughest jobs I've done.

Not only because lugging stuff down spiral staircases is tough (which it is) but because the lady of the insisted on giving a potted history of every piece of her beloved antique furniture supplemented by a detailed explanation of why my life would be over if I scratched anything.

My other abiding memory of that job was that the boss insisted on drinking four pints of Guinness every night before driving his van home at great speed. If anything, those journeys home made the furniture removal seem a relative breeze.

Anyway, it's darned hard work as I've discovered today.

When I move these days I just call Bondi Removals or Two Men and a Truck.

Gents, I salute you.

BBQ of the shorters

We've heard a lot over recent times about how the world is supposedly ending and therefore we should be shorting the equities markets (or worse, that we should be going 'long on fear' by buying gold at nearly US$2,000/oz, resulting in a terrible outcome).

Unfortunately, if you've been busy shorting the markets based around the supposed doom and gloom, the odds are that, on balance, you've gotten barbecued.

No-one contests that the world has faced challenges. 

The headlines will continue to lurch as they always do from debt ceiling crises, to Eurozone unemployment, to the Cyprus contagion, to Syria, to the coming 'Septaper', back to the debt ceiling to...well, whatever comes next.

US stocks have not only doubled since bottoming out in the first half of 2009, they are up by around 150% and have continued to pay healthy dividends.

Of course, every week people will wail "but stocks might fall?" - of course the market might correct at any's obvious that can happen anytime. 

But this kind of misses the point of investing in companies.

Shares in quality profitable, dividend-paying companies, unlike gold and silver, are an income asset. Your income stream should increase over time.

If your strategy involves the market moving in your favour over the matter of a few months you are basically guessing or gambling.

Skilful traders can finish ahead if they are disciplined with their use of stops (or options), but the more I see the more I realise that most people are hopeless at sticking to trading plans.

"But what if the market falls?" - well, the simplest answer is to have a strategy to continue to acquire more quality shares over time. And, when the market is cheap, you get more for your money.

You will do much better than buyers of gold or shorters over the long haul.

Source:  Bloomberg

Home prices in US cities increase most in 7 years


The US recovery continues. And how, when it comes to its house prices!

There will be the usual talk about bubbles and "lessons not being learned" but price gains appear likely to slow up to a reasonable pace.


"Home prices in 20 U.S. cities rose in the 12 months through July by the most in more than seven years, helping boost owner equity.
The S&P/Case-Shiller index of property values in 20 cities increased 12.4 percent from July 2012, matching the median projection of 31 economists surveyed by Bloomberg and the biggest year-to-year advance since February 2006, a report from the group showed today in New York. On a month-to-month basis, price appreciation slowed.
Gains in home and stock values are contributing to increases in household wealth that are helping bolster consumer spending, the biggest part of the economy. Nonetheless, the appreciation in property values may cool over the rest of the year as mortgage rates close to a two-year high temper demand."

Tuesday, 24 September 2013

Property Observer: is Australia's plan to construct more dwellings working?

I write for Property Observer today here.

Incredible how quickly pundits have flip-flopped in precisely 15 weeks from "prices are definitely plummeting" to "we're creating a new bubble"?

Absolutely textbook. 

Monday, 23 September 2013

Sydney bound

A glorious finish to what's been a fantastic British summer this year. 

Obviously, the harvesting is now pretty much done as most UK crops are harvested from July to early September.

Anyway, I'm at last Sydney-bound after a busy day or two in London and looking forward to...well, yet another Ashes summer.

UK home approvals +49%

On a day when gold dropped again, and there is once again a looming risk for the stock market (US debt default confrontation), here's another property-related story from Bloomberg - the death of Britain's housing market was very much exaggerated:

"Homes approved for construction in the U.K. rose 49 percent in the second quarter as government assistance boosted mortgage lending and building permits became easier to get.
Approvals climbed to 37,000 from the same period a year earlier, the Home Builders Federation said in a statement today. The total for the 12 months through June reached 156,608, a 34 percent increase from the lowest year-long period, which ended in September 2011.
The gain “reflects house builders’ increasing confidence in the market and also the positive principles of the new planning system,” Stewart Baseley, executive chairman of the industry group, said in the statement. “With Help to Buy forging ahead strongly and developers looking to increase output, we need to see the increase sustained.”
U.K. house prices climbed for the seventh month in August and will probably continue to increase through the rest of the year, according to a report by Halifax, the mortgage unit of Lloyds Banking Group Plc. Home values increased 0.4 percent from the previous month to an average 170,231 pounds ($272,676), Halifax said. Prices gained 6.2 percent from a year earlier.
The Bank of England’s Funding for Lending Scheme has helped lower mortgage costs while Chancellor of the Exchequer George Osborne’s Help to Buy program allows a home purchase with a deposit of as little as 5 percent of the property’s value. U.K. lawmakers also made it easier last year for home builders to appeal when boroughs voted against approval of housing projects.
Approval rates remain substantially below the 220,000 a year needed to meet the demands of a growing U.K. population, the HBF said. “Onerous” conditions set by local authorities on planning approvals continue to delay construction, the group said.
Buyers have reserved 12,500 homes for purchase through Help to Buy in the five months since the program was introduced in March, the HBF said."

APM: 95% clearance rates in Sydney's "hottest ever" spring selling season

Australian Property Monitors reports on the weekend's auctions. Note the results in the inner west: almost every auctioned property being sold.

"The Sydney weekend home auction market continues to record extraordinary results as buyer enthusiasm for property currently seems almost limitless.

This weekend Sydney recorded another exceptional auction clearance rate above 80 percent with the 86 percent result bringing the average rate over the past month to an unparalleled 85.1 percent. Clearance rates in Sydney’s weekend auction market are now approaching the record levels reported during the great housing market boom of autumn 2002.
With just one weekend remaining in September the Sydney auction market is set to record the highest ever auction clearance rate for that month. This result will be achieved despite the last two weekends each hosting the second and third highest number of auctions for any weekend so far this year.
Unsurprisingly this weekend produced some remarkable auction results in Sydney’s suburban regions. The inner west was a standout despite high auction numbers recording a stunning clearance rate of 95 percent. Sydney’s west also produced a 95 percent clearance rate at the weekend although from lower auction numbers.
Other extraordinary regional results were the upper north shore with 91 percent, Canterbury Bankstown and Sydney’s south each recording auction clearance rates of 84 percent and the north west with an 81 percent rate.
Another weekend and another extraordinary result for Sydney’s weekend auction market in what is shaping up to be the hottest spring selling season ever recorded in Sydney."

Outer suburbs - better or worse?

There has been a lot of 'argument' over the last decade about whether investors get better results from investing in inner or outer suburbs.

Investors who seek higher yields have often said things like: "Over the last couple of years, outer suburbs have shown better growth".

It's true that if you cherry-pick data to support your pre-conceived viewpoint, then you can always torture the figures until they confess. 

Accountants do that kind of thing for a living.

But to get a true picture, go back over the long haul and the results show a clear conclusion.

Ask any experienced investor where the greatest capital growth is found - both in percentage terms and in absolute terms - and they will tell you that over the long haul it is in suburbs located reasonably close to the CBD, where demand is high, close to employment and where the most people want to live (and where there is no land available for release).

I won't reproduce the whole article, but rather link to this piece at The Conversation, which provides the data, detailed explanations and the reasoning - it's well worth a read.

Note that we are absolutely not talking about only long-term capital growth here since the early 1980s - although capital growth has easily been stronger close to the cities - it is also crystal clear that since 2008, the capital growth has been all about suburbs in close proximity to the CBD too.

The charts which prove it are below.

"The biggest cause of increased wealth has been the restructuring of the housing market with increasing demand for inner and middle ring suburbs generating higher prices, a process observed in all Australian capital cities.

Once relatively egalitarian across Australian cities, our property markets have become polarised. The most affordable homes for lower-moderate income home buyers are now confined to the outer suburbs and will only increase in value at slower rates compared to housing in the more expensive inner and middle suburbs — effectively trapping poorer households on the edges of our cities."
Capital growth across Melbourne southern corridor suburbs, for example:

And the city's SE corridor:

The northern corridor of Melbourne showed similar results.

As did the western corridor:

The article presents a raft of other research including looking at, for example, suburbs with a lower median price as compared to the city's median - and the median prices with the greatest gains in this instance were in former industrial suburbs close to the CBD.

In the article provides chart after chart which leads to one inescapable conclusion:

"The research suggests that if lower-moderate income buyers purchase in these outer urban and growth zones they will build housing wealth over time, but at a much slower rate than buyers in more expensive suburbs. This slower rate of capital gains in the growth zones can be seen when comparing their resale prices with inner zone homes.

A startling 36% of growth zone homes sold four to five years after purchase were sold at a loss, while only 9% of inner zone homes were sold at a loss; after six to seven years, 8% of growth zone homes sold at a loss compared with 6% of inner, showing that capital gains growth had caught up with the transactions costs (such as stamp duty and agent fees) involved in buying and selling a property.

The lower rate of capital gain growth means lower-moderate income home buyers risk making a loss if they have to sell early for reasons not entirely of their choosing, such as interest rate increases, loss of job, loss of second income, a need to relocate for employment, or divorce. These households are also less likely to be able to afford to wait to sell until capital gains growth has negated transactions costs.
As home prices are rising faster in middle and inner zones than in outer and growth zones, it is increasingly difficult for lower-moderate income buyers to improve their housing wealth by trading up to middle and inner areas even if they have accumulated substantial equity in their homes. This has implications for households who need greater access to public transport, employment, health care and educational opportunities than are available in the outer and growth zones."
Experienced investors have known this for years, of course. So why do people elect to invest in outer suburbs? Firstly because it's cheaper and therefore easier to buy. And secondly because the 'headline' rental yields are higher. Be wary, however, that cheaper property can variously come with different risks of rental default, vacancies and properties being vandalised - and this can erode the seemingly attractive yield 'on the sticker'.

Over the longer term, rents also tend to grow more substantially in landlocked suburbs where demand in the strongest, so there is no question where the best locations are to invest for the longer term. For capital growth and stronger returns, look to the land which is in the greatest demand, not to cheap suburbs on the outer.

China manufacturing - flash PMI hits a 6 month high

Further signs that growth in China may be stabilising and that growth over the next year may be in the 7-8% range.


"Chinese factory output expanded for a second month in September. A preliminary HSBC Holdings Plc and Markit Economics’ purchasing managers index released today rose to 51.2 after jumping the most since 2010 to 50.1 in August. A pickup in China’s growth may boost Premier Li Keqiang’s odds of meeting this year’s 7.5 percent expansion goal."

Second time around...

I chat to Commonwealth Bank about how buying property the 'second time around' might differ from the first.

Read the article on Commbank's Living Space page here.

A global shift in real estate markets?

I write for Property Update today on how the world's residential property markets are changing.

You can read the article here.

Sunday, 22 September 2013

Time on market

Sydney properties selling very, very fast.

Source: RP Data

A low interest rate era?

A low interest rate environment

On Thursday 5 March 2009, the Bank of England announced a cut in the official bank rate from 1.00% to 0.50%. This followed a rapid series of cuts in response to the impacts of the sub-prime fallout from 5.75% in July 2007.

The Bank of England has not cut interest rates any further since that time for 0.50% is effectively the 'zero bound' in the UK. We are heading towards five years later, so is there a chance of rates rising soon? Gradually people are beginning to think so as the economy improves, although Governor Carney recently announced guidance suggesting that rates could be stuck at 0.50% for three more years.

Down under, Aussie government bond yields and spreads have ticked up in recent months, suggesting that the bottom of tour own interest rate cycle may be closing in on us some time in the next year.

Spread between Australian 10-year bond Yield and the Cash Rate graph

Elsewhere, government bond yields have ticked up, although US yields received a blow after the 'no taper' announcement from the Federal Reserve this week.

10-year Government Bond Yields graph

The UK is by no means unique in its application of a zero interest rate policy (ZIRP). In the US interest rates have been stuck at rock bottom since late 2008. Even in Australia, where we have not experienced a recession in more than 20 years, the cash rate has fallen sharply to only 2.50%.

Australian Cash Rate graph

In fact, take a look at other advanced economies - very low interest rate policies since the onset of the global financial crisis:

Policy Interest Rates – Advanced Economies graph

Inflation is a risk in some emerging markets and policy interest rates have tended to remain some way higher:

Policy Interest Rates – Emerging Markets Asia graph

A new era?

This week the Federal Reserve in the US threw markets a curve-ball by announcing that it would not yet be tapering back its monetary stimulus, leading commentators to observe that the US economy is "addicted to stimulus".

There are some who now believe that rather than developed countries raising and lowering interest rates to stimulate or cool their respective economies, central banks will instead switch quantitative easing (QE) - the 'printing' of money' - on and off, in order to achieve the same outcomes.

Will this prove true? Well, in the short-term this might well be the case. But over the long term, history tells us that the direction and behaviour of interest rates are by no means predictable

During the Great Depression and after World War II the world saw periods where interest rates fell low and many felt that developed economies might never escape from their downward spiral and low rates. Yet by the 1980s inflation was raging and interest rates were instead spiralling upwards to 20% in the US, 15% in Australia and 15% in the UK.

What we can do about it?

In short, the defence against excessive monetary stimulus is to hold income-producing assets which represent a good inflation hedge - shares and well-located property. There is a lot of focus on whether share markets are 'higher' or 'lower' than where they were 5 years ago. Some markets, such as the S&P 500 are at 'record highs'; the ASX 200 (XJO) index chart in Australia sits below where it was before the financial crisis:

Source: ASX

What this overlooks is that equities are an income asset and therefore when tax-favoured dividends are included in returns, Aussie shares are also at all time highs and continue to represent a proven inflation-busting asset class.

ScreenHunter_65 Sep. 20 10.16

If there is a risk of ongoing monetary stimulus, rock-bottom interest rates continuing and inflation hitting the economy, this simply makes it all the more important to have a better plan than just having cash in a bank account.

Stacks of people were suggesting buying gold as an inflation hedge a year ago and they have ended up with an awful lot of egg on their faces as prices plummeted.

Source: kitco

The trouble with gold is that it costs money to insure and store and never pays you an income. Yet if prices collapsed yet further it might represent a decent speculative long-term bet at those even lower prices. Respected fund managers have suggested that holding 2% of a portfolio in gold can be useful should prices jump. But would I suggest building a portfolio around gold?

Saturday, 21 September 2013

Has the RBA's plan to stimulate dwelling construction "failed"?

Time and again we're hearing people say that the Reserve Bank's plan to stimulate dwelling construction has "failed", and that due to high land prices, very little residential construction will take place. These are often the same voices who have consistently called the end of the world, and they've largely been wrong to date.

Anyway, more importantly, is it actually true?

The Australian Bureau of Statistics (ABS) showed that in the year to June 2013, residential construction work done increased by a seasonally adjusted 4.3%.

Source: ABS

For sure, this is not a major increase, but nevertheless it is an increase. Moreover, it makes no sense to judge the results to date without considering the prospects for the future.

The current interest rate easing cycle started on my birthday - November 1 in 2011 - so the downwards trend in interest rates is not even two years old yet. The most recent interest rate cut only took place on 6 August 2013, so how can you write off resi construction when rates can take a couple of years to impact the economy in full? 

It's worth remembering that as recently as three months ago people were saying that dwelling prices were falling, yet just a matter of weeks later, they've now reverted to talking about overheating markets and price bubbles.

Again, the key point is that interest rate cuts do not instantaneously impact the economy and markets - monetary policy takes time to work. This is particularly so with regards to construction - projects can take a good deal of time to be approved and financed, they do not simply appear overnight.

If construction levels haven't picked up by August 2015, then I would have to concede that the RBA's plan may be doomed to failure, but it's too early to write it off given that rates have still been falling. 

This week Commsec undertook an analysis of the ABS quarterly employment report for the 3 months to August 2013. Unfortunately, the manufacturing and retail sectors remain weak, yet take a look at the incredible boom in construction jobs - up by 55,800 workers in 3 months - that's the greatest increase in over a decade of data.

I don't know about you, but that rather looks to me as though residential construction is likely to take off (although it's true that ABS labour force numbers could sometimes be accused of being 'volatile').

Reported Sydney Morning Herald:

"Interestingly the construction sector was the biggest driver of jobs growth in the three months to August, creating almost 56,000 jobs. The strength in housing activity seems to be translating through to additional demand for construction workers. The fundamentals for housing remains strong."

Job losses, and gains

The ABS housing finance data for dwelling construction provides another clue, ticking up for eight consecutive months:

"The number of finance commitments for the construction of dwellings for owner occupation (trend) rose 0.2% in July 2013, following a rise of 0.4% in June 2013. This is the eighth consecutive rise since December 2012. "

And the ABS residential building approvals data shows very large y/y seasonally adjusted increases:

Source: ABS

The building approvals trend is clearly up for both residential units...

Graph: Dwelling units approved

Source: ABS

And for privates sector houses...

Graph: Private sector houses

Source: ABS

The Reserve Bank felt that some upturn in dwelling prices was a necessary precursor to dwelling construction.

Source: RP Data

We've now had a little over a year of dwelling price increases pretty much everywhere except for Adelaide and perhaps Tasmania. It makes sense that construction activity would typically now follow. Those who say that the RBA's plan has "failed" therefore, have concluded prematurely.

Capital city property markets strengthening

It's sometimes said that auction clearance rates of above 70% indicate a 'strong' market.

Australian Property Monitors reported that Sydney recorded another scorching clearance rate of 86% on Saturday.

In Melbourne, a city which has already witnessed a house price boom in recent years, the 80% barrier was also breached according to APM.

The REIV reported a 79% clearance rate for Melbourne.

It therefore appears that property price gains will continue, largely due to low interest rates and investors anticipating capital gains.

Source: RP Data

RP Data's index shows that property prices have recovered on a national basis, largely due to strong gains recorded in Sydney, Perth and Melbourne.

In Adelaide, prices have softened in the past 12 months despite record low interest rates.

Friday, 20 September 2013

Predictable Irrationality: Part 1 - Relativity

In his 2008 book Predictably Irrational, Dan Ariely presented a fairly compelling case which argued that although humans are irrational beings, our decision making-processes tend to be systematic and therefore could to some extent be predictable.

Ariely identified a number of traits and areas of our lives in which he argues that we are predictably irrational, and explains a number of familiar behavioural traits, including why we overvalue what we have (anyone who has ever gone through the process of selling a home may be familiar with this trait!) and why dealing in cash can make us more honest.


One key area that we would do well to be aware of and better understand is how the brain works with relation to relativity and decision-making. Of course, that we tend to compare choices and alternatives is not a ground-breaking concept in itself, but we need to understand that our decision-making can be wildly skewed by the range of alternatives on offer.

It's actually the way our brains our wired: we compare one job with another, we compare last year's holiday with this year's holiday, we compare one brand of beer with its competitor, and so on. We rarely have a keen grasp of absolute value or quality, but once we have the context of something to make a comparison with, we feel more able to make decisions. 

For example, I read somewhere once (no, seriously, I've never done it!) that speed-daters raise or lower their expectations of a potential partner's looks depending upon the 'quality' of the field.

Ariely puts is like this: "Most people don't know what they want unless they see it in context."


Take the example of business magazines and newspapers: such publications are shifting towards digital media anticipating growing demand for that format. They might offer subscriptions in the following manner:

-Option 1 - Website subscription $200pa
-Option 2 - Print subscription $300pa
-Option 3 - Print and website combined subscription $300pa

Offers like this are not framed in such a manner accidentally. The publishers fully expect a handful of penny-wise buyers to go for Option 1, none at all to choose the seemingly unattractive Option 2, and the overwhelming majority to select the 'bargain' of Option 3. 

And here's the key point, says Ariely - we don't choose things in absolute terms and often have little idea of what an investment or consumer goods may be worth. Instead we function by comparing them with readily available alternatives in order to make decisions. Buyers of televisions, for example, often have little idea of what a TV should be worth, so they go for the 'reasonable' middle option (I often seem to do this kind of thing).

The absolute masters of framing deals are vehicle financing divisions in the large automobile groups. Famously car-manufacturing giants in the US frequently made more from financing car deals than they did from their core business sale of vehicles; in effect they became lenders who happened to manufacture vehicles. Car financiers understand better than perhaps anyone else how to frame a deal or an offer so that the buyer focuses on the affordability of the monthly cash-flow rather than the extortionate total repayment amount.


I could drone on with a plethora of other examples, but the key point for investors to understand is how our bias towards relativity impacts our decision-making. 

Clearly in the share markets we are constantly weighing up whether one stock represents better value than another - we only have so much available capital, so we have to make a choice. But should we rather be sometimes focussing on whether the market as a whole offers value? If we are comparing a stock with a PE ratio of 25 as compared to one trading at 30 times earnings, we might think it offers comparatively 'better value'...but still it might represent a poor investment.

Skilled car salesmen know in which order to show likely buyers their possible selections in order to get them 'over the line' to purchase, so do you think a skilled real estate agent might think the same way? I would say so. Buyers in today's property markets where auction clearance rates are high and prices are moving upwards need to be wary of comparing two properties and deeming one to be better value than another...and thus necessarily a 'good buy'.

The reality is that skilled property investors and professional buyers agents usually have a list of key criteria which they look for in an ideal investment, but often not every box can be ticked due to budget constraints. Thus you might be left with a choice between properties of an equivalent asking price where one has, say, a lift and slightly higher strata fees, but another is lacking in natural light and is south-facing. You might have to make a compromise on one or two of your desirable characteristics, but it remains vital not to overpay in a hot market.

It is important to be mindful of how you frame these questions and also consider whether there are some characteristics of properties which are deal-breakers - such as very noisy streets or being located too far from transport or employment hubs, or entertainment. 

More than anything else, do not be deceived into thinking that just because one property appears to be better than another that it must therefore be a sound selection, for this is by no means necessarily true. This is especially the case in the major capitals where the weighting of auction sales is higher than elsewhere - be very wary about becoming involved in frenzied bidding wars.

A final thought

The way we use relativity to make decisions can even impact our emotions. Can we decide to feel sad because we have less than someone else? Absolutely we can, and people exactly that all the time - envy and jealousy spring directly from relativity and from comparing ourselves with the lot of our neighbours or peers.

Australians would do well to consider that rather than being unfortunate, as compared to most of the world, even the 'bushies and the battlers' are often among the most fortunate. We should all try to move away from the idea that we never have enough and learn the character traits of some of the world's poorer citizens where people are often appear more content with their lives despite 'having less'.

A couple of decades back, there was a shift in disclosure requirements in company Annual Reports (sorry, I'm an accountant...can't help it) which required listed corporates to include in Remuneration Reports a large amount of previously unrequired detail relating to the remuneration and benefits of CEOs. So the theory went, by making all of this information public, companies would no longer be able to abuse shareholder trust by paying their CEOs excessive or obscene packages. 

In theory then, CEO remuneration should have fallen, right? Wrong. Of course, what actually happened is that CEOs began to compare enviously their pay packets with other better paid CEOs and remuneration levels soared as they competed for ever-higher pay deals. A Porsche was never going to be enough when the next guy was driving a Ferrari.

Relativity can be useful in decision-making when it used to our advantage, but it can also be destructive unless we can learn to break the cycle of always wanting more.

I'll sign off today with a famous quote from Albert Einstein who developed the theory of relativity in physics: "When you are courting a nice girl an hour seems like a second. When you sit on a red-hot cinder a second seems like an hour. That's relativity."