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).

5 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 finest property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete 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'.

"The level of detail in Pete's work is superlative across all of Australia's housing markets" - Grant Williams, co-founder RealVision - where world class experts share their thoughts on economics & finance - & author of Things That Make You Go Hmmm...one of the world's most popular & widely-read financial publications.

"Wargent is a bald-faced realty foghorn" - David Llewellyn-Smith, MacroBusiness.

Wednesday, 26 February 2014

SCC Demolition

Over the next 12 weeks, the Sydney Convention Centre will be demolished, to be replaced by...the ICC.

So, farewell, by May 2014, the SCC will just be one huge empty space. Oh wait...





Saturday, 22 February 2014

A glimpse into Sydney's future...Central Park

I thought today I'd take a wander across the road from my joint to see what's going down at the new Living Mall at Central Park Sydney.

Central Park is a $2 billion, 6 hectare mixed-use urban village, and new development will bring a couple of thousand new apartments to Chippendale when all is completed. 

Work began way back in early 2010, and the first three residential developments to come online are: One Central Park, Park Lane and The Mark.

For the purposes of comparison (if, like me, you don't know what a hectare actually is) Barangaroo is a 22 hectare site, of which around 6 hectares will be parkland.

It all seems a bit spooky at the moment, since much of the new residential development remains under construction. 

Many of the mall shops are now open - presumably paying peppercorn or introductory rents - but there are very few actual customers.

Chippendale is currently a popular student area, but the proximity to the city is likely to attract professional types as well over time.

A wander through the food court showed the choices on offer to be: Chinese, Indonesian, Thai, Indian, Japanese, Taiwanese...or more Indonesian or more Chinese (I opted for a Tandoori lunch, of course). 

You could easily be forgiven for thinking you were in a shopping centre in Singapore or Hong Kong, which, unfortunately for someone with extremely itchy feet, only gets me daydreaming about living in Asia again. 

This available culinary choices reflect the changing demographic of Sydney, as immigration policy increasingly now reflect where Australia is located in the world. 

The Central Park area is a classic example of a brownfield site (formerly a brewery) being regenerated for residential use.

Based on what I've seen, I like it, and it's definitely a major improvement for the formerly shabby Broadway strip.

Over the next few years, property market commentary is quite likely to shift to discussing "oversupply" - just as is now happening in Brisbane, Melbourne and Perth CBD areas.

It's worth noting, however, that any forthcoming oversupply is most likely to be localised, such as in the City itself and in areas where massive redevelopment will occur (for example, in the inner south). 










Sunday, 16 February 2014

Darling Harbour coming to life!

Darling Harbour redevelopment

In my first book Get a Financial Grip, I noted the reasons why many years ago I bought harbourside property at Darling Harbour. 

Sure, it wasn't exactly cheap when I bought there, but my reasoning was clear enough: at more than 20 years old now, the harbour has long been set for a massive redevelopment, and prices have responded accordingly over the last 4-5 years.

Not only is there a tremendous change afoot with building of a new city-side suburb at Barangaroo on the old ferry terminal site, as I noted here, and not only has the top side of Sydney's CBD undergone a huge reawakening...there is simply a vast amount of redevelopment set to take place at Darling Harbour itself.

What's in the pipeline

Amongst other changes in the area - including a major facelift down at the fish markets - Darling Harbour itself will benefit from world-class exhibition, entertainment and convention facilities at the new International Convention Centre, an Entertainment Theatre, a new 650 room hotel, a revitalised public space and new urban neighbourhood.

The work is underway now, and when it is finished by 2016, Darling Harbour and Barangaroo will join Sydney Harbour as putting Sydney right at the forefront of world-class global locations to visit.

Darling Harbour is already home to the National Australian Maritime Museum, IMAX, Darling Park, the Darling Quarter, Harbourside shopping centre and Merlin Entertainment (Sea Life Sydney Aquarium, Wild Life Sydney, Madame Tussauds).

Darling Harbour is also well-recognised for its high-quality family events - including Santa Fest, New Year's Eve, Australia Day, Hoopla, Fiesta and the many cultural festivals held throughout the year.

Today, by the way, is the Serbian Festival - I just went for a snoop around earlier. 

How it will all look

I've copied a few photos below from the Darling Harbour Live website. 

I'd normally apologise for lifting their photos, but what the heck, we all paid for this as taxpayers anyway.

In terms of payback? Well, Darling Harbour already attracts more than 25 million visitors per annum even before the redevelopment.

To put that number in perspective that's more than the entire population of Australia, so it's taxpayer money well spent.

The only downside is that we're currently in the middle of 30 consecutive nights of fireworks as part of the "month of love"...or something like that. 

There are fireworks every weekend at Darling Harbour even outside of the 'month of love - feels like we're living through the London Blitz sometimes. 











Source: Darling Harbour Live

Wednesday, 5 February 2014

What does the prisoner's dilemma have to do with housing markets?

Prisoner's dilemma

Some time ago, in a mildly humorous post I looked at the prisoner's dilemma theory, which notes that fallible humans, in trying to second guess the actions of others, do not always act rationally or in our own best interests. 

It's sometimes also noted how 'game theory' has a part to play in auction market tactics, for willing bidders must anticipate and then react to the actions of other bidders. Today, it's a slightly different topic I'd like to look at, which has some crossover into the field of social studies.

Improving neighbourhoods

It makes sense that where homeowners or landlords make improvements to their homes or dwellings, then the perception or tone of the suburb is generally lifted and so too the values of their homes. 

However, owners who act individually may or may not have the incentive to make improvements as there is a lack of certainty as to whether others in the neighbourhood will follow suit.

If all the homeowners in a street could make a co-ordinated decision to improve their houses, potentially they could all stand to benefit. That could be unlikely to happen, though. Here's a quote from a classic housing economics textbook:

"It is possible that a landlord or owner will be deterred from improving his own property because of the fear that his returns will be jeopardized by the external costs imposed on his property by unimproved adjoining ones. 

Because each landlord is faced with uncertainty about his neighbour's activities, no one will be willing to risk in investing in maintenance and repair work. However, if they all did invest, both they and society in general would probably be better off."

Source: R. Robinson (1979): Housing Economics and Public Policy

OK, we should strive not to get too bogged down in economic theory, but in my experience, this does ring true. 

How many times do you visit a block of units where the interiors are beautifully presented, yet the common areas are in worse nick than what a student would typically find acceptable?

In terms of a neighbourhood, it's possible that, say, a terraced row of half a dozen houses might be an example whereby the owners could feasibly come together to make an informed collective decision to undertake improvements or repair work. 

But when you're talking about a large number of houses in a neighbourhood, such an outcome will generally not occur, and instead we will see "atomistic behaviour" (individuals making their own decisions and acting alone) and inefficient outcomes.

Externalities

Such matters may have a light-hearted enough angle when applied to million dollar units with dodgy carpets in the stairwells. 

However, when applied to lower demographic neighbourhoods where large-scale activity is needed to improve the poor quality of available housing (i.e. widespread demolition, re-design of housing estate plans, changes to infrastructure, new road layouts etc) then the problem becomes of a more serious nature, and one which is almost certainly beyond the scope of owners co-operating to resolve to make changes.

External factors which play a part in the value of dwellings, are known, logically enough, as 'externalities'. A house in your village street that has been painted an odd shade of lime green might be a slightly annoying but trivial enough matter, but naturally there are far more serious externalities: neighbourhood crime, health, available schooling and education. In such matters, there is commonly a need for positive action at the state or council level.

There appear to be echoes here of the carbon emissions problem and the pollution of our planet. It's all very well ignoring the problem and letting our children or grandchildren deal with the fall-out. But if collectively we all resolve to contribute to improving our attitude to the environment, then the problem can begin to be tackled effectively.

No value judgements

I have absolutely no idea what my conclusion to this post is going to be yet, so let's see how we go here. As mentioned, I'm crossing over into social studies, and perhaps town planning a little, which is all well outside my field of expertise. I'd also just like to note that when discussing lower demographic neighbourhoods and social problems, I make no value judgements.

I was sad to see that in the suburb where I spent my formative years, practically the entire neighbourhood has been demolished - blown up and razed to the ground. 

More than a dozen giant tower blocks which formed the nucleus of the suburb eventually had to be exploded, since they had become overrun with drug abuse, youth gangs and crime. Locally, there was even a well-known burglar known as 'Spiderman' who frequently climbed across to the balconies to clear out the upper floors of the towers. The suburb is barely recognisable to me today.

Two tower blocks demolished in Norfolk Park, Sheffield, to kae way for a major regeneration programme. Photograph: Trevor Smith/ PA

Photo: Guardian

The British high rise experiment had a number of such failures. The Jam's working class hero Paul Weller unleashed a brutal summary in his song "The Planner's Dream Goes Wrong", blaming public schoolboys sitting at computers and planning for box-like social housing, while neglecting to consider the human element. 

Sure, the final outcome in many of Sheffield's high rise developments was seen to be an abject failure. Yet, if you watch social history archive videos of the early residents of the flats, they were often seen to be delighted at having their own bathroom, hot running water, access to new schools and facilities. 

New developments today

Again, well beyond the area of my own expertise here but with somewhere close to a fifth of Brits living in social housing, in learning from the mistakes of yesterday, approved new housing developments today in the UK and elsewhere may require that a mixture of housing is provided, in order to prevent repeating the error of isolating the less fortunate. 

Recently, I looked at the sorry state of affairs in parts of the once-thriving coal mining town of Stoke-on-Trent in England's Midlands. Houses on some estates are selling for a headline figure of one British pound sterling and the local council is practically imploring buyers to take on loans to renovate the dilapidated housing. It's a pretty sorry state of affairs in this part of the Potteries, and you can only hope that the scheme is a success.

Today's trends in Australia

There are some implications for our own housing policies today. I've noted before that independent studies have found a trend towards fringe housing estates in our capitals experiencing poor or even negative capital growth, while the suburbs closer to the capital city CBDs consistently appeciate in value faster, leading to 'cones of wealth' around the city centre hub.

The long-term implication of this may be that younger buyers who are forced to or elect to buy in fringe estates become trapped on that rung of the housing ladder as the gap between prices on the fringe and closer to the cities widens to a gulf.

As my buddy Catherine Cashmore has elucidated in previous articles, this concerning trend has led even first homebuyers to require something of an investor mindset when making their first tentative steps on to what they used to call 'the housing escalator'.

Gentrification

I don't have all the solutions (or even perhaps any of them), but one thing I have noted over the years is that gentrifying suburbs close to the city can often represent a better bet. Take the example of Redfern in Sydney. 

When I first came to Australia in the 1990s, Sydneysiders that I knew back then  in The Shire discussed the suburb in hushed tones: "It's a terrible place. You'll be harassed for money" they said. And, in fact, in my own limited experience of visiting Redfern, I was. 

Yet look at the suburb today, where terraced houses sell for well over $1 million dollars. Ultimately, there is so much upwards pressure on land located just 3km to the south of one of the world's most desirable and thriving cities, that land values (and thus house prices) are practically forced to follow. Surrounding suburbs such as Surry Hills and Alexandria have become trendy and expensive. Accordingly, Redfern's land values continue to be dragged north.

I've seen very similar trends unfolding in London. Suburbs such as Whitechapel and Shoreditch even in my memory were seen as middle class no-go zones for a lot of professional types, who tended to associate these East End areas with the Kray Twins, immigration and crime. Yet, again, look at these areas today. Popular, trendy and extremely handily located for the City.

Even one of my many brothers lived in what was essentially a Bangladeshi/Somalian/African estate in Bethnal Green - well over 40% of the entire suburb is of Bangladeshi descent and the street signs reflect that fact - and why not? 

Increasingly, younger people would rather experience an easy walk (or short public transport journey) to the city than undertake a gruesome hour-long train ride from suburbia with Tube journey to follow - I did that for 3 years, and can confirm that it was crap. This is particularly the case I suspect, if like my brother, you have a penchant for chain-smoking Silk Cuts while making your leisurely way into town.

Shifting trends

Although I've studied some economic and social history in my time, I'm no town planner and so can only note the challenges we face rather than provide viable solutions. It does appear to me that land values in some locations are destined for an altogether different trajectory than others. 

In particular, my experience has shown there to be a risk of an adverse outcome for landowners in towns that are heavily reliant on a few industries and lack diversity of employment, as well as remotely located regional centres.

There also appears to be an increasing global trend towards the more widespread use of residential real estate in capital cities as a means for storing or building wealth. Britain's housing market is now a verified basket case. It's been fine, of course, for those of us fortunate enough to own properties in and around London, but what of the parts of the other half of the country where prices have often collapsed and remain a third lower than they were in 2007? 

Gosh, have I really just written all that? Got to nash...meeting in Surry Hills at 10.30. I'll wander over that way, of course, but no Silk Cuts for me. For all my bad habits, that's one I'm glad to have left behind. 

Tuesday, 4 February 2014

The Population Clock...and the Population Pyramid

To 23 million and beyond...

Can you remember back in April when the press reported that the Aussie population would top 23 million? 

It was something of a landmark when you consider that when I was born there were only around 14 million heads in Australia (and, although I feel it sometimes, I'm not that old!).

The Population Clock over at the Australian Bureau of Statistics continues to keep track of the estimated population in perpetuity. The ongoing estimates are based on the following parameters:
  • one birth every 1 minute and 41 seconds,
  • one death every 3 minutes and 32 seconds ,
  • a net gain of one international migration every 2 minutes and 10 seconds, leading to
  • an overall total population increase of one person every 1 minute and 18 seconds 
You can see what the estimated population is today here.


A pretty rapid-fire rate of growth there, with the number around closing in on 400,000 additional people, and we're not even close to a year on yet.

That's all fairly well known about.

But, what of the demographic shifts? Do we have an ageing population in Australia?

Well, here is what the Australian population looks like today, expressed in the favoured format of a 'population pyramid':


Source: ABS

Pretty interesting stuff. The demographics of Australia are not quite what popular consensus might have you believe. There are around 11.7 million males and 11.6 million females in Australia today (I often hear friends say that there is a shortage of good men around, and right there is just a little bit of evidence...).

Sure, we have a fair number of 'Baby Boomers' (ages approximately 50-70) who are heading towards or into their retirement years. 

But look at what's in the pipeline in my own age group  - the so-called Gen X'ers - which broadly speaking covers 35-50 years olds. Not much of a drop off at all. In fact, far from it - there are millions of us.

And the numbers don't really tail off for the Millennials or Generation Y age group either.

The Population Pyramid of the future

Now here's the really cool bit. The ABS population pyramid allows you to play around with the year and see what our population will most likely look like in the future. 

Below, I've rolled the data out to 2061, to present a likely picture of Australia's demographics in that year.


Source: ABS

Population to almost DOUBLE

The most obvious thing which strikes you from this bulbous graphic is that the population will have swollen to a massively greater size than exists here today. 

There will be an estimated 20,688,000 males and 20,826,000 females, making a total of more than 41,500,000 persons.

That's one heck of an population boom from today's 23.3 million, an increase of close to 80%.

Not top heavy

The other noticeable point is that due to Australia's immigration policy, our demographics will be far more favourable than those seen in many other developed countries.

Note how even as the decades roll on, the Aussie population will not become massively top heavy with retirees as is the fear in countries located elsewhere.

Instead, there will be a constant flow of new, young taxpayers coming through the pipeline, particularly as our immigration policies are typically skewed towards skilled migrants who are under 30 years of age.

Hard to imagine

It's not at all easy to picture how the Australia of tomorrow will look, and indeed, even those forecasting the population only have at best an approximate idea.

Graph: PROJECTED POPULATION, Australia

Source: ABS

At present, around 70% of the population growth takes in place in our five main cities. 

Lob in two other capitals in Darwin and Canberra, together with Newcastle, Cairns, the Gold Coast, Townsville and the Sunshine Coast and the number covers off some 80% of the total growth in population. 

In other words, regional centres only account for a relatively small part of the growth, and the wider availability of land for release and development should keep dwelling prices comfortably affordable in the majority of those locations.

The ABS forecasts that the populations of the respective major capital cities could look something like this by 2056:

Sydney - 6.5 - 7.6 million
Melbourne - 6.1 - 8.0 million
Brisbane - 3.2 - 5.0 million
Perth - 2.8 - 4.2 million
Adelaide - 1.6 - 1.8 million

With the exception of Adelaide, these are vast numbers.

Demographic shifts

In cities such as Sydney, given the fact that the city is essentially unable to spread further due to geographical constraints (Pacific Ocean, Blue Mountains, National Parks), this means that we will be seeing a lot more apartment blocks. I mean, a lot more.

I'm not sure about you, but I haven't popped my clogs by then, I certainly don't plan on driving to any place of work (In fact, truth be told, I already don't - I walk to my office at Martin Place). 

The traffic on our roads already beggars belief at times, so imagine what another 2 million or 3 million people will do to Sydney's strained road network. I'm certain that the three other large cities of Melbourne, Brisbane and Perth will face similar challenges.

There are certain trends which you don't really need me or anyone else to tell you about, because you can see them with your own eyes.

Increasingly, people of my age group and the others coming through the pipeline of slightly younger years, are ideally choosing to live:

-close to the centre of capital cities
-near to key transport hubs and entertainment
-in medium-density dwellings
-in desirable suburbs to the extent that is possible

Opportunity

And if that's not a long-term opportunity for property investors, I don't know what is. 

Steer away from the over-priced and oversupplied high-rise builds and towards boutique developments in the suburbs where height restrictions and NIMBYism have effectively capped the supply and you won't got too far wrong over the long haul. 

If you can buy and continue to own the type of property with outstanding owner-occupier appeal, you will be a long-term winner from the above demographic shifts.

Sunday, 2 February 2014

The three (or four) phases of property market cycles

3 property market phases

Traditionally, it was said that property markets go through three distinct phases: slump, recovery and boom...and then back we trot to step one. This is sometimes expressed on a clock face with underlying economic conditions over-layed on each hour of the clock.

Traditionally oversimplified accounts can tell us what to look for at each stage of the cycle in terms of population growth, vacancy rates, movement in rents, employment levels, GDP growth, levels of dwelling construction, time on market, number of listings and sales, what the popular media is saying, the number of 'seminars'...and so on.

Property investment supremo Michael Yardney has been around and invested through a few more market cycles than I have, and he likes to include a fourth phase in the cycle: the stabilisation phase.


In the modern era, I would add to the list of influencing factors: the availability of finance. Despite regulatory pressures and a widespread belief that the influence of the internet would put an end to the cyclical nature of markets, it still appears to be the case that in a real estate slump mortgage finance becomes devilishly difficult to source, while in a boom lenders are practically falling over each other in a bid to secure new business.  

The 'ending of market cycles' is hardly a new concept. Homer Hoyt, who initially identified the property cycle and its respective drivers when analysing Chicago's land values in the 1930s, even then concluded by pondering whether a new paradigm of 'no more cycles' might be upon us (and we've had more than a few cycles since that time). This suggests that emotional factors are key in perpetuating the cyclical nature of markets.

3 drivers of cycles

In fact, the drivers of a property cycle might be categorised under three broader headings: demographics, financials and emotional drivers. 

Of course, it's never quite as simple as implied, and in a country such as Australia, it is commonly the case that different cities can be at different stages of their property cycle coterminously. One thing which experienced property heads know is that during each recovery phase there will be a series of articles which detail all of the reasons why this time it will be different and the recovery fail to materialise. 

We saw this several years ago, when it was frequently noted that weak credit growth could possibly not help the market to recover and high land prices would halt any potential recovery in its tracks.

The same thing then happens in the boom phase, but this time it's the property investor and estate agent set which is finding the reasons why this time its different and boom conditions can be justified for longer than has ever been the case before. 

When property markets do eventually recover - however long that may take (in Britain's case, for example, well over half a decade) - the tone tends to shift towards allocating blame for rising prices. Usually housing policy, monetary policy or an influx of foreigners get a Guernsey. But, as noted, a key factor is also likely to be the willingness or otherwise of banks and non-banks to lend capital. 

There is normally a level of truth is each of these points, yet when prices are slumping or falling these same policies seem to be working just fine. This too suggests that one of the biggest factors in a property market cycle is emotional, and put simply, the herd mentality. That is, the fear not to get burned when prices are falling and the desperation not to miss out when they are rising.

I covered the major reasons why property markets cycle in this post here

Property markets in recovery phase

A number of our property markets appear to be arriving at or are already in their recovery phase, perhaps most notably Brisbane and Adelaide. A traditional account of what we should see in a recovering property market would include:

-net migration and population growing
-falling or low vacancy rates
-rents increasing
-dwelling construction gradually beginning to pick up
-rising employment

Do Brisbane and Adelaide fit the bill? Hmm, mostly. But rental increases have actually been fairly weak in those two cities, and weaker than those seen in Sydney and Melbourne. As for jobs growth? Well, yes in Brisbane, but no in Adelaide.

Clearly, these and a thousand other examples underscore that property markets are plenty more complex than tends to be made out. 

This, combined with the high level of transaction costs involved in property acquisition and disposal, is why I suggest that a property purchase needs to be made with a long time horizon in mind. If you hold a property through a couple or more market cycles, then the fact that consistently timing markets precisely is not possible tends to be overridden by the long-term upward trend in household income growth, particularly if you buy well.

Property markets into the boom phase

The one Australian capital city market which is now widely said to be in its boom phase is Sydney, with Melbourne and Perth hot on the harbour city's heels. With a market in the boom phase, one might typically expect to see:

-net migration/population growth approaching its peak
-dwelling construction heading to the moon
-vacancy rates falling to very low or tight levels
-time on the market very low
-rents reaching a peak
-employment markets firing
-a low number of listings
-property values rising strongly and thus affordability falling
-a virtual epidemic of property seminars
-an increase in the number of persons per household...

...and a bunch of other stuff.

Sydney ticks most of these boxes, with rents rising by around 4% last year, stock selling very quickly and the lowest level of stock on market that we have seen in years. 

As for construction, well, heck yes! Take a look around the city and its suburbs and there are cranes seemingly everywhere from Barangaroo to Broadway, and from Glebe to Green Square. Where I work at Martin Place, 2013 was the year of the jack hammer. This will be reflected in strong residential construction indices in 2014.

Supply coming online

I note though, that the concept of 'oversupply' in a very large capital city is a markedly different beast to its smaller regional centre equivalent. Yes, there are some major new developments underway in the inner south and at Central Park, but the effect of these on the wider established sector of the market will likely be relatively muted.

This was explained in some detail by Michael Oxley in his book Economics, Planning and Housing, where he notes that in large cities where the ratio of new stock to established is necessarily extremely low, the idea that even a major pick-up in construction levels will materially impact the established market is unfeasible.

To some extent, we have already seen this in Melbourne, where at face value vacancy rates appear to be disconcertingly high (with yet more monster inner city developments in the pipeline), yet the established sector market has continued to power along, with median dwelling values up by more than 12% in the last 12 months alone. 

Sure, Sydney might construct 25,000 new units in the inner south over the next 5 years - and I certainly wouldn't recommend investing in the new stock there from a return on investment perspective - but the population of Sydney is approaching 4.6 million, and grew by nearly 64,000 persons in the past year alone. 

Not only can new stock be absorbed by such a blistering population growth, the reality is that 25,000 units is a drop in the ocean as compared to a city with a population which is roaring unabated towards 5 million. 

The end of the boom phase

It won't be interest rates which eventually halts the Sydney boom either, because the cash rate is locked down at generational lows. And as noted above, it won't be construction levels or oversupply either. 

What will eventually kill off the Sydney housing market boom will be prices becoming too high and yields falling to unacceptably low levels. Just like the last boom through to Q1 2004, this market frenzy will eventually just run out of puff.

The timings are forever uncertain, but this is what Louis Christopher of SQM Research was pointing out this week when he suggested that Sydney prices could boom by 15-20% in 2014. There needs to be a trigger to stop the rampant herd mentality in its tracks such as higher interest rates or a spike in unemployment, and at this juncture, there doesn't appear to be one.

The slump phase

Of course, what follows on from the boom phase of any cycle is the slump, the severity of which tends to reflect the underlying fundamentals of the market in question, as well as the respective strength of the local economy and labour force data. Typically, a slump would be reflected by some or all of the following conditions:

-net migration/population growth sliding towards a trough
-rising vacancy rates
-economic growth at a trough
-rising unemployment
-time on market high
-high number of listings but low sales turnover
-little or no dwelling construction
-higher stock on market
-affordability and yields improving

In Australia, we are entering our 23rd year without recession, and as such we haven't had a major property correction in recent years. Of course, we've continued to experience slump phases, such as in 2008 and again in 2011, but over the last two decades, steadily increasing household wealth has been reflected in appreciating land values. 

Adelaide has been an example of a property market over the last half decade which has largely remained in a slump phase. Prices haven't fallen dramatically, but broadly they have flat-lined and have softened in real income-adjusted terms.

Dwelling Prices graph

Impact of recessions

The United Kingdom is an example of a country which suffered a brutal recession from 2008 during and after the financial crisis. Prices in many regional areas fell by 20-40% and have never recovered, yet well-located dwellings in London have emerged entirely unscathed and stronger than ever.

We've been hearing a lot about a forthcoming Australian recession for the last half decade or so, but it hasn't played out. Indeed, the Reserve Bank forecasts suggest that low interest rates will begin to see economic growth accelerate again in 2015. 



With global economic growth also generally seeming set to rebound, the key issue for Australia to watch out for is an external 'shock'.

In particular, the watch out for falling commodity prices (especially that of iron ore), the extent to which these are offset by a falling Australian dollar, and the development of the Chinese economy. With its data shrouded in mystery and a banking system with more holes in it than a Swiss Cheese, China is one external factor with the potential to destabilise. 

I guess an awful lot boils down to your level of scepticism in China's ability to continue the growth in its industrial production and consumption at rapid-fire pace without blowing up. 

The one thing that is absolutely certain is that it won't be a dull decade ahead!

Saturday, 1 February 2014

Shark cull

A very large turn out to protest to the WA government against the shark cull. A recent survey by Channel Seven Perth found 95% of those surveyed to be against the action. Photo shared via Sea Shepherd Australia - also follow the campaign at #nosharkcull. Sea Shepherd provides its reports on this pointless exercise here.