Pete Wargent blogspot


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Saturday, 29 March 2014

Earth Hour - Sydney

Below are two photos I snared at Darling Island this morning (just having a coffee over here).

Now, if everyone is being good, there should be no lights on tonight from 8.30pm to 9.30pm in the CBD, since it is Earth Hour.

Earth Hour is one export that we can be proud of, since, as you may recall, it began as a lights out event in Sydney back in 2007. 

Today, more than 7,000 cities and one billion people globally take part in Earth Hour.

It's a great event, but realistically if companies (and people) were serious about making a difference they'd turn office lights off every night, wouldn't they?

More than that, the future must lie in investment in green technologies.

Wednesday, 26 March 2014

What if inflation takes off - stocks or property?


I noted the other day that we are living through a period of low interest rates, and in some countries at least, relatively low inflation (click chart).

Let's have some fun today considering what might happen if inflation takes off, and how that might impact investors.


Conventional wisdom says that stocks are a good hedge against inflation, since the investor continues to own a part claim on the assets of the company, and over the long term this may indeed be true if you are owning shares in outstanding companies.

There is no escaping however, that a jump in inflation can eat away at the dollar value of dividends.

Buffett would always say you should try thinking of stocks in the same way as you would a bond: you buy the investment to receive a "coupon" (dividends), but you also hope that a quality company will increase its earnings and therefore market capitalisation or valuation over time. 

Even though that "coupon" from the company is not fixed since company earnings tend to gyrate, over time the returns on equity in the market may be more consistent than you might expect.

Of course, stocks are quite different from bonds in lots of ways.

For one, thing companies and stocks are perpetual while bonds eventually fall due and can be renegotiated, and thus stockholders are kind of stuck with corporate returns. In that sense, stocks are considered to be riskier. 

There are other differences too, in particular the vast swathes of traders and speculators in the stock markets who, in aggregate, don't achieve a great deal except for making brokers happy through transaction costs.

Can companies increase returns in times of higher inflation?

Well, let's think about it logically. If I remember what I learned accountancy college correctly (by no means a given) there are basically five ways in which companies can increase their returns, those being:

1 - Boosting the turnover ratio?

Turnover may increase with inflation, but can it increase in relation to the assets employed by the business?

Hmm, not so sure about that. 

Receivables (what we used to call debtors), for example, just tend to increase in proportion to sales. 

I suppose turnover could increase over the short term in relation to the company's fixed asset base if the assets are being replaced slowly, but the impact of this is likely to be muted, and over the long term companies will probably have to replace their property, plant and equipment at higher prices anyway.

As for turnover in relation to stocks or inventories, this relationship can tend to jump around a bit depending on what's actually happening in the business, such as supply bottlenecks and so on.

Over the decades the beancounters have used accounting trickery such as last in first out accounting (LIFO) to reduce corporate earnings and therefore tax payments. But over time, there is unlikely to be much of an improvement here either.

So, what about...

2 - Improving profit margins?

If you're an optimist you might argue that in times of inflation companies can improve margins by simply increasing sales prices ahead of costs. 

Yeah, well...maybe.

Ultimately, though, there are only 100 cents in the sales dollar, and company costs - which include the cost of sales or raw materials, staff wages, utility bills or energy costs, and admin expenses - are most likely heading north too.

Moving down the income statement...

3 - Cheaper debt or leverage?

Lower interest expenses might improve returns? Pretty unlikely. If inflation goes up, interest rates probably will too. 

Racing inflation tends to cause companies to require stacks of capital to keep a business galloping along, but lenders tend to become less trusting in long-term borrowings and thus the cost of debt will more likely be higher.

4 - Using more leverage?

A possible option, but more leverage tends to equivalently increase company-specific risk, and lower credit ratings can also see the cost of debt increase.

5 - Lower corporation taxes?

Well, we live in hope. Never say never, but I wouldn't bank on it.

The problem with stocks and inflation

Considering all of the above, it seems likely that higher inflation may not necessarily afford companies the opportunity to increase corporate returns, and this can present a bit of a problem.

If a company makes a return of, say, 10%, pays out 5% as a dividend (effectively taxed by inflation as well as income taxes in the hands of the investor) and 5% is reinvested in the business in times of higher costs...the impact of higher inflation now seems less than rosy for the world of stocks.

In any case, this is all working on the basic assumption that you are buying shares at the equivalent of book value, which in most markets is not possible, so this is a consideration for future shareholder returns too.

Over-arching all of this is that if inflation spikes then interest rates will likely also increase, and the perceived higher risk of shares is likely to see investors bombing for the exits in order to seek safer returns from bonds or fixed interest investments (which would now be generating more attractive returns due to the higher interest rates).

Of course, in aggregate, investors can't all exit the stock market at once, so the likely result is transaction costs as investors turn over their portfolios more frenetically, and much lower stock valuations all round.

This is why the best bet for most average investors can often be to try to think as stocks as being more like a bond, and continue to receive those increasing "coupons" (dividends) over time, worrying less about trying to jump in and out of the market ahead of the herd.

Real estate as an inflation hedge?

Conventional wisdom also tells us that property is a great hedge against inflation.

It's true that inflation reduces the value of mortgage debt. What is inflation, after all, if a transfer of wealth from creditors to borrowers?

And, over time, inflation might see wages increase which can eventually push property prices higher. 

All very neat, and a win-win for property then?

Well, maybe, but it's not really that simple at all. 

As noted before, if inflation goes up, then so too will interest rates, and this may impact property prices adversely due to reduced demand, particularly where real estate valuations are already considered to be high.

And, of course, when you eventually come to liquidate your investment, you'll find that the cost of living is much more expensive thanks to the silent thief of inflation.

This, incidentally, is why many investors in remote locations don't experience the level of success that they might feel they have: if the rate of property appreciation doesn't beat the inflation rate, then the returns will necessarily be stunted.

In fact, if you start playing around with a few numbers in a model which variously considers possible rates of inflation, interest rates and expected capital growth outcomes (I wrote a short piece about this topic here), you'll often find that the internal rate of return (IRR) on property as an investment doesn't change very much at all, regardless of what the inflation rate is doing. 

In summary, higher inflation would surely inflate away the value of debt, but you'll likely be clobbered with higher interest rates, and your money will be worth less when you liquidate.

The implication of this, then, is that the specific choice of asset is vital in determining returns.

Simply put, you need to find a property investment which increases in value (or price) ahead of the inflation rate if you want to get ahead.


It's far from all bad news, however.

Just flicking back through what I've covered above, it seems to me that most investors in shares and property should probably hope for a bit of inflation, but not too much. Moderation is best.

The good news is that over the past two decades the Reserve Bank has introduced an inflation target and has largely been achieving this with the odd blip, and interest rates have not been very high for a couple of decades either.

So, try to remember all this when the first interest rate hike inevitably comes. 

Rather than groaning, remember that the RBA targets inflation and price stability for a good reason, and one which ultimately is for our own good!

Monday, 24 March 2014

6 places to invest money and 4 rules for doing so

You can't escape gravity

In economics, interest rates act a little like gravity.

Any changes in interest rates, anywhere in the world, changes the value of financial assets.

Of course, this is blindingly obvious when you are looking at bond prices shifting, but the rule also applies to all other classes of financial assets, including equities, farmland, commercial and residential real estate or commodities.

Simply put, if interest rates are at 10% then the present value of each dollar you receive on any investment is much lower than when interest rates are at 2.50%.


Interest rates impact financial markets.

Famously, Warren Buffett, who knows a thing or two about investment markets, provided the empirical evidence for this in a speech in 2001.

He noted that in the 17 years between December 1964 and December 1981, the US Gross National Product (GNP) increased by a whopping 373%, yet the Dow Jones index essentially went absolutely nowhere, from 874.12 to 875.00.

A major driver for this was that long-term bond rates ran from 4.20% in 1964 to an eye-watering 13.65% by 1981.

In the next 17 years from December 1981 to December 1998, GNP in the US only increased by less than half as much at 177%, yet the Dow Jones went on a bonanza run from 875 to 9,181.43, a truly staggering increase.

Why? Largely because interest rates altered the landscape for financial assets by falling from 13.65% to 5.09%, and this changed the way people invested their money.

We're seeing it happen again now, with rock bottom interest rates in the US firing the Dow from below 7,000 to well above 16,000 since the financial crisis.

Given that investors must contend with inflation, and with interest rates at rock bottom, bonds and fixed interest investments have about-faced as an investment choice from offering "risk free return" to practically guaranteeing "return free risk".

A decade of low rates

You didn't have to be a genius, then, to work out that very low interest rates across the globe would cause a shift in the way people invest their money.

Below I've charted the rates trend in Australia, the US, the United Kingdom, the Eurozone and Japan from 1990 until today (click chart).

The thing about money is that there is an awful lot of it around the world and all of it has to find a home. 

Here are the six of the main places people might choose to put their money.

1 - Cash/fixed interest

Lending investments range all the way from cash in your bank account, to term deposits, government bonds, inflation-linked bonds, corporate bonds, notes, debentures, or hybrid investments, subordinated debt, and a stack of other stuff. 

The basic principle is that the lending of money is exchanged for interest payments.

Clearly with interest rates at historic lows, fixed interest returns are presently very low. High yields are generally only obtained from low grade or perceived riskier investments.

As a result, lending investments are far less popular than they have been and this is seeing a huge shift of global capital towards other asset classes, in particular...

2 - Equities

When my first book Get a Financial Grip was published, I put forward the opinion that if financial freedom is your goal, then the best means of achieving it for the average investor in Australla could be (1) to get broad exposure to (certain suburbs of) Sydney real estate for the long term, (2) to continue building a diversified portfolio of dividend-paying equities, and (3) keep a very healthy cash buffer.

For long-term investors, assets which bring income and the potential for capital growth tend to beat the cash/fixed interest investments. 

Buffett stated that only certain asset classes fulfil these criteria from his perspective: profitable businesses, equities and real estate.

I noted that my suggestions were particularly so given the low interest rate environment (which would likely see funds flowing away from cash and fixed interest and into share markets).

Low interest rates have been very kind to share markets in Australia of late, while investors continue to derive annual benefit from tax-favoured dividends which come with franking credits attached.

Source: ASX

3 - Real estate

Even last year people were still arguing that Australia's housing markets aren't interest rate sensitive.

Remember, though, that all financial assets are in some way sensitive to interest rates.

Questioning of the effectiveness of monetary policy tends to be a part of every economic cycle, of course, but monetary policy generally does work and, like all financial assets, housing markets are ultimately responsive to changes in the cost of capital.

What may have wrong-footed commentators was that there tends to be a lag in effect, with the full impact of interest rate cuts on occasion taking up to 18 months to be seen in full. 

A dramatic turnaround in the tenor of online comments from schadenfreude to snarky has been a fairly reliable indicator of the property markets having moved into a new phase.

The chart below shows what has happened since the most recent trough in mid-2012 which includes a very strong rebound in Sydney and Melbourne (click chart).

4 - Commodities

The most popular for average investors are gold and silver, which don't pay yield but can represent a hedge with a portion of a portfolio. 

It's been a rollercoaster ride for the precious metals over the last year or two. 

Who knows where to next?

Buffett sees gold as a barren asset, since it pays no income or yield. 

In 2011, he drew the analogy that the world's gold stock of 170,000 tons (about 68 square feet) had as great a total valuation at $9.6 trillion or $1,750/oz of all the cropland in the US, plus 16 Exxon Mobils (the world's most profitable company in 2011, generating net profits of $40 billion annually) and around $1 trillion of walking around money. 

When put in those terms, of course, Buffett explains that the choice is a no-brainer, since farmland will continue to produce income and growth over the decades. 

The price of gold tends to peak at times of fear and so can represent a worthwhile hedge for some investors with part of their portfolio. 

Buffett's main gripe is that if you hold a bar of gold for 50 years, at the end of the process you still have that same gold bar, and it still pays no income. Thus, he argues you are hoping for more speculators to push up the price in times of fear.

5 - Collectables

Investing in collectables such as art or antique coins tends to be handy...for experts.

6 - Get rich quick schemes

There have been a lot of these over the years, from pyramid schemes to exotic new diamond mines and emu farms. 

Get rich quick schemes tend to be very suitable for people who have some money and want to rid themselves of it quickly.

4 rules for investing

Rule 1 - Diversify

Don't put all your eggs in one basket - you should have your business, property, shares and cash.

It's easy enough to get diversification in the share markets through using Listed Investment Companies (LICs) or index funds, but one of the problems with real estate is that the leverage involved sees you quickly gain exposure to only a handful of correlated assets in one asset class.

For this reason, while it's not for everyone, I invest heavily in UK property too.

The beacon of truth that is the Daily Mail reported over the weekend that house prices in Britain had increased by as much as £50,000 to £100,000 in only one month, particularly in London and the south-east.

While I certainly don't make a habit of believing everything I read in the Daily Mail, as an active participant in the London market, I can tell you that well-located and in demand property may easily have seen a 5-10% price uplift in recent months. 

In a separate article, the Mail also reported that a surge of investors using their savings and retirement funds could push UK house prices up by 30%. Why? Because the UK's zero interest rate policy (ZIRP) has crucified the value of annuities. 

Just like gravity, you can't get away from interest rates.

Rule 2 - Investment is not about luck

Successful investment is not about luck. It is about patience and discipline. 

Rule 3 - Markets are cyclical

In every cycle, people argue that this time will be different. But corrections follow booms and markets slump before booming again. Cycles continue. 

Investors need to have an awareness of whether asset prices are near their peak or nadir and plan accordingly.

Rule 4 - No free lunches

Very high returns tend to be achieved only through riskier ventures. If something sounds too good to be true, it probably is. 

This is true in bonds where high yields often come with a high risk. In equities, the opportunity for doubling your money quickly tends to come with an equivalent chance of halving it (or worse). 

And high yields in residential real estate are frequently found in areas of lower demand.

When it comes to property, my view has always been while you may certainly start small, you ultimately need to play in a big pond. 

Just like Buffett's point on barren assets - if you invest in a cheap property in a cheap location, then at the end of the process you will still have a cheap property in a cheap location, and the returns adjusted for inflation will likely be lacklustre. 

On the flip side, I know of Aussies who invested in London's Mayfair years ago who have achieved returns that are almost beyond belief - both in terms of capital growth and in terms of income. 

See how much a 2 bedroom apartment might let for in W1 today and you'll get an idea of why property in high demand areas tends to outperform massively over the long term. 

That's why I've tended to look for properties with an 'X factor' that will be in demand for decades to come, such as properties close to the City of London, or in Australia located in Bondi, or on the Sydney harbourside. 

Cheap regional properties can perform reasonably well over short periods of time, but over the long term well-loated capital cit properties outperform.

Sunday, 23 March 2014


Indian food festival this weekend. Yes please.

9 reasons developer costs jumped...and what they're planning to do about it

Rising construction costs

Last year, the Reserve Bank of Australia (RBA) released independent analysis which determined that the overwhelming share of costs relating to greenfield and particularly infill property development sites relate to construction and financing rather than the respective land value per dwelling.

As you'd expect, rising land values have certainly played a part in increasing dwelling prices as the capital city populations increase rapidly. But in mature capital cities elevated developer construction costs on infill sites have contributed disproportionately to the expensive nature of new multistorey apartment developments, as the RBA's research concluded:

"If land availability were the problem, we'd expect land costs to dominate the costs of producing a new home at the city fringe. But that's not what we see. Neither do government charges dominate total costs. Rather, it turns out that construction costs are the largest contributor to the total costs of production, and they seem quite high compared with the total cost of a newly built home in some other developed countries."

Today, I'll consider in some detail why that has happened, but will also explore what Australia's major developers are now planning to do in order to combat expensive construction costs.

Supply response

I put forward the opinion some years ago when Australia's residential property markets were soft that I did not believe that dwelling prices would continue to fall over a prolonged period of time in a mature capital city with booming population growth such as Sydney, since housing supply would collapse until such point in time when upwards pressure returned on dwelling prices. 

The clearest evidence in support of this is how quickly and dramatically dwelling approvals dived in the New South Wales capital after dwelling prices peaked in early 2004. 

It is important to recognise that the executives of Australia's major property development companies are responsible for representing shareholder interests and thus where developments can be completed profitably, so they will be. 

From 2005-2011, however, unit dwelling approvals in Sydney essentially died a death despite the rapid growth in the city's population. 

Source: RP Data

In this context, it was critical that dwelling prices rose in order to stimulate supply, and with median prices having jumped by more than 20% in Sydney since 2012 in concert with a material easing in financing costs, this has resulted in a strong supply response presently unfolding, which is clearly visible across the harbour city. 

This will please the Reserve Bank, since last year it mused:

"It takes longer to build a block of apartments on a brownfield site than the same number of dwellings as detached houses at the fringe. Dwelling investment has already become less cyclical in the past 10 years than it was in the previous 20 years. It might well be that construction lags – and concerns about supply – will become even more acute."

Developer gouging?

Contrary to what some folk believe, there is scant evidence of price gouging by developers. If there was then this would very quickly show itself in the reams of publicly available information of the major development companies available on our securities exchange.

This is important, since tight profit margins add weight to the argument that a prolonged easing in prices would quickly kill off supply.

The large Mirvac (ASX: MGR) property group has a ROIC hitting at ~10%, and its residential developments have been recording extremely weak average gross margins of only 18%. 

You certainly don't require a master's degree in accounting to know that there is not a shred of evidence of price gouging on residential developments happening there.

Land developer Stockland's (SGP) underlying profit in FY13 was hampered by weak housing conditions, with that financial period encompassing the period from 1 July 2012 when sentiment was still in the process of picking up. 

Stockland's Australian residential development division secured an operating profit of only $60m in FY13 due to what the company termed "the prolonged downturn in the Australian residential land market" (Source: Stockland Annual Report 2013) recording an EBIT of  only 19.9% and a ROA of just 5.5%. 

The residential results of Stockland had been propped up in FY12 by sales in Victoria where a very strong uplift in Melbourne dwelling prices from 2006 resulted in respectable margins to the company's residential division. 

Meanwhile Lend Lease's (LLC) Australian geographical segment is recording EBITDA of only $500-$600m and NPAT of around only $400-$500m from colossal annual revenue streams of  $7.5 billion+. 

However, Lend Lease's FY14 H1 results for its Australian geographical segment have disappointed as development and construction profits have once again slipped.

One could continue analysing developer's financial data until kingdom come, but the conclusions would remain the same. Developers are making satisfactory margins in the current environment - particularly now that prices have picked up and financing costs been cut to near record lows - but no more than that. 

The implication of that is this in the face of a drawn out downturn in dwelling prices (or significant rises in the cost of financing) multistorey apartment construction would quickly dry up.

9 reasons construction costs have increased (and what developers plan to do about it)

Construction costs have leapt dramatically in Australia over the years. I could list 90 reasons why this has been the case, but here are just 9 of them:

1 - Good and Sales Tax (GST)

The GST value added tax of 10% was introduced in Australia on 1 July 2000, and since "developers are price takers not price makers", the additional GST costs levied on materials, insurance, consultancy fact, practically everything...were duly passed on to the end consumer, a once-off increase in dwelling prices

2 - Land remediation

It's important to note than rising developer costs are not merely related to the cost of materials - the relatively shallow increase in the cost of project homes is proof enough of that. Moreover, reflective of what we have seen in London and elsewhere, as our cities mature the cost of preparing infill or brownfield sites for construction and subsequently developing them has escalated. 

Challenges facing developers today's infill and brownfield sites include anything from heavy metal or lead contamination, to pesticides, hydrocarbon spillages, the removal of asbestos...even uranium contamination on Sydney's north shore. 

One could perm any one of a thousand examples, but let's take the new Barangaroo South project as a case study for today. 

The main sources of contamination on the Barangaroo site are waste tar and underground structures including gas tanks (due to the Hungry Mile area being the former home of the famous Millers Point gasworks), not to mention the unwelcome presence of "polycyclic aromatic hydrocarbons (PAHs); benzene, toluene, ethylbenzene and xylenes (BTEX); total petroleum hydrocarbons (TPHs); ammonia; phenol and cyanide.". 

The city desperately needs more major developments to come online, yet there will be "no cost to taxpayers for remediation. Barangaroo South developer payments will cover any state liability for remediation.". 

Although the figure won't require disclosure, you can read this as meaning that Lend Lease will be required to pay very substantial fees to the government. Who'd be a developer?

3 - Environmental ratings

In 2003, the Green Building Council of Australia introduced its environmental rating system for buildings in Australia. 

Lend Lease's new Barangaroo South project will be awarded a full 6 Star Green Rating: it will have lower greenhouse emissions, use significantly less potable water, far less electricity and will recycle almost 100% of its construction demolition waste. 

All incontrovertibly great news for the environment. And expensive. 

4 - Durability and sustainability

Today's developments must be durable. To again perm one of a thousand examples, typically in Millers Point developments are of high density and retain storm drainage facilities built to withstand only a 1 in 5 year event. 

Approval for Barangaroo, on the other hand, was dependent on the provision of a wide area public space in the guise of a headland park, to be developed with the site requiring stringent drainage and other durability requirements of 100 years.

The benefits will surely be realised over the long term, but in the short term this comes with a cost premium attached.

5 - Insurance, health and safety, training

In today's increasingly litigious society insurance premiums continue to increase, but disproportionately so in the world of construction.

Actuarial calculations of employment risk unsurprisingly showed that construction worker compensation have increased more quickly than industry norms. Consequently, construction premiums jumped yet again in July 2013.

The costs of health and safety compliance and training for Australian construction firms have also increased dramatically, which is perhaps not altogether unexpected given where construction workers and tradespeople tend to feature on the lists of serious incident claims.

6 - Design

Almost everything about today's project design has become more expensive, from complex planning, architect and legal fees, to expensive European kitchen appliances, stylish bathrooms or marble kitchen surfaces.

Consumers have been willing to pay top dollar for new developments, but they fully expect and demand quality products to be shipped in in return. 

It's not only consumers that are more demanding today. Approvals tend to come with challenging hurdles attached. 

In the case of Barangaroo, for example, Lend Lease is accountable for the designing of an Integrated Travel Demand Management Plan and the Design of a Transport Square. 

An entire new ferry wharf has been planned for the suburb by Lend Lease, and a City Walk bridge is to be constructed, also by the developer.

More than this, if you've ever seen the basement area of a major new development under construction, you'll be familiar with the tremendously sophisticated and technological nature of today's developments.  

Lest there was any doubt about the complexity of today's major developments, the Barangaroo project team was compelled to construct a prototype tower in western Sydney as a practice or dry run before commencing work on the structures proper. 

Leveraged developers operating on tight margins cannot afford unforeseen delays or to make costly mistakes and therefore plans are carried out in meticulous detail. 

7 - Marketing costs

Architects prepare magnificent three dimensional designs for new projects today, which can subsequently be used in sophisticated and compelling marketing campaigns by developers in order to secure offshore sales. 

8 - Key worker and affordable housing requirements

New development approvals today tend to require considerable key worker and/or affordable housing components which are likely to be provided at a net loss for the developer. 

In Barangaroo South's case, 2.3% of the housing must be sold at a significant discount for key worker housing, adversely impacting project returns.

9 - Community requirements during the construction process

More stringent than they used to be, requiring that construction activity may only take place between agreed upon times, with disruption from heavy plant to be minimised for the benefit of local residents. 

I could go on, but I think that will suffice for now...

Not all doom and gloom?

Does this mean we are doomed to ever-more expensive construction techniques which outpace inflation as wages and associated costs increase in perpetuity? No, not necessarily so.

Remember, developers and their management teams are incentivised to maximise shareholder returns, and thus are duly motivated to seek out cost savings (this is already underway through the subtle, gradual reduction of average plot and dwelling sizes) and efficiencies from the development and construction process. 

An example of changes me might see? 

Although many of us associate the hyphenated words "pre-fabricated" with cheap post-War housing, the future of Australian construction appears likely to lie in a process that is not dissimilar.

Due to our extreme climate and relatively small population (and equivalently small average development sizes), and thus also due to a lack of economies of scale, Australia has been slow to embrace the concept of pre-fabricated construction on its major developments. 

However, Australia's largest developers, including Lend Lease, are now actively looking towards pre-fab as a key growth sector within the construction industry and one which may assist developers in bringing average construction cost per multi-unit dwelling under control. 

Acceptance of pre-fab techniques on standalone dwellings is understandably likely to be a slow burn, but on some multistorey apartment developments - with appropriately detailed ple-planning - the use of pre-cast concrete may afford the opportunity to shave 5-10% from the real cost of conventional construction techniques, presenting potential advantages in terms of time, cost and quality. 

However, it is unrealistic to expect that developers will simply pass on any savings or cheaper costs of construction to the end user, being motivated by maximising return on investment as they are so compelled to be.

More realistically, efficiencies in construction would initially manifest themselves in improved developer margins and thereafter in more competitive tender processes. 

In other words, as price takers not price makers, competing developers may slow the increase in the prices of new multistorey apartment dwellings over time, rather than reducing sticker prices.

Implications for affordability

In terms of providing more affordable housing supply, the RBA's research implies that this may be achieved to some extent in outer suburbs by forcing the release of more land in order to bring average and median lot prices down. 

In inner suburbs, however, the combined costs of land remediation, development and construction present major obstacles to providing cheaper supply, although in theory of course building more supply in aggregate may ultimately help to ease the pressure on inner ring prices. 

If I sound sceptical, it's because in my experience most Sydneysiders appear to have a diminished interest in living in outer capital city suburbs, variously due to to poor transport links, diabolical city traffic, inferior infrastructure, a desire to be located close to work and the coast, and near to friends, among a whole host of other reasons. 

Saturday, 22 March 2014

Take me out to the ball game...

Major League Baseball comes to the SCG.

A nice win for Team Australia over the Arizona Diamondbacks in the curtain-raiser last night.

The main event today and tomorrow features the LA Dodgers playing the full-strength Arizona team.

Wednesday, 19 March 2014

Half of all Aussie migrants live in Sydney and Melbourne

Changing times

A great set of data on immigration from the ABS yesterday that's well worth a read. 

I like ABS data, since its charter ensures that the information is free from vested interest and is independently presented.

Amazingly, the ABS data shows that since 2006 net overseas migration to Australia has contributed more to Australia's population growth annually than has the population's natural increase.

The inescapable conclusion of this is that in order to understand where Australia is headed, it is vital to understand the immigration flows.

The 2011 Census showed that there were some 5.3 million migrants in Australia, meaning that more than one in every four (26%) Aussie residents was born overseas.

Not many countries have a higher proportion of foreign-born residents than we do!

Source: ABS

From where?

Where do the foreign born residents come from? 

Well, all over the world, of course, but most notably from the United Kingdom (1.1 million) and New Zealand (483,000). 

Increasingly over the last decade, they also hail from China (319,000) and India (295,000).

Where do they live?

In comparison to people born in Australia, migrants show a tendency to settle in the major urban areas of Australia, reports the ABS.

While 64% of Australian-born people lived in a major urban area of Australia in 2011, an overwhelming 85% of those born overseas lived in a major urban area.

Within urban areas, migrants in Australia tended to live in Australia's two largest cities, a trend seen in Australia since the period after the Second World War.

The 2011 Census showed that around half of all migrants in Australia lived in either Sydney or Melbourne, with 1.4 million residents of Sydney and 1.2 million residents of Melbourne having been born overseas. 

Perth had the third largest migrant population in Australia at 568,000 people, followed by Brisbane with 480,000 and Adelaide at 289,000. 

Numbers elsewhere are significantly lower, with comparatively very few migrants in Darwin, Hobart, or Canberra.

Sydney (39%), Melbourne (35%), and Perth (37%) were also the most popular cities for migrants when considered in proportional terms, with more than a third of the population in each of these cities being born overseas.


Across the Australian capitals, certain trends in settlement are evident. 

Suburbs located in or near city centres are strongly favoured by migrants, according to the ABS. 

With the exception of Hobart and Darwin, the central business districts of every capital city in Australia had more than half its residents born overseas at the time of the Census.

Importantly, suburbs incorporating or situated near universities also featured high proportions of migrants.

Sydney trends

In 2011, migrants tended to be most concentrated around a number of key urban centres in Sydney. 

In the inner city around Ultimo and Haymarket, to the west around Parramatta, and to the south-west around Cabramatta and Fairfield, for example. 

Other areas with a high proportion of migrants include: Westmead, Homebush, Rhodes, Burwood, Canterbury-Bankstown, Campsie, Hurstville and Wolli Creek.

The 'Chindia demographic'

Sydney suburbs where Chinese-born migrants made up the largest proportion of the population included Hurstville (36%), Rhodes (29%), Burwood (28%) and Allawah (24%) in the city's south and west. 

In the city centre area, Ultimo and Haymarket also had large populations of Chinese-born migrants (both 22%).

Suburbs where Indian-born migrants were most densely concentrated tend to be situated in the wider Parramatta area including Harris Park (43%), Westmead (32%), and Parramatta (24%). 

Other close-by suburbs such as Wentworthville (19%), Girraween (17%), and Rosehill (16%) also had large proportions of their population born in India.


Quite clearly, with a massive 85% of immigrants settling in major urban areas we can expect in the future that immigration will swell the population of our four main capital cities dramatically.

And increasingly, immigration is becoming the key driver of the share of our population growth.

However, where migrants head to within the capital cities is less clear-cut. 

The ABS itself notes that: "across the Australian capitals, some common trends in settlement are evident. Suburbs located in or near city centres are strongly favoured by migrants". 

But it's also notable that certain other key hubs of the capital city centres also attract immigrants, particularly those situated close to universities or with historical associations with certain demographics.

The map shows fairly conclusively that the distant outer suburbs tend attract a lower proportion of migrants.

Monday, 17 March 2014

The Hungry Mile (panoramic)

Thought I'd just wander down and take a few snaps of what's going on down at Barangaroo earlier today.

The fire may hold up work on the main towers for a while, but as the first picture shows, there is a truly vast amount of landscaping work to be carried out in the meantime.

There has been a massive over-subscription of interest for apartments on the site, with prices running up to $40,000 per square metre. 

Property Observer covered the sale of 159 apartments in just a few hours here

Monday, 10 March 2014

Darling Harbour regeneration progresses

Over the next half decade Darling Harbour is undergoing a massive multi-billion dollar redevelopment.

Darling Harbour will become home to Australia’s largest convention and exhibition facilities, "Sydney’s largest red carpet entertainment venue", and a hotel complex. 

Opening in late 2016, there will be new world-class convention, exhibition and entertainment facilities.

Suburbs such as Pyrmont stand to benefit greatly, as will tourism in the area, Darling Harbour already attracting some 25 million visitors per annum.

Here is the Sydney Convention Centre last week.

And just a week on - nowhere to be seen.

The demolition stage is expected to take 12 weeks. A new International Convention Centre is to be built on this site as part of the Darling Harbour regeneration.

Sunday, 2 March 2014

Mining town woes continue

Louis Christopher of SQM Research has spent some time recently highlighting that, since the middle to 2012, a number of mining towns are going through a property downturn.

It's something both he and I discussed on Commonwealth Bank's Living Space blog here:

“A number of mining towns around the country are in the middle of a downswing,” says SQM managing director, Louis Christopher. 

It started in the second half of 2012 and as time has gone on conditions in these real estate markets have progressively got worse. There are examples where rents and house prices have fallen by 30 per cent-plus."

There are a number of reasons why this might be the case, though with mining towns you often have to treat them on a case by case basis.

As the labour-intensive construction phase of the mining bboom has now peaked, some mining towns have entered their transition phase.

The other thing to watch out for is towns where employers take matters in to their own hand and begin to provide their own accommodation for FIFO workers. 

On other occasions, land is released for new suburbs and developments.

Living Space continues:

"One of the factors behind this is that Australia’s mining boom is moving into a new phase, says Pete Wargent, co-founder of AllenWargent property buyers, and a former Group Financial Controller for an ASX-listed mining company.

“The construction phase of the mining boom, which has been running for the last decade, is getting close to its peak,” Wargent says. “That’s the labour-intensive phase of the mining boom.
“The next phase of the boom is the production phase.” And with that, comes unemployment.
“It takes a lot more workers to construct a mine than it does to operate one,” Wargent says. Once a mine construction has finished, many workers simply leave town.
A second contributing factor has been the increase in the supply of new real estate in many mining towns to cater for the temporarily higher demand."
Mining towns which have recently hit upon problems include Karratha in the Pilbara, while former star performer Gladstone now faces issues of its own, as noted by Christopher in the Living Space article.
The latest mining town to fall upon disastrous times is the coal-mining town of Morwell in Victoria, where a catastrophic mine fire has been burning for three weeks. 
Authorities are hoping to have the mine fire under control during the next 10 days.
With inhabitants complaining that they are unable to breathe or sleep, authorities are considering evacuating the entire town's population, although health officers have suggested that smoke levels are not at high enough risk levels to date for a full evacuation.   
Morwell is a small town around of around 14,000 population, located around 150km from Melbourne,  but while certain commodity prices have taken a hit of late, nobody could have foreseen such a terrible mining accident.
With buyers nowhere to be found, tragically house prices have been reported to have fallen by as much as $25,000 (~17%) in only a few months.
Morwell was tipped as a property hotspot for investors as recently as a year ago (the most bitter of ironies for residents, for its fresh country air), but in semi-rural areas that are exposed to mining, the potential for fast returns can sometimes come with an elevated risk in the short-term.
On the plus side, Toowoomba and houses in western Sydney both look to have fine prospects in 2014, which just goes to highlight the merits of diversifying investment risk.
I do own some regional properties, but demographers tell us that by 2060, the population will have boomed to 40 million, the overwhelming majority of whom will live in the major cities.
Two-thirds of Australians are expected to live in just four main capital cities by 2060.
14 million of the 18.4 million migrants are expected to move to Sydney, Melbourne, Brisbane and Perth alone
For these reasons, I've always considered supply-constrained suburbs in capital cities such as Sydney and London to be the lowest risk in property investment and so built my property investment plan around that. 
For the sake of the mining community, and that of the town's residents, let's hope the blaze is brought under control in the next fortnight.