Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Wednesday, 23 July 2014


No prizes for guessing where I am this week...

Yeah, pretty obvious innit...I'm back in London.

I haven't been over to London for nine months, so I'll do my usual scoot around town to see what's happening in terms of new development as well as checking out a few of our favourite hotspots.

Stay tuned for that later.

To cut to the chase, I'm expecting to see development almost everywhere around town.

Global financial crisis

After the collapse of Lehman Brothers we saw a lot of silly articles about a potential Japan-style housing capitulation in London, which can only have been written by people with no idea about housing market economics or experience of buying property here.

The thing about Japan's seemingly endless years of deflation is that they have had such brutal and lasting effects that other developed countries will do virtually anything to avoid the same fate.

In Britain's case, this has meant more than five years of rock bottom interest rates (0.50%), quantitative easing in the form of a gilt-buying program (as well as some high quality private sector assets), and at various points in time over-shooting the 2% inflation target by a country mile on the upside (click chart):

But, importantly, no deflation.

Inflationary economies

In an inflationary economy, capital cities with strong population growth are over the longer term guaranteed to see rising dwelling prices.

If prices are flat or falling, construction falls away until vacancy rates decline, upwards pressure on the housing market returns and prices start rising again.

The cycles can take a while to play out, but they repeat time after time.

When new dwellings are built, they will always necessarily be built in today's dollars (or pounds) and with today's labour and construction costs.

In Britain post 2008, with credit growth dying away, we began to see desperate levels of construction the like of which we had not seen in eight decades, so low they were.

In regional Britain, where population growth is weak, and there is far less pressure on land prices, dwelling prices are only just now thinking about recovering from a serious battering post-GFC.

Yet in London, the property market continues to heat up.

Incredibly, dwelling prices rose by another 25 percent over the past 12 months.

With such a strong market construction must follow, and sure enough UK construction PMI printed at a romping 62.6 in June, up yet further from an already incredibly strong 60.0 in May (above 50 denotes expansion).

I therefore expect to see cranes everywhere I look as I trek around town.

Parrallels in Oz

I have always tried to learn whatever I can from the London market over the years.

As a mature market, it gives us an interesting sneak preview of what to expect in Sydney and Melbourne a decade or two from now.

Note, however, that the dynamics in Australia's regional towns and cities are markedly different. 

Weaker jobs and population growth, combined with more land available for release can see prices falling over a prolonged period of time.

Indeed, in cities where the population is falling (cf. Japan, Detroit) property prices in less desirable locations can fall to zero.

With Sydney and Melbourne recording strong dwelling price growth over the past two years, we have long expected housing construction to break all-time records in Australia over the coming year or two, as noted on this blog.

The supply of apartments in particular has not been restricted by planning regulations as is often suggested elsewhere.

Moreover, dwelling supply has previously been soft because prices were not rising strongly enough - but now prices are on the up we will see record levels of residential construction in Australia, as was the Reserve Bank's target all along.

In 2014/15, housing starts should break through 190,000, easily eclipsing the highest level on record set during Australia's 1994 property boom.

And that's exactly what the Aussie economy urgently needs given the corresponding decline expected in mining construction (click chart).