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 of the world's most popular & widely-read financial publications.

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

Saturday, 4 October 2014

Long run UK house prices

Memory lane...

Been flicking through a few old slides this week and came across some interesting housing-related pictures, courtesy of my old man.

While I was born in the inner city and spent my early years in an offenders or bail hostel (Dad was a hostel warden) - today what is euphemistically known as "Approved Premises" - in the late 1970s my parents moved outwards to the fringes of Sheffield, an industrial city in northern England. 

This photo below was my parents' first house in 1978, effectively the equivalent of a fringe suburb starter home in Australia. What odds would you put on that dormer/attic room still being intact in 2014?

Only the other day I was back in Sheffield visiting so I thought I would take a quick look how things around the estate have changed.

Certainly the weather hadn't improved much in the last 35 years, and the general tone of the estate appears to be pretty much the same, although looking at the cars people are clearly a bit better off than they used to be. And, amazingly enough, the dormer survives!

Today the property would probably fetch around £135,000 on the open market, although it would likely take quite a long time to sell being in a city fringe area.

Running a few calculations, this means that over the course of 35 years prices have achieved a quite  remarkable 9 percent annual compounding capital growth return.

Sounds pretty incredible...but is it? Not as amazing as it sounds, in truth. In finance there is an old saying: "if something sounds too good to be true, it probably is."

Low land values

Land values in fringe city areas like this are still, comparatively speaking, very low.

In reality, the replacement cost of such a house would not be too far below the market value with labour and materials costs much higher today than they once were, while there is still plenty of land around which could potentially be released if it were needed for new housing.


Secondly, some of those gains aren't actually "real".

Note how both the owners of our old house and 'them next door' have knocked down shaky old carports to add an extra bedroom and a more solid garage building (as an aside, also look how at much more disposable income people have these days with interest rates stuck at effectively zero! Shiny caravans and 4x4 vehicles replace the ancient Volkswagen Beetle...).

It's not really comparing like with like since today's properties have been extended and extra bedrooms added. This happens often in housing markets and can easily distort reported "capital gains", as can new build properties which skew median prices north.

Inflation...and then debt

Before inflation targeting was a key goal of central banks, economies such as that of Britain endured some horrifying periods of rampant inflation, which included the 1970s and 1980s, as the Bank of England's data shows.

Source; Bank of England

Nevertheless, housing prices have easily outperformed inflation. It's not hard to work out why as lending standards were deregulated.

Partly as an indirect result of the great loading up on household debt, official interest rates today are stuck at just 0.50 percent in Britain and have been so for more than half a decade. Compare that with the 17 percent Bank of England base rate in late 1979! Ouch (click to expand).

Now it becomes clear how 9 percent compounding growth happened!

First there was a long period of very high inflation which meant that the price of virtually everything was rising fast, including wage prices, and then there was a huge increase in household debt as interest rates fell and the servicing of debt went from being an ongoing nightmare to a no-brainer for many folk.

Ironically, higher household debt levels today will themselves act to curb growth and keep interest rates lower than has been typically the case.

Higher debt levels

The great leveraging up on household debt meant that, until 2007 at least, practically anyone who owned a house in Britain saw prices rise, and well above the rate of inflation.

This led to plenty of property seminar types to encourage people to speculate in property in the north of England, often using 100 percent mortgages, because prices "always go up".

Since yields were higher in the north this attracted plenty of speculative capital which in turn saw investors getting burned (and counter-cyclical buyers mopping up thousands of properties at rock bottom prices in a post-crash firesale).

But what kind of growth have prices seen since 2007? Clue: it's close to a nice round number. After inflation regional UK house prices have largely been going backwards for the past seven years.

Interest rates can fall no further being stuck at the effective zero bound, and there is no such strong driver for "capital growth" as there was in the past.

Since 2007 regional prices in Britain have stalled, while in London prices have continued to rise (London prices are up by another 25 percent in the past year, so the below chart needs updating) driven by a chronic housing shortage and boat-loads of foreign investor capital.

Adjusted for inflation prices in London have beaten inflation by approximately 3 percent per annum since Q1 1975 (two years before I was born). In the north of England, the equivalent figure is around 1.5 percent, largely thanks to the massive drop in interest rates and the deregulation of lending standards.

This dichotomy seems unlikely to change. Regional cities which have been heavily dependent on manufacturing have often struggled in developed economies.

In Sheffield's case at the peak of its economic powers (Sheffield is a steel city, best known for its stainless steel cutlery industry) the population was 577,050 in 1951. Although the city has largely reinvented itself the population is still only around 552,000 today.

International cities such as London today thrive largely as a result of their financial services prowess, while the population growth ensures that demand for housing is continuing rates of construction by about 2 to 1. The population of London is forecast to hit 9 million by 2020.

Global issue

This is by no means only an issue for Britain - as developed countries lose their manufacturing base and become overwhelmingly services-driven economies.

By way of an example, just like Sheffield's steel industry, Australia's car manufacturing industry is dying a long, slow death which will inevitably hurt those regions which once benefited from that sector.

As a born and bred northerner and Yorkshireman, this is intensely annoying.

Instead of considering how we might be able to generate jobs and economic growth in Britain's regions, instead we are seeing a mass migration towards London and the south-east of the country, with population forecasts predicting massive growth all around London and the home counties.

Graduates seeking higher salaries and better job prospects - in short, people like me - are sucked towards London as though it has magnetic powers. In many ways, that is exactly what the City has.

Meanwhile, so many of Britain's once thriving regions are limping along.

It's sad to see, particularly for those of us who originally hail from the north, but there appears to be very little political will to drive change in this regard.

We are seeing many of these same problems reflected in Australia - as the recent Grattan Institure recently found our capital cities are becoming more centralised instead of us considering how to grow jobs and population growth in regional centres.