Pete Wargent blogspot

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

'Huge fan of your work. Very impressive!' - Scott Pape, The Barefoot Investor, Australia's #1 bestseller.

'Must-read, must-follow, one of the finest analysts in Australia' - Stephen Koukoulas, ex-Senior Economics Adviser to Prime Minister Gillard.

'One of Australia's brightest financial minds, must-follow for accurate & in-depth analysis' - David Scutt, Business Insider.

'I've been investing 40 years yet still learn new concepts from Pete; one of the finest young commentators' - Michael Yardney, Amazon #1 bestseller.

'The most knowledgeable person on Aussie real estate - loads of good data & charts...most comprehensive analyst I follow in Oz' - Jonathan Tepper, Variant Perception, 2 x NYT bestseller.

Wednesday, 29 October 2014

October close

October wrapping up

From November 3 we have an absolute rip-snorter of a fortnight (well, more like ten days) of domestic news coming our way, which will be very interesting to analyse.

In particular, by November 11 it should become clear whether the Reserve Bank and APRA will be inclined to step up any unconventional macro-prudential measures relating to the allocation of housing credit (seems unlikely) or rather will allow the property market to work through the cycle itself while maintaining a watchful eye on the quality of investor lending (more likely).

This week, by contrast, will be a much quieter one for domestic news.

In the US a range of commentators congratulated themselves on calling the bursting of the stock "bubble" (this has been happening for well over three years now) only to watch in bemusement as markets rebounded to within a fraction of their all-time highs.

Trying to second guess stock market movements while QE is taking place is clearly no easy matter.

In Australia, share market valuations are fairly middling, and certainly less than stretched.

Trailing P/E Ratios graph

  Forward P/E Ratios graph

October home values

In the absence of much other exciting news, let's take a sneak peak at what RP Data is set to report for the month of October from its much-maligned Home Value Index.

It has taken a while to get a handle on the machinations of the index, but the consistently recurring lulls at the mid-point of each calendar year do suggest something of a lag however much the media likes to report weekly movements as being 'real time'.

Of course, the daily index has also given commentators almost limitless scope to champion their favoured markets through the cherry picking of data ("this month's best performer!" is a favourite).

Anyway, based on what we have seen reported from other sources of data, including mortgage finance, we should probably expect to see Sydney surging upwards this quarter and moderate gains elsewhere.

Below is what RP Data's index shows for about the past 15 months (note the mid-year dips), which includes significant increases for the month in Sydney and Melbourne, and notably a 3.8 percent gain for Sydney over the last quarter.

Sydney home values are up by around 13 percent over the past year according to RP Data's hedonic home value measures.

The other capital cities each recorded gains over the past quarter, although Adelaide reversed last month's gains with a 1 percent decline in the month of October (cf. "this month's worst performer!").

Naturally these city-wide figures mask wide variations in the performance of different property types and across individual municipalities, but nevertheless summarised below is what we might expect RP Data to report by city for the month and quarter to the end of October based upon the daily index data.

Overall, if we strip out Sydney the rebound in most housing markets rebound has only been fairly moderate, while most indicators for Melbourne seem to suggest that the Victorian capital city market is likely to roll over some time soon, especially given the elevated volume of stock on the market and the proliferation of sellers.

Outside Sydney investor credit, there is little for the regulators to get too excited about.

There will be continued discussion about the levels of household debt hitting new highs, of course, but sooner or later I expect two other things will also become increasingly apparent:

(i) just how far average borrowers are ahead of repayment schedules given ongoing easy monetary policy settings; and

(ii) how a significant level of 'household debt' relates to the refinancing of buffers.

Household Wealth and Liabilities graph