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Friday, 26 December 2014



Merry Xmas from a the Old Dart (spending some time round at me Mum's this Xmas - ahh) where the bookies will not be paying out on a "white Christmas" event this year - in fact it's a positively glorious and sunny day in the environs of London, where sadly Boxing Day sales are all but underway already!

A sublime gift for a history geek like myself - more than 1,300 pages of Peter Ackroyd - which should make the 24+ hour return flight to Australia marginally more tolerable.

Year Closes

It's been a quite amazing year in many ways.

In Sydney we have seen house prices continue to boom by more than 17 percent over the last 12 months and apartment prices by around 14 percent. 

It has not been such a good year if you invested in iron ore mining companies, though, and it was quite apt that prices finished the last trade at their lowest point in 5.5 years down at a painful US $66/tonne.

This will lead to the Western Australian government cutting or deferring iron ore royalties on a case by case basis in order to keep the state's junior miners afloat - a fair few juniors will not be breaking even at these prices.

In the meantime producers are scaling back production levels by millions of tonnes.

Expect that the Aussie dollar (now down to 81 cents) and interest rates may have further to fall in the first half of 2015.

On the plus side there was a huge upwards revision for the US economy this week, where growth is now reportedly tracking at a booming 5 percent pace on an annualised basis.

This has sent US stock valuations to yet another record high with the Dow Jones incredibly zooming past 18,000 for the first time in history. 

More on this tomorrow.

We'll also publish our property price forecasts by capital city for 2015 later this week, where we expect another big year for Sydney where upwards momentum has not stopped, with Hobart and particularly Brisbane to be the other outperformers in the year ahead.

Most other cities we expect to be considerably softer in 2015.


In keeping with the south of England theme for this blog post, a UK #3 Christmas hit from 1980.  Jona Lewie's protest song was kept from the number 1 slot by John Lennon who had been murdered earlier in that year.

Cheers & thanks for reading for another year! PW

Wednesday, 24 December 2014

Australian Population Grid

Population Grid

The ABS has released its first edition in a brand new series - its Population Grid based upon the Census Data from 2011.

The Census data helps to produce graphics of population density per 1km2 as at August 2011.

Every so often a smart Alec produces a graphic a it like the one below together with a comment with the subtext "no land scarcity in Australia! Property prices will crash!"

And indeed to look at the Population Grid, you would be forced to conclude that there is indeed no scarcity of land in Australia!

Australia the sixth largest country in the world comprising well over 5 percent of the total landmass of all the countries on earth, and is the largest country on the globe with no land border to neighbours.

And most of Australia is completely empty!

Clearly there is no actual shortage of land, particularly out in regional Australia.

Scarce Commodity?

Yet since 2008 house prices in Sydney have continued to rise at around 7-8 percent per annum on average to be well over 50 percent higher than they were at that time, so the crash theories haven't worked out too well.

Why so? 

There are essentially three reasons why land can be a scarce commodity in Australia.

The first reason is that a huge amount of land in Australia is arid and close to uninhabitable, which any satellite view of the country clearly shows.

Shifting the Population Grid to the "mesh view" below reveals the second reason, that most of the land in Australia is completely restricted from the building of dwellings.

The mesh view shows a number of large areas which may not be built on - you can see in the centre of Australia for example a good deal of land within the Simpson Desert which is restricted, and to the west in the Great Victorian Desert. 

There are also National Parks surrounding cities such as Sydney and other land which is zoned not for residential use.

We need to zoom the chart in to see the third reason, and that is that in Australia's largest cities where most of the employment opportunities, infrastructure and facilities are located, folk ideally don't want to live more than about 25 minutes from the centre of the cities.

The largest cities are relatively centric in nature.

Artificial Scarcity

Much of Australia's land "scarcity" is artificial, which has been the case since the main capital cities were first founded using the US-style grid system.

The land was quickly zoned into roughly equivalently sized plots which encouraged speculative activity (the plots were never completely evenly sized - due to inexperienced or fraudulent use of the chain measures, and sometimes plots had to skirt around existing landmarks or buildings).

The issue was exacerbated by all of the main cities being located beside water, preventing outward sprawl.

Cities with land scarcity particularly include Darwin and Canberra, but it's actually the case in almost any large city to a greater or lesser extent due to zoning restrictions and the management of land release.

Property Prices

Property prices can be driven higher by:
  • an increase in the size of Australia's population; and/or
  • the increasing wealth of that population

Data from the Q3 2014 National Accounts released last week showed that household wealth in Australia roared to its highest ever level in September 2014 at $7,719 billion having soared by more than 50 percent since 2009.

Contrary to popular belief this was not driven purely by land and dwelling prices, with a substantial amount of that wealth being grown in currency, deposits and equities, particularly within superannuation balances.

Our recent analysis of demographic statistics here showed that population growth in Australia has slowed to around 360,000 or 1.6 percent per annum which is nevertheless a very large number of new persons each year.

Most of the population growth takes place in only four locations: Greater Sydney, Greater Melbourne, Greater Brisbane/south-east Queensland and Greater Perth.

Population growth is generally slower in the regions of Australia and now likely to slow further due to an ongoing dearth of employment growth or opportunities, as our recent analysis of the detailed labour force data revealed.

This is by no means a unique issue to Australia for there is a global trend toward urbanisation and mega-cities. 

The urban share of the globe's population has increased from 30 percent in 1950 to 54 percent in 2014. By 2050 some 66 percent of the world's population will live in urban areas, and in Australia the percentage share will remain far higher still.

Densest Cities

The Population Grid showed that Sydney is Australia's densest city with 21 square kilometres with more than 8000 people per square kilometre. 

By contrast Melbourne had just one square kilometre.

Unlike Melbourne the sprawl of Sydney is tightly contained on all sides by the Pacific Ocean and National Parks, which is one of several reasons we believe the harbour city will continue to be home to the most elevated dwelling prices in Australia over the long term. 

In 2011 Sydney also had much more widely spread high density living with some 93 square kilometres of land with 5000-8000 people per square kilometre (essentially much of the inner 12km ring) compared to only 33 such square kilometres in Melbourne.

Brisbane was the only other city to have any living at this level of density with 3 square kilometres at 5000-8000 people per square kilometre.

Elsewhere living in Australia is not dense by international city standards.

Sydney's most dense suburbs generally comprise those that are centrally located such as Woolloomooloo, Potts Point and Pyrmont. These "densest" suburbs are considerably denser than those in Australia's other cities!

International Comparison

Nevertheless Australia's cities are comparative lightweights when it comes to high density living.

For example, London has some 327 square kilometres of land with more than 8000 people per square kilometre!

The combination of London's restrictive green belt, within which more than 20 million people now reside, and woeful levels of construction it is small wonder than mix-adjusted house prices in London have zoomed more than 75 percent higher since 2007.

Undperformers and Outperformers

You would have thought that given the geography, economic make-up and planning constraints of Britain it would have been pretty obvious that London would see the greatest house price gains over the long term, which is precisely what has happened.

In truth though the property seminars prior to 2007 often spoke of using 100 percent(+) mortgages to invest in regional Britain for higher yields on the basis that "property always goes up!" - which it largely did until household debt levels peaked in 2007.

This is a confused approach.

While they may sound similar, yield (a spot percentage calculation made at the point of purchase) and income (total rental received over the live of the asset ownership) are very far from being the same thing.

The asset which is in the highest long term demand is the outperformer.

Look for Scarcity of Land

A good many British investors are now discovering just what a poor investment residential housing can be if you invest for yield first and growth second, with ex-London prices failing to record any growth at all in 8 years leaving many investors "under water" or in negative equity.

There are some lessons here for investors in Australia too.

Be wary about investing in outer suburban or fringe city areas where land is not a scarce commodity. 

A $200,000 outer suburban house may comprise only $50,000 of land value, so even in the unlikely event that outer suburb land values boom by 50 percent, the total value of the investment only increases by $25,000.

Why is this the case? Because outer suburban housing is readily substitutable with more fringe housing.

If you invest in property where land is not scarce or in high demand, then this can be akin to investing in the future price of bricks - and project homes actually seem to be getting cheaper over time rather than more expensive.

Asset Selection

The macro picture can only tell you so much, however. It's also important to understand markets at a micro level.

For example some years ago there was a widespread belief that Melbourne's property market must correct due to overbuilding, yet median prices have continued to rise.


Well I don't go to Melbourne all that often, and am surely no expert in that state, but if Melbourne's market mirrors that of Sydney in any way the likely answer is that the residential construction boom has largely comprised:
  • Fringe detached housing for which there is a relatively low demand; and
  • High rise unit blocks, with low owner-occupier appeal.

In the types of property and popular land-locked locations where most people want to live - particularly between 5 and 25 minutes from the city - available land is extremely scarce and, like most large, growing and thriving cities in the world, the prime location real estate becomes more expensive over time.

Sunday, 21 December 2014

Full Employment...& Property Booms of Christmases Past

Mining boom

As all readers must surely know, Australia has been cushioned from severe economic conditions by a decade-long mining construction boom (see the soaring green line below) and we haven't had a recession or a serious economic downturn for well over 20 years.

It has long been our contention that this has led to complacency over regional and outer-suburban property prices in Australia.

In 2015 Australia's economy finally looks set for a downturn which could genuinely hurt, with sub-trend economic growth forecast and mining construction and investment at long last set to fall...probably dramatically.

There may or may not be a full recession, but in any case interest rates do appear likely to be heading towards record lows.

Regional Employment Has Stalled

We have been making the point for a long time now that regional employment growth in Australia ex-Queensland has completely stalled, and this is likely to lead to problems.

The two largest states for example have added very few regional positions in aggregate for the past 7 years and none at all - zero - for well over 4 years now.

Regional Unemployment Rates Rising

Finally this trend is beginning to show up in regional unemployment rates.

This week the ABS Detailed Labour Force data for November 2014 revealed that while capital city unemployment fell in raw terms by 0.4 percent to 5.5 percent, regional unemployment has continued to rise to 6.8 percent.

The difference is most pronounced in New South Wales where the Greater Sydney economy is now firing on many of its cylinders.

Raw capital city unemployment rates declined in Greater Sydney, Greater Melbourne, Greater Brisbane, Greater Adelaide and Greater Perth.

However, unemployment rates once again increased in regional New South Wales, Western Australia, South Australia, Tasmania and the Northern Territory.

Full Employment

If you are looking for property markets which are actually going to BOOM - by which we mean here for dwelling price charts to turn fully parabolic - then one of the factors or catalysts that we can talk about is so-termed "full employment".

If you have followed our UK house price indices over time you may recall that while London is consistently the long term out-performer over time (as we obviously would expect), Northern Ireland's index ran from a base of 100.0 in 1993 to a preposterous 659.4 by 2007 - now that is an outrageous dwelling price boom.

The Northern Ireland index later "retraced" (i.e. it crashed) to ~300 and is now steadily recovering again at 346.

One of the conditions which helped to pump this self-perpetuating bubble-boom was full-employment.

Full employment is the macroeconomic condition where almost all persons are willing and able to work at the current pricing of wages and working conditions.

Everyone in Ireland who wanted a job had one and the feedback loop gradually accelerated.

When city unemployment rates fall to below 4 percent towards to ~3.5 percent this may be an indication that such a condition might exist.

Australian Capital Cities - Unemployment Rate History

When tracking back the Australian capital city unemployment figures over the last 15 years, it is small wonder that Darwin has been on such an extraordinary run, with the city experiencing effective full employment centred upon resources industries (plus financial services compliance) and the public sector for many years.

Indeed the respective property booms of Darwin (2004-2014), Perth (broadly 2003-2010) and Brisbane (a strong dwelling prices uptrend which continued in fits and starts through to around 2009) all look to be glaringly obvious when scrolling back through the data.

Charts are Harder to Read From Left to Right!

However, one thing we can say about this is that everyone is a mining construction boom expert now that the investment boom set to fade into the rear view mirror!

As a resident of Darwin for a decent part of the "Top End" real estate boom, my recollection is that the general view was more along the lines of "this thing surely can't keep going higher...can it?" rather than "hey, this is a once-in-a-century mining boom - this baby is just going to keep on running for years to come!".

Famously my former employers Deloitte have been calling the end of the mining investment boom annually since 2003.

Similarly when the iron ore price doubled to $90/tonne, I was working in the mining industry at that time, and as far as I recall few were predicting that the price would then relatively quickly double again (although actually thinking about it there were a few copper price forecasts from market analysts and brokers which appear to have been wildly bullish in retrospect!).

In any case a glut of commodity supply combined with weaker demand from China has seen most of Australia's key commodity prices clobbered over recent times, with the bulk commodities of iron ore and coal hit particularly severely.

The property boom certainly now at last seems set to end for Darwin as the mining construction boom tapers.

So where else can we look?

New South Wales Unemployment

The raw monthly unemployment numbers can be volatile and are prone to jumping around a bit.

But take a look, for example, at the rolling annual unemployment chart for New South Wales smoothed for volatility.

Greater Sydney's unemployment rate is down to 5 percent and is now in an established downtrend.

Low interest rates have pushed dwelling prices sharply higher, retail trade is booming at double-digit pace and monetary policy settings are generally all too easy for the harbour city.

However, in regional New South Wales unemployment is clearly trending up towards 7 percent and above. This is partly related to the collapse in coal prices.

The paradox of economic downturns is that despite the suffering felt in some regions, a national decline in economic activity can sometimes offer spectacular opportunities in certain property markets as borrowing rates decline.

Sydney clearly does not have anything approaching full employment yet - there is still quite some slack and underemployment in the market, with the Parramatta region, the south-west and outer-western regions dragging the averages up, for example - but some of the inner regions could yet get somewhere close in 2015 and beyond pending further interest rate cuts.

Candidates include parts of Sydney's northern beaches, the inner west, the eastern suburbs and the lower north shore where unemployment rates are already very low (although there are existing indicators of under-employment in some cases).

Looking at unemployment rates in just a few of the suburbs and regions we have invested in and suburbs that we like, it's little wonder that Sydney property prices in these areas have been booming.

To name but a few of them: Bondi Beach (2.4 percent unemployment), Bondi Junction (2.5), Coogee-Clovelly (2.6), Double Bay-Bellevue Hill (1.6), Erskineville (2.6), Woollahra (1.6), Dover Heights (1.7), Randwick (2.3), Paddington (2.3), North Sydney (2.8), Kensington (2.8) and Pyrmont (2.7).

Generally speaking we are less keen on outer suburbs such as Penrith (12.2 percent and rising) and St, Marys (12.7 and rising), or the south coast such as Nowra (10.7) where there is considerably more land available for release and development. 

And at the present time regions of mining influence such as Cessnock (11.6 percent and rising) are struggling with ascending unemployment rates - not everyone works in mining or will directly be affected by redundancies, granted, but the multiplier effect is important. 

Recessionary conditions do not tend to be kind to secondary locations with high unemployment, so tread with great care. 

(That's our opinion, others do differ on this point we should note).

Queensland Unemployment

In Queensland the city versus regional trend has been far less pronounced to date, but a similar pattern is now just beginning to play out with Greater Brisbane's unemployment rate (down to 5.8 percent in November 2014) appearing to have peaked.

On the other hand, mining job losses in particular are set to send regional unemployment significantly higher in Queensland, with the regional unemployment rate already up to 6.7 percent and rising.

We note here that by "regional Queensland" we clearly do not refer to all regions.

The Gold Coast, for example, does not have a high rate of unemployment. Nor does Toowoomba.

But there are plenty of risk areas, particularly in the coal and other mining regions.

The Queensland unemployment rates chart by region presents some handy indicators of where property investors may be interested in looking and some of those which they might look to avoid at the present time.

In such cases it is often the trend which is important rather than the absolute rate of unemployment.

As for individual suburbs for investors to target in Brisbane - if you are interested in investing in the city and using our Buyers Agency services in order to identify outstanding performers, drop us an email at

Struggling Regions

There's no need for us to overwhelm you with charts today, but the final chart below shows how unemployment risk has eased in some regions of Australia but remains far too high for comfort in a number of selected areas.

Outer Suburban Challenges

There are also issues facing some outer suburban capital city areas.

The latest data shows that the unemployment rates in parts of outer Adelaide are spiralling.

For example the Elizabeth now has the highest capital city unemployment in the country, increasing to an extraordinary 33.3 percent in Q3 2014, a figure which is expected to rise further in the years leading up to 2017 as GM Holden and the care manufacturing industry is shuttered.

The rate of unemployment in Davoren Park has leapt to more than 20 percent (20.1 percent and rising) as has the unemployment rate in Smithfield-Elizabeth North (24.0 and rising) and Christies Downs (20.1 and rising), while other suburbs such as Morphett Vale are well into double digit levels of unemployment.

Generally speaking such high and rising levels of unemployment are a poor and potentially risky dynamic for housing markets that are transitioning into an economic downturn.

The Wrap

Of course, unemployment rates are only one of many metrics which we look at across hundreds within our chart packs.

We do like to share a few of them here, but space does not permit a full analysis of every suburb in Australia, and in any event, general investment advice is something to be very wary of...generally speaking.

What our chart packs do show is that unemployment rates in a number of regions are far too high for comfort and increasing given that the economy is likely to slow further in 2015.

On the other hand, low (and possibly lower) interest rates may offer investors some enticing opportunities, particularly in Brisbane.

Friday, 19 December 2014

Aussies Stop Leaving Sydney & Melbourne

Population Growth Slows

Our 2014 population forecasts were a surprise to many in that they projected a very significantly slowing in Australian population growth this year from 396,400 in 2013 to around a (conservative) 310,000 in this calendar year.

While population growth in Q1 2014 remained strong at a massive +111,600, the slowing in net immigration is now beginning to flow through to the quarterly data with growth of only +68,400 in Q2.

The second quarter of the year is traditionally a weaker period for population growth  with the data not seasonally adjusted but this is significantly less than the +92,000 we saw in Q2 2013 and commensurate with our forecasts remaining broadly on track.

Year-on-year growth over the past two quarters has already declined from +396,200 (+1.7 percent growth) to +364,900 (1.6 percent growth) and there will be further declines in that figure over the next two quarters.

This is the slowest national level of population growth we have seen since Q4 2011.

At the state level we expected to see very strong growth in New South Wales and Victoria but slowing population growth elsewhere. 

The ABS released its figures for Q2 2014 today, so let's take a look at what we can learn in 4 short parts, particularly as the trends relate to Australia's housing markets.

Part 1 - Total Population Growth

The total population of Australia increased by 68,400 in Q2 to 23,490,700, suggesting that the rate of population growth will slow in the year ahead.

On a quarterly basis growth is still higher than has historically been "normal" but the extra-strong growth of recent years is fading post-mining construction boom.

Part 2 - Population Drivers

The natural increase of the population has ticked down a little, but the real driver of change is the fall in net immigration.

We have already been witnessing this in the monthly figures for a long while, but now this is beginning to flow through to the national quarterly data.

The latest (revised) rolling annual population change figures show that the rate of population growth in 2008 was even a little higher than we believed at the time at over 2 percent per annum.

However, rate of growth has now eased all the way back to 1.6 percent.

Part 3 - Interstate Migration

Our estimates of immigration and natural increase will be close enough to the mark.

The real key to understanding population growth within Australia is to look at net interstate migration.

One of the dynamics which has helped to grease the wheels of the Sydney housing market over the decades has been an outflow of population to cheaper (and sunnier) climes.

Sydney's chronically under-supplied housing market grown accustomed to losing anywhere up to 42,000 heads from New South Wales in any given year, and usually somewhere between 10,000 and 35,000 per annum over the last few decades.

However, this is no longer happening with migration away from NSW falling to the lowest level ever recorded, with further declines to come over the next 6 months too.

At the same time net interstate migration into Victoria has increased to its highest level on record.

What's happening here? In a word - a quest for jobs (alright, that's four words).

Australians and migrants are increasingly gravitating to or around the largest two capital cities Sydney and Melbourne in search of employment as the mining construction boom wanes. They may not always find it, but clearly the mining states are seen to be a less favourable prospect at this juncture.

Adelaide has been suffering from a "brain drain" for fully a dozen years now, while the mining states of Western Australia and Queensland - which once benefited massively from interstate population flows - are no longer doing so to anything like the same extent.

Indeed Western Australia passed a small but significant milestone in the June 2014 quarter - for the first time in 11 years the state saw a net interstate outflow - OK, so it was only 33 persons, but this represents a material downward shift from previous inflows.

And while Queensland still benefits from net interstate migration (+5,753) this is the lowest figure on record for the Sunshine State.

Part 4 - State by State

Over the long run population growth in Australia has all been about the four largest states attracting ever more heads.

On a rolling annual basis, in line with our forecasts NSW is comfortably leading the way with growth of +109,100.

The mining states are also slowing as we expected with Queensland (+70,500) and Western Australia (+54,400) falling back into line.

On a percentage basis Western Australia still has the strongest growth in the nation at 2.2 percent in spite of the obvious downtrend.

The surprise package so far has been Victoria (+106,700) where growth has not slowed as much as we expected - at least, not yet.

As a result a stonking 59 percent of population growth over the last year was only in the two largest states, with the great bulk of that in Greater Sydney and Greater Melbourne.

Population growth is weak in South Australia at only 0.9 percent, and while the quarterly population count remains marginally positive (+3.200), for us there is a serious question mark around what level of growth can be sustained as the economy sheds further jobs in the lead up to 2017 as GM Holden shutters its Elizabeth plant. One assumes Santos is not hiring much either at the present time.

For different reasons both Canberra (public sector rationalisation) and Darwin (exodus of construction workers) are likely to see their housing markets in a funk in 2015, with rents declining.

Indeed population growth rates in the ACT (+1.2 percent), the Northern Territory (+1.0 percent) and Tasmania (+0.3 percent) are already looking lacklustre and remain significantly weaker than the national average.

Over the last decade the strength of the mining states has been evident.

In the current climate, we expect to see Sydney standing head and shoulders ahead of the other capital city locations in terms of population growth, while due to steadily rising rates of unemployment regional population is generally slower than that being seen in the capitals.

The Wrap

While population statistics are forever tricky to anticipate it seems likely that by the end of the calendar year population growth in Australia will have trended down close towards our forecast range.

The strongest growth still appears likely to be seen in New South Wales driven by the strength of Sydney's economy, but Victoria may yet be a surprise package.

Virtually everywhere else, the trend in population growth is down for the foreseeable future.

Tuesday, 16 December 2014


Snowball Investor

I have a new book due out in 2015 which discusses the 3 golden rules for multiplying your results from property, shares, business and life.

There are three key themes which run through the book which I've termed "golden rules". These three golden rules can be used to multiply your results - not only when investing in property or shares, but also in business and indeed, in all areas of your life.

The premise of the book is that if you can master and continue to apply these three golden rules, what you can achieve may be almost limitless.

The 3 golden rules are:

  • Golden Rule #1: The 80/20 Principle - most of your results will be derived from a handful or ‘vital few’ of your decisions and actions;
  • Golden Rule #2: Snowballing your results - understanding and using compound growth to your advantage; and
  • Golden Rule #3: The Pleasure-Pain Principle - what you link pleasure and pain to will determine the way you act and thus ultimately shape your results.
Keep an eye out for it on the shelves in the second half of 2015.

2014 Nearly Over!

Another year is drawing to a close and what an interesting year it's been! Still to come this week will be our monthly macro housing market update for December and our 2015 property market forecasts by city.

We thought it would be interesting here to take a look at how Australia has changed over the past 10 years. Just think what an awful lot of water flows under the bridge in just one decade!

Back in 2005 in Sydney we had ugly riots in the Macquarie Fields estate, and then later in the year rioting on a larger scale down at Cronulla beach.

In 2006, Steve Irwin lost his life with thousands of us travelling to Beerwah to sign the books of condolence.

Meanwhile the Beaconsfield Gold Mine in Tasmania suffered an earthquake and subsequent rockfall which resulted in a tragedy and an amazing escape for two of the miners, Brant Webb and Todd Russell. We later took the ferry over to Tasmania to visit the mine museum to hear their amazing story.

In 2007 we walked over the famous city "coathanger" to celebrate the 75th anniversary of the beloved Sydney Harbour Bridge which was a wonderful day out, and Sydneysiders also turned off our lights for Earth Hour.

We even had a 2007 tsunami warning in Sydney which shut down Sydney Ferries for an afternoon if memory serves correctly, though my missus was comfortably safe enough - she was out at sea off the coast of New Zealand at the time!

In 2008 there was also a horrible boating accident on Sydney Harbour which claimed five lives.

By 2009 the financial mood had soured following the fallout from the subprime crisis in the US and Prime Minister Rudd announced that he would offer a fiscal stimulus of cash payments to 13 million Aussies. Lots of televisions were bought that year!

Yet by 2010 things in Australia were looking up once again and PM Rudd was considering a new way to tax the "Super Profits" of our mining companies before he was defeated in a leadership spill by Julia Gillard. 

Elsewhere 16 year old Jessica Watson completed a solo voyage around the world and we welcomed her back into Sydney Harbour and watched what turned out to be one of Rudd's final speeches as PM.

Tragically the small cap mining outfit Sundance Resources (SDL) lost its entire board in a tragic plain crash in Africa.

2011 was a troublesome year for Queensland which suffered from terrible floods and we headed up close to Innisfail to work as volunteers on the Cyclone Yasi "Kiss my Yasi" clean-up.

The US debt-ceiling crisis of 2011 and the so-termed "Fiscal Cliff" were compounded by a sovereign debt crisis in Europe of 2012 leading to some unprecedented daily stock market moves in Australia and plenty of worries and wobbles for share market traders!

2013 was a year of many Prime Ministers in Australia within which we ended up with the incumbent Mr. Tony Abbott, while Holden at last announced that it would cease manufacturing in Australia by 2017.

And here we are in 2014, a year in which Toyota has followed Holden in announcing that it will no longer manufacture in Australia.

Of course, these are only a few on the events that immediately spring to mind, and there was much more besides.

The Decade in Charts

Let's take a look at a few charts from the past decade in 6 short parts.

It was a decade through which a great deal of wealth was created in Australia to the extent that we are now the richest nation on the planet in terms of our household wealth.

Keep in mind what opportunities there might in the decade ahead, particularly with "Golden Rule #2" in mind, being the principle of snowballing or compounding.

Like the rolling of a snowball from the top of a hill, where a constant rate of return is achieved on an investment portfolio, the gains grow larger and larger with each passing year or period of time.

Part 1 - Headcount

In just 29 days time Australia's population clock will tick past 23,750,000 (we'll have the latest figures by state for you here on Thursday).

Over the past 10 years the population of Australia has increased by a massive 3.7 million or 18.4 percent.

The rate of growth got a bit faster, then a bit slower, then a bit faster again...but the direction remains clear enough and it will in the decade ahead too.

Most of the population growth has been experienced in Greater Sydney, Melbourne, Perth and Brisbane/south-east Queensland. 

Sydney's population growth has accelerated of late and we'll likely see some unprecedented population growth figures in the harbour city in due course.

Expect similar levels of population growth in the decade ahead.

This of course creates huge opportunities for investors who can isolate demographic trends and spending patterns.

Part 2 - Labour

Despite endless talk of possible recessions for at least the past eight years, we have not had a recession in Australia for well over two decades (see the early 1990s on the below chart) and the labour force has increased by around 1,965,000 or 20 percent over the past decade.

Over the last five years, the huge bulk of the jobs are being created in just those same four capital cities plus south-east Queensland. Regional Australia outside Queensland has not been creating jobs in aggregate, a trend we expect to continue. 

The headline rate of unemployment fell as low as we have seen in modern times by 2008.

Later in that year doom and gloom forecasters predicted up to 20 percent unemployment as a result of the financial crisis, but in the event the rate peaked for the cycle with only a "5 handle".

We are now seeing relatively high levels of regional unemployment as the mining construction boom unwinds.

The unemployment rate in Greater Sydney already appears to have peaked for this cycle at a shade over 5 percent, but interest rates will likely still need to fall due to weaknesses elsewhere in the economy.

Part 3 - Pay

Wage price indices have increased by 45 percent in the private sector and 48 percent in the public sector over the past decade.

In the earlier years of the past decade the mining states led the way, now other states are playing catch-up.

Part 4 - Economic Growth

GDP in Chain Volume Measures terms has increased impressively by more than 30 percent.

The economy grew quickly, then a bit slower, then more quickly again, and then a bit slower. 

But it kept growing.

Australia's GDP per capita in constant prices terms has increased healthily from around US$33,300 to US $37,500 since 2004.

Part 5 - House Prices

Our chart packs haven't yet quite gotten up to December 2014 for dwelling price indices.

As is typical for cyclicals such as real estate there were several distinct periods where dwelling prices were declining in real terms but, over the long term well located capital city dwelling prices continued to increase.

Unfortunately there have been some unusual recommendations as to where to buy and what type of property to buy over the years, but for anyone who has invested wisely in well-located capital city property dwelling prices have increased significantly, resulting in steadily compounding returns on investment.

Part 6 - Share Markets

Those of a negative bent will always take the line that the share market is "only at the same level as it was in 2008" (or whatever the case may be), by tracking back to a recent time when valuations were as high as they are today.

While this may be technically true, it is also disingenuous since it deliberately ignores the point of share ownership or stock market investment, that being the compounding income component (to be fair in some cases pundits also just don't know what they're talking about).

The index is up by around 25 percent in any case and a dividend-rich portfolio has more than recovered any losses that may have been incurred during the 2007-9 crash. On an accumulation index basis in other words, the ASX touched new highs in recent months.

By way of an example of why this is important a $30/share investment in Commonwealth Bank (CBA) has almost completely returned the initial principal invested in fully franked dividends over the past decade. 

Despite ongoing hypothetical discussions about banks going bust that same initial investment is continuing to grow and compound income returns above and beyond the initial $30/share investment in perpetuity, while of course today those same shares are also trading at well above $80/share.

In approximate numerical terms, despite the impact of the global financial crisis $100,000 invested in CBA has returned almost the same $100,000 in fully franked dividends and the same investment is worth well over $250,000 even without the dividends re-invested.

That's compounding in action.

The Wrap

Of course, depending on your outlook on life, you can say "yes, but..." against each of these points and charts. This rather depends on whether you are a "glass half full" or "glass half empty" type of person.

It is ever thus. Where optimists see opportunity and abundance, pessimists see problems and risks.

Over the next decade and over the longer term, successful business owners and investors will continue to compound their wealth just as they did in the last decade and the decades before that, provided that they invest sensibly and wisely in income-producing assets. 

Friday, 12 December 2014

Thriving Industries of Australia's Future?

From Manufacture to Services

If you are interested in economic history you may know that India is unique as an economy in that unlike perhaps every other country which has progressed from "developing economy" towards "developed economy" status, it has all but skipped the export-focused manufacturing stage of its development.

Instead India has gunned straight for its core competency in the services sector, including the providing of shared services such as call centres to the wider developed world.

I saw something else of interest when I lived in East Timor, where television ownership has never become widespread, but instead young people are increasingly skipping forward straight into the digitally connected age by owning mobile phones, and in the case of some younger Timorese, laptops.


Where I come from originally in Britain, with the exception of the fluke discovery of a few billion quid's worth of North Sea Oil (which was basically Scotland's oil but neatly massaged into UK revenues), the one economic success story over the last few decades has been the emergence and then inexorable rise of "The City" as a key global financial centre. That is, London.

The triumph of financial services over manufacturing has not only been important to the development of the British economy and correspondingly to real estate trends - in real estate terms in particular, it has meant absolutely everything.

And how.

The "use great leverage to invest for 'stronger' yields" meme which was so often promoted at seminars in the pre-2007 era is a rather less popular theory today since so many regional investors and homeowners are still even now underwater on their 95 to100 percent mortgages the best part of a decade on.

Australian Industries

You only need to look at the recent Australian trends we've analysed here in manufacturing investment (capital expenditure) to know that just as in other developed countries, manufacturing is now in decline in Australia. 

Other developing countries with lower wages will pick up, while Australia as a high-cost country falls into manufacturing decline.

While there has been much debate as to whether the government should prop up unprofitable industries or allow them to fail naturally, the next high profile closure will be the automobile manufacture industry, which will impact parts of Victoria and South Australia heavily.

Vested interests will invariably argue that the decline of an industry doesn't matter to a region because, well, there are other industries which make up the remainder of the economy.

This is of course true to a point, but in my experiences in Britain the decline a key industry can be of vital importance to a region or city.

Actual and Expected Spend

The decline in actual manufacturing investment expenditure in the chart above is one thing; the decline in long-term expected capex is quite another,

Take the actual long-term expected manufacturing capex in South Australia as an example of a state with a significant manufacturing footprint which has capitulated from $1245 million in December 2010 to a meagre $410 million in December 2013 (the "expected" surveys being produced only annually). Wowsers.

Sure there are other industries in the state, such as defence. Healthcare is another growth industry. Over the longer term, there are significant resources assets which might be exploited, if commodity prices ever recover to attractive levels. 

But it would be drawing a mighty long bow to suggest that the collapse of more than two thirds of the planned investment of an entire industry in just the past three years alone will not have an impact on the local economy, and correspondingly, on consumer confidence.

The Australian Financial Review waseven shocked enough by the recent National Accounts data (which, as I've analysed here previously, revealed a number alarming trends) to ask the Reserve Bank Governor Glenn Stevens himself what on earth is going on - interestingly they have reached the very same conclusion about where the strengths (NSW) and weaknesses of the economy lie:

"One of the things that was surprising about the national accounts was how the strength was really concentrated in New South Wales. I think there was no surprise there’s weakness in Queensland and Western Australia, given the degree to which they’re tied to resources. Are you a bit shocked though at how fast it seems to be softening in South Australia and Victoria, and do you have any explanation for that?"

Alarm bells ringing loud and clear.

Which Industries Will Step Up to the Plate?

Another of the interesting trends we have seen in recent issues of the National Accounts is the contrasting fortunes of Australia's major industries.

While manufacturing has gone from being a mainstay industry in Australia to one of middling importance - and soon to become one of relatively even less significance - other service industries are experiencing an inexorable rise, particularly finance, insurance, real estate & hiring, often known by commentators as the "FIRE" sector.

This trend of the total dominance of the FIRE sector appears likely to become well and truly entrenched over the decades ahead. It's becoming an ever greater piece of the economic pie, and it's where economic strength will be founded in the decades ahead. 

Other industries which appear set to fair reasonably well in terms of Gross Value Added (GVA) include healthcare as the population ages, and mining.

Lest this is not an obvious point, in real estate terms mining towns are generally a terrible idea for investors. 

As Australia transitions into the less labour-intensive production phase of its resources boom, demand for real estate from FIFO workers is in decline - and now so too are rents and dwelling prices in mining towns. In many cases, they are now collapsing as vacancy rates soar to unprecedented levels.

The Rise and Rise of Financial Services

Having worked my entire career in the finance industry in one way, shape or form, I've met an awful lot of folk along the way. 

In the financials sector I've worked in Sydney (and London) with people from Melbourne, Brisbane. Canberra, Perth, Adelaide, Darwin...and also hailing from Europe, Africa, Asia and America.

People come from all corners of the globe to work in Sydney's steadily growing financial services sector.

Over the past 15 years, just as in London, I've often heard people say that residential real estate in Sydney is "overvalued". Detached housing close to the city is also detached from any income-based fundamentals, no arguments there! It's been that way for many years. 

Interestingly I'd estimate that around 950 out of every 1000 people I meet in the Sydney financial services world live in only three small hubs of the city: City & East, Inner West, Lower North Shore.

The others probably live in the inner south, while a few family-oriented folk do move out to the Northern or Hills Districts for space.

While other parts of the city are of course considerably cheaper, most finance professionals barely even countenance the idea of living to the west of Enmore or equivalent distances to the north or south of the city. Many are openly derisory. 

Often unwittingly, therefore, they quickly form a further part of the trend towards expensive inner suburban real estate in the harbour city, increasingly now for established apartment dwellings (though not so much the high rise stock). And so it continues, because Greater Sydney has:
  • a firing economy;
  • massive population growth of ~90,000 per annum;
  • a relatively small number of popular suburbs; and
  • a continuing dearth of the property types/locations that young professionals and dual-income couples desire to live in.
This is set to even more so become the case because while Sydney's economy is the star performer of the Australian economy, other cities and regions are slowing badly and experiencing significantly rising unemployment. This will likely result in lower interest rates and more fuel on the fire in terms of borrowing capacity.

Median prices will do their own thing, but if you know which types of property to buy and in which sector of the market there will once again be further strong gains to be found over the decades ahead.

A Model Successful Property Investor

If you look at a guy like Chris Gray from Empire, he has successfully identified this one big trend and acted upon it to his own great benefit.

Like myself, Chris is a one-time Pom that owns and invests in properties in London and Sydney. Some time in the not too distant future Chris will be a millionaire half a dozen times over, if he isn't that already.

People will says that he's lucky but he's not just that. Over a couple of decades of investing today Chris is a bona fide expert in the minutiae of successful property investment in Australia.

I am sure, however, that if you took the time to ask him Chris would tell you that the actual key to his success has not been his detailed knowledge of investment at all, but rather it has been a combination of the following factors:
  • Identifying one big, key trend 
  • Seeing the big picture rather than fretting about a potentially limitless multitude of possible problems, issues, worries, complications, complaints and hurdles
  • Consistently taking action rather than procrastinating 
  • Having a good head for and understanding of numbers (like me, Chris is - or rather was - an accountant and also like me is a former Deloitte employee)
  • Not being afraid to be a maverick, having the courage to be different and go against the grain, for example by renting his place of residence and investing elsewhere or by venturing into building his own business rather than relying on an employer for a salary
  • Paying no heed to the month-to-month market predictions and the perpetually portrayed doom and gloom in the popular and financial media, which over the longer term have generally been about as useful as an ashtray on a motorbike for real estate trends
  • Investing for the long term by buying only in prime properties in prime locations and never, ever selling a single one.
In fact, next time I see Chris around the traps, I'll ask him myself. Bet I'm right.

Wednesday, 10 December 2014

Euclid's Conclusion


Not a fan of Xmas shopping at all, but as a necessary pain I thought I'd brave the mass hordes of British shoppers in the historic city of Lincoln yesterday. 

Some fascinating history in the city including the Jew's House (built 1150) scene of ugly hysteria in the 13th century on the aptly named Steep Hill.

Lincoln Cathedral (1088) is home to one of the copies of the Magna Carta (signed in 1215, some 800 years ago next year), and perhaps even more importantly, played host to movie scenes from the Da Vinci Code in 2005 where the cathedral was used as a stand-in for the out-of-bounds Westminster Abbey. Heady days indeed.

Cheap Land

Being located absolutely miles from London, and indeed, absolutely miles from anywhere noteworthy, Lincoln for some years held the envied title of being the cheapest city for house prices in the UK, although since the financial crisis crash other cities have taken on this hallowed mantle.

While there is some new demand for housing in Lincoln from immigration, in part driven by an influx of foreign students to the University, there is certainly no scarcity of land available and lot prices remain remarkably cheap. 

Each year a new fringe housing estate seems to have sprung up (with upwardly mobile sounding names like "A-Spire" - actually I just made that up, but usually something similar to that), with new build 2 bedroom houses today starting at a little over £100k and brand new 3 bedroom houses available in the city from around £140k.

Peak Debt

The British housing market has seen prices declining in real terms since hitting "peak household debt" around 2007. 

Prior to that time the UK had undertaken the interesting experiment of lending money to absolutely anyone and everyone, regardless of whether they had actually saved a deposit (or in fact, saved anything at all), with kamikaze loans being issued in many cases of up to 125 percent of the value of the property

The experiment didn't end particularly well, unsurprisingly, but there was a widely held view at the time that people should not need to save deposits to buy houses (cf. "what choice did I have?").

Since 2007, despite very lazy media talk of a "housing bubble", house prices have been have declined in real terms by 30-40 percent outside London and the areas which immediately surround the capital with its heavily restricted "green belt" land.

London has a genuine scarcity of prime location land and with more than 20 million people and rising sardined within the green belt area and interest rates stuck at the zero bound, house prices in the capital have inevitably continued to rise.

Unfortunately plenty of homebuyers and investors were head-faked by the "property always goes up over the long term/invest for high rental yield" mantra and seminar rhetoric of those heady pre-financial crisis days, but once household debt peaked it became clear than this was a fallacy. 

Only land in high demand and with genuine scarcity value has increased in real terms since late 2007, everything else in the regions meanwhile...

Magical Mysteries

Anyway, back to the Xmas shopping, it always seems to be impossible to know what to buy people these days when they already seem to have everything that they could possibly want, so the default choice of gift is usually a new book from the Waterstones store.

My sister-in-law is a numbers geek like me, having studied maths at Oxford Uni, so I bought her the brilliant Casebook of Mathematical Mysteries (she'll never read this blog, so it can be disclosed here that obviously the plan is to read it in full from cover to cover before wrapping the gift). 

"Euclid's Doodle"

If you've ever been interested in subdivision or the rezoning of land you may be at least indirectly familiar with one of the great mathematical mysteries, the Euclidean Algorithm, which has been known about for two millennia since ancient Greece. 

The "bearded mathematician" look has clearly not dated in 2000 years and neither has Mr. Euclid's ingenious algorithm.

Suppose I take my large rectangular plot of land and subdivide a new rectangular plot, then logically enough, I'm left with two smaller rectangular plots of land. I can then subdivide a third and fourth plot from the land if I so choose (not that you need any algorithms to know this much).

So what happens I keep doing this to my rectangular plots of land? 

As the final diagram below shows, the answer is that I am ultimately left with some very small squares of land, with two sides of my smallest plots equal in length to one side of the next largest plot. 

You probably know all this if you've ever subdivided a garden or a plot, and you've probably even drawn something like Euclid's doodle, though you may have given it another name...

Some rather interesting patterns can be found within this series of subdivisions.

The Euclidean algorithm - an algorithm effectively being recipe for solving an calculation - calculates the Greatest Common Divisor ("GCD") of two natural numbers. 

For example if I have a 24 x 60 squares block of land (24 x 60 = 1440), I immediately know that if I want to create the largest square plots that I can, I should aim for 10 plots.

How so? Because the Greatest Common Divisor or "GCD" of the integers 24 and 60, and therefore my block of land, is 12. And thus I am left with ten 12 x 12 square plots as follows (12 x 12 = 144 squares).

Et voilĂ !

Diminishing Returns

While Euclid's doodling might seem at first blush to be a whole load of theoretical nonsense, there is one important logical conclusion to his algorithm, that being that there is clearly a finite end to how many times we can subdivide an area successfully.

This must be so, because the numbers or integers that we are using are positive and we are dividing them, so the figures quickly begin to approach zero.

In terms of rezoning land, there can also be a law of diminishing returns at work here since there is not a great deal of demand for tiny plots of land.

Peak Household Debt in Australia

Australia reached peak household debt around 2006, so it's not surprising that these days I get plenty of emails from people wondering why they have ever invested in property since their returns have been so wretchedly poor...or in many cases even negative! 

Household Finances graph

Many investors have seen little or no real returns in 6 or 7 years because they invested in outer suburban properties, regional centres or small cities outside the four major capitals where land often has little or no scarcity value at all.

If prices do go up then more land is released, rezoned or developed which takes any upwards pressure off house prices again.

To be blunt if you haven't seen strong returns from over the past 7 years it's probably because you have invested in the wrong type of property, because land prices have demonstrably increased in many locations (but only noticeably of late in the main capital cities).

The total value of residential land in New South Wales increased by 37 percent in the six years between June 2008 and 2014, so if you invested in the right type of property (hint: with locational and land value) you have seen dramatic returns.

The problem with so many regional and outer suburban $200,000 properties, which seem appealing and to make good sense because they are cheap and therefore could appreciate, is that median lot prices are worth somewhere around $50,000 with the building value comprising the other $150,000.

$50,000 + $150,000 = $200,000.

Supposing using your outstanding research skills you have invested brilliantly and found a location where land prices surged by a massive 50 percent in that time (unlikely, but let's go with it)!

You would then have a property with land worth 50 percent more or $75,000 and if you are lucky a building still probably worth around $150,000, equating to a total property value of $225,000. 

$75,000 + $150,000 = $225,000.

Hmm. Real estate suddenly doesn't look like such a smart investment in this example since the compounding return from capital growth on the total value of the property is below inflation at only 2 percent. 

Even where land prices have spiralled by an astronomical 50 percent in only 6 years, the investment has failed to match inflation.

The point is that above inflation returns from capital growth for most Australian residential real estate ended quite abruptly with peak household debt in 2006 and returns in most areas have been rubbish ever since.

Investing in cheaper property with low land value is often the equivalent of investing in the future price of bricks, because the replacement cost of property on greenfield sites in outer suburban locations is very low. 

Indeed, it has actually been becoming cheaper in real terms, because the price of project homes has actually been declining in real terms.

Beating Inflation

The flip side to this story, of course, is that houses that sit on plots in inner Sydney have seen land values escalating from below $600,000 to $900,000 or above delivering enormous returns to owners, because they own something that is both scarce and in high demand.

We haven't subdivided our way to the logical conclusion of Euclid's doodling in Sydney in terms of rezoning land, but, heck, we're not very far from it. In inner locations there are no vacant plots, while high land remediation costs means that replacement cost per property are very high, even for blocks of apartments.

The zoning map above is for the lower north shore, but we might just as well have copied here the LEP zoning map from the eastern suburbs or the inner west. 

There is a small amount of green space zoned for recreational public use, some railway and commercial zoning, and a bit of white space at the bottom which tends to be good for yachts, Sydney Ferries and 18ft skiff racing, but not so good for actually building on.

The remainder of the council LGA is fully built out and can be subdivided no further. The only direction left to build is up, but in the leafy green suburbs this will never be allowed by NIMBYism and a pent-up tsunami of potential complaints to planning agencies.

This is not exactly true everywhere in Sydney, of course. In the inner south and around the airport much industrial land has been rezoned for new apartments, and this will also be the case in a number of Urban Activation Precincts (UAPs) located around certain transport hubs. 

Investing in those new developments is unlikely to be such a smart idea since prices are sky high and there is little or no scarcity in that property type.

In the inner west occasionally a greyhound track is pulled down for redevelopment, or an industrial park is sold to a Hong Kong developers for an absurd $350 million. Shamefully on the odd occasion we even build a few blocks of flats on the small islands of green public space. Effectively, though, the inner suburban land supply is all but fixed. 

It has genuine scarcity value and demand is growing in Greater Sydney by around 90,000 persons per annum.

Holding Costs and Attached Dwellings

Of course entry costs can be a tough hurdle in cities like Sydney or even Brisbane and the holding costs on expensive houses can be painful, despite forthcoming record low mortgage rates.

This is why most investors look at units and apartments in Sydney, but a glance at quarterly movements in median unit prices should immediately tell you that you need to be careful what you buy if you want to secure solid returns.

As a very general rule, the more your apartment block is similar in nature to a house (i.e. smaller apartment buildings with lots of land value and not too many individual units), the better. 

On the other hand, the more your apartment looks like a skyscraper, the more likely you will also be scraping together paltry returns in the same way that investors in outer suburbs and many regional areas have been since Australia hit peak household debt in 2006.

Median capital growth on units can often appear to be quite inferior, but if you have owned the right type of Sydney property, you should have seen exceptionally good returns in recent years - asset selection is absolutely the key.

Is There Another Way?

Is this unfair and skewed towards those of us who bought inner city properties years ago or those who can afford to do so now? 

I guess, though it certainly never once felt like it at the time of buying. When we were buying properties in the inner west years ago it was all about the eastern suburbs - everyone wanted to be by the beach and the city and the inner west was considered by many to be uncultured, uninhabitable or even a "ghetto".

Today prices continue to rise, but this is largely because Australia has developed and encouraged a flawed obsession that we can cram ever more people to within a tiny radius around four main capital cities.

Thus we see regular articles from journalists lamenting that they can't afford to buy houses in the inner west despite $1 million budgets (which would buy a mansion further to the west, south-west or north-west of the city), or close to Bondi Beach, or funky terraces in Surry Hills.

We shouldn't all need to live in a handful of suburbs, of course, and t
here is a solution which is more investment in regional business, jobs, transport and infrastructure, but if we all keep trying to buy houses in the same few areas, prices will inevitably go higher (and human nature is surprisingly predictable in this regard, with some years of practice). 

Instead Australia is adopting precisely the opposite approach to what is needed with jobs growth and population growth increasingly focused on the inner and middle-ring areas of our largest four capital cities, as concluded by independent studies carried out by the Grattan Institute, AHURI, the Reserve Bank and countless others.


The ABS Housing Finance data will be released at 11.30am today. This will be closely watched by markets and regulators.