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

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

Sunday, 29 November 2015

Forecasting myths

Supermex

Slow Sunday arvo here, so been watching a few old golf videos. If you didn't know any better, watching old vids of Lee Trevino's swing with his awkward ducking head movement you might be disinclined to believe that he was anything more than a mediocre pro golfer, yet as a six time major championship winner he was one the sport's greatest ever competitors.


Echoing Newton's third law that every action has an equal and opposite reaction, Trevino understood that golf is a game of opposites: if you want to hit the ball up, then swing down hard, while if your club swing through the ball to the left the ball can fade or slice to the right, and so on.

"Supermex" himself was initially plagued with a chronic hook, which he in turn corrected to a fade with an open stance and an exaggerated out-to-in swing, in the process becoming a lethally effective iron player. 

Through recognising that golf is not a game of absolutes, but rather one of subtle opposites and dozens of nuanced actions and reactions, Trevino understood that the player with the "perfect swing" does not win and so set about building a swing that was repeatable and reliable, becoming one of the true champions. 

There will be good times and terrible times, you can hit amazing shots and awful shots, but with a repeatable plan, the "Merry Mex" was able to triumph - even with all that head movement!

Forecasting myths

Last week Reserve Bank Governor Stevens disclosed that he had discussed with his underlings whether the Reserve should do away with its apparently precise central growth, unemployment and inflation forecasts, in favour of publishing only their 'fan charts' and ranges in tables. 

By way of an example the November Statement on Monetary Policy (SOMP) forecasts showed GDP growth returning to 3 to 4 per cent by the year ended December 2017, with the unemployment rate forecast to decline gradually, but the fan charts show that even the 70 per cent confidence intervals are surprisingly wide. 


Noting that accurate forecasting is impossible, Stevens lamented that even if even if the central lines were to be left off the fan charts altogether, those awkward commentator folk would simply back it of the charts, which seems rather unfair.

In short, the most powerful central bank or econometric modelling can't forecast accurately what will happen over any meaningful time horizon, and neither can you!

Ponzi scheme

Also last week a macro market report hit the headlines likening the Australian property market to a Ponzi scheme. Australians would be forgiven for thinking that they've heard such warnings before, for the simple reason that they have, more or less continuously since 2001.

I haven't read the report in question, so am in no position to critique the content, but to his credit Lindsay David of LF Economics has previously made predictions that are specific, measurable and time-bound, and so his predictions can be judged accordingly. 

Co-author Philip Soos has nothing if not longevity, rolling out his crash predictions for such a long period of time that they are threatening to see off their fifth Prime Ministerial term of office (his views were expressed in some detail in the piece "Bubbling Over: The End of Australia's $2 Trillion Housing Party" which predicted a 40 per cent crash for housing values nationally). 


The last time anyone bothered to check the value of Australian dwelling stock had swelled to $5.8 trillion with the latest available data implying that $6 trillion is a shoo-in, probably before the end of the calendar year.


To be fair, on the one hand dwelling prices have indeed corrected sharply in any number of mining towns and regions: Gladstone, Port Hedland, South Hedland, Dysart, and Moranbah spring to mind, and no doubt there are plenty of others.

On the other hand figures released by Residex at the end of last week showed that Sydney's median house price has increased from $668,000 at the end of 2010 to $1,058,500 by the end of October 2015, an increase of more than 58 per cent or nearly $400,000.

Buried under the emotive rhetoric Soos has made a number of robust arguments, in particular the illusory nature of housing shortages, which are seemingly apparent when the economy is humming along, but can wondrously vanish into thin air when market downturns happen.

These simple points highlight the perennial challenges facing macro property market research reports and forecasts: market timing and granularity.

Timing

While macro research can identify downside risks and probabilities, history suggests that it is very difficult to forecast housing markets accurately over any meaningul time horizon.

Famously Case & Shiller called the US real estate bubble in July 2003 when its index read 142.99, yet the index ran all the way to 206.52 in July 2006 before reversing all the way back from whence it came to 134.07 in March 2012 (the latest Case-Shiller reading in 2015 showed the index to be 28 percent above the level it was tracking at the time of the original bubble call, while homeowners have continued to benefit from housing services throughout).

There would be similar tales in Northern Ireland where average house prices all but tripled from £88,000 to £226,000 between 2002 and 2007 before crashing all the way back to £125,000. An obvious bubble, sure, but the timing was difficult (if not impossible) to pick. The average price today has increased again to £162,000, approaching double the average house price in 2002.


In London we have heard crash predictions for at least the past decade-and-a-half, while despite downturns and recessions house prices in some boroughs have tripled...and still there has been no crash.


Few would disagree that parts of Australia's housing market are seriously expensive, but timing the downturns is rarely as easy as it appears in hindisght.

Granularity

The state level data shows that since September 2011, New South Wales (+57 per cent) and Victoria (+23 per cent) have accounted for 80 per cent of the increase in the total value of dwelling stock, while the figures for the June 2015 quarter showed that prices are declining in Western Australia and the Northern Territory.



The obvious point here being that there is no "Australian property market", rather a series of sub-markets which cover 9.6 million dwellings and demonstrate very different characteristics and fundamentals.

Having observed the history of bubble predictions Scott Sumner once concluded that: 

"If we notice market movements that seem to align with our initial forecasts we tend to pat ourselves on the back and assume the forecasts were correct. This is one of many cognitive biases that human beings are prone to. Pay no attention to bubble forecasts. They are useless. Indeed the entire bubble concept is useless."

Risk markets

Last year Soos wrote that due to it having the strongest yields Darwin has the smallest property bubble, a theory which might hold some sway in an academic vacuum, but shows a worrying lack of understanding of the real world and what caused the Top End's housing boom in the first place. 

In fact, in my opinion at any rate, Darwin appears to be the capital city with by far the greatest risk of a genuine price crash, with rents now in freefall and vacancy rates rising sharply (cf. the illusory supply shortage identified by Soos himself). 


Thin property markets such as Darwin with a relatively small population are more prone to shifts in dynamics at the margin, and as population growth switches into reverse gear by the end of this calendar year the results to the downside could be spectacular. 

Other high risk markets include any number of regional areas with a residual resources capex footprint, with mining capex now collapsing, while parts of inner city Melbourne and Brisbane are suffering from overbuilding of new apartments, with APRA's lending crackdown set to leave many off-the-plan buyers short

Even within capital city markets there are sub-markets which can be expected to experience diverging fortunes. 

For example, with the population still expanding rapidly, Sydney has a number of inner city markets for which demand is so high that any correction in prices will be met by a wave of new buyers. On the other hand, price inflation in some of the outer western Sydney locations over the past few years has been so far beyond absurd that even a 40 per cent correction might represent a neutral scenario.

Auction results

This week's auction results represent the Sydney property market dichotomy quite well. Hot...


Hot...


And not...




Most auctioned properties also passed in at Parramatta, Northmead, etc....