Pete Wargent blogspot

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

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Sunday, 24 January 2016

Cycles gonna cycle...

Doom and gloom!

Does it seem to you that there are an awful lot of doom and gloom articles around at the moment? It certainly seems so to me!

The reality is, if you want to find folk predicting an imminent apocalypse, then there will always be plenty on hand to provide that service for you....and I do mean, always! 

Indeed, in the internet age it is perfectly possible to find a daily newsfeed of misery, if that's the sort of thing which floats your boat.

It's all too easy to make relentlessly bearish prophecies as we have seen over the last dozen years or so, for if the calls don't come true then there is very little accountability, and the timescale simply gets pushed out for another year or three. 

The fact is that economies and markets move in cycles, so in that sense we actually are always heading for the next boom or the next bust, at some point in the future.

Timings are forever uncertain, but booms will always be followed by downturns (or even sharp corrections), which will always be followed by recoveries.

I have always believed that whether you invest in shares, property, small business, or all of the above, the trick is to find quality long term investments which can perform well for you through the cycles, and not to have all of your eggs in one basket.

That way you don't have to waste too much of your precious time listening to the media poobahs and soothsayers.

Nobody can see the future with any accuracy, but you can at least put the odds in your favour. 

Of course, we haven't had a recession in Australia for about a quarter of a century now. But as I'm British by birth, I do at least know a little bit about recessions and market downturns - they aren't much fun, but then they do offer opportunities too.

Indeed, Britain has just been through its darkest recession and associated property 'crash' in decades.

Hometrack shows London strength

The latest UK Hometrack 20 Cities Index was released this week and it showed that while property prices in some locations have struggled badly since 2007, others have continued to perform tremendously well.

As you can see in the chart below, my favourite picks - namely Cambridge and London - continue to sit at the top of the tree.

The oil price shock has seen formerly solid growth in Aberdeen quickly turn negative, from +13.5 per cent a year ago to -1.4 per cent today, perhaps to a very small extent mirroring the throes and woes of Australian mining towns.

This chart gives a fine visual representation of the importance of real estate location as well as asset selection.

It is no surprise here to see the "twin cities" as Hometrack now labels them (markets in Cambridge and London have performed in near lockstep, despite the fact that the city of Cambridge is located some 45 minutes from the capital by train) leading the capital growth charts yet again in calendar year 2015:
  • Cambridge +14.4 per cent 
  • London +13.3 per cent
Since the preceding market peak, while most regional city markets have seen close to zero price growth - and significantly negative growth in real terms following an engineered burst of post-financial crisis inflation - the capital city and its proximate University city have seen exceptionally strong growth.
  • Cambridge +49.6 per cent 
  • London +47.3 per cent
As for the period covering the market trough to current prices, these two cities have absolutely shot the lights out:
  • Cambridge +78.4 per cent
  • London +74.3 per cent
The Council of Mortgage Lenders (CML) reported this week that UK mortgage lending has now hit a 7 year high, with an all-too-predictable surge in buy-to-let lending before stamp duty hikes and tweaks to interest deductibility kick in.

Sydney - 2015 land values

One of the reasons that despite cyclical corrections it has been such a difficult proposition to be on the short side of Sydney property over the years has been the ongoing escalation in land values, driven in part by strong population growth.

Data from the NSW Valuer General showed that 2015 again saw substantial increases in median land values across great swathes of the city.

Apart from the Blue Mountains, where the median land value increased by only +5 per cent in 2015, residential land values in Sydney showed significant growth right across the board. 

One of the LGAs I have been targeting in recent times - see herehere, and here for example - has been Randwick, particularly due to the introduction of a new light rail route which will open up the south eastern suburbs of the city.

Note the enormous leap in Randwick land values in 2015 as investors latched on, though in fact almost everywhere in Greater Sydney saw another year of thumping gains in land values. 

That said, not everyone can afford inner suburban capital city property, so those without the budget need to be more thoughtful and considered. 

In May 2014 Property Observer ran a piece on where first homebuyers should look to buy (see link). My recommendation was that first time buyers should look at Blacktown, with lenders accepting relatively small deposits at that time and plenty of upside potential for the suburb.

The results have been rather spectacular, with median value of residential plots booming by close to +48 per cent in the last 12 months alone. 

At the risk of stating the obvious that particular ship has now sailed, while auction clearance rates in Blacktown, the outer western, and south western suburbs suggest that prices in those locations were already in correction mode by the back end of 2015.

As such, land values were materially higher across practically every metropolitan location at the end of the year as compared to the beginning of it.

Long term outperformers

Over the longer term, however, land value ratios and the nature of compounding growth ensure that the best performing properties will be those which sit on land with genuine scarcity and are in the highest demand. 

The highest dollar value gains in 2015 land values were seen in Randwick (+$297,000) and Waverley (+$290,000), with Bondi continuing its outstanding run since 2008. 

Substantial increases in land values were once again seen in the eastern suburbs, the inner west, the nothern beaches, and the lower north shore in 2015, with the highest land values situated in the east and the inner north.

Perhaps not surprisingly the smallest dollar value increases in Greater Sydney median land values were seen in the Hawkesbury (+$42,000), Campbelltown (+42,000), Penrith (+$32,000), and the Blue Mountains (+$11,000).

Overall in 2015 land prices rose by another +22 per cent in New South Wales - despite declines in eight regional areas, including Muswellbrook and Cobar - with aggregate residential land values in the state rising close to $1 trillion. 

Early on-the-ground reports from OFIs suggested a level of market confidence returning to Sydney buyers this weekend, and this was certainly evident at some opens in Brisbane.

Knight Frank forecasts 10 per cent price growth for Sydney in 2016, which sounds rather too optimistic to me, but then I've underclubbed my Sydney predictions for three calendar years in a row now.