Pete Wargent blogspot

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

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Sunday, 28 February 2016


Ain't no mountain

Two Aussie friends of mine Nina and Karl went to the UK for a holiday last year and were considering climbing one of the highest "mountains" over there, Snowdon in Wales (we don't really have mountains in Britain as such, think of a large hill with some very steep edges). 

However, they weren't properly equipped for what can be a dangerous climb in parts, plus they have two fairly young children.

As it can be quite a hairy ascent with some potentially lethal sharp drops, they decided against it and took the tourist railway to the top instead (UK moutains aren't that big, eh).

It wasn't that Nina felt the kids bolting off the edge of a cliff was a likely occurrence - the nippers are both old enough to know better than that - rather that the consequences of a careless mistake or unforeseen accident were too terrible to contemplate, and thus they felt that they could not take on such a risk.  

Widowmaker trades

It's been an explosive week or two to say the least in property-related media, with some diabolical stories coming to light about young investors who were advised by property seminar types to use massive leverage in order to speculate in illiquid and extremely high risk mining town properties.

Having been born in and spending my early years in a frequently depressed coal mining region, I've always been dead set against the idea of property investment in mining towns - plain cuckoo if you ask me - the real killer blow being that when the cyclical downturn inevitably comes, not only do prices collapse, there is nobody willing or able to rent the darned dwellings either.

As such, the most misguided part of the entire strategy was that it was enthusiastically promoted based upon obviously unsustainable cash flow returns running into thousands of dollars per week in some cases, in essence trying to turn residential property into something it is not: an income asset.

Having initially claimed credit for the successes of their clients, those recommending extremely high risk mining town strategies are now attempting to distance themselves from the whole sorry saga, deleting promotional articles from their websites and so on.

Of course it has been relentlessly tough on the poor souls who paid thousands of dollars for such dud advice, with bankruptcy the only realistic choice for some.

This is not to say that their aren't risks of my preferred approach of investing in the largest capital cities too - there certainly are - but they can be better managed with a long term outlook provided that you are sensible, keep prudent buffers to manage cash flow, and understand exactly what your strategy is.

It can also help a bit if you know what you are doing.

Hometrack index

In this context, for years I've discussed on this blog that I believe the best long term bets in UK property to be the capital city London and its "satellite" university city Cambridge (I'm not big on regional locations as a general rule, but the restrictive UK green belt policy has put enormous pressure on land values in the crowded south east of England). 

The latest UK Hometrack figures showed that Cambridge yet again leads the way with +13.9 per cent growth in the year to January 2016, following on from +10.4 per cent growth in the year to January 2015.

Price growth has been almost unbelievably strong for so long now that a correction must fall due eventually, most likely as and when mortgage rates revert higher. 

London has also continued to record extraordinary results with another +13.4 per cent growth in the year to January 2016, following on from +12.2 per cent growth in the year to January 2015, though I expect that the more expensive boroughs will soon feel some fallout from stamp duty reform.

Make no mistake in a period when inflation has been stuck around zero, these returns have been enormously strong, and indeed they have been over the past couple of decades.

Most of Britain's coal mines have long since been shut down, including those in my home region of South Yorkshire. Yorkshire had a total of 56 operational collieries in 1984, the last of which was closed down only in December 2015.

For that reason the closest we have to a "mining town" in the Hometrack 20 Cities Index is Aberdeen, where as you can see above the crash in oil prices has seen price growth flip from double digit levels to sharply negative growth in a very short space of time.

In former coal mining towns, house prices in some cases even collapsed to zero, with the government even offering loans for folk to buy houses for a solitary British pound and then renovate them back into an inhabitable condition.


Last month's Hometrack release showed that Cambridge and London have recorded exceptional price growth even through the great recession and beyond. 


It's a colossal week ahead for local news, an absolute monster!

Being the end of the month, we will get to see the private sector credit figures from the Reserve Bank of Australia - wherein we can expect to see credit growth of around +0.5 per cent - as well as the usual monthly house price data which will likely reveal moderate gains.

Annualised housing credit growth has been tracking at around +7.5 per cent through the back end of 2015, but with investor credit having been strangled to some extent by regulatory intervention it appears likely that this figure will pull back a bit over the months ahead.  

There are also the December quarter GDP partials to be reported within the Business Indicators and Balance of Payments releases, including company profits, inventories, public demand, and net exports, culminating in the GDP result for the final quarter of calendar year 2015 which will be released on Wednesday.

Expect the Australian National Accounts to show that the economy grew by around +2.5 per cent in 2015, with net exports (including of services) having made a modest contribution in the December quarter, offset by the significant ongoing drag from resources construction. No inspirational signs of life in household consumption just yet either.

There are a raft of other interesting releases to come through the week, including Building Approvals and Retail Trade (+0.4 per cent expected for the month) for January 2016. 

Dwelling approvals are forever and inevitably low in the quiet holiday month of January, so the strength or otherwise of this result will be significantly impacted by the seasonal adjustment applied. There has been a lot of volatility lately from the "lumpy" approvals of high rise apartments. 

There is also the International Trade in Goods & Services balance to look forward to. Coal shipments and LNG volumes were up in the month of January, but the trade deficit nevertheless has the potential to blow out to $4 billion or even some way beyond, despite a bit of a rebound in the iron ore price.

Last but certainly not least the Reserve Bank of Australia will announce that it will leave interest rates on hold at 2 per cent on Tuesday, but analysts will continue to watch closely for hints of any easing bias indicating a likelihood of further interest rate cuts later in the year.

Strewth, it's going to be quite some week! Stick around for analysis of some of that...or preferably all of it!