Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), & 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's 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 & charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, author of the New York Times bestsellers 'End Game' & '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'.

Thursday, 20 July 2017

ABC Lateline: Modelling the downturn

Modelling downturns

Housing market modelling shows that a more responsive supply of property to rising prices tends to generate dynamics that can ultimately lead to financial distress.

In Sydney's now-record construction boom this is most likely to mean markets on the city fringe where land is abundant, and the high-rise apartment sector of the market where the sky is almost literally the limit to the response in supply.

The overhang

Why is this so?

The short explanation is that in supply responsive markets large volumes of property are built during the boom period, thus creating a larger overhang of excess dwellings when the market turns down.

This alone can amplify the downturn in prices.

And since by definition more people will have bought near the peak of the market cycle, then more of the loan book is accounted for by borrowers that are liable to experience negative equity, magnifying market risks. 

Time-to-build lags add to risks

Where time-to-build lags are longer in highly responsive markets the impact on loan performance can be exacerbated.

That is, where supply is highly responsive to rising prices but production delivers new housing supply over a longer period. 

This implies that some of the greatest risks are likely to be in the new apartment market, particularly in inner city Brisbane.

Characteristics of loan contracts

In Sydney's case, there is a further concern that if homebuyers are borrowing up to $1 million to buy new homes on the city fringe, then rising interest rates could eventually cause financial distress.

Housing market models unanimously show that the trajectory of interest rates during the downturn is likely to be pivotal in determining the extent of negative equity. 

Note that in Australia many investors have used interest only loans to fund purchases, which due to APRA's new regulatory measures may now be flipped into principal and interest loans at the end of the initial interest only period. 

I discussed this in a summarised fashion on ABC Lateline last night (click image to view video). 

Obviously this is a short excerpt from a considerably longer interview.

The statistical analysis sitting behind our views of the risks broken down to the LGA level can be found in our market reports