Lets talk Turkey

Market dogs

I wrote a series of blog posts earlier this year about the 'dogs of the world' approach to investing, to provide some counterbalance to the exuberance of some global stock markets. 

The key elements of the strategy are are mean reversion, buy low and sell high, and diversify.

The internet is utterly awash with Warren Buffett quotes about being fearful when others are greedy and heaven knows what else.

It's true that Buffett's great genius over the years has been to wait patiently for attractive prices before buying hard. 

But in reality most of those doing the quoting about buying when others are fearful (value) are in reality following the herd just the same as the rest (momentum). 

But can you genuinely be greedy when others are fearful?

Well, that's the ultimate test!

Turkey shoot

I had a chat with Mr. Alan Kohler of ABC News and the Constant Investor earlier today - a very brief chat as it turned out, as he had to go and prepare to report on the Turkish lira crisis.

All news channels will undoubtedly be locked and loaded onto this story with a vengeance due to the heightened and justified fear of contagion.

Yet this is also a key indicator that we're now hitting the point of maximum panic.

The Turkey ETF is now showing a total return since January of negative more than 50 per cent as money managers are unable to justify putting client money into such a high-profile basket case. 

And the MSCI Turkey ETF is down another 12 per cent in pre-market (Turkish equities are now more than 70 per cent below their 2013 peak).

Markets were similarly and extremely concerned about a Turkey default in 2003 leading to some very pessimistic equity valuations at that time. 

Returns in 2004 were up 42 per cent as peak fear passed.

It goes without saying that this strategy is something for a part of a portfolio rather than the bulk of it, and going for the ETF option is lower risk than trying to pick out individual companies. 

Note that this is not a buy recommendation, as I don't give those on this blog.

And anyway, you do need to be able to hold your nose with this strategy at the best of times (or should that be worst of times?).

By way of disclosure, though, all prospective commentary on the Turkish ETF will be positively biased.

Hopefully we'll be Thanksgiving in a year or two from now :-)

Inner city apartment construction halves

Apartment construction drops

Handy stuff from the Bliebster at the AFR today, citing JLL's latest market report on apartment construction. 

In Sydney the number of inner city apartments under construction more than halved from 16,143 by the end of the June 2018 quarter from 39,621 a year earlier, he reports. 

In Brisbane the equivalent drop has been from 11,048 inner city apartments under construction to 6,877, which also comes as little surprise to readers here. 

This was always going to happen, but in the event it came about a few months later than I'd expected...c'est la vie.

As I noted in a recent free market report, only Melbourne of the eastern seaboard capitals has the requisite dynamics to sustain high levels of apartment construction at the present time.

In fact, Melbourne apartments under construction jumped 23 per cent in the June quarter according to the JLL figures, underscoring the point.

The latest ABS available figures relate all the way back to the beginning of the calendar year, so given that we're now in mid-August these are very dated, although they did confirm that the glut of unit completions was beginning to rain in for Sydney and Brisbane early in the year. 

Temporary spike in rental vacancies

This great rush of completions in H1 2018 has already been reflected in the surge in Sydney's vacancy rate to 2.8 per cent as the new stock is absorbed. 

The city itself will grapple with congestion issues as the new residents get bedded in, leading ever more Sydneysiders towards the use of public transport as the population approaches 5.2 million. 

On the plus side, this represents a huge stamp duty windfall for the Office of State Revenue NSW as all these apartments settle.

Supply issues not fixed

Contrary to what some people think, Sydney doesn't have 'too many' physical dwellings, as well demonstrated in work done by the Grattan Institute and others. 

As the 2016 Census night showed, the number of vacant properties was remarkably low for such a large city.

Instead the rising vacancy rate represents a great swathe of many similar property types - mainly small apartments - completing at the same time, with a record number of investors in recent years adding to the rental supply, combined with a seasonally soft winter rental market (this will change a good deal in summer). 

But with the harbour city now at full employment and its population still growing at a powerful ~100,000 per annum the new supply will be absorbed comfortably enough over the next 6 or 7 months. 

In the meantime, watch out for rising settlement default risks and more failed apartment projects. 

In Brisbane the rental vacancy rate reported by all data providers has now been trending down for months, as confirmed by the Reserve Bank in its Statement on Monetary Policy last week. 

That's good news for Brisbane landlords after a tough couple of years for the rental market. 

This time next year, Rodney...

Cryptoshambles

An unfolding debacle.

Source: r/CryptoCurrency via Twitter/bullionbaron

And dozens and dozens more ICOs are in the post, too.

Woe is me!

Melbourne misery

It feels a bit counterintuitive to be writing about misery after a magnificent morning of boogie boarding at Coolum Beach. 

However, I flew down to the Melbourne winter for a couple of days this week - enough to make any resident Queenslander miserable! - and looking with a raised eyebrow at the mass consumption in full swing down there and it got me wondering about all the talk of stretched household budgets and the like. 

Way back in the 1970s American economist Arthur Okun created his famous misery index, which added the seasonally adjusted unemployment rate to the annual rate of inflation to produce a crude measure of pain for households and economic displeasure for the average voter.

Of course, any such index can't reflect the experience of all households.

And given that inflation rates have been much lower on average since the introduction of inflation targeting the results might always look relatively rosy for the modern household.

Australian crawl

With all that in mind I decided to have a bit of a crack at creating a modern Australian equivalent index. 

Firstly, we still start with the seasonally unemployment rate.

It's not perfect, not least because the unemployment rate is very much a lagging indicator, and as such may be prone to understating household pain at the beginning of a recession.

I dabbled with the idea of using the underemployment rate instead, but that isn't perfect either - even if you were using the volume measures - and ultimately there is still no better measure for the health of the economy than the rate of unemployment.

So that's the first part of the index. 

Then we add the headline inflation rate, also in the spirit of Okun (you could make a case for using a core measure of inflation, which would be hard to argue with). 

Given the prevalence of household debt these days, the standard variable mortgage rate (SVR) is then added as a proxy for mortgage serviceability.

You could equally choose to use a ratio measure of mortgage repayments to disposable income to reflect the increased level of household debt, but over the past 20 years the outcome wouldn't be as different as you might think. 

And finally the annual nominal growth in the wage price index is subtracted from the above figures, because people tend to be happier about life when they can see that their salary is heading north. 

You could make a good argument for instead deducting the annual growth in GDP per capita, but since economic growth over the years ahead is likely to be driven in part by a boom in LNG exports that may not directly benefit households in the short term, I've plucked for wages growth.

Let's take a look at what the revised model spits out...

Misery index 2018

It's interesting to look at what the chart throws out for the past two decades, keeping in mind that a higher reading is bad, and a lower reading is good. 

Firstly there was a horrible increase in the year 2000 which largely related to a nasty spike in inflation after the introduction of the GST became effective on 1 July 2000, with an accordant hike in interest rates.

A look back the consumer price index for the September 2000 quarter makes for a bit of gruesome reading with all measures of inflation surging.

Consumer prices eventually cooled, and a few cuts to interest rates got things back on track.

Secondly, there was a spike in the Wargent Misery Index (trademark still pending) in September 2008 as the unemployment rate began to increase, while there was a spike in rents as property investors were spooked out of the housing market by the unfolding global financial crisis.

The Aussie dollar also dropped very sharply at that time from 97 US cents to 62 US cents in a matter of months, with a devaluation of the currency tending to drive inflationary pressures resulting from higher import prices.

Wages growth the missing piece

One positive observation derived from all this is the adaptability of Australia's open economy, with movements in interest rates, a floating currency, and the flexible labour force generally able to absorb shocks and helping to get things back on an even footing over time.

As for what the index shows today?

The unemployment rate has been falling gradually, inflation remains pretty low in historic terms, and mortgage rates are low too.

The index reading is happier than the 20-year average, then, but has deteriorated a bit over the past 9 months due to a combination of low wages growth and a bit of an increase in things like energy and fuel prices. 

The missing piece of the puzzle, clearly, is wages growth.

The wage price index for the June 2018 quarter isn't actually released until next week, so I've used the Bloomberg market median forecast of 2.1 per cent here.

Any prospective upside to wages would clearly be welcomed by both consumers and policymakers!

Last of all, what combination would be required to drive the index to the happiest level ever?

Well, assuming no change in mortgage rates, unemployment gradually getting down to assumed full employment at 5 per cent, and inflation sitting in the middle of the target 2 to 3 per cent band, the  wages growth would have to get quite close to 4 per cent to see a 'best ever' misery index reading.

So, alas, that's not going to happen any time soon! 

Weekend reads - must see articles of the week

Weekend reads

Summarised for you here at Property Update, the world's #1 ranked property website.

You can subscribe for the free newsletter and more here.

3 Friday nuggets from the SOMP

Statement on Monetary Policy

A sumptuous SOMP from the Reserve Bank of Australia today.

Particularly of interest were some useful explanations of bank funding costs, which are up a bit, if not a lot. 

Melbourne on fire

A couple of other interesting things jumped out to me. 

Firstly, we already knew that job vacancies are very healthy in Sydney and Melbourne.

In fact I was just down in Melbourne for a couple of days, and it looked to me like the economy is absolutely screaming along down there. 

I couldn't even make the weather look nice with an Instagram filter, but to witness the consumer economy down their in full swing is something else. 

It's almost as though Melbourne has been sucking the energy out of a number of the second tier capital cities in recent times, and jobs vacancies in Victoria are rapidly approaching the highest levels imaginable. 

With half of the state seemingly now getting under construction it's very much a case of full employment here we come for Melbourne. 

More interestingly, perhaps, job vacancy rates are now rising in Western Australia by the week, with a nascent commodities echo-boom leading to a shortage of available engineers, and hopefully in turn rising wages. 

And finally for today, rental vacancy rates are generally trending down outside Sydney - including notably in Brisbane - while Canberra took yet another leg down.

In fact, rental vacancy rates in the nation's capital looks to be heading to below zero. Oops.

As for inflation getting back to target any time soon, well, err, no it's going to fall to 1¾ per cent actually, although growth in the economy is expected to remain above 3 per cent for a while.

But some time in the next few years we'll get back on track seemed to be the core message.

The market median forecast for next week's wage price index suggests a moderately improved 0.6 per cent growth for the quarter, and 2.1 per cent for the year. 

So, a very gradual improvement is expected. 

Anyway, back in Queensland now, so off to the beach. 

Have a smashing weekend all!

Crypto 2018

A big year for cryptos was promised in 2018.

Certainly it has been that.

#investment

Investor loans dialled back

Investment loans dialled back further

The flow of new investment loans has dropped to the lowest level in about half a decade.

Just as interestingly, the investor share of the stock of outstanding loans fell to 33.7 per cent in June.

That's well down from 39 per cent only three years earlier.

In fact, the investor market share of outstanding loans is now below the average level since June 2004.

It's not too hard to see why rental price growth has been so soft over the past few years looking at the number of investors that were piling into the market.

However, that balance now looks to be shifting back. 

Interestingly this is one way in which the inflation rate could get back towards the target - pushing up rental price inflation.

Whether that's 'good' inflation is another matter entirely, of course!

'Credit positive'

There's a fair amount of prominent commentary around as to what happens next for mortgage lending, generally ranging from despondency to doom and destruction.

Financial markets aren't taking such a dismal view, though, and the banks themselves would doubtless argue that the slowdown in investment lending and dwelling prices has improved their standing and risk profiles.

While punchy Royal Commission headlines put a temporary dent in some equity valuations, the impact overall has been fairly muted.

CBA's full-year results yesterday were generally met with a positive market response, with the rhetoric suggesting that lending volumes will be robust enough over the next year.

Banking Day reported this morning that loan caps were removed for HSBC Australia, Macquarie, and People's Choice Credit Union, though what that means in practice is less clear given tighter standards.

Housing market musings have become more and more focused on 'the now', but overall the desire for home ownership remains strong and in time lending growth will likely pick up again.

As the Reserve Bank Governor discussed in a speech yesterday, immigration has done something quite dramatic to Australia's population pyramid, making a significantly positive difference to the ageing of the population:

'The movement to Australia of large numbers of young people over the past decade has changed our demographic profile in a positive way.'

Indeed so.

And just take a look at that surge in 25 to 35 year olds coming down the pipe: demand for medium-density housing is going to roar higher over the next decade (click to watch video)!

Source: r/Data is Beautiful 

It's a demographic tsunami that will catch a few housing market permabears by surprise, as I discussed here last year.