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.

Wednesday, 14 January 2015

UK Inflation Slow, Slow, Slows...to Equal Record Low

UK inflation dives to 0.5 percent

We had a couple of decades there where the UK was off to the inflationary races.

Them in charge finally managed to get inflation under control with the help of some high interest rates - although as rates were eventually cut the level of household debt ramped up quickly.

Today many parts of the world - particularly Europe - face a threat of a different kind: deflation.

Yesterday's CPI data for the UK saw headline inflation plunge to 0.5 percent, the equal lowest reading in the 25 year history of the survey.


Core inflation ticks higher

The collapse in oil prices is of course a part of that dynamic - which the Bank of England may opt to "look through" - and in fact the inflation situation is not quite as dramatic as it looks. 

The "core" inflation reading which trims the outliers actually snuck a little bit higher to 1.3 percent over the year. 

Nevertheless, it looks likely that we can forget interest rate hikes any time soon with a headline inflation rate at a survey low and threatening to turn negative.

2 percent target rate

The target rate of inflation in Britain is 2 percent - and since the headline inflation rate is more than 1 percent away from target this necessitates a "please explain" letter from the Governor to the Chancellor.- although sadly most Brits haven't heard of Pauline Hanson, so disappointingly they don't call it that.

While on the theme of interest rates, something else interesting has happened in Britain over the last two quarters - the rate of borrowing has dived to previously unthinkably cheap levels.

The average 2 year fixed rate mortgage has plunged by another 0.52 percentage points to sit at an preposterously cheap 2.09 percent!

While some indicators - including mortgage transaction levels - suggest a cooling housing market, borrowing rates at that kind of level are likely to see increased market action in the south-east of England in 2015.

Indeed Halifax's house price index for December reported a surprise 0.9 percent increase to be 7.9 percent higher over the year at £188,858.

Expect to see moderate gains in 2015, particularly in the areas surrounding London.


The Office for Budget Responsibility, which prepares data for the Treasury, sees UK house prices soaring 38 percent higher by 2020. Sounds remarkably bullish to me, but then so do many forecasts.

Investing when inflation is high...or low?

I have covered here before which asset classes tend to be favourable when inflation runs high in this post; "What if inflation takes off: stocks or property?".

But what about real estate as an investment when inflation is low?

The answer is a little surprising.

This question of how property performs as an investment when inflation is lower was addressed a couple of decades ago in an excellent book entitled Building Wealth in Changing Times by Jan Somers.
Some things have not changed since that time – finance journalism was and is still a mile wide and an inch thick – and as interest rates finally dropped from their sky-high climes of 17 percent as we entered the 1990s, the press rolled out the predictable headlines.
"Negative gearing is dead! Property is buried as an investment class!".
Somers’ book was a swift and effective rebuttal to the journalists. 
And over time, her arguments were proven to be exactly right.
Annual Averages
1960s
1970s
1980s
Inflation (CPI)
3.0%
11.0%
8.0%
Capital Growth
6.5%
14.5%
11.5%
Interest rate
4.5%
7.5%
13.5%

Source: Building Wealth in Changing Times, Jan Somers
As Somers pointed out, the 1960s and 1970s offered a unique opportunity for those who invested in residential property.

In theory you could easily obtain a capital growth rate in excess of the interest rate and “create wealth from thin air”.
The catch was that banks were not keen to lend for property investment and thus available capital was scarce.

High inflation in the 1980s
The 1980s presented an altogether different dynamic. High inflation persisted in tandem with high capital growth, but with this came the pain of very high holding costs as interest rates averaged 13.5 percent across the decade.
Equities-only investors love to argue that owners of property do not move ahead, as when they sell and re-buy property the new acquisition has increased in price as much as the property just sold.
There may be an element of truth in that for homeowners, but not so much for property investors.
After all, who wouldn’t want to own a portfolio properties which were bought predonominantly at last century’s prices? 
I’m sure that any long-term owner of property would agree that the best properties in any portfolio are those that were bought for a five-figure sum!
Property in times of lower inflation
While the journos declared the idea of borrowing to invest in property to be dead in the early 1990s, Somers - being a mathematician - ran some numbers through a model and presented some compelling evidence to show that, in spite of the headlines, property can still be a strong investment in times of lower inflation.
What her figures showed was that in times of lower CPI (inflation) and lower interest rates, the internal rate of return (IRR) on a residential investment property could be remarkably similar to the rates of return achieved when interest rates and inflation are high.
Of course in the 1980s property investors enjoyed their debt being devalued by high inflation. But offsetting this were high interest rates and holding costs.
The reverse also holds true - when inflation is low, interest rates and thus holding costs tend to be lower too.
Consequently net returns after holding costs on investment in a less inflationary environment can end up being remarkably similar and equally appealing.
Outperforming properties
The one obvious caveat I will add here is that whether inflation is high or low, it is still important to seek investment properties which outperform the rate of inflation and the median price growth of the asset class.
By investing counter-cyclically in capital cities within states with vibrant economies which have not recently experienced great growth then you can begin to move ahead of the pack.
A major reason that property suits so many average investors is that - rightly or wrongly - most investors seem far more attuned to the idea of buying and holding an investment property for the duration of a mortgage than they do riding out manic depressive stock market gyrations.
Capital city residential property in the right locations has remained a strong performer as Australia's population swells. 
Final points
Glancing back at Halifax's UK index figures at the regional level highlights two important points - firstly that regional property tends to be an underperformer over the long haul compared to prime location capital city property.

And secondly, note the awesome power of compounding over time. 

Over the last two years alone the London index has increased by well over 200 points - and this is on an index which is benchmarked to only 100 points as at 1983.

On a leveraged investment London property has delivered scintillating returns over a very long period of time.

From my own experience I can say that the best performing property investments in your portfolio are those in prime locations which are held for the greatest time horizon, allowing the values to grow and compound unimpeded by capital gains taxes and the "frictional" transaction costs of regularly buying and selling.