Pete Wargent blogspot

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

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Sunday, 1 February 2015

New record high valuation for CBA

CommBank hits record highs

It is not only Australia's property markets which are being buoyed by the prospect of lower interest rates - Aussie share markets have now recorded seven positive trades on the bounce.

Commonwealth Bank (CBA) has seen its share price soar further to new record highs, glancing $90/share for the first time ever, from below $45/share in only 2011.

At that time plenty of pundits were opining that Australia's largest banks would be rendered insolvent by mortgage delinquencies.

It didn't work out that way with loan arrears declining to multi-year lows,  the Reserve Bank noting that aggregate mortgage buffers are at remarkably high levels, the equivalent of "more than two years" of scheduled repayments.

In fact, CBA now has a market cap which values the bank at a staggering $145 billion, while the shorters have long since lost their proverbial shirts.

Indeed CBA's share price has appreciated by more than 20 percent over the past 12 months alone to its highest level on record.

Cash machine

In 2013 I took a look here at how CBA could hardly represent a defensive stock selection in traditional value investing terms - and at that stage the market cap was 'only' $108 billion!

Thus with a PE ratio today of well over 16 and a price-to-book approaching 3, those jumping aboard now are clearly taking on a greater risk than was the case previously.

Nevertheless, Commonwealth Bank has been a tremendously effective cash machine for shareholders pumping out a rollicking franked dividend stream over the past decade.

Delinquency rates have improved

As for impairments, CBA's 2014 Annual Report showed that provisions for impairment losses dived by 13 percent in FY2014.

Meanwhile, Fitch's more timely Dinkum Index recently showed mortgage delinquencies falling to a 7 year low with improvements seen across all Australian states.

Better still, monoline insurer Genworth (GMA) has recorded delinquency rates cascading lower since the 2009 book year.

That's wonderful news for Australia's homeowners and great to see.

Regional delinquencies to rise?

Despite this, with the latest Labour Force figures showing the headline unemployment rate gradually rising in recent years, mortgage delinquencies in a number of regions may now be set to rise despite prevailing low interest rates.

There are a number of factors which can cause a sharp property market correction, including:

-very high interest rates
-a severe recession and/or high unemployment rates
-an oversupply of property

On numerous occasions through 2014 I have repeatedly highlighted a worrying disparity between jobs growth in Australia's capital cities and the regions.

In fact, this is a misnomer, since employment growth in regional Australia has been all but non-existent on a net basis.

The one shining light for regional employment growth was Queensland, but even here regional labour markets are now suffering reversals.

In time this can only in lead to two things: a population flow back towards the capital cities - which the statistics are already showing - and higher unemployment rates in parts of regional Australia, which we have clearly been seeing too.

I have found over time that the month-on-month data in respect of regional unemployment rates is particularly volatile and unreliable, but on a 4 month moving average basis we can see that a number of regions have consistently been recording concerning unemployment rates.

Lately a number of areas in regional Queensland have been facing headwinds following the collapse of certain key commodity prices. 

As highlighted previously here on this blog Townsville and Mackay in the north face significant challenges, while to the south Logan-Beaudesert has consistently featured through the latter half of 2014 as having one of the highest regional unemployment rates in Australia.

Regional Queensland

This week the Courier Mail reported that Queensland has a number of problem regions which have led the state to holding the dubious honour of now holding the highest delinquency rate in the country at at Q3 2014.

While headline delinquency rates have actually fallen in all states, which is welcome news, Queensland has a number of entries featured in the 20 most delinquent postcodes.

These included Kingston in Logan City (which now has the highest delinquency rate in the country), Airlie Beach (7th), Oxenford (8th), Surfers Paradise (10th), Mudgeeraba (12th), Townsville (13th), Mount Isa (18th) and Fernvale (20th).

Fitch's own press release noted that although delinquency rates have continued to fall to just 0.9 percent nationally, Kingston in Logan had a delinquency rate at 3.5 times the national average.

Reported the Courier Mail:

"Queensland has the worst mortgage delinquency rate in the country, and the dubious honour of also containing the most delinquent postcode in the country – Kingston in Logan City.

A quarter of the country’s top 20 worst-performing postcodes were around Brisbane according to latest figures put out by Fitch Ratings today.

Kingston in the Logan City region had the worst delinquencies in dollar terms, with a 30-plus days delinquency rate which was 3.5 times the national average.

Kingston, which has appeared among the worst-performing postcodes since March 2011, replaced Budgewoi (NSW) as the worst performer with 3.2 per cent of mortgages secured by a property delinquent.

While all states’ delinquency rates were looking better, Queensland had the smallest improvement.

The ratings agency warned there could be worse to come in the state, with north Queensland named as a delinquency “hotspot”.

Mackay and northern Queensland have shown an upward trend, with delinquencies increasing or improving less than other regions in the 12 months to September 2014,” the Fitch Ratings report said.

“In particular, northern Queensland was the only region in Queensland to worsen in the six months to September 2014."

The report attributed increased delinquencies south and southeast of Brisbane to the increase in unemployment since September 2013 which “may have impacted mortgage performance”.

Investment risk

Clearly some risks of a property correction exist in regions where unemployment is rising, which only further accentuates how important asset selection will be for property investors through this cycle.

Investors can no longer rely on high inflation or rocketing household debt to push regional prices higher, since that is just not going to happen.

In areas where investment capital is not flowing, capital growth can only be driven by employment growth,  population growth and real wages growth, combined with growing household wealth.

While there may be exceptions, typically we look at investing in capital city suburbs and hubs with unemployment rates below 4 percent, and ideally 2-3 percent or lower.

Investing in regions where unemployment is at elevated levels and rising is, in my opinion, far too risky.

Incredibly Australia hasn't had a recession in some 23 years, but as is the case with all economies we will experience a recession at some point in the future, and property investors should consider carefully what might happen to their portfolio when this does occur.

Experiences overseas have shown that 'thin' and illiquid regional markets can experience punishing declines.


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