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 of the world's most popular & widely-read financial publications.

"Wargent is a bald-faced realty foghorn" - David Llewellyn-Smith, MacroBusiness.

Wednesday, 30 April 2014

HIA: Thunderous increase in capital city land values +22.3% y/y

The Housing Industry Association just pinged through its latest release on residential land values.

As at December 2013, the weighted median land value across Australia's 6 capital cities increased by a thunderous 22.3% in the 12 month period.

In the regional Australia, lot values increased a much more sedate 3.6% year-on-year, giving the chart the illusion of a somewhat steadier increase.

The 4.2% increase in lot values in the quarter sees residential land values easily soaring to their highest levels on record.

As noted previously, it was very hard to see how inner city dwelling prices could fall sustainably over any meaningful period of time with that kind of intense pressure and demand for land.

Clearly the lack of available supply of land for detached housing is also playing its part, though.

"The supply of residential land is falling behind the demand for new homes" said Shane Garrett, the HIA's senior economist.

Tim Lawless of RP Data said that low interest rates were stimulating demand across the sector leading to higher prices.

The building approvals data has shown a massive pick-up over the past year, but nearly all of the increase has related to apartments rather than detached houses.

Australia needs a better longer term plan to shift the focus away from shoe-horning millions more people into just four popular locations.

Dwelling prices rise further in April

Month end - again

Been blinkin' busy of late, and this morning I was appalled to discover that according to my calendar it's already end of the month!

That being the case, with all the usual caveats about why spending too much time looking at monthly and quarterly dwelling price data might not be a smart idea, we can run a few calculations to show what RP Data will report in a few days time as their dwelling price movements for the month, quarter and year to date (click chart):

So, nationally dwelling prices were recorded as being +0.3% for the month, +2.6% for the quarter and an extremely strong +3.9% for the 2014 year to date, with the national figures being skewed by exceptionally strong growth in Sydney.

The strongest gains in 2014 have been in Sydney (+5.0%) as we confidently predicted in our 2014 forecasts, with Melbourne just a tick behind (+4.9%).


I also explained in the same article why I'm not a big believer in property price forecasts...particularly those which claim to forecast to one decimal place!

Anyone who tells you that they have a model to predict prices to that level of accuracy is either (a) lying or (b) delusional.

It doesn't matter what econometric model you choose to build, eventually it will blow up due to an unforeseen X factor.

All you can really do is start with borrowing rates, household debt levels, market sentiment and fundamentals, economic and employment forecasts etc. and then build a base case from there.

But think of all the unpredictable events we've seen in recent years - the US sequester and fiscal cliff, the US debt ceiling crisis, Cyprus debt crisis, changes in monetary and fiscal just can't predict and factor in all that stuff.

So you either make a forecasts with a huge range (e.g. 12% to 30% growth in 2014) or you make a weighted average forecast, accept you'll probably be wrong and risk ending up looking like a total doofus (e.g. our own 6% to 9% in 2014 for Sydney).

As to whether or not Sydney overshoots the top of our expectations? Well, we're only a third of the way through the year, and that remains to be seen.

This all rather contrary to my investment philosophy in any case, which is that property should be seen as a 20-30 year investment decision, and ideally much longer still.

If you're banking on market price movements within a few years, then you're probably in the wrong game.

Other cities

You'll note from the same article that we were generally less optimistic than almost everyone else about property prices in 2014, since we felt that houeshold debt levels were generally too high and annualised wages growth tracking too low to facilitate anything like the levels of nationwide dwelling price growth we've seen in cycles past.

Anyways, back to RP Data's figures.

Melbourne was next up for the year to date (+4.9%), though there's been plenty of chatter around easing auction clearance rates, and RP Data recorded a small fall for the month of April itself (-0.5%).

Some signs of life in Adelaide at last too! - although year-on-year the South Australian capital has still been the worst performing major capital city by a wide margin.

Still, prices have under-performed in Adelaide for so many years that some level of catch-up at last now appears due.

Other providers

Incidentally, I don't have any allegiance to particular data providers.

And since I have no barrow to push on that front and have even less interest in the bickering between them (just look at all of them is my reckoning, and if necessary, give any outlying results the flick) below is what Australian Property Monitors recorded for the first quarter for houses and units (click chart):

Sydney still clearly leading the recovery, both in terms of houses and apartments.

Note, however, that these figures have been impacted by revisions to the December quarter figures.

Without the revisions, Melbourne would have recorded extremely strong house price growth of more than 6% in the first quarter.

SQM Forecasts

Our forecast for Sydney was 6% to 9% growth in 2014, taking the broad view that price growth could eventually be derailed as the year draws to a close and yields begin to sag, just as they did in 2003.

At this stage that looks like that forecast be a touch under-cooked since prices are growing strongly, the market is tight and as yet there is no sign of interest rate hikes on the horizon to dampen sentiment.

SQM Research forecast very strong growth of 15-20% in Sydney in 2014.

Natch these forecasts will be benchmarked against a different price series from the Australian Bureau of Statistics (ABS) at the end of the year, but for a bit of light interest as much as anything else, I've been tracking their annual forecasts against RP Data's Daily Home Value Index.

A bit of mental gymnastics tells me that since a third of the year has gone and Sydney's dwelling price index has been humming along at 5% YTD price growth, then prices should be tracking right at the bottom end of SQM's forecast range (click chart).

And indeed, so they are.

And below are SQM's national forecasts benchmarked against RP Data's index for the first four months of the year (click chart).

Only a third of the year gone, but at this stage I'd take a bet that their national dwelling price forecast could prove to be bang on the money when benchmarked against the ABS series.

Tuesday, 29 April 2014

Surging UK house prices lift confidence sharply

Reports of the death of the wealth effect have been greatly exaggerated, to coin a phrase. In fact, it's hard to believe anyone thought it would be any different this time, to be blunt. 

Rising house prices, rising consumer confidence - it's as embedded in the British way of life as football, rainy weather and Eastenders.

Take particular note of the final sentence highlighted in bold below.

UK Daily Telegraph reports:

"Surging house prices have lifted UK economic confidence to its highest level since before the onset of the financial crisis, according to new research.

With official figures on Tuesday expected to show the UK economy grew at its fastest pace in more than six years, a survey by the Centre for Economics and Business Research (CEBR) and YouGov showed consumer confidence in April rose to its highest level since August 2007.

The YouGov/Cebr consumer confidence index rose by 1.2 points in April to 112.9. This was its highest level since August 2007, and much higher than the long-run average of 94.7.

Official figures today are expected to show the economy grew 0.9pc in the first quarter, up from 0.7pc in the final quarter of 2013. This would represent the fifth consecutive quarter of growth, and on an annualised basis, the strongest rate of expansion since the final quarter of 2007.

A separate report by Grant Thornton on Monday showed that optimism among UK businesses is at its highest level since records began in 1992."

As I charted here, UK total employment is at a record high with the economy adding at a tremendous pace - 250,000 job between November and February - and the unemployment rate has kept ticking down to 6.9%.

GDP for the first quarter also today recorded a fifth consecutive quarter of growth at 0.8%.

Great to see Britain beginning to thrive again.

Last rites...

A quick snap of the last rites being administered for the Sydney Exhibition Centre at Darling Harbour this morning.

The gleaming new ICC will no doubt be awesome, but let's hope the new joint lasts longer than 26 years!


Spend less than you earn

It was mentioned on this blog the other day that I had a cuppa or two with Peter Thornhill, author of Motivated Money. I always learn so much from him, it's worth the price of a coffee a thousand times over.

Although I've been a shameless convert to the Apple revolution, now being an owner of an i-Pad, an i-Pod and so on, I was mildly amused to note that we'd arranged to meet in Woollahra via texting from near-identically crappy Nokia mobile phones.

Two people getting together to discuss investment strategy both on $49 Nokias: a coincidence? I think not.

In fact, the first words on Thornhill's slides when he presents are:

When we catch up a number of the same themes repeat: charitable giving, world travel, the short-termist nature of reporting in the financial media, and so on.

Another theme is the sheer wonder of how people are perfectly happy to inspect their superannuation balances blithely just once per year while barely questioning the results, while at the same time being totally unable to apply that same level of long term discipline to investments outside their funds.

Thornhill was himself a former funds manager but has become something of a rebel against the funds management industry, promoting a passive approach to investing with a heavy focus on the tax-favoured and growing dividend income streams rather than the myopic obsession with daily share prices.

Bank bubble

With all four of the major banks getting rolled on the stock market today by around 1.0% to 1.75% at the time of writing, it occurred to me that it might a good time to review the past year's performance.

My goodness, is it really a full 12 months since commentators called a bank stock bubble in Australia and began advising all manner of short positions? 

Crumbs, it actually is. Where does that time go, eh? If I didn't know better I'd say someone was winding the clock on fast.

I took a detailed look at bank valuations at that time here, which told me that while price-to-book values were clearly too high to represent any traditional notion of value in the Ben Graham/Warren Buffett sense, PE ratios of 12-14 could barely be construed as a bubble (unless you believed that ongoing earnings growth was totally unsustainable).

The "Big 4" banks raked in cash earnings of around $27 billion in 2013 and, to boot, they receive an implicit government guarantee i.e. they are seen as too big to fail.

PE ratios of 12-14 and high expensive entry price given the uncertain economic outlook? Indeed. Lacking in value? Perhaps. 

But...bubble? Mmm.

This is partly reflective of the problem with so much commentary these days: practically everything seemingly must be be described as either a bubble or a crash, whereas by definition the overwhelming majority of what goes on in investment markets takes place at neither extreme.

Share price

In that context, let's take a look at how the "bank bubble" has progressed over the past 12 months.

Note that after five years of very strong gains, the banks are now indeed likely to be due a correction...possibly even starting today looking at the markets!


Let's start with the biggest of all of our big banks: CommBank (click chart):

The share price performance has been very strong, doubtless spurred on by low interest rates and thoroughly underwhelming returns on savings accounts and fixed-interest products such as term deposits.

Price-to-book valuations remain high as expected, the PE ratio is now around 15 with the market capitalisation climbing to around $128,000 million or so.

Remember, investors (as opposed to speculators) aim to own a share of these companies in order to command their own share of the billions which the bank generates in earnings.

And Commonwealth Bank has delivered two very tidy 100% fully franked dividends of $2.00 in August 2013 and $1.83 in February 2014.

Regardless of what now happens to the share price in the coming months, long term owners are winning with those tremendously healthy yields. The share price appreciation has merely been the icing on the cake.


OK, that was CBA.

How about ANZ? (click chart):

More strong share price performance, with the PE ticking up to nearly 15 and the market cap around $95,000 million.

Lovely to see, but the really interesting result was the $0.73 and $0.91 dividends delivered in May and November respectviely, both 100% fully franked too, of course.

Another outstanding result for long-term investors.


Next up, Westpac (click chart):

Another excellent share price performance, market cap now moving above $100,000m and PE ratio of around 15.

But the really exciting thing here has been the massive ramp-up in Westpac's fully franked dividends to $0.96 and $0.98 in May and November respectively.

To put that in some kind of context, in 1997 Westpac was churning out dividends of around 20 cents.

What a result for long term holders that is!


And finally, National Australia Bank (NAB) - (click chart):

Also strong from the NAB.

PE has increased to around 14 and the market cap about $85,000m.

More interestingly, 100% fully franked dividends of $0.93 and $0.97 were once again delivered in May and November, so the share price appreciation has once again merely been the icing on the cake.


Well, the conclusion here writes itself doesn't it?

There will always be people telling you it's a bad time to invest based on some forthcoming calamity.

And of course, given that the share prices of all our banks have now appreciated dramatically over the past five years, a correction at some point is all but assured.

The future, as always, remains unknown, and therefore all that really matters is that you have a suitably diversified investment plan which suits your own needs.

I'd suggest that if your plan is heavily reliant on market timing, the odds of success are immediately diminished.

And the "bank stock bubble" is a fine case in point.

A year ago all the commentary was advising people to short the bank bubble, which didn't turn out too well. So now what? Prices are higher than they were and the dividends keep on rolling out to owners. Go short again? 


At the beach the lifeguards always tell you to swim between the flags, don't get out of your depth and never try to swim against a rip current.

That's pretty much how I'd look at investing: stick to the knitting with the tried and tested investments, always keep within your depth by keeping a sizeable cash buffer and diversifying, and swim with the tide rather trying to fight it (i.e. go long shares and property by owning them, rather than trying to be smart and timing the market with shorts).

Most of us are better off with a long-term strategy to own great companies than speculate or trade them.

Even the pros are frequently hopeless at timing the market, so what makes us think we'll do any better?

Retail sales growth at 4 year high

Overnight, it was reported that the economic outlook in Britain is seen to be "exceptionally strong and broad based".

Hopefully so. But what about Australia?

"There is further evidence that the retail sector is strengthening, helped by low interest rates and the lower Australian dollar.
The Australian Food and Grocery Council and pallet and packaging company CHEP expect growth in consumer spending to rise 6.6 per cent in the 12 months to June.
AFGC CHEP Retail Index, was 5.8 per cent higher in March 2014 than it was in March 2013."
Pretty much as you'd expect: monetary policy is working and sprightly retail sales growth across all sectors is following on from the housing market recovery.
"AFGC chief executive Gary Dawson said retail sales growth is at a four-year high.
"Its encouraging that retail performance has improved across all sectors since mid-2013," he said.
The survey's figures reflect the latest retail spending figures from the Australian Bureau of Statistics which had total retail spending up 4.9 per cent in the 12 months to February, seasonally adjusted.
The AFGC/CHEP report said that the only part of the retail sector that is struggling is department stores, which is continuing to lose market share.
The strongest improvement is in household goods, with sales growth of around five per, cent and clothing retail, up seven per cent."

Monday, 28 April 2014

Crisis looms


Some time ago I went for dinner for a friend's birthday at a restaurant in Surry Hills and when the conversation got on to real estate, as it does in Sydney all too often, the lass sitting next to me who had only recently moved to Sydney (living in the inner west) said: 

"You know, I can't see property prices falling around here - there's just so much demand for property and not enough of it".

I had to laugh inwardly to myself, as I wondered how someone who'd been looking for an apartment since moving to the harbour city for all of about three weeks had been able to grasp what plenty of economists - and for that matter property market commentators - never venture to get a handle on. 

That is, how tight Sydney's property market is in those popular suburbs where the supply is all but fixed.

As it transpired, she was correct, with prices in the inner west rising relentlessly since that time and vacancy rates remaining wretchedly tight.

It just goes to show how a little bit of legwork can give you a genuine feel for what's happening in suburbs at a micro level, to add to what is being reported on a macro level.

Crash risks

An oversupply of property is one of the factors which heightens the risk of a property crash, and in 2003 it appeared that Sydney might be a particularly risky proposition.

Not only had dwelling prices boomed, the rate of population growth was falling sharply (in part due to interstate migration) and vacancy rates jumped to 4.3% in the harbour city and some 5.3% in the outer ring suburbs according to the REIA.

As prices cooled, construction of dwellings dropped sharply as one would expect in a typical market cycle.

In fact, construction levels fell to such woeful levels by 2008/9 that the crash predictions being peddled at that time didn't appear to make much sense unless, of course, you believed that unemployment would increase very sharply, which in the event, it didn't - with some skill and a bit of luck.

Of course, demand for investment properties will ebb and flow with sentiment and the interest rate cycle, but ultimately in a city with a rapidly growing population if construction doesn't keep pace with requirements (which will likely happen where prices are easing) eventually this will come home to roost in the guise of a tightening market until upwards pressure on prices eventually returns.

Source: RP Data

Those who work in the industry tell me that large developers are still genuinely struggling to break even on large scale unit developments even at today's higher prices - and this is indeed being borne out in the relatively slender net profit margins being reported by residential developers on the securities exchange.

Based upon that information, it strikes me that short of grants, concessions or other incentives being made available to developers, a drawn out fall in prices would see dwelling approvals and subsequently construction dry up once again.

This is why it is so important to understand replacement cost when reading the property market cycle.

The Reserve Bank itself gave a pretty handy rundown here.

The above figures for infill sites relate to multistorey apartment blocks and give a useful indicator as to replacement cost of property in Sydney.

As a very general rule of thumb, when apartment prices fall below replacement revoir construction.

On the flip side, median house prices in Sydney long ago became decoupled from any kind of sensible price/income ratio, and as such are marching to their own drum and may be more prone to a correction.

Crisis looms?

And so, here we are today.

The REINSW reported this afternoon that March 2014 vacancy rates in Sydney had fallen to near crisis levels falling by 0.3% to only 1.4% (click chart).

Reported the REINSW:

“Sydney is going backwards in regard to properties available for rent. Something must be done to ensure that there is a greater level of choice for those seeking to secure a rental property in Australia’s biggest city."

In Sydney's inner 10km ring, vacancy levels have fallen to desperately low levels of only 1.3%, which would come as no surprise whatsoever to anyone who ventures to actually look at what's happening in the market.

A vacancy rate of 1.3% across such a dense property market is described by the REINSW as "verging on crisis levels".

There are some question marks over whether the new stock which is sold offshore is being let or left empty, but to date, with humble apologies, I have no worthwhile data to present on that. 

That may be one to look into.

Elsewhere in the state, of course, demand is significantly lower since most of the speculation is taking place in Sydney's favourably located suburbs and vacancy rates are correspondingly considerably higher.

Construction picking up

As prices have picked up, so too is now construction in Sydney, and over the coming years vacancy rates will likely eventually rise again, but the rates of vacancy likely to be significantly higher in areas where large new developments are taking place (cf. what has reportedly played out in Melbourne in recent years).

Naturally anyone buying property in Sydney today needs to be extremely wary of buying in a suburb or sector of the market which will soon be inundated with a deluge of new apartments, and that's most particularly the case for persons buying expensive off-the-plan or high rise stock.

In the right suburbs where supply is fixed, it's pretty much as you were with vacancy rates as close to zero as we're ever likely to see.

High disposable incomes - Aussies now #1

What an amazing chart set and what an amazing result for Australia.

Bravo, absolutely fantastic stuff from Bloomberg.

Source: Bloomberg

Giving more

Australia is a country which is fast becoming spoiled for its high incomes.

What would now be really fantastic to see would be Australians embracing charitable giving with the same zeal that America has done previously.

In the past, Aussies have perhaps been seen as poor relations to other countries, but since this is no longer the case, we should now be more generous to less fortunate regions of the world. 

Andrew and Nicola Forrest were the first Aussie billionaires to sign the Giving Pledge.

Other metrics

As for how we fare on other metrics, Bloomberg has Australia ranked as #1 for most organic farmland and #1 for having the highest minimum wage.

We are also ranked at #3 most decadent country, #6 for longest lifespan in the OECD and #7 for highest salaries in the OECD.

Happily we are also only ranked at #50 for unemployment, despite what people would try to have you believe (we'll probably move up a notch to 40-something as the data rolls through to March 2014).

There is one area we need to work on, however, and that is that thanks the widespread availability  and consumption of junk food and increasingly sedentary lifestyles, Australia now ranks #3 for heaviest adult population, behind the US and New Zealand.

What's happening with iron ore?


Next week is an absolute corker for data: retail trade, labour force, building approvals and more.

This week, however, is set to be a much slower affair, so I thought I'd take a quick squiz at what's happening to Australia's most valuable export commodity, iron ore, and what that might mean for the economy.


Up to half of Western Australia's resources by value can be accounted for by iron ore, and nearly all of the iron ore which we dig up and export is shipped out from Western Australia, in particular from the Pilbara region.

More than nine-tenths of Australia's iron ore is located in the state WA, and about four-fifths of that is in the Hammerlsey Province in the north-western corner of the state.

The big companies producing up there include Fortescue Metals Group (FMG), BHP Billiton (BHP) and Rio Tinto (RIO), between them churning out tens of millions of tonnes or the commodity annually.

It's a spectacular sight (and site) if you ever get the chance to visit, particularly since all of Australia's iron ore projects are open cut rather than underground operations. 

The Dampier Salt ops are also an amazing sight to behold.

Of course, most of the iron ore is destined for China to fuel its constuction boom, with Japan, South Korea and Taiwan each taking a smaller share, with nearly all of it being used to make iron in the form of steel.


Between 2007 and 2011, iron ore prices went on a spectacular run, first doubling and then doubling again as demand for the commodity soared, with prices heading to a wildly exuberant $190 US$/tonne (click chart).

To put this in some kind of perspective, Fortescue is aiming to have lowered its production costs from above $80/tonne to around $73/tonne by next year.

Since 2011, with a supply deluge hitting the market and China's economy perhaps running a little less hot than previously, spot iron ore prices have come back into some kind of reality, and today the spot price sits a little above $110 US$/tonne. 

A number of investment banks and forecasters expect that the spot price will fall further in the coming years, thus damaging Australia's terms of trade.

US$ prices

Australia is highly leveraged to its iron ore export trade, especially to the ongoing level of demand from China, which is why developments in both the price and demand are scrutinised so closely by the financial and business media.

Note, however, that since iron ore contracts are denominated in US dollars, to some extent adverse fortunes in the spot price might be offset by corresponding movements in the Australian dollar.

To put that in plainer English: if the iron ore price collapses, the Aussie dollar will likely follow suit, and the export price in US dollar terms will be less impacted that would otherwise be the case.

I'm not even sure that's plainer English, but hopefully it makes a bit of sense.

A bountiful surge in Australian exports

As for export volumes, well, Australia certainly seems to have little to worry about on that front.

The Reserve Bank's John Edwards said that Australia was benefiting from a "bountiful surge" in exports.

And looking at the data, which is shattering export volume records by the month, it's hard to disagree.

The Reserve Bank's chart packs are more than a month out of date now

When the next chart pack is released in the next week, the y axis will  most likely have been adjusted because the latest export data out of the Pilbara implies that we are heading right off them charts...

Bulk Commodity Exports graph


For this week's $11 movie at Broadway I watched Divergence. Was alright I guess, but felt like it was about 100 hours long. 


Sunday, 27 April 2014

MYOB The Pulse: "A good news sandwich for real estate buyers!"

Very excited to announce that my first article for MYOB's Pulse is now live.

"If you’re self-employed or own a business, there’s good news on the table if you’re looking to buy a residential or commercial property. 

I’m going to deliver the news in a “sandwich”.

Back in the halcyon days when I worked in the accountancy profession, the firm’s Partners advised me that as a manager, I should deliver any bad news to mentees as a so-termed “good news sandwich.” 
That is: good news, bad news, good news.
Thankfully today I don’t have too much bad news to deliver, so let’s kick off with some good stuff..."

Read the rest of the article here.

"No" to more rate cuts?

So thinketh the cash rate futures markets.

For what it's worth, the 30 Day Interbank Cash Rate Futures May 2014 contract is trading at 97.505, indicating as near as dammit zero chance (about 2 in 100) of an interest rate decrease to 2.25% at the next RBA Board meeting on May 6.

On balance, markets believe that the cash rate is working steadily on the economy and no further cuts will be needed to return economic growth to trend.

If you have excellent 20/20 eyesight, you'll just about be able to identify that the implied yield curve is still just a touch inverted and bottoms out in August 2014 at 2.480, just a couple of basis points (bps) below the current cash rate of 2.50% (click chart).

Erko continues to deliver

Erskineville - one of my favourite suburbs - it's the property market gift that keeps on giving.

Those of us fortunate to own investment property there might easily have seen up to 50% capital growth over the last 5-6 years or so.

I'm half tempted to put the word 'fortunate' in inverted commas, since I can remember when we bought in Erskineville friends telling me in no uncertain terms what a dumb idea it was.

"No-one wants to live in the inner west".

"It's a ghetto"

"The slums of the future!".

I could equally say the same about when we bought on the Sydney harbourside at Pyrmont all those years ago,

Actually, come to think of it, every single time we've bought property people have said it's a bad idea.

Maybe that's not coincidence, since buying when everyone is telling you it's a bad idea is likely also the time that you can pick up some of the best bargains.

As my missus said to me the other day, after 17 years of investing in shares and property, buying real estate has only ever brought us good news over time.

In the short term, there will always remain risks, of course, but in order to achieve success you do need to have the fortitude to overcome the downturns.

SMH reports here

"Erskineville has enjoyed a resurgence and is now what the selling agent Shane Turner, from Travers Gray Real Estate, said was ‘‘a very sought after area, and one of the most beautiful in the inner west’’.

Asset classes

Economy recovers

So, the UK economy is expected to record growth this week which shows GDP of 3.2% for the year, the fastest rate of growth since 2007.

The UK economy is now only 1.8% smaller than it was at its peak before the financial crisis and the recovery looks to be well on track.

Investments 1996-2014

It's been a rollercoaster ride in Britain over the last 18 years: we've had a monumental property boom, the internet tech stock bubble and then the global financial crisis hit which clobbered most asset classes.

Interesting read today in the UK's Daily Telegraph comparing asset class returns from 1996 to 2014.

$1,000 invested in equity or government bonds in 1996 would today be worth around £3,000.

Commercial property in the UK has been a steady investment and would be worth around £3,600 today.

However, the best investment would have been property, with a cash purchased buy-to-let investment today being worth around $4,800.

When it's considered that most property investments are bought using a mortgage (buy to let mortgages were introduced in Britain in 1996), the combination or leverage and compound growth has seen property investors finish well ahead, with the £1,000 invested using a 25% deposit being worth £13,000.

"...every £1,000 invested in an average buy-to-let property bought with a 75pc loan-to-value mortgage was worth £13,048 in the final quarter of 2013, a compound annual return of 16.3pc."

That accords very much with our own experience of investing in Britain, and in fact, many of those who invested smartly around London and the south-east weren't even too much impacted by the financial crisis, with prices comfortably returning to new peaks in 2014.

It's the combination of leverage and compounding growth which has been such an effective strategy for property-owning Britons.

The report suggested that buy-to-let would continue to show superior returns to other asset classes, which may well be correct, but then since it was commissioned by a mortgage company I wouldn't pay too much heed to their future projections.

Buy-to-let borrowing in Britain has returned with great pace, booming by 44% through 2012 and 2013.

Saturday, 26 April 2014

What's going down in Sydney property?


A lot of confusing property market commentary around at the moment...perhaps even more so than usual!

I read one article from a US pundit stating that "Australia's property prices are rising faster than ever". That makes for an interesting headline, but none of the real data shows anything remotely close to that. 

RP Data's figures instead demonstrate that, Sydney aside, Australian dwelling prices have essentially done absolutely diddly squat since their previous peak in 2010.

Source: RP Data

Price changes in real terms

Of course, the above figures are in actual or nominal terms.

In real terms, when adjusted for incomes dwelling prices have gone backwards everywhere except for Sydney over the past four years or so.

Pundits often state that "asset prices can't outpace inflation", but since wages can outpace inflation, so too can dwelling prices. 

Given that incomes tend to increase over time, and given that the speed limit on asset valuations largely boil down to the availability of credit and borrowers' ability to service that credit, you might expect that over time dwelling prices could mirror household income growth, while acknowledging that interest rates and the make-up of the average households will also shift.


It's now around a decade since Sydney's preceding property boom finished.

Here is what has happened to rents over the time since December 2003 as compared to average weekly earnings ordinary time earnings (click chart).

The earnings figures I've used here are the average weekly ordinary time earnings (AWOTE) from the Reserve Bank which increased by a little over 50% over the past decade, which is, of course, well ahead of the rate of inflation, as noted in previous posts.

The recently released inflation data from the Australian Bureau of Statistics showed that Sydney rents mirrored earnings growth remarkably closely in the harbour city over the past decade, also increasing by around 54%.

As for house prices, contrary to the incendiary commentary from our well-meaning but misguided US friends, Sydney has been one of the weakest performing property markets over the past decade, with house prices lagging incomes significantly since 2003 (click chart):

The chart above explains why I've long suggested Sydney as being the best risk-adjusted bet for investors in Australia over the past 5 years, since I believe that over the medium term eventually prices would catch up again sending the market up to its next cyclical and irrational peak.

The chart also explains why SQM Research felt that Sydney could show 15-20% growth in 2014.

Recall also that the official cash rate in Australia in the boom years 2000 to 2003 hovered between 4.25% and 6.25%.

Today the cash rate is only 2.50% which is a nontrivial 275bps below where it was in December 2003, so it is not unfeasible that we even might yet see the red light overshoot the blue.

Since average earnings might grow, say conservatively, by say another 2.50% or so in 2014, this would mean Sydney dwelling prices would have to record exceptionally strong growth in the ABS house price index of around 20% to again hit their previous eye-wateringly high levels.

Historically the most expensive city

Sydney has historically been Australia's most expensive city.

Louis Christopher of SQM Research said that "Sydney is like a high PE stock. It trades at high levels because people expect prices to continue performing in the future".

He's right.

Throw in record low interest rates, Sydney's massive population growth, the new impact of self-managed super funds (SMSFs) being able to invest directly in residential property and the fact that the great stock market crashes around the world have seen a global shift from equities to prime location real estate, and I'd take a bet that some time in the coming decade the red line will again have crept closer to the blue.

Global shift

We opined a long time ago that there has been a global shift towards storing wealth in real estate in prime locations, one which has been accelerated by the financial crisis, rock bottom interest rates and a trend towards capital flight from countries across eastern Europe and Asia.

Note that as foreign funds wind their way to these shores, rarely will they be invested in remote or rural areas. 

On the contrary funds will flow to the inner suburbs of Sydney and Melbourne.

It's no coincidence that I've been heavily invested in real estate in cities like Sydney and London, and nor is it any coincidence that we have offices in those two cities. 

Reports Reuters:

"As property prices cool in Hong Kong and Singapore, which have long been magnets for Chinese investment, more money is flowing to real estate markets such as New York, London and Sydney. 

Chinese have overtaken Russians for the first time as the biggest buyers of apartments in Manhattan, according to real estate brokers."

Juwai also reported this week that Chinese investors are unsurprisingly focusing on Sydney and are buying in suburbs such as Chatswood, Epping, Camperdown, Epping, Mosman and East Sydney.

Construction boom

Remember, Sydney's construction boom is not only residential in nature.

Darling Harbour's SCC is now flattened in preparation for a truly massive new construction project which will include a gleaming new International Convention Centre and hotel:

Barangaroo: Tower 3 is now constructed up to Level 19, although it appears questionable whether the project is on track for its completion date after the fires on site:

Most of Martin Place is also now under construction - it feels like you need a hard hat just to get around town at the moment as project financing costs have eased - monetary policy works!

All very helpful to help offset the fall in mining construction which remains in the post over the coming years.


ANZAC Day morning: tourists visiting Sydney enjoy the spectacular vistas of Scenic World in the Blue Mountains...

Oh dear.

Been up here before a few times so gave up in the end and went to watch the footie at the mind-boggling Penrith Panthers "World of Entertainment" - the place is just one unbelievable wall of pokie machines and gambling terminals.

Almost an exact repeat of last year's ANZAC Day NRL scoreline with the mighty Roosters depatching St George-Illawarra Dragons 34-14 in front of a 39,000 crowd. 

Happy days.

Property Update: Articles of the Week

The most interesting articles of the week summarised by Michael Yardney at Property Update here.

The Property Update weekly newsletter now was 75,786 subscribers, so you might like to sign up while you're there. 

If you'd like to join the inner circle, then why not subscribe for Michael Yardney's daily commentary too - news and tips to your inbox daily...

Thursday, 24 April 2014


An early start indeed for Australians with the dawn service commencing at 4.30am before repairing to the local Returned and Services Leagues (RSL) Club for a traditional game of Two Up.

ANZAC Day is seen to be Australia's most important national occasion.

It marks the anniversary of the first major military action fought by Australian and New Zealand forces during World War I.

The word ANZAC stands for Australian and New Zealand Army Corps.

The soldiers in those forces quickly became known as "Anzacs" and the pride they took in that name endures to this day.

When war broke out in 1914 Australia had been a Federal Commonwealth for only 13 years, and as such the newly formed national government was particularly keen to establish its reputation on the world stage.

In 1915 the ANZACS were to form part of the Allied expedition which became known as the Gallipoli campaign, the aim of which was to capture Constantinople (today’s Istanbul) in Turkey, which was then the capital of the Ottaman Empire and an ally to Germany.

The Australian and New Zealand forces landed on Gallipoli on 25 April and immediately met with fierce resistance from the Turkish defence.

The Gallipoli campagain had been designed as a plan to knock Turkey out the War quickly but instead it became a stalemate and the campaign dragged on for eight gruesome months.

At the end of 1915 the allied forces were evacuated, after both sides had suffered heavy casualties and endured great hardships.

Over 8000 Australian soldiers had been killed in the campaign.

News of the landing on Gallipoli had made a profound impact on Australians at home and 25 April soon became the day on which Australians remembered the sacrifice of those who had died in the war.

The Gallipoli campaign failed in its military objectives for the War but the Australian and New Zealand actions during the campaign left us with a powerful legacy.

What became known as the “Anzac legend” remains an important part of the identity of both nations.

The Ode

They shall grow not old, as we that are left grow old;

Age shall not weary them, nor the years condemn.

At the going down of the sun and in the morning

We will remember them.

More new highs

Up and up she goes...Aussie stocks are back on a run again and recovering more lost ground by the day and surpassing levels last seen in 2008.

Source: ASX

Over in the US, earnings season has been positive so far.

Only around a third have reported to date, but about three quarters of companies are beating on earnings per share (EPS).

It's notable that earnings are well up on last year by more than 7%. 

According to IG Markets, a big driver of revenue growth has been from the oil and gas space.

Must read...

Nice touch from John Liston of Liston Landers accountants in Melbourne...

Read about us on Property Observer

From Property Observer today.

To be clear I was not practising* jubilation, merely observing...


*this gets a red squiggly underline when I type it, but this is Australian English, not US.

Lower north shore lift off

Sydney's lower north shore is now by far and away the strongest sector of the property market in early 2014 reports Australian Property Monitors.


You already knew this would happen of course, because we flagged the lower north shore as our "Where to Buy in Sydney for 2014" in our Summer 2013 Buyers Eye issue here.

We update these Buyers Eye reports quarterly as well as providing ad hoc reports such as our London Universities report which we issued here

Watch out for future issues of the Buyers Eye here and subscribe to our mailing list.

Wednesday, 23 April 2014


Rental increases over time

Instead of more dull analysis of today's inflation figures from the current quarter (cf. "men's clothing and hairdressing costs increased" - well, that makes me safe at least), I thought that instead I'd take a slightly more detailed look at rental growth in Australia over the long term.

This is information which is embedded within the inflation data.

Here I've run a chart of rolling 12 monthly rent increases over more than 40 years (click chart):


This kind of chart is a property spruiker's dream, since it shows that annualised rents have never fallen in Australia across a time-span of more than four decades. 

In fact, rents have never even fallen in nominal terms in any individual quarter let alone over a 12 month period.

One suspects that this is as much an example of behavioural finance in action as it is a role of pure supply versus demand.

That is to say, even in times of recession or weakened rental demand, landlords appear to have been more inclined to freeze rents rather than actually cut them.

It's a cognitive or psychological bias that consumers don't expect prices to fall.

After high inflation in the 1980s which saw the cost of almost everything rise dramatically, rental growth was far more subdued in the 1990s before a dwelling supply shortage saw rents beginning to really ramp up again towards an 8% annualised pace from around 2007.

Slowing rental growth

The above chart shows that rental growth has been slowing again of late to 2.9% in the year to March 2014 despite relatively tight property markets in some regions. 

Why? The reasons are arguable. 

At least part of the reason, in my experience, is that landlords essentially have no pressing need to demand rental increases since the overwhelming majority of investors will at the very least be neutrally geared in the current low interest rate environment.

Another argument might be that in many areas, the rental property markets simply aren't that tight and therefore landlords are unable to command higher rents than they are already are.

Apartment rents have risen strongly in Sydney over the past five years, but growth has been more subdued elsewhere and in other sectors of the market.

It's actually very tough to generalise on a national basis.

The long run

On the flip side, while housing bears might be keen to run such a chart to show how rental growth has eased of late, it's doubtful they'd be so keen on running the full 40 year chart since it raises a couple of awkward questions.

Firstly, the rent versus buy equation looks to be very much skewed towards those who decide to buy property as a place of residence since rents have continued to grow relentlessly come hell or high water for more than 40 years.

Rent versus buy?

Don't get me wrong, by the way, I'm not against renting. Far from it, in fact. 

I've been a renter for most of my adult life, and in cities like Sydney it's undoubtedly the case that one can generally afford to rent a far, far superior property to live in than one can afford to buy

This is particularly so for dual income and higher earning households due to the low yields on higher-end property. 

In any case, the taxation dice in Australia are loaded very much in favour of the renter-investor due to the prevailing negative gearing tax laws and the dividend imputation system through which the Hawke/Keating government addressed the previously iniquitous double taxation of dividend income in 1987.

Naturally, from a personal finance perspective the trickiest trap to avoid is renting your place of residence and spending everything else that you earn.

One saving grace in Australia is that we have compulsory superannuation contributions.

Other countries sometimes don't even have that, leaving many in the unenviable position of having no house, no investments and no pension.

I don't know if there's an existing acronym for that - perhaps there should be.

A second awkward question posed by the above chart is what happened when negative gearing was quarantined during a calamitous experiment which lasted only from June 1985 to September 1987.

Rents began to increase at a furious double digit pace of more than 10% per annum before the quarantining decision was reversed by Keating and the rental increases eventually eased (click chart).

Clearly, just as there is a lag effect with monetary policy, so it is with housing market policies since real estate is a highly illiquid asset class and the process of making a decision to buy, finance a deal and complete upon a purchase can easily take up to six months.

By Q1 1988 rents were increasing even more rapidly at an eye-watering annualised pace of above 11%.

I note that some would choose to re-present this chart adjusted for inflation (CPI), but since rent is itself a component of inflation, then this is perhaps something of a curiously circular approach.

In any event, renters don't readily adjust their rental increases for a notional CPI figure - rather they tend to just look disdainfully at the nominal annual increases.

More notably, since this chart is a national average it doesn't paint the true picture, which is that rents skyrocketed in the two capital cities with tight rental markets - being Perth and Sydney - where rental increases comfortably outpaced inflation by a wide margin.

According to the HIA, in nominal terms "rents rose by 37% across Australia and by 57% in Sydney" during the period in question.

More worryingly, and more significantly still, in New South Wales waiting lists for public housing jumped alarmingly "from under 110,000 to above 140,000" before the negative gearing laws were hastily reinstated.

Elsewhere, in cities such as Darwin, Hobart and Brisbane, rental markets were less tight and the effects of quarantining of the laws on rents were totally muted, with rents actually declining in real terms.


This is all pretty interesting (to me at any rate) for it raises a number of key questions around what might happen if another attempt was made to quarantine the prevailing tax benefits specifically in relation to residential property.

Today, data provider SQM Research shows that Australia has several tight rental markets which variously include Darwin, Adelaide and Sydney.

If a "market in equilibrium" is said to have a vacancy rate of around 3%, then this chart suggests that Australia must have some exceptionally tight rental markets (click below chart).

Sydney's problem child inner west region immediately springs to mind as just one such troublesome example.

It's doubtful whether we'll ever get to see what happens if negative gearing laws are again quarantined or grandfathered.

But since there are many thousands more landlords today than there were in decades gone by it would certainly make for a fascinating case study.

One can only imagine the hysteria if the many thousand of landlords in Sydney attempted to jack up rents from already high levels. 

Of course, I don't really know if another attempt will be made to alter the negative gearing laws, but presumably the rulings could be amended prospectively so that future investors can only claim on new builds. 

Rewriting history?

We should be wary of trying to rewrite history with regards to the quarantining of negative gearing. 

If you read books which touch on the subject written in the first half of the 1990s, the increase in Sydney and Perth rents is only cited as a secondary reason for the reinstatement of the negative gearing rules. 

The principal reason cited was the jump in housing waiting lists - in New South Wales the numbers increased "from under 110,000 to above 140,000" during the period for which the rules were changed, an alarming "trend which was immediately reversed" upon their reinstatement.

It's also an obvious over-simplification to state that governments will save billions of dollars by simply scrapping the existing rules. 

Tax accountant Ed Chan highlights why he believes government costs and impacts on the wider economy would escalate and possibly spiral if more public housing was required in this article here.

The most damning evidence of all against the quarantining of negative gearing laws is that the previous attempt was a fiasco which lasted all of two years, which presumably has led the pollies of today to be more inclined towards to the status quo.

This whole negative gearing debate is a classic example of participants starting with their conclusions and finding the supporting evidence to back up their pre-conceived case.

I myself would be more inclined to leaving things as they are but then, like thousands of others investors, I've positioned myself rationally to benefit from the existing state of affairs in terms of dividend imputation and franking credits, negative gearing and depreciation laws, and deferred capital gains taxes through employing buy-and-hold strategies.

Kerry Packer once said: 

"I am not evading tax in any way, shape or form. Now of course I am minimising my tax and if anybody in this country doesn't minimise their tax they want their heads read because as a government I can tell you you're not spending it that well that we should be donating extra.”

In any case, my personality is that I tend to have a cognitive bias towards the status quo on many of today's political issues outside of animal rights and live exports. 

What do you think? Ping me: