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.

Sunday, 31 August 2014

Petwood

Interesting estate in Woodhall Spa, England. Originally built as a country residence around the turn of the 20th century but converted to a hotel in the 1930s - all I could think of was Fawlty Towers.

US shares smash records

Some years ago Warren Buffett said he would place big bets on there being no double dip US recession and he expected share markets to recover. And what a period it has been for shareholders. 

The S&P 500 has doubled over the past five years to break a new all-time record high of over 2000 after four more consecutive weeks of gains. Valuations are becoming more stretched and value is ever harder to find but stock markets have kept on pushing higher. 

There have been some shocks along the route (US debt ceiling crisis, various European crises) yet those who followed the end of the world meme or followed recommendations to explore opportunities on the short side have not only missed on on five years of healthy dividends, they have missed out on doubling on their portfolio's value too. 


Uncharacteristically not all of Buffett's calls have been on the money in recent times, but that has not stopped Berkshire Hathaway more than doubling its share price over the last five years. 

Berkshire have always steered clear of stock splits in order to discourage speculators and frequent trading. It probably works too - an individual share in Berkshire Hathaway will now set you back around US$206,000 with the company valued at $330 billion dollars and trading at a P/E ratio of 16.

Berkshire's market capitalisation passed $300 billion for the first time in March of this year after recording a net profit of $19.5 billion from consolidated revenues of $192 billion. Due to its colossal size it is only reasonable to expect that Berkshire's ROE will be lower in the future than has been the case over the decades past. 

Which does better - capital city or regional property?

Bloomie runs the numbers for the last decade in order to find out.

Source: Bloomberg

Source: Bloomberg

Of course, the answer is inherently clear with London's performance smashing the regions to smithereens.

Note that the household debt super cycle ended more than seven years ago now, before which time you could practically have bought any old property in any old location and done reasonably well as household debt levels were ratcheted up to the max.

Those days are now well in the past.

We expect to see very similar trends continuing in Australia over time too.

Household debt levels have long since peaked out and therefore we do not expect to see any meaningful regional property price growth in aggregate in real terms - just as we have seen in the UK where regional prices have declined markedly over 7 years in real terms (refer above).

Household Wealth and Liabilities graph

Interestingly mortgage serviceability has improved dramatically in Australia in recent years as lending rates have fallen, so there may be a small window of opportunity for regional property to increase in nominal value before lending rates are normalised, whenever that may be, possibly in 2016.

Household Finances graph

So many salaried households, particularly in regional areas, will be tapped out as borrowing rates are eventually normalised that we do not expect to see regional dwelling prices in aggregate rising much at all through the next cycle.

There will be regional cities which buck the trend, of course. Gold Coast and Sunshine Coast spring to mind as two possible examples, and there will no doubt be more.

A stylised example which takes into account wages growth and the cost of borrowing shows that we could see regional nominal prices rise by a small quantum in the coming 18 months, but at the first sign of rate hikes we might expect sentiment to be spooked and momentum halted.

Housing Prices graph

There won't be any mining town growth this time around as there was from 2003 to 2013 to drag the averages higher either.

Quite the opposite in fact. 

Mining capex is well and truly set to hit reverse gear and we do not expect the production phase of the boom to have tangible benefits to housing markets as the construction phase of the mining boom dies away.

We expect to see mining construction activity drop off by at least 20 percent over the next 12 months with potentially significant risks to the downside on that figure.

With the terms of trade having been in virtual freefall the drop-off in capital expenditure seems increasingly likely to be pulled forward.

There is not likely to be too much joy for mining towns in the years ahead.

UK house prices rise for 16th month in a row

Unsurprisingly UK houses prices increased by another 0.8 percent in August making it 16 months in a row for the Nationwide house price index (click chart):


First home buyer affordability remains bang on its 25 year average. 


The price-to-earnings ratio is above the long run average, which is not a surprise given the ultra-low interest rate environment.


If you have read my books you will know how much emphasis we place on proximity to train links for property investment, particularly in capital cities which are growing and with increasing volumes of traffic on the roads.

Nationwide provided some interesting analysis to show what kind of a premium is attached to properties location on train lines in London and other cities.


Total embarrassment for the 'analysts' who announced that the London market had crashed based upon one month of noisy data from the Rightmove asking price index. 

The real world actuals data shows London prices having boomed by 7.6 percent in the last quarter and by a massive 25.8 percent in the last 12 months alone. 

Clearly we are now expecting the market to slow somewhat after that bonanza run, but if you genuinely think the market has crashed, you really should seek professional help in reading charts.


The best performing region in the UK was London (+25.8 percent y/y) while one of our other long-time favourite cities Cambridge notched an impressive 20 percent capital gain in the last 12 months. 

The outer metropolitan and outer south east benefited to some extent from the London effect and recorded 16.4 percent and 14 percent capital growth respectively.

Analysts will be watching the economic recovery carefully in order to anticipate when the first rate hike in years might finally eventuate.

Saturday, 30 August 2014

Saturday Summary - articles of the week

Summarised by Michael Yardney at Property Update here.

Transfield - kaboom

A bit of water under the bridge since I entered the Sun Herald shares race at the beginning of May this year.

While Downer EDI has been a disappointing performer (true to form, it has to be said), the REITs in the portfolio have been performing well with GBP, ABP, CQR and BWP all turning in solid performances with healthy franked dividends to back them up.

The real rip-snorter has been Transfield Services (ASX: TSE) which, like Downer, I selected on the basis that I thought it would be a good time to own companies with the potential to snare hefty government contracts.

In the event TSE grabbed a monster $1.2 billion contract to provide security and catering services on Nauru and Manus islands as well as jagging major defence contracts in the Northern Territory.

The result has seen Transfield careering back into a net profit position of $53 million after a $253 million net loss in the prior year.

A stunning turnaround story which has seen the share price go through the roof (click chart).


Interestingly one of my other picks Sirtex Medical (ASX: SRX), which I picked purely on a technical basis for its blue sky potential, has also gone on a tear recording a 27 percent capital gain.


SRX impressed with its Appendix 4E and full results presentation increasing its turnover by 34 percent and net profit by a third, but the pharmaceutical is priced as a growth stock with a sky-high PE ratio now, and as such it is hard to make any case for value. 

There is always potential downside risk in companies which are priced for ongoing growth in this manner.

{Disc: been holding TSE}.

Friday, 29 August 2014

Investor lending drives further credit growth

Low interest rates working?

A survey of 23 economists this week showed all 23 of them to believe that the interest rate easing cycle is over, albeit few are expecting hikes any time soon.

A key reason for that is doubtless that lending rates have actually been falling independently of official cash rate decisions made centrally by the Reserve Bank.

Personally I still wonder whether this will be enough, particularly when viewed in the light of an iron ore price which has crashed by 35 percent in 2014 and a stubbornly high Aussie dollar.

On the flip side, there is some evidence to suggest that low interest rates are having an impact in other areas of the economy in spite if the declining terms of trade.

Consumer confidence is set to rebound above is long term average, retail sales are expected to resume their upwards trend by growing by 0.4 percent in July and yesterday's capex survey showed that away from mining and resources there are signs of life in the larger services sector of the economy.

For the time being at least interest rates will be stuck on hold until further evidence comes to light.

Financial Aggregates show investor credit growth

The Reserve Bank released its Financial Aggregates data for July today which revealed that easy monetary policy is gradually impacting credit aggregates.

In the year to July 2014 total business credit has spluttered 3.4 percent higher and personal credit has increased by 0.8 percent.

Housing credit rose by another 0.5 percent in July to be a strong 6.5 percent higher over the year, clear evidence that cheaper credit is set to drive housing markets higher.


The gradient of the red line in the chart below shows that housing credit for investors has been outstripping that of credit for owner occupiers over the past year (click chart):


In terms of annual percentage credit growth the data shows that the housing credit growth rebound has been driven largely by investor credit which has increased by 8.8 percent over the past 12 months as compared to a 4.8 percent increase in owner occupier credit.


When smoothed on a rolling annual basis below, the data becomes clearer with the red line denoting a strong uplift in investor credit.

Of course, percentage credit growth is nowhere near as high as it was in decades gone past, but since it is the transaction of dwellings at the margin which drive the market property prices have rebounded very strongly since 2012 and are heading higher still.


As a percentage share of housing credit, investor credit has ticked higher again, now representing 33.8 percent of the total. Interestingly this is exactly the same percentage share of housing credit in the RBA's Financial Aggregates data that we saw a decade ago in July 2004.


Outperforming property types and location

The data continues to imply to us that the property types which will ultimately outperform in this cycle include those which are strongly favoured by investors, particularly well-located properties in Sydney. 

Our previous analysis of rolling 12 monthly investor loans by state has clearly shown that Sydney will be the king of price growth in this period of the cycle (click chart):


When you factor in the increasing demand from offshore or Australian real estate which is not well captured in reported data, the bias in favour of Sydney becomes all the more compelling.

The latest statistics from Juwai denoted that the favourite locations for Chinese buyers fall in the following order: Sydney, Melbourne, Brisbane. Perth and the Gold Coast.

As the terms of trade have declined dramatically we expect the Australian dollar to fall further from its current elevated point, which may drive significant further demand from offshore.

In this property market cycle, we are following that demand and have thus focused on Sydney real estate. 

Recent property market forecasts from analysts have suggested that the currently property market cycle has another two years to run which fits in tidily with what we have heard from major developers. 

BIS Shrapnel recently forecast price growth of 6 percent per annum for Sydney apartments through to 2016.

Thursday, 28 August 2014

Capex rises again showing rebalancing

A nice surprise - private new capital expenditure increased in the June quarter by a seasonally adjusted 1.1 percent (click chart):


The driver was a nice increase in other industries (largely, services) new capital expenditure when observed in chain volume measures terms.


When looked at in current prices terms by state on a trend basis, a decent increase in activity in the June quarter is apparent in most areas.


Expected capex 2014/15

As for the outlook over the next year, no surprise that we're expected to see a sharp 20 percent decline in mining capex, which will impact the mining states.

Chart: Financial year actual and expected expenditure- Mining Capital Expenditure

The good news is that, as hoped, expected capex in other industries has really started to pick up over the past 6 months driven by ongoing low interest rates.

Chart: Financial year actual and expected expenditure- Other Selected Industries Capital Expenditure

Piecing it together the expected capex for 2014/15 increased by 5 percent on the prior estimate to $145,158 million, although this still represents a 10.2 percent decline on the prior year's equivalent estimate.

Chart: Financial year actual and expected expenditure- Total Capital Expenditure

Overall, a surprisingly good release which shows rebalancing away from mining and a steadier decline in capital expenditure than had been feared. 

With new home sales declining in the month and in the last quarter across the board, interest rates still appear to be as likely to fall further as not. 

Wednesday, 27 August 2014

Residential construction goes from strength to strength

Rebalancing?

An interesting set of data indeed from the Australian Bureau of Statistics today covering Construction Work Done.

The headline data shows that the residential sector is going from strength to strength, but the ongoing decline in the mining sector and resultant stagnation of the economy may still necessitate interest rates heading lower still in our view.

Residential construction increased by another 2.2 percent seasonally adjusted in the June quarter to $13.4 billion, to be 9.6 percent higher over the past year. That's great to see.

However, this was more than offset by a 3.1 percent decline in engineering construction to $29.7 billion - driven by declining commodity prices and a dearth of major new mining projects - with that sector now tracking at 5.6 percent lower than a year ago and set to decline significantly.

When you consider the respective magnitude of each sector, you can see why we think that interest rates may be heading lower yet (click charts to expand).


The doom and gloom community will wring their hands at the prospect of a mining bust of course, praying that it will send Australia into a period of recession and unemployment. 

Yet there is some hidden good news in the data.

Although total the value of construction seems almost certain to decline, as I discussed here residential property construction does have a strong multiplier effect, and both directly and indirectly will employ many more people than an equivalent value of mining construction ever did.

For this reason among others the economic future for New South Wales in particular seems relatively bright, as I'll explore in more detail below.

Building on the up

So first, the good news, and that is that building work done continues to rise, particularly for the residential sector. No sign of inelastic supply or land prices killing the sector here, it's a residential construction boom (click chart).


And the happiest part of this release was the notable increase in detached housing construction. 

To date, the residential construction boom has been all about attached dwellings, to the extent that there is a looming oversupply of units and apartments in certain sectors of our inner city property markets, particularly in Melbourne, Brisbane and Sydney.

Of the 2.2 percent increase in resi construction in the June quarter, 1.6 percent of that was down to detached housing, which is a most pleasing result. 

On the flip side, major renovation work has gotten itself stuck in reverse gear, declining by 2.4 percent in the June quarter (click chart):


When we analyse the building work done by state, it is clear that New South Wales is the king of building work done in this cycle. 

With an infrastructure and dwelling deficit to tackle, NSW is in the midst of a building boom which is keeping the local economy firing.

Our clients who took our advice to own Sydney property in this cycle are likely to be feeling pretty pleased with themselves at this juncture with the economy thriving and dwelling prices booming.

South Australia continues to bumble along while Western Australia is heading towards a residential construction downturn.


Mining boom recedes

Moving onto engineering construction, and we can see that the mining cycle is now well into the construction downturn phase.

This has been an extreme example of a textbook mining boom cycle to date, and we expect there will be plenty of misery ahead for a great many mining town property markets, which is why we have always strongly advised against this extremely risky strategy.

The Chindia boom saw commodity prices flying north into a dramatic bubble which in turn led a monster mining construction response in Australia.

As exports and supply have begun to ramp up bulk commodity prices are now in near freefall mode, a trend which may even accelerate further yet should China's economy slow.

In such an environment fewer and fewer new projects will pass feasibility to the construction stage and these highly elevated levels of engineering construction activity will surely die over the next three years. 

Clearly Western Australia and Queensland have much to lose in this regard, but the data shows that engineering construction is likely to tank almost everywhere, with neither South Australia nor New South Wales exempt from the forthcoming hurt.


I'd like to be proven wrong but I've highlighted before that South Australia urgently needs infrastructure spend or jobs growth from somewhere to prevent the state from becoming mired in recession, if it isn't there already. State Final Demand has been negative for the past three quarters and unemployment has been rising.

Total construction

Piecing it all together on a seasonally adjusted basis reveals the below levels of construction work done by state (click chart):


On a trend basis, the ABS noted in its traditional matter of fact tone:

"Construction work done in New South Wales has risen for three quarters...and construction work done in Victoria has risen for three quarters."

Which is lovely to see. But...

"Construction work done in Queensland has now fallen for two quarters...in Western Australia has fallen for three quarters...in South Australia has fallen for three quarters...and in the Northern Territory has now fallen for three quarters."

And...

Construction work done in the Australian Capital Territory has risen this quarter, following falls in the previous eight."

A neat summary of much of the problem facing the Aussie economy, really. Sydney's economy is tracking very nicely, but as our employment growth analysis has shown this is not likely to be a very pleasant period for most regional towns and cities. 

At the macro level total construction work done is now in moderate decline, with the increase in residential construction work just not enough to offset the fall of that in mining. 

With falling commodity prices, the mining sector decline seems almost certain to be pulled forward.


Summary

All in all, while the cash rate futures yield curve remains inverted, futures markets still seem remarkably placid, but we are not sure that this is likely to last.

Barring some kind of miracle nominal GDP growth for Q2 looks set to be negative with trade to act as a drag this quarter. Westpac sees a significant swing inventories rescuing the headline, anticipating GDP at 0.4%qtr, 3.0%yr.

While it's true that lending rates have been falling independently of the Reserve Bank's official cash rate, it remains possible that a negative GDP print on September 3 could see renewed clamour for further monetary policy easing.

Still expecting another possible cut in this cycle, though it may take until the new year to arrive.

All surveyed economists see a hike next up, though most likely not for the best part of another year. For that reason some analysts optimistically expect the current property market growth cycle to run for another two full years.

Monday, 25 August 2014

Randall

Annual cricket match fundraiser for the David Randall Foundation in Essex yesterday. First year in four that we actually got some half decent weather. Some good funds raised, well done everyone!


London market moderates

Ahh, I wasn't going to bite, but can't resist a quick comment. A few excitable 'pundits' have been calling a London property bust based on an apparently dramatic 5.9 percent decline in asking prices in August 2014.

If only they had carried out just a few short minutes of research they would realise that Rightmove's index (the methodology of which is explained here) is a volatile affair with a long history of sending out correction signals in the summer holidays and particularly in the month of August.

In fact, Rightmove have long since desisted from making bold predictions based upon its monthly asking price index after a number of embarrassing calls.

Cf. August 2004 and the "IF THIS ISN'T A SLOWDOWN, WHAT IS?" call, which neatly pre-empted a colossal 100 percent boom in London house prices (oops).


Falls in August asking prices continue to occur. In 2012, for example, the "largest ever August price drop":


And so on to August 2014, and the reported 5.9 percent decline. Being active in the London market, our view is that this is little to get too aroused over given some of the equivalently outlandish increases in preceding months - in October alone London asking prices jumped by well over 10 percent, an equally nonsensical reading when taken in isolation.

Far better to simply observe the prices on a longer term basis (click chart):


Commentators would do well to observe the trend rather than making silly predictions based on monthly figures. Alternatively, smooth the data. Here's the 6 month moving average (click chart):


Just a few quick observations. Firstly, it's notable how London property has fared way, way better than regional UK property. The blue UK line is itself skewed north by London prices - when London is excluded, UK property is in the midst of enduring a lost decade. 

Secondly, the Office for National Statistics data recorded UK house prices as hitting an all-time high just a few days ago. However, the ONS data does lag, and the Rightmove data likely indicates something of a moderation in sentiment.

We believe that's partly because interest rate twitchers are beginning to anticipate a rate hike perhaps some time in 2015.

There has also been a marked slowdown in the rate of processing mortgages since the recent Mortgage Market Review. Combined with a 20 percent increase in newly marketed properties for sale, this is acting to slow the market a little.

That said, there are sectors of the market which are still red hot, particularly to the south-west of London. Asking prices in Croydon - an "overlander hotspot" and one of the locations we bought investment property in last year - have increased by a rip-roaring 21.5 percent over the past 12 months.

Opportunities going forward are largely related to the construction of the Crossrail project.

Sunday, 24 August 2014

Sydney property market...bazinga

We've been suggesting for a couple of years now that low interest rates will keep property investors hammering the Sydney property market, and it's certainly been the case that interest rate cuts have had a marked effect on market activity through recent cycles. 

The chart below shows the correlation between the first rate cut of the most recent easing cycles and auction clearance rates.

Through September and October 2008 the official cash rate was cut from 7.25 percent to 6 percent.

And then, on my birthday in November 2011 the cash rate was cut to 4.50 percent, heralding the beginning of the latest cycle.

You can see below the reaction of Australia's major property markets.


For months commentators have been suggesting that the market is fading, but we have had to agree to disagree.

Au contraire, with the cash rate now at only 2.50 percent, demand from investors in particular is exceptionally strong and rising.

If you have been following the data, you will know that investor finance in New South Wales is going through the roof (click chart).


There is also a theory that investors in the Sydney market have been "pulled forward" and therefore the market has been overdue to reverse. 

Perhaps yes to some extent, but in reality rising dwelling prices in Sydney have created more equity for redraw, low interest rates have led household savings higher allowing potential investors to employ more leverage...and if the Aussie dollar slides further then more foreign capital may find its way into the Sydney and Melbourne markets too.

Weekend - auctions booming

Anyways, it was an absolute rip-snorter of a weekend of auctions despite the rain.


Australian Property Monitors recorded a thumping preliminary auction clearance rate of 83.4 percent, with the trend over the past five weeks one of a strengthening market as we move towards spring.


RP Data, which typically records a lower result, came in at 75.8 percent.

No slowdown there. As for where the market is really firing...one of our favourite suburbs of the past five years just keeps on going, recording a perfect 100 percent clearance rate this weekend...

Saturday, 23 August 2014

UK property 'bubble' - part 3

Completing my triumvirate of posts on the UK housing market data today, I've been back in my home city of Sheffield in Yorkshire the past couple of days.

Listening to some overseas commentary about the UK market, you'd think the property market across Britain was apparently in a bubble.

Yet surely only someone who doesn't know the meaning of the word could describe the ex-London UK housing market as a bubble.

Speculative mania? Uncontrollable credit growth?

Prices have gone absolutely nowhere for more than seven years - backwards in many cases - and this through a period when inflation has been romping along at a 5 percent pace at times. In real terms, prices are way down in regional markets across England (click chart).


The truth of the matter is that away from London and the south-east most housing markets remain painfully slow. Much of the same housing stock which was for sale when I was over here a year ago and the year before that still remains for sale.

This is a key reason why I don't invest in regional markets. Property is an illiquid enough asset as it is without compounding matters by investing in thin markets where demand is low.

Australia will get a sharp downturn one day, and when we do illiquid, depreciating assets will prove to be very painful for some investors who want to sell.

Being back in Sheffield in northern England it has been very notable how developments like the Hallam Tower which I photographed below have not progressed one iota in more than ten years, and this is a site with the most spectacular views across the city.

The Park Hill redevelopment has progressed a little over the past decade but much of it is still derelict.

A property bubble? Hardly. Britain's housing market is very much a case of London and the south-east versus the rest.

Saturday Summary - articles of the week

Summarised by Michael Yardney at Property Update here.


Friday, 22 August 2014

Northern Ireland to reinflate a housing bubble?

The ONS data for Northern Ireland (NI) shows that its house prices are up 4.9 percent on a year ago raising the interesting question of whether the country will repeat any of the same mistakes of the last decade.

It seems unlikely that price will be allowed to run upwards unchecked as they were through to 2007. At the peak of the bubble in June 2007 NI house prices had increased by 55.9 percent in only a year before eventually reversing.

The worst year in NI was the year to June 2009 when prices fell by 23 percent in only 12 months, before falling further through 2010 to 2012 (click chart).


Despite claims to the contrary, London is a very different proposition. 

Quite apart from being a major international financial centre, with a population of more than 8.3 million the ratio of new housing stock to established in such a large city remains immaterial and thus limited in its impact on the market.

The population of Belfast by contrast is only 280,000, so a boom in levels of construction can have a marked impact on housing market economics.

Ireland experienced a perfect, self-perpetuating housing bubble storm of full employment, booming prices and massive overbuilding. 

London has the opposite problem after years of woefully inadequate construction despite rapid population growth.