Is there a God, a property bubble and other big questions?

Is there a God? It’s a big question for a Tuesday!

Two main schools of thought here…

In his controversial book ‘God is not Great’, Christopher Hitchens concluded:

‘What can be asserted without evidence, can be dismissed without evidence’.

His logic is that until someone proves there is a God, the burden of proof suggests that he need not take a leap of faith which opposes reason.

Others argue that there are many things in the universe which cannot be explained and therefore logically there is likely to be a higher power which has created those things which we cannot understand.

Luckily I mainly write about personal finance so I can leave those big questions to people with appropriately-sized brains.

 

Occam’s razor

There are a few ideas which keep on popping up in various guises through history, and Occam’s razor is one of them.

The theory states that we should ‘cut away’ the more complex theories until we reach a level of simplicity which best explains a problem or conundrum. The theory is not irrefutable in scientific terms, yet probability theory dictates that the simplest and most logical explanations are often the most accurate.

All other things being equal, simpler explanations are better than more complicated theories.

While the concept is sometimes referred to by different names, at its core the idea of Occam’s razor has variously been used by Sir Isaac Newton and Bertrand Russell.

 

Australian Property Bubble

You don’t need me to tell you that there has been a lot of talk about an Australian property bubble over the past dozen years or so.

A bubble is a scenario where prices rise dramatically above their true value and continue to do so until prices go into freefall and the bubble bursts.

The supposed property bubble didn’t burst after the last great boom period, however.

And nor did it burst through the global financial crisis as credit markets remained liquid.

And it hasn’t burst in the half decade since, despite a moderate downturn on 2011 and early 2012.

Some market commentators like to say that we are in a bubble, but there are no forthcoming signals that it is about to pop, and perhaps therefore it will not burst for decades into the future.

I hate to be the harbinger of unhappy tidings for housing market bears, but a bubble within which prices corrected moderately and which hasn’t burst for a dozen years, appears unlikely to burst, and may not burst for decades to come…well, I’m afraid that isn’t meeting any of the obvious criteria for a bubble.

Occam’s razor: a bubble which ain’t bursting…probably just ain’t a bubble.

 

“Generation Rent”?

Of course, I’m well aware that prices are high in some parts of Australia. I hail from a part of the world, after all, where you can buy a reasonable enough house for 50,000 quid (Sheffield, Yorkshire).

Lest you thought there was any danger, however, of the affordability debate ever going away, be assured that in Britain – even where prices have corrected by a third in many parts of the nation since 2007 (!!) and interest rates have been at absolute rock bottom for years – it’s still fashionable to talk of “Generation Rent”.

How so?

Generally, because during market downturns, lenders tend to require higher percentage deposits which many young people are not capable of saving today.

We’ll still be discussing housing affordability 50 and 100 years from now.

 

Multi-speed markets and affordability

Commonwealth Bank recently released its affordability report which I considered yesterday, and it shows that in terms of loan repayments affordability in Australia is rapidly heading towards its best levels in many years.

Source: CBA

But it’s not as simple as all that.

Residex’s latest price movements show that house prices are unaffordable in some cities and are easing, while apartments, which are popular with investors, are rising in price.

Stephen Koukoulas of Market Economics dared to highlight the CBA report yesterday and was met with the predictable howls of protest and abuse. But Koukoulas has been on fire with his Tweets of late and his response was another belter:

“Australia could register massive budget surpluses if we had a carping tax.”

Very droll, and also correct.

[sam id=35 codes=’true’]

In truth, it’s long been known that Australia has a problem with way too many of the 23 million of us wanting to live in a handful of popular locations, particularly in Sydney and Melbourne.

Some commentators seem besotted with the idea of Australia’s “uniquely monocentric” cities.

This is all rather odd because the last time I checked Sydney has a main CBD, a huge business district in North Sydney and another one at Parramatta to name but three. But it’s true that as a nation we are obsessed with living in just a few tiny parts of a gigantic landmass.

Brisbane, Adelaide, Hobart and regional Australia don’t seem to meet any of the criteria for a bubble given that prices have not increased materially for years and in many cases remain significantly below previous peaks.

dwelling

Parts of the Melbourne market are steaming along, however.

They sure seem to love their real estate down in Victoria, and a roaring annual population growth of 94,800 people in the state may explain part of the phenomena.

In Sydney, dwelling prices have under-performed household income growth quite substantially since the early months of 2004, so there’s a reasonable argument for a ‘slow melt’ in certain parts of that market. The price action of detached dwellings in some suburbs is generally looking a little soft, while the broad middle market of the inner/middle ring suburbs presently looks very strong.

 

Five correction risks

Whether or not there we meet the criteria for a speculative bubble, where prices are high there must exist in parrallel a risk of a market price correction. Here are five of the main property market risks:

Black swan events are by their very nature unforeseeable, so we, um, can’t predict them.

If you’re interested in black swan events read Nassim Nicholas Taleb’s book of that name, where you will plough through reams of material to discover that (a) if you play a game of heads and tails, someone actually has to win (can’t argue with that logic), and (b) economic models are flawed because some things aren’t predictable (well yeah, obviously…but anyone got any smarter ideas?).

Interest rate risk is basically off the table for now, and policy change risk doesn’t appear likely in election year either, especially given that both major parties have distanced themselves from the ubiquitous negative gearing debate.

Oversupply may be a risk if you buy property in some of the regional markets which periodically capture attention and space in print. Not if you own property in supply-constrained capital city suburbs where vacancy rates remain very tight.

The key risk at this point in the cycle is recession/unemployment risk.

The good news is that unemployment is presently relatively low at 5.5%. Two key dates for your diary, though:

  1. Thursday’s new and expected capital expenditure report from the ABS – are we heading off a mining construction and investment cliff? And if so does Australia have the tenacity and dexterity to pull off the ‘Great Rotation’ into other areas of economic growth?
  2. The next labour force survey on June 13. Australia’s economy has been adding a promising number of jobs over the past 12 months.

However, with due respect to the ABS, the labour force reports are like a monthly game of employment Russian Roulette and the numbers are all over the shop…let’s just hope that the jobs growth trend is our friend and the headline unemployment rate remains reasonable, eh?

Watch this space.

[post_ender]



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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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