Each Saturday morning I like to share some of the interesting property investment and economic articles I’ve read during the week.
I’ve put them here all in the one place for your easy reading.
Enjoy your weekend….and please forward to your friends by clicking a social link buttons on the left.
Why house prices are set to jump 10 to 15pc
The good news story for property investors this week was that the monthly RP Data – Rismark house price series rose 1.4% in September and house prices are up 2.0% in quarterly terms.
Capital city property markets have recorded their strongest gain in more than 2 ½ years, rising for the fourth consecutive month in September.
In contrast, Hobart,Canberra and Darwin saw price falls in September.
Looking at the broader trends, the gains in recent months have been led by Melbourne (+3.0%qoq) and Sydney (+2.8%qoq), while Darwin has also been strong (+3.9%).
The improvement in Melbourne prices has been the surprising given the falls earlier in the year – indeed, in year to-date terms Melbourne prices are still down 1.2% so far this year.
As can be seen in the chart below, Darwin, Hobart and Sydney prices have seen the best improvement in 2012.
House prices have improved in recent months, responding to the 125bps cuts by the RBA since November 2011.
This of course has been noted by the RBA in recent Statements so it will not be a surprise ahead of today’s meeting. But the RBA will have to weigh that improvement against the concerns in other parts of the economic outlook as it decides on rates.
Rising house prices and still low unemployment may be enough to keep them on hold today, but another cut is likely in coming months. Of course, any additional interest rate cut will only further support housing demand and house prices in the December quarter.
How to build a multi million dollar property portfolio with just $45K
Another great Real Estate Talk show produced by Kevin Turner. If you don’t already subscribe to this excellent weekly Internet based radio show.
This week he has a heap of great guests:
- Michael Matusik from Matusik Missive
- Louis Christopher from SQM Research
- Jane Slack Smith from Your Property Success
You should definitely subscribe to this weekly audio program. Click Here It’s free and you can listen on the go on your smartphone, iPad etc.
The end of a house price hiatus
In an article in Business Spectator Stephen Koukoulas wrote that house prices are climbing higher, reversing what were steady falls from early 2011 through to about May this year. And this was before this week’s good news about the September house price increases.
He explained that there are sound reasons to think that house prices will continue to move higher. The fundamental underpinnings of housing demand and house prices are extremely favourable and are likely to stay that way for some time.
The prior falls in house prices, which totalled around 7 per cent, helped to improve affordability for those potential house purchasers who previously judged a new house as just out of reach because prices too were a little too high. Economics works – lower prices brings in higher demand.
There has been another strongly positive influence.
Household incomes have been rising at an annual pace of around 4 per cent which means incomes have risen by around 6 per cent over 18 months in which prices fell, which boosted housing affordability through an ability of householders to spend and borrow more.
Making the house purchase equation attractive has been the additional fact that the unemployment rate has been steady at a low rate, just above 5 per cent, for more than two years.
Koukoulos explains that while growth in employment, hours worked and the participation rate have slowed, the labour market is still in excellent shape. This gives borrowers – and lenders – confidence in entering the mortgage market.
From a cyclical perspective, the level of mortgage interest rates is clearly another positive factor supporting demand for housing and with that, prices. At the start of 2011, the standard variable mortgage interest rate was around 7.9 per cent, meaning an average monthly repayment of $2276 on a $300,000 mortgage. The mortgage rate is now 6.85 per cent meaning that the monthly repayment has dropped to $2092, some $184 lower than a year ago.
Or put another way, for a repayment holding at $2276 a month, the borrower can boost the size of the mortgage by over $25,000 which can possibly be used to bid up house prices in the process.
Koukoulas concluded that the outlook suits further gains in house prices at least in the next year or so.
If the current favourable influences start fuelling house price growth that is too strong, say around 10 per cent per annum, the RBA would view this unkindly and if other circumstances allow, it may react to cool them with higher interest rates. But that is a hypothetical issue for the moment – let’s first see if these recent rises continue before getting carried away.
Investors that ignore the lessons of the past are bound to repeat them
In an article in the Age Annette Sampson writes that successful investment rests on learning from your mistakes, not avoiding mistakes altogether.
While it would be nice to say you’d never dropped the ball financially, building wealth is about taking risks – and sometimes getting it wrong.
The only way to avoid mistakes is to avoid taking risks completely. And that, arguably, is the worst mistake you can make because you’re guaranteeing a below-par return.
She explains that over the past couple of decades, a long list of financial products have turned out to be lemons.
In every case, there were clear lessons to be learnt, but too often the same mistakes were made all over again.
Here are a few of those dud products, and what they should have taught us about investing and managing our finances.
Just like a bank or building society Estate Mortgage managed mortgage trusts that it claimed were just like bonds or term deposits but offered much higher interest rates. And this was in the late 1980s when high interest rates were really something. At one stage, investors in Estate Mortgage funds were receiving income payments of 22 per cent – more than 6 per cent above what the banks were paying.
But despite all the claims of ”high returns, nice and safe”, Estate Mortgage was an accident waiting to happen and investors lost their money.
The pattern of promises of high returns with no risk has been repeated many times since, often with the same dismal results. Westpoint and Fincorp are more recent examples.
Estate Mortgage also showed the importance of understanding the assets underlying mortgage loans. While misleading disclosure was a problem for Estate Mortgage investors, many simply invested on the basis of high returns, safe as houses, rather than asking questions first.
The high-profile collapse of Storm Financial was a textbook lesson in the dangers of gearing and one-size-fits-all financial plans. The Storm model was simple – build wealth through borrowing, in some cases gearing up twice by borrowing once against their homes and then through a margin loan.
Remember the technology boom and all those dotcom companies selling on price-earning multiples in the stratosphere? There were plenty of lessons to be learnt from the resulting tech wreck.
That when people start to claim that the world has changed, it’s time to start worrying.
That fundamentals such as whether or not a company earns a profit matter. And that unrealised capital gains can disappear just as quickly as you made them.
But the other lesson is that whenever there is an investment bubble, there will be a rush of funds launched to exploit it.
You’d think we’d learn. But fad investments still come along to take advantage of heated markets and investors still get sucked into them. Absolute return or hedge funds, resources, emerging markets, high income – they’ve all had their day, and the product launches have followed.
Basically, a CDO was a way of packaging subprime debt (such as home loans to American borrowers who had no hope of paying them back) to sell to mug investors as a high-quality security.
Dodgier debt securities were packaged with AAA securities to develop the ideal investment that combined a high yield with the perceived security of a high credit rating. The ratings agencies gave solid ratings to many of these securities without understanding the risks behind them.
But with many of these products, it only required a couple of defaults in the lower-ranked securities for investors to lose money overall, due to the high risk of default in some of these securities and the relative ”thickness” of the different tranches of debt (or how much AAA debt there was relative to the proportion of low-grade debt).
As with many of the engineered financial products that offered a mix of security and high yield and went down with them, the big lesson to be learnt from the CDO debacle is to keep it simple.
Or, if you don’t understand something, don’t invest in it.
Fancy a share in an alpaca farm, anyone? What about a viticulture scheme? Jojoba? Ostriches? Avocados? Forest plantations?
It’s amazing what otherwise intelligent people will and do buy in the pursuit of saving tax. Tax schemes investing in all manner of agricultural products were heavily sold in the lead-up to June 30 in the 1980s and 1990s largely on the basis of high upfront tax deductions. But these deductions were not always allowed and, even when they were, many investments were left to wither on the vine as the promoters focused their attention on flogging new schemes.
Costs of the schemes were often exacerbated by commissions of 10 per cent or more paid to the advisers and accountants that sold them.
The more recent high-profile collapses of Timbercorp and Great Southern Plantations highlighted the risks of investing in agricultural schemes and offerings have been few and far between in the past few years.
But people will always want to find ways to reduce tax.
And as the agricultural schemes showed, there will always be promoters devising products to help them do so.
If we’ve learnt nothing else from the tax-scheme lemons it is that a tax break isn’t everything. It is the integrity and performance of the investment that matters; any tax benefits should merely be icing on the cake.
UNLISTED PROPERTY FUNDS
Who says lightning never strikes twice?
In the early 1990s, investors in unlisted property funds were given a sharp lesson in liquidity when the property market took a downturn, redemption requests took an upturn, and operators of unlisted funds appealed to the government to allow them to freeze redemptions.
Major fund provider Aust-Wide collapsed and many other funds were restructured and listed on the stock exchange, with investors hit by substantial losses.
It was conclusive proof that you can’t make long-term investments and enjoy instant access to your money back – or not on a sustained basis, anyway.
Fast-forward to 2009 and, in the fallout from the GFC, investors again found their holdings in unlisted property funds frozen. In some cases, managers had the authority to refuse redemptions to prevent a sale of assets in a falling market; in others, high debt levels meant they had fallen below mandated liquidity requirements and so were unable to pay redemptions.
Mortgage funds were also frozen during the crisis to prevent a fire sale of assets, highlighting the disconnect between investors’ expectations that they should be able to get their money back at short notice (often a selling point of the fund managers) and the fact that any property-related investment should be undertaken for the longer term.
Since the last crisis, the Australian Securities and Investments Commission has forced funds to be clearer in disclosing key issues such as how much debt they’re carrying (including when and how it must be repaid) and how investors can withdraw their money (including any limitations).
World’s tallest building
At 828 metres Burj Khalifa is the world’s tallest building, but it’s rein will be short lived.
Sky City One – at 838 metres – will overtake the tower upon completion in January 2013, and the kilometre-high Kingdom Tower is planned for Jeddah, Saudi Arabia, at the cost of US $1.2 billion and on completion, expected in 2018, will become the world’s tallest building.
The tower will comprise a hotel, residential apartments and office space. It will also include the world’s highest observation deck on level 157.
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