A Text From a Real Estate Agent – Here’s What it Said

Each Saturday afternoon between 2:30 and 3:30 pm, I receive a text message from a real estate agent who provides his distribution list with an update of how the day went. Last Saturday, his tune completely changed, which intrigued me. Here’s the text:

I commend him for his honesty – well done. And it’s true. Clearance rates have been falling sharply since mid 2017 (see below chart).

Source: AMP

Clearance rates have dropped from a solid 80% to about ~46% (final) in Sydney, and ~49% (final) in Melbourne. The last time we saw these levels were back during the GFC and 2012 (when interest rates were first cut).

Here’s what the auction market looked like last week:

Source: Core Logic

Allow me to give you insight as to the implications (at least historically) of falling clearance rates. They’re a leading indicator for house prices by about 5 months (see chart below). As auction clearance rates fall, we see property prices fall in the following months.

Source: JP Morgan

Not only are clearance rates a leading indicator, so too are housing finance commitments (loans). These have also been falling (see chart below). Loan commitments are a leading indicator by about the same time as clearance rates – 6 months.

Source: JP Morgan

As the regulators and banks tighten lending standards, as we continue to see a rise in the supply of dwellings, as affordability is still an issue given low wage growth, and with the constant drumming of political and policy uncertainty (negative gearing and CGT discount), we can expect further weakness ahead.

As I began to write this note, I found out that 60 Minutes was airing ‘Bricks and Slaughter’ at 8:30 pm (click here for the ‘Part One’ episode).

The episode was basically calling for a housing crash. Martin North of Digital Finance Analytics predicts a housing crash of 40%-45% within the next 12 months, and we hear Louis Christopher of SQM Research echoing Mr North’s call.

Follow these gentlemen on Twitter and you will see a slightly different point of view:


Well done 60 Minutes in fear-mongering the Australian public.

To this day, we continue to hear comparisons being made to the US property bubble. What most people don’t understand is that the “housing market” is made up many other smaller ‘markets’. To illustrate this point, take a look at the table below. It shows the top 10 US cities’ boom from 1996-2006, crash from 2006-2011, and so on.

Take a look at New York, up 173% during the boom, and down 24.45% during the bust. Dallas was down 7.53%, and Boston down 16.38%. The interesting thing about all of this is that the city with this largest gain (LA) was not the city with the largest fall – it was Phoenix, down almost 55%! On average, the US housing market fell 33%.

One fact that I don’t believe gets enough showtime is the oversupply of dwellings in the US pre GFC. Leading up to the GFC, the US had overbuild close to 6,000,000 units of housing. As of the beginning of 2018, the US is sitting close to 2,000,000 units short (see below chart).

In Australia, we have a very different story (see below chart). For many years, we have never truly caught up to the demand for dwellings. Having said this though, we are getting to a point where we are now seeing good supply hit the market.

Source: NAB

The Australian, specifically Melbourne and Sydney property market has been running hot for a number of years now. We will see a collapse in prices – timing and magnitude, no one truly knows. However all indicators are pointing to a slow down and natural correction.

The fundamentals for property in this country remain strong, yet the sentiment remains weak. The market will present buying opportunities for those that are patient, disciplined, have a game plan and are cashed up. As foolish as one may feel for holding funds in low returning cash and term deposits, the tide will turn, and you too will have your opportunity.

Property Prices Doubling Every 10 Years is a Myth, Here’s Why

There’s an old saying in Australia, property prices double every 10 years.

How true is this old saying? I was recently presenting financial analysis we had undertaken for a property portfolio. As we presented our findings, our assumed rates of return were questioned – why would you use such a low rate of return – historically property prices have double every 10 years?

Let’s jump down this rabbit hole.

We Aussie’s have an obsession over property. I get it, I love my property too and have also been lucky enough to be a beneficiary of this market. I will however be the first person to admit that it was through no skill whatsoever, nor did I anticipate to what extent this market would rise when I initially invested in property. My decisions are driven with specific objectives – a roof over my family’s head, investment properties in specific locations for income and future development potential to help my kids in the future, a beach house to get away from the hustle and bustle and spend time with my family. What I do with any of my properties are unlikely to be be influenced by what the market is doing, nor by what the market believes my property is worth. In fact I couldn’t care less.

Yet so many people have the equation so wrong – speculating on the price of land on the basis that property doubles every 10 years. Allow me to let you in on a little secret – the concept of property values doubling every 10 years is completely misleading. Don’t believe me? I’ve crunched the numbers, and here’s what I think.

I’ve summarised the return of the Melbourne property market for every decade beginning 1980 in the table below (median price). For example, for ten years ending 1990, the growth in the median price of Melbourne property was 237.93% – ridiculous, right!?

Table 1: Nominal 10 Year Return

Source: REIA, Core Logic

Based on the above table, I can understand why you may have been told (and believed) that property prices double every ten years – both the average and median percentage return for price rises have been over 100% since 1980.

Let’s take a look at what happens when you take into account inflation. The table below is the same as above, and I have calculated the Real Rate of Return in the third column. Take a look at the example we looked at earlier. The nominal (before inflation) return from 1980 to 1990 was 237%. When you take into account inflation, or the real return for the same period, was 55.06%. Although this is still a solid return, its certainly a far cry from 237%.

Table 2: Nominal & Real 10 Year Return

Source: REIA, Core Logic

Once you take inflation into account, the average and median ten year real return is 50.24% and 44.14% respectively.

Even though in Table 1 the average and median price rises are in excess of 100%, prices only increased more than 100%, 55% of the time – 45% of the time, prices did not double. Once you take inflation into account, since 1980, Melbourne median property prices have not double. Ever. During the decade ending 2005 they came close, returning 92.58%.

Now that we have established that real property prices don’t double every ten years (although my guess is that there will still be those who don’t believe me, and if this is you, reach out to me – we can chat further), I decided to analyse Melbourne’s rolling ten year real returns per annum. In other words, what was the real rate of return each year for every decade since 1940. For example, let’s say you purchased a Melbourne property in 1940 and held it for ten years, your actual real rate of return was about 9% pa. If you held property for ten years ending 1960, your annual return was a bit over 10% pa. If you held property for ten years ending 1987, your annual real return was 0% – yes, property can not grow in real terms.

The average annual real (after inflation) return for those holding property for ten years was about 4% pa since 1940 (ending 1950).

Here’s the chart. The blue line represents the return, the green dotted line is that average annual return, and the red dotted lines represent +/-1 and +/-2 standard deviation from the average.

Table 3 – Real Melbourne 10 year Rolling Growth (pa)

Source: Stapledon, ABS

What we can also see from the above chart, is that property goes through cycles – who would have thought!? Periods of high growth are followed by periods of low growth, and periods of low growth are followed by periods of high growth.

Where does this leave housing as an investment?

This is probably one of my favourite charts. It’s put together by Shane Oliver of AMP Capital and compares the long-term return of Australian residential property, Australian shares, Australian bonds, and Australian cash.

Source: AMP Capital

Since 1926 residential property has provided investors with a similar return to Australian shares – 11.1% pa to 11.5% pa.

As you can see from the above chart is that although Australian shares have performed slightly better, they have come with higher volatility. They are more liquid and easier to diversify, whereas property has been less volatile (partly because it’s not valued every single second of the day – unlike the share market), it is less liquid and harder to diversify.

Both shares and property have rewarded long term investors. In fact, shares and property tend to have low correlations with each other, meaning they typically don’t go up and down at the same time and at the same magnitude. Therefore, from a diversification point of view, there is a very strong case to hold both in your portfolio for the long-term.

I guess anyone can fudge the numbers to support whatever narrative they’re peddling. At the end of the day, the facts are the facts. You deserve to know the truth, it helps you manage your own expectations and make better investment decisions. Just because property prices haven’t doubled every ten years, doesn’t mean they won’t.

Godspeed.

The Changing Face of Melbourne

Once upon a time in 1667, the Dutch East India Company, the most valuable company in the world at the time, wanted a monopoly on nutmeg – a spice that was worth considerably more than gold. During this time, Run island, a tropical island closer to Darwin than Jakarta, was prized as the home of nutmeg.

In July of 1667, the Dutch acquired Run island via a swap with the British. They agreed to trade New Amsterdam for Run island. The Dutch now had a global monopoly on nutmeg. It has been described as “the real estate deal of the millennium”.

Unfortunately for the Dutch, the price of nutmeg eventually collapsed. The British stole seedlings and dramatically increased supply by growing them in other parts of the world. Furthermore, the arrival of other stimulants such as coffee, tea, and tobacco didn’t aid the Dutch’s situation.

Today, Run island has a population of around 2,050, and still grows nutmeg. New Amsterdam was renamed New York, and the rest is history. All of this within a very short period of time – 351 years to be exact.

They say investors have a three year time horizon, last year, this year, and next year. As human beings we’re wired in such a way that makes it difficult for us to be able to see so far into the future. Take the city of Melbourne for example.

Here’s the evolution of Melbourne city over 130 years, in images, taken from the top end of town – Spring Street:

And here’s Melbourne today – a very different picture to that of the first.

 

Between 1% and 3% of a city is demolished and rebuilt each year, such that over almost a lifetime, a city is completely transformed and almost recognizable.. Incremental change is so difficult for us to recognize, however over long-periods of time, it’s clear as day.

Here’s a different perspective, one that most of us can recall. Southbank, in the blink of an eye is completely transformed.

Today is no different. With not only the unprecedented level of construction within the city of Melbourne, but also the density of construction, the public are outraged that we are killing our cities. Our cities have never stopped growing, have never stopped evolving, and have never stopped progressing.

This is what progress looks like. Just because it’s new, just because this wasn’t how it used to be, just because this isn’t how we grew up, doesn’t mean we should fear what the future holds.

Melbourne was founded on the 30th of August 1835. A lot has changed since then. A city which is 183 years young, houses a population of around 4.725 million. Contrast this to the city the Dutch swapped for their nutmeg monopoly in 1667. New York City, founded in 1624 is now around 394 years young, housing a population of around 8.625 million.

By the year 2046, Melbourne’s population is expected to increase by 2.8 million people. Here’s what Melbourne’s skyline looks like looking up from the south:

Here’s what the same skyline starts to look like when Melbourne houses 10 million people:

And if you were to take all the buildings on Manhattan Island and placed them into the city of Melbourne, this is what it would look like:

Although quite staggering, it can be done.

As investors we need to fight the minute by minute news headlines that try and grab our attention each and every day. Although we are not wired to, we know deep down that true, significant, and sustainable wealth is created over long periods of time – yet we want it all now. We need to change the way we think about, and invest not only our money but in ourselves. We seem to be attracted to complexity and complication when in fact simplicity yields a more favourable outcome. We seem to prefer to make significant and material changes less frequently, when in fact small, incremental changes made more frequently, which may seem insignificant to us today, compound to and have a far greater impact than we could have ever imagined. It’s like a freight train that gains momentum – it becomes unstoppable.

Try and add 5+5+5+5+5+5+5+5+5+5 in your head. It’s pretty easy, you can do it right? The answer is 50. What if I asked you to multiply instead of add in your head, 5x5x5x5x5x5x5x5x5x5? There’s no way you’ll be able to do it, in fact, I don’t even think you’ll be able to wrap your head around it (by the way, the answer is 9,765,625).

As investors we underestimate the long-term. We underappreciate the power of compounding. Because it isn’t intuitive, we ignore it, and try to solve problems through other means. Next time you’re planning ahead, stop and think about the long-term. Stop and think about the potential of compounding.

Thanks to Tony Crabb of Cushman & Wakefield for the inspiration.

The Great Melbourne Land Boom

Melbourne’s population had boomed, and it had not only become one of the wealthiest cities in the world, but had also developed an international reputation as one of the greatest cities in the world.

Melbourne was in the midst of a land and property boom. Cable trams ferried crowds through the streets and the young and fashionable ‘did the Block’, promenading the footpaths and arcades of Collins Street. Telephone and electric light were novelties and Melbourne’s first skyscrapers appeared. Theatres and opera houses drew large audiences through the weekend evenings.

Melbourne showed itself off to the world by hosting major international exhibitions of industrial, scientific and artistic progress from all corners of the globe.

I’m talking about Melbourne in the 1880’s – it was dubbed ‘Marvelous Melbourne’ by British journalist George Augustus Sala when he visited in 1885. Here we are in 2018, and the tune hasn’t changed in 133 years.

Between then and now however, Melbourne witnessed some of the most severe economic collapses which are now simply buried in history books.

Bubbles, in any market, have a tendency to burst. Not long after, in fact within a decade, Melbourne’s Land Boom crashed in the early 1890’s – it caused a depression that rippled through all the Australian colonies.

Rather than building high-density apartment blocks like the European cities, Melbourne expanded wide and far. Real estate during the 1880’s was ‘The Land of Promise’, as proclaimed by this sales poster for Moreland Road, Brunswick (click for larger image):

Source: Moreland Road, The Land of Promise, West Brunswick, close to Essendon, 1888 (Dyer collection of auctioneers’ plans, Melbourne and suburbs State Library of Victoria)

Investors would buy up farms and subdivide them. They would then lure buyers with free railway passes out to the new estates, feed them and serve champagne before bidding got underway.

By 1889, the value of land in parts of Melbourne was as high as London. The Argus, a daily Melbourne newspaper wrote, ‘[The hunger] that has seized hold of so many people is the result not of an hallucination, but of an awakening to the value of land as a safe, a sound, and a profitable investment.’

In April of 1893 the Commercial Bank of Australia, who had lent substantial money to those involved in property speculation, closed it’s doors. The bubble had popped, and the boom was over. It’s estimated that Melbourne’s unemployment rate jumped to 20% during the 1890’s. Property prices dropped almost 40% (Melbourne) within years. This compares to a drop of 20% during the 1930’s depression.

Following the collapse of the 1890’s, it wasn’t until the boom of the 1950’s that would see prices return to levels reached during the 1890’s. It would take Melbourne 60 years to recover in price.

Here’s an aerial shot of a new housing estate in 1948, known at the time as ‘Heidelberg’.

Source: Charles Daniel Pratt 1892-1968 Photographer/State Library of Victoria/H91.160/376

Every bubble is different. Their formation varies from duration, magnitude, and cause. It was higher interest rates that would eventually pop the bubble of the 1890’s, and the banks’ failure to take security for loans written during this frenzy would lead to the collapse of a number of them. With bank lending having soared since 2012, prices having doubled during this time, and interest rates at an all time low, could we be facing another crisis like the one that has been buried in history books for decades? Of course not, it’s different this time. Right?

Australia’s Property Market is a Speculative Bubble

Last week I attended an investment management conference in Melbourne. The day was lined up with asset managers providing the attendees with their point of view on markets – including the stock market, bond market, and of course, the property market. Most, if not all of the firms presenting were either equity or bond managers. I don’t believe there was a property manager presenting on the day. Yet, most managers spent a bit of time discussing the property market, and the gloomy outlook for this sector. The large debts, the level of construction, foreign buyers, I could go on.

That evening I also attended a property development forum, presented by two specialist groups, who talked about the current situation in the property market, providing a different point of view from the asset managers earlier on in the day. I guess this is what makes the market, right? One persons view compared to another.

Here’s where I think the property market is at.

We’ve been hearing the same call for years – the Australian property market is a speculative bubble…blah blah blah.

Sure, property prices aren’t cheap. In fact, they’re sitting a little above their long-term trend according to AMP.

All the reasons the equity and bond guys were giving at my presentation are well known. Ballooning debt levels, prices to income and rent ratios are high, and there are far too many cranes in Melbourne’s skyline (and yes, there is an index for this).

Unfortunately, in both my experience and readings, things are little more complex than this.

1. Ballooning debt

Household debt has been skyrocketing since the GFC, and after the RBA began cutting rates in 2012 (I guess you could argue debt has been skyrocketing since 1991). Yet the amount of interest paid by households is back down to levels not seen since 2004. Notwithstanding, this is a problem. How will this debt be reduced? Inflation? Wage growth?

2. It’s a bubble

When people refer to the US property bubble, I ask them which city they’re referring to. Yes, the US had a property meltdown, however not all cities we’re wiped out. New York fell 24.45%, Dallas down 7.53%, and Boston fell 16.38%. In fact, it wasn’t even the cities that had the largest growth pre-GFC that fell the most (refer LA and San Francisco). On average, prices in major cities fell around by one third of their value.

Similarly, when people talk to me about the Australian property bubble, I ask them which city/ies they’re referring to. In Australia, it’s largely been a story of Sydney and Melbourne.

Source: CoreLogic

This hasn’t always been the case (see chart below). Perth property prices we’re going bananas during the mining boom, yet they’ve been lagging ever since. Most cities circle around the national average, some over-performing, and some under-performing. Lack of affordability eventually encourages investment into other cities, as we’ve seen recently into Queensland and Tasmania.

3. We’re building too many dwellings stupid

It’s everyone’s greatest fear (or possibly greatest desire – a claim to fame perhaps?). The miraculous oversupply of property, more specifically in apartments. It’s expected that Victoria will be home to about 8 million people by 2050. And these people will want somewhere to live, surely. Based on these numbers, it may come as a surprise to most people, but we’re just now starting to build enough property to help support our growing population. Sure, we’re going to see periods of oversupply and periods of under-supply, which in turn will result in periods of price growth and periods of price declines. This is not unusual, the free market has been valuing assets this way for centuries.

Over the last 7 years, Victoria’s population has been growing well above the national average.

This is supporting vacancy rates remaining low. In Melbourne and Sydney, we’re seeing below average vacancy rates:

You think it’s bad now? Over the next 20 years, population growth is expected to surge. Here’s where they’ll grow the fastest:

These people are going to want somewhere to live. Here is where we’re going to see the largest growth in dwellings:

If you think there is a lot of development activity in the City of Melbourne, you haven’t seen anything yet. The city you and I know today, will not be around in the next 10-20 years. Here’s a great interactive site the City of Melbourne have up, and you can see what is constructed, what has commenced, and what has been applied for.

4. The banks are a proxy for the residential property market

Then why are you investing in the stock mister equity guy?

At the end of the day, it’s going to take one of two factors to bust (temporarily) this housing market – a rapid rise in rates, or a rise in unemployment. The consensus goes something like this…rates are rising, which will lead to higher unemployment, which will lead to loan defaults, which will lead to property price declines, which will lead to a banking collapse. Sounds reasonable. Luckily for us, this actually happened, so we can see what impact is actually had. Western Australia – mining boom collapse. Trade fell 25%, unemployment up to 6.50%, property prices fell 12%. Do you know what impact this had on Westpac’s lending losses – they doubled…from 0.02% to 0.04%.  If this scenario we’re replicated across the nation, bank profits would be cut by 0.60% (farrelly’s). Not really the Armageddon scenario that’s being painted.

5. Tighter lending standards will stop the price rises

It’s no secret, lending is tightening. This has created an opportunity for private/non-bank lenders to enter the market. The banks shouldn’t be expected to cater for every transaction that occurs. I was recently told by someone that Westpac (if WBC can do it, I’m sure most of not all lenders can) are now able to tell how much exposure they have to a single building even each purchaser took out their loan from a different Westpac branch/office. This enables the bank to limit their lending to one particular building/construction.

My expectation is that we’ll see in Australia what we’ve been seeing in the UK and US. That is, non-bank lenders growing as a proportion of all lending.

Currently you could lend senior money out and receive 10-12% pa. I do wonder though, what impact this will have on bank profits.

In summary:

We have an under-supply problem. Our population is growing at a rapid pace. We’re seeing them from all around the world, and they want somewhere to live. Here is the state of Victoria’s population and household projections to 2051. This report is used by decision makers in government to plan for our future. I suggest it’s something worth reviewing if you’re looking to invest in property. You should also check out the government’s online planning maps. Again, this may be useful if you’re looking to invest in property for the long-term.

Sure, the market isn’t cheap – this isn’t something new. The property market grows at above average rates, and is then followed by growth at below average rates. When rates eventually rise, my expectation is that we’ll see a decline in prices. Those that have over leveraged themselves will be forced to put the for sale sign out the front. The fact that most people have, and will continue to want to buy, live, and invest in property, will naturally create a safety net. Property prices can float sideways for long periods of time. They don’t always need to boom or bust, the outcome is not always binary.

As long as the music keeps playing (demand), we’ll all keep dancing. Australia does not have a property bubble.

How to Invest Your Money

Over the last week, I’ve been speaking with a number of clients and investors about their investment portfolios and how to best allocate capital.

It’s a tough one. With so much content being publish dictating how we should invest our money, it’s no surprise investors are being left a little confused. I feel as though many investors are allocating capital based on how someone else thinks they should live their life, rather than allocating capital based on their own life goals and priorities. I mean, who better to tell us what we want than ourselves, right?

So, I decided to create a blueprint to help you decide how to allocate your capital, with the following caveat: There are many other investment options that are available to investors than what has been captured in this design, although, I reckon you could probably place most of them in each of the buckets I have included. My point is, it’s not perfect, but a good enough guide.

If you have any questions, need clarification, or would like to discuss further, please feel free to get in touch.

Enjoy (click for larger image).

Like any destination, before you decide how you’re going to get there, it makes sense to decide on where you’re going first.

Australia Doesn’t Have a Property Bubble. Here’s Why.

Australian Property Bubble

I missed ABC’s ‘Betting on the House’ investigation which aired on Monday night. Luckily for me however, the ABC upload their episodes online, so I was able to catch it last night. If you didn’t catch it, click here.

It’s the Great Australian Dream – buying and owning you own home. It’s been an Aussie dream for almost 150 years. Research suggests 44% of Melbournians owned their own home in 1881, with similar rates in Sydney and Adelaide. These figures were unmatched in the developed world at the time. Not much has changed. The great dream however, seems to be slipping away for many Australians – it’s become the Great Australian Nightmare. So we’re being told.

Firstly, I must say kudos to the music director – so very dramatic. I almost lost sleep last night.

The investigation focused on two key areas. 1) speculation and fear-mongering of a permanent property collapse, and 2) speculative and poor decision making by investors.

1. Speculation and fear-mongering

“…the dream run is about to end.”

Markets go through cycles. Periods of high growth are followed by periods of low growth. This is fact, yet we carry on as if we’ve never seen this before.

The investigation reports “…a correction is now inevitable”. Of course, a correction is inevitable, markets don’t rise in a liner fashion. The more you pay for something, the lower the future expected return. The less you pay for something, the higher the future expected return.

Are we going to see future rates of return in the property market like we have seen most recently? Highly unlikely. Are we going to see a free-fall and permanent collapse like the experts are predicting? Maybe. I believe it’s unlikely.

References are made and parallels are drawn to the US property market collapse of 2008. The US property market! Where are you referring to mister property expert? Las Vegas? Chicago? New York? Because if you are in fact referring to New York, property prices fell 13% during the GFC, and are now worth more than they were at the peak of the market in 2007 (almost reminds me of the Melbourne property market actually). The “market” is such a big place, throwing it all into one big bucket doesn’t provide much insight.

2. Poor decision making

The prevailing motivation behind the stories that were shared during the investigation were fueled by greed, and a ‘quick win’.

In two years, Roy Pallesen and Rowena Ebona, who were interviewed during the investigation, bought 7 properties. They did it by leveraging more debt against the rising value of their investments. “Everybody can do it, that’s the thing, and if we can do it and I feel a little bit like Beavis and Butthead, then anybody can do it.” Wow. How do you think this will end for Beavis and Butthead when rates rise and valuations drops? Rates will rise and those who are over leveraged (such as Beavis and Butthead) are certain to face problems. It’s a downward spiral. We don’t have a property bubble, we have a greed and poor decision making bubble.

All the principles that we preach when it comes to investing were thrown out the window during this investigation. Think long-term. Don’t over leverage. Diversify your investments. Invest in line with your goals. Don’t buy property from property developers and mortgage brokers who cold-call you in the evening selling you a “risk free” investment. If it sounds too good to be true, it probably is.

We recently held an exclusive property forum for a small group of clients and investors titled, ‘The Great Property Bubble?’. Speaking at our forum, was one of the country’s most well-respected property experts, Scott Keck. Do yourself a favour. Set 25 minutes aside sometime this weekend, and listen to Scott Keck’s point of view on the situation and make up your own mind (click on the image below).

I don’t believe the market will continue rising in the short-term at the same pace we’ve seen recently. I’m not saying the property market is going to collapse either – although I do believe we’ll see certain areas in the market correcting, precisely like we’ve seen in Perth. Where? I have no idea. When? I have no idea. For how long? I have no idea. How much? I have no idea. And nobody else does either.

Investing should be done not on speculation, but on sound, thorough, and well thought through analysis. And they should be made with specific objectives that align with your life goals. For the everyday investor, if you’re making decisions purely in the pursuit of money, you’re going to lose. It’s as simple as that.

We’ve gathered a few other highlights from our investor forum, which you can watch by clicking here.

My Monday Rant

It’s been a little while since I’ve had the opportunity to write to you, as so much has been happening. We held our first investment forum for 2017, discussing the great property bubble with some of the best in the business, which was a great success. We had a full house of clients, developers and investors. I’ll be sharing key take outs of the forum in the coming weeks.

Over the past few weeks, a whole bunch of stuff has been happening, so I thought I’d give you a run down of what I’ve been seeing and thinking:

+ Don’t be fooled. Everyone talks about how great the performance of the US stock market has been over the last decade. A closer look will tell you that even the German stock market has performed better than the S&P 500. Don’t believe everything you read in the paper.

Source: Yahoo Finance

+ The US stock market has been falling over the last few days leading up to the healthcare vote in the US. Financial media had been reporting the impact this has had on markets. This is the drop they’re talking about…

Source: Thomson Reuters

I’ve also been reading about what this means, and what impact it will have on financial markets. No one still know’s what caused the Black Monday crash in 1929…88 years on, and we expect people to have the answer to something that hasn’t even happened. Let’s get serious for a second folks. The same doomsayers that were telling us a Trump Presidency would be catastrophic for financial markets continue to publish their pessimism and expect the general public to hang off their every word.

In the end, the bill was shot down and stocks rebounded.

+ This is why you shouldn’t take forecasts seriously, even from Central Banks. Wage data was released last week. I thought it would be amusing to revisit this chart, which shows the RBA’s regular forecast of wages with actual.

The RBA has been forecasting higher wages since 2011. They’ll be right eventually.

+ Prime Mister Turnbull has been considering allowing First Home Buyers (FHB) to access their super to purchase a home. This has to be the height of stupidity. I will not waste your time and expand.

+ Apparently foreigners are “hoovering” up all of our property. No one could really quantify this, until now. We have the data (dun dun duuuuun):

  • NSW – 25% of new supply
  • VIC – 16% of new supply

So, 1 in every 4 in NSW and 1 in every 6 in VIC. Not very “hoovering” is it?

When we hear the the term “foreigner”, most people think of the Chinese. And rightly so. Here’s how much the Chinese make up of foreign buyers:

It’s quite staggering actually.

Nevertheless, do you ever wonder why this is the case? This is one of many reasons. Although a compelling one, the storage of wealth probably ranks higher than price, certainly from the discussions I’ve had with Chinese investors. Anyway, here’s price and yield from the point of view of our Chinese neighbors.

+ The Melbourne/Sydney apartment property boom/bust theory continues. We’re told construction, prices etc. have all the traits of a bubble not seen anywhere else in the world. If we take a look at other mature apartment markets in the world, such as New York, we’ll quickly learn that this has happened before and has not ended the way the doomsayers claim. Here’s New York apartment prices (per square foot) since 1910. They’ve been climbing since the 1950s.

In the end, no one really knows what the future holds. No one really knows what impact certain events will have on financial markets. Trying to front-run the global markets’ investors is nothing but pure speculation. It’s easy to do it when it’s not your money. Next time someone tells you what they think, or what you should do with your money, ask them what they’re doing with they’re money.

 

Here’s where millionaires are flocking to

Money may not buy happiness, but it does buy the ultimate flexibility for making financial and lifestyle decisions.

For many of the world’s millionaires, money provides a highly effective means to escape their home country when times get tough. They can pack their bags, and move their family and capital to a location that will provide superior opportunities for prosperity.

According to a new report by New World Wealth, this couldn’t have been truer for 2016, as the amount of millionaire migrants increased by 28% from the previous year.

Human and capital flight

In 2016, there were a total of 82,000 millionaire migrants that left for greener pastures. Here are the countries they’re feeling and flocking to.

Here are the top 5 net outflow countries.

France tops the list for a second straight year, as rich people dodge conditions that they consider to be adverse. France has rising religious tensions and populism, but it also has a tax system that is not particularly friendly to the ultra rich. The International Business Times calls the ongoing problem a “Millionaire Exodus”.

China and India both continue to have net outflows of millionaires, but two of the more interesting countries on this list are Brazil and Turkey.

Brazil continues to be deep in economic crisis, with its worst-ever recession likely continuing into its eighth-straight quarter in Q4 2016. The country also recently impeached Dilma Rousseff in August 2016. On the other hand, the Washington Post describes Turkey as a country that is in a “permanent state of crisis”. This may be a fair criticism, since in 2016 there was the assassination of a Russian ambassador, a currency crisis, an economic crisis, and also an attempted military coup.

Like most people, millionaires don’t like uncertainty – and they have the wherewithal and conviction to get out of places that have ongoing issues.

Here are the top 5 net inflow countries.

In 2016, Australia was the number one destination for millionaire migrants, with the United States and Canada being close behind.

New Zealand also had the amount of net inflows double, while the UAE remained a popular location for the wealthy in the Middle East.

Demographics is super important, especially when it comes to the topical issue of housing affordability. These charts show us the millionaires migrating to Australia. What they don’t show however, are the countries general population growth.

Here’s historical and forecast population growth for Australia:

To put this into perspective, we’re sitting at number 5 in the world!

We need to focus on the bigger issue here. How we, as a country, as businesses, as people, accommodate and take advantage of this trend.

Source: Visual Capitalist, NAB

Here’s where you should invest your money

When I tell people what I do, one of the first questions I’m asked never surprises me, “where should I invest my money?” I always struggle with this question, although it’s what we do in our firm each and everyday, because it’s such a difficult question. There’s so much more to it than the question that’s asked. When I respond with, “what are you investing for?”, people are generally stumped. However, the response is also always the same – and it never surprises me either…”to make money”. No sh*t! Why, what’s the money for? When investing, it’s super important to be very clear on what you’re doing, and why you’re doing it. It provides you with the clarity you need to make good investment decisions.

Nevertheless, in an attempt to answer this question, I decided to provide my point of view on major asset classes:

Cash

Cash is king. They say you should hold 3 months’ of expenses in cash. I don’t think there’s a hard and fast rule. It really depends on your situation and plans.

  • If you’re young, have a stable job, no intention on leaving your job, 3 months may do just fine. Sure, you won’t be getting much in return but it’ll go a long way in an emergency.
  • If however, you don’t want to be held hostage by your job, hold 12-18 months’ of expenses. This gives you the opportunity to work on your new idea – often referred to as ‘f*** you money’.
  • If you’re retiring or retired, hold 2-3 years’ worth of expenses. You never know when the next financial crisis will cut the income from your portfolio by 25%. It also helps avoid having to sell assets at fire sale prices.

Bonds/Fixed Income

This is where you’re going to get your diversification from your stocks and other risky assets such as property (if you need it). Having said this, if you can stomach the ups and downs of risky assets, and you’re not replying on the income, you could probably build a case not to invest. Personally, I don’t hold any bonds or fixed income (not personally or in my super fund). I can ride a 50% draw down on risky assets without feeling sick. Then again, I’ve also got time on my side. Others aren’t so fortunate.

If you’re retiring or retired, bonds will give you regular cash flow, and provide your portfolio with cushion – when you really need it. Okay, I can already hear you thinking it, what about rising rates and the impact on bonds?

To give you some indication of the performance and behaviour of bonds over the last 31 years, I’ve prepared the below table. It shows us the average return for a world bond index, as well as the best and worst returns and when they occurred (click for larger image):

Source: Returns 2.0

If you’re not convinced, let’s go back even further and see what happens in bond bear markets. Consider the post-war period (1941-1982) when yields on the US 10 year went from 2% to 15%. You know what the worst loss during this time was? 5.01% in 1969 – fairly mild. In fact the average loss during this time was 2.1%. During this same time, inflation averaged 4.49%. Inflation was what hurt bond holders, doing twice as much damage than the impact of rising rates.

Here’s the list:

Source: Ben Carlson

As long as your holding bonds for the right reasons, income, diversification, greater price stability etc., I believe there is a genuine need for bonds in a well diversified portfolio.

Property

First thing’s first, pay off your home loan they say. I totally agree with this concept. If however, you’re in a position to do so, why not invest at the same time?

Personally, I believe most investors should hold property in their portfolio. The downside however, is that it’s a lumpy asset. Especially at current prices, it’s not cheap. Rental income doesn’t get me excited, so what is it? Land. Pure and simple.

I’d be looking for property with development potential (I’m talking residential property – I personally don’t have much experience in commercial property). Land is where the value is derived from, not the dwelling (IMO). Close to transport, freeways, shops, schools, and look for areas where government has a clear long-term plan.

If you’ve got a really long time horizon, 25+ years, look out, further out. I’m talking growth zones. There’s plenty of them – acres and acres of land. The problem is, it’s a 25+ year plan. Unfortunately most investors can’t see beyond the next 12 months, they lack patience.

With prices of dwellings rising so rapidly, it makes it difficult to see exceptional value right now. Then again, it all depends on why you’re buying.

Here’s where Australia’s house prices (real) are (orange line) relative to their long term-trend (blue line). According to AMP, currently they’re sitting around 14% above it’s long-term trend. If you’re buying your family home, which your going to live in for the next 20+ years, and your telling me you think you may be paying $200,000 over the odds. If it’s the property you really want, I say who cares. It always goes back to why your investing.

Source: AMP Capital

Shares

If you want your investments to grow over time, you should be looking at a portfolio of shares. The allocation of and the factors you tilt toward will be dictated by your personal needs and tolerance for risk. Whether it’s large, ‘blue chip’ stocks, or small company stocks, which are more volatile, however have provided a greater return of the long run.

Currently, the broad Australian share market is generating income of around 4.5% pa plus franking credits. You’re certainly not going to get this from cash, fixed income, or rental yield (residential).

To give you some indication of the performance and behaviour of Australian shares over the last 31 years, I’ve prepared the below table. It shows us the average return for the All Ordinaries Index, as well as the best and worst returns and when they occurred (click for larger image):

Source: Returns 2.0

As you can see, the shorter your time frame, 1, 3 and even 5 years, the return range is very wide (look at the best and worst returns). Once you move your time horizon to 10+ years, your return range is much narrower. In fact, your worst 10 year return was 4.51% pa! Interestingly, the average return over all the periods except 1 year, are within 34 basis points of each other.

Done properly, a share portfolio could help achieve many objectives, whether it’s to fund your child’s education, help them buy their first home (refer to my comments on property), provide you with a regular income stream whilst growing your wealth, or be the engine room for your retirement.

If you’ve got the time and the patience, you will be handsomely rewarded over the long run. The next 12 months? I have absolutely no idea. And to tell you the truth, no body does.

Bringing it all together

Over long periods of time, your investments will compensate you for the risk you’ve taken. Risk and return is not dead and diversification still works.

Source: AMP Capital

There are many cases that can be built to invest is so many different asset classes. Whatever the investment, it needs to be right for you and your why. Be clear on what you want and reverse engineer it, the investment decision will be much easier.