Saturday 31 August 2013

Unemployment to tick up today?

Labour Force data out at 11.30am.

Expecting to see unemployment tick up today from last month's surprise 5.5%, perhaps even to 5.7%.

The April figures showed 50,100 jobs added (+0.4%) but if ABS past history is anything to go by we'll see a chunk of those figures wound back in May.

Such is the way of ABS employment figures...

China manufacturing slows

As anticipated by forecasts, China's manufacturing index slowed to a reading of 50.1.

It was still enough to spark a sell-off of Aussie shares, down 1.9% for the first day of the financial year.

Nevertheless, interest rates should be kept on hold tomorrow at 2.75%.



Source: ASX

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NatureWise UltraPure GCA Green Coffee Bean Extract
Made exclusively for those who want the very best results, NatureWise UltraPure GCA is the only green coffee bean extract on Amazon that uses 100% Pure Green Coffee Antioxidant GCA, the only clinically proven green coffee bean extract standardized to 50% chlorogenic acids. With 1,800 mg of Pure GCA per daily serving, you are guaranteed to receive the highest quality and quantity of chlorogenic acids per day.

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Friday 30 August 2013

How's the serenity?



Bit of a rough crossing today, but made it over to Atauro Island off the coast of Timor-Leste, despite breathing in a couple of hours worth of outboard fumes. 

As Daryl Kerrigan would have said as he breathed in the fresh country air: "Smell that? Four stroke."

Property Update: The Gini coefficient and inequality

I write for Property Update today here.

Don't forget to subscribe for the newsletter, along with 60,000 other eager property beavers...


The balanced product portfolio

Thinking back to when I studied Business Management as a young 20-something, it always seemed rather pointless when we as students learned about the suite of "MBA tools" which business leaders and executives apparently used to run companies effectively.

We tended to learn the tools simply as lists to be recited in examinations and then forget them as soon as the exams were over, without considering that they might actually have a use in the real world.

You've probably heard of some of them: the SWOT analysis is one good example, where a business identifies its Strengths, Weaknesses, Opportunities and Threats. Whether or not they refer to it as a 'SWOT', every major business which has ever succeeded has carried out this analysis - they wouldn't be applying appropriate corporate governance if they hadn't, and besides, they would likely soon be out of business. 

Some other MBA tools sound like complete gobbledigook (the ridiculous-sounding "Storming, Forming, Norming and Performing" springs to mind) while others, such as 'Porter's Five Forces' have proved to be extremely useful in the world of business over the decades.

In truth, these tools are all useful, for they would certainly have been canned years ago by the Harvards of the world if they weren't.

The Growth-Share Matrix

Commonly known as the 'BCG Matrix' after the Boston Consulting Group which designed it, the 'Growth-Share matrix' was designed to help companies allocate their resources efficiently and effectively manage products and their portfolios. It looks like this:
The theory is that a company should be able to place each of its products in one of the quadrants and thereafter decide how best to deal with it.

In the ideal world, all businesses would have products with a high market share, in a market with high growth. A good example might be Microsoft's Windows product back in the 1990s: it was a booming market which Microsoft had a large share of. Such products are called STARS and can continue to generate great profits for the business.

If further investment is needed to retain the star status, companies should provide it, for they have a star product and Microsoft continued to improve Windows with each successive product in order to maintain market dominance. That is a winning investment.

Sadly, many businesses have products which are in markets with low growth, where they also only retain a small share of the market. These products are known as DOGS - they are unlikely to be profitable and should be divested or ditched.

As is the way of the world, things are rarely this black and white.

Some products, for example retain a high market share in a low-growth industry, and these are known as CASH-COWS. Often reflected by products in mature industries, cash-cows can generate more cash than they take to maintain so companies should look to own plenty of cash-cows. Conventional wisdom says that  these products should continue to be milked while applying as little investment as possible, although not at the expense of new brands.

But what if you have a product which sits in a booming industry of which you only have a small market share? This is known as a PROBLEM CHILD...or sometimes, by those who don't really like business lingo,  such products are know as "question marks". These are products for which are growing rapidly and thus can consume cash, but due to having low market shares they don't generate much cash. 

A problem child could gain market share and become a star, and eventually a cash cow when the market matures and growth slows. But if a problem child fails to become a market leader then it could degenerate into a dog. A problem child should therefore be analysed carefully in order to determine whether they are worthy of the investment necessary in order to grow market share.

Take the example of a small start-up business in China which supplies automotive parts. It is placed in a booming industry but only has a small market share. It probably needs to invest in order to gain market share.

The diversified portfolio

Just like an individual investor, the balanced company with the diversified portfolio can capitalise on its resources. Ideally the company should have:

-stars, the high growth of which represent the future of the business
-cash-cows, to supply the funds for future investment and to keep the business alive
-problem children or question marks - to be invested in to be converted into tomorrow's stars

Dogs, of course, should be divested.

Not dissimilarly, the individual investor should ultimately aim to have cash flow investments to pay for living expenses and to fund new investments, and capital growth investments to create long-term wealth.

Applying this to investment

The BCG Matrix was created in order to help businesses assess products and their place in the market, but investors would do well to be aware of .the principles of market growth and market share. After all, investors own shares in companies and therefore need to understand their future prospects.

To a lesser extent investors can also apply the principles to their own portfolios. In an ideal world, we'd all own star investments which continue to outperform for decades to come.

Other investments, even if they are lacking in growth potential we may elect to hold if they generate a continuing strong cash flow. Examples might include fixed income investments or commercial properties.

A problem child, might be represented by a company which itself needs to undertake investment, restructuring or perhaps a transition to production in order to become a future star. Alternatively, you might own a run-down property which could, through investment, be turned into a desirable, multi-dwelling, outperforming investment.

What if you own shares in a dog? Divest it. Too many investors observe a falling share price and see an opportunity, believing it could 'bounce back'. But a genuine dog investment - a company with low market share and low growth - it is commonly wise to dispose of. A company which cannot generate profits will ultimately be worth $nil, or, in the best case scenario, the net realisable value of its assets.

In the world of real estate, it is popular to say that the superior investment strategy is to "never, ever sell". It's true that due to the material transaction costs involved in acquiring and disposing of property, a well-located property is best held indefinitely.

But if you own a genuine dog, the law of opportunity cost requires that it is disposed of so that funds can be more appropriately allocated elsewhere.

Some property investors like to say "property prices can never crash to zero". Well, I'm afraid that in some circumstances they absolutely can. Ultimately, real estate is only worth what another person is prepared to pay for it, so you need to own investments in locations in the greatest demand. Sometimes it makes sense to dispose a dog investment and re-invest in a superior location.

Stocks belted; AUD hits 20 month low

Dow off 217 points overnight or 1.4%.

The Aussie dollar plunged as low as 95.1 cents before recovering a little.

Strong US payroll data on Friday could send us down to new lows and towards 90 cents which in turn would be welcome news for Australia's economy.

Thursday 29 August 2013

ASX sell-off

Markets down as expected following the Fed announcement, but it turned into something of a sparked sell-off, with the XJO down 2.12% on the trade.

The dollar is getting whipped, touching 92.3 cents, somewhere much closer to 'fair value' and a more comfortable place for our economy by and large.


Source: ASX

Wednesday 28 August 2013

England steamrollered by a vegetarian

Cracking first day of the Ashes cricket series in England. 

After a solid start, England were blown away by chief destroyer Peter Siddle (5-50) for a paltry 215.

In the macho world of men's cricket, where alpha males like to talk about how much steak they eat, us poor veggies are often left to 'feast' on rock melon and Lamington fingers during the interval.

So it was good to see 'Sids' on top form: veggies will rule the world one day, mark my words...

Just like in 2005, though, it was all action (perhaps the influence of a proliferation of short-form cricket) and England hit back with 4 wickets of their own before the close. 

The first Test will be all over in 3 days at this rate, but it stands to be a great series. Now, we just need to see some sunshine in Nottingham...

***

Labour Force data today - we're looking to see if the economy can add any jobs or whether the unemployment rate will tick up a notch.

Aussie stocks follow US higher

Odd how stock markets that go up barely rate a mention as compared to a couple of days of falls.

The S&P 500 is shattering records in the US - up for 7 days in a row (+0.31% on Friday) to a record 1,680.19/

Aussie stocks responding in kind with several positive trades in the black.

However, Aussie bank valuations may be sliding, with hedge funds said to be taking short positions.



Source: ASX

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Commodities tumbling

Now down more than a quarter since the peak of  June 2010.

Not good news for Australia and increases the likelihood of a further rate cut in the coming few months.

In brighter news, our manufacturing index picked up sharply today.

Graph: RBA Index of Commodity Prices

BHP production +17% y/y

BHP follows suit in its production report for the year ended 30 June 2013, with iron ore production up 17%.

"Western Australia Iron Ore delivered a thirteenth consecutive annual production record as shipments in the June 2013 quarter increased to an annualised rate of 217 million tonnes"

HIA: New home sales climbing since September 2012

From the HIA Media Centre:

"The HIA New Home Sales report, a survey of Australia's largest volume builders, showed that total
seasonally adjusted new home sales increased by 3.4 per cent in June 2013, representing a fourth consecutive rise. 

Detached house sales increased by 7.3 per cent at the end of last financial year, but multi-unit sales dropped by 17.5 per cent.

In the month of June 2013 detached house sales increased by 19.7 per cent in Victoria, 7.1 per cent in Western Australia, 3.9 per cent in New South Wales, and 0.5 per cent in South Australia. Detached house sales fell by 11.0 per cent in Queensland."

A bit odd to see such a huge increase in Victoria, although monthly figures can be volatile.

Still a way to go for this series to represent what might be considered to be 'strength' in the new sales market, but the uptrend is encouraging.


Source: HIA

Tuesday 27 August 2013

Billabong sunk

Takeover talks fail and Billabong looks instead to debt financing after coming out of its trading halt today. The BBG share price lost another 50% of its value during the trade. 

The Billabong share price has now fallen from above $14.00 in 2008 to just 23 cents.

The XJO ground out small gains of 0.25% after the interest rate announcement.


Source: ASX

---

So, Australia's all important GDP growth will be reported tomorrow.

It's an absolute crapshoot trying to predict GDP given that it combines transactions across household consumption, dwelling investment, business investment...and so on...but, hey, we're looking for 0.8% q/q to give us 2.7% y/y growth.

Not great, but not too bad either. 

Let's see tomorrow!

Is Aussie construction picking up?

Well, you could make a case for it being so if you're a 'glass half full' person, but the answer is: no, not really.

The best thing you can really say about the latest AIG monthly indices is that the rate of contraction is less than it has been. 

It's the 'least worst' result in four months.

Only 13 of 27 economists surveyed by Bloomie think that interest rates will be cut in August.

It looks to me like the Reserve must cut, unless we get any dramatic news in the coming 30 days month (basically higher than expected inflation or a collapse in the currency).

Remember, it's construction that is supposed to pull us out of the quagmire - and the national construction industry is contracting!!

The RBA can't afford to get behind the curve on this - rate cuts needed.


Source: Australian Industry Group

Monday 26 August 2013

Melbourne "solid"; Sydney "stunning"

Reports the ever-entertaining Dr. Andrew Wilson of APM.

Sydney recorded a 77.4% auction clearance rate with a surge in listings this weekend:


Property Update: an economics lesson

I write for Property Update here, where I discuss the problems of making generalisations in investing and the confidence (or otherwise!) that should be applied to making forecasts.


Sunday 25 August 2013

OK-5109f 62-Inch Crystal Silver Floor Lamp


Features
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62-Inch Crystal silver floor lamp. Simple and elegant floor lamp featuring a silver finish on classic lines and white shade. Draped in crystals. It's for any of room. The instructions are included and easy to install.


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Saturday 24 August 2013

Mortgages for 4.69%?

HSBC has dropped its fixed rate home loans as follows:

2 year fixed - 4.69%
3 year fixed - 4.79%
5 year fixed -  5.09%

The major Aussie banks are also offering very low fixed rates now as the competition for market share hots up.

Shares finally seeing a brighter trade up ~1.60% so far, with they bank stocks rebounding...

Halo 2


Features
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Opening Scene

Halo 2 opens with a cut scene in the Covenant Holy City of High Charity. Much has happened since Master Chief (that's you) created so much havoc for the Covenant in the first Halo, and the Arbiter has much atoning to do for his failures. This first cut scene is long, but the lush graphics, orchestral sound, and polished voice talent for both this and other cut scenes as well as the game itself put most animated television shows to shame.

Much has happened since Master Chief created so much havoc for the Covenant in the first Halo, and the Arbiter has much atoning to do.

In the end, though, Halo 2 is unabashedly a first-person shooter. It has a Mature rating and is not meant for kids. Gameplay is constant and intense. No sooner is one bunch of aliens taken care of than another descends. The controls are identical to the first game so those familiar with it will be up and blasting in no time. And the sound and graphics have been beefed up so that Halo 2 is undoubtedly one of the most beautiful console games available.

Opening Fire

Most of the weapons from the first game return, although strangely the MA5B Assault Rifle (the default weapon in the first game) is not available. There is a single melee weapon known as the Covenant Sword, but the controls for it are the same as that for all the shooter weapons, making it difficult to direct. Also, for a new twist, you can hold two of the smaller guns at the same time and shoot double-fisted.


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Thursday 22 August 2013

Retail trade, construction too soft-- RBA needs to cut

A veritable data-fest today. 

Let's start with the retail trade data, which came in very weak at only 0.1% growth seasonally adjusted.

"The seasonally adjusted estimate rose 0.1% in May 2013. This follows a fall of 0.1% in April 2013 and a fall of 0.6% in March 2013."

Hmm, not good.

So when the RBA was "bricking itself" in November about accelerating consumer activity (if indeed any bricking actually took place) it needn't have done.

Graph: Monthly Turnover, Current Prices, Trend Estimate

Source: ABS

Meanwhile, engineering construction activity fell by a seasonally adjusted 3.0% in the quarter. 

It's likely to be all downhill from here on in (with one exception: Queensland) as the capex boom unwinds. More central bank stimulus needed.

Graph: Value of work done, Chain volume measures

Source: ABS

Very little traction evident here, and that's just not good enough. 

The RBA needs to cut interest rates again, and soon.

Absent another collapse in the Aussie dollar in the next month or a seemingly unlikely spike in inflation this quarter, you can factor in another interest rate cut in August.

Today's data has seen futures markets pricing in a 57% chance of a cut on August 6, a leap from the 47% chance factored in yesterday.

As if to underscore the point, RBA Guv'nor Glenn Stevens stated that the RBA "deliberated for a very long time" about its last interest rate decision, implying that the decision to keep rates on hold was a close-run affair.

Was this just 'jawboning' or was he being fair dinkum? 

Hard to say, but it's amazing what just six simple words can do to the markets! 

The share markets shed a thumping 1.9% and the Aussie dollar plummeted to just 90.7 cents, a world away from the 106 cents plus of not so long ago.

Interest rate cut coming...

Is Australia really like Japan?

Japan - the basket case

Another week, another article comparing Australia's property markets to Japan. If only I had a buck for every time people said "but in Japan"...then we'd definitely never experience price deflation Down Under because I would be a zillionaire and would be out spending like a certified madman.

There's no question that Australian property prices can and do fall, and indeed so they did in 2011 and early 2012. And they remain below previous peaks in all capital cities, except in Sydney which zooms on to fresh heights. I don't rate the neverending comparisons with Japan, though. 

It's actually the brutal effect that Japan's deflation had on its economy and living standards that leads nervous central banks such as the Fed in the US and the Bank on England in the old dart to drop interest rates to the effective bottom of the zero-bound range and engage in 'quantitative easing' (QE) - they must avoid deflation of the currency at all costs.

It's impossible to read the minds of our central bank Board, of course, but one assumes that they would err on the side of caution with regards to inflation and not make the mistakes which Japan made (namely, failing to create a sustained increase in the broad money supply, and tightening monetary policy again too soon when deflation was strangled, leading to its famous 'lost decade').

Incidentally, Japan finally seems to have learned its lessons and is engaging in so-called 'Abenomics' which promotes a range of policies include radical QE, the setting of negative interest rates and targeted inflation which has seen GDP growth return promisingly. Japanese Yen don't have a use-by date printed on them, but almost may as well have: check out how the stock market has responded (+56.5% on last year, despite the recent wobble).

Forget fundamentals, this is the new normal: booming asset valuations when the QE tap is turned on, and a panicked stampede for the exits at the merest hint of it being switched off again.


Source: Bloomberg

Ageing demographics

A large part of Japan's problem has been demographic, with its population ageing and more than a fifth of the population being aged over 65 - some 30 million 'older people'. Worse still, the population has been falling, which is never going to be a positive dynamic for economic growth.

Whether we like it or not, although Australia will face the ageing population problem and issues related to its dependency ratio, she will not allow her population to fall. Instead, our population is soaring, by 392,500 heads in the last 12 months recorded.

My Pommie pal Catherine Cashmore, who is always worth listening to (not just because she's English; rather because she is 'in the property market' every day and not only stuck behind a desk) argues in this article that while population growth might not cause property prices to grow in an upswing, it can sometimes hold prices up in a downturn.

Cashmore also explains why established dwellings in Australia's inner suburbs are frequently favoured by homebuyers and investors to new housing stock in the outer and fringe locations, and, importantly, that while the supply and demand of dwellings have an impact on prices, perhaps the supply of and demand for credit have a greater bearing.

Why deflation will be avoided at all costs

It's all too common for people to criticise our inflationary economy, but maybe it's worth re-capping on why deflation should and will be countered at all costs.

In theory, you might think that price deflation could be a good thing. We could go down to the servo and find that instead of being charged an extortionate 100 bucks fill up the Holden Thunder ute and acquire a four 'n' twenty pie with a pack of Lamington fingers (for this is how most Australians live, of course), it might only cost us $80 and we'd be effectively richer as a result. Cool.

Rewind the clock, though, to the Great Depression, where price deflation was accompanied with falling prices (including real estate prices), banks collapsing, countless companies going bust, astronomical levels of unemployment and the most brutal period of the 20th century across the globe. Just like the more recent global financial crisis, the Great Depression was preceded by debt-funded greed and speculation, and the Dow Jones index increasing by a preposterous fivefold in just six years.

When prices fall, those who hold debt are punished, and this is particularly so in the housing market. You could buy a house with a $500,000 mortgage today only to discover that the underlying asset is only worth $400,000 next year, leading to what is known euphemistically as being in 'negative equity' (i.e. up the creek, minus paddle).

It's fairly common today for people to say that anyone with mortgage debt has got it coming to them, and they'd deserve all they get. That may be so, but the real problem with a deflationary economy is the potentially relentless downward spiral.

The deflationary spiral

If you think you can buy the Lamingtons and the four 'n' twenty next week for fewer dollars than this week, you'd likely become discinclined to spend, and this leads to consumers hoarding cash. Retail trade dries up and Caltex probably have to drop their prices further to entice you back to the servo.

This becomes a total nightmare for Caltex because they still have to pay the pump attendant a $40,000 salary, but their turnover and margins are getting clobbered. They probably have to lay off one of the pump attendants.

Of course, with no job, the ex-pump attendant won't be borrowing money to buy a house, so the amount of money in the economy falls. It's the exact opposite of inflation where too much money is chasing too few goods pushing up prices.

The real risk in this circumstance is accelerating deflation (which is what Professor Steven Keen erroneously predicted would happen to house prices in the latter half of 2012; instead they increased strongly, largely due to investors returning to the market in anticipation of further price gains).

The best case outcome for the Australian housing market (in my humble opinion, at least - renters always disagree) is that prices continue to increase, but only moderately and at a lower level than the growth in wages, thereby effectively becoming cheaper over time. Unfortunately, price movement is rarely so uniform.

High inflation also brings its own uncertainties and can lead to boom-bust cycles, which is why we have a target range of inflation of 2-3%.

What if Australia stumbles towards recession?

Three things would happen. Firstly, interest rates would be dropped. Unfortunately interest rates in Australia can only drop so far until they hit a number starting with a '0', so if that doesn't work, the 'printing presses' will be switched on (QE), which actually means that the RBA will start buying assets (e.g. bonds), effectively increasing the money supply.

And thirdly, specifically with regards to the property markets, if prices began to slide dramatically, there would likely be other interference, such as, for example, relaxing the rules on foreign buyers, or other meddling. Non-property owners don't like it being said, but that's what, in my opinion, would probably happen.

It's easy for pundits to be critical the RBA's policy of targeted inflation, but, much like when we complain about getting older, it sure as heck beats the alternative.

Tuesday 20 August 2013

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Trust and ownership rights

How long is a metre?

A metre is defined as the length of distance which light travels in a vacuum in 1/299,792,458 of a second.  

Like most people, I don't have the first clue how far light travels in any given period of time (in a vacuum or otherwise), but I do remember my junior school teacher Mrs. Mitchell telling us that somewhere in France there is a one metre bar which we actually could go and check to prove how long a metre is.

I just looked it up...and there is! In 1885 a prototype one metre bar was built and stored in agreed conditions in France.

Not that in reality we'd ever get to see it, though. To a great extent, we still have to trust that the metre is what we are told it is, because without that trust the metre would be redundant as a measurement of distance. 

Without the trust, in fact, we'd be in a spot of bother - how would we ever know how far a centimetre or a kilometre was? Would the whole system of distance measurement disintegrate? Would we have to invent a new system?

Without standards, enforceable laws, property rights and a government to police them, what we would be left with would be chaos: an anarchist system.

Reliance on trust

The reliance on trust extends to the wider capitalist system. One of the reasons why Britain was the world leader at the time of the Industrial Revolution was that it had a well-developed and regarded system of law which allowed capitalism to flourish. European countries such as Germany did not exist in the form which we know today - instead they often consistent of many smaller states where land disputes and conflicts continued unabated for decades.

Fundamental to the capitalist system are property rights. 

If you or I buy a plot of land in Sydney or South Australia tomorrow, we need to be able to prove that we own the land so that someone can't later claim it as theirs, leaving us wondering why we parted with our stash. This is one of the challenges facing countries such as East Timor where repeated internal displacements of the past lead to land rights disputes in the present.

Indeed, the notion of property rights now extends beyond the ownership of physical property such as land and buildings. There are also property rights relating to brands, ideas and words - intellectual property rights. And this is one of the challenges which the world faces in coming decades as countries with cheaper labour such as China become able to clone products originally made in developed countries.

This morning, I can tune in to watch the Ashes cricket on my laptop i-Player, for a cost of £10, payable to Sky Television. Alternatively, I could probably find a free live stream on the internet. It would be illegal because Sky own the rights to the broadcast, but, realistically, who is going to police their ownership? 

They say that there is no such thing as a victimless crime, but who would be the victim in this case? Arguably the players would miss out because I hadn't paid my ten quid, but more likely it would be Sky Television, who would then ultimately pass on the cost to other viewers in the future. In the end, we'd all lose out.

This is why the policing of intellectual property rights and piracy is also important to allow capitalism to succeed, just as is the governing of rights to physical property.

The tragedy of the commons

One of the many reasons why 'mixed' housing developments are preferred to social housing only estates is that it has been realised that property dwellers are generally more likely to redecorate property which they own rather than property which they do not.

The worst case scenario is what is known in economics as the tragedy of the commons - resources can be abused by people if they do not own then. 

The most pertinent modern example is perhaps the environment: because officially nobody 'owns' the environment, we feel more able to pollute it, because there is not always a dollar cost attributed to pollution. Although of course in a sense, we all own the environment - we only have one planet for us to share - and the potential cost of pollution over the long-term could be unimagineable.

One of the reasons that capitalist economies have flourished where communist systems have flagged has been related to ownership rights. Food shortages often occurred in eastern European states where farmers did not own the land and therefore were disincentivised to maximise production, instead allowing fields to lie fallow. 

Trust in property investment

The word trust crops up in modern property investment frequently. 

Property investors may elect to hold their assets in a trust as a means of asset protection. 

If you use property professionals, you need to trust that they will do the right thing by you and offer the service you require for a reasonable fee.

When a bank lends you money via a mortgage, it needs to trust that you will eventually be able to pay it back and not default on the repayments.

If you become an experienced investor, you may eventually be able to borrow many millions of dollars from the bank, but only once you have established a level of trust between yourself and the lender.

If you are buying a property, you need to be able to trust that the counterparty holds up their end of the bargain, as well as been able to trust your reliance on the contract laws and the legal system in place in that state. 

Perhaps most importantly of all, we need to trust that our government bodies continue to provide a fair and consistent legal system which they enforce. 

A large part of being a successful investor, therefore, is being able to make yourself someone that can be trusted - someone others view as truthful, strong, consistent and reliable.

In the meantime, we'd better hope that no-one loses that prototype metre bar. Because if they do, we're all stuffed.

Housing bust has been a real fizzer

The 'inevitable Australian housing bust' has turned out to be a real fizzer. We haven't been short of property crash predictions in Australia, but so far the forecasts have come to nought, with market sentiment once again reversing northwards from mid-2012 as interest rates were dropped. Until the day we get a crash, of course, we never will be short of predictions, but yesterday's housing finance data showed further increases in May.

Some housing bust predictions

Neil Jenman, 2001: "The real estate market will crash".

Jenman reiterated his coming Melbourne property crash prediction in 2003, noting that: "The peak will probably turn out to be late 2001 to mid 2002, around time that we issued our first warnings."

But we never really got a property crash. Instead we got something of a slowdown in many markets, but prices in Melbourne have since surged and more than 80% higher than they were at that time, while Australia's city populations have surged. 

I note in passing that the Australian population when Jenman made his first crash call, as recorded in the 2001 Australian Census, was 18.972 million, as compared to 23.115 million today. Demand for housing in capital city suburbs is rising with every passing week.

The property crash predictions have continued, yet prices in many areas have kept on climbing:

Professor Steven Keen, 2008: "When the expectation [of rising asset prices] goes, ultimately goodbye 40% of the current price of houses."

David Llewellyn-Smith, 2010: "This blogger reconfirms his assessment of the bust ahead for Australian housing."

Leith van Onselen, 2010: "In my opinion, an Australian house price crash is inevitable and cannot be avoided."

Philp Soos, 2011: "Australia's property bubble will inevitably burst."

Jordan Wirsz, 2011: "Property prices will crash by 60%."

Jordan Wirsz, 2012: "Buy gold." (immediately before the gold price crash).

David Collyer, 2012: "I predict that property prices will fall by 15-20% in 2012".

Harry Dent ,2012: "The real estate market will crash in 2012. Prices could fall by more than 60%."

Philip Soos, 2013: "Australian housing will crash."

So, the first thing we can ascertain is that the timings of asset price cycles are far more unpredictable than we tend to believe they are.

But while it might appear that Australian real estate is on the up, on closer inspection, I'd suggest that perhaps in many markets a long, slow decline in real terms is already well underway, which in all fairness to Keen is precisely what his words seemed to imply back in 2008. In particular, property markets in Adelaide, Brisbane, Canberra and many regional markets have not yet responded in any meaningful way to stimulatory monetary policy.

In fact, only Sydney's housing markets have broken through to new highs, with all other markets below previous peaks, which thus represents something of a decline in real terms.

Dwelling Prices graph

Housing finance data

Has the risk of a property crash gone away? No. Whilst prices remain high, there is always the chance of a crash. However, yesterday's housing finance data suggests that no housing bust is imminent, with the value of dwelling commitments rising seemingly inexorably over the past year:

Graph: Value of dwelling commitments, Total dwellings

Source: ABS

To instigate a property market crash, given that there is no real over-supply of dwellings in most cities, we'd probably need a credit shock, a sharp rise in unemployment, much higher interest rates or a policy change such as a reform of the negative gearing tax laws (or, of course, a 'black swan' event, which by its very nature is an unforeseeable trigger). These factors look to be unlikely in the short term, but we could yet see unemployment rising materially as the labour-intensive mining construction boom unwinds.

Prices declining in real terms?

There could also be some hidden good news for homebuyers in some Australian cities. Prices have essentially gone nowhere for years in cities such as Adelaide, Canberra and Brisbane, which means that prices in real terms have been declining and are becoming more affordable, particularly with interest rates falling to record lows.

FHBs

Plenty have said that this can't be a property recovery without the participation of first homebuyers, and some have also said that prices cannot move higher without first homebuyers propping up the bottom of the market (not that this has ever held back London house prices over the past quarter century).

However, you choose to define the word 'recovery', it's heartening to see the number of first homebuyer commitments picking up over the last few months, although the value of their commitments remains relatively low to date. I have long felt that FHBs will gradually come back into the market once they believe that prices won't fall further, but this is one data set to keep a close eye on.

Investors are leading the recovery

There have been some reports 'on the ground' that at last activity in Brisbane is beginning to pick up. And some have also been arguing that prices in Adelaide are going to now pick up strongly after a slack five years. I'm not so sure about Adelaide, as the supply appears to be meeting the demand for housing.

A closer look at the figures shows that investor activity in Australia (value of investor commitments) is up an astonishing 24% over the year which in part explains why Sydney recorded yet another extraordinary 81% clearance rate on Saturday. Investors are pumping up the market.

Sydney prices are up +8.5% in this cycle already, with the inner west markets running very hot (as I've been saying forever and a day now, it's the $500k-$1 million inner west suburbs which represent the hot markets).

The 'positive cashflow investors' who are suggesting that regional centres and fringe suburbs are going to beat inflation and be good investments over the next decade are, in my opinion, stuck in the past - in 2005 to be precise, which is when households stopped leveraging up and began saving.

It may not have been a bad strategy from 1993-2005 for those for whom servicing investment mortgages was an issue, but it's the wrong strategy today. If you are waiting for households to simply keep on taking on ever more mortgage debt in perpetuity and prices to magically keep increasing ahead of incomes you are likely to be very disappointed.

Household Finances graph

The recovery in property markets has been investor-led, which means that quality inner-city markets will be the likely outperformers - the regional markets/fringe suburbs look much more likely to me to struggle badly. If you want to outperform you will need to anticipate where the next huge wave of speculative investment capital is heading, and that is to the four main capital cities, and in particular, to Sydney suburbs close to the city.

Melbourne has already experienced a tremendous boom in prices since 2007. Perth is travelling very strongly again with its low unemployment levels of just 4.6% and booming population growth. And prices in Sydney seem set for more very strong growth. I'll be forced to change the broken record on Sydney's inner west at some point, but judging from the scorching auction clearance rates recorded on Saturday, not for quite some time to come yet.