The Biggest Estate on Earth: How Aborigines Made Australia

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Product Description
Reveals the complex, country-wide systems of land management used by Aboriginal people in presettlement Australia Across Australia, early Europeans commented again and again that the land looked like a park, with extensive grassy patches and pathways, open woodlands, and abundant wildlife. Bill Gammage has discovered this was because Aboriginal people managed the land in a far more systematic and scientific fashion than most peoplehave ever realized. For more than a decade, he has examined written and visual records of the Australian landscape. He has uncovered an extraordinarily complex system of land management using fire, the life cycles of native plants, and the natural flow of water to ensure plentiful wildlife and plant foods throughout the year. Aboriginal people spent far less time and effort than Europeans in securing food and shelter, and this book reveals how. Once Aboriginal people were no longer able to tend their country, it became overgrown and vulnerable to the hugely damaging bushfiresAustralians now experience. With details of land-management strategies from around Australia,this bookrewrites the history of the continent, with huge implications for today.

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Not so super...

A brighter day ahead for stocks in Australia.

It needs to be! Markets are doing their level best to undue all of their good work of the past 12 months.

It was all fairly predictable really. As soon as those articles starting appearing saying "best year for superannuation in years..." the kiss of death was well and truly applied.

Here's the ASX200 one month chart:

Source: ASX

Some thoughts on investment strategy

Stocks up yet again in the US overnight. We've heard nothing but doom and gloom from some quarters for the past half decade and yet all you needed to do to generate returns of well over 100% since 2009 was to hold the Dow Jones index, a price-weighted index of 30 blue chip industrials.

Warren Buffett once said that being out of the market introduces a different risk to being in the market, and over the history of stock markets, it has indeed been a costly one. Here's the Dow 5 year chart, courtesy of Bloomie:

Source: Bloomberg

A huge deal was made at the time about the blips in the chart, such as the corrections caused by the US debt ceiling crisis and the European debt crises, yet over time corrections tend to take on a decreased significance as share index values run higher.

The stock market recovery has not been as pronounced in Australia, but you would have done very well had you focussed on the industrials and financials, as opposed to resources.

Indeed, over the decades in Australia, profit-making industrials have tended to outperform resources stocks and listed property trusts, tending to be more self-perpetuating businesses which pay strong dividends, while mining companies re-invest capital in further projects and have often paid weaker dividends in downturns.

Property trusts (once known as LPTs, now as A-REITS) have paid out high dividend ratios but demonstrated weak capital growth, sometimes diluting values through capital raisings for new projects.

Resources stocks have had a poor run since the onset of the global financial crisis. The 5 year chart of Rio Tinto (RIO) is an example of this under-performance, until its recent upturn which was buoyed by a bounce in the iron ore spot price.



Source: ASX

Generic advice

There is a worrying trend towards generic advice being issued from a wide range of sources on the internet. Each person has different financial goals, needs and risk tolerance levels, so generic advice is often misleading and could result in capital loss.

Even more worryingly, an awful lot of generic advice is dished out about investing (or very often not investing for whatever reason) by people who have never built an investment portfolio of their own.

Free advice is usually worth what you pay for it, as the old saying goes.

Ben Graham once said that if you have an amount available to invest regularly, then the only sensible investment strategy is to write yourself a contract committing to buying shares in good times and in bad on a regular basis.

This strategy is even more straightforward today because instead of having to buy a cross-section of the index to diversify your specific investment risk, you can simply invest regularly in a diversified product (such as an ETF or, my preferred option, an Australian LIC with heavy exposure to industrial stocks) which mirrors the balance of investments and risk profile you require.

My wife's index fund has just entered its 17th year of existence; that's nearly 200 consecutive months of share market acquisitions. This investment approach offers great peace of mind and requires very little skill other than discipline - you don't need to fret about how the market is performing on a day-to-day basis (if you are doing so, this maybe an indication that you have adopted the wrong investment strategy).

If the market falls, your money will just buy more stocks. And if it rises, your net worth increases and you buy fewer shares while the market is high. In the meantime, you can enjoy the growing dividend streams.

The only calibrating this investment approach might need is to learn to buy more heavily when the market suffers a major correction, such as it did through the financial crisis.

Most developed world economies are not like Japan and do not fall into a long spiral of deflation. Indeed, even in Japan, lessons have now been learned and stimulatory monetary policy has seen stock valuations surge by an astonishing 74% in the past year.

Property

Investment strategy in Australian property is a different beast for most average investors.

Statistics show that most Aussies do not ever invest in more than a handful of properties and therefore are unlikely to benefit from the averaging approach which so benefits share market investors.

The leverage involved can also mean that even when only buying a small number of property investments, the balance of a portfolio can be skewed towards this asset class, increasing the portfolio's risk.

Further, yields are so low on residential investment property that the asset class only becomes worthwhile for most if the investor can source reasonable capital growth. Cash flows can be reasonable on some commercial property types, but mostly this is not the case on residential stock.

For these twin reasons, it is important to invest only in areas where the population is forecast to increase for decades to come and there is little land available for release.

Commentators will continue to give the impression that they can forecast short-term market movements, despite the not-so-secret truth that they can't.

When you are granted a mortgage, the lender tends to give you a handy hint as to the appropriate time horizon for limiting risk in property investment in the terms of the loan: banks are comfortable that real estate is of an acceptable risk over 25 years.

Historically, this has been true, but investors would be wise to exercise care when selecting property investments and stick to those which suit their own risk profile.

---

CPI (inflation data) today, which will determine whether interest rates are cut again in August.

Don't make the rest of us worry, Rob!

All the warnings over the years about a possible Australian recession are getting a tad wearisome.

The unemployment rate of 20% predicted by Steve Keen is actually only at 5.7% and basically fairly low unless you are in Tasmania (and his house price crash predictions were even worse).

For all the never-ending predictions of a bust, house prices have moved up to all-time highs and share markets have been on a fabulous run for the past year.

The iron ore price which was set to ruin Australia by falling to US$70/tonne is actually at double that level when considered in A$ terms thanks to the correction in the currency.

The Reserve Bank of Australia, with all of its army of economists sees GDP growth continuing at 2.5% to 4% over the next couple of years.

Of course, some bloggers will continue to forecast an Australian recession, a massive property crash, a mining investment cliff, a commodity price crash or chronic levels of unemployment...they've been doing that for years with no joy, and they'll never go away. So what? I'll go with the Reserve Bank economists any day and get on with living life.

Interest rates at a stimulatory 2.50% are set to keep the Aussie economy growing...

---

{warning: contains expletives}

(probably not the best idea posting this video - it ends with England getting dusted by Holland - hopefully the Aussie economy will fare a little better than poor old Graham Taylor!)

Ashes rain-tained

Still raining at Manchester at 4pm, so barring miracle it looks as though England will retain the Ashes without much of a chance for the Aussie to have a say today after a promising morning. 

A shame that rain had to intervene - Manchester has a long history of draws in Test Matches versus Australia, largely thanks to inclement Lancastrian weather. 

Congrats to Ali for a successful first Ashes series as captain and to the other England players - I can report that all the lads back at Maldon are very proud!

Rip off Australia?

One of the unfortunate consequences of living in a country which extends its recession-free run to 22 years and beyond with low unemployment rates is that things can become expensive. As someone pointed out last week, why should Australian replica rugby jerseys cost $150 when Brits could buy their Lions jerseys for £50? 

Any Aussie who has gone to live in London will be familiar with what Aussie guests do when they first come to visit you, which is exactly the same as what Poms do when they come Down Under: start comparing the prices of stuff.

Australia is an expensive country these days. That's partly a function of the exchange rate - gone are the days when the proud Pommie pound bought 3 dollars and you could eat out like a king in Sydney for a tenner in British money.

But it's more than that, The cost of living in Australia has surged upwards in recent times, perhaps in many cases more than the consumer price index (CPI) implies. As an Anglo-Aussie who spends a lot of time in both countries, I'm reasonably well-versed in the nuances of this subject, so a few observations from yesterday...

A day trip to London

Aussies are most upset about the price of fuel being set to "soar to $1.70", but spare a thought for the Brits on this one - for the UK government has been taxing the living daylights out of fuel for decades. It cost me more than £100 to fill up yesterday. A hundred quid for a tank of fuel! Outrageous. Lord knows how truckies make a living these days.

What else is better in Australia? Traffic. The 150-mile journey to Hampton Court yesterday took me a preposterous 7 hours, including a short stop for much-needed caffeine at Peterborough services. I didn't dare drive all the way back last night, but even the 50 miles or so back to near Aylesbury for a bed took another 3.5 hours. That's nearly half a day of driving, and a few hours more today in order to get back 'home'.

There are now around 40 million cars in Britain and the population has continued to rise to 62.75 million. As far as I could tell, at least 61 million of those people were at Hampton Court yesterday. Every single available square metre of the grounds was populated with a person, making enjoyment thereof close to impossible.

Accommodating needs

Although Britain's population is not rising at the same pace as that of Australia, a major challenge facing the Brits is the population migration to London and the south-east, and the housing shortage crisis that this is causing.

There's plenty of talk of a "UK housing bust", but it's much rather a two-speed story. London prices and other cities in the south-east such as quality suburbs in Cambridge have barely seen prices skip a beat with strong price gains recorded throughout the financial crisis. Other parts of the country such as the north-east have performed dismally for half a decade.

Other things that aren't cheap in Britain? Hotels - at least £100 in the south-east for a soulless chain hotel not deserving of even 1 star on the RAC ratings. Much better to get a Bed and Breakfast for around half that price so you at least get a hearty meal to start the day.

Entry tickets for Hampton Court? £30 X 4 = £120. Not exactly a cheap family day out. As for booze - as a designated driver I didn't partake, but if the price of the comically small bottles of water on sale were anything to go by, there would have been no change out of twenty notes for the hordes guzzling jugs of Pimms and lemonade (it was hot yesterday, so it was selling fast).

It's definitely the case that Australia has become a high-cost country in which to live, but the Poms don't have it too easy either.

From what I have been witnessing there is definitely no recession in the south-east (restaurants and pubs seem to be packed out 7 days and nights a week), but then, things tend to cost a lot, so there is a trade-off. Elsewhere in the country, life is significantly cheaper comparatively, but then a disproportionate amount of the 7.7% unemployment rate relates to areas away from London.

The good life comes at a cost.

It's common to speak of "Generation Rent" in Britain. But although few like to hear it, housing in most parts of Britain is very affordable, with prices having retraced over half a decade and interest rates on hold for years just 0.5%. Mortgage rates can be fixed for 5 years at a percentage beginning with a '3 handle', so how can housing be unaffordable? The truth is that it's not the mortgages that are unaffordable; for most it's saving the required deposit.

Of course, housing in London is expensive. But I note that in the area where I sued to commute in from in Essex as a 21 year old, it's perfectly possible to acquire a quality dwelling for around £80,000, which means that mortgage repayments can be incredibly cheap at present - the interest component of a mortgage need only be a couple of grand. It may not be fashionable, but it should be reality for first homebuyers to start on a sensible rung of the housing ladder.

This, of course, is a familiar problem in Australia. Story after news story focusses on young couples being unable to afford to live within walking distance of Sydney Harbour or in the inner-city near Melbourne CBD - but if that is our real goal in a country with a booming population we are surely destined to fail. Instead, we should be looking at improving transport, housing supply and infrastructure away from the few capital city hubs.

The brutal truth is that young people in Britain are renting because they often don't have the discipline to save a deposit, instead inventing new 'essential' costs that were not considered so a couple of decades ago - mobile phones, overseas travel (often more than once per year), plasma screen TVs, new cars and all the rest. The UK Government's Help-to Buy scheme may fix this in the short-term, but this ultimately means dishing out more mortgages to people who have no reasonable proven track record of saving, which may not be a good thing.

History

Britain suffers from ridiculous overcrowding at such events as I attended yesterday, but the history is worth it. Hampton Court Palace and its grounds are spectacular, originally having been built for Cardinal Wolsey Henry VIII in 1514, before King Henry got bored of Wolsey and enlarged it for himself  in 1529 (he must've had a spare moment from beheading people).

I also took the chance to visit Waddesdon Manor, priceless stuff for an economic history buff (i.e. nerd) like me. One of the 40 major Rothschild residences dotted around Europe, it represents a staggering show of wealth.

A fascinating story is that of the Rothschild family: as bankers they were the wealthiest family in the world, profiting massively as financiers of the Napoleonic Wars and generating wealth from almost every venture they partook in.

Sounds like a great life, but on the flip side, in order to keep the wealth 'in the family', so to speak, they often married their first cousins via arranged marriages. Can't have everything, I guess.

With the family wealth being split across many descendants, the Rothschild's wealth was gradually dispersed, and Britain's inheritance tax rules put paid to the rest - the family was forced to 'donate' such properties to charity.

{Hampton Court yesterday}

Keeping the 'Gini' in the bottle

"Money to money"

At my cricket club, we  used to have fundraising raffle draws a couple of times each season.

Many of the prizes were often donated by the chap who was well-known as the "rich guy" in the club. The other members called him, affectionately I think, "Two Jags", which was the nickname of a British MP who drove two prestige Jaguar cars.

I recall a couple of times fate decreed that "Two Jags" won a raffle prize himself, which always drew a good natured heckle or two: "Money goes to money!" or "re-draw!". And, in fact, he usually did simply give the prizes back.

In fact, looking back, the same guy often sponsored the club and its matches and paid for equipment, but rarely did so with any great show. While many of the playing members grumbled about their match fees of membership fees, the club only really survived thanks to the generosity of a few of the wealthier members.

In an ideal world, countries would work in a similar way. The wealthy would pay a fair share of tax. Those in genuine need of benefits and support would be looked after, and so on. Does it happen in reality?

Gini

There are certain numbers in economics which you're never quite sure how are calculated, but can provide a useful measurement guideline. One such number if the "Gini coefficient", which is sometimes known as the "Gini ratio".

Gini is a measue of inequality across a frequency distribution of values, which is one way we can measure inequality in a country: by looking at the statistical distribution of incomes.

In the unlikely event that I come to earn all of the income in Australia leaving income of $nil for the other 23,057,276 of you, then Australia will have a Gini coefficient of 1. We will be perfectly inequal!

More's the pity, this seems to be an unlikely outcome, not least because the government would tax my income and then look to redistribute it elsewhere.

And besides, I'd probably want to spend some of it. There's not much point in having all of the money in Australia if I can't use it!

In theoretical terms, it's actually possible, although highly unlikely, that the Gini ratio could be greater than one, if some of us had negative income.

At the other end of the scale, if all 23 million of us earned exactly the same income we would be perfectly equal, and Australia's Gini coefficient would be zero.

In practice, that's extremely unlikely too. Even in regimes where equality was seen as an ideal, it rarely eventuates in reality.

Gini ratios can be used to measure other forms of inequality too - of education, for example.

Gini ratios of the world

When countries go through periods of great change, Gini ratios can move higher - countries become more unequal - as new wealth is created by a minority. For example, when Britain went through its industrial revolution a new class of capitalists generated great wealth that had previously largely been the preserve of the land-owning nobility.

It's therefore unsurprising that countries such as China and Brazil, which are countries which have rapidly expanding economies, the Gini ratios are high. India looks to be heading in a similar direction.

What is perhaps more concerning, is that Gini ratios is developed world countries such as the US and Britain have also increased in recent decades - societies have become more unequal.

In Australia, our ratio has increased too, although we are somewhere 'in the pack' when it comes to global inequality.

Gini ratios can sometimes be misleading. Why? Because the ratio can rise while the absolute number of people in poverty decreases, and it can be distorted by other factors such as population booms.

It's also often the case that countries with larger populations can show a greater inequality ratio.

Why do the rich get richer?

It's sometimes said that "the rich get richer, and the poor get poorer" and sometimes, it is true.

Why? Largely it comes down to knowledge and the law of reinforcement - wealthy people tend to understand finance and tax laws, and they increase their financial skills through habit. As Aristotle said: "we are what we repeatedly do."

One of the reasons that the wealthy have been able to create wealth for the longer term is that they understand how to use the power compounding growth in their favour.

In theory our tax systems are designed to be progressive, in that the wealthy should pay the lion's share of tax and the wealth of a country should be redistributed fairly.

Unfortunately, it just doesn't work that way. A theme which we will see developing more and more in coming years is that multinational companies will be increasingly chastised for clever profit-shifting across tax jurisdictions.

With the advent of the internet, it's harder than ever before for tax authorities to determine where companies should be domiciled and where taxes should become payable.

In Britain, Barclays Bank paid only 2.4% tax on its 2009 global profits, resulting in a group of angry protesters storming one of its London branches. The bank paid £113m of corporation tax on profits in the UK despite its multi-billion-pound profitability.

And yet, this was legal. Tax avoidance is legal; tax evasion is illegal. It pays to understand the difference.

Wealthy individuals also know how to avoid large tax bills. One way is to acquire quality, income-producing and appreciating assets and then never to sell them.

I recently posted about how Sir James Dyson, a smart bloke who became a billionaire essentially through inventing a purple vacuum cleaner, has bought up £150 million worth of prime British farmland.

Has Sir James suddenly developed a fascination with Lincolnshire sugar beet at the ripe old age of 66? Well, he might have, but somehow I doubt it. What is much more likely is that Dyson knows that UK farmland is not necessarily liable to incur painful inheritance tax so he may be able to pass on his wealth without the Inland Revenue swiping a large share of his billions.

Better still, prime location British farmland continues to appreciate in value, so the Dyson legacy wins twice over.

Sometimes, money does indeed go to money.

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This concert was captured live at the Evelyn Hotel in Melbourne, Australia on June 20th 2003. Virgil Donati - Drums, Ric Fierabracci - Bass, Frank Gambale - Guitar.

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Could the touted recession get revised away?

It's well known that some commentators have been going on and on (and on) about the risk that Australia will sink into recession. Australia's GDP growth is bumbling along at a trend of 2.6% per annum or a seasonally adjusted 2.5% p.a. The bearish excitement reached fever pitch when in the last quarter Australia's GDP was again reported at just 0.6% for the 3 months to March, suggesting a possible forthcoming downward trend.

GDP growth

Source: ABS

Not a great result, but monetary policy takes time to see its full results, and, after all, 0.6% is still growth, even if it is not considered to be strong growth.

The March GDP result of 0.6% was quite some way lower than had been initially forecast, but I remarked at the time that there remains every chance that the figure could be revised upwards. And if that were to be combined with a half-decent result for the June quarter, we could yet come in at closer to 3% per annum than 2.5% for the year to June 2013, thus leaving us wondering what all the fuss was about.

Further, last week's inflation figures revealed one piece of gratifying news - the mining construction boom has not left Australia with an inflation problem, such as has been the case when booms have been experienced. Strip out the effect of the carbon price, and annualised inflation actually sits below the targeted 2-3% range (and thus ultra-low interest rates may be maintained).

Building activity

And so to the building activity figures released this month. Again, not a great set of results, although dwelling units commenced increased over the past year for both houses (+5%) and units (+21%) implying that the Reserve Bank's stated plan to stimulate dwelling construction may be beginning to take some sort of shape.

Dwelling units commenced

Source: ABS

In all the excitement of highlighting the soft year-on-year building activity figures, very little weight was given to the following note in the Building Activity release.

Significant revisions to this issue

• the total value of work done in Australia during December quarter 2012 has been revised upwards by $582.1m or 2.8%.
• the total value of work commenced in Australia during December quarter 2012 has been revised upwards by $1,790.9m or 8.8%. This was driven by revisions to non-residential commencements ($844.4m) and new other residential commencements ($621.5m).
• the number of dwelling unit commencements in the December quarter 2012 has been revised upwards by 3326 dwellings or 8.4%.

All revisions to the December 2012 quarter's figures and all of them in one direction: upwards. It's also interesting to note that actual capital expenditure undershot expectations in the March quarter in falling by 4.4%, so it will be very interesting to see what is reported for the June quarter on August 29. 

There may be implications for GDP growth which could result in upward revisions.

The Reserve Bank will have been heartened by a major correction to the currency, with the Aussie dollar having devalued markedly against the US dollar since the middle of April, as well as a decent rebound in the iron ore price.

GDP revisions

Detailed research by the Reserve Bank shows that over the past 15 years, Australia, just like our buddies from across the Tasman, has a tendency to revise its GDP figures in an upwards direction. 

Source: RBA

While the biggest absolute revisions to GDP tend to be driven by the highly unpredictable inputs such as change in inventories (by its very nature an "extremely volatile series") and corporate profits (ditto), the RBA's research shows that drivers of revisions in the past have also included household consumption, dwelling investment, engineering and construction, and non-residential building.

Summary

The RBA has highlighted that its real time GDP prints can be subject to significant revisions and that early estimates of GDP tend to undershoot the 'final' results to some degree.

"Revisions to early estimates of GDP growth have tended to be sizeable and in an upwards direction, though these characteristics are not unusual by international standards."

Of course, some will continue to highlight every risk facing our economy and every negative angle they can possibly find until the day they drop off: it's their job, after all, gloom-peddling being a mini-industry in itself these days. 

But keep any eye out for what happens over the next six weeks, especially now that we have seen building activity figures for previous periods revised upwards. Could we end up with GDP for the financial year of closer to 3% than 2.5% when the National Accounts are released in early September? There may yet be a surprise to the upside.

---

Played two games of cricket in the last two days, a full 200 overs of cricket in 48 hours. 

I used to do that sort of thing without batting an eyelid when I was 21 years of age, but today I feel closer to 121. Retained some form of old with the bat, a nice little 70-odd with a few lusty blows, and even rolled out 13 overs of military-medium pace, but the less said about my ground-fielding the better ('Tufnellesque' - could barely bend my knees by close of play yesterday).

I also got sledged several dozen times for "looking like Jesus", "don't give this bloke two lives", "the batter's been resurrected", "he's their saviour..." etc etc. Youngsters today...no respect (not that I had any either when I was a young pup, to be fair).

Truly a struggle to get out of bed this morning. Ouch.

Building activity - nothing too exciting

Value of building work done: up +6% y/y for new residential building.

Up a bit, but still not enough.



Source: ABS

Dwelling units commenced: up a promising 13% on a year ago, but scored a miss this quarter.

Possibly a volatile data set, but not a great result this time around.

Source: ABS

Private dwellings commenced: units and apartments +21% year-on-year, but the quarterly figures are all over the place and down sharply this quarter. 

Far less of an increase for houses, only being +5% y/y.

Source: ABS

Overall, you could make a case for there being an uptrend in activity over the past year, but it wouldn't be a particularly convincing one.

Residential building activity is especially vital for Australia for two reasons.

Firstly, because the Reserve Bank is relying upon an increase in activity to rebalance the economy away from mining construction.

And secondly, because Australian city population growth is so high, as detailed here by Michael Matusik:

"Those urban places that saw over 4,000 new heads (above ground) during 2012 include:

Melbourne (77,000 increase); Perth (65,000); Sydney (62,000); Brisbane (43,000); Adelaide (14,000); Gold Coast (11,000); Canberra (7,000); Sunshine Coast (5,000); Newcastle (5,000) & Townsville (4,000).

These top ten growth cities hold four-fifths of Australia’s population growth.  Our eight capital cities combined make up 70 per cent of the country’s population growth."

The great delevering begins?

The great delivering begins?

Plenty of financial commentators were on hand to forecast a "housing bust" after the last great property boom in Australia. They were wrong and have incorrectly continued to make those predictions for years now.

But while there has been no major crash in capital city house prices, the aggregate weakness of the current property market upturn to date may represent compelling evidence that Australians could be slowly beginning to delever and are once again saving more.

Ultimately when dwelling prices-to-income ratios become high there are only really three ways in which affordability can improve without assistance from cheap borrowing rates.

Firstly there can be a major real estate market crash, as was seen in countries such as Ireland. Major crashes are often preceded by irrational market speculation until the market turns and a crash is triggered.

Secondly, there could be a mini-crash which is followed by weak markets and a slow recovery. This happened in parts of England situated away from London around half a decade ago, and prices are yet to fully recover in many regions such as in the north-east of the country.

And thirdly, prices can flatline or continue to rise but only in a weak fashion and slower than the rate of household income growth. There is a good argument to say that this is what has been playing out in Australia’s major capital cities, although, as is its way, Darwin has the potential to be an outlier.

Phase 1 – leveraging up (1993-2005)

Between 1993 and 2005, as interest rates fell and lending standards were deregulated, households geared up like never before. As noted recently by Luci Ellis of the RBA, household debt levels have broadly plateaued since 2005.

Phase 2 – slow melt begins? (2006-2009)

While prices in some areas remained strong, on a nationwide basis Australians stopped gearing up and price-to-income ratios eased a little.

Phase 3 – financial crisis and intervention (2009-2010)

As the subprime crisis took hold in the US and Lehman Brothers collapsed, a number of global real estate markets fell into turmoil. Australia avoided this, in part through intervention, as low interest rates stimulated the markets and other manipulative tools such as First Home Owners Grants were implemented. Prices jumped across Australia in a short but quite powerful mini-cycle.

Phase 4 – slow delevering continues? (2011-)

Property prices fell on a nationwide basis by around 7-8% through 2011 and the first part of 2012. But interest rates have been dropped to record lows and a property market recovery is well underway over a period of more than 12 months now, which is clearly evident in the increase in housing loan approvals.

However, price gains to date have been significantly weaker than has been seen in previous cycles, which reflects the higher levels of household debt Australians are now carrying, and thus prices may fall in real terms over time.

The future downside of property markets (for example, when recessions hit, unemployment increases or when interest rates move higher) will likely be protected by the use of loose monetary policy where appropriate and perhaps the relaxing of foreign investor rules, although this will favour certain capital city markets disproportionately. Booming population growth in some cities will also underpin these same markets to some extent.

New trends

One of the trends which has been playing out globally is the increased impact of property investors on major real estate markets. Certainly in Australia, over the past two decades the level of investment mortgage debt has increased more than double the rate than that of the growth of mortgage debt for principal places of residence.

The proliferation of investors in part explains the strength of the Sydney and Melbourne markets in recent years.

The Brisbane and Adelaide markets have been significantly weaker over the past 5 years, and may be representative of the gradual delevering. Brisbane has very strong population growth which should keep the market buoyant enough. Notes the ABS:

"Between 2011 and 2012, the population of Greater Brisbane increased by 2.0% (43,300 people), which was the second fastest growth rate of the capital cities, behind Greater Perth (3.6%)."

Some commentators have been tipping Adelaide to outperform for the last 5 years, but it has not happened as the chart below shows. While the short-term is inherently uncertain, over the long run I believe Adelaide will be a weaker city market than, say, Sydney, due to Adelaide's weaker long-term population growth and dwelling supply meeting demand. Notes the ABS:

"At 30 June 2011, the estimated resident population of South Australia was 1.64 million people, which represented 7.3% of the total Australian population. In the ten years to June 2011, the state's population increased by 126,500 people, or 8.4%. This was the slowest growth of all states and territories, equal with Tasmania."

The current property cycle continues, with all capital cities showing price gains, but Adelaide has been the worst performer of all the capital cities over the past 12 months. Prices in Adelaide remain all but flat in spite of record low interest rates. In contrast, Sydney has shown price gains of more than 8% and Perth more than 9% in this cycle, and Sydney's price gains look likely to continue. 

In summary, if you are expecting to benefit from households gearing up on mortgage debt ahead of the rate of income growth you are likely to be disappointed, because the great leveraging up took place years ago.

You may, however, move ahead, if you can anticipate the property markets and dwelling types which will be favoured by investors as well as homebuyers in the future. Broadly speaking, established medium-density dwellings and well-located houses in supply-constrained suburbs of the four major capital cities will likely be the best bet. 

These markets will be better protected in downturns too as as foreign investment rules are relaxed, with investors surging back to these markets each time a property market recovery is demonstrably underway.

Some say that promoting investing in suburbs close to the capital city centres is old-fashioned advice. Far from it - if you want to outperform the market in the future you need to be in the markets which will attract flows of domestic and international investment capital, because this may be one of the greatest drivers of future property price growth.

Why would price growth be stronger in remote regional centres, fringe/outer suburbs or small cities when the great leveraging up began two decades ago and finished in 2005? (it won't).

Storm lifts but too late for Australia

A typical summer day in northern England, with Aussie cricketers unfortunately thwarted by the weather...

The iron ore price rebound

Anyone who's worked in the resources sector will know that commodity price forecasts should generally be taken with a pinch of salt, and the cleverly worded day-to-day commentary (guesswork) an even larger pinch of salt. 

But it is interesting to note the tremendous turn-around in fortunes for the volatile iron ore spot price, particularly as prices were supposedly heading lower before a huge rebound which is approaching a 50% appreciation in price.

Today the spot hit US$131.90/tonne, a vast improvement on  the dismal depths seen in the third quarter of 2012 when the spot price fell below US$90/tonne.

Combine this tremendous rebound with an Aussie dollar correction from above 106 US cents to 91.7 cents and this equates to a A$ price of around $144/tonne.

Wow. 

Great news for the Aussie economy: what a lot can change in less than 12 months, eh?. 

Of course, it is something of a risky business being so highly leveraged against one manic-depressive commodity price as well as a similarly volatile currency, but naturally, it's all 'happy days' and sweetness and light when things are working out in your favour. 

Let's hope that things stay this way...

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While on the subject of volatility in day-to-day prices, it's also interesting to note that RP Data has Sydney dwelling prices up by more than 4% in fewer than 6 weeks.

Hmm. So much for those "falling house prices" and "more properties being sold into a falling market" being reported in May (in the face of 80% auction clearance rates and 85%+ in the inner western suburbs).

Nationally RP Data has prices up by more than 1% in July, but much of that is really only offsetting falls reported in May. 

If inflation prints low net week (say, 0.6% for the quarter or less) then interest rates will likely be cut again in August and there now appears to be a genuine risk that Sydney's property markets will be sent into overdrive.

Sydney's real estate problems are multi-faceted and well documented: a booming population of 60,000 extra persons per annum, construction too slow, planning restrictions, NIMBYism, a disproportionate level of investor activity and appreciating land prices, to name but a few of the issues.

Sydney stands to be a likely beneficiary of the weak response to interest rate cuts elsewhere - in cities such as Adelaide, prices have stalled over the past half decade despite the recommendations to buy property there from yield-seeking property commentators, while Brisbane, Canberra and most regional markets have not been much cop either, and show few signs of really picking up to date. 

It very much looks like a long, slow, bleeding decline for many parts of the country - dropping interest rates fired up activity once through 2009-2010, but it doesn't look as though there will be much response a second time.

Futures markets are already pricing an August interest rate cut to 2.50% as more likely than not (a 64% chance of a cut on August 6), and indeed, they are all but pricing in two further cuts by March 2014.

It's overwhelmingly investors who are pumping up the Sydney property market, with prices breaking to record new heights.

Nationally, however, prices still remain 2% below their previous 2010 peak and don't seem inclined to be heading a whole lot higher at this juncture.

Dwelling prices from the RBA chart pack (a bit of a time-lag in the data here: it will be updated again soon):

And copied below is the futures implied yield curve, showing the cash rate as likely to be headed towards 2.25% by March next year. 

Record low levels as the Reserve attempts to rebalance the economy away from mining construction and towards dwelling construction.

Interesting times...

Source: ASX

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The category 3 heatwave continues in the UK.

Loving the cricket live from Lords, England making 361 in the first dig with another century from Ian Bell.

Now, Australia's turn...

Barbecue of the shorters

An ongoing complete shocker continues for those who have continued to advocate shorting Australia's banks.

There has been a long-held theory from bearish commentators that in order to effectively short the Australian property market, 'investors' should instead short the major banks.

How has that played out? Well, in a nutshell, it could barely have gone any worse.

Commonwealth Bank (CBA) hit a record high share price today of $73.86.

Since the recently renewed call to short the banks, CBA's share price is up nearly 8% this month and almost 20% this year alone. The stock valuation has continued an astonishing trend, tripling in price since a low of around $24 during the global financial crisis.

Not only have the banks continued to deliver outstanding dividends, the capital growth has been electric too.

Even at today's elevated share prices, with a market cap of nearly $120 billion, the bank is delivering a dividend yield of close to 5%.

But as I discussed in a recent post, there is not much defensive value in the banks at these prices for new investors.

And, for those trading the stock rather than holding for the long haul, market signals from Japan (the Nikkei being on a miserable losing streak) are concerning.

Source: ASX

[Disc: I'm a long-term holder of CBA and two other major banks]

RP Data: Sydney property market in rude health

Weekly report from RP Data.

Auction clearance rates up to boom time levels of 80.3% in Sydney. Melbourne strong at 71.6%. The two major capitals make up the overwhelming majority of auctions in Australia.

Stock on the market has fallen across Australia. Why? More investors buying who don't have existing properties to sell. 

Across the capital cities, clearance rates continue to improve.

Houses in Canberra are selling fast, but I remain unconvinced that Canberra is a superior long-term bet.

The workforce may be reduced and there are great swathes of land which may be released if planning restrictions are ever eased. And indeed the Government announced yesterday that they will release 4,800 residential plots in 2013/14, which is a red flag for dwelling prices staying strong.

Better opportunities elsewhere in my opinion.

The fastest selling property types are Sydney apartments (34 days) and now Sydney houses (35 days).

I'd be surprised if we weren't discussing price gains in Sydney apartments by election time.

Source: RP Data

Most affordable suburbs have outperformed

Hot sunny day in London where I've been attending auctions. Quite clear that in this part of the world the quality suburbs of London remain smoking hot, but the areas away from London are still struggling to gain momentum even after half a decade, although there are signs at long last of an upturn. Thanks to the UK Government's 'Help-to-Buy' scheme, Bovis Homes today reported a 60% y/y surge in sales as the market is steadily being re-inflated.

Meanwhile back in Australia, RP Data releases figures which show that the most affordable 25% of capital city suburbs have outperformed the remainder of the market over the past decade.

Source: RP Data

It's difficult to avoid make sweeping generalisations here, of course, but this is broadly what we might expect to see at this stage in the cycle, given the below:

The official cash rate in Australia threatened by 2008 to increase back towards the levels seen pre-1993 (it was hiked by 25bps to 7.25% on 5 March 2008) which was the year of the introduction of the target inflation rate. But since that date, the cash has plummeted to record lows. 

In fact the cash rate in Australia has fallen from an eye-watering 17.50% in January 1990 to a record recent low of only 2.75% on 7 May 2013. With households able to source incredibly cheap credit at low mortgage rates (as low as 5% or even less today), this has lead to easily the most material gearing up in the history of Australian households.

I'd suggest that anyone who looks at this chart and thinks that homebuyers Australia-wide are preparing themselves for a major and sustained boom in credit growth might be ever-so-slightly optimistic. 

We know that Australia, just as in many other countries, saw banks and lenders dishing out 100% mortgages in the period leading up to 2008, so there is likely to be some bad news in the post in the more affordable segments of the market as and when interest rates revert towards the historical mean.

As noted by RP Data, the premium sector of the market tends to be the most volatile; whilst for the past two cycles, the most affordable properties have been the most stable. The problem here is that their chart only goes back to 1998 and therefore does not go back far enough to show what happens to lower demographic suburbs when interest rates rise: traditionally - and if overseas markets are a useful guide - prices get clobbered as mortgage stress is experienced. 

The good news for property die-hards is that Australia has to date been perhaps unique in developed world economies. We have not experienced a recent major property downturn in the capital cities and we haven't had a recession for some 22 years and counting. And long may that economic record continue. 

However, property is not a magical risk-free asset class and all countries experience property downturns - and when this happens, markets with a strong proportion of investors are likely to be those which hold up best. I wouldn't want to be holding property in the cheapest markets where people tend to live through necessity rather than through choice. 

Instead, I have a strong preference for markets where investors look to at the first sign of a recovery and where foreign funds will flood - close to the centre of the major capital cities.

Some properties in affordable areas will be represent good investments, but be very wary of properties with seemingly attractive high yields and that are in low demand. I've seen properties for sale here in England in small towns for the price of just one pound, and you've probably heard of similar stories from regions of the US. 

Finding new hotspots

In recent months I've had some long, drawn-out  discussions with an experienced property buyers agent who is in the market daily about this very topic. 

Naturally, I understand the theory that instead of buying where everyone else is rushing to buy, you may wish to buy in a regional centre where 'no-one' is buying - in the hope that they might soon do so because of, for example, new government infrastructure, projected employment growth or perhaps a nearby mining project.

The problem with this is that when people migrate to an area to work, they very often do not buy, they rent. And when they do buy (if they remain in the region), they do so to settle based on their earnings which tend to be in line with others in that area.  

The only way in which prices are generally going to be pushed higher and ahead of wages growth is if you can anticipate a swathe of speculation which itself generates a larger influx of accelerating debt - and if you get that in outer areas and regional centres, you'll usually get new home building, which increases supply and masks the actual price increases (showing instead only median price increases). 

Mining towns exhibit many of these traits - price increases can often be fuelled by investors (who may profit if they get their timing right - risky); those who work in the town often save their money and instead invest it in property in the capital cities. 

When will this property cycle end?

RP Data shows that all capital cities have recorded prices gains over the past 12 months, values being  pushed up by the record low interest rates. Gains have been strong in Sydney, Darwin and Perth, but weak in Adelaide and Brisbane.

When will this cycle end, in the unlikely event that it ends coterminously in all cities? Impossible to say and anyone who claims to know is fibbing. 

It could be in just a couple of months' time when Mr. Rudd calls an election. It could be in 2014 as the RBA starts to hike interest rates. It could be later in 2014 as unemployment starts to ratchet up (job losses also hurt affordable market sectors disproportionately, so let's hope this doesn't happen in Australia). Or perhaps the cycle will even run for 18 months or more.

In any case, whenever Australia's next significant downturn occurs, expect the broad middle market in supply-constrained capital city suburbs to hold up best. They usually do.

Sydney still scorching - 78% clearance rate (again)

Lest there was any doubt about the hot Sydney property market continuing into the chilly winter months...

Another near-record 78% clearance rate today to follow last weekend's 78%, which means that price gains might be expected to continue well into the coming months.

A bit of a dilemma perhaps emerging for the RBA, for an interest rate cut is probably needed to stimulate construction, yet this risks sending property markets such as Sydney into overdrive. 

It may be a sacrifice they have to make, but they must also be wary given that Sydney prices are already well above previous record highs.

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On the subject of Sydney, an amazing 16-41 win for the British Lions. 

I have to admit that no matter how long I live in Australia, and despite being an Aussie citizen, I'll always support the Brits - can't change that!

Ashes cricket starts on Wednesday and it is roasting hot over here near London. Can't wait...

US stocks charging on improving data

The Dow has has added more than 130 points at the time of writing and the S&P 500 is up by around 1.2% to above 1,700 as healthier manufacturing data was released in the US. 

Aussie stock futures have also climbed strongly which will once again throw a spanner in the works of those who called shorting the market yesterday.

That said, ANZ's Shane Oliver, who always seems to take a sanguine view, quite rightly noted that there is a fair risk of a market correction in the next two months (so much uncertainty about the US stimulus plans for one thing) although Oliver sees the index as being higher at the year's end. Sounds like a sensible viewpoint to me.

At this stage the Federal Reserve believes that low inflation could hold back the US economy and thus it will continue with its $85 billion monthly bond purchases in order to stimulate activity...for now.

There has been a little run of good news in the last day or two. The US economy grew more than had been expected in the second quarter, and stronger PMI manufacturing data from Europe as well as US manufacturing data improving growing at the fastest pace in two years. This follows improving unemployment data in the US.

The European Central Bank President Mario Draghi seems to believe that Europe is 'through the worst' of its many problems.

The recent flow of good news has seen a colossal amount of funds flowing into US equities, more than $38 billion into ETFs last month, the most since December 2008, sending the index up by 5% in July alone. 

Meanwhile, it has sure been a long, slow haul for Bloomberg's consumer comfort survey, yet it has now reached its best reading in five years as house prices, stock valuations and economic data all improve.

Source: ETF

Great news if global economies and confidence are picking up. However, stand back and wait for the stock market to whipsaw when the plug on Fed stimulus is eventually pulled....

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Long hot summer day over here in England as Australia take control of the Third Ashes Test in Manchester, captain Michael Clarke leading the way with 125 not out.

That should put an end to the silly "ten-nil" predictions at least. As Geoffrey Boycott said on TMS during the First Test "anyone who predicted ten-nil is just idiotic". Not only did Australia come within a hair's breadth (or a Haddin snick) of winning the First Test, they are now fully in command of the Third Test.

The flip side to this is that although the wicket may increasingly be taking spin, it seems to be a good batting pitch, so Cook will know that England are potentially just one good batting performance away from retaining the Ashes.

I've always felt that England should win this series but that Australia could definitely surprise them Down Under. 

Losing Pattinson, however, could be a real body blow for the Aussies - I was at the 'G' a couple of years ago when he blasted away the Indians and you could only be impressed with his potent combination of blistering pace and accuracy.

England's first choice XI is strong, but perhaps they don't have great strength in depth. Swann may be their trump card.

Hopefully, the return series will be all square going into Sydney so I can catch up with Cookie for a shandy during a live Aussie Ashes series. Last time we caught up for a beer in Sydney it was the Poms who were on the receiving end of the five-zip taunts! We didn't hook up in 2010 as Cookie was busy shattering all-comers batting records.

For a chang- up I've got tickets for Adelaide and Sydney Tests this time around, instead of my usual Brisbane trip. Bring it on!