Market appears to have bounced back from the recent short-term oversold position.
However, it started to show cracks again.
Fundamentally, the global economy is weak. US, UK and Europe countries remain in fragile state of economy. I see no near-term solution to this deep trouble with debt.
If the government around the world start cutting into their spending, it spells recession.
If the government continue to leave interest rate at virtually zero, the economy will be okay on life support for now but it will create mass inflation in the long run.
It is probably that there will be hyper-inflation.
This is exactly what you experience in the asset market right now. Both US treasury and gold price rally at the same time. One would have expected that the return on these two asset should be the opposite of each other.
It means that shorter term environment is deflationary whilst inflationary in the longer term induced by the mass amount liquidity to chase too little goods once economy starts to recover.
One conclusion this does not look good either way.
Friday, June 25, 2010
Saturday, April 10, 2010
From safety to greed
It is amazing to experience the roller coaster ride from a credit induced recession.
Investors sentiment went from concerning return of capital to chasing return on capital again mere 18 months after the arguably most servere economic downturn of all time.
Many simple lesson can be learnt during the process:
1. How quickly people can forget about all the gloom and doom in the midst of the global financial crisis.
2. Unlevered investor has the upper hand to sit out the trough during recession when market goes into disarray while the levered ones do not have such luxury
3. No asset class price can continue an upward trend indefinitely and vice versa regardless of the fundamentals.
4. The entry price remains the single biggest determinant of the resulting return on asset.
5. Market can stay irrational longer than one can stay solvent.
Investors sentiment went from concerning return of capital to chasing return on capital again mere 18 months after the arguably most servere economic downturn of all time.
Many simple lesson can be learnt during the process:
1. How quickly people can forget about all the gloom and doom in the midst of the global financial crisis.
2. Unlevered investor has the upper hand to sit out the trough during recession when market goes into disarray while the levered ones do not have such luxury
3. No asset class price can continue an upward trend indefinitely and vice versa regardless of the fundamentals.
4. The entry price remains the single biggest determinant of the resulting return on asset.
5. Market can stay irrational longer than one can stay solvent.
Thursday, April 1, 2010
A deeper look into housing affordability
According to the 6th annual demograhia international housing affordability survey, Australia capital cities possess 22 of the 62 severely unaffordable markets in this years survey.
The survey uses median house price to gross annual median household income as the main metric to measure the housing affordability.
Sydney ranked second serverly unaffordable house market with a median multiple of 9.1, Melbourne at 8.0, Adelaide 7.4, Darwin 7.1, Perth 6.9, Hobart 6.8, Brisbane 6.7 and Canberra at 5.8.
The report attributes the reason for the servere housing unaffordability of Australian major cities to be "plan-driven" land use regulation instead of more responsive "demand-driven" process.
The report compares Sydney and Melbourne ("plan-driven" land use regulation) to Atlanta and Dallas-Fort Worth in the United States ("demand-driven" land use regulation). The statistics presented in the report were mind-blowing.
If you are unfamiliar with the median multiple metric described above. Try the % of gross annual income used to mortgage on median house price.
If you are still not convinced, take a look at the monthly mortgage payment.
The numbers above speak for itself. The most ironic thing about the comparison is the following:
So what does this tell you about demand for housing in two cities with significantly higher population growth than Sydney and Melbourne?
It speaks pretty loud and clear to me that Australia house market has been in an increasingly dangerous bubble territory owing to the lack of affordable land due to the prescriptive and "plan-driven" adminstrative process.
To share some personal experience with you. I contacted the Kogarah City Council enquiring about criteria on land sub-division in early February 2010. The following was what happened until I received a response in mid-March 2010.
a) I called the council on one Friday afternoon to enquiry about sub-division of land. I was told the person in charge was busy at the time of my call.
I left my contact details and was promised a call back latest by the following Monday.
b) no response until the following Wednesday. I sent an email detailing my enquiry. The email was not replied one-week later informing that the person in charge was on leave.
c) Sent a reply email to request to speak to someone else in the Kogarah council. It was told that the person on leave is the only one knows anything about the sub-division of land. Therefore, I need to wait for the person to come back from holiday. I was also told I would be contacted when the person returns. A date was provided on when the person will return.
d) One week after the supposing return date, there was still no response provided. I had to send an email yet again to see when the council can provide a response.
e) one day later the person called. The phone conversation lasted less than 60 seconds.
A 60-second phone conversation regarding the criterias on sub-division of land took a local council over 6 weeks to respond. You can imgaine how efficient the government works. (Be sure to check my previous post on difference between prviate and public sector).
One more important thing to note about the prescriptive land use regulation.
This is not the "years of supply" of land that matters but the supply of affordable land.
The survey points out:
By the way, the report defines affordable as having a median house price to gross income ration of 3.0 or below. This figure was last seen in Australia in 1980s. This figure will be an insult to many experts in the property market.
The survey uses median house price to gross annual median household income as the main metric to measure the housing affordability.
Sydney ranked second serverly unaffordable house market with a median multiple of 9.1, Melbourne at 8.0, Adelaide 7.4, Darwin 7.1, Perth 6.9, Hobart 6.8, Brisbane 6.7 and Canberra at 5.8.
The report attributes the reason for the servere housing unaffordability of Australian major cities to be "plan-driven" land use regulation instead of more responsive "demand-driven" process.
The report compares Sydney and Melbourne ("plan-driven" land use regulation) to Atlanta and Dallas-Fort Worth in the United States ("demand-driven" land use regulation). The statistics presented in the report were mind-blowing.
In Sydney and Melbourne, the median mutiple is 9.1 and 8.0 respectively. While for Atlanta and Dallas-Fort Worth is 2.6 and 2.7 respectively.
It takes 6.25 to 14.5 years for the residential land to be designed for development and the completion of the first home in Australia due to the more prescriptive use of land regulation.
The same process in Atlanta and Dallas-Fort Worth takes only 1 to 1.5 years as a result of demand driven process.
If you are unfamiliar with the median multiple metric described above. Try the % of gross annual income used to mortgage on median house price.
Sydney 57.4%
Melbourne 50.4%
Dallas-Fort Worth 13.4%
Atlanra 16.8%
If you are still not convinced, take a look at the monthly mortgage payment.
Sydney $2,968
Melbourne $2,521
Dallas-Forth Worth $790
Atlanta $680
The numbers above speak for itself. The most ironic thing about the comparison is the following:
Population growth in Dallas-Fort Worth was much faster than Sydney which is now nearly 50% larger than Sydney.
Atlanta population is now 50% higher than Melbourne and more than 25% greater than Sydney.
Yet the median multiple for Dallas_Fort Worth was 3.5 in 1981 and it dropped to 2.7 by 2008. For Atlanta, the median multiple remained the same at 2.6.
So what does this tell you about demand for housing in two cities with significantly higher population growth than Sydney and Melbourne?
It speaks pretty loud and clear to me that Australia house market has been in an increasingly dangerous bubble territory owing to the lack of affordable land due to the prescriptive and "plan-driven" adminstrative process.
To share some personal experience with you. I contacted the Kogarah City Council enquiring about criteria on land sub-division in early February 2010. The following was what happened until I received a response in mid-March 2010.
a) I called the council on one Friday afternoon to enquiry about sub-division of land. I was told the person in charge was busy at the time of my call.
I left my contact details and was promised a call back latest by the following Monday.
b) no response until the following Wednesday. I sent an email detailing my enquiry. The email was not replied one-week later informing that the person in charge was on leave.
c) Sent a reply email to request to speak to someone else in the Kogarah council. It was told that the person on leave is the only one knows anything about the sub-division of land. Therefore, I need to wait for the person to come back from holiday. I was also told I would be contacted when the person returns. A date was provided on when the person will return.
d) One week after the supposing return date, there was still no response provided. I had to send an email yet again to see when the council can provide a response.
e) one day later the person called. The phone conversation lasted less than 60 seconds.
A 60-second phone conversation regarding the criterias on sub-division of land took a local council over 6 weeks to respond. You can imgaine how efficient the government works. (Be sure to check my previous post on difference between prviate and public sector).
One more important thing to note about the prescriptive land use regulation.
This is not the "years of supply" of land that matters but the supply of affordable land.
The survey points out:
The prescriptive land use regulation provides land seller and buyer the reliable information on where the development will occur. This tends to significantly raise the price of land and eliminates the supply of affordable land.
By the way, the report defines affordable as having a median house price to gross income ration of 3.0 or below. This figure was last seen in Australia in 1980s. This figure will be an insult to many experts in the property market.
Tuesday, March 30, 2010
Difference between private and public sector
This is one line I think it is so true. I quote from a blog called Calafia Beach Pundit:
This is exactly why the budget deficit will not go down but up. There is no notion of cutting costs in a public sector despite all the talks and spins around rein the spending.
The private sector is all about survival: if your revenues drop, you have to cut your spending. The public sector is all about politics: your survival and prestige is a function of the size of your budget, so you never consent to a cut. Instead, you always ask for more and more spending authority, no matter what.
This is exactly why the budget deficit will not go down but up. There is no notion of cutting costs in a public sector despite all the talks and spins around rein the spending.
Sunday, March 28, 2010
Stimulus may not be so stimulating after all
Do you know that stimulus may not work the way we expect. It can and in history it had negative impact on GDP growth defying its very intention.
During early 1990s, Sweden adopted aggressive fiscal expansion to revive the economy. Guess what happened? Private consumption and business investment fell sharply and economic growth was pushed into negative territory.
I suspect that the suddent increase in public spending crowded out the private spending.
Stimulus may have worked this time. However, it didn't solve the very pressing issue which brought us into this mess at the first place i.e. excessive level of credit and credit growth.
Imagine when the world reaches a debt level such that the lowest level interest rate will not prompt household to borrow and spend money. Many gurus called it the "zero" hour. Some argued that we have already had a tasteful of it.
Can you really imagine that? Well there is no need to imagine. Japan was and still is a perfect example.
During early 1990s, Sweden adopted aggressive fiscal expansion to revive the economy. Guess what happened? Private consumption and business investment fell sharply and economic growth was pushed into negative territory.
I suspect that the suddent increase in public spending crowded out the private spending.
Stimulus may have worked this time. However, it didn't solve the very pressing issue which brought us into this mess at the first place i.e. excessive level of credit and credit growth.
Imagine when the world reaches a debt level such that the lowest level interest rate will not prompt household to borrow and spend money. Many gurus called it the "zero" hour. Some argued that we have already had a tasteful of it.
Can you really imagine that? Well there is no need to imagine. Japan was and still is a perfect example.
Hot potatos will cool down eventually
Following my last post regarding Australian property market being over-valued by many metrics such as price to rent ratio, price to disposable income ratio etc.
For those who thinks that property price does not decline because the land cannot be created hence making it scarce resource. Here is the hard evidence for a second thought.
Japan's land prices at new low. The land price is currently at 1/3 of what they were in 1991 after Japan's bubble economy peaked. No one can argue the scarcity of land in Japan, one of the most densely population place on earth.
Yet land price fell long and hard. More importantly it is still falling.
Think twice when many experts put their cases forward regarding the fundamentals of the Australian property market. Think what happen to Japan.
Japan is a prime example of what happens after accumulation of mountains of debt. At some point, the economy will snap. The harder the market streams ahead itself. The hard and longer it falls from the top.
Nothing goes up forever vice versa. Each individual have different level of risk tolerance.
However, one thing is common everyone hates to lose money. So don't get yourself into that position.
For those who thinks that property price does not decline because the land cannot be created hence making it scarce resource. Here is the hard evidence for a second thought.
Japan's land prices at new low. The land price is currently at 1/3 of what they were in 1991 after Japan's bubble economy peaked. No one can argue the scarcity of land in Japan, one of the most densely population place on earth.
Yet land price fell long and hard. More importantly it is still falling.
Think twice when many experts put their cases forward regarding the fundamentals of the Australian property market. Think what happen to Japan.
Japan is a prime example of what happens after accumulation of mountains of debt. At some point, the economy will snap. The harder the market streams ahead itself. The hard and longer it falls from the top.
Nothing goes up forever vice versa. Each individual have different level of risk tolerance.
However, one thing is common everyone hates to lose money. So don't get yourself into that position.
Friday, March 26, 2010
Australia residential property
The following is a list of signs manias and financial crises by Edward Chancellor from GMO investment management.
1. Great investment debacles generally start out with a compelling growth story.
2. Blind faith in the competence of the authorities.
3. A general increase in investment is another leading indicator of financial distress. Capital is generally misspent during periods of euphoria. Only during the bust does the extent of the misallocation become clear.
4. Great booms are invariably accompanied by a surge in corruption.
5. Strong growth in the money supply is another robust leading indicator of financial fragility. Easy money lies behind all great episodes of speculation from the Tulip Mania of the 1630s – which was funded with IOUs – onward.
6. Fixed currency regimes often produce inappropriately low interest rates, which are liable to feed booms and end in busts.
7. Crises generally follow a period of rampant credit growth.
8. Moral hazard is another common feature of great speculative manias. Credit booms are often taken to extremes due to a prevailing belief that the authorities won’t let bad things happen to the financial system. Irresponsibility is condoned.
9. A rising stock of debt is not the only cause for concern. The economist Hyman Minsky observed that during periods of prosperity, financial structures become precarious.
10. Dodgy loans are generally secured against collateral, most commonly real estate.
Australian residential property has been a darling asset class for investor since financial crisis. Unlike many other developed nations, the resilience of the property sector has fuelled another round of significant property price thanks to government intervention.
I have long argued that the commentary about the supply and demand imbalance is not a sufficient condition for property boom. More importantly the long rising price is greatly owing to the deregulation of the banking sector and availability of cheap debt.
Australian property market has yet to reach the signs of mania and bubble described above. However, it is certainly on its way there.
A very simple sign of over-exuberance comes from observations in daily life.
Many of baby boomers such as my uncle believe that equity is very risky and property is safe and only goes up and never comes down.
Another example is that some mechanic I know has turned away from his business to focus on property investment.
It was no surprising for baby boomers to believe that property price won't drop as this has largely been their experience up to date. It is not uncommon to extrapolate future from historic experience.
However, headwinds are ahead of us not behind us as many believes after GFC. The reason is two-folded.
1. As baby boomers come to retirement, the spending will significantly reducing coming off the peak of their wealth and income phase. This will place significant pressure on property prices.
2. Level of household debt. Australian household debt has reached unprecedented level despite the GFC. In some sense, Australia households are in worse position than U.S. and U.K as they are yet to realise the consequence of the level of their debt.
So who will be winners and losers from this property mania.
In the short term, there will be a wealth transfer from the later generations to baby boomers i.e. gen X and Y to baby boomers.
In the long run, some future generation will benefit from property prices declines. The million dollar question is which future generation.
1. Great investment debacles generally start out with a compelling growth story.
2. Blind faith in the competence of the authorities.
3. A general increase in investment is another leading indicator of financial distress. Capital is generally misspent during periods of euphoria. Only during the bust does the extent of the misallocation become clear.
4. Great booms are invariably accompanied by a surge in corruption.
5. Strong growth in the money supply is another robust leading indicator of financial fragility. Easy money lies behind all great episodes of speculation from the Tulip Mania of the 1630s – which was funded with IOUs – onward.
6. Fixed currency regimes often produce inappropriately low interest rates, which are liable to feed booms and end in busts.
7. Crises generally follow a period of rampant credit growth.
8. Moral hazard is another common feature of great speculative manias. Credit booms are often taken to extremes due to a prevailing belief that the authorities won’t let bad things happen to the financial system. Irresponsibility is condoned.
9. A rising stock of debt is not the only cause for concern. The economist Hyman Minsky observed that during periods of prosperity, financial structures become precarious.
10. Dodgy loans are generally secured against collateral, most commonly real estate.
Australian residential property has been a darling asset class for investor since financial crisis. Unlike many other developed nations, the resilience of the property sector has fuelled another round of significant property price thanks to government intervention.
I have long argued that the commentary about the supply and demand imbalance is not a sufficient condition for property boom. More importantly the long rising price is greatly owing to the deregulation of the banking sector and availability of cheap debt.
Australian property market has yet to reach the signs of mania and bubble described above. However, it is certainly on its way there.
A very simple sign of over-exuberance comes from observations in daily life.
Many of baby boomers such as my uncle believe that equity is very risky and property is safe and only goes up and never comes down.
Another example is that some mechanic I know has turned away from his business to focus on property investment.
It was no surprising for baby boomers to believe that property price won't drop as this has largely been their experience up to date. It is not uncommon to extrapolate future from historic experience.
However, headwinds are ahead of us not behind us as many believes after GFC. The reason is two-folded.
1. As baby boomers come to retirement, the spending will significantly reducing coming off the peak of their wealth and income phase. This will place significant pressure on property prices.
2. Level of household debt. Australian household debt has reached unprecedented level despite the GFC. In some sense, Australia households are in worse position than U.S. and U.K as they are yet to realise the consequence of the level of their debt.
So who will be winners and losers from this property mania.
In the short term, there will be a wealth transfer from the later generations to baby boomers i.e. gen X and Y to baby boomers.
In the long run, some future generation will benefit from property prices declines. The million dollar question is which future generation.
Subscribe to:
Posts (Atom)