UK Property Market – February 2010 Update

I am still yet to buy myself a flat or house even though the ownership of one is important to my retirement investing strategy in the longer term. I have now for the time being even stopped looking on the internet at house prices in the area that I am interested. The reason for this is that in my opinion UK house prices are still overvalued by a huge margin. Last week the Nationwide reported that average house prices had fallen from £163,481 to £161,320, a monthly fall of £2,161 or 1.3%. On an annualised basis house prices in absolute terms are still up annually by 9.2% and if I look at real (after inflation) returns they are still up by 6%.

Buying Gold

As I postulated here I made the decision on Wednesday to buy more gold. As with the last time I bought gold, the buy was not big at 0.6% of my total retirement investing assets. The trade was made by moving cash to gold rather than with new money. At the close on Friday gold had reached £733.01 (Note: I have a gold priced in GBP widget on the right hand side bar widget of this blog as I follow it closely) which means that even allowing for buy/sell spreads and trading costs I am up on this buy decision by 2.5%.

A home for cash

UK Retail Prices Inflation (RPI) is currently running at 3.7%. This means that if you are a UK basic rate taxpayer that to just stand still you need to be earning interest of 4.63%. It’s even worse for higher rate taxpayers, you need to be earning 6.17%.

So what’s available out there? A quick look at MoneySavingExpert shows that the best ‘clean’ account, which is one that plays no tricks like introductory bonuses or withdrawal penalties, is paying interest of 2.5%.

This means that even with this account the basic rate taxpayer is every year is losing 3.7% - 2.5% + 2.5% x 20% tax = 1.7% of purchasing power on their cash holdings and the higher rate taxpayer is losing 3.7% - 2.5% + 2.5% x 40% tax = 2.7%. So if you are a prudent saver you are being punished while if you are in debt up to the eyeballs your debt is gradually being eroded by the wonderful [sic] inflation that we are seeing. This is thanks to the Bank of England base rate of 0.5% plus the great management that the government is showing.

I’ve protected myself as well as I can by having a significant portion (17.6% of total assets) of the low risk (cash and bonds) portion of my current low charge portfolio in NS&I Index Linked Savings Certificates which is giving me a real positive return. Unfortunately a new Issue of these has not been offered for some time and so I can’t put any more money here.

A little over 3% of my cash is sitting offshore in a ‘clean’ account paying interest of 4.25%. I’m losing money in real terms daily however at least it’s better than the best UK ‘clean’ account rate of 2.5%.

The remainder is in a ‘clean’ UK based account paying 2.1% interest. This is losing significant purchasing power however I feel powerless to do anything about it. I see no option at the moment but to sit tight and hope that one day my prudence is rewarded. Does anyone have a better option?

As always DYOR.

US Inflation – February 2010 Update

The above chart shows the Consumer Price Index (CPI-U) to January 2010 courtesy of the Bureau of Labor Statistics. Year on year inflation has fallen from 2.7% in December ’09 to 2.6% in January ‘10. Annualising the last 3 months and inflation is running at 0.0% and annualising the last 6 months has inflation at 1.2%. It looks like the US has their deflation ‘problems’ under control for now.

I have taken the liberty of dividing the chart into two sections. The first red section runs from 1871 to 1932 and the second blue section runs from 1933 to present day. I chose this break point as during 1933 the US officially ended their link to the gold standard. I think this chart demonstrates a point that government will always choose to inflate debt away at the expense of savers if given the chance. They could not do this under the gold standard.

To demonstrate this arithmetic mean inflation rates have been:
1871 to 1932 CPI = 0.5% with deflation being a regular occurrence.
1933 to Present CPI = 3.7%
The CAGR CPI from 1871 to present has been 2.1%.

UK government bond yields continue to rise – February update

I continue to monitor the 10 year government bond yields of three countries (Australia, United Kingdom and the United States) to try and understand when interest rates may start to rise with my datasets shown in today’s chart.

Since June of 2009 the 10 year Australian bond prices have actually fallen by a relatively small 0.5%. In contrast the US 10 year has risen by 7.4% and the UK 10 year by 13.8% to be 4.20% today.

I’m going to update why I think the United Kingdom bond (gilt) yields continue to rise:
Reason 1. The Bank of England have now made clear that they are going to hold interest rates at 0.5% even though inflation is well above target. They have even mentioned that they could yet perform more quantitative easing (QE) which must be inflationary. In the letter to the Chancellor the Bank of England claims that ‘the direct effect of the short-run factors on inflation should be only temporary’ and that ‘although it is likely to remain high over the next few months, inflation is more likely than not to fall back to target in the second half of the year...’. I can’t help but feel that the Bank will ignore their inflation target of 2% and that it’s a case of do as I do not as I say given that the Bank of England’s pension fund has 88.2% of its assets devoted to Index-linked gilts. The market is starting to think the same thing and so to ensure a sensible real (after inflation) yield the prices have to fall and yields rise.

Reason 2. Alistair Darling has forecast government borrowing to be £178 billion. On Thursday last week yet another record was set when it was announced that in a month when tax receipts usually flood in the government still had to borrow £4.34 billion. This is the first time since 1993 that the government has had to borrow in a January. Punters are now starting to suggest taht at current trends the government deficit could be £10 billion more than forecast. Supply and demand principles should hold. More supply of debt for purchase should reduce the price of debt.

Reason 3. The UK government are still yet to explain how they are going to reduce the levels of borrowing. The levels of borrowing are heading to 13% of GDP and may even exceed that of Greece which we have seen so much of in the press lately. How long until the credit worthiness of the UK is downgraded. This will depress prices meaning yields will have to rise.

Reason 4. Those who already own government bonds and can see what’s happening will start to sell their holdings. This combined with the Bank of England now out of the market and no longer buying debt through QE has to reduce the number of buyers. Again supply and demand should prevail pushing yields higher.

So what does this mean for my retirement investing strategy? Exactly where I was last month. If I owned gilts I’d be considering selling. I don’t own fixed interest gilts so I’m ok here. I do own index linked gilts but with inflation kicking off I’m comfortable with this and following the Bank of Englands pension fund.

I also will continue watching house prices carefully. The interest rates on mortgages have to rise as those wanting to borrow for a house will effectively be competing with the UK government for funds. I can’t see how house prices can continue to rise with increased borrowing costs and this could turn out to be the catalyst that brings on a reduction in house prices.

As always DYOR.

Assumptions:
- All yields are month end except February which is 18 February 2010

Gold Priced in GBP – February 2010 Update

I am currently forced to buy gold priced in GBP for my retirement investing strategy as this is where my earnings from employment occurs. I t therefore makes sense to look at how gold has performed over the years priced in local currency.

At the time of writing this post the announcement has just been made that the government’s net borrowings for January are dire at £4.34 billion compared with last year’s surplus of £5.3 billion. This looks to have caused the GBP to weaken to 1.557 to the USD and even with the International Monetary Fund (IMF) declaring that they intend to sell 191.3 tons making gold priced in GBP to be currently £715.57.

In absolute terms gold has never been this expensive when looking back over historic average monthly data since 1979. However there has been a lot of inflation over this period and so as always I will look at the real (inflation) adjusted price of gold over this period which is my chart today. The inflation dataset that I will use is the UK retail prices index (RPI).

This chart shows a very different story. Since 1979 we have seen two higher real peaks. The first was £840.89 in 1983 and the second was £1043.39 back in 1980. These peaks are 18% and 46% higher respectively than today’s price suggesting that there is still plenty of potential upside.

The trend line of the chart suggest gold today at only £248.20 and the historical average real gold price from 1979 is £429.50. So by both these measures gold looks over priced in GBP terms.

History suggests that gold has significant potential upside from its price today and given that I am underweight gold against my desired low charge portfolio I think I am going to buy some more. I will of course update the blog when this occurs.

As always DYOR.

Assumptions include:
- Last Gold price actual taken on the 18 February 2010
- All other prices are month averages.
- February ‘10 inflation is extrapolated.

Australian Stock Market – February 2010 Update

To try and squeeze some more performance out of a retirement investing strategy that is heavily focused on asset allocation I am using a cyclically adjusted PE ratio for the ASX 200 to attempt to value the Australian Stock Market. The method used is based on that developed by Yale Professor Robert Shiller. I will call it the ASX 200 PE10 and it is the ratio of Real (ie after inflation) Monthly Prices and the 10 Year Real (ie after inflation) Average Earnings. For my Australian Equities I will use a nominal ASX 200 PE10 value of 16 to equate to when I hold 21% Australian Equities. On a linear scale I will target 30% less stocks when the ASX 200 PE10 average is ASX 200 PE10 average + 10 = 26 and will own 30% more stocks when the ASX 200 PE10 average is PE10 average -10 = 6.

Chart 1 plots the ASX 200 PE10. Key points this month are:

ASX 200 PE10 = 18.2 which is down from 18.8 last month. My target Australian Equities target is now 19.6% which is up from 19.2% last month.

ASX 200 PE10 Average = 22.8

ASX 200 PE10 20 Percentile = 17.3

ASX 200 PE10 80 Percentile = 27.7

ASX 200 PE10 Correlation with Real ASX 200 Price = 0.81

Chart 2 plots further reinforces why I am using this method. While the R^2 is low at 0.1433 there appears to be a trend suggesting that the return in the following year is dependent on the ASX 200 PE10 value. Using the trend line with a PE10 of 18.2 results in a 1 year expected real (after inflation) earnings projection of 13.3%. The correlation of the data in chart 2 is -0.38.

Chart 3 plots Real (after inflation) Earnings and Real Dividends. Dividends and Earnings both remain below the trend line. Earnings also remain very close to that of Dividends. What this means is that currently Australian companies are using nearly all their Earnings just to fund the Dividends. Yet the trend line suggests typically clear distance between the two with the trend lines running almost parallel. I ask the same question as last month. Where is the money for investments going to come from?

As always DYOR.

Assumptions include:
- All figures are taken from official data from the Reserve Bank of Australia.
- February price is the 17 February ’10 market close.
- February Earnings and Dividends are assumed to be the same as the January numbers
- Inflation data from January to February ’10 is estimated.

“How Lloyds TSB is helping first time buyers”

I was amazed but unfortunately not surprised to see the methods that Lloyds TSB (which is being propped up by my taxes) is using to try and cajole first time buyers into the UK housing market. The product being peddled justified a four page advertisement in a major London newspaper and is called the Lend a Hand Mortgage.

The advertisement starts with “as a response to the current market conditions, the Lend a Hand Mortgage is giving first time buyers the opportunity to get help with their mortgage from family and friends.” From what I read it doesn’t look like that great a deal to me.

Lloyds claim that “in 1999, 592,000 first time buyers completed mortgages, by last year it had fallen to 193,000, according to the Council of Mortgage Lenders,” My chart today demonstrates clearly one of the big drivers of why this has occurred. For the year 1999 the ratio of Nationwide Historical House Prices to the Average Earnings Index (LNMM) was an average 742.7 and in 2009 this had risen to 1139.1. That means affordability has reduced by 53%. This un-affordability has been caused by the very same banks that are creating products like that advertised extending ever easier credit which is what put us in the current mess we are in today.

The mortgage advertisement goes on to say “even as recently as a couple of years ago, it was much easier to get a mortgage... and it was not uncommon to get a 100% mortgage that didn’t need a deposit.” As we all now know that was just foolish. I’m still amazed this occurred. If you can’t put together a deposit for a mortgage just how did the banks expect people to be able to afford to repay that mortgage. Additionally the banks were counting on property never decreasing in value plunging people into negative equity. Even the most naive banker by spending 10 minutes on the internet could have found historical data that showed how false this assumption was.

Some more data provided in the mortgage advertisement states that “according to the Council of Mortgage lenders, in July last year 80% of first time buyers were turning to their parents for help, up from 50% in February.” To have included this Lloyds clearly think that this adds to the sell. What’s it saying? Everyone else is doing so you should to? Personally I find that a terrible statistic and quite sad. House prices are so over valued compared to earnings that it is almost impossible for a first home buyer to buy a roof to put over their heads without external support. Basic human needs are food, clothing and shelter. Now we are in a situation where one of the basic human needs is now unobtainable without support. What type of country are we living in?

So how does this product work? Let’s say you want to buy a house for £100,000. As the first home buyer you offer up 5% (£5,000) worth of deposit and your ‘helper’ offers up 20% (£20,000) which is placed in a savings account earning rate of 4.15% for 42 months. Then by magic the first home buyer is able to be given a mortgage of 95% (£95,000) at 5.69% fixed until March 2013 if you don’t pay a product fee (whatever that is). Let’s analyse this a little:
- The ‘helper’ gets their money back after 42 months “provided the buyer doesn’t default on their mortgage payments, and provided the amount of the mortgage compared to the value of the property (LTV) has dropped to 90% or less – as assessed by us...” So Lloyds have cleverly protected themselves from a house price crash of up to 25% for the next 3.5 years by effectively offering a 75% mortgage.
- Should Lloyds have only offered first home buyers the 75% mortgage it would have meant that a £5,000 deposit could have only secured a mortgage of £15,000. Instead, this scheme can leverage the first home buyer up to a mortgage of £95,000 while providing some protection to themselves.
- The mortgage is a repayment mortgage however to demonstrate quickly how much this mortgage benefits Lloyds I’m going to assume an interest only mortgage (ie no principle is repaid). Both final amounts I’ll present would be a little less if calculated as a repayment mortgage although not by much as the principle reduction per year is very small in the early years of a mortgage. Let’s look at what happens in the first year. So the buyer who takes a standard 75% mortgage provides Lloyds with charges of approximately £15,000 x 5.69% = £853.50. Now the buyer who takes a ‘Lend a Hand’ provides Lloyds with charges of approximately £75,000 x 5.69% + £20,000 x (5.69%-4.15%) = £4,575.50.

To me it looks like a continuation of the past:
- The first home buyer ends up over leveraged and indebted for life which is what put us into the credit crunch in the first place.
- Lloyds ends up squeezing more than 5 times the revenue out of the same customer.
The only difference is that this time Lloyds are a bit cleverer and give themselves some more protection than previous times.

I’m not convinced the product is designed to give “more people...a chance to own their first home” more likely a chance for Lloyds to maximise its revenues. I’m remaining out of the house market for now and the more I read about these types of products the more I think current prices are unsustainable.

As always DYOR.

Gold Within My Retirement Investing Strategy – February 2010 Update

Within my Retirement Investing Strategy I currently hold 3.2% (up from 3.1% at the last gold update due to a buy decision made this month) of my portfolio in gold with a targeted holding of 5%. Gold is the only portion of my portfolio that does not provide a yield (dividends, interest etc).

The first chart shows the updated real price of gold since 1968, with the wild ride that comes with gold obvious. This month the real (after inflation) price of gold has risen by about 0.3% to $1,119.40 per ounce. The trend line however suggests a price today of $631.00 which is the same as the last update. The historical average real gold price from 1968 also remains at $600.52. So by both of these measures gold still appears overpriced.

The correlation between the real S&P 500 (also displayed on the first chart) and real gold also holds from the last update at -0.33. The second chart provides the ratio of the S&P 500 to gold demonstrating just how far apart the two can vary. Today this ratio has lowered slightly from 1.01 to 0.96. The trend line however suggests a ratio today of 2.63 and the historical average ratio from 1968 to today is 1.63. So this measure would suggest that if you were looking to choose to buy the S&P 500 or gold then the S&P 500 might be the better option.
The final point to make however is that while both the first and second charts suggest gold is overpriced on historic measures I cannot forget that in 1980 gold reached an average real monthly price of $1,728 which is a long way above where we are today.

My investment methods are largely mechanical and given that I am underweight gold against my desired low charge portfolio I should be buying more. Unfortunately all my earnings are made in GBP and in this currency gold is starting to feel expensive. Of course I would never make a decision based on feel so I’m going to do some historic real gold price analysis priced in GBP before making the decision to buy more. Of course I’ll share this analysis with you over the next few days.

As always DYOR.

Assumptions include:
- Last Gold price actual taken on the 16 February 2010
- Last S&P 500 price actual taken on the 12 February 2010.
- All other prices are month averages.
- Inflation data from the Bureau of Labor Statistics. January and February ‘10 inflation is extrapolated.

UK Inflation – February 2010 Update

Yesterday the Office of National Statistics reported the January 2010 UK Consumer Price Index (CPI) as 3.5% up from 2.9% and the UK Retail Price Index (RPI) as 3.7% up from 2.4%. It seems the records just keep being broken. Last month we had “the increase in the CPI annual rate of 1.0 per cent between November and December 2009 is the largest ever increase in the annual rate between two months” and this month we have an ”increase in VAT rate leads to record CPI monthly movement for a December to January period.”

The first chart is tracking the CHAW Index which is the RPI including All Items. I focus on the RPI as my National Savings and Investments Index Linked Savings Certificates use the RPI to index from. The current level of the Index remains above the trend line however what is interesting is that the index is actually starting to fall. In December ’09 it stood at 218 and it is now at 217.9, a fall of 0.1. At first glance this might suggest that the Bank of England has it all under control and inflation is going to start falling towards their 2% CPI target. I’m not convinced as let’s look at what’s happened for the same period over the previous 10 years:
- December ’08 to January ’09, -1.8
- December ’07 to January ’08, -1.1
- December ’06 to January ’07, -1.1
- December ’05 to January ’06, -0.7
- December ’04 to January ’05, -1.0
- Then in order of the previous 5 years -0.4, -0.1, -0.1, -1.1 and -0.7

The second chart is again based on the CHAW Index. This chart shows annual figures based on the previous 3, 6 and 12 month’s worth of data. As of December the 12 month figure is 3.7% (as published by the ONS), the 6 month figure is 4.2% and the 3 month figure is 3.5% annualised. It will be interesting to see what happens next month as I still think the Bank of England are looking for all the excuses to sweet talk the market but are chasing a “little inflation”. This will ease the pain on those who are in debt. That is the government and the public who on average have over extended themselves. Those prudent savers (like myself) will of course be punished as the value of their assets is reduced.

The fact that CPI is so far above the 2% target prompted the Bank of England to write a letter to the Chancellor. What a read. Firstly the excuses:
- “the restoration of the standard rate of VAT to 17.5% is raising prices relative to a year ago.” I think it’s a little hypocritical to use this excuse. When the rate went from 17.5% to 15% a little over a year ago I don’t remember anyone using this effect to help explain why we were seeing deflation. Instead it was quick, panic, drop the Official Bank Rate to record lows and Quantitative Ease (QE). Now the boots on the other foot and we just ignore it.
- “oil prices have risen by around 70%.” Why no mention of the fact that they and the government managed to engineer a currency devaluation knowing that import prices will rise, causing the average punter to pay more for fuel, which feeds into CPI.
- “the effects of the sharp depreciation of sterling in 2007 and 2008 are continuing to feed through to consumer prices.” As mentioned above all engineered by the Bank and government and now it’s all oh well too bad at least we have an excuse.
Secondly, it is clear we should not worry as the Bank of England knows what it is doing [sic]. Inflation is well above target but the “low level of Bank Rate, will continue to provide a substantial boost to nominal spending for some time to come.” In case that wasn’t inflationary enough “it will continue to monitor the appropriate scale of the asset purchase programme and further purchases would be made should the outlook warrant them.”
Finally, “equally, if at some point in the future, the medium term outlook for inflation threatened to rise above the 2% target, the Committee would tighten monetary policy.” To me it looks like we are well above the 2% target and that’s why the Bank of England are writing the letter in the first place. The Bank of England next meets on the 04 March however this letter makes it clear. Interest rates won’t be raised and we still have the chance of yet more Quantitative Easing to come. How much more do they want to distort markets and force up asset prices through low interest rates. I hope the bond market soon stops all this nonsense and takes the decisions away from them.

It’s interesting to parallel this with another developed economy central bank. The Reserve Bank of Australia seems to have CPI in control at 2.1% after raising rates a number of times. They are clearly committed to their inflation target as the latest minutes show that the decision to hold rates last month was a close call and that rates would continue to rise in 2010 if the economy continued to grow.

One only has to look at the exchange rate between the countries today to see the attitudes of both banks demonstrated by the markets.

As I stated last month, all I can say is that I’m glad I own Index Linked Savings Certificates and Index Linked Gilts.

As always DYOR.

A History of Severe Real S&P 500 Stock Bear Markets – February Update

Looking at the first chart which shows the real (inflation adjusted) S&P 500 (or its predecessor) stock market I have identified three historic severe stock bear markets. These I am defining as stock markets where from the stock market reaching a new high, they then proceeded to lose in excess of 60% of their real (inflation adjusted) value. These are best demonstrated by the second chart which shows each of these stock bear markets and the fall in percentage terms from the peak. So briefly what were these bear markets (full details here).

The first severe stock bear (marked in purple on the chart) market started with a new real high being reached in September 1906 and incorporated the 1907 Bankers Panic. From the high it took until January 1920 for the stock market to reach a real loss of 60.9% and then until December 1920 to reach its real low of -70.0%. That’s a period of 14 years and 3 months.

The second severe stock bear (marked in blue on the chart) market started with a new real high being reached in September 1929 and is obviously the period of the Great Depression. The markets passed through -60% on a number of occasions. In June 1932 the market reached its real low of -80.6%. That’s only a relatively short period of time however it really wasn’t over then as the market never really recovered and kept dipping back below -60% in real terms. 20 years later the market was still below the real -60% mark.

The third severe stock bear (marked in olive on the chart) market started with a new real high being reached in December 1968, incorporated the stock market crash of 1973 to 1974 and the 1973 Oil Crisis. From the market high it took until March 1982 for the stock market to reach a real loss of -60.9% and then until July 1982 to reach its real low of -62.6%. That’s a period of 13 years and 7 months.

So that brings me, as always, to the last line on the chart marked in red which shows the real bear market that we are currently in. This period began in August 2000 with the Dot Com Crash however we were unable to reach a new real high before the Global Financial Crisis took hold. In this real bear stock market we have been unable to break through -60% ‘only’ reaching -58.6% in March 2009. That is a period of only 8 years and 7 months.

As the second chart clearly shows we have now dipped back below the -40% line to be at -41.9% from -39.4% last month. We are now 9 years and 6 months into this severe bear market which is a relatively short period of time compared with the other severe bears shown. The previous bears all went below -60% in the years to come and at this point were:
- in 1916 at -25.4% and over the next year heading to -33.8%.
- in 1939 at -50.7% and over the next year pretty much standing still in real terms to reach -52.0%.
- in 1978 at -50.1% and over the next year heading to -53.1%.

I’m going to keep watching this comparison as I think it could be just starting to get interesting. Governments around the world are fast running out of borrowing capacity as Greece has aptly demonstrated. Closer to home the Bank of England has stated that more quantitative easing (QE) could be just around the corner. What will that do to inflation? The best growth that can be ‘created’ in the UK even with QE, bank bailouts and “cash for clunkers” is a miserly 0.1%. Finally, despite the big bonuses, I don’t see any evidence that the banking sector has repaired itself. I don’t see other developed economies being a whole lot better. Could we yet see that real -60% bear? History suggests there is still plenty of time for it to occur.

Assumptions include:
- Inflation data from the Bureau of Labor Statistics. January and February ‘10 inflation is extrapolated.
- Prices are month averages except February ‘10 which is the 12 February ’10 S&P 500 stock market close.
- Historic data provided from Professor Shiller website.

Guest post – alternate investing strategy

Today is a guest post from a reader of Retirement Investing Today. Two elements of their investing strategy have inspired me. Firstly, they are in their early twenties and have already clearly accepted full responsibility for their own actions with respect to their own economic well being. I certainly wasn’t at that point at that age. Secondly, rather than just following the herd mentality with regards to investing they have adopted an investing strategy which includes a very interesting asset class – whisky. As with all Retirement Investing Strategy readers I wish them much success and I hope you enjoy reading their story. I know I did.

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I am fairly new to the investment game, this being my second financial year as an investor. I decided against joining a pension scheme as I do not like the idea of saving for all of my working life and planning my retirement on the faith (that is very low) of an annuity company providing me with a good income. I want to plan my retirement and manage my own investments. I am in my early twenties and my plan is to accumulate enough capital by the time I am in my mid-fifties to provide an acceptable income that can be enjoyed for the rest of my life. When I have finished retiring, the income from my capital will then be able to be enjoyed by my successor(s), rather than an annuity company. Following the recommendation on this blog, I have purchased a copy of “Smarter Investing - Simpler Decisions for Better Results” by Tim Hale. I cannot recommend this book enough.

My target portfolio at the moment is:
Cash - 65%
UK Equities - 25%
Gold - 5%
Whisky - 5%

The large percentage that is allocated to cash is not because I am cautious but because I have a short term goal to save enough to use as a deposit to fund a home within three years, which is too short to invest.

My contribution to this blog today will be about whisky as there is a noticeable lack of information on the Internet about this asset class. Whisky currently makes up approximately 5% of my portfolio.

Whisky is a spirit that is enjoyed all over the world. Recently, we have witnessed a very large growth in the demand of Scottish whisky due mainly to the rapidly growing middle classes in developing countries. Supply has not been expanding nearly as fast (I can tell you this personally as I live in Moray, which has the largest concentration of single-malt distilleries anywhere in Scotland). My reason for allocating 5% of my portfolio to single-malt Scottish whisky is that I aim to profit from the expanding ratio between supply and demand. Historically also, whisky collecting has generally been a very profitable pursuit, although a certain level of knowledge on the subject is essential.

There are essentially three ways to invest in whisky:
1 – Buy shares in a company that makes profit from the whisky industry
2 – Buy young whisky casks en primeur and hold them until that have matured
3 – Buy bottles of whisky and hold them in order to take advantage of dwindling supply.

I am concerned with the third option.

It is important to point out at this point that bottled whisky does not mature further and will not change in character if it is stored correctly (more on this later). It is also important to select bottles from iconic well established distilleries, as these are the ones that will be most in demand. The main distilleries that I am interested in are Ardbeg, MacAllan, Balvenie, Talisker, Glenfiddich and Port Ellen. These are all very well respected and are in high demand all over the world. The last one that I mentioned has closed so it goes without saying that demand for their expressions are going to increase.

Most of these distilleries have an online committee/club that is free to join. Quite often, special limited edition expressions are offered only to member. The last committee exclusive that Ardbeg offered (Ardbeg Supernova) was ranked as the world’s second finest whisky and now sells for 150% of the price less than one year on. In years to come as more of these limited bottles are consumed I expect the value to increase.

The ideal bottle of whisky for investment purposes will be (in order of preference):
1 – From an iconic distillery (and if it has closed even better).
2 – Part of a very limited release
3 – Aged beyond 30 years (although younger expressions are also worth considering if they meet the rest of these requirements)
4 – Mostly unavailable to the open marker (i.e., committee releases or distillery exclusives)
5 – Taste good (I use the latest edition of Jim Murray’s whisky bible for this).

Take note that bottles are also produced by external bottling companies who buy casks en-primeur and bottle them much later. Often this is the only way to buy expressions from closed distilleries. Some external bottling companies to consider include Duncan Taylor & Co and Douglas Laing & Co.

I recently acquired a 30 year old bottle of MacAllan, bottled by Douglas Laing & Co. This particular expression was bottled after the whisky has matured in a rum cask and is one of just under two hundred bottles. I believe that this expression has a very high chance of increasing in value significantly.

There are also quite a few rare bottles that are only available by visiting the distillery. This can be very costly if you do not live near them (this is where I have an advantage). If you are able to visit a distillery at a small cost, it is definitely worth having a look to see what exclusives are available.

Whisky bottles are not as sensitive to wine as they have a high alcohol content. They can be stored anywhere that is not subject to major temperature fluctuations, however they must be stored within their tube or box, to prevent light from oxidising the whisky.

As far as taxes is concerned, duty is obviously paid when you purchase the bottles (unless you buy them from an airport), however I believe that like wine, whisky is exempt from capital gains tax.

I am very optimistic that my ever growing whisky collection will generate a good return for my portfolio however there is the possibility that some bottles will not increase in value as much as I hope they will. If this is the case I might even enjoy a nice dram of scotch when I retire!

Please do your own research.
"

US (S&P 500) Stock Market – February 2010 Update

To try and squeeze some more performance out of a retirement investing strategy that is heavily focused on asset allocation I am using a Cyclically Adjusted Price / Average 10 Year Earnings (PE10 or CAPE) ratio for the S&P 500 to value the US (specifically the S&P 500) stock market. The method used is that developed by Yale Professor Robert Shiller. Background information here.

Chart 1 plots the Shiller PE10. Key points this month are:

Shiller PE10 = 19.9 which is down from 20.6 last month. My UK Equities target asset allocation therefore increases from 18.6% to 18.8%. Additionally my International Equities target asset allocation increases from 13.3% to 13.4%.

Shiller PE10 Average (1881 to Present) = 16.4. This means we are currently still 21% higher than the long run average since 1881.

Shiller PE10 20 Percentile (1881 to Present) = 11.0

Shiller PE10 80 Percentile (1881 to Present) = 20.6. The Shiller PE10 has now fallen back through the 80 Percentile.

Shiller PE10 Correlation with Real (ie after inflation) S&P 500 Price = 0.78

Chart 2 further reinforces why I am using this method. While the R^2 is low there appears to be a trend suggesting that the return in the following year is dependent on the Shiller PE10 value. Using the trend line with a PE10 of 19.9 results in a 1 year expected real (after inflation) earnings projection of 5.2%.

Chart 3 plots Real (after inflation) Earnings and Real Dividends for the S&P 500. Real Dividends are still falling however they are still above their long term trend. Real Earnings have a roller coaster ride continually, particularly since about 1990. If the Standard and Poors forecast earnings are to be believed however we continue to be above the long term earnings trend and climbing.

Assumptions include:
- Q4 ’09 & Q1 ’10 earnings are estimates from Standard & Poors.
- Inflation data from the Bureau of Labor Statistics. January & February ‘10 inflation is extrapolated.
- January & February ‘10 dividends are estimated as December ‘09 dividend.
- Prices are month averages except February ‘10 which is the 11 February ’10 S&P 500 stock market at 1430.
- Historic data provided from Professor Shiller website.

As always DYOR.

My allocation to emerging market equities

Tim Hale in his book ‘Smarter Investing : Simpler Decisions For Better Results’ provides some tips for investing in emerging markets. These are:
“
- do so in moderation;
- Own a diversified pool of markets, rather than putting all your eggs in one basket, such as China, despite what the Sunday papers may say;
- be prepared for the times when returns diverge substantially from UK and developed markets on the downside;
- don’t be overly optimistic about the degree to which a free lunch is on offer
“

Additionally he suggests that the correlation between emerging markets and developed markets is 0.6 although he also states that this could be generous. I have also considered that “from 1987 to 2004 emerging market equities only beat US equities by 1 percent ... but with around twice the level of volatility...”

With all this in mind plus knowing that I want to minimise fees and taxes I have positioned my retirement investing emerging markets equities as follows:

- Investing in moderation with a desired allocation of only 5%.

- The ETF owns a diversified pool of markets which I detail below.

- I am prepared for times when returns diverge substantially which should help me to buy low and sell high as I have described in previous posts.

- I am not being overly optimistic about the free lunch.

- I am buying the ETF’s within my ISA. I have done this as picking up on the high volatility point means that I may have to buy and sell often which is in my opinion best done in a tax wrapper to prevent capital gains tax ever becoming payable.

- I have minimised fees by buying an emerging markets exchange traded fund (ETF)

My Emerging Markets Equity ETF asset allocation is as follows:
- 16.9% China
- 15.7% Brazil
- 12.2% South Korea
- 11.0% Taiwan
- 8.7% India
- 6.9% South Africa
- 6.6% Russia
- 4.3% Mexico
- 2.7% Malaysia
- 14.9% Other

As always DYOR.

Buying Gilts, Property, International Equities and UK Equities

As an employee of a company I have the option to contribute to a pension scheme. I have made the choice as part of my retirement investing strategy to contribute to the pension scheme as the company matches my contributions up to a limit, plus as I salary sacrifice into the pension, they also generously contribute the 12.8% employers national insurance that they would have otherwise paid to HMRC. I will complete a blog on pensions hopefully in the near future.

This is new money that enters every month and is currently the equivalent of about 0.5% of my total retirement investing assets. Another months worth of contribution has just been made. This is currently automated to occur each month and will be invested as follows:

- 4% to Index Linked Gilts. This adds up to be a very small contribution but I want to just keep nibbling a little.

- 60% to UK Commercial Property. A big contribution is made here as my desired low charge portfolio requires 10% asset allocation and my current low charge portfolio is only at 8.1%.

- 21% to International Equities. My desired low charge portfolio currently requires 13.3% asset allocation and my current low charge portfolio is only at 13.1%. This is the only input to International Equities that I am currently exploiting.

- 15% to UK Equities. This is one that requires a little explaining. My desired UK Equities is 18.6% and my current UK Equities is 18.6% so I am where I need to be. Where I am underweight heavily is Emerging Markets Equities by 2.3% and my total Equities exposure is also underweight by 2% at 54%. In an ideal world I would be buying Emerging Markets however my company based pension is inflexible (like a lot of company based schemes I would guess) and the lowest cost Emerging Markets Equity fund that I can buy has fees of 2%. Now I refuse to pay anyone 2% in fees and so the compromise I have made is to try and bolster my Equities allocation while acknowledging I am underweight Emerging Markets. Not ideal I know but fits with strategy to minimise fees.

As always DYOR.

UK House Price Thoughts

As part of my retirement investing strategy at some point I need to buy a house. As I have mentioned before I am not currently buying as I believe house prices are overvalued.

I have been looking for a data set that would show me when average interest rates charged by the banks for house mortgages were starting to rise. I was also looking for a measure that would show increases fairly quickly rather than waiting for lots of old fixed rate mortgages to expire. I thought I had found a good measure and started to see rates rising by using UK resident banks interest rates of new loans secured on dwellings to households when I blogged here.

I’ve been thinking about what loans secured on dwellings means and it seems likely that it includes a lot more than mortgages. I’ve had another trawl through the Bank of England web site and found a data set that should be certainly showing very recent changes to mortgage interest rates and might be more appropriate to use. This data set is the monthly interest rate of UK resident banks and building societies sterling standard variable rate mortgage to households not seasonally adjusted (data set IUMTLMV). A chart of this is shown above. Unfortunately, unlike the previous ‘secured on dwellings’ data set variable rates are still at lows of around 4% having been as high as 8.87%. So unfortunately for those (including me) waiting for increasing mortgage rates to potentially reduce house affordability it appears we have a while to wait yet.

On a more positive note it’s not all good news for house prices. Firstly, as reported by the Financial Times lenders “have warned that they will have to slash mortgage lending and raise rates on home loans if the government insists on prompt and full repayment of the £300 billion they have received in state support since 2008”. This is linked to the Special Liquidity Scheme and the Credit Guarantee Scheme which must be repaid by 2012 and 2014. So the banks are back to big profits and big bonuses yet they can’t give the government back the money they have borrowed. That money is my taxes we are talking about. If they can pay bonuses they should be repaying their loans like everyone else. The article goes on to say that the “lenders cannot retain their existing loan books and still make new ones while access to wholesale funds is as limited as it is” and continues with “retail deposits, which are considered far more stable and which bank regulators are encouraging lenders to rely on more heavily as a source of funds for new lending, simply cannot grow quickly enough to make up for the wholesale funds that are being withdrawn.”

Here’s an out of the box idea. How about the government lets the market operate freely rather than distort it with all this intervention. So where do the banks then get their money from? Another ‘crazy’ idea. How about they start paying interest rates on savings that are above inflation and that will encourage people to start saving again. Oh that’s right, that would then force mortgages up and maybe bring house prices back to more sensible levels. Let’s see if the government after the next election gives in to the banks demands.

Secondly, the Financial Times also reports that estate agents have seen the first drop in new buyer enquiries for 14 months. Is this a genuine fall or due to the cold weather that we have been happening? I guess it will all show up in the house price figures in due course.

As always DYOR

My Current Low Charge Portfolio – February 2010

Buying (New money): As always I contributed about 60% of my gross salary towards my retirement investing strategy. Since my last post the allocations I have made are 100% Cash.

Asset Movements: As I detailed here I also moved about 0.6% of my total retirement investing assets from cash to commodities (gold).

Selling: Nothing this month

Dividends: Australian Equites paid dividends equal to 1.6% of the total value of my Australian Equities. These dividends were moved to cash.

Current UK Retail Prices Index: 2.9%

Current Annual Charges: 0.59%

Current Expected Annual Return after Inflation: 4.1%

Current Return Year To Date (from 01 January 2010): -2.8%

How close am I to retirement: 39.7% down from 41.3%. Retirement can move further or closer each month and is affected by movements in asset allocations, asset prices or additions/withdrawals to my current low charge portfolio.

The following are the highlights for the month:

- Desired Cash portion moves from 12.4% to 11.5%. This month I have moved further from the desired by going from 13.5% to 14.0%.

- Desired Bonds portion doesn’t move from 17.4%. This month I have moved further from the desired by going from 20.1% to 20.8%.

- Desired Property stays constant at 10.0%. This month I have moved closer to the desired by going from 7.9% to 8.1%.

- Desired Commodities stays constant at 5.0%. This month I have moved closer to the desired by going from 2.6% to 3.2% with the gold purchase.

- Desired International Equity portion moves from 12.9% to 13.3%. This month I have moved further from the desired by going from 13.3% to 13.1%.

- Desired Emerging Market Equities stays constant at 5.0%. This month I have moved further from the desired by going from 2.9% to 2.7%.

- Desired Australian Equity portion stays moves from 19.3% to 19.2%. This month I have moved closer to the desired by going from 20.5% to 19.5%. As I mentioned above dividends helped me to remove some assets from here.

- Desired UK Equity portion moves from 18.0% to 18.6%. This month I am right on the desired by going from 19.3% to 18.6%.

Australian Property Market (Alternate Data) – February 2010 Update

The Brisbane and Australian Eight Cities (Sydney, Melbourne, Brisbane, Adelaide, Perth, Hobart, Darwin & Canberra) House Price Index published by the Australian Bureau of Statistics (ABS) catalogue 6416.0 suits my requirement to track Australian house prices as part of my retirement investing strategy. It however seems to have two flaws. Firstly the housing data is only published quarterly and secondly this housing data is then published over a month after the quarter ends.

I’m therefore looking for something that helps me keep my finger on the pulse a little more. Certainly monthly figures are desirable. I am going to therefore use housing data published by RPData and in particular I will monitor the Brisbane and Logan City numbers.

The ABS published their quarterly data to December 2009 on Monday. This chance only comes every 3 months and so it is interesting to compare the ABS data with the alternate monthly dataset that I am using from RPData which is shown in the above chart. The ABS shows that for the quarter to December 2009 Brisbane prices have risen by 3.8% with a year on year increase of 10.9%. Remember the ABS reports median prices for detached properties only.

In contrast from RPData I am using what are called recent median house sale prices so I would expect similar data. For Brisbane the data shows increases for the quarter to December 2009 of 5.9% which is significantly different to the ABS. Year on year the increase is 7.1% which is also significantly different to the ABS. If anybody can explain the big difference I would be very interested to know.

Also looking at Logan City the quarter reveals increases of 3.5% while year on year increases have been 7%.

Free Asset Allocator Website

I am running my entire retirement investing strategy including expected annual returns and projected retirement dates from an excel spreadsheet. Today though, I stumbled upon a nice little tool that looks to be written by Morningstar which provides a quick way of mixing up simple asset allocations to project expected returns. Additionally if you enter the portfolio value, annual investments, desired years to retirement or similar and your total financial goal it provides a probability of reaching the goal. Link here.

The website states “Asset Allocator helps you assess the likelihood of meeting your financial goals based on your current financial situation. If you find that you are not on track to meet your goals you can adjust certain criteria and immediately see the effect of your portfolio's growth potential.”

I entered my retirement investing strategy into the site which included a Portfolio Value which is currently at 40% of my Financial Goal. My Annual Investments were based on me investing around 60% of my gross annual earnings and I entered my time to retirement (Years) as 7 years. Asset Mix was entered as my Desired Low Charge Portfolio as I describe regularly on the site including here.

The Expected Return was provided as 8.99% with a 3 year standard deviation of 13.18. An Expected Return of 8.99% seems a little bullish for my tastes. Using my models I have a current expected annual return after inflation of 4.2%. The UK arithmetic mean of the retail prices index (RPI) since 1987 is 3.5%. Totally these would give an expected return of around 7.7% before inflation which is a variation of 1.29%.

What is also provided by the website is a Probability of [reaching my] Goal. In my case this was provided as 91%. I’ll take those odds...

As always DYOR.

Tax efficient investing – Individual Savings Accounts (ISA’s)

To ensure that I maximise the annual return on my retirement investing strategy I am constantly focused on three key elements:
1. Ensure I have the right asset allocation in place
2. Minimise the fees that I pay by buying index linked investments wherever possible
3. Minimise the tax that I pay

To minimise the tax that I pay I use one tax friendly investment and two tax wrappers.
I have written in the past about the tax friendly investment I use to help me minimise tax – Index Linked Savings Certificates.

Today I’m going to talk about one of the tax wrappers I use which is Individual Savings Accounts (ISA’s). The other tax wrapper I use is a personal pension which I will discuss in the not too distant future.

I’m not going to go into great detail about how ISA’s work as most people are aware of them and you can find plenty of information on the internet including here.

My current retirement investing strategy holds around 9.7% of its assets in Stocks and Shares ISA’s. I do not use Cash ISA’s at this point in time. Providing that you find a Stocks and Shares ISA provider that does not have any fees for the privilege of using the ISA tax wrapper I cannot find any negatives to using them. At the very worst you are break even and neither better nor worse off.

For me the Stocks and Shares ISA is performing a powerful function. To minimise fees for some of my asset classes I am buying offshore based exchange traded funds (ETF’s) which are categorised as non-distributing funds by HM Revenue & Customs. In very crude terms if I was not holding these within the ISA and I chose to sell to rebalance my portfolio the capital gain would be taxed as income rather than as a capital gain. This also means that I could not use my capital gains tax allowance either. As all income (dividends and interest) and all capital gains are tax-free within an ISA I am sheltered from this problem.

As always DYOR.

The Bank of England holds the Official Bank Rate at 0.5%

The Bank of England made two decisions today.

Firstly the bank decided to stop quantitative easing as they were happy with the £200 billion of government bonds that they already own. What is now going to be interesting to watch is what happens to government gilt prices and yields now that the government have lost a key buyer of their debt. In December alone the UK government needed to borrow £15.7 billion and I look forward to seeing where the buyers of all this debt are going to come from. The other thing that I look forward to is seeing if the Bank of England is ever going to be able to sell the government debt that they have already bought.

Secondly the bank decided to keep the official bank rate on hold at 0.5% for the twelfth month in a row as I suggested they would on Tuesday. This is the lowest rates have been even if I look back to the year 1694. Even during the Great Depression the Bank Rate only went as low as 2%. My chart today shows the relationship between the official bank rate, the consumer price index (CPI) and the retail prices index (RPI). Normally, as you would expect, the correlation between the official bank rate and inflation is quite high. However currently the bank seem to have lost all interest in controlling inflation so while it heads skyward the bank rate flat lines. I’d really like to know their justification for this when the Monetary Policy Framework under which they operate includes “...Price stability is defined by the Government’s inflation target of 2%. The remit recognises the role of price stability in achieving economic stability more generally, and in providing the right conditions for sustainable growth in output and employment.” I guess we’ll know Mervyn King’s thoughts when he writes a letter to Alistair Darling next month following the CPI heading over 3%.

UK Mortgage Approvals – February 2010 Update

On Saturday I discussed why I might have been early in my call that we had potentially reached the ‘Return to “normal”’ phase of the UK house market. I would like to revisit this again as I continue seeing data that is potentially starting to point towards a further housing market correction.

The first chart is a repeat of that shown on Saturday. I described how the new interest rates secured on dwellings are still very low at 4.5% compared to the peak of 6.3% and have likely had a big effect on the market. What is of interest however is that this 4.5% increase is 7% more than the low of June 2009 and is trending in an upwards direction with no assistance from the Bank of England.

The second chart today also shows another interesting piece of data. The olive line is the most interesting which shows seasonally adjusted monthly mortgage approvals decreasing for the first time in 13 months dropping from 60,045 to 59,023 in December which is a decrease of 2%.

Rising mortgage interest rates will put pressure on those who have variable rates or are coming off fixed rates. It will also decrease the level of borrowing possible for a new person trying to enter the housing market. Additionally falling mortgage approvals suggests less competition in the market for each house that is for sale.

Could the rules of supply and demand finally start to work in the near future?

A tale of two Central Banks – Reserve Bank of Australia vs Bank of England

The Reserve Bank of Australia (RBA) announced today that they were keeping interest rates on hold at 3.75% after raising rates by 0.25% a month for 3 months in a row. According to the Financial Times this surprised most economists.

In my opinion the RBA seem to have timed their increases well. In September of 2009 the Australian Consumer Price Index (CPI) saw a low in this cycle of 1.26% and even though this was the case they started raising rates in October. We have now seen the RBA increase rates by 20% from their lows. It doesn’t seem unreasonable to me for them to take a pause to see what effect this is having given CPI is still only 2.1% and given the inflation target for the RBA is as follows:

“The Governor and the Treasurer have agreed that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2–3 per cent, on average, over the cycle. This is a rate of inflation sufficiently low that it does not materially distort economic decisions in the community. Seeking to achieve this rate, on average, provides discipline for monetary policy decision-making, and serves as an anchor for private-sector inflation expectations.”

This target was introduced in mid 2003 and since that time the arithmetic average has been 2.7% so to me as a simple Average Joe they seem to be doing a reasonable job.

Now to the contrast which is the Bank of England. They have kept the Official Bank Rate at a record low of 0.5% now since March 2009. The Bank of England also saw the UK Consumer Price Index (CPI) reach a low in this cycle in September of 2009 at a rate of 1.1%. However instead of following the lead of the RBA they have sat on their hands allowing CPI to reach 1.5% in October, 1.9% in November and we now have the CPI at 2.9% (with last month being the largest month on month increase in history) and the Retail Prices Index (RPI) at 2.4%. I can’t see how they can allow this to occur given the Monetary Policy Framework under which they operate includes:

“The Bank’s monetary policy objective is to deliver price stability – low inflation – and, subject to that, to support the Government’s economic objectives including those for growth and employment. Price stability is defined by the Government’s inflation target of 2%. The remit recognises the role of price stability in achieving economic stability more generally, and in providing the right conditions for sustainable growth in output and employment. The Government's inflation target is announced each year by the Chancellor of the Exchequer in the annual Budget statement.”

I think the Bank of England have now shown their hand and think they can control the inflation genie and allow “just a little bit of inflation”. I’m backing that they don’t raise interest rates this week. I guess only time will tell.

Australian Property Market – February 2010 Update

I intend to keep a close eye on Australian house prices as I build my retirement portfolio. This is because Australia is a very likely retirement possibility (if not sooner) for me.

The first chart shows the quarterly Real (adjusted for the Consumer Price Index) Brisbane and Real (again adjusted for CPI) Australian Eight Cities (Sydney, Melbourne, Brisbane, Adelaide, Perth, Hobart, Darwin & Canberra) House Price Index with data taken from the Australian Bureau of Statistics catalogue 6416.0 since 1991. This Index was reset in 2003/2004 and so I have “corrected” pre March 2002 data by taking the ratio’s of the pre and post September 2003 to June 2004 data as a multiplier. This chart carries data only until December 2010 and clearly shows a nice dip at the start of 2009 before the latest data point has taken house prices to new record real highs.

My second chart shows Real Annual Changes in price from 1995 to present. In Real terms over this period Brisbane has seen average increases of 5.3% (up from an average of 5.2% last quarter) and the Australian Eight Cities has seen average increases of 4.9% (up from an average of 4.8% last quarter). Unfortunately for me though the trend lines (particularly for Brisbane) continue to head upwards.

In non-inflation adjusted terms over the period Brisbane prices have seen average increases of 8.1% and the Australian Eight Cities prices have seen average increases of 7.8% (up from an average 7.6% last quarter). Unfortunately if you don’t already own a property you continue to be priced out when compared with average earnings. Using the Australian Bureau of Statistics catalogue 6302.0 (extrapolating the last quarter as the data is not released to the 25 February) which looks at average weekly earnings shows that while house prices have had their long run averages increase this quarter, Total Weekly Earnings have stagnated at a yearly 3.8% and Total Full Time Adult Earnings at 4.3%.

My third chart shows what happens when house prices continue to rise at a rate greater than salaries. Over this period affordability of Brisbane houses when compared to Adult Full Time Weekly Earnings has gone from a low of 0.063 to 0.121 meaning affordability has halved and the Median Eight Cities houses have gone from a low of 0.064 to 0.112 which is a huge reduction. This type of shift is just not sustainable but when/if will the market return to a more sustainable equilibrium.

Looking at the big increases this quarter I can’t help wonder if the data is ‘reliable’ and I would like to see how the histograms have changed since 2008. This is because the government has brought forward demand and changed the dynamic in the market by offering first home buyer grants with changing values depending on the date. If I had have bought before 14 October 2008 I would have received $7,000. Using this as a 5% deposit would mean I could borrow $140,000. If I had have bought a new house between 14 October 2008 and 30 September 2009 I would have received $21,000 which again with a 5% deposit would mean I could borrow $420,000. That has to change the supply and demand dynamic in the market. This ‘stimulus’ has now been gradually withdrawn with first new home buyers being reduced to $14,000 between 01 October 2009 to 31 December 2009. Finally, since 01 January 2010 first home buyers are back to $7,000 meaning we’re back to that $140,000.

So if I was a first home buyer I would have bought between October and September with first home buyer stragglers buying also in October to December. I would now be out of the market. I think the Housing Industry Association (HIA) may have seen in this when they reported that new home sales are down 4.6% in December 2009.

It will be very interesting to see what happens next. Australia has rising interest rates and if supply and demand works (assuming no government intervention) second home buyers may now struggle to sell without reducing prices as their pool of buyers has been reduced, along with the pool that remains having smaller deposits. This should reduce prices going forward. This should then flow through the rest of the market. Interesting times ahead...