Australian Property Market – January 2009 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 September 2009 and clearly shows a nice dip at the start of 2009. Could this be the Bull Trap phase of my second chart with us now nearing the Return to “Normal” phase?

My third chart shows Real Annual Changes in price from 1995 to present. In Real terms over this period Brisbane has seen average increases of 5.2% and the Australian Eight Cities has seen average increases of 4.8%. 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 7.6%. Unfortunately if you don’t already own a property (or three) you continue to be priced out when compared with average earnings. Using the Australian Bureau of Statistics catalogue 6302.0 which looks at average weekly earnings shows that Total Weekly Earnings has only increased by a yearly 3.8% and Total Full Time Adult Earnings by 4.3%.

My fourth 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 0.125 meaning affordability has halved and the Median Eight Cities houses have gone from a low of 0.064 to 0.113 which is a huge reduction. This type of shift is just not sustainable but when will the market turn? Will Australia raising interest rates and reducing first home buyer grants be the catalyst. Only time will tell...

The Burj Dubai and Real Estate Cycles

The Burj Dubai has been all over the press in the past couple of days as it had its grand opening. What an engineering spectacle! The tallest building in the world at over 800 metres tall with more than 160 stories and a luxury hotel designed by Giorgio Armani. So what do I think? I think of a great book entitled “The Secret Life of Real Estate : How it moves and why” by Phillip Anderson which states that “the world’s tallest buildings have a consistent habit of being completed right at the top of the real estate cycle ... producing for us – at least so far – the most reliable indicator of an approaching peak”.

Anderson also suggests a 24 Hour Real Estate Clock where hours 1 to 16 take approximately 14 years during which time property values rise reaching a peak and then hours 17 to 24 takes approximately 4 years during which time property values fall. I'll work through an example using a dataset that I’m closely following – raw (not adjusted for inflation) Nationwide UK Historical House Price shown in the chart above.

Anderson suggests that from the previous cycles low, the first 7 years will see property increase in price before a mid cycle recession. Using the Nationwide figures I'll call the low November 1992 and I'll call the recession start April 2000 which is 7 years and 6 months. During this period property increased in value by an average 6.5% per annum. So that fits.

I'll suggest using the Nationwide figures that there was a 6 month mid cycle recession during which time property increases slowed considerably and rose by 1.62% over that 6 months. Still positive as inflation for that 6 months was 0.9%. So that fits.

There is then a second 7 year cycle (completing the first 16 hours of the 24 hour clock) which starts from the onset of the mid cycle recession. During this second cycle property increases at a greater rate than during the first cycle. I'll call this peak October 2007 which is 7 years and 6 months. During this period property increased in value by an average 11.9% as predicted by the Anderson model. So that fits.

Now the fun begins with the 'Keynes crash phase' which runs for 4 years. Using this model we should come back and look at property in October 2011. What are highlights of this cycle - foreclosures and bankruptcies increase (yes!), stocks enter a bear market from past highs (yes!), credit creation institutions reverse policies (yes!), economic activity stalls (started but then QE began, I think we may still be here), wipe out of debts/stagnation (still needs to occur), wreckage is cleared away (still needs to occur) and finally stocks start climbing (they have but was it caused by QE and we are in for another big drop?) then the 18 year cycle can begin again.

As I’ve detailed previously I am yet to buy myself a flat or house. The above indicates that maybe I won’t get the opportunity until late 2011 or so...

2009 Yearly Retirement Investing Portfolio Review

Edited 06 June 2010: I have found more exact data allowing me to determine benchmark returns to the day.  I have therefore updated the data in this post to reflect this.  As the blog has developed I have also changed the method used to calculate the returns as I have learnt more accurate methods.  I started with:
- [assets at end of period – assets at start of period – new money entering portfolio] divided by [assets at start of period],
- then used the mid-point Dietz which was a more accurate method,
- and now use Excel's XIRR function for anual returns.  If it is not a full year I then adjust XIRR by the PRR (Personal Rate of Return) = [(1+XIRR Annualised Return)^(# of days/365)]–1.
In those post I also used incorrect weightings for the benchmark portfolio.  It should have been 72% stocks/28% bonds as per here.
Apologies for the confusion but I'm learning here too.
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2008 was a bad year for my investment portfolio and by year end the 02 January 2009 I was -19.7% -15.7% using [assets at end of period – assets at start of period – new money entering portfolio] divided by [assets at start of period] as my return calculation method. 2009 also started badly and at one point in March my portfolio was -12.4% and we weren’t even a quarter of the way through the year. As everyone knows the markets then started recovering and I rode the wave to end the year at period 02 January 2009 to 31 December 2009 at +21.5% +24.9% including fees.

Gold Within My Retirement Investing Strategy – January 2009 Update

Within my Retirement Investing Strategy I currently hold 2.6% of my portfolio in gold with a targeted holding of 5%. Gold is the only portion of my portfolio that does not provide some sort of yield (dividends, interest etc). So why do I hold it?

The first chart shows the Real price of gold since 1968 with it becoming quickly obvious that it can be a wild ride. The first reason I hold gold is demonstrated by drawing a trend line through the dataset which provides the formula Real Price = 1.37 x Year -2120. This suggests a trend Real price in 1968 of $573 and a trend real price in 2010 of $630. So provided you don’t buy during one of the scary boom periods this suggests that gold has the potential as a good long term place for me to protect myself from inflation.

The second and very important reason I hold gold is that the correlation between the Real S&P 500 (also displayed on the first chart) and Real gold is negative at -0.34. The second chart provides the ratio of the S&P 500 to gold demonstrating just how far apart the two can vary. So my thought here is that there will be some opportunities where stocks will be overvalued but gold will be cheap (and I can buy) and vice versa. Over the long term maybe I can then squeeze some more performance out of my portfolio.

For the moment I don’t know what to do with gold. I’m certainly not selling what I already own as it’s a long way from its historic Real highs however I’m not sure whether to buy any more as it’s also a long way above its historic trend line...

Stock Market History – The Great Depression Compared with Today

So a second great depression has been avoided... Most countries are out of recession... The stock markets are headed upwards again...

All wonderful stuff except I just don’t feel comfortable with the above chart showing progress from the Real (prices adjusted for inflation to present day) peak in 1929 taken from the Shiller dataset and comparing that with the Real (again inflation adjusted) peak in 2000 for the S&P 500. The correlation between these two periods is currently sitting at 0.65.

Is the stock market out of the woods yet?