Revisiting housing demand/supply

As well as interest rates, an important factor affecting house prices is the level of demand versus supply. If lots of houses/apartments are being built without sufficient population growth, that will tend to put downward pressure on prices and vice versa.

Amid travel restrictions, net overseas migration has plummeted and therefore so too has Australia’s population growth. This looks to have been further augmented by slowing births as women delay pregnancy amid the current economic/political uncertainty. That says physical demand for housing has hit the brakes. Population growth over the year ending Dec-2020 was 136,000 compared to 387,000 a year prior. A massive slowdown.

On the other end of the spectrum, new supply of housing has continued on pretty healthily. In fact, the HomeBuilder stimulus has seen new building activity for detached housing increase. Approvals and commencements have increased, which means completions will soon follow. It is completed dwellings that effectively add to housing supply, as they can be lived in.

So effectively, new demand for housing has slowed while supply has remained very healthy, with completions running at around 200,000 per year. In 2020, completions were around 182,000 compared to 136,000 population growth! That’s more than one dwelling for every person!

Ratio of annual building commencements/completions to population growth

In this case, we can ask how can there be a rental market squeeze, of which the anecdotal data is supportive of! SQM Research says that at the national level, rents for 3-bedroom houses have increased by 11.8% annually and 7.5% for 2 bedroom units! Meanwhile vacancy rates have been trending lower to 1.7%. So the evidence on the ground is that despite our low population growth, the rental market is on fire.

What gives? One argument is long-term rental stock is being converted to AirBnBs to meet hot local tourism demand (amid a lack of overseas travel), effectively taking that stock out of the rental market (and to the tourism market). Another argument is that household preferences have shifted. Amid lockdowns and WFH, people are less likely to want to be in a sharehouse as opposed to their own place. This would effectively increase rental demand. Yet another reason, similar to the second, could be an increased rate of romantic separations (again supported anecdotally) increasing demand.

All-in-all, the proof is in the pudding, which is that the property market is red hot both in terms of prices and rents. However, the longer term outlook may be more sanguine. A lot of the factors I just referred to could be short-term in nature. After they settle down, strong building activity relative to population growth may take precedence. That would be expected to put downward pressure on rents and prices. Add in the prospect of higher mortgage rates and you could make a case for the next correction being in the works.

Revisiting housing demand/supply

Commodities hold on

The stratospheric rise in commodity prices has largely been met with disbelief and skepticism. Yet, the iron ore price remains around US$220/ton while other commodities have been buoyant as well (copper, nickel etc).

A lot of the strength has been to do with stimulus in China coming out of the CV-19 shock. But to my mind, an underrated factors has been the increase in money supply around the world due to central bank actions. This is the ‘money illusion’; i.e. if there is twice as much money supply, prices will be twice as high. There’s no doubt money supply has increased significantly over the past 12 to 18 months. As an example, money supply (M0) in the US increased from roughly $US3,500,000 million pre CV-19 in early 2020 to 6,041,900 million currently – not far off doubling.

Is there any wonder we have seen inflation and asset prices go up? A major driver of the 5.4% annual official inflation figure in the US has been an increase in the price of used cars (by circa 45% p.a.). Are the used cars worth more or is the currency worth less? Similarly, the crazy house price increases seen around the world make more sense when we consider the money creation that has taken place and the record low borrowing costs.

Seen in this lens, the commentators expecting a normalisation of the iron ore price to under $100/ton are playing yesterday’s game, in my opinion. This isn’t 2014/15 anymore (the last time the iron ore price crashed, down to US$40/ton), this is a very different world and I suspect we are not going back.

Commodities have been one of the few remaining areas of value in the market in 2021 in my view. I’ve been buying into resource stocks in recent months as I’ve seen them as the best value. We are also moving into dividend season after what should be a record earnings season and I’m expecting some huge payouts. BHP is one I’ve been adding to this year, which hit a new high on Friday not far off $52.

Commodities hold on

Housing market update

CoreLogic confirmed the property boom continued apace as we close out FY2021.

Hobart was the biggest gainer in June gaining a remarkable 3%. My former home state has certainly changed markedly since my time there in the 1990s. A shock to see some of the prices for units and houses there when I browsed Domain today. Putting it simply, if I moved from Canberra to there, I’m not sure I’d be moving into a more affordable market or not anymore! Speaking of Canberra, it joined Sydney to also record over 2% gains for the month.

Unsurprisingly, lending for housing has exploded. Owner-occupiers, spurred by grants, were the first movers. Now investors are joining the party amid cheap mortgage rates and a galloping market. The gains beggar belief…

Who knows what this FY will bring! We’ve been on a wild ride lately…

Housing market update

Celebrating wins

As FY21 draws to a close I’m reflecting on some of my best investments of the past 12 months. Here are the top three shares bought in the previous 12 months:

  1. Nordstrom (B $12.19, Current $36.42, gain = 199%)

Nordstrom (American luxury department store chain) I bought around October 2020 as a rebound play post CV-19. The stock had been smashed but still hadn’t recovered by much even in October (over six months since the market bottomed). My thanks to a YouTube channel I watch for putting me onto this one as being a US-based stock, I’m not as closely across the trends over there. Sometimes copying smart people can pay dividends.

2. ANZ Bank (B $17.77, Current $28.28, gain = 59% + dividends)

ANZ I bought in September 2020 to build out a smaller position I had started during the crash. Like Nordstrom, it was clear by September that the company’s business (loosely the Australian property market) would be fine. It was clear there would be no meltdown in the property market at this point, yet the company was still heavily sold off. ANZ recently paid a 70c dividend, almost an 8% yield on that purchase price.

3. NIC (B $0.6, current = $0.995, gain = 66% + dividends)

This one’s a bit messy as I bought Nickel Mines a bunch of times over the past year, most of which was in the 60-70c range, but I have bought some recently which is currently marginally down. NIC is a nickel producer based in Indonesia. The financials of the company look compelling if nickel prices hold or move higher. The nickel sold is an input into stainless steel production in China, though the company is looking at diversifying to produce Nickel Matte that can be used in the Electrical Vehicle (EV) industry. The company has also started paying a dividend, with the last semi-annual payment rising to 2cps. This is a relatively high dividend yield (~4%) for a nascent company indicating the positive economics of the business currently.

There have been a range of smaller winners and thankfully no major losers over the last year. Something I’ve been focusing on for a while is cutting down on giving the market ‘easy money’. I try and focus on investments where I see it as unlikely I’ll lose money. That is, only invest on high conviction trades and let the rest go. Patience.

Here’s to kicking ass in FY22!

Celebrating wins

Market wobbles

Having been in the share market for roughly 20 years now, I still marvel at how hard it is to master market psychology. We’re tempted to buy when share prices surge higher than fearful and brow-beaten when they fall sharply lower.

Today was such a day on the ASX, falling by circa 2%, a pretty nasty fall, with the XJO at 7,235. Worse for me a couple of my larger holdings get beaten up badly such that I was down 4%. Ouch. One of them was CBA which fell by a seismic $5.63 today, which may have also reflected disappointment with the price it got for spinning off its general insurance business. But some perspective here, CBA fell to a touch over $98. I bought heavy last year under $60 (still up over 60% excluding dividends) and topped up again earlier this year just under $82.

I don’t say that to brag (well maybe a little – it is my blog afterall ;-)), but to make the point that sometimes our nerves and trust in ourselves can be rattled when the market moves against us like this. If you trust your investment thesis, the share price will take care of itself in due course. CBA I still like, but I certainly wasn’t enthusiastic as the price went north of $100, ergo no recent buys.

One area of the market I do like is iron ore. I’m watching in fascination as the iron ore price stays over US$200/ton. I’ve said this before, the market is pricing in the price to normalise from here given how little share prices have moved in the likes of BHP/RIO. But the longer it stays up, the more these companies will mint money like we’ve never seen. With most of the iron ore majors going ex dividend in 2-3 months, I think we’ll see them start to gather buying activity.

For the record, I took a position in FMG today at $22.15. Buying on big red days is putting our knowledge about psychology to use.

Until next time.

Market wobbles

Victorian exodus

IFM Chief Economist Alex Joiner nailed it when he said “the exodus continues and it’s probably not just the weather”. Victoria has started losing residents at a significant clip, having not so long ago been the state people were moving to most earnestly.

New South Wales has long had negative net interstate migration as a lot of overseas arrivals have started in Sydney then branched out across the country. Melbourne’s exodus is more telling. The sunshine state has received around 30,000 residents (net) over 2020, no small number. No wonder housing markets have been on fire up there as well.

Victoria is in a significant amount of trouble and looks on path to be another failed socialist state.

Victorian exodus

ABS confirms property surge

The ABS released its dwelling price indices for March 2021, which showed a 5.4% rise over the quarter and a 7.5% rise over the past year. This was an acceleration in annual growth from the December 2020 quarter as can be seen below:

All cities have now shown solid growth over the past 12 months, even Melbourne has increased by 5.9%. Hobart (+10.2%) and Canberra (10.9%) were the two strongest cities over this period. While all cities have benefitted from record low mortgage rates, these two cities have been relatively livable as well in terms of government restrictions (contra Melbourne).

It’s a very strong turnaround from the June 2020 quarter when dwelling prices fell by 1.8% (there’d be a few smarting sellers I’m sure). That means annual price growth will accelerate even further when the June 2021 results come out in a few months.

Until next time.

ABS confirms property surge

The power of consistency

A slightly different style post today, on the power of consistency.

What do many of the highest achievers have in common? The answer is dedication and discipline, day in day out over many years.

The best athletes are those who are not just naturally gifted, but those who attend to every ‘1%er’, their diet, their psychology, their cross-training etc. They leave no stone unturned in maximising their potential. And this process does not stop, it’s a lifestyle. Yes, there may be small breaks (cheat meals after a big event etc), but the committment is near total.

This same power transfers into the financial world. The most successful in personal finance adhere to the same principles. They don’t blow their money on exorbitant holidays, expensive sports cars or clothes just to impress or flaunt their wealth. They continue doing the work, saving diligently (bringing lunch into work, not eating out, haggling on big ticket item purchases, brewing their own coffee) and investing their free cash flow into assets (shares, property, crypto etc). They know success comes from continued discipline, not one month of effort.

This is important to keep in mind when things get difficult. In the moment, the discipline can seem unsatisfying. I had this thought recently as I was eating a very bland meal of chicken and rice for lunch while my colleagues had purchased much more appetizing options. However, the cost of the lunch was circa $2 vs $13, an $11 difference. Again, this can seem menial, but the small things add up, just as for elite athletes.

Focus on your goals, visualise success and the sacrifices become more palatable.

The power of consistency

Synchronised boom

Dwelling prices continued to spiral upwards over May, increasing by 2.3% in the month alone at the five capital city index level, to be 9.1% higher than a year ago.

The strongest increases in the month were in Hobart (+3.2%) and Sydney (+3.0%). The weakest gains were 1.1% in Perth and ‘only’ 1.75% in Canberra and Melbourne. Over the year, the troubled city Melbourne increased by the least amount (5%) with the strongest gains in a rebounding Darwin (20.3%), followed by Hobart (+16.3%) and Canberra (+15.6%). Remarkable gains. It surely has been a synchronised increase, with scarcely any property owners worse off than a year ago.

CoreLogic monthly price index change

Policymakers have been content to ‘let her rip’ as price gains demoralise those saving to enter the market. Until higher inflation passes into official numbers, the RBA is unlikely to stand against the property market. Still, fixed mortgage rates look like they are slowly grinding higher, fuelling speculation the bottom of the mortgage rate cycle may be in.

Elsewhere in markets, Australia remains lucky from iron ore holding over US$200/ton meaning our largest miners are making unprecedented profits. Watch for massive dividends from the majors come August/September.

The crypto market has taken a pretty large leg lower which is no surprise given how hard it has run out of the post CV-19 panic lows in March 2020. When it’s all looking too easy markets often correct, is that a lesson coming for residential property? We will see. Until next time.

Synchronised boom

Mortgage rates to rise?

One of the strongest influences on house prices is mortgage rates. The sonic boom in house prices post CV-19 reflected another leg down in interest rates (with the RBA’s official rate at a record low of 0.1%) amid other factors.

However, there are signs that rates may be moving higher, even without any Central Bank action. Massive stimulus, combined with supply chain frictions has sent prices rising. The US recorded annual inflation of over 4% – the highest read since September 2008. The price of lumber, steel, coffee etc have all moved sharply higher over the last year. Inflation is here, we all know it!

Michael Burry (of Big Short fame) caused a stir when he mentioned Weimar Germany and moved his fund to strongly short US Treasuries, betting on a rise in yields (and thus fall in price).

In Australia, our largest lender, Commonwealth Bank has started to raise rates on some of its longer term fixed rate mortgages (https://www.msn.com/en-au/money/markets/commonwealth-bank-asxcba-hikes-interest-rates-is-the-rba-wrong/ar-AAKdRmx). I’ve personally just rolled out of a 3-year fix from 3.87% into a new term at just 1.87% (less than half the interest rate!). No wonder property prices have been booming! However, if inflation continues to rise, these mortgage rates will be a happy memory. In the meantime, it’s a great time to consolidate your financial position by paying off principal amid these low interest rates. If rates to rise and your property falls in value, at least you will have insulated yourself to some degree.

Until next time.

Mortgage rates to rise?