Is Property A Safe Haven Whilst The Stock Market Is Stormy?

As the stock market slumps into what is now technically a bear market, investor attention turns towards safe havens, particularly Australian residential property.

Historically, as sharemarkets fall, investors head towards bricks and mortar. This time around though, as stocks are falling, the latest property data indicates a further tightening of already chronically low rental stocks with the prospect of increases of between $50 and $100 a week in rents. If the projections are accurate, rental yields will continue to rise, particularly in outer suburbs.

Before you rush for the real estate sales guides, take a steady, deep breath and read on.

Monique Wakelin writes in the Eureka Report that the cardinal sin is to assume that all property is going to provide a short-term, safe haven of income and growth, and to buy quickly and indiscriminately!

The good news for investors is that record low rental vacancy rates and a growing housing shortage have pushed median rents up consistently throughout 2007 with the promise of more to come this year. Australian Bureau of Statistics figures show that in the year to September 2007, average dwelling rents showed their highest growth rate in 17 years. Separately, property group Residex’s measure of the growth in advertised annual rents shows a jump of 18% to 35%, depending on location, over the past 12 months.

Average weekly rent rose by $35, and Residex claims we could see increases of up to $100 a week this year. Further, ANZ's annual property outlook indicates that the long lead times on lease renewals (which prevent investors from raising rents) mean we won’t see true market values emerging until later this year, but we can expect upward movements when lease renewals start to bring the rental increases into the data stream.

Moreover, the latest report from property research agency RP Data says that rents in the outer suburbs have surged ahead of increases in capital values, whereas the opposite is the case for inner urban and coastal locations.

It is true that accurate market rates of rent require relatively long lead times to emerge. Investors can’t raise rents on existing tenancies until leases expire. What's more, there’s nothing uniform about when that occurs. Put simply, no two properties are ever created equal and rental properties are no different.

The tenant market, like the home buyer market, has only so much capacity to pay. Like the general housing market the tenant market has become multi-layered and multi-faceted and is being driven primarily by affordability issues. For instance, rent movements in the most sought-after inner-urban end of the rental market are less volatile because of perpetual demand. Already relatively high rents for the most sought-after properties tend to rise – over the longer term – in a slow and steady fashion, underpinned by higher demand for locations offering a particular lifestyle.

Even though it is owner-occupiers that drive price growth, the additional demand from tenants helps maintain values. Investors in these prime zones are focused (as they should be) on capital growth first and foremost and rental yields second.

Property investors need to understand where their “consumers” (tenants) come from. About 30% of the Australian population rents, both out of economic necessity and choice, in the short-to-medium term and most do not expect luxurious accommodation. Break this down and we find that outside of the largely lifestyle-driven inner urban areas, the rental “consumer” is in pursuit of comfortable, affordable accommodation. This core pool of renters includes first-home buyers excluded from the market for longer in the face of low housing affordability.

In the real world, irrespective of the data, to suggest that an average rental property that currently returns $320 a week is going to remain in hot demand if it is bumped up to closer to $370 or $420 a week in six months is to misunderstand the realities of market capacity.

The informed investor must instead strike a sensible balance between arriving at a reasonable and sustainable income level that will bridge the gap with loan repayments for an asset and avoid raising rents to a level that would effectively price them out of the market. Investors must look beyond the hype and the generalised data and assess their own assets very specifically.

When a lease is up for review, ask the managing agent what that particular property, in that specific location, with that tenant pool would realistically rent for if it was vacant and being offered to the market for the first time. It is critically important to weigh up the advantages of reliable, steady income from good tenants and moderate rental reviews against dramatic rent increases that lead to high tenant turnover, greatly increased wear and tear and potentially long and costly vacancy periods.

And, let’s not forget the bigger picture; greedy investors who adopt the “let’s raise the rent as far as we can, as quickly as we can” will add further to upward inflationary pressures. That can only bite them where it hurts the most – by way of increased interest rates.

How Dumb Are Most Real Estate Agents?!

This question has been asked many times. Real estate constantly polls as one of the most untrustworthy professions in the country. Have you ever heard the phrase “trust me I’m a real estate agent?” While this all sounds a little cliché the reality is that the general public has very little trust for real estate agents.

They tend to drive flashy cars, wear suits (some cheap, some not) and are always just a little bit late for every appointment to the frustration of buyers, tenants, vendors and landlords. So does this perception that real estate agents are untrustworthy, incompetent and overpaid really have merit?

The last comprehensive survey of the public put Doctors, Solicitors, Dentists, Pharmacists, School Teachers and even Accountants all well ahead of Real Estate Agents – the big question is why is this consistently the case? I believe the answer lies in the entry requirements to the profession which only require a 3 day course to become a certified agent. Could you imagine a 3 day crass course in Medicine and you could then operate on unsuspecting patients?

There would be enormous public outrage and the course would be banned in a flash. So why has Real Estate been allowed to offer such crash courses to the profession which bring completely unsuitable people into the industry with absolutely no idea what they are doing? The answer lies with the pressure groups that our Government actually listen to like the Real Estate Institute – they make a small fortune from memberships and training. They have self interest at heart when directing policy and have been allowed to influence decisions for far too long.

There are no base requirements to be a real estate agent. Your English can be disgraceful, as can your people skills. You don’t need to have completed high school and there are no checks in place to see if you even attended school. At Marquette Turner we believe that there is only one way to change the perception of the industry and that is through formal education. My fellow Directors are all studying a Masters degree or a Doctorate and we believe that will change the real estate landscape over the next 20 years. So next time you are deciding which agent is best to sell your home it might be worth asking them what formal qualifications they have. Ask them what formal negotiation and marketing training they have completed – after all you are entrusting your greatest asset to them and you have a right to know that you have chosen the best person for the job.

We have posted two parts of the five part expose of the “Real Estate Cartel in Australia”. This is a must read and the third part will be published in next week’s E Mag. You can catch up on the previous exposes by clicking on the links below.

EXPOSED: The Real Estate Cartels, Part 1 & Part 2

Michael Marquette michael@marquetteturner.com.au

A Little Inflation Is Like Being a Little Bit Pregnant

HAVING a little bit of inflation is like being a little bit pregnant. Is that old adage worth bearing in mind as consumer prices across the globe accelerate? Marquette Turner takes a look at what's going on.

According to an index produced by Goldman Sachs, global inflation was 4.8% in the year to November, two percentage points up from the previous year. Prices accelerated in 80% of the countries that Goldman tracks.

By historical standards, this is all small fry. An inflation rate of 5% hardly marks a return to the double-digit price increases that haunted rich countries in the 1970s and emerging economies for far longer. (For much of the 1990s, the average inflation rate in poor countries was 50%.)

Nonetheless, the upswing is broad enough to pose awkward questions. With ever more signals, from weak retail sales to rising joblessness, pointing to an American recession, is the world headed for a bout of stagflation-lite? And will stubborn price pressures constrain the marked easing of monetary policy that America's central bankers now promise?

As The Economist reports, the answers depend on what has been driving inflation up and whether those pressures persist even as economies slow. Ultimately, inflation is a monetary phenomenon, so responsibility lies with central bankers.

Pessimists point out that monetary conditions have been loose in recent years, with real interest rates low and credit growth rapid, particularly in emerging economies.

Others worry that the task of central bankers has become harder as globalisation has shifted from being a disinflationary phenomenon to an inflationary one. The downward price pressure from cheap Chinese goods may be abating while the developing world's rampant demand for resources may continually drive commodity prices higher.

There is some truth to these arguments, but none offers a complete explanation of recent price trends. In some emerging economies monetary laxness is clearly fuelling inflation—in the Gulf states, for instance, as the direct consequence of their dollar pegs.

But elsewhere the picture is less clear. Take China, where fears of social unrest have made inflation one of the government's top concerns and have led it to impose various price controls over the past week. The accumulation of vast foreign-exchange reserves has fuelled domestic money growth and the inflation rate has tripled in the past year. But that rise is almost entirely due to a jump in food prices, particularly of pork. Core inflation (excluding food, but including oil) is running at only 1.4%. Pig disease deserves more blame for China's recent inflation than loose policy. What's more, China's monetary conditions are tightening fast.

More important, China's productivity is growing faster, by 20% a year, according to America's Conference Board, a research organisation. That means overall unit costs are still falling.
It is true that the prices of imports from China are rising after several years of decline. But that has more to do with the weakness of the dollar than with increasing Chinese production costs. And even if the prices of Chinese goods rise, they could still dampen inflation in richer economies, because they are much cheaper than domestically produced equivalents and are gaining market share. As China produces higher value items, it will push down prices of domestically produced goods in ever more industries.

A more direct link between developing countries such as China and inflationary pressure comes through commodity prices. The prices of many raw materials have surged in the past 12 months. The food index is up by almost 50%. The price of oil has risen almost 80%. These jumps are the main cause of higher inflation across the globe. They are also related, at least in part, to structural changes in the global economy.

The world economy is increasingly powered by countries, such as China and India, whose growth is far more energy- and commodity-intensive than that of rich countries. Since 2001, China has accounted for about half of the increase in the world's demand for metals and almost two-fifths of the increase in oil demand.

This shift means that the usual relationship between America's business cycle and commodity prices may change. Past American recessions have sent the prices of oil and other resources down. That may no longer be so. Economists at HSBC say that the correlations between industrial output and commodity prices began to fall apart a few years ago.

But that does not mean commodity prices will continue to surge. Emerging economies may be more resilient to an American recession than hitherto, but they are unlikely to grow faster. At the margin, therefore, the demand for commodities will slow. And in the longer term, higher commodity prices will eventually lead to greater supply. Much of the surge in raw-material prices in recent years reflects the fact that few foresaw the pace of emerging-market growth. All of which suggests that, even if commodity prices don't fall, their rate of increase will ease, and the biggest driver of recent global price pressure will weaken.

Given the American backdrop, the Fed's recent decision to step up the pace of interest-rate cuts is understandable. The weak economy poses a bigger danger than inflation. But there are risks. Even if commodity-price inflation wanes, the falling dollar means America faces other inflationary threats. And if overall price pressure remains stubbornly elevated, inflation expectations may yet rise. If that happens, the Fed will face the unenviable task of curtailing its easing or even raising rates while the economy is weak.

Simon Turner simon@marquetteturner.com.au