Buffet & Shiller predict US stock market crash. Next major interest rate move will be upwards – here’s when. And more in property news this week…
Our aim is to filter only the most relevant economic, investment and property news affecting investors from the torrent of information filling the newsfeeds each week so you don’t have to. We then present them in digestible snack form so you can update yourself over morning tea.
Read on and enjoy your economic, investment and property news this week.
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In economic, investment and property news this week…
- Buffet & Shiller predict US stock market crash.
- Next major interest rate move will be upwards – here’s when.
- Have investors really ruined first-home buyer’s dreams?
- How much does migration drive house prices?
- Government forces RBNZ to take house prices into account.
- Mega Nido store closes after receivers fail to find a buyer.
- Good news from around the world.
Buffet & Shiller predict US stock market crash
The US stock market is near its all-time high but two leading indicators, one created by Warren Buffett and the other by Robert Shiller, say it’s due for a massive correction.
The Buffett Indicator…
The Buffett Indicator compares the total market value of US stocks to GDP.
You could call it the ultimate crash indicator because it predicted both the dot-com crash of 2001 and the 2008 GFC crash.
Warren Buffett himself calls it: “The best single measure of where valuations stand at any given moment.”
When the line is within +/-30% of the historical trend line, stocks are deemed to be “Fairly Valued”.
When the line goes beyond 30% (+1 standard deviation above the norm), stocks are “Over-Valued” because they’re valued much higher than GDP and need to come back down.
Anything over 60% (+2 standard deviations) is deemed to be “Strongly Overvalued” and will most likely correct sharply.
We are currently at 80%.
These are historical, all-time highs.
Some believe that’s why Buffett dumped stocks and hoarded cash throughout 2020. Berkshire Hathaway ended June 2020 with an all-time record $147 billion in cash.
The Shiller P/E Ratio…
The Shiller P/E Ratio divides the price of the S&P 500 index by the average inflation-adjusted earnings of the previous 10 years.
Also known as the Cyclically Adjusted P/E Ratio (CAPE Ratio), it was created by Yale professor Robert Shiller, the author of Irrational Exuberance.
When the Shiller P/E ratio goes above 25, stocks are deemed to be in an “extreme bubble”.
We are currently at 34.
At the end of the roaring 20s, just prior to the Wall Street crash of 1929, the ratio peaked at 31.
At the peak of the dot-com bubble the Shiller P/E ratio hit 43, the only time it’s been higher than today. And we all know what happened when that bubble burst.
In the heady days leading up to the Global Financial Crisis, the ratio peaked at 27, way below today’s 34.
We are in unchartered territory.
Volatility vs Stability…
Does the volatility of shares scare the bejeezus out of you?
The stability of industrial property should help you sleep at night. Industrial property weathered the Covid-19 pandemic better than just about any other asset class I can think of.
Take a close look at Provincia industrial property fund…
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Next major interest rate move will be upwards – here’s when
Reinforcing last week’s interest rate story titled, Lock in those long rates while you can, Tony Alexander wrote in yesterday’s Tony’s View newsletter that the next major move in interest rates is going to be upward, but it probably won’t happen until 2023.
“Before then, starting maybe very soon, we will see medium to long-term mortgage rates going up as the wholesale market yield curve steepens (it already has),” writes Tony.
“When monetary policy starts tightening, we economists will make forecasts for how high rates will go and how fast they will get there.
“If we are in a bad mood we will try to scare millennials with stories of how high rates tended to go in the past. But there is simply no way we can reasonably predict what interest rates are going to do over the next few years.
“I fully expect them to go up, and that people will receive surprises. But no-one has had a decent forecasting record since 2007 and every central banker knows that each tightening or loosening cycle is a complete ‘suck it and see’ exercise.
“The best they can hope for is not to tighten too slowly or too rapidly – knowing however that getting things exactly right and avoiding rapid rate change at some point is near impossible.
“Low borrowing costs will for this year and next help underpin strength in the housing market and will not stand in the way of the next growth-driving force operating – business capex.”
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Have investors really ruined first-home buyer’s dreams?
Rental property owners have become the left’s favoured whipping boy in recent times.
Property investors are demonised by anyone with an axe to grind and blamed for oppressing the disadvantaged and making the housing market unaffordable to all but a privileged few.
Is there any truth to the propaganda?
First-home buyers blame property investors for outcompeting them and driving prices up, ruining their dreams of home ownership.
Left wing journalists like Bernard Hickey pour hate on property investors too, saying property investors have profited unfairly at the expense of others.
“Rental property investors have ridden a Government guarantee, lower interest rates, much faster population growth and endemically low house building rates for 30 years to extraordinary and untaxed wealth,” moans Hickey.
He continues his long-running investor-bashing campaign unabashed by the fact that many of his outrageous claims are proven to be deliberately misleading or false.
The people in his echo chamber don’t care. Hickey’s distorted reality validates their belief that investors are greedy ‘rich pricks’ who oppress the poor.
Hickey said the inspirational story of Ana Meredith’s “journey” towards owning 25 rentals by 2025 made him “sick for the future of first-home buyers”.
“The best any first-home buyer can hope for is they don’t have to bid against an investor supercharged with fresh equity and debt.”
But Meredith says property investors are not to blame for the problems first-home buyers face getting into the market, and that she is not in competition with first-home buyers who often have limited resources.
“I buy really rundown properties and I do them up. That is not necessarily the first-home buyers’ market. A lot of them don’t have additional cash to renovate.”
Unlike earlier generations of DIY property ladder climbers, today’s first-home buyers generally want a home that is already done up and ready to move into. Meredith says she rarely finds herself up against those people at auction.
“I don’t want to be either, because they emotionally buy and often pay a lot more for a property than it is worth, whereas my calculations have to work for them to be cashflow-positive investments.”
This case from another part of the country illustrates Meredith’s point…
An investor we know attended an auction for a 3-bedroom house in Manurewa, Auckland this week. It had a CV of $560k but he’d done his sums and was intending to bid up to $685k.
Another investor attending the same auction was prepared to bid up to $710k.
The property sold to a first-home buyer for $750k. She was determined to get it and put in an offer prior to auction. The auction opened at her $750k offer price and sold under the hammer after attracting no more bids.
As Meredith said, first-home buyers often buy emotionally and pay far more than investors who would be cashflow negative if they paid the same.
And they blame property investors for driving prices up and making it impossible for first-home buyers to get into the market?
Economists make the same mistake too, claiming that investors and first-home buyers are both competing for houses at the cheaper end of the market.
It’s an easy mistake to make when just looking at the macro data rather than what’s actually happening on the ground.
Yes, they’re both buying lower-priced properties. But they’re not always buying the same type of property, e.g. do-ups vs done-ups.
And if they are, they’re not buying the same type of property at the same price point. The numbers for an investor must stack up, which means they have a natural ceiling beyond which they will not go.
First-home buyers, on the other hand, are buying emotionally and will often pay far more than an investor is willing to pay. Unless of course they’re not prepared to make any of the compromises we made when buying our first houses and are trying to buy beyond their means, in which case they’re just being unrealistic.
The bottom line is that investors buy rationally. If a first-home buyer loses an auction to an investor, it’s not because the investor pushed the price up to an unrealistic level. It’s usually because the first-home buyer had an unrealistically low price expectation.
Not that they either realise or admit this. Instead they blame investors for ruining their home ownership dreams.
To quote Ana Meredith again: “Everyone is trying to blame the other person but it is not a blame game; it is a supply and demand problem.”
Would somebody please explain that to Bernard Hickey and his coterie of left wing finger pointers.
How much does migration drive house prices?
REINZ and real estate agency press releases tend to focus on the most recent month’s changes in things like prices and sales, emphasising the positives and minimising the negatives.
But very rarely do they relate the month-to-month changes to a longer-term context.
To help you understand where in New Zealand house prices might rise at a higher than average rate, I analysed Stats NZ regional population data from 1996 to 2020.
Over the 24-year period from 1996 to 2020, New Zealand’s population has grown 36% as seen in the chart above. The North Island at 39% has outperformed the South Island, which only increased 29%.
The Regions…
Auckland region
Looking at our major centres, Auckland is the star performer with a population growth of 54% over the period. An above average growth rate puts pressure on housing supply, which has been unable to keep up, hence there is significant upwards pressure on house prices.
Since 1993 Auckland house prices have increased by 584% vs 464% for all of New Zealand excluding Auckland.
Wellington region
Wellington has underperformed the national average. With a population growth of 27% over the period, it has grown at a slower rate than Otago.
There is [hopefully] a limit to how much the government can keep on increasing the number of bureaucrats it employs. This plus earthquake concerns and local infrastructure issues will continue to hold back population growth in the region.
But unless Wellington addresses its problems with NIMBYs blocking all attempts to increase the housing supply, upwards price pressure will continue.
Since 1993 Wellington house prices have increased by 467%, virtually identical to the national average increase of 464%.
Canterbury
Canterbury at 34% was only slightly behind the national average. The region suffered a population loss following the devastating earthquake of 2011 but has recovered strongly. Despite this, its population growth is now tracking slightly below the national average, whereas before it was tracking slightly above.
Although Canterbury’s population is growing at close to the national average, a huge increase in the supply of houses following the post-earthquake rebuilding program put a handbrake on prices.
Since 1993 Canterbury house prices have increased by only 288% vs 464% nationwide.
House prices in the region have been tracking below the national average pace since 2014, which coincides with the surge in house construction.
This proves the point that high house prices are caused by lack of supply, not excessive demand from investors or immigrants.
Informed commentators have been banging on about this for two decades now, but what does it take to make the government listen?
Otago
Otago’s population growth of 30% is heavily distorted by Queenstown-Lakes, which grew at a much faster rate than Dunedin. Covid-19 threw a spanner in the works for Queenstown, which until then had very strong price growth.
Since 1993 Queenstown house prices have increased by 580% vs 464% nationwide.
The Auckland effect…
The Auckland effect is readily apparent in the chart above. The neighbouring regions of Northland, Bay of Plenty and Waikato all benefit from Aucklanders downsizing and escaping the rat race. Notably, all three have above average growth rates.
Low-growth regions…
Be careful investing in these regions which, apart from West Coast, have barely managed to drag themselves out of negative growth.
Younger investors with a long-term horizon should only buy if the deal is cashflow positive, the yield is good, and you don’t care whether house prices in the area go up or down. In 25 years you’ll own them outright and 100% of the income will be yours to live on in retirement.
BTW, what is it about Palmerston North that attracts such vitriol? I know people who enjoy living in Palmy, but I may be alone in my favourable views. From the book Shit Towns of New Zealand available at bit.ly/furphyrissoleshop…
“Even the most intrepid of travellers would be hard-pressed to find a place as remarkably unremarkable as painfully boring Palmerston North.
“The city mainly exists so that people can confuse it with New Plymouth (hint: it’s the one with less crack and more stultifying boredom).
“A good sense of humour is especially essential. Unfortunately, most Palmy punters prefer to escape their locale-induced ennui with pastimes such as pissing their pants and passing out in the main street or masturbating in telephone boxes.
“Palmerston North is a university town in the same way that Kim Kardashian West is a philosopher, boasting an educational institute that caters to people whose crowning achievement was being able to spell ‘NCEA’ correctly and who are looking for a place to blow their course-related-costs loan on RTDs and discount condoms.
“Any visit to Palmerston North is guaranteed to have you screaming out of town faster than Mark Lundy.”
Ouch!
Government forces RBNZ to take house prices into account
The government has decreed the Reserve Bank will now have to take house prices into account when making its decisions, reports Radio NZ.
Finance Minister Grant Robertson wrote to the bank’s governor Adrian Orr late last year suggesting this course of action.
In his reply Orr warned against the option, saying there could be adverse trade-offs.
Robertson pushed ahead regardless, changing the Bank’s remit so it must consider government policy on house prices when making monetary decisions.
“The Bank will have to take into account the government’s objective to support more sustainable house prices, including by dampening investor demand for existing housing stock to help improve affordability for first-home buyers,” Robertson said.
The Bulletin asks whether this is just Robertson passing the buck? “Some argue that the house price crisis is caused more than anything else by a lack of supply, which the government itself shares some responsibility for.”
The Bulletin says this also means the Reserve Bank could have competing priorities. As foolish as such an approach would be, mass unemployment would probably bring down house prices.
“Right now the main goals of the Reserve Bank are controlling inflation, and maintaining sustainable employment levels – this new remit on housing is intended to slot in behind those on the priority list.”
“So that all raises the question – will squaring this particular circle actually be possible? An opinion piece by Stuff’s political editor Luke Malpass titled Government’s slow crawl on housing continues concluded with a line that sums up the broader issue – ‘the problem is that every intervention will have an effect somewhere else in the system.'”
COMMENT: It beggars belief that Robertson still doesn’t understand the true nature of the problem. As mentioned in two separate articles above, high house prices are primarily caused by lack of supply, not excessive demand from investors.
Informed commentators have been banging on about this for two decades now and yet the government is still trying to kill the investor bogeyman rather than fixing the real problem of insufficient supply.
Try fixing the excessive delays and outrageous fees charged by local councils, and removing red tape that restricts the supply of land and increases building costs instead.
But that takes much longer than one election cycle so they won’t. And that, folks, is why both rents and house prices will continue their inexorable rise.
Mega Nido store closes after receivers fail to find a buyer
The Nido mega-homeware store in Auckland will shut for good as receivers fail to find a buyer.
McGrathNicol, the receivers, said a purchaser was unable to be found despite initial positive interest from a number of parties.
Kare Johnstone, a partner at McGrathNicol, said established furniture retailers had been trading well as a result of the pandemic, with consumers looking to upgrade their furniture or home.
However, she added Nido was a start-up entity and “had a number of challenges, including reaching the level of sales required for it to continue to trade”.
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And finally, in not-property news this week something too good not to share…
Good news from around the world
Future Crunch had to go digging for this stuff. Progress happens slowly, away from the cameras, and it’s not always exciting or dramatic so it doesn’t get widely reported. That doesn’t mean it’s not happening though.
A new study in Denmark has found that less people over the age of 70 are having strokes and fewer people of all ages are dying from the disease. It’s good news for global health; strokes are one of the leading causes of death and disability worldwide. Researchers say the decrease is due to improvements in stroke awareness and a drop in smoking rates. Science Daily
The American Cancer Society says death rates have fallen again. Its latest figures show a 2.4% decline from 2017 to 2018 – the largest one-year drop ever. Longer term, there’s been a 31% fall in mortality rates between 1991 and 2018, translating to almost 3.2 million fewer deaths had rates remained at their peak. Its mostly thanks to declines in the four most common cancers: lung, colorectal, breast, and prostate.
Colombia has granted legal status to almost two million Venezuelan refugees. The bold humanitarian gesture, made by President Iván Duque earlier this month, gives them temporary protected status for ten years, allowing émigrés to work and access public services such as health and education. In a world where nationalist sentiments have all too often been stoked against refugees and migrants, it’s a remarkable example of leadership (smart economic move too). UNHCR
Subscribe to the free edition of Future Crunch here.
That’s it for this week, thanks for hanging in there.
Cheers, Brandon 🙂
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This content is provided for general information only and should not be relied upon or used as a basis for making any investment or financial decision. To the extent that any information or recommendations in this content constitute financial advice, they do not take into account any person’s particular financial situation or goals. As individual circumstances differ, we strongly recommend you seek independent legal and/or financial advice prior to acting in relation to any of the matters discussed herein. Neither Provincia Property Fund Ltd nor Provincia Property Management Ltd nor Provincia Property Fund Management Ltd nor any person involved in this content accepts any liability for any loss or damage whatsoever may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in this content.
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