23/06/2011 - 00:00

Dollar, inflation keys to property rebound

23/06/2011 - 00:00

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It looks like a case of ‘owners sit tight, buyers get ready’ in local property for the next two years.

Dollar, inflation keys to property rebound

HERE’S a test – see if you recognise these four features in a city, which is:

• relatively small, but enjoying a period of fast growth while the rest of the country is stagnating;

• home to a large number of small, innovative companies, and a mini-flood of initial public offerings (share floats);

• expecting a period of sustained growth thanks to demand for its products; and

• located on the west coast.

Sound like Perth?

If you said yes, you would be right, until you get to the fifth clue.

• residential property prices are booming, some rising by more than 20 per cent over the past 12 months.

It’s the property market that separates Perth from Palo Alto, centre of the US technology development industry, and a city better known as the heart of Silicon Valley.

Situated south of San Francisco in California, Palo Alto, and a series of nearby sister cities, are booming thanks to the surge in internet and other technology developments such as Facebook and LinkedIn.

In some ways, Palo Alto resembles Perth with the obvious difference being that one relies on smart technology developments (and an abundance of marketing) while the other relies on the smart development of resources, which also makes extensive use of high-tech science.

So why is it that family homes in the $1 million range in Palo Alto have risen so sharply while similar homes in Perth have fallen in value?

There is no quick answer, but here’s a starter list.

• Interest rates have been rising in Australia versus near zero in the US, which does wonders for repayment commitments.

• The Australian dollar has soared in value while the US dollar has slumped, meaning that foreign investors have fled Perth and poured into Californian cities.

• Perth prices boomed in the first phase of the resources upswing, meaning they have had further to fall.

• Over-borrowed investors have been forced to sell by nervous banks.

Interesting as those points of difference are, they are not what could termed long-term factors.

Interest rates will peak when the Reserve Bank is convinced it has crushed inflation, with the unspoken political agenda being to have the job finished before the next federal election when the current government would love to see a small downtick. In other words, a two-year timeframe is wrapped around the rising interest rate cycle.

The Aussie dollar has probably done its best work, with a fall of US10 cents widely seen as likely over the next 12 months, pulling it back to around US95c.

The price falls of the past year will reach a point of natural resistance when the last forced seller is driven out of the market, and banks regain their confidence, but probably only after Europe fixes its finances, or falls apart, with either event reasonably assured to happen over the next two years.

Taken as a whole – and given the fact that Perth is at the centre of a boom that probably has more substance than some of the tech-nonsense coming out of Silicon Valley – and you can see a property price recovery down the track.

How far down the track? Well that two-year timetable seems to cover a number of the ills that need to be corrected.

Inflation has to be killed off. The government has to go to the polls. The Aussie dollar will follow the interest rate cycle, the banks will have totally repaired their balance sheets (if they haven’t done so already), and the Western world needs to resume growth and get over what looks to be a double-dip recession, particularly in the US.

For homebuyers, that means the next 18 to 24 months will be a wonderful time to get into the market, or upgrade.

For home sellers, at least those who don’t have to sell, it will be a good time to do nothing.

Disconnected

DISCONNECTIONS between markets, such as that seen in the Perth versus Palo Alto example, are more widespread than some people might imagine as the world continues to struggle with its search for the so-called ‘new normal’.

Oil is an interesting case study of a commodity that is seemingly ubiquitous, in that it is roughly the same sticky, black stuff the world over, which burns.

But, over the past few years, there has been a dramatic disconnect as the two benchmark oils – Brent in Europe (named after a North Sea oil oilfield) and West Texas Intermediate (no clues required) – have drifted away from a time when they had a similar price structure.

Last week, Brent crude hung on to a price of around $US114 a barrel while WTI sank to $US95/bbl.

Oh how wonderful it would be to fill a tanker in Texas at $US95 and drop it into Rotterdam at $US114.

Oil is not alone in our world of disconnections. Gold too is out of whack, with physical gold (the metal itself) more than doubling over the past five years, but the share price of goldmining companies falling well short of that performance.

Blame for the gold companies’ underperforming against their sole commodity is a lack of dividend flow to investors, a fact that is driving a push for miners to become more generous to their shareholders.

Out of favour

A FINAL thought on things going in different directions. A few years ago, US hedge-fund guru Phil Falcone was flavour of the month, thanks in part to a big shareholding in the Andrew Forrest-led Fortescue Metals Group.

Not today. Mr Falcone is struggling to make headway with a satellite wireless network called LightSquared, which is his pet investment inside the Harbinger fund he runs.

During the past few months, investors are reported to have tried to withdraw $US1 billion from Harbinger, only to be offered shares in LightSquared, which is having problems with US government regulators worried about the system interfering with other wireless signals.

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“One of the most common of all diseases is diagnosis.”

Karl Kraus

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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