Are you a Vertical or Horizontal analysis type?

Are you a Vertical or Horizontal analysis type?

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Most would answer that they are not sure given they apply a number of metrics whilst attempting to draw a conclusion on a particular subject. Real estate is a classic example given there are so many suggested formulas that can be applied to draw a conclusion yet there is no stand – out determination process.

I was asked this week what is the best method within the real estate industry to better understand the market machinations as to exactly what is going on – and do I look at the markets from a vertical or horizontal position? The answer to that would be both given on a weekly basis I look at the stock number movements and the weekly sales activity. Unlike the share market which closely watches the market capitalisation from its All Ordinaries Index, the real estate market is an entirely different beast given it offers no decisive measures or methodology.

The residential and commercial investor stampede has been unprecedented in 2013 and 2014 prompting many to call this a property ‘bubble’. One should ask the question if the ‘bubble’ theorists were investing in real estate would they still refer to this as a ‘bubble’. Of course not because they are simply commentators not participants and there is a striking difference between the two. The investors are looking at the markets overall from a vertical position (which also encompasses their entire investment portfolio) whilst the commentators have adopted a horizontal position concerned only at what’s immediately before them.

SydneyCBD_Quay

SYDNEY AERIAL PHOTOGRAPHY

To put these theories into practice one must apply what I call the Professor Julius Sumner Miller analogy – “Why is it so?” Firstly, are the Australian real estate markets weaker or stronger post Global Financial Crisis (GFC)? The answer to that is that the markets overall were much stronger Pre – GFC although for some strange reason this point is entirely missed in the debate (thanks to the horizontal observation.) We need to remember that prior to the GFC  the Australian economy was basking in an unprecedented twenty plus years of economic growth.

Next, in the “Why is it so?” analogy, is trying to understand why the household and the investment markets bear no resemblance to what is happening in the property markets. In particular the Reserve Bank which is actually now quite blase with its outlook especially when commenting on the Australian real estate markets. Given one would think that when the cash rate is at a record low then why aren’t households trading – up to take full advantage of the historical low cash rates?

Look no further than the latest Quarterly Statement on Monetary Policy – “The forecast for output had not materially changed. GDP growth was still expected to be below trend over 2014/15, before gradually picking up to an above – trend pace towards the end of 2016”.

It’s all very well to borrow more and upgrade the family home given record low rates so what’s stopping the markets from jumping – in?

Look no further than annual wage growth which is presently at the slowest rate on record. It’s all very well to increase the debt ratios in the present environment (horizontal analysis) but when one applies the vertical analysis there are severe head – winds ahead when rates start to rise again, which looks like 2016/2017.

The Reserve Bank pointed out in another one of their papers recently: “Nominal labour income has grown at an average annual rate of 2.7 per cent over the past two years, compared with a decade average of 6.2 per cent. And the widespread expectation is that wage growth will remain subdued for a time”.

Another clue is the rising rate of household borrowers who have preferred to pay back their loans via the interest – only option, which is not a positive sign for when the cash rate starts heading back to that Pre – GFC thingummy called ‘normality’.

So this might go part of  the way into trying to explain this thing called a ‘bubble’ – I prefer to call it a burp due mainly to a lot of external wind.

On that basis we can expect to see the cash rate coming down further in 2015 only to (hopefully) see it start increasing late in 2015 to early 2016 as a best case scenario.  Watch annual wage growth statistics as they become available given this is an obvious trigger for increased action in the housing markets. For those on the interest – only option you still have the best part of twelve to eighteen months to strategise your best options going forward, given history tells us it is not simply a case of Who Dares Wins.

So to answer (or should that be update) my preferred options when analysing the real estate markets I am a confirmed Vertical observer.

MOSMAN – 2088

• Number of houses on the market this time 2013 – 99

• Number of houses on the market last week – 114

• Number of houses on the market this week – 123

• Number of apartments on the market this time 2013 – 59

• Number of apartments on the market last week – 76

• Number of apartments on the market this week – 71

CREMORNE – 2090

• Number of houses on the market this time 2013 – 13

• Number of houses on the market last week – 13

• Number of houses on the market this week – 14

• Number of apartments on the market this time 2013 – 18

• Number of apartments on the market last week – 36

• Number of apartments on the market this week – 37

NEUTRAL BAY – 2089

• Number of houses on the market this time 2013 – 10

• Number of houses on the market last week – 10

•Number of houses on the market this week – 10

• Number of apartments on the market this time 2013 – 33

• Number of apartments on the market last week – 41

• Number of apartments on the market this week – 44

For this week’s sales in Cremorne real estate, Cremorne Point real estate, Mosman real estate, Beauty Point real estate, Clifton Gardens real estate, Balmoral real estate, Neutral Bay real estate, Cammeray real estate

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For this week’s open for inspections

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Source: APM Price Finder

Cheers ^__^

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