In today’s Money Morning…your responses to last week’s Money Weekend…is Australia’s resources recovery sustainable?…incredible gains on offer in the right niche commodities…and more…
Last week in Money Morning we took a look at Australia’s housing market. Particularly the growing debt levels involved, and the effects this has on the rest of our economy.
This week, your editors turned their eyes to the resources market. How strong is the current recovery? Can it last? What are the hottest commodities, and the best stocks to benefit from them?
I’ll get to that in a second. But first, many readers wrote in with commentary on last Saturday’s Money Weekend article on Aussie real estate. I can’t address every email today, but here are a few responses.
‘Sorry, but anyone who thinks a house bought today is going to be worth less in 40 years clearly doesn’t understand “economic rent”.
‘Housing is still affordable, just not in the areas most young people want to buy in for their first home. Plus first home buyers today want it all. My family of 7 grew up in a small 3 bedroom home with one bathroom and 3 girls in one room and two boys in another.
‘They bought it 46 years ago for $12,000. Sold it 5 years later, after cleaning up the big gardens, for $36,000. Today, 42, years later it’s worth around $1.2 million.
‘Now that’s a good investment.
Thanks Graeme. Turning $12,000 into $1.2 million sounds like a stunning investment at first glance. And it’s not bad. But you do have to take the timeline into account.
Over a 46 year period you’re talking about a compound annual return of about 10.5%. That’s still quite good. But you also need to take inflation into account. Using the RBA’s inflation calculator, $12,000 in 1972 would be worth roughly $132,000 today.
Running the figures again in real dollars (inflation adjusted) the return works out to 4.9% compounded annually. I also imagine that over a 46 year time frame there were more than a few maintenance issues — new roof, several coats of paints, kitchen and bathroom upgrades…
The other problem is that a home you live in isn’t exactly an investment. It’s a place to live. If you sell it, whatever the profit, you still have to buy somewhere else to live.
How can you take those gains off the table, without putting them back on when you buy your next home?
You could always move somewhere cheaper, of course. That’s exactly what David suggests:
‘Tyler, my heart goes out to you and your entire generation. I have seen the house I was born into in Reynolds Street Cremorne, Sydney NSW, sold recently for $3.4 million. My father paid $4000 for it in 1942. The workers’ cottage I bought in Bardwell Road Mosman in 1974 for $37,500 and sold in 1986 for $130,000 has just sold for $2.4 million. It was built in 1896 of weatherboards with an iron roof. It’s a dump, (you park your car on the street) compared with my present house on the near south coast which is worth about $1 million, and has 4 bedrooms, 3 living rooms, 2 full spa bathrooms, a double garage, and is centrally air-conditioned.
‘My answer to all of you young ones: GET THE HELL OUT OF THE CITY! Go country! Breathe fresh air, avoid parking meters, traffic snarls, the sheer energy-sucking drudgery, and find a new life. I am 73 but I am surrounded by hundreds and thousands of young couples and families doing just as I am advising you. Most are self-employed, and they network like crazy and share the tons of work available. We live near Nowra, close to pristine beaches, with abundant water and services of all kind. Good schools and hospitals are all around us. Don’t wait. Just do it. Don’t give up on the ownership dream. Just shift your sights to where the life is worth living. Give Sydney and Melbourne the shove they deserve! Pull your fingers out, youth, and get moving. You’ll never go back!
Thanks, David. I actually spent my teenage years in country Australia. But the career opportunities simply aren’t there for most professions. Reducing your cost of living doesn’t help much if you cut your income by half…or lose it entirely!
That may well mean many younger readers will look at renting for life, and seeking their investment returns elsewhere. There’s that conflict between real estate as a home versus an investment, again.
There were plenty of other responses, many more than I have the space for here. So we’ll leave off with Rob H, who ripped into me for being bearish on real estate while Port Phillip Publishing also publishes the work of Phil Anderson and his team, who are bullish.
I enjoyed this email. After all, we learn more from criticism than from praise. And Rob was certainly critical. It’s a lengthy letter, but here are a few of my favourite lines:
‘I dare you guys to actually challenge each other & make it public. You’d gain far more cred if you did.’
‘Writing articles that goes against what you charge serious money for just makes you look slightly foolish.’
‘You advertise services that contradict your article right next to or within your articles — cmon guys — get with it!’
‘I wonder how Vern sees all the difference of opinions — he seems to be quite sincere in having the truth told.’
‘Will be interesting to see how this all pans out. Some of you are going to be very wrong — hopefully some of you are going to be very right.’
It can be frustrating to hear two conflicting opinions, Rob. But at Port Phillip Publishing we trust you to make decisions for yourself. We each put the best researched ideas in front of you that we can, and we’ll often have lively discussions about those ideas here at the office. But there’s no such thing as a ‘party line’.
Yes, that means some of our publications disagree with one another at times. But you can trust that the individual or team behind each publication really believe in what they’re saying…and can back it up with hard facts. And with all of the information in front of you, you’re empowered to make your own choices.
If you’d like to hear exactly why Phil and his team think you should not bow out of the real estate market, you can check out their research here.
And since Rob asked about what Vern thinks, check out his article from Monday’s Markets and Money, ‘The Bloated and Obese Aussie Property Market is Headed for a Forced Diet’.
Now, on to this week’s articles in Money Morning…
The week began on a positive note. Greg Canavan wrote on Monday morning that our market was set for a good day, after strong results from the US. And with the Chinese economy showing signs of a healthy recovery, Australian commodity exporters have been recovering in turn.
One commodity in particular is set up for an unexpected jump in demand. So much so that it could trigger a supply crunch. Not good news for retail customers in the short term. But very positive for suppliers. You can find Greg’s article here.
The positive numbers continued to roll in on Tuesday. Greg wrote about a strong opening to earnings season, and why it’s such a good sign. He explained why the dangers of Australia’s debt levels are unlikely to affect us in the short to medium term. Of course, there’s still the looming long term issue. But as investors, we can’t afford to miss the opportunities presented to us in the meantime. To read more, you can find Tuesday’s Money Morning here.
Also writing Tuesday, Shae Russell questioned why one demographic is so underrepresented in the investing industry. Not least because the numbers seem to prove that those few who do participate perform better than the majority. So why do they overwhelmingly avoid share markets? Read Shae’s investigation here.
On Wednesday, Greg argued that the recent recovery for iron ore has probably run its course. But that doesn’t mean there aren’t any gains to be made in resources. Every time commodities boom, there’s a different one or two that run hotter than the rest. You can read the details in Wednesday’s Money Morning.
And on Thursday Sam looked at what exactly a resource is, and why one niche of the market that most people wouldn’t think of is acting exactly like a commodity market. One with the bottom falling out of it, to be precise. You can read the details here.
Friday Sam looked at a few resource stocks that could perform so well that you’ll never need to have a job again. Which may be a good thing because, as he writes, in a few years there may not be any jobs for you to have. For a worrying look at the effects of rising automation on Australia’s job market, and how you can get out in front of it, check out Friday’s Money Morning.
Last, but not least, this week’s podcast has a slightly different flavour. With Kris and Woody out of the country, the Financial Anarchists producer Dan took the reins. He speaks with our own Greg Canavan about his latest research into the Australian energy markets. There’s a crisis coming for Australia’s energy prices. But Greg has found a silver lining; an opportunity for you to profit from the chaos. And Kris phones in from the retirement capital of the US, to talk about your twilight years.
That’s it from us this week. Thanks again for all of your emails. You’ll hear from me, and the rest of the Money Morning team, again next week.
Editor, Money Weekend
Aussie Dollar to US Dollar:
Gold: US$1,238.72 (AU$1,608.01) per troy ounce
Silver: US$18.07 (AU$23.46) per troy ounce
West Texas Intermediate Crude Oil: US$53.46 per barrel
ASX 200: 5,805.80