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Shares on the nose?

Peter Switzer
2 October 2009

There's a stench that some people seem to smell about shares, and the perceived pong has been pumped up thanks to the Global Financial Crisis, but it really worries me that poor old stocks are on the nose for the wrong reasons.

The penny dropped when I was talking to Matt Abraham on 891 ABC radio this week and he said he doesn’t have any shares. It was revealed when we reflected on the big share price slump which ended after 6 March this year, giving way to this robust rally, where the local S&P/ASX 200 has gone up over 50 per cent.

Of course, Abraham was technically wrong, but it was his program and so I did not pick him up on it. He does own shares, indirectly through his super fund but the point he was after was made — he did not like shares.

House price conflict

The conversation started on housing and how there was now conflicting news out there on the future for house prices.

The prediction of a 40 per cent fall in house prices, which was made by the country’s increasingly lonely bear, Associate Professor of Economics at the University of Western Sydney, Steve Keen, looks absolutely dead in the water.

This week, we saw headlines that told us Australian home prices had soared to record highs in August. The combined muscle of low interest rates, grants to first homeowners and growing confidence about the job market all weaved their magic spell and prices went skyward.

Home values up

The RP Data-Rismark Hedonic Australian Home Value Index – the largest property database in Australia – went up by 1.9 per cent in August and this was the eighth consecutive monthly gain.

For the year Australian dwelling prices have risen by 6.6 per cent and that’s the strongest gain in 15 months.

For the technical types, if you look at all our capital cities, dwelling prices are higher than a year ago and the RP Data-Rismark Hedonic Australian Home Value Index is now 3.8 per cent higher than the previous peak, which happened in February 2008.

CommSec’s chief economist Craig James broke up the figures.

“Higher-priced suburbs are now showing stronger price gains than cheaper suburbs,” he pointed out. “Both top-end and medium-price home prices have risen 8.2 per cent since the start of the year with prices in cheaper suburbs up 7.5 per cent.”

The miracle economy

This is an extraordinary result given that in Western counterpart countries, house prices have slumped because of the GFC. In the USA house prices nearly followed the Keen-script dropping 30 per cent, while in the UK they saw a 20 per cent slump.

In Australia we now have shares up, property up and super is rebounding while unemployment is tipped to peak at or below seven per cent, which is all fantastic for what looks like a ‘miracle economy’.

Keep the cycles in mind

By the way, property guru economist, Frank Gelber from BIS Shrapnel, told me on my television program on Sky News Business Channel that we’re at the start of a new housing upswing, which could last three to four years.

And that’s the point of this article. Asset markets such as the stock market and the property market go through cycles. The problem comes if you buy bad assets or you want to get out of good assets at the wrong time.

During the ABC radio interview, it became apparent to me that Abraham saw shares as second-rate assets to property and many people would agree with him. However, I believe there’s a sweet smell of successful shares that need to be talked about.

Good property, bad property

Don’t be fooled, there’s good property and bad property and knowledge or expert guidance is needed to make sure you don’t wind up as a real estate or share market loser.

I asked Rod Cornish from Macquarie Bank, as it was then, to do the stats on returns from property versus shares. I was fed up with stockbrokers bagging property and real estate agents writing off shares.

Looking at returns over five-, 10-, 15- and 20-years, the returns oscillated between 10 and 12 per cent with some periods where shares beat property and vice versa.

Anyone who bought shares for the first time on 9 March, say an ETF on the top 30 stocks on the Australian Stock Exchange, could be up 50 per cent plus. However, if they bought mid-October 2007, they could see their fortune cut in half.

If they stuck with their investment, they would have got more than half of it back and over the next few years will get in front and I bet the average return will come in around 10 to 12 per cent over the longer timeframe.

Do the homework or get an expert

The value of having great property and financial advisers or doing the homework yourself is that you should end up buying great assets that return capital gain, dividends or rent and simply hold them for an approximate return of 10 to 12 per cent. If you want to do better than that you will need to become an expert, have a great adviser or you simply will have be very, very, lucky!

 

For advice you can trust, contact Switzer Financial Services.












Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.



 

 

 


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