Which Cities Would I Consider for Property Investments?

I did a rudimentary scoring world class cities...

 

The factors I inputted are:

 

1. Price to income (the lower the better),

2. GDP growth per capital (higher the better) 

3. Property rights index (taken from Global Prop Guide, higher better).

4. I filter out by population. Cities that a less than 1m I avoid due to developers easily overbuilding.

5. Taxes (including capital gains, stamp duty, rental income tax). lower better.

6. Supply over demand. Lower better. I cross check population growth of city vs housing starts.

 

The lower the score the better.

 

Bottom Line:

 

Cities in the OECD dominate. This is probably due to the aftermath of the Global Financial Crisis, which brought prices down.

 

American cities like Houston Texas, Phoenix Arizona, Dallas Texas, LA, NYC and Chicago are BUYS. Although the US has one of the highest property related taxes, they have the highest gross yields, and lowest price to income ratio, hence greatest affordability. You can buy a nice single-family home in Phoenix for as little as USD300k. A condo in Chicago downtown sells for around USD250 - 350 PSF, almost below construction costs. But we have to be careful that some cities, e.g. Houston may have oversupply looming. Others, like NYC are in acute shortage. Invest in cities where the population is growing.

 

Australian / NZ cities are not in a bubble. Melbourne, Sydney, Perth, Brisbane and Auckland are attractive destinations. The taxes are lower compared to the US. Affordability is good. Rental yields are however, not much higher than borrowing costs.

 

In the UK, London an Birmingham are considered BUY. London is probably the most expensive in terms of price to income, and have the lowest yield. But there is acute shortage as the population is growing much faster than they can build. The urban sprawl in London is hitting its limit so the inner city prices will boom. Taxes in the UK is far lower than in the US, although the Capital Gains Tax for non residents to be implemented after April 2014 has taken some shine off.

 

In Asia, the best places to invest are Tokyo and surprise surprise, Penang! Penang is still relatively affordable compared to Iskandar or KL. There is also a shortage in Penang as its population is boosted by people making it a retirement home and expats migrating there. Tokyo is one of the largest metro in the world with a population of over 20m. There is naturally a shortage of housing but one must take into account the earthquake risk and language barriers.

 

On the SELL list, most Asian cities dominate: Singapore is hampered by high price to income, low yields and looming oversupply. Bangkok, Manila and JB form the tail end of the list of AVOIDS. Bangkok's condo take up rate is less than 60%! I see a repeat of the Asian Crisis due to its construction boom. I've been writing many negative posts on Iskandar for some time and I can tell you that it will NOT be a lifestyle choice for many to live there. It will however be a successful industrial site for Singapore's manufacturing sector.

 

City	Price To Income Ratio	Gross Rental Yield City Centre	Score	Action
Perth, Australia	6.94	5.75	1.893262985	BUY
Phoenix, AZ, United States	1.5	18.62	2.080122411	BUY
Brisbane, Australia	5	8.87	2.136730456	BUY
Sydney, Australia	8.86	5.02	2.175446652	BUY
San Antonio, TX, United States	1.72	13.06	2.505074016	BUY
Houston, TX, United States	2.51	13.67	2.522389608	BUY
Melbourne, Australia	9.21	4.52	2.699370446	BUY
Adelaide, Australia	4.21	11.53	2.885278078	BUY
Auckland, New Zealand	6.09	6.71	2.916747662	BUY
Dallas, TX, United States	4.42	4.79	3.068051487	BUY
Birmingham, United Kingdom	2.97	9.82	3.765940921	BUY
Los Angeles, CA, United States	5.46	7.06	3.976238624	BUY
Philadelphia, PA, United States	2.82	11.62	4.030457324	BUY
San Diego, CA, United States	3.3	11.15	4.516080859	BUY
New York, NY, United States	8.71	7.02	5.138380716	BUY
Penang, Malaysia	7.64	4.56	5.344684684	BUY
London, United Kingdom	15.75	4.02	5.404768601	BUY
Chicago, IL, United States	2.78	14.06	5.654533846	BUY
Singapore, Singapore	21.53	3.86	9.554407708
Kuala Lumpur, Malaysia	9.52	4.9	9.728973184
Tokyo, Japan	8.61	5.25	11.06249913
Detroit, MI, United States	1.31	17.09	11.88625103
Osaka, Japan	6.92	4.61	17.5494674	SELL
Manila, Philippines	14.22	9.21	27.69417912	SELL
Quezon City, Philippines	12.27	2.26	28.52298259	SELL
Bangkok, Thailand	22.5	4.98	29.49754793	SELL
Makati, Philippines	26.67	5.45	51.93408315	SELL
Johor Baharu, Malaysia	20.19	2.43	59.9526902	SELL
Davao, Philippines	27.39	1.87	64.12406781	SELL

 

A Volatile Equity Market in 2014 Beckons

As you can see, the valuations of most markets are not cheap. Only the Chinese and Russian equity indices are cheap. The rest of the ASEAN markets are considered above median. US and Europe is in between.

 

However, the macro picture, e.g. earnings growth, GDP growth, and yield curves are supportive of further growth in 2014. Hence if you factor in the macro / monetary picture, stocks could rise further. With this current correction, China, Mining, Europe, Korea, US and Global stocks have > 30% upside over 2 years. Japanese equities have over 20% returns for the same period.

 

Caveat: if earnings disappoint, we could see a major correction in 2014 given the rich valuations.

 

I believe we could see very choppy equity markets in 2014, much like in 2011. Wear your seat belts!

 

 

Why Markets Move in Cycles

Stock Market Cycles

There is a big difference between owning a share and a bond of a company. There can be many arguments about how we should classify convertible bonds, perpetuals, high yield bonds etc. But when a company is below investment grade, there is no difference between owning the credit or the stock. The difference between a bond / stock is much bigger when you invest in an investment grade company.

When the economic cycle turns down, a bond of an investment grade company may drop 10 - 20% at most. If it is rated AA or AAA by a reputable rating agency like S&P, Moodys or Fitch, it may even rise in value during a recession as investors flock to safe havens that pay higher coupons than fixed deposits. As a bond investor, you don't care as much that the company's earnings grow year after year. You only care that the company doesn't borrow too much and is able to service your coupons.

In a down cycle, a stock can be worthless if the company does not survive. Hence investors / speculators tend to throw their shares at the slightest hint of a down turn. Typically, a blue chip share can drop by 30 - 50%, a cyclical, small cap stock 60 - 80%.

In a down cycle, a company's earnings may be affected so the dividend payout may suffer. Insurance companies, sovereign wealth and pension funds may move their funds to bonds for more secure payouts.

In a recession, unemployment rises, factories' capacity utilisation falls. Capital investments are delayed as the budget shrinks. A factory or a shop is allowed to deteriorate during a recession. Weaker players default and leave the industry. The recession hits a bottom when the number of companies that produces goods and services hits equilibrium with the overall demand for the same. Capital investments then start to increase slightly to touch up the shop, to repair the machinery. Employment then increases.

Once there is a hint of recovery, insiders of companies will purchase their shares first. The company's stock will bottom up. Four to five months later, CNBC and various news papers will report that earnings are starting to improve. By then, the stock would have risen by 15 - 30%.

Property Market Cycles (By Philip J Anderson)

Didn’t see the downturn coming? Neither did the Queen. She was forced to ask the English houses of Parliament in 2008: “Why couldn’t anyone see this coming?” Hardly surprising she was curious. She has a lot of property to look after… 

The economic system we have today is built on the economic rent.  It’s pretty simple once you see it. The process is underpinned by the enclosure of the economic rent, a concept first formalized by English economist David Ricardo. Ricardo’s Law of Rent states, simply, that the economic rent is not a cost of production. A house costs pretty much the same to build, wherever you build it – wages are the same, and materials costs are the same. But the selling price will depend on the location. 

So builders, for example, will bid more for the best locations. That money doesn’t go to the workers building the house, and nor is it spent on improving the materials used. It purely benefits the owner of the land.  

This bid is what Ricardo was first to identify as a “surplus”: the economic rent. Property investors know it today as locational value. Wherever a price is put on this locational value of land, a property cycle will develop - a boom and then a bust in other words - as speculators and companies chase land prices higher and higher, reducing the proportion of wealth being invested in creating jobs and investing in productive businesses. This cycle is beyond the control of central banks. 

All good so far. The significance of what you can read here, though, is that with everything I do and teach about the cycle, a careful study of it and you too will then be able to work out not only how and why the cycle will turn, but more importantly WHEN.  

Timing; this is the most important part.    

Then who knows? One day we might have as much property to look after as the Queen does…