Episode 18

Porsches, Paintings and Property Prices: Alternative investments and what they can mean for property and the economy

Alternative investments and what they can mean for property and the economy

  • Classical Car Index
    • The CommSec Luxury Vehicles Index lists the following as luxury vehicle makers: Audi, Aston Martin, BMW, Bentley, Ferrari, Hummer, Jaguar, Lamborghini, Lexus, Lotus, Maserati, Maybach, Mercedes-Benz, Morgan, McLaren, Porsche and Rolls Royce
  • Wine index – Liquid assets
  • Art or Luxury Property

 

Characteristics

  1. Almost like an asset backed security – No income, gains come from the increase in price of the good that backs it
  2. Capital growth focused rather than income
    • Pretty volatile – Based around demands

 

Luxury Investment Index

  1. Subjective pricing – Good example of ‘elastic’ and ‘inelastic’ demand
    • Imagine Demand supply cure
      • Demand slopes down, supply up
      • Demand – very vertical = Inelastic (remember through I being vertical)
    • Inelastic – necessities, price changes don’t affect demand
    • Elastic – horizontal – responsive to changes in demand, change in price, due to close substitutes
  2. Financial crisis – luxury declines – elastic good
    • Small change in quantity demanded, big change in price

 

So… what does this have to do with property?

  1. In economics no relationship is perfect – but they can be related. Lead-lag relationship
    • Historically: slowdown in sales of luxury vehicles = a slowdown of upper-end property prices.
    • This infiltrates the broader market.
  2. Luxury vehicle sales are still good – growth of sales is coming down from high levels

 

All about consumer confidence

  1. Confidence is demand: more confidence, more demand
  2. This is why there is a relationship in most assets that work off supply and demand –
    • Types of assets that are risky = Drop when confidence drops
    • People sell so the price drops
  3. Confidence (demanded) affected by many factors, a few factors:
    • Affordability – Wage growth
      • Plus, low inflation – 3% wage growth with 0% inflation better than 12% with 15%
      • Car affordability has never been better – Lower car costs, wages increasing
    • Anticipated environment – Prices continue to go up
  4. Confidence – Self-fulfilling prophecy – If people think that the economy is doomed, they run!

 

Components of the index – Micro and Macro

  1. Estimates of family finances compared with a year ago – up from 12.9 to 15.2
    • Looking back – own personal finances
  2. Estimates on family finances over the next year – down from 29.3 to 29.00
    • Looking forward
  3. Economic conditions over the next 12 months – up from 13.7 to 15.3
  4. Economic conditions over the next 5 years – down from 15.2 to 14.6
  5. Good time to buy a major household item – rose from 38.6 to 43.3

 

The current state 

  1. ANZ – Consumer sentiment – Rose 1.2% to 123.5 – Highest in 4 years (long run average = 112.9)
  2. WBC – Consumer confidence – Rose 3.9% to 106 

 

What will impact the future confidence and overall economy

  1. Wage growth – 2% wage growth required some adjustment after years of 3-4% per cent annual wage growth. But more people are realising that prices are growing at a slower rate than wages or are even going backward.
  2. Affordability – interest rates – Current borrowing to finance expensive goods is low
  3. External factors – market crashes in shares/business
    • Individual demand dried up
    • Leads to companies not earning as much (people are buying)
    • Leads to companies having to cut costs (affects supply potentially)
    • Leads to further demand drying up as people lose jobs
      • Incomes go down (or are expected to)
    • All of it has a similar pattern and is a chain of events.
    • Everything working together leads to an increase
    • Everything working against one another out of fear leads to an inevitable decrease

 

The take away

  1. Not designed to profit off – relationships aren’t perfect
    • Correlation doesn’t equal causation!
  2. When luxury car sales are in retreat – higher probability that home prices aren’t far behind.
  3. This episode was to give a better understanding about how the economy works
  4. Economy is a collective of millions of people
    • Bacteria – Growth
    • Microcosm where one good can show a trend for the overall health of the economy

 

Thanks for listening!

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