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!