Prices for prime properties in some global cities are softening. Commentators tend to put their weak local market down to local conditions – tweaked tax laws, or regional political concerns – but are they missing the big picture?

Bears have lost – or at least not made – untold billions by betting on the end of the bubbly market for assets we’ve seen since the boom began in 2009.

And I’ve been pretty optimistic throughout what’s still being called a “recovery”.

But nothing lasts forever.

Crucially, US interest rates are already well off the bottom.

Continuing low rates in Europe, Japan, and the UK curb will restrict how fast and how far US market interest rates will go. Perhaps the US President will too, with his random Tweets driving fearful money back into Treasury bonds, in turn pushing yields back down.

But with North America’s unemployment now very low and its economy boosted by a late-cycle tax-cut bonanza, it’s hard to see why the Federal Reserve won’t continue to hike its benchmark interest rates in the months and years ahead – a complete contrast to the easy money regime that has prevailed since 2009.

The end to that near-limitless cheap money will surely be felt around the world, one way or another, in time.

Is prime property already rolling over?

Global gains

The Financial Times has detailed how global cities have boomed since the crash:

Over the past 10 years, the life-cycles of global cities such as London, New York and Sydney start to look very similar.

They begin with central banks cutting rates; then foreign buyers are welcomed in, prices go up, high-end homes are built, capital appreciation drops and then cities are left with a lot of stock which is too expensive to sell.

The FT also featured a snapshot of how the cream of the global cities had prospered over the past decade:

It’s quite remarkable really.

True, most of these cities had seen high house prices long before the financial crisis.

But few (if any) pundits predicted the house price growth we’ve seen in these global cities in the subsequent 10 years.

The financial crisis involved an excess of debt and speculation in property – albeit more sub-prime properties than Manhattan penthouses.

Property therefore didn’t seem the obvious place to look for a new boom.

But in retrospect, it looks obvious what happened.

By successfully (re)inflating asset prices, quantitative easing (QE) made the rich, richer. And the rich tend to live in global cities.

In the fearful years that followed the near-collapse of the financial system, few wealthy people fancied a move to a far-flung rural town…

London falling

The FT article explains this dynamic in the context of London.

Waves of capital washed into London’s housing market – first from bog standard rich people seeking safety, then from sovereign wealth funds lured in by the fall in the pound, then Russian and Middle Eastern investors fearful of disruption in their part of the world, and finally with a wall of money from Asia.

Already high prices for prime London property hit levels that seemed fantastical. (£140m for a penthouse, anyone?)

When did this start to reverse?

The collapse in commodity prices in 2014 didn’t help. That squished the spending power of Russian oligarchs and Middle Eastern royalty.

Stamp duty changes the same year also increased the cost of buying the priciest homes.

The price of visas were raised. From April 2015, tougher anti-money laundering measures were introduced, too.

All told, the Home Office recorded an 80% fall in the number of foreign investors moving to Britain in the year to 2016.

Then there’s the ugly white elephant – Brexit – which has turned UK assets into the most unloved in the world for global fund managers.

The result? A malaise that has spread beyond Mayfair and Belgravia. London house prices just posted their first annual fall since 2009.

The FT argues London property simply got too expensive. And sure, if London homes were cheaper then perhaps they could have shrugged off some of these headwinds.

Stamp duty might never have been raised so high if the Government hadn’t seen a cash cow to be milked, too. There’s an element of reflexivity to this.

But look at other big global cities. Many of those also seem to be losing their footing. Can it be a coincidence?

Here, there, nearly everywhere

Let’s whip around the world, montage-style:

Toronto:

Re-sale home prices in the Toronto region dropped 12.4 per cent, or about $110,000, year over year in February.

[…] the Ontario government took cooling action by introducing its Fair Housing Policy, including a foreign buyers tax, said Jason Mercer, TREB director of market analysis.

Sydney:

Cracks are showing in the Sydney property market, with prices now falling for the first time over a 12-month period since the boom began.

New York:

Manhattan real estate sales and prices took a fall in the fourth quarter, and they’re likely to slide even further this year after the new tax rules take effect.

Total sales volume fell 12 percent compared with the fourth quarter of last year — the lowest quarterly level in six years, according to a report from Douglas Elliman Real Estate and Miller Samuel, the appraisal firm.

The average sales price in Manhattan fell below $2 million for the first time in nearly two years.

China:

Out of the 70 cities tracked, prices dropped in 16 cities month on month including first-tier cities Beijing, Shanghai, Guangzhou and Shenzhen.

It was these top-tier cities which saw the most significant decline in prices.

Shenzhen had its biggest drop in three quarters as prices slid 0.6 percent from the previous year. Prices fell 0.4 percent in Guangzhou, 0.3 percent in Beijing and 0.2 percent in Shanghai, compared to the same period last year.

Granted, these are tiny falls so far. Not much more than noise.

It’s also not universal – Paris and Singapore for example appear to be bucking the trend. Perhaps it’s because they missed out on the prior boom, but anyway if some global cities continue to do well it does slightly scupper my thesis that cheap money is beginning to ebb away, exposing the priciest assets.

Perhaps it is just a matter of froth being blown off. The masses had their Bitcoin frenzy in late 2017. Maybe global property was the same mania for the 1%.

Yet it’s still odd to see prime property falling even as the global economy does better than it has done for years.

Property is typically a lagging indicator, not a leading indicator like the stock market. House prices tend to react, rather than predict.

But when it comes to the end of super low interest rates, perhaps prime property does have something to say about the future?

Prime property is very often bought with cash, not a mortgage. To some extent that might soften the link between property prices and rates – certainly compared to the mass market.

However investment is everywhere and always a relative game.

If the rich can now get nearly 3% from a ten-year US government bond, maybe they no longer want to bother with taxes, estate agents, and getting the windows cleaned twice a month?

It will be interesting to see who reaches a similar conclusion next. The share prices of so-called ‘bond proxies’ like consumer goods giants have already softened a little, but they could have much further to fall if investor appetites truly change, for instance.

In contrast, maybe the cheap-ish, cheer-less UK stock market might finally get some love, stuffed as it is with cyclical miners and banks.

Your next local house price crash: Made in China?

I began writing this article in the snowy miserableness of March, but got distracted by new flat nonsense and never finished it.

And that’s convenient, because this month the IMF came out with research stating that global cities are indeed increasingly moving in sync.

In its latest Global Financial Stability report it found:

…an increase in house price synchronization, on balance, for 40 advanced and emerging market economies and 44 major cities.

Countries’ and cities’ exposure to global financial conditions may explain rising house price synchronization.

Moreover, cities in advanced economies may be particularly exposed to global financial conditions, perhaps because they are integrated with global financial markets or are attractive to global investors searching for yield or safe assets.

I have no firm conclusions to draw about all this right now. My track record of predicting property prices is poor!

Also, before anyone (rightly) pipes up and says that potential house price falls in New York shouldn’t derail your passive investing strategy – I obviously fully agree.

This post is filed in the Commentary section. Most readers own property, too, so the asset class is hardly irrelevant. But acting on the end of the QE-era should probably be left to those of us silly enough to muck about in active investing waters.

To that end, I am Watching This Space.

One of the (less important) reasons why I finally bought a flat in London this year was I could see the market was soggy, and I put much of that down to Brexit uncertainty. Given that Brexit uncertainty should pass, one way or another, it seemed a potentially opportune window to buy.

But synchronized falls for global property could indicate I was mistaken about the role of Brexit. Perhaps the property cycle has turned. We’ll see!

The tactics you use to accumulate your retirement pot just won’t do when you throw the whole system into reverse and start spending those savings.

That’s a message that’s been slow to spread but is picking up speed now that the discipline of retirement research is moving out of academic journals and into Amazon books – placing more powerful retirement strategies into the hands of DIY investors like us.

The running has been made by US pioneers so far, but the good news is that we finally have our own Made In Britain take on retirement.

Abraham Okusanya is a UK-based retirement researcher and fintech entrepreneur and his book, Beyond The 4% Rule, should be required reading for any prospective UK retiree who won’t be relaxing in a hammock woven from secure Defined Benefit pension.

A great British retirement

When you need a strategy to last you the rest of your life, it’s a good idea to make sure that the American prescriptions travel well.

Beyond The 4% Rule marshals plenty of evidence to show that the US experience does translate but needs localisation. Okusanya shows the way – bounding as nimbly as a mountain goat across the deceptive slopes of retirement investing. He writes with a smile too, which is a welcome change from the dry-as-sticks tone that characterises most work in the field.

As the pages breeze by, you’ll find yourself covering:

• The safety first alternative to nursing your portfolio through retirement uncertainty.

• The Sustainable Withdrawal Rate (SWR) – UK style.

• Why the 4% rule is a terrible rule of thumb.1

• Sequence of returns risk and inflation – two of the arch-enemies of retirees.

• Longevity risk – your chance of drawing a golden ticket in the lottery of life.

• The various ways you can pump up your SWR – including factor diversification, variable withdrawal strategies, choosing an acceptable failure rate(!), and declining consumption patterns in your dotage.

If all this is unfamiliar ground, you will find it relatively easy going with Okusanya as your guide. He makes light work of it – but that also means he takes some shortcuts.

The rocky patch

In my opinion, Beyond The 4% Rule stumbles in a couple of important areas where it would be better not to rush.

Okusanya replicates US withdrawal rate research by replacing historical US data with UK numbers. He doesn’t offer guidance as to how relevant historical UK returns are for contemporary retirees. We’d argue that in these days of globally diversified portfolios, UK data alone is not the best foundation for withdrawal rate assumptions.

This comes to a head when Okusanya pits a 50:50 global equity/global bond portfolio against a 50:50 UK equity/UK bond portfolio.

Okusanya’s numbers show that the UK portfolio has the higher SWR in the historical worst case. It also bests the global portfolio’s SWR 58% of the time between 1900 and 2016.

You’d be forgiven for thinking: “Well, it’s a UK-only portfolio for me, then – what a turn up!”

It is indeed a turn up. The renowned US retirement researcher, Wade Pfau, who has led the way on international withdrawal rates, came to a different conclusion. The global portfolio’s SWR beat the plucky UK 78% of the time between 1900 and 2012, according to Pfau. It also delivered a higher SWR than the UK portfolio in the worst case scenario.

I’m not saying Okusanya’s numbers are wrong. It takes only a different dataset or different assumptions to change the result. They could both be right! Precision is a myth in retirement investing.

But Okusanya errs, I believe, in presenting his research in a way that could lead investors to concentrate their portfolio in UK assets and ditch global diversification.

It’s not as if Okusanya is unaware of the Pfau findings. The key paper appears in the reference section of the book. His analysis could have been expanded to explain that the UK’s actual historical path was only one of many that might have been taken – as the fate of other developed countries shows. He might have explained that the historical returns are uncertain that far back, and that small input changes can create different results.

Okusanya does admit that the global portfolio’s worst case scenarios are largely caused by the catastrophic impact of World War One on the countries that bore the brunt. But he goes on to state that the evidence suggests the UK portfolio is better in extreme conditions.

This seems a bad case of projecting past performance into the future. We have no reason to believe that the UK could not be on the losing side in a major future conflict. Or it could be a ruined winner – as was Belgium after World War One.

Even US researchers such as Pfau think that US retirees should base future plans on the global dataset rather than expect their country’s 20th Century luck to hold.

To be fair, Okusanya doesn’t unequivocally back the UK portfolio. He makes a brief case for a global allocation based on volatility. But he’s vague and readers could use stronger guidance to interpret his evidence.

A lack of rigour also undermines the section on asset allocation between UK equities and bonds. Okusanya shows that a 100% UK equity portfolio delivered the best SWR across the board for a 30-year retirement. Yet Pfau has shown that optimal asset allocations are all over the map for different developed countries.

Drawing firm conclusions from a single dataset is a risk for retirees. Michael McClung was careful to use out-of-sample data to test his findings in his retirement investing book Living Off Your Money. Okusanya skips the nuance.

No easy answers

There’s an entertainingly self-aware comment from Monevator reader Mr Optimistic on another retirement book thread:

Thanks for the tip on Beyond the 4% Rule. Just bought it: hopes it helps in my quixotic quest for an easy answer!

Beyond The 4% Rule does not provide our easy answer. But in truth that’s because there are no easy answers for DIY retirees.

Despite its flaws I unequivocally recommend Beyond The 4% Rule. If you don’t know much about deaccumulation it’s a great introduction. There’s plenty of gold here for the more knowledgeable, too.

Okusanya brilliantly re-frames retirement failure not as the threat of running out of money but as the chance that you’ll need to lower your spending at some point. Combine that with his probability section showing that the odds of your nightmare scenario materialising and you living long enough to see it are pretty low, and suddenly the case for a bombproof SWR comes apart. If this convinces you to lower your demands from 100% historical success to 90%, then you can treat yourself to a nice SWR uptick.

There’s also a handy section at the end that shows how you can tweak your SWR in tune with various ‘Beyond the 4% rule’ factors you can bake into your plan. You add SWR points for positives like variable withdrawal strategies and subtract points for negatives like fees.

Again though, Okusanya’s version is infuriatingly incomplete and light on caveats, compared to similar work by the likes of Michael Kitces. FIRE devotees will also be disappointed by the book’s omission of time horizons beyond the standard 30 year, retire-at-65 game plan.

All of which serves to illustrate that while you could put a plan together from Beyond The 4% Rule, you probably shouldn’t. It’s better to use it as a gateway to more knowledge. The Kindle version enables you to click through immediately to the fantastic body of research – including UK sources – that Okusanya references. You can then follow up your reading with Michael McClung’s Living Off Your Money and Wade Pfau’s How Much Can I Spend In Retirement?

You can also check out the free chapter of Beyond The 4% Rule and read Okusanya’s blog.

Like the 4% rule itself, Okusanya’s book is an excellent contribution to our understanding of retirement investing.

But it’s not the easy answer. There isn’t one.

Take it steady,

The Accumulator

1. The original research behind the 4% rule was a massive breakthrough, but Chinese Whispers have turned it into a retirement-maiming meme. [↩]

What caught my eye this week.

People seem very confused about Amazon. This week I heard some market pundits chortling among themselves about how crazy high the valuation was for a company that “doesn’t make any money.”

Ho ho ho! In fact they only stopped laughing to say Amazon really must be regulated because it’s grown so vast and so powerful that it’s becoming a monopoly.

Um, hang on a minute…?

The company hasn’t raised external capital for decades and supposedly doesn’t make any money – yet it’s still managed to grow so big that it ought to be regulated away or even broken up?

And the company is obviously over-valued, except it’s also a monopoly that crushes all competition and only governments can stop it? (What price would you put on that sort of market dominance?)

I’m an Amazon shareholder, and have been for years. If you know of any other ‘obviously over-valued’ $700bn companies that grew that way in barely 20 years and that are so laughably bad at making money that ardent capitalists are calling for changes to the competition laws in the US to enable regulatory intervention, please do shout – I might like to invest in those, too.

Consumers seem similarly confused.

I know people who say they boycott Amazon because “it doesn’t pay any taxes”.

Firstly, why should it if it “doesn’t make any money”?

Secondly, Amazon – and the general shift to online sales – has helped keep a lid on inflation since the 1990s, and has crushed the cost of almost everything tangible, everywhere.

Why are people who are disdainful of city fund managers taking a 0.5% fee managing money so nostalgic about High Street giants where the business model might be to mark up tat up by 100% or more?

People are funny.

Our disposable incomes stretch far further these days, partly due to the relentless deflationary impact of online retail. I wouldn’t be surprised if the typical UK household is several thousand pounds a year better off compared to if the Internet had somehow never been invented.

Do you think you’d get thousands of pounds a year of extra value in your life if Amazon paid more taxes?

I have my doubts. I’d rather have the pounds in my pocket.

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