Property, Shares and Confidence

Blowing Bubbles- Again

Another day, another piece on property bubbles from the good fellows over at Montgomery :

“One thing seems clear: If we’re having a discussion about whether or not house prices are in a bubble (as we have been for some time now), house prices do not represent good value at the current level. The debate is about whether they are expensive, or seriously expensive.”

Now, of course we’re all guilty of making sweeping comments – and myself more than most given my tendency towards a macro focus on this blog – but this snippet gives the full broom treatment to Australia’s property markets.

The last time I checked in at the back end of 2014 there were 9,448,300 dwellings in Australia, a figure that will be approaching 9.5 million or so today.

Are some of those dwellings expensive? Indeed, and some of them are extraordinarily so in the present and persistent low interest rate climate.

But equally, aren’t some house prices very cheap? Very much so – in outer suburban Adelaide and Hobart, for example, and in any number of regional centres – although of course, “cheap” does not mean good value (“cheap today is cheap tomorrow” as the old real estate mantra goes).

The same holds true of share prices and indices, for that matter.

Are some share indices and stocks trading at high valuations? Yes. In fact, globally some markets are romping ahead to dizzying heights as I looked here only earlier this week.

That does not mean that some individual stocks don’t offer great value though, particularly for those investors with the requisite skills in fundamental analysis.

With the benefit of hindsight, although not my favourite sector due to being capital intensive and reliant on the sale of commodities, 1999 was a great time to buy resources stocks. 2009 was an amazing time to load up on bank shares.  Today, health care and materials companies are worthy of consideration.

Of course this doesn’t mean all companies in a sector are worth buying, or even any of them. There is no “one size fits all.”

Focus

This was one of a raft of pieces from Team Montgomery of late referencing popping property bubbles, property speculators, the end of the property boom, shares now being due to out perform property and so on.

All fair enough, although the truth is that ex-Sydney (and to a lesser extent Melbourne) there hasn’t actually been a property boom to date in this cycle, rather a protracted period of relatively flat prices in real terms and correspondingly there is no “Australian property bubble”.

Resources that influenced Perth and Darwin are seeing declining rents, the polar opposite of frothy conditions, while a number of mining towns have already capitulated. Canberra’s property markets seem similarly uninspired.

Why so much angst from equities-only investors then, one wonders, apart from the wider ramifications for the Australian economy and share markets of a genuine and material property correction?

An obvious point from a fundie perspective is that more funds under management equals more fees, so naturally enough does make sense to point out from time to time the benefits of a diversified share portfolio over the risks of holding a specific investment property or portfolio of properties.

I’m not sure whether it makes a great deal of difference though. In my experience there exists a fair proportion of investors who are simply “shares people” or “real estate” people and they won’t ever be budged either way!

Stock Valuations Decline

Perhaps another of the reasons for the angst is that the Australian share markets (generally!) have been on the receiving end of a bit of a shellacking over the past month, which naturally the financial media reports unfailingly on a daily basis.

Since threatening to crunch through 6,000 on March 18 the market has tanked, paring all the way back down to 5,600.

6,000 now seems like a distant dream once again, although this week’s dovish Board Minutes from the Reserve Bank reinstated a moderate easing bias, which may help to fire markets up again.

Now as intelligent people, both you and I know that such short term movements don’t mean a great deal for stock market investors with a long term mindset. In fact, cheaper market prices equates to a greater array of buying opportunities for those with an appropriately disciplined investment approach.

It’s funny what daily media headlines can do to folk, particularly when Sydney house prices are suddenly once again rising at an annualised pace of somewhere north of 15 per cent. 

The XJO (ASX 200) chart shows that this index has pulled back to the same level as the beginning of March 2007, well over eight years ago.

While experienced investors are well aware that accumulated returns inclusive of dividends have been robust, a good proportion of Mum and Dad investors tend to like to see capital gains, preferably of the fast buck variety.

Sydney Property Leads Cycle

What seemed to be a highly unlikely outcome for much of the past decade is now once again becoming a reality – Sydney houses selling for double what they did during their last cyclical low around 2005.

Granted I have only come across a few such examples to date, all of them houses rather than apartments, and usually in popular beachside suburbs such as Bondi, but I expect this will become an increasingly common occurrence over the year ahead.

Of course the main advantage that property investors have over share market investors is the use of leverage which can magnify gains…and losses.

An investment which doubles in value can see the dollars invested increased 10 or 20 fold before transaction and holding costs – for those who get it right and are prepared to hold through the lean periods of the cycle.

Dare we even mention it, some folk even used 100 per cent leverage in the period leading up the the financial crisis, making the returns on “investment” extraordinarily high.

Risks to the downside

There is an old saying in investment that if something sounds too good to be true then it probably is.

So, what’s the catch? 

One such catch is that most people just aren’t very good at investing in property. The stats show that most don’t achieve their goals, owning only one or two properties, with many selling within the first early years of ownership.

It’s not always entirely their fault, mind – property advisers have recommended some desperate choices over the last decade, including mining towns and any number of far-flung locations which haven’t fared anything like Sydney has. 

It was popular for a while to say that capital city investors were singing the same old tune from years ago and had failed to move with the times, though I haven’t heard anyone saying that of late as the Sydney market continues to take off.

Inner ring Brisbane is now seeing prices rising again too, though not for all property types and suburbs it must be said, and I believe that generic apartments will struggle through this cycle.

Spruikfest

You only had to set foot in the Sydney Homebuyer Show this year to see that the property forum was packed to the rafters with the flocking crowds, far outweighing the numbers at the share trading and investing event. This is what always happens when house prices are rising of course.

Unfortunately so to were the self managed superannuation fund (SMSF) property spruikers out in force, barking orders about setting up trust structures to buy property to anyone who would listen – and anyone who wasn’t listening as well, come to think of it.

The thing to remember is that property and shares are not really directly comparable investments for any number of reasons which I don’t have the space or inclination to repeat here.

Equities are a far “cleaner” and more liquid asset class, very well suited to retirees of the right mindset contrary to popular opinion, particularly given the favourable tax treatment of franked dividend income in Australia. No tenants or related headaches. No repairs and maintenance bills, Quick and easy to sell parcels of shares. 

Property investment suits many long term Mum and Dad investors, despite its illiquidity, and the leverage can see them magnify gains (or losses) at a greater rate, provided they invest well (or badly).

For reasons I never really got my head around, some property advisers have recommended investing in towns where there is acres of land around and thus no scarcity. 

The key to long term successful property investment is finding an asset which is in extremely high demand.

This generally means the larger capital cities, near jobs and where people want and need to live – and is scarce in supply, which ideally means a dwelling with a land value content and in a land-locked suburban location.

The long run data shows that even most average capital city property has generally done well through the cycles, beating inflation over time. It won’t be long before the Sydney median house price has doubled again since 2003, soon thereafter to be threatening the $1 million level.