What the numbers say about property
When it comes to house prices, supply and demand rules.
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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Richard Haynes
:
Hi Roger, sorry for weighing into this late. I just wanted to pick you up on a few things that don’t quite check out in your article when I took a look at the data myself.
The household growth rate of 1.65% is less than the 1.84% that the ABS are predicting between 2011 and 2021. This reduces the apparent oversupply by 20,000 dwellings pre annum. (http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/3236.0Main%20Features42011%20to%202036).
Further to this, historically we have always built more dwellings than we create households. I did a bit of random sampling for different periods to work out what the theoretical oversupply was:
– 1996 to 2006, annual oversupply of about 70,000 dwellings (80% “oversupply”)
– 2006 to 2011, annual oversupply of about 35,000 dwellings (35% “oversupply)
– 2011 to 2016, annual oversupply of about 32,000 dwellings (20% “oversupply”)
– Current rate of oversupply is 64,000 dwellings (38% “oversupply”)
Perhaps we like building a lot of holiday houses in Australia, but I’m not convinced by this alone.
The other factor is of course the removal of supply. I’m not sure what the rate is but the ABS do estimate the total number of residential dwellings in their House Price Index stats and interestingly for 12 months leading up to March 2016 they only estimated an increase in dwellings of 171,000. So they’re suggesting here that net dwelling increase is actually about equal to household formation. I seriously doubt that for every four dwelling built, one is knocked down so I’m questioning the ABS on this one. However, no doubt the infill development that is dominating our new dwellings is also increasing the number of demolitions.
I’m also interested to see in the ABS’s household projections they’re assuming our persons per household stays relatively static. This is not consistent with global trend and rates. England, Scotland, New Zealand and Japan all have less people per household than Australia. Australia has also trended down in person’s per household so not sure why the ABS is predicting this trend to effectively stop.
And finally, I think the ageing populating is going to create demand of apartments (and also put further downward pressure on the persons per household stats).
I don’t disagree that property prices are likely to come off, but I’m going to go out on a limb here and I can’t really make the numbers support that assertion when I deep dive into the history. Who knows, throw in a chunk of international investor intentionally vacant dwellings and perhaps there isn’t actually that much oversupply at all. I can’t call it because there’s much more going on here driving asset prices than just straight supply and demand.
Thanks for the article, it prompted a bit of research I’d been meaning to do.
Richard
Roger Montgomery
:
We’ll have to agree to disagree. I’ll publish a chart soon that may help to put the supply question into a more useful historical perspective. Re: “I seriously doubt that for every four dwelling built, one is knocked down so I’m questioning the ABS on this one”; consider the impact of zoning changes and the aggregate impact of four houses being knocked down to build 80 apartments occurring nationwide.
simon
:
hi Roger
just an aside
do you own Property?
…………or Properties?
Paul Amos
:
Hello Roger. It would be interesting to hear your take on the now expanded concept of parents guaranteeing loans to get their children into the housing market. It is not new but it is now very common. Does anyone know how common this is? Will this impact on both generations perhaps and also ultimately impact on demand.
Cheers Paul.
Joe Rich
:
Thanks for the article Roger!
You mention that, according to January data investment commitments are down ~15%.
Not sure how the data is collated, but could much of this be due to investors reclassifying mortgages and loans from ‘investor’ to ‘owner occupier’ as banks (under guidance of APRA) have slugged the former with higher interest rates?
I.e investors are still taking out similar levels of debt, just classifying the debt differently?
Roger Montgomery
:
Something to look into. Thanks!
Luke Joseph
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A mortgage broker suggested to me recently that I should consider doing this exact thing in order to pay a lower interest rate for an investment property loan.
Andrew
:
Good read thanks Roger.
My belief regarding investing in real estate is that doing it properly is not entirely different to investing in other asset classes such as equities.
Terry Ryder (I consider him the “Roger Montgomery” of residential property investing) says that there is actually no such thing as “the Australian property market”. There are hundreds of property markets around the country & they are all different. In much the same way as you tell us that we don’t invest in “the stock market” but buy parts of quality businesses, one must choose a quality property that enriches the lives of quality tenants who will be prepared to pay a premium to live there. The property must have bright prospects because it is in an area where demand is high or set to grow. That may well not be in a capital city in fact most likely not (the property equivalent of buying an iron ore miner).
It must be acquired at a discount to its intrinsic value. If there are no quality properties, or they are expensive, stay in the safety of cash until an appropriate opportunity comes up.
Sadly, this is not the approach to property investing we see by & large in Australia.
Roger Montgomery
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Of course a very sensible approach. Just be aware that the reason US banks were willing to sell credit default swaps (securities that would profit if mortgages defaulted) to hedge funds was because those banks also believed their mortgage books were geographically diversified and that a country- wide sell off was inconceivable. Not unlike the argument you point to. Now, I don’t believe we will experience a US-like sell off but not because of that argument.