Are Aussie home prices are about to boom?
If you think residential real estate in our major cities is already too expensive, then hang onto your hat. Because I think the conditions are right for home prices to explode.
Residential property dominates the assets held by Australia’s household sector. Meanwhile residential mortgages account for 62.8 per cent of the debt held by households. Finally, the construction industry is the third largest employer in Australia with residential construction representing a third of the cohort.
Therefore, the one thing the Government, regulators such as APRA (Australian Prudential Regulation Authority) and the Reserve Bank of Australia do not want is a full-blown housing collapse. And for that reason, the probability of experiencing one is very low.
Property bears should also remember that thousands of property owners have been lured by the government into becoming property owners through incentives such as first home buyers grants, mortgage guarantee schemes and, most recently, the HomeBuilder scheme. Hypothetical blame for the wealth destroyed by a property collapse would be laid squarely at the government’s feet, something a government seeking re-election can ill afford.
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.
John
:
Surely if rents drop, land tax increases, and amenity decreases then prices will have to drop?
Roger Montgomery
:
How does the amenity decrease John? If referring to returns only, they’ve been miserable for decades. Ultimately it’s rising rates that should be the concern. If rates are permitted to rise, or rise beyond the control of governments and central banks, then we have a problem.
John
:
Roger, given that all you have argued is correct from a value investor perspective do you expect rents to increase (or match) in line with booming prices? Is it possible they stay stagnant or even decline? I guess the question here is what is the real underlying value of these properties despite increasing prices? If the underlying value does not match the price I am guessing there is a problem.
Roger Montgomery
:
Hey John,
When we kicked off the blog in 2010 we valued property using the intrisnic value formula. It has never in my life time been cheaper than intrinsic value. Thanks to bank funding and tax breaks it has always traded at a premium to value.