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I am calling a short sell on Australian residential apartments


I am calling a short sell on Australian residential apartments

If you wait for the swallow to sing, spring will already be over.  In other words, waiting for the data to prove a trend has changed may be more expensive than you’d like. And while there is plenty of mounting data to suggest that property prices are heading for a big fall, there are also less obvious signals.

One possible signal for a property market peak was the ‘For Sale’ shingle being placed on the century-long-held Soul Pattinson building in Sydney’s Pitt Street Mall by one of Australia’s most successful and respected investors and patriarch of listed investment firm Washington H Soul Pattinson (ASX:SOL), Rob Millner.  Another signal may just be property market patriarch John Symonds listing his magnificent waterfront mansion on Sydney Harbour for sale.

More recently, we have been struck by the stunning growth in the number of practicing real estate agents.  With Australia’s population growing by 1.6% per annum, we don’t think the number of real estate agents required to service the population needs to grow at a rate in excess of this.  And yet, in 2016, Victoria, NSW and Queensland have seen real estate agent numbers grow by almost 8.7% according to the NSW Office of Fair Trading, Consumer Affairs Victoria and Queensland Office of Fair Trading.

Another observation is the preponderance of property developers making the rich lists and in particular the mushrooming number of property developers under 40 – who were still at school during the last recession.

If you invest for long enough you will see business owners in a variety of sectors come and go like a rising and receding tide.

A final sign is the increasing prevalence of deniers – those that suggest there is no problem in the property market.  These individuals represent Exhibit A for an emerging problem.  One 39-year old apartment developer admitted there could be oversupply in the apartment market but denied the issue would affect his business because, “…if you’re doing projects in the 30-60 apartment range I think your going to be OK…that 200-plus market is going to be harder.”

As one much more experienced investor wryly observed; “It’s only when the tide goes out do you see who was swimming naked.”  And another; “don’t mistake a rising market for genius”.

There is little doubt in our mind that the number of property developers on the rich lists will be far fewer in the years to come as many projects fall into the hands of receivers and our friends at Pickles take care of the wave of repossessed European cars.

Outside of signals what is the data telling us:

Here are some facts worth keeping in mind;

According to a UBS survey, more than a quarter of 1,228 recent Australian home buyers who had taken out a mortgage over the past two years, admitted they misrepresented some information on their loan application. 28pc of mortgage customers were not completely factual in their application; one-in-20 said their application was only “partially factual”, and 41pc of 2016 mortgage broker applicants admitted their broker suggested misrepresentation.

There are more cranes employed in the construction of residential developments in Sydney, Melbourne and Brisbane than a large group of major North American cities including New York, Boston, Chicago, San Francisco, Los Angeles, Toronto and up to Calgary.

According to Morgan Stanley apartment oversupply would be around 100,000 units which could spark a sudden downturn and put around 200,000 jobs at risk.

Another investment bank, UBS, argues completions of (free-standing) houses already peaked last year, while in contrast the multi’s super-cycle is still only about half done, with the number of units completed in 2018 likely to end up well over double the pre-boom trend.”

We have written extensively about bubble-like conditions in Australia’s property market, particularly apartments and have repeatedly warned investors to eschew leveraging to buy apartments. According to the ABS, there were more than 150,700 “other” residential dwellings under construction in the first quarter of 2016, which was 10.9% than the previous quarter, a third higher than previous corresponding period and over 130% than five years earlier.

Australian residential real estate, despite being on the cusp of oversupply, is some of the most expensive in the world on a House-price-to-income ratio basis.

Record prices and oversupply cannot coexist for very long.  It didn’t in Iron Ore and it won’t in commodity-like homogeneous apartments.

At the same time that house prices are rising stratospherically, debt is being accumulated at an alarming rate.

There is always, and without exception, one common theme to the vast number of crises the world has experienced; excessive debt accumulation, irrespective of whether it is by the government, banks, businesses or consumers.  And the accumulation of debt almost always poses greater systemic risks than it seems during the boom, making banks seem far more stable and profitable that they really are, while the injection of cash makes the growth that results look more sustainable than it really is.

Quite simply, Australians have taken on more debt, typically to chase more expensive houses, and have less money to pay for it.

Putting your head in the sand and ignoring the signs simply perpetuates the behaviour that leads to the problem.  If you are patient, you will do very well in investing over the long run.  You may have to wait two or three years for property prices to start declining more broadly and it might be many years, even eight years from today, before the bottom is reached, but the discounting by developers (a very important sign of oversupply affecting prices) has already begun. Developers are luring buyers with offers of $15,000 Harvey Norman vouchers and holidays to Asia.  Others offer up to a million frequent flyer points if you buy an apartment and ten-year rental guarantees are also now luring buyers.

The discounting represents a gentle start to lowering prices that will become more aggressive as the oversupply builds…

Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.


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This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564) and may contain general financial advice 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 advice from a financial advisor if necessary.


  1. Hi Roger, are you prepared to place a % on what you believe Sydney’s median house and apartment prices will drop by?

    • No SPiro, that would be a guess at best and attempts to be precise just set you up to be precisely wrong!
      I cannot say when or by how much, but I can suggest that ‘lower’ is about right and that it could be 2024 before we see the low point.

  2. Roger, do you have any thoughts on the Gold Coast specifically? I agree with you completely about the three eastern capitals, and I have no doubt that the bust in the highrise sectors will spill over into general property markets and ultimately the broader economy. Thus I have been actively shorting (via options) banks over the last 20 months (for disclosure).

    But I consider the Gold Coast a little different from other markets at this point mainly because it was the most internationally exposed market going into the GFC. I took notice of SQM Research’s frequent warnings of the huge number of for sale listings back in 2013 and we bought two units at severely beaten-down prices – I estimate about 50% discount in real (inflation-adjusted) terms from peak pricing immediately before the GFC (admittedly this required me to do a lot of soul searching as I had been an outspoken critic of small scale residential property investing including in submissions to government inquiries – a while back I placed on the public record – through the Macrobusiness blogsite – my reasoning for going ahead with these purchases.)

    There is no doubt that the Gold Coast is into a rapid development (mostly highrises) phase, but it is a few years behind the eastern capitals, and as yet the vacancy rate remains around 1-1.5%. Moreover, if the risks to the Australian economy develop as we fear then the dollar should depreciate considerably somewhat insulating – perhaps even net benefitting – tourist regions. The one concern that I can pinpoint is the influx of Chinese developers and what would happen if China stumbled and these developers went bust.

    The gross rental yields we are achieving on our original purchase prices are over 8% (and even though body corp fees etc can be high, net is still above 5%). We would consider selling one of the apartments if we can get a sale price close to 150% of our purchase price which, at current rental returns, would still yield around 4% net for the buyer. Comparing the relative risks for capital appreciation/loss over all time frames, I can’t help but think these apartments are a better proposition for cash buyers than bank equities.

    I find it mildly amusing when media reports of a potential property bust show images of the Gold Coast – recency bias at work I would suggest. In my view, as long as one steers clear of the off-the-plan spruikers, the Gold Coast is one of the lower risk markets for property investment at present. Values might still be around long-term fair value, perhaps even good value if this financial repression persists. And even though we are considering taking a nice profit on one apartment, the other will be held in our SMSF for perpetuity because it was bought at the right price and because it is difficult to see better opportunities going forward as I share your views on likely low future investment returns and the risks to the broader Australian economy.

    Having said all that, if you have some countervailing arguments I would value hearing them…

    • Hi Brett, From Perth to Hobart, every time I visit I am told why the local market is ‘different’. I appreciate your thoughts on the subject but high supply and high prices cannot coexist for long. Those who are netting 2% now will see their capital decline. Those netting 5% will see the same thing but perhaps to a lesser extent. However keep in mind that investors have not been rational going up, and they tend to be even less rational going down. For that reason relative valuations and symmetry aren’t always maintained in a sell off – if of course one does eventuate. I was particularly interested in your sentence “Values might still be around long-term fair value, perhaps even good value if this financial repression persists”. If dependent on something that cannot continue, then ‘value’ isn’t genuinely value.

      • Brett Edgerton

        Really appreciate you taking the time to respond, Roger. I guess implicit in my comment is my own view that “high prices” are not co-existing with “high supply” on the Gold Coast at this stage, and from my reading of that particular market the potential for that to happen, on both sides of the equation, is perhaps 3-5 years down the track (I guess this was the area in which I was hoping you may have had access to some good analysis to confirm or dispute this view). And yes, irrationality of the market (and the potential for black swan events in this environment) is on my mind and is the reason why, even though I can rationally make a case for the Gold Coast outperforming other Australian markets, we are considering reducing exposure (also, depending on domestic and global conditions perhaps relative outperformance just means prices fall less than elsewhere). Finally, fair point on “genuine value” – I guess what I have in mind is that Gold Coast rents should continue to perform well since this is one of few centres with very low vacancy, and further depreciation in the currency (if it occurs) will work to absorb a significant amount of building through increased visitor numbers. So I think there is a reasonable probability that todays purchasers of second-hand apartments on the Gold Coast will enjoy increasing rental returns and capital gains such that returns are favourable over the short, medium and long term. (I should say here that I am doubtful that Australian interest rates will increase for quite a number of years, and even internationally I am concerned by the world having used increased leverage to deal with problems caused by too much leverage.)

        In your response I appreciate your scepticism about any particular market because its pretty much how I usually view these situations. And I have to admit that I now find it rather odd to be supportive of a particular property market – even if it is just one market and for very specific reasons – having been bearish for a long time on Australian property. It reminds me of Jeremy Grantham writing on how he is known as a permabear but nobody remembers that he was one of the few bullish analysts early in his career in the early-mid 80s. I am a stay at home Dad and don’t often get the opportunity to challenge my views in conversation with high quality thinkers, so sincere thanks for your time.

      • Listened to an interesting podcast with Kyle Bass yesterday and during his sub-prime roadshows circa 2006 he practically visited every state in North America. Without exception the bankers he met all agreed there was a massive bubble in housing, however the local conditions in their state were strong enough to insulate them from the coming carnage. Food for thought.

      • True Jimbo, but read Jeremy Grantham’s latest quarterly newsletter, and also very much including Ben Iker’s excellent article, and think about that in reference to what I said above in both comments… It’s an excellent treatise on why many very smart investors expect lower returns for longer and well worth the read (from GMO website)…

  3. Roger we’ve taking about this building (pardon the pun) for a few years, like night following day. It seems the white shoe brigade has taken up residence in Sydney & Melbourne in plague proportions. Shall we start writing the news copy for 2018 and 2019.

  4. Sadly its all about basic greed. As a seller most people want to get the most they can from their property. As a buyer they are keen to get a bargain but ultimately they see prices increasing day by day so they jump in and bid higher than they can afford, but interest rates are low so lets go for it. So greed wins and the RBA sits on the sidelines shuddering. Well they shrug, we have to help our industry. What industry its all gone! Its a spiral. Listen to Roger and take action now.

  5. The property market isn’t all about Sydney and the higher prices in the 30km ring around it. There are other areas around the country, within 30kms of a capital city that you can buy affordable housing (approx. $350K house) that is very unlikely to be affected by an Inner City apartment boom and bust (where apartments are $600k+).

    • Big call that! If were a first home buyer commuting into the CBD from my potentially $350K cookie cutter, fence to fence home on 300sqm in Werribee and an apartment in Southbank or Docklands has halved in value and can be hard for the same money, I’d be thinking long and hard.

      Even more importantly the banks would have tightened up significantly, probably at the behest of foreign lenders who by that time are a little skittish, so rates are probably higher and your average investor who likes to refinance annually to add to their portfolio can no longer get finance.

      It’s hard to imagine this not rippling and contaminating the whole market.

  6. Hi Roger, given that the state of the economy has little or no correlation with sharemarket returns I am interested in your thoughts as to how this issue affects investors in the Montgomery fund

  7. Cheers Roger, another sobering article. I’ve found it most interesting charting Mining Share of GDP versus the Stapledon House Price Index since the 1970s.

    This is the third significant mining boom in that period (peaks in 1974, 1988 and most recently 2013).

    In each boom prior to this, house prices peaked between 3 and 5 years after the peak of the mining boom. With this current mining boom topping out in 2013, history suggests housing may do the same somewhere between 2016 and 2018. The ducks are most certainly being lined up.

    The only other observation was this boom made the previous two look anaemic.

    Your point about it potentially taking up to 8 years for prices to bottom out is on the money. Buyers who bought at the height of the 1970s boom (around 1974) had to wait until 1987 in real terms before getting their money back. Those that bought shortly after in the late 80s boom were treading water for ten years before recouping their investment (prices rose almost asymptotically in the late 80s!).

    Yes housing has been a solid investment in recent times and certainly over a long period. But for those with a ten year investment horizon, history tells us it may not be the one way bet that the property industry would have us believe. I’d be especially worried about the many approaching retirement and pursuing this strategy without the benefit of time to recover if it all turns sour.

  8. Hi Roger

    Great call but how do I profit from this short. How can I short and profit from this idea?

  9. Hi Roger,
    Couldn’t agree with you more. I remember seeing Paul Keating interviewed about the last recession. He said he remembered just before it happened flying up to Noosa for a family holiday he could see cranes everywhere building apartments and hotels. On the way back he could see cranes everywhere as he flew in over Sydney. “That was a warning sign” he said….. I wonder what he would make of the current situation?
    Does the reserve bank see something we can’t see?
    I think In a few years we’ll look back and say they should have been gently dabbing the brakes over 2014 -15 rather that letting in run.

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