It’s time to say adios to the Global Everything Boom
Over the last 10 years, quantitative easing (QE) by many of the world’s central banks has driven down interest rates and steered large numbers of ‘investors’ to speculate on the appreciation of anything, creating what’s been called the Global Everything Boom. But now the boom is waning, and highly indebted speculators better watch out.
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.
andrew ronan
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It’s funny how everyone blames negative gearing for unaffordable property prices, but completely overlook the real culprit which is the lowest interest rates in history, and since negative gearing is only logical in a market that rises quicker than average incomes rise, it would not be a problem if we had normalised interest rates that keep asset prices in check.
Under these circumstances investors would place far more emphasis on the yields rather than capital gains as prices would only move relatively inline with income growths. It also makes saving logical because prices aren’t continuously running away. It’s a no brainer.
I wonder how many of the so called property investors would feel comfortable with a highly leveraged investment in the ASX 200 say, which has an actual yield, not many I’d say, but they have no problem leveraging up to the hilt in property, in which yield is considered almost irrelevant.
Killian
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Really good and insightful article. I watched property prices in Ireland crash 60% right after I graduated which led me to move to Australia. However, I disagree with you on one point, your views on negative gearing. Negative gearing has amplified the Australian property bubble. It’s an artificial government intervention which keeps property prices artificially high. It also only pays off when properly prices are rising and now that they are not may accelerate a stampede for the exits. The Market is passing its judgement on the folly of negative gearing. Its not the bust which destroys wealth it’s the greed which precipitates it.
bob bellhouse
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Roger, your comments about business and the economy are always insightful, yet I disagree with your comment about negative gearing. While it might help investors, we also belong to a community with many young people who are excluded from the opportunities we had when we were starting out because property prices are so high. Not only does negative gearing help to inflate property, it also encourages an allocation of resources away from other productive areas of the economy.
Roger Montgomery
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You can negatively gear any investment asset purchase. It’s only negative on property because the income is so poor.
Allan
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If the negative gearing rules are repealed and existing properties are grandfathers, I can imagine property values still get hit. The reason being that while the existing owner can benefit from the gearing, property values are determined by the next buyer, and if that buyer cannot gear, then the motivation for owning is decreased in relative terms, reducing the price.
I imagine it like a wedding diamond, below a certain carat there is no market, so it doesn’t matter what benefit the current owner gains, the next potential owner will not gain the same benefit (ability to resale, sentimentality etc) and will thus certainly not pay the original price.
Does my logic sound correct?
Roger Montgomery
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I tend to agree Allan. It could however tighten supply because existing beneficiaries don’t want to lose the benefit.
simon
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1. yes true RM, then eventually rents go up as less supply of existing rental stock (does that old rental stock sell to first home buyers and owner occupiers then ‘leave’ the market permanently? ) and the ‘new stock’ isnt that appealing as it becomes ‘second hand’ once purchased and no longer qualifies for N/gearing as it can only be used once as a rental property…
this is a dumb policy to solve a problem that is already being solved by the market which is always the best way to let things be sorted out.
2. RM we would love to know yr opinion on Labors other dumb policy ‘cancelling franking credits’ as you havent mentioned your thoughts on this policy in the media??
I note Geoff Wilson is strongly against it and is fronting a huge media petition /campaign to get it stopped
thank you
Roger Montgomery
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I wrote about it some time ago. We all accept progressive taxation before retirement. Progressive taxation, with less onerous tax brackets, should apply post retirement too. So if you receive $50,000 of franking credit rebates after retirement they’re all yours. If however you receive millions you’ll have to pay some tax on that. pretty straight forward.
Allan
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Hi Roger, thanks for your point about tightening supply. A follow up question if I may.
For those that are holding onto the benefit of NG, I imagine they are choosing to “suffer in silence”, since the fact they are NGing means the holding cost is negative. This is fine when the market value is going up and they expect a greater fool later.
But with the market going down, is there still much enthusiasm to hold a depreciating asset?
Of course, owners with sufficient cash flow can ride this out. These are the one you’ve mention who will tighten their supply, I assume. With leverage at such heights though, I wonder many that invested on the last 5 years can really ride this out.
Roger Montgomery
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You’re right. Overseas at least negative equity is the single biggest trigger for delinquencies. It will certainly be interesting to see if the experience is the same in Australia. I suspect having a job may have something to do with it.
simon
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Very interesting and well thought out thesis RM -kudos
– cannot find fault with your argument.
I dont disagree with falling prices (for now, esp. in SYD & MELB) so the only small opinion I can offer is 2 things-
1.What if RBA cuts rates late next year to 1% (2 rate cuts or more) due to the rapidily deteriorating economic /housing outlook?
2.What if the Govt (whoevr that may be) opens the flood gates to immigration?
Remeber Labor’s history tells us they are pro ‘saving’ the boat people so there could be a massive increase in yearly intake of immigrants -I havent heard Labor mention policy on immigration.
PS Im holding property for at least 15-20yrs / not shares
Roger Montgomery
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Q1.What if RBA cuts rates late next year to 1% (2 rate cuts or more) due to the rapidily deteriorating economic /housing outlook?
The impact depends on liquidity – that is, the willingness of banks to lend more. if rates are lower, there may be more people willing to borrow but whether they qualify for a loan and how much they get, is entirely up to the banks. RBA could cut next year but if funding costs are going up, mortgage rates might not fall as much or at all.
Q2.What if the Govt (whoevr that may be) opens the flood gates to immigration?
As I mentioned in reply to Steven’s comment: There has always been population growth. The world is becoming more populous and it has been growing for a millennia, but that has not prevented property prices from falling before and it won’t prevent falls in the future. The argument that a growing population will always support house prices is like saying the 9% of our salaries that we all put into superannuation each year will always support stock markets. It’s the ‘weight of money’ argument and its flawed.
simon
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ok then, im all out of logical arguments.
so where do we hide in a falling property and stock market scenario with cash term deposit rates about 2.5% which wont cover inflation?
possibly reduce exposure to both assets while still holding a foot in both camps with minimal or no debt and hold higher levels of cash until things become cheaper or more certain….?
jimbo james
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Sounds appetising Simon. I’ll take 2.5% on my cash over 20-50% losses on property and shares. Yes please.
steven lock
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Reported on ABC news recently – Sydney population growing by around 100,000 a year and Melbourne by 120,000 a year, for the time being there is a huge demand for housing.
Roger Montgomery
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Hi Steven, There has always been population growth. The world is becoming more populous and it has been growing for a millennia, but that has not prevented property prices from falling before and it won’t prevent falls in the future. The argument that a growing population will always support house prices is like saying the 9% we all put into super each year will always support stock markets. Its the ‘weight of money’ argument and its flawed.
steven lock
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I was suggesting over a much longer period than the current cycle, if the same demand continues, particularly in Sydney and Melbourne.
Roger Montgomery
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Oh Yes, Sydney real estate should be higher in 20 years time. Possibly considerably. The question is, will you make more money from real estate or from owning the banks who will be lending to a much bigger population?