More signals that the property market may have peaked
As we have written before, signals are everywhere. Pay attention to them, and you won’t need to wait for data to confirm that a trend has changed. Which brings us to the latest signals from our property market.
We last wrote about a possible signal for a property market peak being the ‘For Sale’ shingle 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. We note that property market patriarch John Symonds is also selling his magnificent waterfront mansion on Sydney Harbour.
More recently we have been struck by the stunning growth in the number of practising 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.
We also note the increasing preponderance of property developers making the rich lists and in particular the mushrooming number of property developers on the Young Rich List. 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.
We also think the increasing prevalence of deniers – those that suggest there is no problem in the property market – is Exhibit A for an emerging problem in the property market. One 39-year-old apartment developer who will emerge on this year’s Young Rich list, and said to be “worth” an estimated $60 million, admitted there could be oversupply in the apartment market but denied the issue would affect his business. “Construction will be at an all time high for mid tier builders next year including us and 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 Pickles Auctions takes care of the wave of repossessed European cars.
And finally we observe that mortgage fraud is “systemic” in Australia. More than a quarter of recent home buyers in a UBS survey of 1,228 people who had taken out a mortgage over the past two years admitted they misrepresented some information on their loan application. The survey revealed 28% of mortgage customers were not completely factual in their application; 5% said their application was only “partially factual”; and 41% of 2016 mortgage broker applicants admitted their broker suggested misrepresentation.
There’s an aphorism that goes something like: if you wait for the swallow to sing, spring will already be over. In other words, if you wait for data to confirm that a trend has changed, you will have missed the turn.
Rate rise anyone?
For more information and opinion on whether we are headed for a significant property market correction:
- Through my telescope I see a property bubble forming
- You better believe it the property boom is over
- Property can only produce modest returns
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.
peter o'brien
:
Hi
Are you suggesting that people who are negatively geared get out now
Thanks
Roger Montgomery
:
That’s a question for their independent advisor’s to provide the answer to. I for one won’t be borrowing any money to buy an apartment right now.
Duane
:
Why do some people get in the middle of the swamp before they think of crocodiles!
Good luck property investors
Roger Montgomery
:
Good luck indeed. Luck however is not a criteria upon which an investment strategy can reliably be based.
simon oaten
:
another good data series to highlight “funding costs”:
https://fred.stlouisfed.org/series/USD3MTD156N
Our banks are showing the 1st signs in accounts of higher int costs for funding……
unemployement in Oz is rising (viz Ford / Holden / Toyota and the flow-on effects)…….
arguably, B&D are “bottom of the cycle” ……..
and the long-end of the curve (10 / 30yr) are showing signs of stress……
Hopefully, your readers fully understand the implications on valuation for our Banks (but my super fund loves the dividend……).
Please keep repeating this message Roger.
rgds
simon
Rajneesh Kadian
:
Roger it’s 90 percent
Amrish K
:
Hi Roger,
Interesting article as always. It would be interesting to know if the growth that you’ve called out in real estate agent numbers in the Eastern states and the lower rate of population growth in Australia overall if offset by domestic migration trends. We would expect to see higher net migration into the Eastern states given how well their economies have been performing.
Regards,
Amrish
Roger Montgomery
:
Not enough to justify all those agents.
karl
:
To what extent would the property market be insulated by the RBA cutting interest rates to 0%? It’s not hard to imagine the immense political pressure that would be mounted on the RBA to reduce rates if we saw a substantial downturn either in the broader economy or the property market. Clearly a further 1.5% cash rate cut would significantly improve the capacity of homeowners/investors to meet their repayment obligations. I suppose this is a short to medium-term scenario but it’s not out of the question that we could be locked into low interest rates for an extended period.
Roger Montgomery
:
Hi Karl,
I hope there aren’t many investors who are relying on being ‘bailed out’ of their misfortune by governments.
karl
:
Hi Roger,
I’d suggest anyone buying property in Sydney or Melbourne at these prices is relying on being bailed out by the RBA, either in the form of holding rates for many years or cutting them further.
jimbo james
:
The banks are squealing about rising funding costs and margin pressures now. How is an economic pin head like Australia going to compete for wholesale funds if we don’t offer a significant interest rate advantage over larger, more stable competing markets? Surely we are close to our own version of ZIRP.
The real culprit of any pain coming is hidden inflation. For such low interest rate, supposedly deflationary times, everybody seems to be preoccupied with cost of living pressures……that really shouldn’t exist if the data was accurate. But essentials such as health care, food, utilities, insurances and education keep rising rapidly. Wages on the other hand are not. Household budgets are being smashed and our CPI boffins will keep many hoodwinked until such time as the sheriff turns up to take the keys.
Roger Montgomery
:
Thanks Jimbo. Interesting and well articulated.
karl
:
Despite the fact that economic indicators are still looking okay, most commentators suggest we’re headed for another cut to the cash rate within a year. Seems to me the RBA would have no problem pulling the trigger towards near zero/ZIRP as soon as we start seeing some ugly unemployment numbers.
I for one am hoping they keep what little juice is left in the tank for a real crisis, as opposite to wasting it on their myopic obsession with inflation.
Rajneesh
:
Talking about systemic fraud, I know someone with 2 milllion dollars worth of loan spread over three apartments in Waterloo, Zetland and Mascot, NSW. Her income is 80k, when I asked how she got the loans on her income, she gave me the number of a mortgage broker who got her ‘over the line’ in her mortgage applications. I asked what’s her contingency plan if she can’t rent them out anymore. She said she will sell them for a huge profit simple!!!
I knew that day we are heading for a subprime crisis in Australia.
Roger Montgomery
:
Frightening Rajneesh. What is her LVR?
jimbo james
:
I second you on that Raj. Everyone seems to know a mortgage broker who will ‘get you over the line’. That’s almost industry vernacular now!
You’d have to have rocks in your head to invest in Aussie banks over the next 3 years.