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Prepare to lose enormous [property] wealth: UBS and Harry Triguboff

13092017 property bubble

Prepare to lose enormous [property] wealth: UBS and Harry Triguboff

Earlier this week, The Australian – the newspaper I write for fortnightly – updated their reporting of Australian property mogul Harry Triguboff’s view on property prices.

Separately this week, UBS reported the results of a survey of almost 1000 Australian mortgage holders who borrowed in the twelve months to August 2017.  They observed; “Our 2017 survey found factually accurate mortgage applications fell to just 67 per cent. There are now ~$500 billion in ‘Liar Loans’ on the banks’ books.” A third of borrowers admitted to understating their living expenses.

UBS found ANZ had 45 per cent inaccurate applications – the highest of all the banks – while NAB had 38 per cent. Both were substantially higher than in 2015 and 2016 suggesting standards are not getting better, and if anything, the banks are slackening their due diligence in order to drive growth.

As you know we have long been concerned about property prices in Australia.

You can read some of our most recent warnings following any of the below links:

We could be wrong about the property bubble (but we don’t think we are)

The property boom may finally be about to bust

Cash crunch is coming for property investors

Unless Treasury’s latest data showing a 17 per cent lift in intended business capex, or the forthcoming infrastructure, spending boom leads to significant employment and/or wage growth – highly indebted property investors and speculators could be much worse off.

According to The Australian on Monday 12 September 2017,

“The slowdown in the apartment market is worsening and will have a severe impact on the economy if it is not arrested”, according to the country’s biggest apartment builder, billionaire Harry Triguboff.

“The number of new apartments sold had dropped and prices had fallen about 10 per cent over the past six months, the founder of Meriton Group told The Australian.”

“China’s continued restrictions on capital flowing out of the country, the local banking crackdown limiting finance for investors and sluggish domestic wages growth had combined with government policies causing a perfect storm for apartment construction.”

Back in May, we warned here, that Chinese interest in Australian property had plunged.

The Australian also reported this week; “At the same time, Reserve Bank governor Philip Lowe last week said he was watching the Brisbane property market carefully, particularly given the pressure on prices from the large rise in the supply of new apartments in that city.”

Back in March we warned you about Brisbane property prices in particular.  In our blog post entitled Brisbane apartments are ground zero we specifically highlighted the issues for Australia’s property investors emanating from Brisbane.

With serious implications for the economy, BIS Oxford Economics now expects ­national building starts for high- density (above four-storey) apartment buildings will have halved by 2019 from last year’s peak and could drop further in 2020.

Managing director Robert Mellor told The Australian; “The RBA and Treasury are being a bit optimistic on the dent to GDP growth. We will not see economic growth at 3 per cent”.

Mr Triguboff added; “Australians could lose an enormous amount of wealth.”

 

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.

21 Comments

  1. Well in Wollongong the market has definitely changed. Good quality family homes are still selling quick and for high prices but the lower end of the market has tanked. Only 2 months ago I was seeing 30 to 40 people at an open home for a dump in a commission suburb. Just this Saturday I went to a similar property and was the only one at the open home. It was the first open.

  2. Remove from your thinking property Prices always go up. My parents lost Money on real estate and so has my uncle who had to sell his own home to cover losses on his Investment Portfolio in 2011. The current Australian real estate market is powder keg waiting for a light to ignite the fuse….

  3. Jimbo,

    Here is the article from the AFR. http://www.afr.com/real-estate/residential/70pc-of-chinese-pay-cash-to-buy-australian-homes-sparking-moneylaundry-worry-20170403-gvc5vv

    It is only been recently that the Chinese government has put the clamps down on its capital controls (and now the bitcoin price starting to drop since China is getting serious about these outflows.

    http://www.smh.com.au/business/chinas-smurfs-beat-cash-controls-sending-real-estate-soaring-20151102-gkpab9.html

    http://www.austrac.gov.au/sites/default/files/sa-brief-real-estate.pdf

    Even so, the Australian Government has a lot to answer for.

  4. Roger
    you need to clarify your belief that its apartments your arguments are referring to and focusing on (not land/ housing?) because in that case I am in agreeance with you my friend !
    I had assumed no-one round here (was dumb enough to ) buy apartments so I mistakenly believed you were talking about housing in general /not specifically apartments…

    Also what is your feeling on retail ?
    Now Im not a retail investor/ I feel they are like TLS
    but Im starting to feel that JBH and HVN are oversold /overshorted on newspaper artciles re-Amazon fears and housing slowdown.

    • Thanks SImon,

      I am similarly minded regarding retail. If Amzon takes $15b of revenue in a few years time, it will amount to 5% of retail sale market share. That doesn’t send everyone broke. nevertheless the 40% decline in NSW apartment consutruction approvals will feed into lower activity over the next twelve months, and lower payments to contractors (construction is the third largest employer in Oz) could impact retail sales.

  5. Roger,
    I have stated previously my bullish predictions on the property market. These predictions weren’t based on any form of analysis but rather the first hand witnessing of on a Saturday morning more than 100 people showing up to an open house. My thought was (and continues to be) that these were family home buyers, not investors. Their appetite was unlikely to change, for whatever reason they were looking for a new place to call home. The long held opinion of the Montgomery team is based on economics and in in reality it makes absolute sense but I suspected that not enough of your team witnessed firsthand the fervour that these buyers have. In any case, reading your blog is one of the better parts of my day, please keep up the good work.
    My question is, how does the Montgomery team view the recent uptick in business sentiment from China? Does your team believe that this will translate into a pickup in the export of raw materials to China and as a consequence, have the potential to absorb the bulk of job losses from the retail construction space, like it has in previous economic cycles?

    • Hi Andre,

      Intresting observations. Thanks for sharing. In 2014/15 the pace of CHinese growth was much weaker than the officials numbers suggested and it was wise to be out of materials and resource stocks. By contrast, in 2016, the Chinese economy grew very strongly, even though the official GDP numbers were relatively unchanged. It was wise to be in resources (we of course don’t believe resource companies are high quality and are somewhat circumspect aboput investing in them). The bounce in 2016 Chinese activity was not picked up in the official numbesr but it was picked up in Capital Economics’ (“CE”) China Activity Proxy. Since the beginning of 2017 however the China Activity Proxy has turned down again (suggesting weakening demand for materials) and CE are forecasting new lows by late 2018/19. You can see the chart here http://www.abc.net.au/news/2017-06-08/china-gdp-graph/8602362

      • Thanks Roger for that information. I also think that we should also note an equal level of caution as real estate agents use terms like “basis points” and “the Fed”. Scary stuff.

  6. Thanks Roger.
    How do you reconcile your warnings on the property market and your ownership of the heavily exposed banks? This appears contradictory.

    • Hi Karl,

      The big four banks represent 27% of the ASX200. We have 7.5% invested in the banks. Stating it differently, we are significantly underweight the banks – which reconciles with our view.

  7. For those interested check out Australian Economist, Phillip J Anderson’s take on the property market and property cycles worldwide since the dawn of time……..if he is right there is some way to go before we see a slowdown or the sell-off that everyone fears…….his research and analysis is backed by hundreds of years of data from property cycles worldwide…..his views, as such, are contrarian but present a much wider explanation/thesis as to why economies have always been inextricably linked to rising land prices and will always be …… he has not just popped up in the last few years but has been detailing his views for the past 20 years or so……definitely worth a read

  8. Roger hopefully one day you will stop ‘throwing everything at it’ in your attempt to talk property prices down and admit you were wrong. Look at how wrong you were on HSO and ISD and VTG.
    Property has never dropped 70% in value like those shares have.

    You dont seem to bring that topic up every month yet you keep coming up with every negative view on property you can scramble around on google to find. How about you find a bit more of an objective view rather than constant doom and gloom which has proven incorrect for 3 years running.

    • Hi Simon,

      Thanks for the frank assessment. I have to confess to a wry smile when I read such passionate words on the subject of an asset class. We aren’t talking about the welfare of children or a threat to democracy or a military invasion, so I am always a little stumped by heated words over nothing more than apartment prices. Nevertheless I hear you but I’ll back a portfolio of 30 quality companies (including a few that we get wrong) over Sydney, Melbourne and Brisbane apartments, purchased at retail prices with 80% or 90% leverage, any day of the week.

    • Actually Simon, I see Roger and his team regularly and openly discussing their ‘failures’ – which ironically is why you’re able to use them as ammunition.

  9. Thank you Roger,

    How do you feel about the massive amounts of people the LNP is bringing into the country (+278,310 to July, so probably much more due to 457 /student visa conversions) which will continue to put pressure on wage increases. Additionally there is a tacit refusal to close the loop holes on money laundering to accountants, real estate agents and lawyers (considering that 70% of Chinese buyers pay in cash). Will not these factors continue to backstop the bubble? Additionally as inflation numbers continue to dissapoint around the world are we going to see interest rates rise in the major markets (Fed/ECB/BoJ?)

    • Yes it could Andrew. As I mention in the article; if Treasury’s latest data showing a 17 per cent lift in intended business capex, or the forthcoming infrastructure spending boom leads to significant employment and/or wage growth things might be OK.

      • This forecast capex increase was mentioned in another MIM article recently – where do you foresee these dollars going? 4×4 utes? IT infrastructure? Mining Equipment?

    • Source that says 70% of Chinese buyers pay in cash? I’ve seen credible data suggest it’s the complete opposite and around 80% are highly leveraged, largely through Australian banks! There’s also data suggestive of Chinese buyers paying cash, with money borrowed from foreign banks. Who to believe?!

      I thought this inner western Sydney agent spoke very frankly about the state of the markets, namely Sydney which literally fell off a cliff in July (down 5-6% at this stage), Melbourne still solid but close to top, the dangerous levels of leverage being employed, flawed auction clearance rate reporting, liar loans and his involvement as an agent dealing with pushy mortgage brokers looking for favourable rental valuations on behalf of aspirational buyers. Sobering listening direct from an insider via ABC Nightlife (one of Roger’s great hangouts).

      http://www.abc.net.au/radio/programs/nightlife/real-estate/8912992

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