Warning lights flashing for economy
I have previously explained how, in an environment of low interest rates (that will eventually rise), and record high asset prices (that will eventually decline), now is the time to instruct to your adviser to investigate alternative strategies such as market neutral funds. After reading today’s blog you may be asking your adviser or the team at the family office team to ‘speed it up’.
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.
Jarad Stirling
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Great article Roger and Alarming podcast Mathew. As a financial planner, I find it extremely frustrating hearing Investment Property advisers recommending clients increase their debt burden and purchase investment properties to fund their retirement. There’s very limited chance these clients will ever be able to pay off additional debt, nor is there financial situation fully explored to see if they can. They become speculators hoping/praying for interest rates to remain low and prices to appreciate. I can see it all ending in tears, especially for those loading up in property.
Jarad Stirling
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Great article Roger and Alarming podcast Mathew. As a financial planner, I find it extremely frustrating hearing Property specialists recommending clients increase their debt burden and purchase investment properties to fund their retirement. There’s very limited chance these clients will ever be able to pay off the additional debt, nor is their financial situation fully explored to see if they can. They become speculators hoping/praying for interest rates to remain low and prices to appreciate. I can see it all ending in tears, especially for those loading up in property only.
Kerrod Thomas
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Roger, most crises materialise when a certain “event” (or “events”) occur that trigger the crisis. In your view, what do you think the event could be that triggers the next crisis in Australia? There could be any number of events, all at varying levels of likelihood of probability of occurring.
I don’t know if the book by Reinhart and Rogoff covers this, but to me it seems to be the next stage of the discussion and analysis.
Roger Montgomery
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Academics are still trying to agree on what caused the 87 crash…don’t always need a catalyst. In time one tends to transpire though…
Kerrod Thomas
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Yes, you’re right. And often the catalyst only becomes apparent in hindsight unfortunately.
Jarrod
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Apologies, correct link here:
*[1] http://edge.alluremedia.com.au/uploads/businessinsider/2016/04/RBA-net-debt-to-debt.jpg
Jarrod
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Interesting and pertinent historical perspectives, Roger.
Notwithstanding, I wondered if you are aware of any Australian household NET debt figures?
For example, I am aware of data suggesting Australian household NET-debt-to-income has been falling over recent years (e.g. suggesting a relative increase in household savings) [1].
You also note that the 1990 Australian household-debt-to income ratio was 56%, compared to the present 206% figure. However, Australia’s superannuation system has grown significantly since 1993 with Super Guarantee, growing from 3% of employee income p.a. to today’s 9.5%, excluding other contributions. As of 2011, as a proportion of GDP, Australia has the fourth-largest retirement savings pool in the OECD (92.8% of GDP)[1].
(Not being an apologist for unsustainable debt here, just curious as to your thoughts.)
Thanks,
[1] http://edge.alluremedia.com.au/uploads/businessinsider/2016/04/RBA-net-debt-to-debt.
[2] http://static1.squarespace.com/static/52850a5ce4b068394a270176/t/52ea91a4e4b0ce59aa11043e/1391104421709/Private+Retirement+Savings+OECD+2011.png
Roger Montgomery
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Net debt is a function of asset prices which are inflated by the debt itself. Silly.
Phil Crossan
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Did you know that a single individual property could be a subject of a bubble that inflates and then bursts?
My parents sold their property in Logan City, Qld for $225,000 in 2003. That same property sold for $1,000,000 in 2007.
That property was advertised for $1,250,000 in August 2014, but the price was cut steadily and was sold in November 2015 for $700,000.
mathew
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Roger not sure if you caught this but I’m sure some of the thoughts will concern you
https://www.youtube.com/watch?v=RswXjph3-nQ&t=1751s
Mat
Roger Montgomery
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Hi Mat, Thanks for sending that through. My goodness. I watched from the 20min mark and was speechless. There wasn’t a property market in Oz that wasn’t given a positive slant.
They painted a rosy picture everywhere. But did they also unwittingly contradicted themselves?
For example, they note that even if prices are high right now, you don’t need to be concerned. High prices are great because ‘yields catch up’.
Then, elsewhere in the discussion, they note that its very hard to get a tenant in WA. The question I would ask is; How do yields ‘catch up’ if you don’t have a tenant! Oversupplied apartments cannot, by definition, all be tenanted at a price that is attractive for the oversupplied landlords.
Then, without blinking, they note you can now buy a property in WA for less than you could five years ago.
Completely ignoring the losses to previous buyers from five years ago, the low WA property prices are painted positively too…
Not positive for you however if you 1) hypothetically listened to the same message in WA five years ago and expected low yields to catch up…and 2) now you don’t have a tenant AND 3) your property price has slumped!
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. In Sydney developers are offer $15,000 Harvey Norman vouchers and holidays to Asia. In Melbourne there are up to a million frequent flyer points available if you buy an apartment and in Queensland and Melbourne ten year rental guarantees. The discounting represents a gentle start to discounting that will become more aggressive as the oversupply builds…
Andrew Bunting
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One major factor DOES seem to be different this time and that’s demography. The west’s (and China’s) ageing population could force interest rates to stay lower for longer and inflict a ‘new normal’ interest rate regime. Demographically, the world is turning Japanese (a wood with no saplings, or too few at any rate). No one seems to be talking about this much. Immigration from Africa and India could solve this, (the only two global regions with young populations). But there’s no political will to allow it. What to do?
Roger Montgomery
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Hi ANdrew, Yes this time could be different! History however suggests it never is.
Darren Chalkley
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Great article as usual Roger, I work in finance in WA and see the damage being done first hand. As an observation the market, in general still sees rates heading lower with minimal uptake of fixed rates.. On the WA government debt side, do you have any stats on the nature of the debt – good debt vs bad debt?…..
Roger Montgomery
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Good debt? What is that?
jimbo james
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When you lose your job;
Good Debt = Bad debt!
Spoken from personal experience. Never again! Cash is King.
Aaron Killeen
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Very Good article! As someone living in Karratha WA, I have seen parts of this article first hand!
Roger Montgomery
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Thanks for sharing Aaron.
Scott
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I’d be interested to know what potential % fall in property prices you believe could eventuate? Hard to predict but none the less, interested to know your thoughts.
Roger Montgomery
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You are right Scott. I cannot tell. I wouldn’t be surprised if the ‘average’ magnitude is much lower than this, but some individual falls of 30% won’t be unusual.