• Roger chats with Gary Rollo to discuss why Megaport is a holding in the Montgomery Small Companies Fund. Watch here.

Through my telescope, I see a property bubble forming

Through my telescope, I see a property bubble forming

Another week, another set of entertaining quotes from the auction rooms as a fresh wave of investors bids over the reserve for a piece of Sydney real estate. Oh, yes, you gotta love asset bubbles. They produce quotes that, when told on the other side of the crash, seem so ridiculous they’re unbelievable.

I will never forget, for example, in 1999, giving a talk for the Australian Stock Exchange at the Sydney Auditorium on Bridge Street.  It was the height of the tech boom and the average first day listing premium for an IPO was 90 per cent. Yes, that’s right, you could buy into any IPO and your average return was almost a doubling of your money on the first day.

I asked the audience to raise their hand if they would be happy if their fund manager generated a 20 per cent return.


Not a single hand was raised in a room literally packed to the rafters.  Indeed, the room was so full of ‘investors’ the fire department came in and informed attendees that they were not able to sit or stand in the isles.

Speaking of venues with standing room only, Fairfax reported that a property auction on Monday night in Double Bay, Sydney, was packed not only with 100 people inside but another 50 standing in the street outside.

“In a repeat of last week’s LJ Hooker’s Centennial Park auctions, parents buying for children, upgraders, downsizers and a fresh wave of investors bid over reserve price at nearly every one of the 10 auctions on Monday night.”

According to Fairfax one buyer who missed out observed: “There’s no land left and nowhere to build.”

Absurd!  Especially absurd given many of the properties for sale were apartments – where land is created by adding another floor.

In another sign of a bubble, a jilted buyer was quoted saying, “Buying a property in an area like Bondi, where everyone wants to live, will never hurt owner occupiers or investors.”

John Kenneth Galbraith in The Great Crash wrote, “As noted, at some point in a boom all aspects of property ownership become irrelevant except the prospect for an early rise in price. Income from the property, or enjoyment of its use, or even its long-run worth is now academic. As in the case of the more repulsive Florida lots [in a mid-1920s Florida land boom], these usufructs may be non-existent or even negative. What is important is that tomorrow or next week, market values will rise—as they did yesterday or last week—and a profit can be realized…”

The aforementioned Bondi commentator was also quoted as saying, “With interest rates this low, people can afford to bid up another few hundred thousand…”

Back in 2011, I wrote, “a bubble guaranteed to burst is debt fuelled asset inflation; buyers debt fund most or all of the purchase price of an asset whose cash flows are unable to support the interest and debt obligations. The bubbles to short are those where monthly repayments have to be made.”

Make no mistake, the property market is officially in a bubble.

Will Rogers once said; “The fellow who can only see a week ahead is always the popular fellow, for he is looking with the crowd. But the one who can see years ahead, he has a telescope but he can’t make anybody believe he has it.”

When the man with the telescope makes his prognostications, they fall upon a stunned and disbelieving silence.


You be the judge about whether we are looking through a telescope or not.


Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than three 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.

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.

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  1. Yes, I liked your comment about being 6 months early rather than 6 minutes late, Roger. I know that feeling well. I was in New York the day Lehman failed. I remember just looking at the TV and groaning, because I had been considering selling my bank stocks for quite some time before that event.

  2. Interesting article. Property always brings out the emotion, so it’s good to read a common sense look at the broader issues.

    From a Perth perspective, my Financial Planner impression is that we have already experienced something of a bubble and a *gentle* burst for residential property prices here. We have example after example of a range of suburbs showing zero house price growth over the last 10 years – and that is based on bank valuations. At the luxury end of the market, Mauro Balzarini’s Dalkeith mansion recently sold for $13.7m – having been purchased for $12.25m in 2006. Alan Bond’s lieutenant Peter Beckwith built the home in 1990 for a cost of $18m. This is a single example but it does highlight the possibility of NOT making money in property over even a reasonable time period.

    Perth has already experienced something of a burst bubble in this regard, and this has occurred even in an era of the lowest interest rates for generations.

    On the other hand, were central bank experiments to end with an inflationary run, wouldn’t it be possible/likely that residential property prices could rise even further? Or at least provide some ‘floor’ for Sydney/Melbourne/Brisbane prices? (Subject to the usual caveats for population growth/ bank LVR’s/ bank capital requirements/ employment variables).

    When i read of (mainly Sydney) property prices and attitudes, i can’t help but remember the time when Japanese property purchasers were willing to sign multi-generational loans just to get exposure to the booming property market.

    Just thinking…

  3. Thank you for the insightful commentary, one I totally agree on. Which ASX companies would most be most exposed should or predictions transpire?

    • Mortgage insurers, property developers, banks, and down the track retailers of furniture and appliances…and that’s for starters. Be sure to seek and take personal professional advice.

  4. I wonder what the repercussions will be if there is a sizeable property correction?

    Generally when asset prices have risen for a while it gives the owner the perception of wealth, so one may live/spent up to or beyond their means. If or when there is a substantial property price correction that wealthy feeling could quickly fade. Consumer discretionary spending could slow which of cause will have a flow on effect to the rest of the economy including jobs. I guess this stems on the size of a property price correction.

    What have property price falls done to the economy of countries around the world in the past?

  5. Roger,
    Well written and easy to agree with as always. I personally agree but yours is another compelling article lacking in any real evidence to support your position. Have found it disappointing recently that “property bubble” articles are mostly filled with hubris and anecdotes. The favorite tricks of the property Bulls.
    I am sure that you and your team are the best chance to produce a fact based email to support your position. I would love to see you find some time to craft this.

  6. What is the best way to short the property market?

    How are Montogomery Funds positioned to benefit from the inevitable downturn?

  7. Is our telescope limited to Sydney & Melbourne or is it Australia-wide?

    As early 30s professionals, my wife and I have a substantial deposit (and annual earnings to support a loan) to buy a $1m+ 4bdr owner-occupier house in inner-city Brisbane. Short of finding a bargain (defined as what thesedays?) should we instead just look to rent for 10+ years while all this blows over?

    Having been a property bear for the better part of the last ten years, it’s hard reconciling fundamentals with personal realities/preferences.

    • Yes your bear stance was early Greg. Being too early is of course indistinguishable from being wrong. Maybe the answer is in the degrees. In funds management we talk a lot about position sizing and ‘weightings’. Maybe aiming for the million plus property is the issue? By questioning the weighting towards property (how expensive a property you purchase), you may arrive at an allocation/weighting that doesn’t force you to be only ‘all-in’ or ‘all-out’. Be sure to seek and take personal professional advice.

  8. The same can be said about several stocks on the market.
    One that was recently valued @ $12 but traded at a PE of 52+, had an EV/EBITDA of 41 and a share value of ~$9.50. Debt, thankfully ,was non-existent.
    I wonder what happens to companies like these?
    I also have been of the opinion that the property market is over-priced. Perhaps, one day we’ll be proven correct but in the mean time, like in shares, if prices continue to rise in Melbourne/Sydney at similar rates then traders will continue to make money, like they do with shares.

  9. People should look at what’s happening in Vancouver the hottest property market in the Western world. Property spruikers kept saying buy now or forever be priced out, no more land left in Vancouver, they even had a tv show called Rich Chinese Girls, prices dropped upto 50 percent in last month. Sigh, a fate which awaits Sydney, Melbourne, Brisbane

    • Hi Raj, Readers may enjoy this article about Vancouver Real Estate

      here’s an excerpt: “Now, as a new dawn breaks in Metro Vancouver’s real estate market, realty companies and real estate boards are reporting the first anecdotes of deals falling through as foreign buyers forfeited deposits on binding deals rather than pay the new tax. And they report evidence of local buyers withdrawing offers in expectation that the market will soften. Elton Ash, executive vice-president of Re/Max Western Region, said it is too early to accurately quantify how many deals fell apart, but he’s heard from realtors in some of the company’s 30 Metro Vancouver offices of cases where foreign buyers who couldn’t rearrange previously negotiated closing dates have already walked away. “Our expectation is that there will be a percentage of transactions collapse due to the buyer basically defaulting on the contract,” Ash said. He and other realty experts say it may take up to two or three months to gauge the full effect of the new tax.”

      • The catalyst for the change was the introduction of a foreign buyers tax. What do you think the catalyst for Australia could be? Does it even need one?

      • According to Martin Armstrong it’ll most likely be increased cost of owning property via increased government taxes including domestic buyers. Governments are getting desperate for cash and there’s no better cow than property. You can’t hide it, you can move it and you won’t be able to sell it when everyone’s selling. Armstrong’s model has predicted a decline already

  10. Good article Roger …….I wonder what will stop the bubble ……it just seems to keep inflating.

  11. Of all the cognitive biases, confirmation bias is the favourite of Australian property disciples.

  12. “There’s no land left and nowhere to build.”

    In, no less, one of the least densely populated countries on the planet. Absolutely priceless.

    What concerns me though is the rock and a hard place the RBA will be in when and if the economy and/or inflation improves. It seems to me buyers at these prices are stuffed unless the status quo continues on for another 20 years. Either the economy improves and interest rates will move towards their historical average – rendering the mortgage unaffordable; or, the economy gets worse and there’s significant unemployment – rendering the mortgage unaffordable.

    [As a small aside the ‘tweets panel’ on the new page is partially obscuring the article text on IE11]

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