Warning to property investors: you’re trapped in a bubble

Roger Montgomery

By

December 1, 2016

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You wouldn’t normally expect us to talk about property, but we’ve got some very strong views, and I want to outline our thesis. Many of you will have clients who are heavily invested in property, and I am concerned for those who have leveraged to buy apartments.

In the year to May 2016 – which was some time ago – we know the total number of apartments sold in Australia amounted to about 96,000 units. That’s new, off-the-plan apartments, as well as existing apartments. But in the year to May 2017, the number of off-the-plan apartments due to settle will be almost 94,000 apartments – almost the same number of apartments sold in Australia in the year before.

This simply means there are a lot of apartments about to settle. What we know is, some of those apartments won’t settle … leaving developers with more apartments than they would like to have to sell.

View Roger Montgomery’s exclusive video for Professional Planner readers at the bottom of this article

We also know that upon settlement the banks are lowering the valuation of these properties, leaving some investors potentially with negative equity.

The fact of the matter is the property industry is worried about an increasing supply.

There has been a significant increase in the supply of apartments going all the way back to the 1960s. This supply far exceeds what is necessary or required by Australia’s population growth rate of 1.6 per cent.

When developers started construction of their apartments two or three years ago and selling off the plan, they were hoping to sell 100 per cent of them. But we also know that that they start construction even if only 60 or 70 of them were sold or pre-sold. This means that, in addition to the apartments that are due to settle and won’t, there will also be an additional supply that hasn’t been pre-purchased. All of this is going to come onto the market soon.

It means that at the same time we have record high property prices, we’ve got record supply. Historically, in any market you can’t have record high prices coinciding with record supply. Either prices have to fall, or the supply has to fall. But one of those two things must happen.

What we know is the behaviour of developers is not changing. In fact many deny there is a problem at all. And they all believe it is only a problem in other markets. Denying there’s problem continues the behaviour that causes the problem.

We’ve got an increasing supply at the same time we’ve record process. This won’t continue forever. We’ve also got the key ingredients of a bubble.

When inflated asset prices are driven by debt, it increases the toxicity of the subsequent crash. You have been warned.

 

TOPICS:  bubbleproperty investment



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Roger Montgomery

About The Author /

Roger Montgomery is the chairman and chief investment officer of Montgomery Investment Management.