05 May The boom is about to go bust
Is anyone else thinking this market is crazy? I can’t believe the prices some people are prepared to pay for property right now and that is if they can even find a property to buy. And maybe that is the problem just there. Lack of supply!
The article below from theage is an interesting read. It makes you wonder if this market is sustainable for much longer? What do you think?
Asset bubbles in shares and property could burst in the next six to 18 months, according to one of the country’s more bearish investment experts, who is warning baby boomers that their retirement savings are at risk.
Australian shares, which finished trading at a seven-year high of 5958 points on Monday afternoon, are now only a whisker away, or another rate cut, from hitting a fresh high of 6000 points, a place they have not visited since financial markets collapsed in the wake of the global financial crisis.
Property prices in the country’s most popular capital cities are also testing new highs, despite rising unemployment and soft wages growth which have worsened housing affordability.
Roger Montgomery, of Montgomery Investment Management, believes asset bubbles are likely to pop in the near future and that “there is a real chance that Baby Boomer retirement plans may sink, thanks to their inability to avoid repeating the investment mistakes of their past”.
“The value of retirement nest eggs is really being elevated by the willingness of people to take more risk because they are faced with such low returns. But the stock market has never been a place where the majority win,” he said.
“We think the best case scenario is lower returns in the near future, and the worst case includes a correction of some description,” said Mr Montgomery, who runs two funds that are both heavily weighted towards cash despite the low interest rate environment.
PM Capital’s global portfolio manager, Ashley Pittard added that prices in shares and property are now close to dangerous levels.
“They are certainly approaching valuation extremes that would suggest when they deflate they will cause significant damage to the country and it is a timing issue of when problems will emerge. It is not sustainable to have [bank] loan growth that on average has increased by 10 per cent per annum consistently for 15 years and a housing market that has only gone one way, which is up, over the same period,” he said.
Sydney’s median house price went from $765,493 in the September quarter of 2013, to $872,811 in the December quarter of 2014. Melbourne’s median property price moved from $568,399 to $614,479, according to Domain Group data.
Fuelling demand is expectations of lower cash rates. Financial markets are now pricing in a 56 per cent chance of the Reserve Bank of Australia trimming the official cash rate from 2.25 per cent to a new record of 2 per cent on Tuesday.
Merrill Lynch senior economist, Alex Joiner said that households who take on too much debt in the low rate environment could be caught out once rates rise.
“Inevitably rates will move back to a more normal level and that is when we see the debt servicing ratio-income used to service debt, moving higher – households will be much more sensitive to upward moves in interest rates,” Dr Joiner said.
Mr Montgomery noted in a website post on independent publishing service, Cuffelinks, that eventually “the price of those assets [stocks and property] will be pushed way too high,” he said. “After that, a large number of investors will, sadly, suffer financially again – from buying too late and paying too much.”
Since the RBA cut rates in August 2013, before a long period of remaining on hold, the Australian benchmark stock index, the S&P/ASX 200 has advanced 27 per cent to 5975 points on Monday afternoon. Over the same period the number of companies that have listed on the Australian share market has surged.
Investor interest in higher yielding assets such as banking stocks have also gained in appeal during the past two years. The increased store of wealth in the country’s major banks has helped the financials index explode in value to represent 44 per cent of the local stock market.
Commenting on the research, Domain Group senior economist, Andrew Wilson said he expected a further acceleration in property prices should the RBA lower rates on Tuesday. He added that another rate cut will not help housing affordability.
“There is no doubt that markets have started off well this year,” he said. “In terms of affordability, the interest rate cut is really at the margin. The banks have cut headline interest rates but not the discount rates.
“Affordability hasn’t really improved in real terms but it has improved confidence. I am not sure we are going to get the same drive from rates as we have in the past, but it should be interesting,” Dr Wilson said.