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What to do in a Property Bubble

Bubble, bubble toil and trouble, people are panicking, worried they’ll miss out and worried they’ll get cut short – what will it be?

Is this a property bubble at all?

Thing is the nay-Sayers have been calling the Australian property bubble for years.   I guess eventually they could be right, maybe even now, but what people who call bubbles are really trying to do is predict the future.  I’ve had some experience in that and let me tell you it always ends in tears.

Call the boom too early and you risk missing out on the majority of the gains in any cycle.  Call it too late and you risk over paying.

Arguments for

A child plays with soap bubbles at an event to support autistic children and their families in a park in Kiev

The bubblistas quote fast rising debt to equity, debt to household income and debt to GDP ratios as indications things are getting out of hand.   But Australia still ranks behind many stable Western economies like Canada and even NZ in those stakes.

This article in the AFR by Edmond Tadros makes the argument simply:

Australia’s housing boom in five graphs

Read it and make your own mind up.

The minutes of the Reserve’s September policy meeting noted it was alert to the potential for bubbles.

“The main risks in such a scenario would likely be to the stability of the macro-economy rather than the financial system, particularly if households were to react to declines in their wealth by cutting back on their spending,” board members said in the minutes.

The Reserve also noted potential overheating of the housing market, saying “policy also needed to be cognisant of the risks to future growth that could accompany a large further build-up in asset prices, particularly if that was associated with an increase in leverage”.

Board members said the “risks associated with this trend warranted ongoing close observation”.

 

But is it even a bubble at all?

John McGrath is adamant it’s not.  “This is just a normal period of post-(global) financial crisis catch-up,” he says. “We were 10-15 per cent off our pre-GFC highs and most markets have now caught that back over about four years, which is no different to the 5-10 per cent growth rate we’re used to.”

Assistant Reserve Bank Governor Malcolm Edey says the central bank is keeping a close watch on house prices, which he says are growing at an above-average pace, however he then qualifies by saying, “We shouldn’t be rushing to reach for the bubble terminology every time the rate in house price increases is higher than average, because by definition that’s 50 per cent of the time,” Edey says. “And you’re just going to be unrealistically alarmist by making that call.”

So even though property prices in most Australian capitals are now well and truly on the move with Sydney leading the way, it’s impossible to call “bubble” (which implies it’s all going to explode and drift back down in price).

Fact is last time this happened we had almost twenty years of sustained property price growth.

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Why it might not be a bubble

Firstly, while prices are growing there’s no an extraordinary amount of speculation and borrowing is not getting out of hand.  These are two early indicators of trouble.

The household debt-to-income ratio stands at 147.3 per cent, which is lower than its record level of 153 per cent before the financial crisis.

The Commonwealth Bank recently stated, “Unlike the US, we have an excess of demand over supply, our population continues to grow at above-average rates and there are low residential vacancy rates and rising rents.”

Already stringent lending standards were toughened through the GFC, the bank says, and there’s minimal “low-doc”, or risky, lending. Also unlike the US, local lenders have full recourse to the assets of defaulting borrowers and unemployment remains relatively low, as do loan arrears rates.

David Rees, head of Australasian research at Jones Lang LaSalle, said, “A housing bubble is when prices move away from fundamentals, but in Australia’s case, prices were responding to fundamentals, like low interest rates, population growth and an undersupply of new housing.”

Secondly positivity has returned generally to the economy.  Despite our politicians saying things are dire unemployment remains low and consumer confidence is reasonably high.

australia-consumer-confidence

Consumer Confidence in Australia decreased to 94 in September of 2014 from 98.47 in August of 2014. Consumer Confidence in Australia averaged 101.86 from 1974 until 2014, reaching an all time high of 127.67 in January of 2005 and a record low of 64.61 in November of 1990. Consumer Confidence in Australia is reported by the Westpac Banking Corporation, Melbourne Institute.

australia-unemployment-rate

Unemployment Rate in Australia decreased to 6.10 percent in August of 2014 from 6.40 percent in July of 2014. Unemployment Rate in Australia averaged 6.92 Percent from 1978 until 2014, reaching an all time high of 10.90 Percent in December of 1992 and a record low of 4 Percent in February of 2008. Unemployment Rate in Australia is reported by the Australian Bureau of Statistic.

Then, there’s a lot of Chinese investor money flowing into the country.

A CLSA survey found, that as Chinese prosperity increases, so does the desire to emigrate and purchase a property foothold in countries such as Australia.

This year’s survey found that 15 per cent of moneyed Chinese people had plans to emigrate, almost double the 8 per cent level only three years ago.

So a better question might be, “Bubble or no bubble, what is my strategy?”

Bubble Busting Strategy – Dollar Cost Averaging

From Wikipedia, the free encyclopaedia:  Dollar cost averaging (DCA) is an investment strategy for reducing the impact of volatility on large purchases of financial assets.

By dividing the total sum to be invested in the market (e.g. $100,000) into equal amounts put into the market at regular intervals (e.g. $1000 over 100 weeks), DCA reduces the risk of incurring a substantial loss resulting from investing the entire “lump sum” just before a fall in the market. Dollar cost averaging is not always the most profitable way to invest a large sum, but it minimizes downside risk.

It’s a strategy that is often applied to shares but not often thought about in others areas of investing.

Basically no matter what happens you just keep buying at regular intervals.

Most people starting out with equity and a reasonable can get to 3 or 4 investment properties quite easily.

22tl-auhir-small

A fast rising market certainly makes it easier to borrow, as long as you don’t over commit.  So if you can afford it, and remember to do your maths not on today’s interest rates but something more like the long term average – 8%, buying in a fast rising market is actually a good thing – it will get you to your goal faster if you take  a long term view.

Time in the market

The old adage of time in the market is better than trying to time the market still holds true.

ScreenHunter_68-Feb.-13-07.23

A quick look at this house price growth graph shows there’s not many 10 year periods since WW2 where property hasn’t increased in value significantly even if you had bought at a previous high.

So if you think it’s a bubble here’s my tips:

  • Don’t necessarily stay out – you could be wrong and you could miss out on the best, high growth part of the boom;
  • Don’t think it’s going to go on forever and don’t put all your eggs in one basket;
  • Do all your sums at long term averages – 8% interest or above, 4% rental yield or below and growth rate at around 8% or less.
  • Don’t get carried away with auction fever – paying more than your expectation is ok, but one recent auctions achieved a whopping 73% premium over its reserve – that type of variation between buyers’ and sellers’ expectations is insane;
  • Keep some powder dry for when the boom ends and prices ease;
  • Follow all the usual rules for buying and stick to them.

Happy hunting out there!  Let me know how you go.

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Written by Peter Spann

Peter Spann – Film Maker | Director | Business Coach | Writer | Public Speaking Coach | Presenter | Investor.

 

 

© Copyright: 2014 Peter Spann – All rights reserved

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