Wednesday, 29 April 2015 12:01

Australia has a property bubble now in 2015

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We recently spoke to Roger Montgomergy (Sky Business News/Montgomery Fund) about whether he believes Australia is in a Property Bubble.  Here is the interview.
















Transcript of video

Australia has a property bubble.

Mark Draper: Here with the Roger Montgomery from Montgomery funds. Thanks for joining us Roger.

Roger Montgomery: It’s a pleasure mate.

Mark Draper: Now when taxi drivers start talking to me in Sydney about the property market, it makes me very nervous. Are we about to see a property crash or what do you think it’s at?

Roger Montgomery: Well, at the timing of it, we are definitely in a boom. Is it a bubble? I’m leaning towards yes but it’s not a forty-five degree angle or anything like that but definitely, we are hitting, we’ve got the key ingredients in place, in fact, the key ingredients for a bubble being placed now for probably twelve months to eighteen months. We have now got some ridiculous prices being paid for property, I’ll give you some examples, so there was a block of flats in Mosman in Sydney that were being auctioned, five apartments that the total income, the gross income from the five apartments was $139,000 dollars and the block sold for $3.5 million dollars on 139 million dollars of income and of course there was maintenance involved and help with keeping the tenants happy. A good friend of mine is one of the largest property shopping centre and commercial real estate owners in Australia and privately run business. He has a building leased to a major bank in Melbourne for ten years, so a blue chip tenant for ten years and if he tries to sell that property, he can get about six thousand dollars a square metre. In a city resident, let me put this into perspective. In a city CBD residential real estate in Melbourne is selling for over $10,500 a square metre and in Sydney $15,500 a square metre and usually you don’t have a blue chip tenant so prices are definitely heady and it’s simply a function of low interest rates. Let me give you some other statistics, 43% of all home loans, residential mortgages taken out are interest only…

Mark Draper: Is that across Australia or New South Wales?

Roger Montgomery: It’s across Australia. Across Australia, interest only and then you’ve got for example the mortgage, the residential mortgage debt to disposable income in a recession we had to have in the 1980’s, it was about 30…1990’s, 1991, it was about 35%. That ratio is now 140%. At a time when interest rates are at zero or very close to zero and it may as well be…

Mark Draper: Because in the 1990’s they were…

Roger Montgomery: They were very high, 18% and so understandably people have taken on more debt but if interest rates go up, the income that you are earning doesn’t rise to pay the higher interest rate, so that’s the problem when you’ve got so much of people’s disposable income paying off a mortgage, so I’ll give you an example. 25 year loan, 80% LVR, at current interest rates, that first year when you are paying off that mortgage, that is taking up using a median house and a median income, about 75% to 80% of disposable income is going to service that mortgage.

Mark Draper: Wow.

Roger Montgomery: And think about what happens when interest rates go up, or worse, interest rates don’t go up, they stay low for a long time because the economy is truly sick and people start losing their jobs and that is the really big concern that if the United States raises rates too early, we will get a repeat of 1937, we will get a double dip recession and the reason why that is a problem is because the previous recessions, and remember the United States are seven years into its growth cycle, and most growth cycles last about seven years. It is now seven years. If they raise rates and the economy slides into a recession again, well in previous recessions the Federal Reserve has cut rates by 3% to 4%, 300 to 400 basis points, when rates are zero there is not that room, so what happens after that and that is a big problem because the reason why I relate that back to Australia is because Australia growth is tied to China’s growth, China’s growth is tied to the United States’ growth and Europe. Europe isn’t going well, Japan isn’t going well, the United States might go into recession if they raise rates too soon so that can be a big problem for property investors. In any event there is no doubt that the basic rule of investing is true, the higher the price you pay, the lower your return.

Mark Draper: That is certainly good advice Roger and in terms of thinking about property, what would your advice be for bank shareholders that are arguably leverage to the Australian property price.

Roger Montgomery: So it is important to understand that the highest risk mortgages where the LVR (Loan to Valuation Ratio) is higher than 80% or 85%, there is usually mortgage insurance taken out so that derisks the highest risk mortgages for the bank and that places it on the likes of Genworth and GIO or QBE rather and so they’re the ones that you need to be worried about from a business perspective rather than the banks. Having said that though sentiment will turn against the banks and the share prices might suffer but that could be an opportunity to buy them cheap again so the business performance might not suffer as much as the share price performance.

Mark Draper: Right. Thank you very much for your time. It is a hot topic. It is a hot market over here in New South Wales. We appreciate it.

Roger Montgomery: It’s a pleasure. Thanks mate.

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