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Roger Montgomery (Montgomery Investments) talks with Mark Draper (GEM Capital) about the Australian property market which is now firmly in decline.

They discuss whether the market has bottomed and what indicators investors should be watching out for as well as some investments to be cautious about.




The Spanish property market was materially over valued and fell spectacularly following the GFC, causing significant damage to the Spanish economy.

We recently spoke with Clay Smolinski about the similarities of the Spanish Property to the current state of the Australian property market, to determine whether investors can learn anything from the lessons of history.



Sunday, 02 April 2017 18:00

The Australian Housing Market - bubbling away

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Written by Shane Oliver - Chief Economist AMP

The cooling in the Sydney and Melbourne property markets evident in late 2015 in response to macro prudential tightening deployed by APRA has proved ephemeral. Price gains have reaccelerated and auction clearance rates & lending to property investors have rebounded. Over the last five years Sydney dwelling prices have risen a ridiculous 73% and Melbourne prices are up 47%. As a result the Australian housing market continues to cause much angst around poor affordability and high household debt. This note looks at the main issues.

Source: CoreLogic, AMP Capital

Is Australian housing overvalued?

On most measures Australian housing is overvalued:

  • On the basis of the ratio of house prices to rents adjusted for inflation relative to its long term average Australian houses are 39% overvalued and units 13% overvalued.
  • According to the 2017 Demographia Housing Affordability Survey the median multiple of house prices in cities over 1 million people to household income is 6.6 times in Australia versus 3.9 in the US and 4.5 in the UK. In Sydney it’s 12.2 times and Melbourne is 9.5 times.
  • The ratios of house prices to incomes and rents are at the high end of OECD countries.

Source: OECD, AMP Capital

Why is it so expensive and household debt so high?

There are two main drivers of the surge in Australian home prices over the last two decades. First, the shift from high to low interest rates has boosted borrowing and hence buying power. This has taken Australia’s household debt to income ratio from the low end of OECD countries 25 years ago to the top end. Second, there has been an inadequate supply response to demand. The following chart shows a cumulative shortfall relative to underlying demand had built up by 2014 and is still yet to be worked off despite record construction lately.

Source: ABS, AMP Capital

Consistent with this, while vacancy rates have increased they have only increased to around average long term levels. In Sydney vacancy rates are below average.

What about investors and foreign buyers?

A range of additional factors may be playing a role in accentuating demand beyond that implied by population growth. These include negative gearing and the capital gains tax discount, foreign buying and SMSF buying. Negative gearing is just part of the normal operation of the Australian tax system. However, the interaction with the capital gains tax discount by enhancing the after tax return available to property investment may be resulting in higher investment activity than would otherwise be the case. This may particularly be the case when past property price gains have been strong encouraging investors to think future gains will be too. While commitments to lend to property investors slowed in 2015 after APRA tightened macro prudential controls, this has since worn off.

Source: ABS, AMP Capital

Foreign buying is likely also impacting – with indications that it is around 10-15% of demand – but it is also concentrated in particular areas and SMSF buying appears to be relatively small. But like lower interest rates, all of these should have a less lasting impact if the supply response was stronger.

Is a crash likely?

The surge in prices and debt has led many to conclude a crash is imminent. But we have heard that lots of times over the last 10-15 years. In 2004, The Economist magazine described Australia as “America’s ugly sister” thanks in part to a “borrowing binge” and soaring property prices. Most recently the OECD has warned of the risks of a property crash. However, the situation is not so simple:

  • Firstly, we have not seen a generalised oversupply and at the current rate we won’t go into oversupply until 2018 and in any case approvals suggest supply will peak this year.
  • Secondly, mortgage stress is relatively low and debt interest payments relative to income are around 2003-04 levels.
  • Thirdly, lending standards have not deteriorated like they did in other countries prior to the GFC. In recent years there has been a reduction in loans with high loan to valuation ratios and interest only loans are down from their peak.
  • Finally, generalising is dangerous. While prices have surged in Sydney and Melbourne, they have fallen in Perth to 2007 levels and seen only moderate growth in other capitals.

To see a general property crash – say a 20% plus average price fall - we need to see one or more of the following: a recession - which looks unlikely; a surge in interest rates - but rate hikes are unlikely until 2018 and the RBA will take account of the greater sensitivity of households to higher rates; and property oversupply – this would require the current construction boom to continue for several years. However, the risks on the supply front are high in relation to apartments.

What can be done to fix it?

Recent RBA commentary strongly hints that more macro prudential measures to tighten lending standards are on the way. These could include a further lowering in the 10% growth cap on the stock of lending to investors and tougher debt serviceability tests. This is in part about reducing the risks to financial stability when it’s too early to consider raising rates.

More fundamentally, policies to help address poor housing affordability should focus on boosting new supply, particularly of standalone homes which have lagged. This includes relaxing land use restrictions, releasing land faster, speeding up approval processes and encouraging greater decentralisation. This is largely a state issue. Policies designed to make better use of the existing housing stock (eg, by relaxing constraints on empty nesters downsizing) could also help.

Policies that are unlikely to be successful include increased first home owner grants (as in periods of high demand they just result in higher prices) and allowing first home buyers to access to their super (again this will just result in even higher prices unless supply is fixed before and will mean less in retirement).

Tax reform should ideally be part of the package and include replacing stamp duty with land tax (again a state issue), removing the capital gains tax discount that is a distortion in the tax system and lower income tax rates to discourage use of negative gearing as a tax avoidance strategy. Piecemeal cuts to stamp duty targeted at FHBs will just result in higher home prices. Abolishing negative gearing would just inject another distortion in the tax system and could adversely affect supply (although I can see a case to cap excessive benefits).

What is the outlook?

Generalised price falls are unlikely until the RBA starts to raise interest rates again and this is unlikely until later in 2018, which after a few hikes will likely trigger a 5-10% pullback in property prices as was seen in the 2009 & 2011 cycles:

  • Sydney & Melbourne having seen big gains are most at risk.
  • Prices are likely to fall further in Perth and Darwin this year, but they are close to bottoming and should rise next year.
  • The other capitals are likely to see continued moderate growth this year and a less severe down cycle around 2019.
  • But units are at much greater risk given surging supply and this could see unit prices in parts of Sydney & Melbourne fall by 15-20% as investor interest fades as rents falls.

What are the risks to the economy?

Slowing momentum in building approvals points to a slowdown in the dwelling construction cycle ahead. This combined with a slowing wealth affect from rising home prices means that the contribution to growth from the housing will slow. However, as this is likely to coincide with a fading in the detraction from growth due to falling mining investment and higher commodity prices it’s unlikely to drive a slowing in the economy. However, a likely decline in rents (as the supply of units hits) will constraint inflation helping keep interest rates low for longer.

Source: REIA, AMP Capital

A property crash would have bigger impact given the exposure of banks, but as noted above such a development is unlikely.

Implications for investors


  • While there is a strong long term role for residential property in investors’ portfolios at present their remains a case for caution. It is expensive on all metrics and offers very low net income (rental) yields of 2% or less. This leaves investors highly dependent on capital growth.
  • But it is dangerous to generalise. Apartments in parts of Sydney and Melbourne are probably least attractive. Best to focus on areas that have lagged behind.
  • Finally, investors need to allow for the fact that they likely already have a high exposure to Australian housing. As a share of household wealth it’s nearly 60%.




Friday, 29 May 2015 14:35

Australian Housing in One Chart

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We sourced this chart from our friends at the Montgomery Fund - it is self explanatory in our view.


We are recommending caution with investments that are leveraged to the housing market in Australia which would appear at extreme levels.

Thursday, 07 May 2015 00:55

Australian House Prices - at the extreme

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ResearchKey  points

> A  housing recovery has been a necessary aspect of rebalancing the economy through  the mining bust.

> While  Australian property prices are overvalued, this should not be a constraint on the  RBA. Expect another rate cut in May with the possibility of more to follow.

>The  medium term return outlook for residential property is likely to be  constrained.


The case for the RBA resuming interest  rate cuts this year has been fairly clear: commodity prices have fallen more than  expected; the $A has remained relatively high; while residential construction  and consumer spending are okay the outlook for business investment has deteriorated pointing to overall growth remaining sub-par; and inflation is  low. This has seen the cash rate fall to 2.25%. While the RBA left rates on  hold at its April meeting, it retains an easing bias pointing to further cuts  ahead.

However, the main argument against further  rate cuts has been that the housing market is too hot and further rate cuts risk pushing home prices to more unsustainable levels resulting in a more damaging  eventual collapse. But how real is this concern? 

Housing construction doing its part…

Economic upswings in Australia rarely start without a housing upswing. Lower  interest rates drive housing demand resulting in higher house prices which  boosts consumer spending via wealth effects and drives home building. The  latter is happening with approvals to build new homes at record levels.


  Source:  Bloomberg, AMP Capital 

…but what about overheated property  prices?

But the big debate has been whether low rates are  just fuelling an overheated property market. Its long been known that Australian housing is expensive and overvalued. 

      Real house prices have been running well above trend  since the early 1990s and are now 14% above it.  

  Source:  ABS, AMP Capital 

      According to the 2015  Demographia Housing Affordability Survey the median multiple of house prices to  household income in Australia is 6.4 times versus 3.6 in the US and 4.7 in the  UK. In Sydney its 9.8 and 8.7 in Melbourne.
      The ratios of house  prices to incomes and to rents are at the high end of comparable countries in  the OECD. 

While it's generally agreed Australian property  prices are high, the reasons for it are subject to much debate with many looking for scapegoats in the form of negative gearing and buying by foreigners  and SMSF funds. However, these don't really stack up: negative gearing has been around for a long time and while foreign and SMSF buying has played a role it  looks to be small and foreign buying is concentrated in certain areas. 

The shift to low interest rates since the early  1990s has clearly played a role. Consistent with this, the rise in price levels  from below to above trend has gone hand in hand with increased household debt.  The trouble is that other countries have lower levels of interest rates and  most have lower household debt to income ratios and house price to income  ratios. A more fundamental factor is constrained supply. Vacancy rates remain low and there has been a cumulative supply shortfall since 2001 of more than 200,000  dwellings. The main reason behind the slow supply response appears to be tough  land use regulations in Australia compared to other countries.

High house prices compared to rents and incomes  combined with relatively high household debt to income ratios suggest Australia  is vulnerable on this front should something threaten the ability of households  to service their mortgages. While this vulnerability has been around since the  house price boom that ran into 2003 – with numerous failed predictions of  property crashes! – the RBA is right to be concerned not to further inflate the property market. The renewed strength in auction clearance rates this year to record  levels in Sydney is a concern. 


  Source: Australian Property Monitors, AMP Capital 

However,  there are some offsetting factors. First, home price gains are now narrowly  focussed on Sydney. According to CoreLogic RP Data Sydney home prices rose  13.9% over the year to March. But growth across the other capital cities ranged  from 5.6% in Melbourne to -0.8% in Darwin with an average of just 1.5%. So, the  rest of the Australia is hardly strong. 


  Source: CoreLogic RP Data, AMP Capital

Second, growth  in housing debt is running well below the pace seen last decade, and there are some signs of a loss of momentum in the last few months.Investor debt is up  10.1% year on year but reached around 30% through 2003 and in the last few months has slowed to an annualised pace of 9.3%. 


  Source: RBA, AMP Capital

Finally, the RBA and APRA have pushed down the macro prudential path to contain risks around housing.Tougher APRA expectations of  banks were announced in December with the threat of sanctions if these expectations are not met.

So while the RBA is right to be mindful of the  impact of low interest rates on the property market, the concentration of the  property market strength in just Sydney, the signs of a possible topping in investor property loan growth and the heightened role of APRA indicates that  the property market should not be a constraint on further RBA interest rate  cuts. As the RBA has pointed out in the past it needs to set interest rates for  the "average" of the economy. And the "average"still points to the need  for lower interest rates as the slump in mining investment intensifies, non-mining investment remains weak, iron ore prices are down another 23% since  the February RBA cut, the outlook remains for sub trend growth and ongoing spare  capacity in the economy and inflation remains benign. This points to the need  for further rate cuts to provide a direct boost to spending and an indirect  boost via the inducement to a lower Australian dollar. Expect the cash rate to  fall to 2% in May with a strong possibility rates will fall below that later  this year.  

Housing as an investment

Over the very long term residential property adjusted for costs has provided a similar return for investors as Australian shares. Since the 1920s housing has returned 11.1%  pa compared to 11.5% pa from shares. See the next chart. 


  Source: ABS, REIA, Global Financial Data, AMP Capital  Investors

They also  offer complimentary characteristics: shares are highly liquid and easy to diversify but more volatile whereas property is illiquid but less volatile. And share and property returns tend to have low correlations with each other so  including both offers diversification benefits. As a result there is a case for  investors to have both in their portfolios over the long term. 

In the short  term, low interest rates point to further gains in home prices. However, this is likely to be constrained by the economic environment and the impact of  tougher prudential scrutiny of bank lending by APRA. Over the next 12 months  home price gains are likely to average around 5%, maybe a bit stronger in  Sydney and Melbourne (key beneficiaries of the post mining boom rebalancing) but staying negative in Perth and Darwin (as the mining bust continues). 

The residential property outlook for the next 5-10 years though is messy. Housing is expensive on all metrics and offers very low rental yields compared to all other assets except bank deposits and Government bonds. The gross rental yield on housing is around 2.9% (after costs this is around 1%), compared to yields of 6% on commercial property and 5.7% for Australian shares  (with franking credits). See the next chart. 


  Source: Bloomberg, REIA, AMP Capital

This means that the income flow an investment in housing generates is very low compared to shares and commercial property so a housing investor is more dependent on capital growth to generate a decent return. So for an investor, these other  assets continue to represent better value.

Dr Shane Oliver 
Head of Investment Strategy and Chief Economist 
AMP Capital

- See more at:

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.

Monday, 26 January 2015 14:19

Australian Housing .... still expensive

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In the long running obession that Australians have for the property market, we have sourced the latest affordability charts that outline housing affordability in Australia (a key measure of price), relative to other countries property markets.  The key measure used is the price of property relative to income.  The higher the multiple of income, the higher the price.

The first chart shows that Australia's property market is far more attractive than Hong Kong and even New Zealand.  Measured against Canada, a country that has many similarities to Australia, our market looks stretched.

To put this chart though into more perspective, let's consider what sort of levels are considered unaffordable.  Here is a table showing broadly accepted definitions.

Finally the table below shows the numbers on a "State by State" basis.


"Hong Kong's Median Multiple of 17.0 was the highest recorded (least affordable) in the 11 years of the Demographia International Housing Affordability Survey. Again, Vancouver was second only to Hong Kong, with a Median Multiple of 10.6. Housing affordability in Sydney deteriorated to a Median Multiple of 9.8, which was followed by San Francisco and San Jose (each 9.2). Melbourne had a Median Multiple of 8.7 and London (Greater London Authority) 8.5. Three other markets had Median Multiples of 8.0 or above, including San Diego (8.3), Auckland (8.2) and Los Angeles (8.0)."

Jeremy Grantham, a world recognised investor with GMO remains concerned at the levels of the Australian property market and we would encourgage investors to exercise caution in assuming the run up in property prices will be a permanent feature of the Australian economy.


Note:  Charts sourced from Mike Shedlock "Mish's Financial Trend Analysis"


This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein, but should obtain appropriate professional advice based upon their own personal circumstances including personal financial advice from a licensed financial adviser and legal advice. Fortnum Private Wealth Pty Ltd ABN 54 139 889 535 AFSL 357306







Tuesday, 23 September 2014 10:32

Australian House Prices - Bubble Trouble?

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We do not wish to join the queue of forecasters calling an Australian house price bubble, but we did think it worthwhile to flag this graph that appeared in a recent Financial Review article.

The chart below tracks median house prices in several western countries since 1995.  Clearly the red line, which is Australia shows the highest rate of growth in house prices since 1995 from the countries selected, with Canada coming in second.

Canada of course joins Australia as an exporter of raw materials to China, and in many ways is considered a very similar economy to ours.

The next chart shows the house price growth per state in Australia from the Reserve Bank.

This graph shows sharp price increases particularly in the eastern states (left side of graph), with more subdued price action in Adelaide and Canberra.

Finally we consider the state of Household Finances, particularly the level of debt in the household sector.  The graph below clearly shows that following the GFC, households have not really reduced their debt levels, from an elevated level - they have simply slowed down their rate of borrowing.


The level of household debt in Australia is very high by world standards and we continue to remain cautious on investing into sectors that revolve around discretionary consumer spending as a result.  This is evident in the graph below (sourced from JP Morgan)

Australian house prices are considered to be the second most expensive in the world.  While we are not calling for a property crash, which would be in no-ones interest, we are suggesting caution for property buyers given that Australian houses are significantly more expensive than their US counterparts, and Australians have taken on more debt than many of our overseas peers.


This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein, but should obtain appropriate professional advice based upon their own personal circumstances including personal financial advice from a licensed financial adviser and legal advice. Fortnum Private Wealth Pty Ltd ABN 54 139 889 535 AFSL 357306


Friday, 13 June 2014 09:43

Australian Property Market in Graphs

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Debating the state of the Australian Residential Property market is a national past-time, so with that in mind we will contribute to the debate.  This article shows the Australian Residential Property market in a series of charts that compares our market to either historical averages, or other property markets around the world.


The chart above shows the price of property compared to average income for the last 100 years.  Clearly, current pricing is at an all time high relative to incomes.


This chart shows the house prices compared to rent received, measured as a deviation from the long term average.


The third graph shows House Price to Incomes, and measured on the basis of deviation from the long term average.


Finally, the chart below shows in blue the value of the median house price in Australia.  The Black line shows the median house price in 1986 if it were simply indexed to wages growth.  This chart confirms the disconnect between house prices inflation and wages growth.  Clearly houses have risen far more significantly than wages since 1986.


We recently asked well known Australian investor Roger Montgomery for his thoughts on the Australian property market - here is a short video with his thoughts.



Thursday, 14 March 2013 13:56

Assessing a Property Investment

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I recently had a client ask me to assess the merits of an unlisted property trust offer that he had received - the name of the offer shall remain nameless, but I thought it would be interesting to walk you through the key reasons I advised to disregard the offer.

I must highlight that on the surface of it, the offer looked very attractive with a juicy rate of income of 9% pa and some lovely photos of the building with a well known listed company as the major tenant.

Firstly, the trust consisted of only one office building, so there was no geographic diversity. Add to this that 80% of the building was leased to one company and this means that investors are not only putting their eggs into one basket (one property), but almost totally relying on one tenant.

The tenant was a successful listed company, so we are not arguing that the company would go broke, but highlighted what would happen if that company wished to relocate into larger or smaller premises.  If this happened then virtually all of the income is vulnerable.

There were two other aspects that concerned us.  One was the average lease expiry which was only until 2016 - which means that the income from the property was only really secure until 2016.

Finally this property trust was an unlisted property trust which meant that in the event of an investor wanting to get their money back, for any reason, there is no mechanism to do this.

I thought this was an interesting exercise in the aspects we consider when deciding to proceed or "bin" an investment idea.

Mark Draper

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

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