Australian Property - The State of Play
Like stock prices, property prices are such fodder - everyone has an opinion on them. Unlike open heart surgery or anesthesiology, it's one of those things that doesn't require one to be an expert. Whether you're an expert or novice, you probably have an opinion on how it should be. Paul Roos and I spoke about this in episode 11 of the Masters in Investing podcast.
Who would have thought property prices would do what they did during the pandemic. Both expert and novice got it wrong. Completely wrong. Trying to predict the behaviour of human beings truly is a difficult task. Think about how often the tax laws or legislation changes, yet investors, business people, and taxpayers find another way to constantly better their position. Usually through a way that wasn't considered.
It doesn't matter how large the rock that obstructs the flow of a river, the water will always find it's way around. - I made this up.
House prices have been surging this year, with growth rates not seen since 2010. Property, like most other assets classes, is primarily driven by supply and demand. With everything that is going on right now, I thought I would try and simplify the state of play. So here are three key factors to keep an eye on - Building Approvals, Dwelling Construction, and Prices.
In simple terms, developers/investors apply for building approvals, they construct, they sell. And not always in that order. Larger developers seek approval, sell, then build. Scott Keck explains this in episode 7 of the Masters in Investing podcast.
Not only have we seen prices rise significantly over the last 12 months, we have Building Approvals rise to levels only seen twice before since 1995 - in 2002 and 2010, and it looks like it's peaked and now taking a turn.
From here, we are seeing Dwelling Construction rise and it will probably continue to rise as there is a natural lag in application and approval of dwelling construction and the construction itself. If you look back in history, you also see dwelling construction peaks after prices. In other words, prices peak before dwelling construction peaks. Generally, once Building Approvals peak, so too do prices (refer 2002 and 2010 for extreme examples) - if you listen to episode 7 of the Masters in Investing podcast with Scott Keck and episode 17 with Ross Palazzesi, Managing Director of Metricon Homes, you'll understand why.
My guess is this run will cool down sooner than when most believe. Recency Bias means most of us believe this run will continue for longer than it actually can or will. I have no idea what the future holds, but if history is any guide, we know these runs don't last forever. And each time we see these levels of growth, things cool down sooner than expected. It's unlikely this slow down will be caused by rises in interest rates, rather, intervention by a concerned regulator. We saw this in 2017 and look at the impact - we then played catch up.
Right now we are in a situation that is still very uncertain. What will migration look like in 12 months' time? What does work look like in 12 months time? What will the economy look like in 12 months' time? No one has answers to any of these questions. And the answers to these questions are key to understanding the impact on property prices. For now, we've had a good spurt. We'll need to take a breather if we expect to do anything like this again soon.