A Crescendo, … the crescendo, … or a precipice?

“The property obsession in this country is at a crescendo” (“Doing my Block” – The Daily Reckoning, June 2015) is a key line in an article they penned this month relating to the current property market in Australia, and certainly from a media perspective they could not be more correct. I don’t think that there is a time of day now that you can’t find some sort of property programme on the television.

All of this added to the news reporting fixation with an ever increasing market and money coming from everywhere to maintain it just seems to continually escalate the whole process; but I must say I still remain cautious.

I had a conversation with an investor colleague recently where he informed me that most Australians have no appreciation for the amount of money presently in China that is seeking to find a place in the Australian property market. This is a seriously interesting comment in the light of recent commitments by the federal Government that intends to curb investment in Australian real estate by foreign nationals. However of greater interest was a radio programme on the weekend where the presenters had brought in a property specialist to try and advance some theory on why (to quote) “the Chinese are willing to pay over the odds for Australian property.”

A number of factors were put forward, and whilst I do not intend this to be a rewrite of the programme there were some key factors that must be considered. Interestingly in China it is not possible to buy real estate, you only lease it for a period of 70 years, additionally the Chinese have a dynastic approach to wealth; that is they purportedly do not simply focus on the now, but they also focus on future generations of their family. Couple this to a desire to place their wealth in ‘safe hands’ then a country like Australia becomes far more preferable over local investments in China.

Consequently we have a significant investment in predominantly unit construction within Australia, and even more so in Sydney and Melbourne. Because they see this as a safe place to park the money, and as they hope to one day use the property, they are less inclined to rent the property in the interim. Thus we can relate to commentary that as much as 55 percent of newly constructed units are not lit up of an evening.

The problem with bulking so much into one form of asset is that if there is ever a need for a mass exiting from the market then the impact of a flood of property will be cataclysmic on the country as a whole and could easily unbalance the entire economy, hence the Reserve Bank of Australia’s concern at this time.

It has been in my lifetime that you could not get funding for a one bedroom apartment in Sydney such was the volatility of that niche sector of the market.

Great Britain is seriously moving to exit the European Union, and daily fears increase about the ultimate failure of Greece. We live in times where we are not easily able to go back to past events that specifically align with today, consequently caution may well be a virtue.

I personally become concerned when I see businesses selling today what they don’t expect to have until next year. There is a continual reduction of the full time workforce, there is less and less money circulating and the charitable organisations are reporting a steady and growing number of people seeking assistance with less and less coming in.

A senior partner of Andersen’s once told me that “there wasn’t a company on this planet big enough to bring this Firm down”, but Enron found them; much earlier J. Bruce Ismay was heard to say that “the Titanic was unsinkable”, but it did, and in between, the railway line to Castle Hill and Rogan’s Hill (along with eight other stations) was closed in February 1932 because “it was too far out to ever be a dormitory suburb of Sydney” and now they are building a new one.

Moving forward with property; well, caution just may well be a virtue.