The Valor Blog.
Investment News and Views, Direct from Our Team.

“Be fearful when others are greedy…”

CBA is hitting all time highs as seen in this article here.

With TV shows like The Block Sky High also hitting all time highs, I am very suspect of rational thought being used in the property and banking sectors. Paying $1.5 million for a three bedroom apartment when there are plenty of apartments just around the corner in Docklands doesn’t seem overly rational. The net yield on these prices has to be in the very low single digits. Unless you think that these apartments are going to be $3 million in 10 years, then you are unlikely to enjoy acceptable returns. When you can buy a nice terrace in numerous areas around the corner for a cheaper price, then the limit on the upside is obvious.

A significant slowdown in China which is becoming more likely, leaves those who are leveraged into property, banking and mining exposed. If the Australian dollar falls low enough and fast enough then Australia and its property, banking and mining markets may be ok. Whilst we are expecting significant falls in the dollar, we are uncertain of its trajectory and therefore this is not a bet that we are willing to take and I certainly would not leverage into this slowdown. Unfortunately we are a distinct minority. The majority of Australians are leveraged into this slowdown in property and hold quite large exposures of banks and miners either directly or through their super.

“You only know who has been swimming naked when the tide goes out” (Warren Buffett). It looks as though we are much closer to high tide than low tide.

Anecdotal evidence is weak when used alone, however when attached to empirical evidence, it can be handy addition to your investment arsenal. Over the last month or two, the number of people I know who have been suggesting that now is the best time to invest in the property market is hitting an all time high. Every one of these “property moguls” has vested interests in attempting to mould my investment strategy. They all have one way bets on the property market. A moderate fall in the market combined with rising unemployment would likely completely wipe away most, if not all of their wealth (and probably lead to negative equity). They may be correct, however when you have a greater than zero chance of completely destroying your wealth, I am highly unlikely to get excited about buying anything. The fact that there is significant confidence in highly leveraged property owners makes me far more cautious.

For those that are overexposed, the recent price rises may be a good time to review your portfolios. Sadly most are completely oblivious to what is likely to happen and many are at risk of being significantly poorer over the next few years.

Buying a family home with low leverage is an emotional decision and has nothing to do with investing. To keep a roof over ones head and look after your family is very rational. Buying with higher leverage makes this less rational. Buying an investment property with extreme leverage and losing money on it in the faint hope of capital gains is just dumb!

We will buy very large amounts of property in Australia when yields are much higher than they currently are (at least 50% higher). If this does not happen, we will avoid this sector as we do with any investment that has limited upside and significant downside.

If you believe that the current interest rate settings around the globe are permanent, then property is likely to be a reasonable investment. If interest rates ever rise, then the prices currently being paid are likely to look rather foolish.