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

Housing Recovery?

A very well weighted argument for both cases of the housing recovery from Matthew Kidman here.

I am not going to comment on which way I think the housing market is headed, because I dont know and no one really does. (I am slightly more bearish than Matthew Kidman though). What I do know is that there are an enormous number of people betting the majority of their retirement savings on a sustained recovery in Australian real estate. People with highly geared investment properties who are in their 50’s, retiree’s with 30%, 40% and even 50% of their superannuation in Australian bank shares and the countless number of baby boomers who are planning to downsize and use the current equity in their houses to supplement their super.

Whilst all of these strategies may pan out, they are not as guaranteed bets as those who are relying on them believe they are. If the loss of confidence in high indebted nations that the rest of the western world are experiencing invade our shores, then these residential property dependent strategies could make a serious dent in many peoples retirement dreams.

Our view is that to place such a large bet on the sustained recovery in the Australian residential market is to bet that unemployment will remain at extremely low levels for many years to come. We believe that betting that unemployment will remain at five and a half percent for the foreseeable future is not rational. The history of the last hundred years suggest that a cycle in Australia should average every 8 years or so. Just because we haven’t had a cycle since the early 1990’s does not mean we should base our investment strategies on one not occurring. 

The raw numbers are not in the favour of those with heavily weighted bets on the recovery. Enormous mortgage debt to GDP up there with the worst in the world, a mining investment boom coming off its peak in the next few years and the baby boomers retiring does not suggest we are expecting a boom any time soon. Having said that, if interest rates continue to fall, there may be some “hot” money flowing into the markets.

My travels around the world as an international pilot allows me to compare average housing costs in different cities and countries. Australia really does have some crazy prices when compared to other fantastic cities with larger populations. This disparity in prices may be purely due to the hot Australian dollar, but I am not sure that this is the only factor creating the difference in value for money.

With some fantastic assets on sale in the rest of the world, now is the time to diversify your risk from the scenario that Australian residential housing does not have a sustained recovery that many people are so dependent on.