Why Australians invest in property

Why Australians invest in property
Why Australians invest in property

In my blogroll I link to some useful sources for the diminishing number of fans of Australian share markets, including Motley Fool (stock picking) and Montgomery (value fund).

Both have put out pieces recently talking about the property market peaking.

Demonstrating excellent efficiency Motley Fool simply released a near carbon copy of last year's note, while by my last count Montgomery has run no fewer than seven articles in a dozen days (could be eight, I've lost count). An impressive hit rate indeed!

Of course, as a property market advisor, I'm duty-bound to say that just as there is no one 'share market', so do homebuyers buy one house, and not the entire real estate market with all of its gleaming dog-boxes in the sky.  

In any case, share market promoters predict property market downturns every year; it's all part of the sales pitch. 

Why property?

I do a good deal of my work with hedge funds, and one of the points which often requires explanation to curious visitors from overseas is why everyday Australians even invest in property at all.

Good question. It's partly because Aussies are encouraged or incentivised to do so, since the government invests as close to zero as makes no difference in the provision of rental housing.  

It's also because because Australia is one of the most urbanised nations on earth, with a population broadly set to double by mid-century, and with more than four fifths of that population growth expected to be in just a handful of capital cities. 

Investors fancy that by owning property in middle ring capital city suburbs, land prices will rise over time, and over any meaningful period of time they've consistently been very handsomely rewarded for taking that view.

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Why Australians invest in property

Perhaps even more important than all of the above, it's because with our compulsory superannuation contributions tens of thousands of Mum-and-Dad investors saw their retirement plans cruelly FUBAR by the last share market crash (it's a family blog, so you'll have to look up a few of today's acronyms). 
Small wonder that people look at bricks at mortar as an investment option with mortgage rates close to record lows. 
Elephant in the room
Since we're on the subject of asset classes that are set to underwhelm, let's talk about Aussie shares!
The towering elephant in the room is that Australia's share market has been performing atrociously, with the ASX 200 some 24 per cent below where it was nearly a decade ago, despite yesterday's bounce and in spite of the lowest interest rates on record ("time in the market....lol).
Why Australians invest in property
Since December 2012 while record low rates have pushed the S&P 500 around 50 per cent higher, Australia's ASX 200 is struggling to record any gains at all (not that this is a new phenomenon - hardly! - Aussie stocks have chronically underperformed the S&P 500 for well over two decades). 
And what's more, since we have an index that has a fair weighting towards resources stocks, the market is not even heading back to 6000 any time soon, at least not sustainably, however much the vested interests may try to talk it up. 
Thanks to collapsing resources earnings, the market is actually offering less value than all those years ago, not more, as measured by forward PE ratios.
What's that you say? Ah, you don't invest in the market, you invest in individual securities? Ha, touché!
Yes, I know, I know, it's all about the dividends (assuming that those don't get slashed as well). 
Market is not returning to 2007 peak
In my opinion, the share market is more likely to fall than rise, just as soon as the latest ridiculous spike in commodity prices inevitably reverses, and as APRA taps on the credit brakes again.
When I wrote my first book in 2011, I set out some introductory guidelines for how investors should assess 'value' in the share markets.
I noted in that book that healthcare was definitely a sector worthy of attention, not only because I'd previously worked in the listed healthcare sector as a Group FC - spending endless hours and weekends fine-tuning my beloved Annual Reports and ASX releases - but because of our ageing population.
Share market investors could be forgiven for being confused, as there is a lot of conflicting advice around. Some like to invest actively or trade, others like to invest passively with low fees, others still take a more focused or value approach.
As a value investor, Montgomery has previously noted that technical analysis is "nonsense", which may well be so, but TA does at least present market participants with some guidance for when to sell. 
Value investors need to be rigorous, and to employ a considered judgement call for when a stock is no longer offering value, all the while benchmarking a portfolio against new opportunities as they arise. 
One of the challenges for value investors is that the most mouthwatering opportunities inevitably lie outside the largest listed companies, in smaller and more dynamic businesses with far greater potential for growth.
These mid-cap companies have potential for greater returns, and can be more volatile (higher beta, if CAPM is your thing), which means that you might sometimes need to be able to cope with large drawdowns. 
Here's value stock favourite Vita Group (VTG), for example, which recently crashed spectacularly. 
Why Australians invest in property

And in the healthcare sector, which has performed tremendously well in recent years, here's another favourite value stock Healthscope (HSO), which has also recently crashed.
Why Australians invest in property

It's also been quite a rollercoaster ride for value investors' favourite Sirtex Medical (SRX) over the past year, which rose quite impressively before crashing.
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Why Australians invest in property

A value investor's motto is that you should buy shares like you buy groceries (i.e. BTFD...more acronyms sorry) and therefore theoretically these crashes in the share price can represent buying opportunities.

Assuming that you still see the intrinsic value stacking up, and assuming that you are right and the market is wrong, that is.

Buyer beware 

Like you and me, all businesses have a life cycle. They are born, they grow, and one day, they wither and die (or merge, or get bought out, or taken over).

For that reason a value investor must know when to sell as well as when to buy.

Forge Group (FGE) was one of Montgomery's "A1" services businesses of yesteryear, while Decmil (DCG) was another favourite, both of which ran into trouble after the resources capex cycle peaked in 2012.

Fortunately Montgomery is a market pro, and being in the market full time he has the ability to manage risk, so in turn he was able to see the writing on the wall for the mining service sector and sold out in 2012 before the SHTF.

The way in which this is possible is to forecast the economy and its unpredictable cycles, and to recalculate the intrinsic value of a security on an ongoing basis.

In my experience, too many amateur investors fall in love with their analysis, and while they enjoy the process of buying stocks they find that breaking up is harder to do (too often they think the market is wrong, when perhaps it is the outlook for the company or sector that has changed).

Here's what happened to Decmil (DCG), which struggled to stay profitable after the resources investment boom peaked in 2012:

Why Australians invest in property

Forge Group (FGE) went to the wall almost overnight in 2013 after massive power station losses were unexpectedly revealed to the market, with Forge's Managing Director David Craig (not the singer) noting that the this was "extremely disappointing".

David Craig (not the singer) proved to a master of understatement as he noted that unexpected writedowns on two power stations for the 2013/14 financial year totalling $127 million were "not acceptable to the board". Probably not that acceptable to shareholders either, tbh.

Why Australians invest in property

Even in September 2013, just before the company went into administration, the intrinsic value of FGE was said to be above $13 (when the real value was closing in on $nil, had the full story been disclosed to the market). 

Herein can lie some of the many challenges with value investing in individual stocks - companies can report half-truths, or mask enormous losses, or trade while insolvent, or sometimes even worse. 

In case you think you won't ever pick a dud stock, recall that Warren Buffett recently took an enormous bath on his huge investment in Tesco, when a corporate fraud was uncovered in the guise of aggressive accounting and overstated profits.

ASX to fall
Don't be duped into believing that the Australian share market offers better value just because the index is still much lower than it was in 2007. It doesn't.

In fact, in my opinion the index is probably heading lower when the prices of coal and iron ore crash again, and, as always, it's only a matter of time before the next 30 to 50 percent drawdown. So you'd better be prepared. 

PETE WARGENT is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and blogger.

His latest book is Four Green Houses and a Red Hotel.

Pete Wargent

Pete Wargent

Pete Wargent is the co-founder of BuyersBuyers.com.au, offering affordable homebuying assistance to all Australians, and a best-selling author and blogger.

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