Update No. 219 – 12/06/15

I am sick of hearing about housing prices.

I was going to write a long piece about all the reasons people complaining about this are soft and/or thick-headed. I saw an article this morning that covered off a number of my main gripes, so I will be relatively brief about it.

Mortgage rates have in about 30 years gone from averaging about 20% to averaging less than 5%. In 30 years the interest component of servicing the average mortgage has effectively fallen by 75%. It should not surprise that this has accompanied strong price growth. When you couple this factor with strong immigration based population growth, strong growth in the median wage, an increase in the number of dual income households, poor land release practices by Governments, the attraction of a stable political environment for foreign investment and massive NIMBYism in major population centres, all these factors working in the same direction create what Charlie Munger refers to as a lollapalooza effect. There are minor factors such as the Negative Gearing taxation regime that also effect this situation at the margins, but the roughly $4 billion of annual tax savings from negative gearing are a tiny contributor to the present lofty valuation of the roughly $9 trillion of Australian residential housing stock.

House prices are unjustifiably high at present, particularly in Sydney. Purchasing a home in Sydney that will be worth meaningfully more in 10 years would require some skill (or luck) in my view in the current market (unless interest rates remain at record lows) absent renovation or other capital value uplift. You need to (as with any purchase) consider your alternatives. You need to remember that like any asset class, the value of homes can go down as well as up. I pointed out to someone today that the 2008 purchase price of the little townhouse I call home was at the same price as the original owner had bought the home for off the plan when it was first developed over 7 years earlier. Sydney had a nearly flat housing market over that period, with only very modest growth. Such a period will come again, probably sooner than people think.

If one asset class is at valuations that make no sense, find another asset class to be invested in. This should not be a difficult idea to grasp. In fact, it is the very foundation of market economics. My household consumes perhaps 5 kilograms per week when banana prices are $2/kg. When banana prices go to $6 or 7/kg, believe me when I say consumption will fall in my household. When home prices in your city go from some multiple of median income to some much larger multiple of median income, react as you are supposed to. If the mispricing is sharp enough (as it is in Sydney presently) it may warrant serious investigation of a change of jobs and cities.

The market actually works remarkably well. When the Sydney house price boom peters out, you will gradually see regional NSW markets catch up. Regional NSW cities and towns will ride a wave of outbound Sydney capital at some stage.

My Grandparents lived in a home with two other families when they moved to Australia, very few would make such a sacrifice to get what they want nowadays. It is quite wonderful – largely because we are more prosperous than we were then – that we mostly don’t really need to.

I know some people have a hard time at the edges, sometimes through circumstances beyond their control, but those who work hardest, save most diligently and think about what they are committing their capital to and why still prosper in our society. I suspect they always will – Tony Hansen 12/06/2015

EGP Fund No. 1 Pty Ltd. Up by 9.18%, leading the benchmark by 2.04% since July 1^st 2014. Since inception, EGP Fund No. 1 Pty Ltd is Up by 86.07%, leading the benchmark by 47.78% all-time (April 1^st 2011).

^{*1 after a 31 May 2013 dividend of 2.333 cents per share (cps) plus 1.000 cps Franking Credit, a 31 May 2014 Dividend of 7.000 cps plus 3.000 cps Franking Credit and a 31 May 2015 Dividend of 8.6667 cps plus 3.7143 cps Franking Credit}

^{*2 calculated based on dividends reinvested}