Looking at housing in 2018

Founder and Chief Investment Officer of Montgomery Investment Management
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As you are probably aware we have held a negative view on Australian property for number of years. Indeed, we have received our fair share of criticism for it, not only from parties with vested interests in the property market but also from those who simply didn’t share our bearish view. A difference of opinion of course is what makes a market, providing both buyers and sellers.

Our thesis has been relatively simple; a glut of new apartments would force developers to discount their inventory in order to move it and recycle their capital (if any). The transmission mechanism for older apartments was equally simple. Owners of the oversupplied newer apartments would be forced to lower rents, which would cause tenants to migrate to the cheaper apartments and force landlords or older apartments to lower their rents. The lower yields from weaker rental income would then put financial pressure on highly-geared landlords (remember Australia’s mortgage debt to income level is at a record) and trigger additional forced selling beyond developers.

In the September quarter the thesis began to play out. Brisbane apartment prices plunged $81,000 amid an acknowledged oversupply in the Queensland capital, and ahead of another release of new units that will flood the market in 2018. In a report, prepared quarterly by property consultants Urbis, the average Brisbane unit price was reported to be $644,667, down from $745,563 in the July quarter. With another 7100 apartments planned for release in 2018, continued pressure on landlords and developers is likely.

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