Vampire Squid calm about Oz property

 

Back in 2009 Rolling Stone describe mega investment bank Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

And what does the Vampire Squid think about Australian property?

They’re pretty calm actually.

In fact, they reckon the surplus that opened up in Sydney and Melbourne on the back of massive apartment construction has unwound, and we’re now moving back towards shortage.

This is what they said recently in one of their exclusive notes to clients:

Overall, we find that Australia’s housing market is now close to balanced after being somewhat ‘over supplied’ in recent years. Regionally, this oversupply was entirely driven by conditions in the mining-exposed states of Western Australia and Queensland, with little evidence of oversupply in New South Wales or Victoria.

This will have important implications for relative house price growth.

In an absolute sense, once interest rates are also factored in, our analysis is consistent with prices grinding lower in Melbourne and Sydney, but potentially rising elsewhere.

…Even a large sell-off by existing foreign investors in the popular markets of Victoria and New South Wales – which we view as unlikely – is unlikely to lead to significant increases in oversupply.

Price falls have already started in Sydney and Melbourne, but this isn’t surprising given the APRA-induced credit crunch and the fact that these markets were simply so hot for so long.

A little bit of pay-back was to be expected.

But as the Squid points out, the basic fundamentals of the market remain solid.

At the end of the day, everything comes back to supply and demand.

Supply had a run on for a while, although it was largely concentrated in the high-rise sector.

That’s now behind us, with apartment construction coming down from recent highs.

So supply is flattening out.

At the same time, demand remains strong.

Population flows into Sydney and Melbourne remain elevated, and we’re seeing the first signs of an improvement in wages on the back of stronger labour market outcomes.

As I keep saying, the only thing holding the market back right now are the APRA restrictions, and the chilling effect the Royal Commission is having.

Neither of those things can last.

Once those clouds clear, we’ll find that the Squid is right. The fundamentals are strong, and prices will keep growing.

(It doesn’t often pay to be on the wrong side of the Squid.)

Spiro Kladis
Managing Director, Cashflow Capital

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