Standing on the outside looking in - Morphic Asset Management

Standing on the outside looking in

After a few weeks of blogging on stock stories we decided to return to something near and dear to every Australian’s heart: property. As the title alludes to, as Global investors we see Australia a little from an outsider’s perspective – which is why we thought the Cold Chisel title was somewhat apt.


So today we’re going to construct the bull case for Australian property. Yes, that’s right – the bull case. We’re going to provide some supporting evidence as to why this country is unique and, as such, should be valued that way compared to the rest of the world.


1. Scarcity of available land in big cities

Australians love to live in a few large cities. It’s one of the quirks of a country this size, that everyone wants to live in just a few cities around the coast. There’s a well-documented phenomenon that large cities trade at a premium on house price to income ratios and further, that coastal cities trade at a premium to inland cities (Figure 1 shows a selection of USA cities).


Figure 1 – The salary you need to buy a home in the United States



Smart buyers have always known that you can’t go wrong buying in cities near the water, as Lori Sacco who has done well from the boom told one of the newspapers:

“There’s not that much waterfront land out there,” she says. “So I think prices are going to continue to go up.” Sitting in one of Sacco’s many living rooms, it’s difficult to argue with her.

Anthony Java had similar things to say:

“Young people [often] complain Sydney prices are unaffordable but they’ve spent the last five years in Europe – if you make that choice, then good on you, but it’s not impossible to buy a house.”

It was a similar story at a Double Bay auction in Sydney last month:

“It’s simple economics,” one buyer who missed out said. “There’s not a lot of supply and too much demand. There’s no land left and nowhere to build.”

James Cramer, co-founder of also wrote about what he heard from speaking to some property developers:

“..homebuilders, desperate for land, have taken to knocking down homes that are worth high-six and low-seven figures for the lots alone, because the scarcity of land is beyond belief. When homebuilders start tearing down million-dollar homes, a housing executive told me, the rapid price-increase cycle is just beginning.”


2. High levels of immigration

Australia has high levels of net migration and all these people need to be housed (Figure 2). Whilst numbers have slowed of late, it is still over 150k arrivals each year.


Figure 2 – Population and Labour force in Australia


Source: Minack Advisors

People like Mark Steinert are at the frontline and are better placed than most to see what this demand looks like:

“it would take a lot of overbuilding, or a collapse in the economy, or a rise in interest rates, to turn this market,” he said. “Normally they all happen together, but I cannot see that happening in the next five years. But the price growth..will be a better than many expect, 3-4 per cent a year for the next three years, based just on inflation and population growth. The level of population growth is high, even though it has come off from the mining boom,” he says.

Christopher Flanagan is also at the frontline of valuing properties and he shares a similar view writing for JP Morgan:

“[B]ased on what we know and see in terms of employment and interest rates, it is extremely difficult to see how five years from now we could be looking back and observing a historical 5-year growth rate of, say, less than 5%”

And to quote from Nicolas P. Retsinas who is the director of the Joint Center for Housing Studies:

“We estimate that household growth…will be 10% higher than previously projected… The inventory of unsold new homes is at a historical low…. We have fewer unsold new homes on the market today than we had in 1978.”


3. Insatiable demand from Chinese buyers

Australia is lucky enough, that having sold a lot of commodities to China, to now benefit from their newly found wealth flowing back into buying properties.

The National Association of Realtors points out that:

“..foreign real estate buyers continue to strengthen the..real estate market, accounting for 36 percent or $6.1 billion of total sales volume.”

So is there any bad news? I thought you guys were bears?

There’s only a little bit of bad news: half of the quotes above are directly sourced from articles written in the USA between 2004 and 2006 (click on the hyperlinks to read original articles). And they reference in parts Florida, which was chosen by one member of Team Morphic who was on tour with then listed Rinker in 2005 and heard these quotes:

  1. Every American wants to move to warm Florida;
  2. Florida is a haven for South American money due to its large Latino population;
  3. Land is scarce as it’s surrounded on both sides by water;
  4. To quote Rinker “We’re pouring concrete on 53 sites and we can scarcely keep up with the demand”
  5. Miami is an ocean based city so it should trade at a premium.

And this is what the Miami house price chart looks like with a dashed line from the time those articles were written.


Figure 3 – Miami house price chart (Nominal and Real)


Source: Bloomberg, Team analysis

Because all good lies have a kernel of truth and all bubbles begin with strong fundamentals. Whilst we await the comments about how it’s different here in Australia, we would posit it’s something a bit more prosaic. The country is at the back end of a 25 year credit fuelled expansion (Figure 4). The gearing up of Australia to buy property just means that an “accident” when it occurs will have much larger ramifications than expected.




Source: Minack Advisors

The “shortage of supply” argument is looking a bit tenuous and seems to be more like Florida in the mid 2000’s (Figure 5 and 6 below).




Source: Minack Advisors



Source: Federal Reserve Bank of St Louis

In Figure 7, you can see nearly every Australian city or town trades at a premium to other cities in the world. This is what many years of excess credit supply creates.


Figure 7 – House Price/Income and city size in 2015


Source: Minack Advisors

You’re calling thE TOP?

No. If cutting interest rates “pulls your future returns forward to today”, then we’re just pointing out that “debt narrows your future” – a beautiful quote from a friend as it so neatly sums up the problem with debt. Debt is not intrinsically good or bad. Rather, it reduces the number of paths that your life can take.

We have no idea what happens next, but as the quotes above show, neither do the experts:

“In short, we are asked to worry about something that has never happened for reasons still to be coherently explained. ‘Housing bubble’ worrywarts have long been hopelessly confused. It would have been financially foolhardy to listen to them in 2002. It still is.” Alan Reynolds, Senior Fellow, Cato Institute No Housing Bubble Trouble,”Washington Times (January 8, 2005)

We just know a lot of debt won’t help when the time comes.


So is there any good news?

Yes. The foreign exchange market is generously offering you the chance to swap out assets that will be worth less in US dollars into global assets at a rate that will be looked back on wistfully.

So we suggest to consider taking the opportunity whilst you can and add some non-Australian dollar assets to your portfolio.

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