Let us look first into the Australian listed equities and then secondly to the Sydney property market. For the purposes of this discussion, let’s remain in the helicopter (high level) and put valuations aside, focussing on the demand profile.
In the case of Australian equities, a number of things stand out. Firstly, anecdotally there remains a high level of caution even to the point of scepticism. Cash levels remain elevated. Stock weightings remain below historic norms. In short, the asset class looks to be under-owned.
Secondly, and even more importantly from a demand perspective, the 34-year bull market in bonds looks to be over. For 30+ years, bond yields have headed south, driving bond prices higher. This is now reversing. Bond prices are declining as the yield curve grinds higher. As we have seen with renowned bond investor Bill Gross, we have reached the inflection point and the risks are now materially higher.
Why is this significant? Because the bond market is substantially larger than the equity market. If even a small percentage of investors reduce their exposure to bonds and re-allocate to equities, the effect of this ‘marginal buying’ would be pronounced.
I suspect this is already well underway — certainly in the US at least. Shares, which are fully valued in an historical context, continue to rise because of the ‘weight of money’: the marginal buyer switching from bonds to equities.
If we now turn our attention to Sydney property, there are possibly four main groups that constitute the ‘demand profile’.
The first of these is the home-owner, the spent buyer. Whilst this group may upsize or downsize and may dominate turnover, their net impact on demand is neutral. So, it is really the other three groups that provide the marginal buying.
Second is the investor pool. Traditionally this category has been one of the major drivers, accounting for up to 40% of demand. This group is clearly in the sights of the regulators, with a directive from APRA this month instructing lenders to restrict growth to this segment to a maximum of 10%. With additional pressure being applied through the percentage of interest-only loans, lending value ratios (LVRs) and net interest margin (NIM), this group is post-peak and on the way down.
Third is those non-owners wanting to buy their primary residence. This pool now appears more stretched than ever on two fronts:
a) those who can afford to buy have already capitulated and bought and,
b) the remainder looks less able to buy than ever.
On this second point, Demographia’s 13th Annual International Housing Affordability Survey (2017) is telling, finding that Sydney is now the second most unaffordable major housing market in the wold behind Hong Kong.
Offshore buyers a critical factor
This leaves the heavy lifting — the marginal buying — to the much-maligned offshore purchaser. And this is where some analysis falls down. Whilst the off-shore buyer may only represent in the vicinity of one in ten purchases, a very high percentage of these purchases represents new buying, that is, true marginal buying. So, this category is critical, also because affordability and other metrics have less impact on their buying decisions. But while this category has the most financial capacity to continue to grow, it too appears to be post-peak given the increasing regulatory scrutiny.
It is important to remember that the supply side will be growing, so the market requires steady buying at the very least but preferably increased buying to maintain prices or drive them higher. With the three main categories of marginal buyer under duress, it’s difficult to see how demand can be maintained let alone increase.
In summary, despite both Australian equities and Sydney housing prices appearing fully valued, the outlook for each asset is noticeably different. In the case of Australian equities, there is latent demand in the system. In the case of Sydney property prices, the marginal buyer may have been largely marginalised!
Content first published on cuffelinks.com.au.