Upon returning from a business trip last week we caught an Uber. Being value investors we have a keen appreciation for value in all aspects of our life and we have been early adopters and frequent users. The only downside is we no longer receive 'investment advice' from cab drivers. Luckily for us, in this instance, our Uber driver had some opinions.
During our drive down the Monash freeway, we noticed our drivers distinct ‘middle America’ accent and took the opportunity to discuss the US housing crash of 2009. Our intent was to further educate ourselves on the challenges of recognising property bubbles (a hot topic of late) and thought that there would be no one better able to recognise the signs than someone who lived the situation just a few years ago.
Our driver (let’s call him Bob) explained that in hindsight the signs of the US property bubble were clear to see. Easy access to finance, LVR’s of 95% to 105%, a general excitement that saw every layman (he specifically mentioned his barber) praising the wisdom of property investment, and every other TV show displaying house renovators and property flippers making sensational returns.
Bob went on to explain that the pain of the recession following the market crash was very real, with his family home giving up all the valuation gains it had seen in 20 years, and jobs being lost left, right and centre. In fact, Bob had made his way to Australia specifically to escape his situation in Texas, and to pave a new path to financial freedom in Australia.
Having heard Bob's sound explanation and sobering story, we were somewhat shocked to hear the next piece of his story. It turns out that Bob has been taking double shifts of late to help him fund the 5% deposit needed for an almost $1 million home in suburban Melbourne. Somewhat taken aback by the news Michael politely asked: “aren’t you nervous about the inflated price of property here?”. Frighteningly, his answer was one that was all too familiar:
"There is so much demand for property here, prices simply can’t fall if you buy in good neighbourhoods”.
When Uber drivers are talking about the merits of property investment, when LVR’s are at 95%, when interest rates are at all-time lows, and when your average buyer is happy to purchase a house at all time high prices (with a smile and the confidence of someone who knows they can’t lose), when the hysteria is so overwhelming that even Bob, our Uber driver, who had experienced a boom and bust cycle before can't recognise the similarities, it’s time to seriously think about what might happen if this house of cards tips over.
We’ve been fascinated and frightened by the neck-breaking speed of property returns in recent years. We’ve been confident (and wrong) that a property correction is due at any moment, but we appreciate that we can’t know with certainty if or when the property market will fall.
Our view is that every prudent investor must be aware of all the risks faced by their investments, and should make the appropriate plans to react should any of those risks become reality.
At Collins St Value Fund, we recognise that all too often the market is influenced by emotion and hearsay. Fleeing to cash at the first thought of risk is almost always a poor decision.
Our plan is to closely monitor all those macro themes that we have identified as a risk to our portfolio, plan a response for each circumstance, and be ready to act when the signs begin to present themselves.
In investing and in life, we think it’s better to be wrong and ready than right but unprepared.
Vasilios (Vas) is the Co-Founder, Executive Director and Investment Manager of the Fund. Prior to founding the Fund, Vas managed equity portfolios for wholesale clients at Leyland Private Asset Management where he was a Portfolio Manager from 2010...
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Up here in Townsville property prices have been falling ever since the GFC and are STILL FALLING. We recognise that (as with big cap vs small cap stocks) Sydney and Melbourne represent the vast bulk of total real estate value, but the American crash affected nearly every state and properties of all values. Maybe when Perth and regional centres in all states start to show similar patterns to our 2 biggest cities the crash will truly be imminent.
William that is very true that Melb & Sydney represent the vast bulk of total real estate. These 2 cities hold the key and if they turn down over a few months in a row, this could be a sign. Syndey has just had 1 negative month (although small)!