Thursday, October 13, 2016

Another Reason to be wary of the REIT ETF

Honestly, I really like REITs as an asset class, so for me to not get behind the new REIT ETF really ought to say something about why I am hesitant.

One thing to note is the heavy geographic concentration of Australian assets which makes up more than 50% of the ETF index construction. Exposure to the Australian property sector and the AUD will be significant to say the least.

I really don't think that Australian property has a bright future going forward. In fact, I think that it is gloomy. Hella gloomy.

I've talked about it in 2015.

I've talked about it also earlier in 2016.

Interest only mortgages is just insane to me, yet it's a thing in Australia. Not only is it a thing, but it made up 50% of all new mortgages back when I talked about it. Who knows what the figures are like now.

Acting Man has come up with a whole article about the madness in the "Australian property bubble". I quite agree that it is a property bubble.

Nation wide, price to rent ratio is a staggering 27. That means the rental yield (calculated by taking the inverse) is a pathetic 3.7%.

The median multiple of a house is now 8 times annual income.

Household debt to income is at all time highs.

This is about as obvious as it gets guys.

I'm looking forward to a cheaper ozzie in the near future. Plans for a proper aussie holiday and perhaps prospecting on some serverely distressed assets in the tier 1 cities might be in the cards if they relax their rules to allow foreign property buyers to save their property market from collapsing inwards. However, I doubt it.

On the plus side, the data is more for residential property, but I can assure you that Australian bubble vision is not contained to just residential property.

2 comments:

  1. i tend to disagree, judging by folks living there. dynamics is rather different and i think the diverse economy will withstand a shock better than singapore. if you look at the effects of the mining shock, it is rather contained as well. they also hold the record of 25 years without a recession, which may fall in the scenario that you painted.

    the malls are well populated, the drinking holes or pubs hold strategic licenses and the consumer discretionary and logistics facilitate both the consumption and the import and export economy.

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    Replies
    1. Hi Kyith,

      I've not been around Oz much, so I can't really draw from personal experience. Just saying that on paper, things look very peak-ish to me and I would be wary. It might not be as dire as I am painting it to be, but I don't think anytime soon would be a good time to jump in either.

      With rental yields rivaling that of Singapore and a tax rate starting at 32.5% of rental income (which means lower real returns), I find it hard to stomach that this isn't bubbly!

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