Investors Flee from UK Property — Will Aussies Follow?

When the UK voted to exit the European Union (EU), it chucked a spanner in the works of markets. Bonds and gold went up as equities went into a tail spin. However, within a few days, the fear of uncertainty died down.

It was almost laughable to say that Australia’s share market was gravely affected. On the day that the vote was announced, the S&P/ASX 200 dropped 3.9%, to 5090.2 points. Yet days later the market climbed its way back above the 5200 mark.

Even the UK market, the FTSE 100, has forgotten about the scare. The index is now trading 3.3% above its pre-vote levels. But it seems fears still haven’t died down. Recently, UK investors have stated to flee from property funds.

Investor flight has caused three large UK property funds to halt withdrawals. This means investors who have capital sitting in the fund are unable, for the moment, to take it out. The three property funds are M&G (the UK’s biggest), Aviva and Standard Life; combined they account for around ₤9 billion ($15.8 billion) worth of assets.

The reason why multi-billion dollar funds halted withdrawals is obvious enough. They want to prevent a ‘bank run’ like situation. It just goes to show you how much of an impact sentiment has on the market.

Shares in property related funds plunged on the day. The nosedive wiped off ₤3 billion from the FTSE 350 Real Estate Investment Trust Index. But other than being overpriced, what fears are surrounding UK property?

The only concern that comes to mind is that people are being fearful for the sake of it. Once a couple of investors become nervous or ‘jumpy’, it encourages the rest to follow. The only thing that has happened is that investors are withdrawing money from property funds.

This doesn’t mean that property is the problem. It’s more likely that the managed funds are the problem. Property funds are not the only ones struggling at the moment. According to an article in the Australian Financial Review this morning, investment banking fees are figuratively melting away.

Global fees in the first quarter decline 23% compared to the prior corresponding period. Again it just goes to show you how influential sentiment is when it picks up enough steam. This is why central bankers and people of influence need to be careful when speaking publicly.

Just the wording of what they say is analysed and scrutinised until investors arrive at a meaning completely different from the intention.

But back to the topic at hand. If there are overseas fears over UK property, are these fears likely to reach our shores?

It’s no secret that the media loves to hype up our overvalued property market. Yet, as of late, our market has been able to enjoy a breather. Instead of warning investors about the impending Aussie real estate crash, reporters have had their hands tied elsewhere. The Brexit situation has taken up most of their time and thoughts. However, when things blow over and fears settle down, will they come back to warns us of the property bubble?

 

Australia’s property correction — not bubble

While many generation Y folks might like Australian property prices to dramatically crash, I just don’t see it happening. Suren Australian property, in some areas, might be overpriced. House prices are around 8.7 times that of median wages for Australia as a whole.

So I could see an argument for Australia’s property correction. Yet I find it hard to believe that Aussie property will fall by more than 40%. Population and wage growth are huge factors which affect property prices. And while wage growth has been slipping of late, population growth is in favour of long term property prosperity.

As more people choose to reside in specific suburbs, property prices tend to rise. This is because of the increased number of buyers. And while Australia is geographically big, only around 10% of our land is habitable. To see how important population is in determining property prices, cast your eyes to Melbourne and Sydney.

Both of these cities have the highest populations in Australia. And, through no coincidence, they also have the highest median property prices in Australia. But it’s not simply because a lot of people live there. It’s because a lot of people want to live there.

Both of these capital cities offer a variety of jobs and lifestyles which are attractive to the vast majority. According to the Australian Bureau of Statistics, Australia’s population is only going to expand. It is expected to double within the next two generations.

But as I’ve said above, sentiment can also play a huge role in affecting asset prices. Instead of following the herd, be greedy when others are fearful, and fearful when others are greedy. I’m not telling you to go out and buy property tomorrow. However, you should be sceptical when nonsensical fears push prices down.

If you’re quick enough, you might be able to pick up a bargain.

Härje Ronngard,

Junior Analyst, Money Morning

PS: Most people think great deals in Aussie property are already all gone. This is the worst attitude to have. Why would you take financial advice from some self-proclaimed guru? Instead, why not do your own research and take control of your financial future. But where do you start?

If you’re interested in investing in property, or you already own property, check out Money Morning’s property expert Callum Newman’s report ‘Australian Real Estate Game Plan’. In the report, Callum reveals the eight letter word that really drives property values. It’s the ultimate guide to help you start your future property plan, and it’s free!

To get your copy of Callum’s report, click here.


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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