Australian Stocks and Real Estate: Where the Money is Going

Local residents, who saw the rapid rise in land values which was daily taking place before their eyes, invested all the money they could raise in land, which was making people wealthier in a year than a lifetime of hard labor.’

Homer Hoyt, One Hundred Years of Land Values in Chicago

In the quote above, Homer Hoyt is talking about the real estate boom that hit Chicago in 1834. The place went wild with property speculation. It’s a long time ago now, but while Chicago’s changed, humans haven’t. Nor has the basic structure of the economy.

That’s why the news about residents in the Sydney suburb of St Leonards might have the same psychological effect in Australian real estate in 2015.

In case you didn’t catch the news, the Australian Financial Review reported during the week that a string of nine home owners in St Leonards have grouped together to create a development lot that could be valued at $55 million.

The land has the potential for about 200 apartments. According to the local agent, ‘St Leonards is set to be Sydney’s hottest inner suburban development location for 2015,’ JLL’s Sam Brewer said. ‘It has rail, views, parklands, schools and is on the city’s doorstep.’

Funny how those desirable elements have nothing to do with the actual houses the current residents are living in. But, jeez, we sure do have high ‘house’ prices here, don’t we?

At the time of my writing, the local council had not given its final seal of approval to change the zoning. But it will probably happen. What’s not in doubt is that the greed factor is going to drive people’s behaviour as stories like this circulate. It’s going to push more money into real estate. It’s early days yet, too. Here’s how to take advantage of it.

Of course, you may fancy a piece of Europe more than Australia. That’s certainly true of US investors. With the euro taking a belting and heading to parity with the greenback, US dollar investors are heading to Spain, Italy and France to make the most of it. Prices are 20% cheaper just thanks to the currency moves.

The Wall Street Journal reported this week that the European property market logged its best year in 2014 in volume of sales since the crash. In 2015, the figures are already 1.5 billion euros up on comparative figures last year.

American investors in particular are on a buying spree thanks to the strong dollar…

‘Investors are bullish on European property partly because, with the economies of many European countries poised for more solid recoveries, they see opportunities to increase building occupancies, rents and cash flows.

You can see this represented in this graph here…

European property market


Europe’s real estate cycle is moving away from the downturn and stagnation brought on by the previous collapse.

Of course, you may have all the property you want and are wondering about the stock market.

On that, I picked up another interesting story in the Australian Financial Review this week. The paper reported on Wednesday that Australian super funds are currently holding 18% of their assets in cash. The twenty-year average, according to the Deutsche Bank strategists who did the study, is 10%.

In 2012, the super funds had 20% of their assets in cash as well. The difference is, back then, the average one-year term deposit had an interest rate of 4.25%. Today, it’s just 3%. The super funds will be feeling some pressure there on their returns.

They also face the same dilemma a lot of retirees do when the time comes to roll over their term deposits. Do they accept the lower rate of cash or go searching for yield? My bet is they’ll go hunting for yield.

The AFR attributes the high cash weightings the super funds are holding to expensive stock valuations. That suggests any substantial move down in the Australian stock market will draw this money out. That is to say, any correction downwards and the fund managers will step in and buy the dip.

If you’re waiting for another massive stock market collapse, I don’t think you’re going to see it. Over at Cycles, Trends and Forecasts, we’re bullish on stocks for 2015.

In fact, we have our own measure of valuation for the stock market as a whole. It suggests Aussie stocks remain reasonably valued, if at the top of the range, based on historical fundamentals anyway.

The upside for Australian stocks and real estate in 2015 looks strong. In fact, as far as stocks go, you might only have a week or so to get set for the bull run this year. To find out why, start here.


Callum Newman

PS. On the latest episode of the DR podcast, I talk to real estate expert Catherine Cashmore. If you’re interested in property, you need to hear this. Check it out on iTunes here or Stitcher here.

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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