Why house prices are sky-high, and why you should care less about Phil Lowe

Do you know why Australian house and apartment prices are so high? If you think it’s largely down to any of the following reasons, you’d better think again, says Chris Bedingfield .

He believes it’s a problem largely created by governments, but not in the ways you might think. Speaking with Livewire’s Patrick Poke in the latest episode of Rules of Investing, the long-time property specialist and portfolio manager at Quay Global Investors rules out the most commonly-cited culprits of:

• long-term low interest rates,
• taxation policy including CGT and negative gearing concessions, and
• immigration levels.

Listen to the podcast in the link below, or read my summary in this wire. 

Property

The real reason Aussie housing is expensive

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It seems most of us are looking too far along the supply chain, while the problem really starts at the initial stage of land purchases by property developers.

“In Australia, we’ve had all levels of government – local, state and federal – with their hands in the pockets of residential property developers,” Bedingfield says.
“Over the last 30 years, we’ve had this user-pays mentality where governments say, ‘we’re not going to give free infrastructure to these expanding suburbs anymore but will bake it into the land prices.’”

This uplift in production prices, at the very earliest stage of building, is where the issues arise. Illustrating the widespread lack of understanding, Bedingfield recalls a conversation with a few US clients from his time at Credit Suisse, where he worked between 2006 and 2014. They were comparing the high average house prices in Sydney versus Texas.

“’You guys have got a massive bubble,’ they said, to which I responded, ‘well, how much does a packet of cigarettes cost in Texas? Do we have a cigarette bubble too?” Bedingfield says.

At the time, cigarettes cost an average of around $4.50 a packet in the US versus around $25 to $30 in Sydney.

“The government imposes taxes on cigarettes to make them unaffordable and what they’ve done to the housing market’s exactly the same. Except, of course, we should dissuade people from smoking,” he says.

“Governments are trying to fill their coffers with taxes, but who they’re really benefiting are existing homeowners, while the marginal cost of a new house is so much higher.

“If the government really wants to do anything about it, they all need to get around a table and take the charges out.”

Central banks don’t move the dial

Bedingfield also has a somewhat unorthodox view on just how much central banks influence share markets, particularly in developed nations. He believes equity markets have fooled themselves into thinking central banks have a real impact on share markets. “In reality, they don’t,” he says.

Casting back over the last decade, Bedingfield notes that returns from S&P 500 companies are almost entirely explained by the earnings growth of their stock and dividend yields.

Why? Because there’s no direct link between central bank activity and equity markets.

“When central banks do quantitative easing, they swap very high-quality assets from the market – government bonds or sometimes AAA-rated private debt – for cash. That’s it,” Bedingfield says.

“For the sellers of bonds, those very low risk, low returning assets, it’s just not in their nature to say, ‘I used to own these low-risk bonds, now I’m going to go and pump Tesla shares”. It makes no sense.”

The office isn’t dead

Though his funds don’t own office property assets, Bedingfield also attempts to debunk the popular view that commercial buildings will, to a large extent, cease to exist.

In simple terms, he says the argument is based on the moves taken by companies such as Google, which has said all employees can work from home two days every week.

“The maths says two days out of five equals 40%, which is a 40% reduction in demand, which is devastating for office,” Bedingfield says.

“But it’s nowhere near that bad because if you’re an office manager who has to provide enough accommodation for your workforce, you’re not providing for the average number of people to come into the office, but for the maximum.”

He believes there’s a very good chance many employees will choose to work from home Monday and Friday but in the office on Tuesday to Thursday.

Work from home is here to stay but telling employees they can work remotely two days a week is unlikely to have much of an impact on office space.

“Tenants are very vocally saying they’re reducing office demands because of this but I’m pretty sure they haven’t properly thought this through," Bedingfield says.

In this context, he suggests the re-leasing market for office space will be very interesting in two to three years’ time, “when everyone comes into the office on a Tuesday morning and has nowhere to sit.”

He advises investors to be patient with the asset class but is confident it’s not going anywhere.

“The sentiment right now is terrible, which is usually a good buy signal. But work from home isn’t going to be as bad as people think.”

“Foolish to bet against the consumer”

Bedingfield also tackles what he regards as misconceptions about the future of bricks-and-mortar retail, another sector that has copped plenty of flak over the last couple of years. He notes that current sales trends from bricks-and-mortar retailers are now way above where they sat pre-pandemic.

“Even in the lead-up to COVID, there was a narrative that it was failing because e-commerce was eating traditional retailers’ lunch. This is partly true but at the same time, households were full to the gills with debt and wage growth was really low,” he says.

"Yes, we’re going to get some beats and misses relative to expectations, but the total volume of retail sales is completely off the charts, not just here but around the world. It would be foolish to bet against the consumer, in areas of retail, household consumption generally, bricks & mortar retail.”

Another of what Bedingfield describes as “jewels out of the ashes of COVID” is a niche of the property space that is buoyed by long-term demographic trends. Something of a hybrid of healthcare and residential property, senior housing is facing big tailwinds in the decades ahead.

“This is a sector that was ravaged by COVID because it housed the most vulnerable, so share prices of these companies have been clobbered. As a result, people have stopped building this stuff because the maths doesn’t work,” Bedingfield says.

“The supply of new stock has come to a standstill, which is creating the perfect storm because it takes two to three years to build these properties from scratch.”

Describing it as a 20-year growth story, he’s most excited about the valuations of real estate investment trusts in this space, many of which sit well below pre-COVID levels.

One of the examples he cites is Chartwell, the largest owner of retirement homes in Canada. Key reasons it appeals are the favourable population demographics, with Canada’s average age skewing higher than the US, alongside tighter building supply. Bedingfield also refers to this as a potential opportunity, which also presents something of a risk: it may well be taken out in the next few years.

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