When I joined The Intelligent Investor back in May 2001, I was one of two analysts who started on the same day. My colleague has since become a good friend and he's now forging a successful path as an analyst with a respected funds manager. In between times, though, he took up work as a property valuer.
As someone who enjoyed analysing and valuing assets, he was naturally drawn to this field. But it failed to live up to his expectations. Over a drink one evening he lamented that he was a property pricer not a valuer.
What did he mean by that?
Stockmarket analysts usually value a stock by looking at the cash flows the stock is expected to produce over time. Then they discount them to account for the time value of money (a dollar tomorrow is worth less than a dollar today; just ask any first-year finance student).
BusinessDay special: The Great Property Riddle
Property could be valued in the same manner, treating it simply as an asset that produces cash in the form of rent. Except that it isn't. At least, not by ''property valuers''.
Rather than estimating the real underlying value of a property, my property valuer friend explained, he was expected to look around for similar properties that have recently sold. Those prices are then extrapolated for the property under examination, bumping it up for being closer to the shops or knocking it down for the want of a car port.
In this way he'd come up with a price at which a property might be expected to sell in the near future. The use of the word ''price'' is critical; it is not synonymous with value (as investors in many markets around the world have learned the hard way in recent years).
And yet this distinction between price and value is as important in the property market as it is in the stockmarket. Price, as they say, is what you pay and value is what you get.
So how does property stack up if it is viewed in the same way as a stock? To me, parts of the Sydney market look 20-30% overpriced.
This figure varies from area to area, but every residential property investment I've analysed relies on the assumption of rising capital values to compensate for a lack of adequate income (many property investors are ''negatively geared''). That may prove to be the case.
But today's buyers need it to be so.
To me, it seems this gap between price and value in property has been hidden by a combination of low interest rates and a booming economy. But with rates and living expenses now rising, that gap is becoming increasingly obvious.
If you've owned your own home for a number of years and have made a decent dent in your mortgage, you might think this has little to do with you. And to some extent you'd be right.
Overpriced property is naturally more of a concern to people who are currently paying for it. But there are a number of potential knock-on effects that could hurt investors in other areas, notably the sharemarket (which you are probably exposed to, directly or indirectly, in your super fund). And that's why it's on my radar.
This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor. BusinessDay readers can enjoy a free trial offer at The Intelligent Investor website. Click here for more Intelligent Investor articles.
45 comments
More comments
Comments are now closed