It's no secret that Australians have a love affair with property.
Not only is it a standard topic of conversation at dinner parties but for many it is their single largest investment. For this reason alone it's definitely understandable that Australians have a natural bias against believing anyone who proposes that property may be overvalued.
Out on a limb
Last week it was reported in the Australian Financial Review that the chief economist at investment bank Goldman Sachs had concluded that based on his analysis:
"Australian house prices are currently 20% above fair value – the most expensive since December 2007."
Perhaps more alarming however was a further comment that if Australia's economic growth rate turns out to be slower than expected, that 20% overvaluation would rise to 36%!
This warning from Goldman Sachs could be a timely warning for investors in property-related stocks, with a number of these stocks trading near their 52-week highs and about to report what are likely to be very good results.
For example, home builder Avjennings Ltd (ASX: AVJ) has gained nearly 17% in the past 12 months which is significantly better than the 1.3% return from the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). The company recently provided an upgrade to its full year guidance for profit before tax of $47 million or higher, which was a significant upgrade to the circa $40 million guidance previously provided.
Meanwhile, Villa World Ltd (ASX: VLW) only has a 2.6% gain to show for the past year, however, it is up around 400% over the past five years! The group also provided a pleasing profit update to the market in the lead up to August reporting season with guidance for net profit before tax (excluding a $6.5 million one-off litigation provision) of between $32.5 million and $34.5 million.
Music about to stop?
As most investors will be aware, the property sector is extremely cyclical. While the timing of shifts in the cycle are hard to predict; one thing that's near-to-certain is that above average growth in property prices and above average growth in demand for new homes and apartments won't last forever.
