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Here’s why property-related stocks could be about to crash

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.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.