Ask Colin

Are we in rampant speculation (June 2017)?

The detailed question was:

In recent weeks there have been many articles in the paper regarding the property bubble bursting.  Probably the most alarming one being that of Altair Asset Management selling everything.  Whilst I appreciate that these alone do not mean we are in rampant speculation, are they indicators that perhaps we may be close?

I don’t believe there is any doubt that there is an over-heated market in property in Sydney and Melbourne. There was also one in Perth and apartments in Brisbane but they have cooled/are cooling without great effect on the economy so far. However NSW and Victoria are far bigger and I have been concerned about them for some time and included it in my analysis of the third phase.

 

That said, the stock market is clearly overvalued as well, but there is no real sign of rampant speculation there. Stock valuations are complicated by low interest rates which justifies low earnings yield (inverse of the price earnings ratio). For me this has so far meant a reluctance to invest my 20% cash reserve because I cannot find stocks that I want to buy. That said, I may employ the cash reserve in my LIC strategy. That will collect a dividend, but in a declining market, capital may be at risk.

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