Maybe the sky isn’t falling

An article titled “The Australian housing market – what are the key issues?” by Dr Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital somehow ended up on my desk. I gave it a quick once-over expecting the usual unsubstantiated gloom and doom most people churn out, but was pleasantly surprised to find a relatively balanced view.

Just for the sake of the exercise, I tried to extract some of the positives and a few of the not-so-negatives to help investors maintain a positive outlook.

Here are a few of the points I found interesting (with my comments in brackets):

  • Expect average home prices to fall 5-10% once an interest rate tightening cycle gets underway in 2018-19. (See my comment in point three below.)
  • Sydney and Melbourne unit prices are most at risk. (Based on what?)
  • Over the last 5 years Sydney dwelling prices have risen a ridiculous 73% and Melbourne prices are up 47%. (Makes a drop of 5-10% mentioned above seem almost bearable if you’re playing a long-term game – and you should be. Lets talk strategies for getting people into their first property ASAP. If you’re sitting around waiting for prices to fall, that’s a fool’s game.)
  • There has been an inadequate supply response to demand. (The ABS graph shows a shortfall of almost 50,000 dwelling based on current demand. So much for all those ‘oversupply’ articles I keep reading…)
  • Consistent with this, while vacancy rates have increased, they have only increased to around average long-term levels. In Sydney, vacancy rates are below average. (So, maybe the sky is not falling after all, Chicken Little.)
  • While commitments to lend to property investors slowed in 2015 after APRA tightened macro-prudential controls, this has since worn off.
  • Foreign buying is also impacting – with indications it is around 10-15% of demand – but it is also concentrated in particular areas and SMSF buying appears to be relatively small. (Yes, we know some suburbs are very popular with overseas buyers. Have a strategy; know your price points if you’re looking in those suburbs; be sure to look at alternatives.)
  • The surge in prices and debt has led many to conclude a crash is imminent, but we’ve heard that lots of times over the past 10-15 years.
  • (In any case,) The situation is not that simple:
  1. Firstly we have not seen a generalised oversupply and at the current rate, we wont go into oversupply until 2018 and in any case approvals suggest that supply will peak this year.
  2. Secondly, mortgage stress is relatively low and debt interest payments relative to income are around 2003-04 levels. (Read the second part of the sentence again!)
  3. Thirdly, lending standards have not deteriorated like they did in other countries prior to the GFC. (Think non-recourse loans in the US.) In recent years there has been a reduction in loans with high loan to value ratios and interest only loans are down from their peak.
  4. Finally, generalising is dangerous. While prices have surged in Sydney and Melbourne, they have fallen in Perth to 2007 levels and seen only moderate growth in other capitals.
  • Polices to help address poor housing affordability should focus on boosting new supply, particularly of stand alone homes, which have lagged.
  • Generalised price falls are unlikely until the RBA starts to raise interest rates again and this is unlikely until later in 2018, whish after a few hikes will likely trigger a 5-10% pull back in property prices as was seen in the 2009 & 2011 cycles. (I’m reminded of an interview with Harry Triguboff, one of Australia’s billionaires, in which he said something like; “people worry about a 3 or 4% price drop but they forget property has gone up perhaps 10% every year for the past 5 years…”)
  • While there is a strong long term role for residential property in investors’ portfolios, at present there remains a case for caution. It is expensive on all metrics and offers low net income (rental) yields of 2% or less. This leaves investors highly dependent on capital growth. (See my previous comments about the long term nature of property investing. Good asset selection and management should see you do better then 2%)

Hope you find those points as thought provoking as I did. I reiterate what we believe and forms part of our approach with our clients at Equi Wealth. Investing is not a singular event; it’s a process. Investing in property is best thought of and implemented as a long term strategy. Property is – and probably always will be – the foundation of a wealth creation strategy for most investors. Good asset selection and ongoing review and management are key to success.

Life is for living. All the best on your investing journey!


Words by John Di Natale, Director of Equi Wealth