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:

·     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.

·     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!)

·     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.

·     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. A sound strategy, good asset selection and management should see you do better than 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!