Australian Property in the Near Future

Property is one of the most talked about subjects in Australia. Punters have made millions from either flipping houses, or using buy and hold strategies. Not everyone is quite so lucky, however. Long gone are the days of property prices doubling every seven years.

You can no longer just buy, indiscriminately, and let time do the heavy lifting. When I say heavy lifting, I’m referring to capital appreciation. 10 years ago, Aussie house prices went on a tear. Some investments ended up doubling in less than two years.

But housing prices can only climb so high. There is obviously a limit to their growth ceiling. Have we hit it? I would argue no. However, it really depends upon what type of property we are referring to.

All property is not created equal

Location is one of the most important factors of property prices. This is why inner city flats cost more than a two-storey, three-bedroom house 30 minutes out of the city.

People care about where they live more than what they live in. Living close to the CBD offers so many advantages. You are closer to the central hub of employment. Many prestigious schools are located closer to the CBD. And infrastructure is constantly improving in more populous areas.

Essentially, people are not buying tiny one-bedroom flats. They are buying a lifestyle. And this is how you arrive at one-bedroom apartments, with Sydney harbour views, costing $2.42 million.

Supply surpassing demand

I want to make it clear: I don’t subscribe to the idea that the Australian property market is in a bubble. Stating such a thing would mean believing the whole of Australia is just one market. But even within cities, there are sub markets of real estate.

For simplicity, think of it like our own equities market. If the S&P/ASX 200 starts to drop, and continues to fall for an extended period of time, you might believe Aussie stocks are overvalued. However, within the ASX 200 are a couple of tech stocks, which post impressive returns over the same time period.

So if you’re unwilling to look closely at the opportunities available, you simply lose out on the opportunity of making money. Therefore, even if the Melbourne median housing price falls over the next five years, it doesn’t mean you can’t profit from it. Various suburbs within Melbourne could very well grow by 8% or more annually.

I can see this as a reality in the next couple of years. While I don’t think there will be a crash, a correction might happen within capital cities — simply because of oversupply.

Australia’s population continues to grow, and is expected to double in the next two generations. However, both foreign and domestic investors have been pushed out of the market. Regulators are still cracking down on banks to ensure they are not over-lending.

During this financial year, construction will start on a record 220,000 new dwellings. And a record 49% of these new dwellings are expected to be multi-level units. A new report by BIS Shrapnel is predicting property prices to drop next year — all because of the oversupply problem. Excluded from the expected drop were Brisbane, Canberra and Hobart.

Report author Angie Zigomanis said, ‘As these dwellings reach completion, all states with the exception of NSW will have moved into over-supply, or be experiencing an increasing over-supply.

Banks are also doing their part to eliminate a significant drop in high rise apartment prices. Bankwest, owned by Commonwealth Bank of Australia [ASX:CBA], has pulled many discounted mortgage products from its range.

The bank has withdrawn its Complete Variable Home Loan investor special rates. However it is investors who really need competitive rates. But now as more banks tighten up on lending their actions could also increase speculation surrounding Aussie property.

Fears fuelling the fire

Recently, we have been bombarded with the fear of uncertainty. The Brexit situation blew over in a matter of weeks. And now commentators have latched back on to property, spreading fear and pessimism. But it’s not just commentators and analysts. Regulators are constantly adding fuel to the fire.

Banks would love to give out more loans to investors. However, regulators are the ones telling banks to ease up on lending. They are in fear of prices suddenly dropping, much like they did in the US. Of course, this is a legitimate fear to have. But by creating pessimism and uncertainty, their efforts might end up backfiring.

Sentiment plays a bigger role in markets than we’d like to admit. If you’re a value investor, you don’t pay attention to what the opinion of the market is. Markets might think we are in for another crash. But this will not deter value investors. They will continue to collect premium stocks at great values.

But a huge difference between stocks and homes is their liquidity — the ease in which you can buy and sell. It obviously takes more time to sell a home than it does to sell stocks. You’d be extremely lucky to put your house up for sale and have someone buy it on the same day. Yet this is routinely what happens with stocks.

From a purely capital gains perspective, if the market turns against you, shares are much better than property. You can limit your losses with shares by simply selling out. Yet your property might end up sitting there with no buyers in sight, becoming cheaper each week.

So if regulators and banks continue to spread fears, they might end up coming true, affecting many Australians’ net worth negatively. However, in the grand scheme of things, this is just a minor irritation. Property investors who are in it for the long run aren’t looking to sell. They want to accumulate their rental incomes and retire on a passive income. So while some fears may be legitimate, others are just used to sell headlines.

Härje Ronngard,

Junior Analyst, Money Morning

PS: Most people think great deals in Aussie property are already all gone. This is the worst possible attitude to have. Why would you take financial advice from some self-proclaimed guru? Instead, why not do your own research? Take control of your financial future. But where do you start?

If you’re interested in investing in property, check out Australian Real Estate Game Plan, a report written by Money’s Morning’s property expert Callum Newman. In the report, Callum reveals the eight-letter word that really drives property values. It’s the ultimate guide to help you start your future property plan, and it’s free!

To get your copy of Callum’s report, click here.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia