Why Australian Property Can Go MUCH Higher

Every other month, some investment bank or fund manager comes out and calls the top in housing.

Last month it was global investment banking giant UBS. Based on its indicators, UBS believes housing activity has peaked. That we should steel ourselves for a fall of up to 7% in house prices over the next 18 months.

But analysts have been calling for property prices to fall year after year.

And year after year, they get it wrong.

We’re bombarded with all the reasons why house prices will fall. Yet few, if any, can tell you how property can go higher.

Well, here are a few…

Number one on the list is infrastructure.

The Turnbull government is about to begin the largest infrastructure spend seen in a generation. A massive $75 billion to build rail and road projects across the country.

That will cause higher property prices, wherever it goes in.

A new freeway, which cuts a two-hour journey into 30 minutes, does nice things to property values. Wherever it’s built, the value of land simply rises.

For example, a new train station makes nearby houses more desirable. Money spent on roads, rail lines and better public transport all send house prices higher.

You need to watch and study government infrastructure plans, because they’re telling you in advance where to buy for price growth.

Another factor that is hugely beneficial for property prices is population growth.

Last year, Australia’s population surpassed 24 mln people. We’re adding mlns of people faster than ever before.

Based on current trends, we’ll add a mln people every two to three years.

But if history is any guide, the population may grow far beyond that estimate.

In 1999, Australia had 19 mln people. At the time, the Australian Bureau of Statistics (ABS) made a forecast that we’d reach 24 mln people by 2033!

Population growth surprises on the upside, and it shows no sign of slowing down. The latest data from the ABS shows population growth is picking up as immigration hits a four-year high.

The problem for housing is when demand outstrips supply. That’s nothing new, or news to anyone. What is new is that an ever-growing part of that demand is coming from China.

Money from the Chinese will send Australian house prices higher.

They say property is all about location. For the Chinese, it’s more about perspective.

From the viewpoint of China’s new wealthy, our houses are not only cheap, but high yielding as well.

The median price for a two-bedroom apartment in Shanghai is around $900,000. That’s 25% more than the same apartment in Sydney.

In Shanghai, rental yields average around 1.5%. As a landlord of a property in Sydney, Chinese investors can get double that.

So when you hear all the noise about how expensive our property has become, in the eyes of others, it’s cheap.

And the research is backing this up.

Broking house Credit Suisse put together a report on this very topic.

Some key findings showed foreigners are buying 25% of new housing supply in NSW and 16% in Victoria. China currently accounts for almost 80% of all foreign demand.

If you think this is a trend likely to fade away, here are some stats to consider.

China notches up a new billionaire every five days. There are now 1.6 mln US dollar mlnaires in China — double the number there were in 2010, but way short of the 2.5 mln expected by 2021.

The Credit Suisse report further found that despite the capital controls and foreign buyer taxes, foreign purchases of Australian property are only accelerating. Nothing can satiate the appetite of China’s new wealthy for our property, it seems.

Another reason why house prices can go higher are loosening lending standards. If people are able to borrow more, then they can logically afford to bid up more for real estate.

Banks in the US have already been pushing down lending standards for years. And with President Trump coming in and making financial deregulation one of his top priorities, well, you can see where all this is heading. It’s huge for property prices.

Australian regulators will, in time, face pressure to follow suit. It all bodes well for higher house prices here.

This real estate cycle is just starting to hit its stride. With all the infrastructure work going on, unemployment at historic lows, and looser lending on the horizon, it suggests house prices will go higher from here.

But there’s a caveat. It won’t go on forever.

There will come a point when land prices will go completely over the top and see us repeat the events of 2008. It’s just not going to happen this year, or the next.

To know when it will happen, you need to know the real estate cycle.

That’s the key.

They say it can’t be done, but once again they’re wrong. Once you understand the underlying force driving the economy, you can broadly forecast what’s coming next.

It has less to do with the movement of central banks or the stock market. Or movements in interest rates, inflation, or some other mechanism.

It’s directly related to land price.

The movements in land price cause the real estate cycle to repeat in a set sequence and timeframe.

It repeats regardless of government policies and the type of government in power.

The financial reforms put in place after the global financial crisis have only guaranteed yet another real estate cycle, and boom-bust, as that crisis was not financial in nature.

It was a land crisis.

And while the underlying cause of the cycle is ignored, the real estate cycle must repeat.

At Cycles, Trends and Forecasts, that real estate knowledge has been distilled into our 18-year real estate clock. That clock gives you the basic framework of the economy. Once you have it, you will know where property is headed and what’s broadly coming next for the economy.

Now…we’re going to look at that clock in more detail in a brand-new video presentation next Tuesday. It’s long. Over an hour. But I’m positive you’ll find it riveting viewing. It looks at where we are in the cycle…and what happens next. And not just for property. For all kinds of asset markets.

Make sure you set aside some time on Tuesday to watch it. You’ll be glad you did.


Terence Duffy,
Lead Researcher, Cycles, Trends & Forecasts

Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come.

Money Morning Australia