The Australian property market has offered many investors and homeowners a secure asset with potential for long-term capital growth.
Australians scour property market news intensely,
It’s understandable. For instance, over five years to late 2017, Australian housing prices increased by almost 50%.
Internal Reserve Bank of Australia documents also showed that the central bank foresees property values could rise by as much as 30% by 2023 if the cash rate remains at current low levels.
Property is an equity investment class that offers returns through rental income and capital gains associated with property and land value appreciation, in a rising property market.
Properties can record higher returns than fixed-interest assets in certain market conditions.
This is in part because of their higher-risk profile depending on the property type, location, and length of time held.
For instance, apartments may be riskier than standalone dwellings.
No doubt, owning and holding properties has proved a successful investment strategy for many Australians.
But property is not a risk-free asset, and investors should consider their debt profile, market trends, macroeconomic indicators, and property investment alternatives such as REITs.
Real estate investing
‘The property market is always going up.’
We’ve likely heard this from a few of our friends, relatives, or colleagues.
But is property investing really as safe as houses?
While it’s true that house prices have generally risen in value, you should also note that the run-up in prices is not homogenous.
Property value appreciation has been most pronounced in Sydney and Melbourne.
Additionally, the property market in cities like Perth and Darwin has been relatively weak.
As RBA Governor Philip Lowe stated in 2019, ‘it is pretty clear that there is no such thing as the Australian housing market.’
‘What we have is a series of separate, but interconnected, markets.’
Therefore, one should not bank on a purchased property to rise in value no matter what.
It pays to conduct due diligence on the housing market of the city one is seeking to purchase a home in, the overall economic conditions, and general interest rates.
One should also factor in household debt.
With property prices frequently outpacing inflation and wages growth, funding property purchases frequently entails taking on larger and larger debt.
Wayne Byres, chair of the Australian Prudential Regulation Authority (APRA), stated in March that APRA is ‘alert to signs that very low interest rates and rising housing prices create a dynamic in which households seek to take on even higher debt levels, and that banks searching for credit growth seek to accommodate that demand through greater risk taking.’
Such a constellation of economic factors is not necessarily a cause for concern, but it is a reminder against complacency.
Of course, if one seeks the capital growth benefits of the Australian property market, buying a property directly is not the only investment avenue available.
Investors can also consider investing in diversified managed funds of property assets.
There are investment products such as listed property funds called Real Estate Investment Trusts (REITs).
REITs are handy because apart from their historical dividend yield, they can expose investors to a vast array of property — commercial, industrial, and retail.
By purchasing shares in REITs, one can gain a share of a portfolio that can comprise residential bulk builders, toll roads, high-rise offices, supermarkets, and shopping malls.
Importantly, one does not need a mortgage to do this. However, investment risks can apply.
Property market cycles
Forecasting what’s next for the economy is usually considered nearly impossible. But here at Money Morning, we don’t let that stop us from trying.
Understanding the underlying forces which drive the economy will go a long way to accessing the insight that few will ever attain.
It is often thought that forecasting the economy includes factors such as the movement of central banks or the stock market. Or even the movement in interest rates and inflation. But while they may play a small part, their impact doesn’t hold weight.
So, what’s it based on? The real estate market.
Here at Money Morning, we believe the economic cycle is largely underlined by what happens in the real estate market. And the cycle simply continues to repeat.
Homer Hoyt’s book published in 1933, One Hundred Years of Land Values in Chicago, identified the repetition of Chicago’s real estate cycle.
Hoyt’s study of history, which focused on land values, makes a strong case that the economy moves in a clear sequence of around 18–20-year cycles.
As Hoyt notes, real estate cycles are directly related to land price. The cycle repeats regardless of the government in power and their policies.
Since Hoyt’s book was published in 1933, little has changed in the real estate cycle. The cycle just continues to repeat itself.
The Global Financial Crisis (GFC) wasn’t financial in nature, and so it appears that the reforms initiated after the GFC have only set in motion another real estate cycle.
Instead, we’ve seen a land crisis.
The underlying cause of the crisis may have been ignored, but the real estate cycle looks set to repeat.
To receive more information on an analysis of Australia’s property cycle and real estate, check out Cycles, Trends & Forecasts.
Cycles, Trends & Forecasts is a monthly newsletter dedicated to illuminating the real estate cycle — and ways one can hopefully profit from it.
If you’re interested in property exposure investments like REITs, or you’re a property buyer, seller, investor, or developer, then this newsletter may be of interest.
What is the best place for property and real estate news?
Publications like the Australian Financial Review, ABC News, and The Sydney Morning Herald all frequently report on the leading stories affecting Australia’s property market.
If you want to study the data yourself, the Australian Bureau of Statistics and the Reserve Bank of Australia are great places to start.
CoreLogic also publishes daily and monthly residential value indices, including summary monthly movement data.
There are also organisations like the Real Estate Institute of Victoria (REIV), which provides detailed property market information and resources focusing on the state of Victoria.