Investing in Property: Safe as houses?
Posted 05 Jan 16
Australia’s property market has enjoyed very strong returns in recent years. So where is the market headed in the years ahead?
If you live in Sydney or Melbourne at the moment, you could be excused for believing that property prices always go up.
It’s at times like these that it pays to remind yourself that all property markets are subject to market cycles.
In Sydney, for example, the overall residential property market rose 48% in the three years to June 2015, according to Australian Bureau of Statistics data. However, Sydney has been the poorest performing capital city in Australia if you look over a 10-year period, as you can see from the graph below.
That’s because while Perth and Darwin were skyrocketing thanks to the mining boom, the Sydney market was dormant. In the eight years prior to June 2012, Sydney’s residential property prices rose an average of only 2% per year.
The message from all of this, according to BT Technical Services Manager Bryan Ashenden, is that property investors need to have a long- term investment outlook.
“In general, property is an investment that favours the patient,” Mr Ashenden says.
“Your success comes down to what point in the cycle that you get into a market and your ability to ride out the inevitable falls or flat spots.”
The difficult thing is to pick the right time in the cycle. At the moment, there is a widespread belief that the Sydney and Melbourne market is overheated and is likely to pull back or soften over the next five years. Recent reports from investment banks such as Morgan Stanley, Macquarie and Credit Suisse have pointed to a cooling in both Sydney and Melbourne over the next two to three years.
Market researchers BIS Shrapnel share that belief. In the recently released Property Prospects 2015 -2018 report, while the group predicts continued growth for Sydney and Melbourne this financial year, they have tipped falls of around 4% per year in the following two financial years for both cities. Perth, Adelaide, Hobart, Canberra and Darwin are all set for continued sluggish growth, according to BIS Shrapnel, while Queensland is predicted to shine.
The group expects Brisbane, Gold Coast and Sunshine Coast all to record price growth of around 11-12% over the next three years.
Property research specialists SQM Research are less bearish in their outlook for 2016 than BIS Shrapnel, particularly in relation to the Adelaide and Hobart which they expect will show growth in 2016.
In its recently released “Housing boom and bust” report, SQM Research predicts Melbourne will take over from Sydney with price increases in the range of 8 to 13 per cent while Perth and Darwin prices will continue to languish.
At the heart of issues for Australian residential property is affordability. Australia’s median house price is now 6.4 times the median income of Australian households, according to the Demographia International Housing Affordability Survey 2015. Sydney came in at 9.8 times household income. This is significantly higher than the US at 3.6 times and the UK at 4.7 times median household income. The questions many observers are asking is how sustainable is the growth in the Australian market considering that key measure.
The high price of our residential property is also a challenge for property investors as a single property will often make up a very high proportion of their total investment portfolio. That makes it very difficult to have a diversified investment portfolio.
If that individual property, suburb or state doesn’t grow, then your investment return could be flat or even worse, result in a loss.
Adding commercial property to your portfolio can add diversification. It can also be a good alternative for investors not keen on making the significant outlay required for residential property. Australian Real Estate Investment Trusts (AREITs) listed in the ASX give you access to commercial property such as shopping centres, office blocks and factories with only a small investment.
As you can see from the table below, AREITs have performed very strongly over the five years to 30 June 2015, increasing in price by around 11.50% per annum.
|Performance to 30 June 2015
- AREIT – SPDR S&P/ASX 200 Lister Property Fund Exchange Traded Fund (ETF) price movement (excluding distributions). Residential property – weighted average of eight Australian cities – Australian Bureau of Statistics
- Gross yield of Australian residential property October 2015 – RP Data-Rismark. AREIT yield – SPDR S&P/ASX200 Listed Property Fund Exchange Traded Fund (ETF)