Is Australian Housing a Sound Investment


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This newsletter is from Marcelle Murphy an Economist from Advance Investment Solutions on "Is Australian Housing a Sound Investment".

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Is Australian Housing a Sound Investment

  1. 1. Is Australian housinga sound investment?Housing is often seen as The housing market collapse in the US that the Australian housing market may and Europe in the wake of the global be vulnerable to a correction, whichan attractive investment, financial crisis (GFC) is a vivid reminder could see prices fall sharply, and leaveoffering positive capital for Australians of the potential downside many homeowners or investors owinggrowth over the long risk of property as an investment. more than their asset is actually worth. House prices in the US for example,term and, for investors in have plummeted 31% from their peak inparticular, a steady stream July 2006, and are now considered to be What are the recent trends?of rental income. Is this still largely undervalued. In determining the prospect of athe case for the Australia? In contrast, the housing market in downturn in the market, it’s useful to Australia has so far held up reasonably firstly look at recent trends in houseWe ask Marcelle Murphy, well, but the key issue gnawing at the prices. Chart 1 shows the trend in theEconomist at Advance, to minds of homeowners and investors ABS House Price Index from Marchexplore the key factors alike is whether or not this will remain 2003. Australian house prices have been on a broad upward trend, increasing by the case. Australian house prices aredriving the Australian now generally regarded as very much a total of just over 70% to Decemberresidential property market. overvalued, and have earned us the 2010. Within that period, there have reputation of being the most expensive been some short-term ups and downs. and least affordable housing market in After showing solid upward momentum the world, according to the Demographia in the 12 months to March 2004, prices 2011 International Housing Affordability stabilised for a few years, before rising Survey. In light of this, there is a concern again from March 2006. Chart 1: Australian: House Price Index March 2003 to December 2010 Index 2003/04 = 100 160 150 140 130 120 110 100 90 80 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Source: ABS & Advance Investment SolutionsIs Australian housing a sound investment? | 1
  2. 2. By 2008 however, prices actually started migration played a bigger role. In the to decline with the onset of the GFC. year to June 2010 alone, migration In fact, from the peak in March 2008 to accounted for 57% of the increase in the trough in March 2009, prices fell by population, compared with 43% for 5.5%. In 2009, supported by historically natural increase. Higher migration levels low interest rates, the Government’s have therefore resulted in a significant First Home Buyers Grant, a relaxation increase in the actual level of underlying of foreign investment rules, and the fact demand for housing in recent years. that the Australian economy rebounded well from the GFC, strong demand Supply of housing for housing helped drive double digit At the same time, the pace of growth price growth, pushing prices to record in housing stock or supply has slowed. high levels. As interest rates increased The total supply of housing in Australia Marcelle Murphy from late 2010 and foreign investment as at 2009 (latest available statistics), Economist rules were tightened once again, we’ve was just over 9 million dwellings. This Advance Investment Solutions seen this pace of growth taper off. Even is based on statistics from the 2006 allowing for this however, it’s clear that ABS Census and dwelling completions house prices are still around record data for the last three years. As Chart high levels. 2 shows, the actual growth rate in the stock of dwellings slowed to an average What’s been the key of 1.4% pa between June 2008 and June 2010 — well below the 2% average factor driving the long- population growth rate. There are various term upward trend in reasons as to why growth in the supply of housing has slowed, in particular house prices? land availability (limited due geography, zoning and environmental constraints), Population growth high infrastructure costs and long The most obvious long-term influence development processes. on the Australian market since 2003 has Given the more rapid increase in the been the basic interplay of supply and level of underlying demand for housing, demand, where the demand for housing and the slower growth in dwelling stock, has outpaced the supply of housing (see the National Housing Supply Council’s Chart 2). Rapid population growth has 2010 State of Supply Report estimated been integral in boosting the demand for that Australia currently has a cumulative housing. Indeed, between March 2003 shortfall of just under 180,000 dwellings. and June 2010, the total population has As with any product, when there’s grown by 12.6%, with an average yearly higher demand relative to supply, the growth rate of 1.6%. price of the product is bid up. Housing In the two years to June 2010, the is no different, and the general upward average was a very high 2%. Natural trend in house prices since 2003 largely increase contributed solidly to overall reflects this fact. population growth, but net overseas Chart 2: Australian dwelling and population growth % 2.2 Number of dwellings Population 2.0 1.8 1.6 1.4 1.2 1.0 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Source: ABS & Advance Investment SolutionsIs Australian housing a sound investment? | 2
  3. 3. “Residential property has Will house prices continue In summary then, whilst there is likely to be some short-term weakness in houselong been considered a to rise? prices, a sharp, sustained decline inreasonable investment Short-term prospects prices doesn’t appear a likely prospect.for those investors with In the short term there’s a reasonable In fact, with the underlying demand for housing expected to remain strong anda long-term horizon.” likelihood that house prices will show supply being slow to respond to this only moderate growth, and perhaps demand, the most likely outcome is that even decline moderately. Price growth prices will remain on a broad upward has slowed to 5.8% over the year to trend in the medium to long term. December 2010, after a solid 16% increase to June 2010. The prospect of further increases in interest rates in 2011 How does housing in and possibly 2012, along with the fact that prices remain near record highs, Australia compare to suggests some further deterioration other investments? in housing affordability. This will deter The strong demand for housing in potential home buyers, particularly first 2009 on the back of what could be timers, and will see some downward considered unusually very supportive pressure on prices this year, and possibly factors (historically low interest rates early 2012. and strong government incentives), Medium to long-term prospects and the resulting spike in house prices, prompted a word of caution from RBA The prospects in the medium to long Governor, Glenn Stevens, for those term however, are encouraging, based contemplating riding on the bandwagon on supportive fundamentals. With for speculative purposes. In a television underlying demand for housing already speech just over a year ago he said, “It’s exceeding supply, the situation is only a mistake to assume a riskless, easy and likely to be accentuated, given the guaranteed way to prosperity is just to strong growth prospects for Australia leverage to property”. in the medium term. The economy is on the cusp of a major investment boom, Any investment carries risks, but it’s which will help sustain solid income how you manage that risk that counts. growth, and support housing demand. Residential property has long been Furthermore, the current tightness of the considered a reasonable investment for labour market means it will be necessary those investors with a long-term horizon. to further increase net migration levels Chart 3 compares the returns on housing to help service the impending upswing in (using the ABS house price index, and activity. This again will mean increased therefore not taking into account rental demand for housing. yields etc), against other key investment options from March 2002 to December Unfortunately, housing supply is unlikely 2010. As illustrated, the Australian to be able to keep pace with this stronger house price index has generally demand. Whilst conditions conducive outperformed fixed interest over this to new home building have improved time period investment, and has clearly recently, such as an easing in credit outperformed unhedged international conditions for developers, other factors equities. In fact, an investment of will continue to limit the potential for $100,000 made in March 2002, would supply to increase. The development have more than doubled in value by and approval process for new dwelling December 2010. Unlisted property, as construction remains long and onerous, measured by the Mercer’s direct property and infrastructure costs are still index, just outperformed residential relatively high by historical standards. property. It should be noted that this Furthermore, according to Reserve Bank particular index includes non-residential of Australia (RBA) research, whilst new property as well. Australian equities and land has been released on most city listed property both performed well for fringes to allow for development, the cost the first five years in this period, but the of that land has also increased in recent onset of the GFC saw these returns come years, adding to the cost of new dwelling back sharply in recent years. construction. Even if these conditions were to improve in the near term, there is a relatively long delay between approval and construction, and therefore the pace of growth in dwelling stock.Is Australian housing a sound investment? | 3
  4. 4. Chart 3: Comparison of Australian House Price Index to Australian and International shares, Listed Property and Fixed Interest. Index rebased to March 2002 to December 2010 S&P/ASX All Ordinaries Mercer Direct Property MSCI World in $A Australian Fixed Interest 300000 S&P/ASX 200 Property Australian House Price Index 250000 200000 150000 100000 50000 0 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Source: DataStream & Advance Investment Solutions The above chart clearly shows that At Advance, we consider the the long- Australian housing is a sound investment term outlook for Australian residential in the long term. However, investors property to be encouraging. As an should exercise caution, as the nature investment, Australian direct residential of direct housing (ie less liquid and high property has a key role to play in a transaction costs), wouldn’t suit all diversified portfolio. investors. As always, a well diversified portfolio of investments is the optimal way for investors to generate solid returns for their level of risk tolerance. Adviser Services: 1300 361 864 document has been issued by Advance Asset Management Limited ABN 98 002 538 329 AFSL No. 240902 (Advance). The information provided is of a general natureonly and has been prepared without taking into account the objectives, financial situation or needs of any particular person. It is not intended to constitute investment,legal of taxation advice and should not be considered or relied upon as a comprehensive statement on any such matter. Before acting on the information, a personshould consider its appropriateness, having regard to their objectives, financial situation and needs. Whilst every effort has been taken to ensure that the assumptionson which the outlooks given in this document are based are reasonable, the outlooks may be based on incorrect assumptions or may not take into account known orunknown risks and uncertainties. Past performance is not a reliable indicator of future performance. Information from third parties is believed to be reliable however ithas not been independently verified. While the information in this publication is given by Advance in good faith, it does not warrant that it is accurate, reliable, free fromerror or omission. Advance is a member of the Westpac Group. An investment in a managed fund issued by Advance does not represent an investment in, deposit withor other liability of Westpac Banking Corporation ABN 33 007 457 141 or any other member of the Westpac Group. Subjectto any terms implied by statute which cannot be excluded, neither Advance nor any other company in the Westpac Groupand their directors, employees and associates accept any responsibility for errors in, or omissions from the information.Current as at April 2011. AD11944-0311lmIs Australian housing a sound investment? | 4