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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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1. Is Australian housing
a 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, which
an attractive investment, financial crisis (GFC) is a vivid reminder could see prices fall sharply, and leave
offering positive capital for Australians of the potential downside many homeowners or investors owing
growth 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 in
particular, 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 a
the 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 house
We ask Marcelle Murphy, well, but the key issue gnawing at the prices. Chart 1 shows the trend in the
Economist at Advance, to minds of homeowners and investors ABS House Price Index from March
explore 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 are
driving the Australian now generally regarded as very much a total of just over 70% to December
residential 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 Solutions
Is Australian housing a sound investment? | 1
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 Solutions
Is Australian housing a sound investment? | 2
3. “Residential property has Will house prices continue In summary then, whilst there is likely to
be some short-term weakness in house
long been considered a to rise? prices, a sharp, sustained decline in
reasonable 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 and
a 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. 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 advance.com.au
This 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 nature
only 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 person
should consider its appropriateness, having regard to their objectives, financial situation and needs. Whilst every effort has been taken to ensure that the assumptions
on 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 or
unknown risks and uncertainties. Past performance is not a reliable indicator of future performance. Information from third parties is believed to be reliable however it
has 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 from
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Current as at April 2011. AD11944-0311lm
Is Australian housing a sound investment? | 4