Is NOW a good time to Invest in Real Estate?

Jamie Lowden
Aussie Franchisee – Glenelg SA

Two questions I am regularly asked as the franchise Principal of Aussie Glenelg is, “Are interest rates going up or down?” and “Is it a good time to invest in real estate?”  Not being an economist myself, I regularly research what some of our brightest economists in the country have to say.

Here is an extract from Dr. Shane Oliver’s article, “3 things to consider when it comes to Australian housing.” My own observations are interspersed in purple.

“Commodity prices have fallen more than expected; the Australian dollar has remained relatively high; inflation is low and the outlook for business investment has deteriorated pointing to overall growth remaining sub-par.”

This has seen the cash rate fall to a record low of 2% as of 5th May 2015. 
Investors should not be paying any more than 4.35% with some banks offering rates as low as 4.04%

“The main argument against further rate cuts has been that the housing market is too hot and further rate cuts risk pushing home prices to more unsustainable levels resulting in a more damaging eventual collapse. In this article, we explore the validity of this concern.”

What’s driving Australian housing?

 “While it’s generally agreed Australian property prices are high, the reasons for it are subject to much debate with many looking for scapegoats in the form of negative gearing and buying by foreigners and SMSF funds. However, these don’t really stack up: negative gearing has been around for a long time and while foreign and SMSF buying has played a role it looks to be small and foreign buying is concentrated in certain areas.

 In contrast, the shift to low interest rates since the early 1990s has clearly played a role. Consistent with this, the rise in price levels from below to above trend has gone hand-in-hand with increased household debt.

 Another fundamental factor is constrained supply. Vacancy rates remain low and there has been a cumulative supply shortfall since 2001 of more than 200,000 dwellings. The main reason behind the slow supply response appears to be tough land use regulations in Australia compared to other countries.”

This suggests to me that we are not going to see a slowing of property growth in the foreseeable future due to a fundamental shortage of housing in Australia.

Property prices: 3 factors to consider

  1.  “Home price gains are now narrowly focused on Sydney. According to CoreLogic RP Data Sydney home prices rose 13.9% over the year to March. Growth across the other capital cities ranged from 5.6% in Melbourne to -0.8% in Darwin with an average of just 1.5%. So, the rest of Australia is hardly strong.
  2.  Growth in housing debt is running well below the pace seen last decade. There are some signs of a loss of momentum in the last few months. Investor debt is up 10.1% year on year but reached around 30% through 2003 and in the last few months has slowed to an annualised pace of 9.3%.
  3.  The RBA and the Australian Prudential Regulation Authority (APRA) have pushed down the macro prudential path to contain risks around housing. Tougher APRA expectations of banks were announced in December with the threat of sanctions if these expectations are not met.”

Housing as an investment

Over the very long-term residential property adjusted for costs has provided a similar return for investors as Australian shares. Since the 1920s housing has returned 11.1% pa compared to 11.5% pa from shares. They also offer complimentary characteristics: shares are highly liquid and easy to diversify but more volatile whereas property is illiquid but less volatile. Share and property returns tend to have low correlations with each other, offering diversification benefits. As a result, there is a case for investors to have both in their portfolios over the long term.

Australian property provides a competitive investment alternative to shares.

In the short-term, low interest rates point to further gains in home prices. However, this is likely to be constrained by the economic environment and the impact of tougher prudential scrutiny of bank lending by APRA. Over the next 12 months home price gains are likely to average around 5%, maybe a bit stronger in Sydney and Melbourne (key beneficiaries of the post mining boom rebalancing) but staying negative in Perth and Darwin (as the mining bust continues).”

The South Australian market has provided consistent conservative returns over the 20 years, avoiding the ‘boom and bust’ experienced on the east coast of Australia.

Dr. Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital’s diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Jamie Lowden
Aussie Franchisee – Glenelg SA