Good article in the Sydney Morning Herald from David Llewellyn-Smith of MacroBusiness here where he questions “is Australian property worth the risk?”
It’s immediately clear that much of the bearish rhetoric has about-faced remarkably quickly from the excitable “prices will fall 15-20% in 2012” to weary acceptance that in the short term prices will once again continue to increase.
If there’s one thing that we should have learned about Australian property over the years it’s that short-term predictions are often next to useless.
From Jenman’s “coming property crash” warnings of a decade ago, to Keen’s “40% crash” call of 2008 or Keen again in 2012 insisting upon accelerating price declines, we’ve well and truly proven the old adage that “prediction is very difficult…especially if it’s about the future.”
Llewellyn-Smith (“DLS”) misfired himself in June 2012 when he stated it to be likely that “rate cuts will do nothing to stimulate new borrowing” which already looks to be a play-and-miss based upon the recent ramp-up in auction clearance rates, fuelled by Australian’s seemingly unquenchable thirst for exposure to residential real estate.
DLS’s central case for Australian property was that it will experience a “slow melt”.
Property data for the last quarter has shown property prices growing at or around double digit pace in all four of the major capital cities, which doesn’t indicate any kind of melt, slow or otherwise.
This is mirrored in MacroBusiness’ own chart below which instead shows price gains-from-trough:
Source: MacroBusiness via RP Data
That said, I have no qualms with DLS’s argument that average price to income ratios are likely to revert downwards over time, but that enduring human trait of herd mentality is likely to ensure that the path to that outcome will be far from smooth.
The impact of the Baby Boomers
Although I’m more overtly positive than perhaps most on Australia’s economic prospects, I find it hard to disagree with many of the views put forward on MacroBusiness, and they have made some particularly compelling arguments about the impact of retiring Baby Boomer generation and Australia’s increasing dependency ratio as they begin to retire.
Although demand in Australian capital cities will continue to be underscored by huge population growth, it’s difficult to dispute that the popularity of the quarter acre plot in the distant outer suburb is dwindling and this may well see the prices of these property types falling over time.
Expensive capital city house prices and the trend towards medium-density living have seen a huge drop in the average Australian household size over the past century, although I’ve more than a sneaking suspicion that the bottom of this curve may have already passed, with expensive rents leading to an increase in the numbers of tenants sharing dwellings.
Llewellyn-Smith makes some good points about the largely unseen macroprudential constraints on the Australian property market, principally the role of APRA which has doubtless maintained a more hawkish eye on lending standards since the financial crisis (and that can only be a good thing for property market stability).
In the long-term, as I’ve noted before many times, Central Banks and regulatory bodies such as APRA are likely to play a far more active role in the controlling and deflation of asset price bubbles than they have in the past. APRA’s Chairman earlier this year revealed his views on the importance of regulatory vigilance in the aftermath of the sad demise of of Lehman Brothers in September 2008.
But in the short-term, what’s to stop Australian diving headlong into property as they seem to be? More risk-averse Aussies have reportedly paid down debt during the recent downturn in confidence which has surely increased the availability of credit.
A lack of available deposit capital seems unlikely to represent a problem in the short-term (if you’re wondering where deposits might come from the chart below might give you some idea).
Sentiment appears to be improving in the major markets and continued price rises look to be likely in Sydney, Perth and certain other market sectors.
Is Australian property investment worth the risk?
David Llewellyn Smith’s main argument in his recent article was that holding Australian property in a portfolio is not worth the risk.
I agree that if you are expecting the median price of all properties to somehow zip on ahead of household incomes over the long-term, you are probably wrong and the history of markets stands against you
Just as the amazing returns from shares in Westfield since 1960 don’t prove that shares are always a great investment, so it is in property.
The rising tide of sentiment seems likely to lift all property boats in the coming months, but the next downturn will come eventually, and what happens then?
As DLS is correct to highlight, investment is about managing risk and I agree with his statement that a longer time horizon is likely to reduce the risks inherent in property ownership.
We know that property markets are granular and diverse market sectors will behave very differently. In fact, in some sectors of the market a slow melt is arguably already unfolding. Median dwelling prices in Adelaide and Hobart have fallen in actual terms over the past year in spite of a cash rate at half century lows, which is an alarm bell. What will happen when the next major downturn next ensues?
The role of vested interests
Timings are always uncertain, but as and when Australian property markets eventually face a significant downturn, falling prices will probably be countered by the full force of the usual vested interests.
Responses may include accommodative monetary policy from the RBA, market encouragement from the major banks who have heavy exposure to residential property and a relaxation of foreign investment rules.
Foreign investors may be able to fly to the rescue in major international city markets (which is why I’ve felt over the years that long-term risk is lower in quality medium-density, median-priced dwellings close to the respective centres of Sydney and Melbourne) but this will never occur in remote or outer areas.
I’ve always been flummoxed by the concept of why investing in cheap areas where few people want to live is seen to be a smart idea.
Yes, rental yields might be a few dollars higher, but at what cost?
With ‘help’ from foreign investment the average price of a detached house in London, for example, despite being some 20% or so below its peak, clocks in at a scarcely believable £1.08 million ($1.6 million) – the median price of detached houses also dropped sharply but remains at around £700,000 (which even at 28-year-record weak exchange rates for the pound sterling equates to well over a million Aussie dollars).
As the AFR noted in its article here Australian cities face huge challenges including an “alarming trend of declining land supply” and that the “housing shortfall could blow out to 663,000 by 2031, with the Australian population on track to reach 35.9 million by 2050 – even if all those baby boomers die and their properties are then sold on.”
With our population increasing frantically by a million people every few years, if Australian cities are to experience the widely-promised major market correction then it would want to occur soon, particularly as the construction of appropriate and appealing new capital city dwellings hardly seems to be inspiring.
Expect to see high auction clearance rates in the Sydney and Melbourne property markets (and yet higher still in the hot sectors such as in Sydney’s Inner West) as investors pile back into the market with abandon, and data providers to report further price gains in Sydney, Melbourne, Perth and Brisbane in March (but possibly declines in Adelaide).