Shaking the foundations

Written on the 23 October 2016

September 2016

High prices. Fast bidding auctions. A mass of new constructions. The housing market has risen fast in the past few years but is it becoming too risky? Tim Rocks, Head of Market Research & Strategy, believes there is little to fear from housing at the moment but investors might find more attractive opportunities in shares.

Burning down the house

The view of rapid increases in house prices since 2011 has lead to fears around:

1. a housing bubble
2. the potential of a crash and mortgage stress
3. timing for a potential crash.

But are high house prices really a sign of bad things to come?

The truth is, the increases have been concentrated in areas with rising employment, incomes and population flows like Sydney and Melbourne, while others have just risen with inflation or even fallen like Adelaide and Perth (Source: Corelogic). Falling interest rates have offset increasing house prices so households are actually spending roughly the same percentage of their income on mortgage repayments as they did before the rapid rise in prices. Mortgage defaults are also lower than historic averages (Source: Reserve Bank of Australia (RBA)). This might change if interest rates or unemployment suddenly rise, but at this stage, interest rates are more likely to stay the same or even decrease.

Nothing lasts forever

The sharp increase in housing prices, even in areas like Sydney and Melbourne, is unlikely to last forever but doesn't necessarily mean a crash. While prices have increased, construction of new apartments has also been rapid. For example, developers added 30% to city apartment supplies in Melbourne, 36% in Brisbane and 18% in Sydney by the end of 2015 (source: RBA). This additional supply has seen rent increases slow down and vacancies rise, which should gradually translate to a slowdown in prices and construction.

So from an investment perspective, housing is likely to be less attractive over time because a greater supply not only means less opportunity to command high rent, but also less certainty of a constant rental income. But for owner-occupiers, this change may translate to some stabilisation in house prices and greater opportunities if interest rates stay low.

A share in time

Investors specifically targeting returns may need to extend their search beyond bricks and mortar. Currently, shares and listed REITs (listed property trusts) offer higher yields compared to the rental income and deposits from residential property (Source: Datastream). This is likely to continue over the next couple of years, particularly as supply in residential property increases, but also as the need for office space, warehouses and shopping centres continue to make listed REITs necessary.

An investment property may still be an important part of a portfolio, but it depends on what your goals and needs are, along with your expectations for returns. Shares and listed REITs can be a riskier type of investment, but do offer the potential both for higher gains or bigger losses depending on a range of factors.

Disclaimer

Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.