My view is that residential property in Australia has a favourable long term outlook, particularly for high quality assets within close proximity to our major capital city CBDs. This article explains why.
Please note the following qualifiers before starting though:
- Given my work as a finance broker, my view is inherently biased, however the asset class is one that I genuinely believe in and am heavily invested in personally
- Not all markets are created equal, there will always be markets that outperform the averages, and from a financial standpoint these are the areas/properties buyers should be targeting
- If your pessimistic on the Australian economy as a whole, question whether creating exposures more towards cash, business or shares will yield superior outcomes for you
- It’s unfair to directly compare the residential property market in Australia to other residential property markets in different parts of the world, our banking system, demographic trends and attitude towards property are entirely different (more on these points below)
- Buying high quality established housing in the inner city and middle ring suburbs around our major capital cities is not an ‘out there’ concept, most people who have done this over the past 30 years have made a lot of money, particularly if they have strategised and financed their purchases sensibly
- Following the strong growth in house prices both Melbourne and Sydney have recorded between 2012-2017, it’s not unreasonable to assume the next 3-5 years may be slower, this doesn’t undermine long term prospects though (and if you’re more reliant on short/med term growth perhaps one might consider other capital cities)
- Asset selection will become increasingly important, it’s critical to ‘buy well’ and depending on your circumstances you may also look at securing a property where you can add value yourself (e.g. through renovation or development)
Ok, we can get started now…
Like all markets, our property market is underpinned by the simplest law of economics… Supply and Demand.
Here are my 6 reasons to suggest that over time demand for well located residential real estate in Australia will outstrip supply, and therefore drive up prices.
#1 Strong demand – We have a love affair with property
Australia’s property market has become underpinned by a high degree of home ownership, which is now estimated to represent 70% of the residential market [1].
Since the period following WW2 this has been supported by the ‘Great Australian Dream’ – the idea that home ownership leads to a better life – and even within today’s more multicultural population, most Australians are still aspiring towards it.
The pursuit of home ownership keeps demand strong and creates stability in prices, particularly in the more desirable areas (closer to the major capital city CBDs) where people want to live.
#2 Strong demand – strong population growth will continue
Today one of the key reasons our cities need supportive policy to promote population growth is because our baby boomer population is now starting to exit the workforce. This creates job vacancies which need to be filled by new workers, otherwise Australia’s tax base would erode, budget pressures would exacerbate and our prosperity would be undermined.
Australia’s population growth over the last decade has been strong (up over 20% from 2006 [2]), and this trend is expected to continue.
Sydney and Melbourne are expected to gain a further 3 million residents by the mid-2050’s, and Brisbane and Perth are expected to gain 2 million more each as well. The expected growth rates for our five major capital cities are Perth 127%, Brisbane 81% Melbourne 59%, Sydney 56% and Adelaide 37% [3].
These growth expectations are positive for house prices because new entrants to an area need homes, which fuels demand.
#3 Strong demand – Our economy will keep growing (driven primarily by demand from China and India)
Australia is gifted with natural resources, and many of these resources are in strong demand globally.
According to PWC, China is already the world’s biggest economy (as measured by Purchasing Power Parity, a proxy for total output adjusted for price level differences across countries), and India has the potential to overtake the US as the world’s second largest economy by 2050 [4].
The shift in global economic power to the economies of China and India will be of major benefit to Australia as a major trading partner. Economic growth creates jobs, and jobs in turn create housing demand due to improved affordability.
#4 Strong demand – Housing demand from China will continue
Melbourne and Sydney property prices are cheap in comparison to Beijing and Shanghai.
According to the investment bank Credit Suisse, a 2 bedroom apartment in Shanghai cost around A$900,000 in December 2016. The same property in Sydney was 25% cheaper. Similarly the rental yield for apartments in Shanghai was only around 1.5%, and the equivalent yield in Sydney was about double that [5].
Australia is also seen by the Chinese as having a sound political, legal and economic environment. Property rights in Australia are enforceable and real estate investment is regarded as a secure store of wealth. People from China also see Australia and a great place to educate children.
All these factors suggest Chinese demand for Australian housing is likely to remain strong, despite increased costs and various impediments [6].
#5 Strong demand – Interest rates may remain low
We live in a world today where economic forces are pushing interest rates in a downward direction. And low interest rates make borrowing more affordable, which drives demand and props up property prices.
In 2016 inflation rose 1.5% which was the lowest calendar year increase since 2008, and as at July 2017 it has been 6.5 years since inflation was above the RBA target range of 3.0% [7].
Although rates may not be cut further, as our underlying economy is quite strong (corporate profits are at 33 year highs [8]) and such a move would pose numerous other risks (particularly to our dollar), it’s conceivable that we will sustain a relatively low interest rate environment at least in the short term.
Furthermore, if interest rates were to increase, the consensus is that increases would be slow and gradual due to our level of indebtedness.
#6 Shortage of supply
There’s no new land being released in the suburbs close to our major capital city CBDs. These are the areas near to where most people work and want to live though. This is what creates a supply shortage, which drives up prices.
According to the Grattan Institute over 60% of new jobs are created within 10km from our major capital city CBDs [9].
The majority of new jobs are coming from our knowledge industries like healthcare, scientific and technical services, construction and education [10]. Jobs in agriculture and manufacturing (which tend to be located further away from our CBDs) are now in decline.
Supply can be increased by building more medium/high density housing around the CBDs, but that’s difficult with slow planning processes and other impediments to developers like high costs and additional infrastructure requirements, which no one wants to pay for.
If one day all the red tape for developers gets cut and development feasibilities improve, then inner city and middle ring housing supply could be increased. However if you’re fortunate enough to own ‘land’, and high quality established dwellings in these locations, then they become more scarce under this scenario. Developers may even offer you a premium for your site if they can develop it.
In Summary
In summary, my view is that residential real estate in Australia is well positioned to experience continued long term capital growth. The demand/supply equation which sets prices appears to be most favourable in the inner-city and middle ring suburbs surrounding our five major capital city CBDs.
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