It may be time to in­vest again

The Weekend Australian - Review - - Prime Space -

IS it safe to in­vest in res­i­den­tial prop­erty yet? I’m start­ing to think so. There are dan­gers. In par­tic­u­lar, the spec­tre of ris­ing in­ter­est rates. If in­fla­tion es­ca­lates next year, well, that could put a span­ner in the works. But there is an over­rid­ing pos­i­tive — we’re not build­ing enough and there is al­ready a sig­nif­i­cant de­fi­ciency of res­i­den­tial stock in Bris­bane, Syd­ney and, to a lesser ex­tent, Melbourne.

Pro­vided that we can ride out any set­backs, two to three years from now res­i­den­tial prop­erty in those cities will be build­ing mo­men­tum into a strong up­swing.

It was the Re­serve Bank that put an end to the last cy­cle. It was pre­ma­ture in the sense that there was no sur­plus of res­i­den­tial stock.

But, pet­ri­fied at the prospect of a con­tin­u­ing hous­ing prices

bub­ble’’, and us­ing only two in­ter­est rate rises, they talked a blue streak and fright­ened in­vestors out of the mar­ket.

Cer­tainly, some­thing had to be done. Prices were ris­ing un­der their own mo­men­tum as in­vestors kept up the pace and owner oc­cu­piers bought ag­gres­sively for fear of be­ing locked out of the mar­ket.

When the down­turn came, not only did in­vestors desert the mar­ket, but all the heat went out of the pur­chas­ing de­ci­sion for owner oc­cu­piers.

Mar­ket psy­chol­ogy switched from greed to fear. De­mand for prop­er­ties dried up. New de­vel­op­ment fell and the cy­cle turned down.

The prob­lem was that the set­back to prices was ac­com­pa­nied by a sub­stan­tial set­back to con­struc­tion.

The Syd­ney mar­ket pan­icked, with prices fall­ing by 10 to 15 per cent and con­tin­u­ing on a down­ward drift since then.

The num­ber of dwellings un­der con­struc­tion fell by a third, sig­nif­i­cantly be­low the un­der­ly­ing de­mand.

We’re not build­ing nearly enough in Syd­ney. There is al­ready a sig­nif­i­cant de­fi­ciency of res­i­den­tial stock and it’ll get a lot worse over the next few years.

The rental mar­ket is ex­tremely tight, with ris­ing rents and a short­age of stock.

Th­ese are the pre­con­di­tions for a sub­stan­tial up­swing.

The Melbourne mar­ket was less af­fected, with prices fall­ing only slightly be­fore re­cov­er­ing while con­struc­tion fell by just over 20 per cent.

Build­ing fell be­low un­der­ly­ing de­mand, but not by as much as Syd­ney, so that there is now a mod­er­ate de­fi­ciency of stock.

In Bris­bane, the down­turn came de­spite a sub­stan­tial de­fi­ciency of res­i­den­tial stock at the time.

Prices growth slowed to around the in­fla­tion rate so that prices stead­ied in real terms rather than fall­ing, and con­struc­tion dropped only mod­er­ately.

But here again we’re not build­ing enough and the al­ready se­vere de­fi­ciency is get­ting worse.

The up­swing is im­mi­nent — in fact, I think it has al­ready be­gun — but it will take time to build mo­men­tum.

Mean­while, the Perth mar­ket was so strong that it didn’t no­tice the other mar­kets had turned down, with the boom con­tin­u­ing and only now turn­ing down.

On the east­ern seaboard, tight rental mar­kets, ris­ing rents, in­suf­fi­cient build­ing and an in­creas­ing de­fi­ciency of res­i­den­tial stock are set­ting the stage for an up­turn, stronger in the mar­kets where the de­fi­ciency is greater.

In this en­vi­ron­ment, a rise in in­ter­est rates could pro­vide a set­back, but only tem­po­rar­ily.

Mind you, the next cy­cle won’t see any­thing like the mag­ni­tude of price rises that were ex­pe­ri­enced in the last one.

Af­ford­abil­ity will re­main an is­sue, con­strain­ing the next round of price rises. But it will still get worse from here. Rents will be much higher in the next cy­cle.

What we will see in the next up­swing is a strong rise in res­i­den­tial build­ing, mod­er­ate in Vic­to­ria but much stronger in NSW and south­east Queens- land. And the real strength of the up­swing will be early next decade. At the peak of the next cy­cle NSW will need to build 60 to 70 per cent more houses than at present to off­set the de­fi­ciency of stock and cater for on­go­ing un­der­ly­ing de­mand. And we have to ask whether we will have enough ap­pro­pri­ately zoned land when the de­mand comes through to pre­vent an es­ca­la­tion in the cost of hous­ing lots feed­ing through to Syd­ney hous­ing prices.

In Melbourne, the avail­abil­ity of rea­son­ably priced land not too far from the city will keep a lid on price growth through the next cy­cle.

Bris­bane is set­ting up for a boom.

Is it safe to in­vest in res­i­den­tial prop­erty yet? For me, the an­swer is yes. Cer­tainly, rents are sub­stan­tially lower than in­ter­est pay­ments — and that tends to sug­gest de­lay­ing the pur­chas­ing de­ci­sion for an owner oc­cu­pier. For in­vestors, yields are far too low to make hous­ing in­vest­ment at­trac­tive with­out sub­stan­tial cap­i­tal growth. It will take far too long for strong rental growth to in­crease yields suf­fi­ciently. And we can’t ex­pect the cap­i­tal growth ex­pe­ri­enced last cy­cle. But a lot of the risk has gone out of the mar­ket and re­turns will be ex­cel­lent when they come. Mean­while, the first lots of buy­ers are dis­cour­aged renters.

In some cities, it may take some time for the up­swing to come through. And a rise in in­ter­est rates could pro­vide an­other set­back.

How­ever, given the de­fi­ciency of res­i­den­tial stock, a pa­tient in­vestor or owner oc­cu­pier could do worse.

In Syd­ney and Melbourne there’s still plenty of time to find the right prop­erty.

In Bris­bane, there’s less time.

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