Now is a time for caution in residential property investment with Sydney and Melbourne currently appearing expensive with prices likely to fall further and very low rental yields.  Top to bottom falls could be around 20% (for Sydney and Melbourne).  If you are patient, over the very long term, residential property adjusted for costs provides a similar return to Australian shares.

Sydney and Melbourne property prices had risen significantly and have fallen for 12 months in a row, and prices are also falling in Perth and Darwin.  There have been price surges since the mid 1990s with prices expensive relative to global standards, long term trend, rents and relative to income.  Low interest rates have contributed and also made it difficult to save a deposit.  Household debt has gone from the low end of OECD countries to the top end.  A range of factors have contributed including:

  • Increased borrowing power due to the shift from high interest rates to low rates over the last 20 to 30 years.
  • Surge in population growth from mid last decade, above previous trend.
  • inadequacy of supply due to tight development controls and lagging infrastructure.

It is likely that prices will drop further due to:

  • fewer buyers
  • tightening bank lending and greater difficulty for investors
  • interest only borrowers shifting to principal and interest and therefore increased servicing
  • banks withdrawing from SMSF lending
  • a cutback on foreign demand (Chinese investment fallen by roughly 70% since 2015)
  • rising unit supply (one to watch in Brisbane) with Australia’s residential crane count of 528 which is way above the US total crane count of 300 and Canada with 123.
  • expectations that prices will fall which will fuel people’s behaviour.
  • concerns that a change of government may effect negative gearing and capital gains tax concessions.

Please see the full article for the house price outlook, thoughts on why a crash (a 20% or more fall in national average prices) is unlikely, and the effect of the property cycle on the economy.  Shane does suggest that the RBA will likely keep interest rates on hold until 2020, and may actually have to reduce rates.

You can download and print the full article here.

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About the Author

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.

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