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?
Burning down the house
The view of rapid increases in house prices since 2011 has lead to fears around:
a housing bubble
the potential of a crash and mortgage stress
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.
We typically access property in the form of listed domestic and global REITs for our portfolios and continue to see opportunities in share markets in the coming year.
For more information on accessing property and shares for your investment portfolio, please contact your financial adviser.
This information is current as at 30/08/2016.
This document has been created by Westpac Financial Services Limited (ABN 20 000 241 127, AFSL 233716). It provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. Projections given above are predicative in character. Whilst every effort has been taken to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The results ultimately achieved may differ materially from these projections. Information in this document that has been provided by third parties has not been independently verified and Westpac Financial Services Limited is not in any way responsible for such information. Past performance is not a reliable indicator of future performance.
© Westpac Financial Services Limited 2016.