by Chris Becker
The always happy chaps at Commsec are out with their 2015 missive, while pitched at the “Mum and Dad” investor crowd does contain some interesting points, although complacency stands out, not a unique attribute.
Interestingly their take on Aussie property seems a bit bearish for a major investment house managed by the biggest mortgage lender in the land. The title of their report, “Will home prices slip or slump?” sounds a foregone conclusion until one gets into the juice:
It doesn’t seem to matter what shape the broader economic environment is in, there will always be some concern about the housing market. Seemingly home prices are always either running too hot, or alternatively prices are falling and putting at risk the wealth levels of Australians. Or there are concerns that home building is either too strong, creating the risk of over-supply, or that there is not enough building occurring, leading to rental auctions.
Ok, fair and level to start with although I don’t think there has been recent concern of overbuilding, as completions are only just catching up to approvals:
Let’s move on:
In the current environment, the main worry is that home prices are rising too strongly, resulting in some weakening of affordability levels of first home buyers.
Some? Theres not many left!
And the cause of Sydney’s bubble is not speculative demand, but basic economics according to Commsec:
Sydney home prices are merely responding to a shortage of supply as well as strong demand. A year ago the rental vacancy rate in Sydney was 1.6 per cent – an 18-month low and not far from the record low of 1.3 per cent. Interest rates are low, new building has been weak, returns outside housing have been low for investors and population has been rising.
So Sydney home prices have just been playing catch-up. Over the last decade Sydney home prices have risen by just 3.6 per cent on average per year, the second lowest of the capital cities.
But the supply is starting to rise. In the year to July just over 39,000 new dwellings were approved for construction. Over the next 12-18 months a record supply of stock will flood the market, leading to softer growth of home prices and potentially softer rents. In just four years, home building has doubled. But with the rental vacancy rate still low in Sydney, prices seem more likely to slip, rather than slump, and this will serve to reduce home price momentum in other regions.
Ah I see its all about Sydney to just “slip” in 2015. “Record” supply, households in an income recession, unemployment rising and a post-mining boom chasm arriving around mid year, with federal Budget chaos in the mix and we’re only going to see a slip? And the only real torque that could be applied to the market – frenzied Chinese investor demand – doesn’t even rate a mention, upside or downside.
Maybe I’m being a bit harsh here, and they do end on a less complacent note, although it is mixed with the usual “rivers are on average, only 3 feet deep” investment missive:
In 2015, investors will have to give serious thought to greater diversification of their investments – especially as the easy gains in home prices now appear behind us. Returns on shares and property have tended to coalesce over time – over the past 15 years returns on both assets have averaged 10 per cent per annum.
But for more sophisticated investors, the lesson to learn here is to observe quietly what the consensus conventional crowd are doing and preaching and position yourself thus to take advantage of their weight in trends and in their mistakes in not managing the risk.