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  3. Property, still a safe bet?

Property, still a safe bet?

By Paul Miron*
Posted on 09 August 2021 — 23:13pm in Property, Investing, Inflation

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The latest official property data figures have been released, indicating house prices in some capital cities in Australia have risen as much as 29% [1]—the sharpest increase in the residential property market since 1988.

What makes this even more astounding is that this occurred during a once in 100-year pandemic and negative net migration growth, the first time since WW2[2].

While most of us are scratching our heads in disbelief, bank economists are upping their forecasts. Their consensus is that the property market still has another 10-17% in appreciation to go in the next 12 months[3]. Bank economists have mostly got it wrong during COVID-19, initially predicting that property prices would drop by over 30% in 12 months. The prices increased by over 15%.

Some of the key questions to ask are:

  • What are the critical drivers of property prices?
  • Are there any structural changes anticipated in the property market?
  • Are there any other factors that play a role in contributing to property prices?

As much as a 14% increase in property price can be directly attributed to a 1% decrease in interest rates according to RBA's modelling[4].

Low interest rates are undoubtedly the single most significant factor that drive property prices. Other factors to consider are: building approvals and efficiency of the planning process (supply of property; net migration (increases demand); employment; and vacancy rates.

Perhaps the most eloquent modelling recently undertaken is by the RBA's Peter Tulip, which quantifies a premium attributed to property prices due to lack of supply and planning constraints.

 

Sydney

Melbourne

 

 

 

Additional cost to houses

$489,000

$324,000

% to the total value

73%

69%

     

Additional cost to units

$355,000

$97,000

% to the total value

68%

20%

Peter Tulip's paper attributes house prices to be 73% higher in Sydney and 69% higher in Melbourne, primarily due to the lack of additional land supply and unit approvals[5]. From an urban planning perspective, there is a constraint of available land.

New land releases are not cost-effective for the government due to the increased cost of providing infrastructure to support new green-fill suburbs. Continuing with the urban sprawl as a solution may have outlived its lifespan. It is not surprising that Treasurer Frydenberg is establishing a parliamentary committee to inquire into housing supply. Its conclusion will most likely align with RBA's research – need for more building approvals and a more efficient and robust planning process.

Importantly, new land releases are the best antidote in keeping prices low. This would avoid the need for macroprudential intervention to make borrowing money harder by dampening demand or increasing interest rates to reduce property prices. These actions are ultimately counter-productive in making housing more affordable.

With property prices continuing to rise, diminishing affordability for first home buyers, this issue will become a powerful political platform for debate in the next election. It is important to note that the custody of the planning process is with both state governments and local councils. And although the Federal government is responsible for financing major infrastructure, voters' perception is that planning is a federal Issue and responsibility.

COVID-19 lockouts have resulted in net migration being negative, which has dramatically reduced the demand for units. CoreLogic data below shows the premium houses command over units has never been higher[6].

 

Credit: CoreLogic

It is easy for property commentators to conclude that units are less desirable; people have lost confidence in living in units during the pandemic. Recently publicised cases such Opal towers and others have created reduced interest for units.

As Australia's property market grows and immigration recommences, the Sydney, Melbourne, and Brisbane units' market will have commonalities with other cities such as New York, Paris, and London. Units in these cities are not considered a secondary option to houses but a complimentary option due to the ability to live in desirable locations, close to amenities, schools, transports, entertainment, work, and avoiding the need for motor vehicles.

Units in Australia have historically catered for: a transient purchaser who wishes to live in an apartment temporarily until they can afford to buy a house; overseas students; a cheaper investment property option. As a result, units are generally smaller in size with lower quality building finishes.

On the flip side, we believe there is a strong demand for larger, high-quality apartments. This high-end unit market is expected to grow further as the baby boomers look towards their future accommodation needs, and conventional houses will not fulfil their needs.

The state government is acutely aware of these issues and appreciates that building the correct type of units to meet market demand will keep affordability down and cater to the broader market. In anticipation, the state government has just implemented a raft of changes to ensure that build quality will continue to improve with further enhancements to the minimum standards to increase apartment sizes, natural sunlight, and general amenity for new unit developments.

The NSW building commissioner David Chandler publicly names and shames builders ensuring that developers pick up their game which in turn will protect purchasers. This will restore confidence for purchasers wishing to buy apartments, especially those who want to buy off the plan.

Despite units performing relatively poorly compared to detached houses, we believe that there will be an increase in demand for units. The challenge will be for quality supply as the demand increases. The consumer will be increasingly selective, expecting a superior or equal liveability offered in an apartment to that of a house.

In summary, as in the past, property will continue to be resilient, forming the backbone in making the commercial mortgage sector the sector that provides asset preservation that investors want along with regular income distributions. We see a lot of opportunity within the market in the coming years for our investors.

*Paul Miron, Managing Director, Msquared Capital. Paul has over 20 years’ experience in banking and commercial finance. He started his career within the business bank of Colonial State Bank. After becoming a senior banker, he started his own financial services business over 16 years ago. Miron’s expertise is economic theory and market trends, which is pivotal to assessing which investments MSQ looks to provide to our investors. 

 Msquared Capital offers investors the opportunity to create a diversified portfolio of mortgage investments using appropriate tools and a proven platform to invest intelligently. Investors are paid consistently and on a monthly basis, whilst their investments are secured by registered first mortgages over quality real estate assets on the eastern seaboard of Australia. It has never been more important for investors to have the peace of mind that comes with first mortgages than during turbulent times as they have proven to withstand an unexpected economic shock. For more information, please contact Msquared Capital.

[1] Australian house prices: Grim picture for housing affordability as pandemic prices skyrocket (domain.com.au)

[2] Centre for Population

[3] https://www.theurbandeveloper.com/articles/sydney-housing-market-update

[4]  https://www.rba.gov.au/publications/rdp/2019/pdf/rdp2019-01.pdf

[5] https://www.rba.gov.au/publications/rdp/2020/2020-04.html

[6] https://www.corelogic.com.au/news/premium-houses-over-units-has-hit-record-highs-which-capital-city-shows-biggest-gap 

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