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Written by Guest author Terry Taylor
In the Weekend Australian March 18-19 2017, an article was published titled “Listen carefully… that’s the sound of the property market tipping over”. It was written by Roger Montgomery, the founder and chief investment officer of the Montgomery Investment Management. Mr Montgomery has been commenting on property for quite a number of years now, mostly negatively, despite the fact that there is no evidence that he is involved in the property industry. This probably means that his view is not that balanced, but of course we are used to people who are not involved in the property industry commenting negatively on the industry.
Mr Montgomery starts his article by saying “It has begun. The much maligned prediction of a sell-off in property prices is beginning to come true.” In the article a number of assertions are made which are either not correct, misleading or at the very least, don’t tell the whole story. A similar article written in 2004 and published in BRW and the Melbourne Age by John Stensholt and titled “GOING, GOING …” and with a subheading of “Property prices are dropping, auctions are failing and buyers are suing to get out of contracts. The property party is over” shows that these types of negative articles have been with us for a very long time.
Despite all of the doom and gloom forecast in John Stensholts’ article the actual performance of the market in the 12-year period since that article was published, shows that prices have actually risen by approximately 66% in Sydney, 79% in Melbourne and 53% in Brisbane. When other capital cities are taken into account the median growth in prices in Australia for that period was 76%. Those people who chose not to invest during that period because of the negative commentary have clearly missed out on the long-term gains that residential property has provided over extensive periods of time. Property is not, nor has it ever been, a short-term investment.
Of course, what Mr Montgomery and many others are mostly talking about is the rapid price growth of well-located properties in inner city Sydney and Melbourne and maybe to a much lesser extent, Brisbane. Now if you are one of the lucky owners of one of these properties congratulations but for most Australians this is not the reality of their world nor is it a property market which affects them. The negative commentary that is dished up daily to us in our media does however affect them and is having a real effect on confidence which is a dampener for business confidence and flowing on from that, jobs and wage growth.
Properties outside of the prestige areas in our major cities will in all likelihood experience growth in price but that growth in those outer areas will be nothing like the growth of prices in say the Eastern suburbs of Sydney, harbour-side properties and similar locations in inner-city Melbourne.
The reason for the specific property price explosion that the commentators are regularly talking about is that the populations of these inner-city locations of Sydney and Melbourne have been growing rapidly because this is exactly where most financially successful Australians and other international citizens want to live.
Sydney and Melbourne are now international cities desired by people from all over the world. Brisbane will get there at some stage, it is next on the list and Australia’s population growth will ensure that our other capital cities will eventually get there too. Who wouldn’t want to live in Australia. There is limited availability of land in the inner city desirable locations of our capital cities which is where more people want to live than there are properties available. This is a supply and demand issue and is nothing new. The same limitation applies to any major city anywhere in the world.
So, to address some of the comments in the article. An early comment in the article is that interest rates are now lower than any time since Captain Cook. Now we know that that’s a tongue-in-cheek comment. But interest rates have never stopped anyone buying a property. People buy when there is confidence and most people through a lifetime of experience have confidence in property. The ASX’s latest 2016 Russell Report, probably the most balanced of all-asset type performance reports produced in Australia, shows that over the last 10 and 20 year periods, residential property has outperformed every single other asset class in Australia, bar none. For your interest, we have attached a link to that report so that you can read for yourself what is actually been happening in the Australian markets, including residential property, over very long periods of time.
Mr Montgomery’s comment that the boom in property prices has everything to do with low interest rates is not correct. It is a furphy. Perhaps it may be true in the financial markets that he operates in but it is not true in the case of property. Every residential property is going to be someone’s home. The last period of low interest rates similar to those being experienced in Australia now, was 1959 to 1970 during which house prices growth according to ABS data grew by only about 30% Australia-wide. Clearly low interest rates aren’t the main catalyst for price growth. The reason for the price growth is lack of supply and increasing demand for properties in specific locations.
Most readers might be too young to remember what interest rates were like 50 years ago but interest rates in the in the early 50’s were below 5% followed by a sustained period over 10 years of housing loan interest rates between 5% and 6% similar to the rates we have now. In this latest and current cycle interest rates have only been at the 5% level for about 3 years. We can’t project where interest rates will be in the future, but it is not unreasonable to think that interest rates may stay relatively low for quite some time yet.
Mr Montgomery then says “Surging house prices have nothing to do with a shortage of land”. Does he, can he really believe that? We know we have lots of land in a country the size of Australia, but most of it is not in the centre of our capital cities. The fact that the bulk of Australia’s population lives in our major cities around the coastline of Australia is indication enough of where the majority of us want to live. It is also where the scarcity of land within the desirable areas of these major population centres that demand is greatest and prices of property are at their highest. This is certainly not going to change at any time in the future and to suggest that house prices have nothing to do with the shortage of land is a complete distortion of the facts and could not be justified on any reasonable understanding of the facts.
A further example is Mr Montgomery’s comment – “And yields cannot fall much further when your oversupplied property is vacant and your yield is zero – as many leveraged Brisbane apartment owners are about to discover”. Whilst it is reasonable to expect that rental yields will rise and fall depending on supply, markets always self-regulate so that any oversupply is relatively quickly absorbed before the next building cycle begins.
With respect to those inner-city rental yields falling to zero it is quite clear from the actual rental statistics provided by the REIQ (real Estate Institute of Queensland) and Urbis that those vacancy factors have only risen by a fraction of a percent and are already correcting as inner-city properties are absorbed. Where rental vacancies are likely to rise is in locations further away from the lifestyle amenities most people want these days. The market evidence is indicating that people are choosing to move closer to the city and, because property prices are so high for inner city houses, they are choosing to forgo space for amenity by living in more medium density property.
For many years now I have been commenting and writing on demographics in Australia and how household formation was reducing the number of people who were going to live in each household. It is only couple families with children who actually need a house with a block of land and there is increasing evidence that even some of those families are choosing to live in more medium density accommodation to get closer to the amenities they want and to reduce travel times to work.
A large percentage of couples without children, single person households and shared households, actually prefer something to live in that is not on the outskirts the city. With today’s busy lifestyles they don’t want all of the maintenance that an individual house on a decent size block of land requires. In fact, if you haven’t noticed, blocks of land that people are building houses on today have reduced in size substantially with most family homes basically covering the entire size of the block and leaving no land available anyway to play cricket in the backyard. Many of our medium density properties have many more lifestyle amenities for families to use including being closer to large parks where you can actually have a game of cricket.
Please note I’m not saying everybody wants to live in a large inner-city tower, I’m just saying more of us want to be closer to where we work and to the lifestyle amenities, cafes, shops, etc. that we have come to love so much. Lack of appropriate infrastructure, increasing commute times from the outer suburbs where most of the single dwelling houses are and are still being built has also caused people to re-think where they are going to live.
A good example of this is in Brisbane where people are choosing to live in apartments closer to the centre of the city. The statistics verifying this move to inner city living are supported by local inner-city schools, such as Brisbane State High School and the West End State School (WESS). According to the WESS’s own records more than 62 percent of all students attending their school are from families who live in nearby units (apartments). There has been a complete failure to plan for new schools in the inner-city areas where people want to live. Of course, the authorities will find a way to fix the problem because they really have no choice other than to provide amenities in the areas where people want to live.
Perhaps we need to build vertical schools to conserve land in our inner cities but that story is for another time. Notwithstanding, this is a trend that is set to continue as the populations of our cities continue to grow. Parents are selecting well designed apartments, if they can find them, and that’s a challenge, to live in to reduce their commute times to work and to get their children into the school catchment areas they want.
Further, the evidence of this shift is clearly seen in the statistics and once again which is in total contradiction to the context of the article published in the Weekend Australian. The statistics show that vacancy levels in these inner-city areas are actually not increasing significantly, despite the fact that there has been a substantial increase in supply, which is required to meet the changes in demand for properties closer into the city.
The jury is in and the verdict is that people are choosing, in numbers, to move closer to the central infrastructure of our major population areas. This is why developers and lenders and government authorities, state and local, have agreed that more property needs to be built in those inner-city areas. Clearly you cannot increase the number of single lot houses in areas close to those central locations. The only alternative is to build medium and higher density residential properties which is exactly what is happening.
Vacancy rates in these types of properties, if they do increase, will fall back rapidly as the new property coming to the market is absorbed and few newer developments are brought to the market. The market is self-regulating as it always does and will continue to do so. The challenge however is to build more appropriate properties for families to live in, in the areas close to the amenities they want. It’s not easy to find properties that have been designed as well as they ought to be with good floor plans which accommodate proper family living. At Specific Property, our selection criteria for an acceptable investment or a future home is that these properties must have well designed floor plans and be able to accommodate real-size furniture.
NB Prices can fall in property markets but not for long and by much if the properties are where people want to live and if demand is increasing. Where demand is greater than supply then prices will have no choice other than to rise in line with the cost of building and the increasing cost of land in the desirable areas where people choose to live.