High Rise Property

by daniel archibald

Why do Australians love property so much? What is it about this form of asset class that cultivates such passion and long-lasting interest and enamour? Maybe it's because of its tangibility – i.e. the fact that you can touch it, smell it and know everything about it. Or maybe it's the greater sense of control over the investment you feel as you improve its value through some minor renovations or a new paint job, or as you lift up rent by another $20 per week. Or maybe it's the fact that you can own an asset worth a few hundred thousand dollars when you only need to put down a much smaller deposit.

 What ever the case, we're in love. But is the honeymoon over?

Back in 2009, I wrote about the state of the residential property market. At that point in time, prices had slumped in Australia and banks had reined in their lending practices. There was also the perennial push to open up more land for development and increase supply along with banks stretching out their margins. Most of Australia was also in a recession.

At the time I laid out reasons why property might be about to bounce back and listed the following points:

  • Prices had already slumped, removing some of the downside risks
  • Over supply was not likely to be a problem in Australia's major cities in the medium term
  • Interest rates were low and not likely to jump high any time soon
  • Stimulus measures were likely to support property
  • SMSF access to geared property meant a whole new supply of investors would come on board

As we have seen over the past 6 years, residential property has really gone from strength to strength. Higher unemployment and the end of the mining boom have had no meaningful effect on prices yet and auction records continue to be set. Other areas that have seemed to underpin this price growth might include lower interest rates and overseas buyer interests, but even so, property prices have surged much more than most were predicting back in the dark days following the GFC.

 So the question now is "where are prices likely to head?

Speak to most international commentators and economists and they are likely to tell you that Australian property prices are heavily inflated. But they've been saying that for the last decade. With the fall in the $A, our units and homes are looking even more attractive to overseas investors, despite the high prices. But when does the party end, or does it just keep on going?

It would be somewhat foolish to predict that prices can continue to rise forever. Especially from an asset class that has no real value drivers other than inflation. But it could also be unwise to predict any major fall in prices, especially given the ongoing demand-supply characteristics of Australian residential property.

As with most markets, the trend is your friend, until it isn't. Panic buying, which can happen just as an asset bubble is about to burst, hasn't seemed to happen just yet. This would hopefully reduce the likelihood of a dramatic correction.

And even if we do get a sharp fall, surely Australia's love for property is likely to overcome such temporary difficulties…


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