Australia's natural resources have provided prosperity over the years. Our nation's wealth has come from farming or mining the land, the current generation of investors has prospered from either buying it or building on it. There has been an over reliance on property as a wealth-building asset that householders, lenders and investors share a common interest in property performance.
Mortgages make up for nearly 70% of our major lender’s balance sheets;
Real estate assets form over 40% of the total assets held by Australians; and
Residential property investment has delivered outsized returns of over the past 15 years.
It should come as no surprise that conversations with investors will start and finish in a dialogue over the outlook for property market.
There are some key issues that are weighing on housing conditions and why we are bearish on this investment asset class.
There is a significant unevenness between supply and demand in some markets. Historically, housing activity was supported by rising demand driven by population growth, but this trend has reversed, particularly in cities with a greater exposure to the mining investment boom. Similar concerns have been raised in the apartment markets of Brisbane, Melbourne and Sydney. The risk may be more manageable as local and foreign demand remains relatively strong, though the sizeable amount of work in the pipeline and increased scrutiny on foreign investors are likely to contribute to a moderation in new investment in the two cities.
Rental conditions are restrained. Vacancy rates in Perth and many other small regional cities across our nation that have risen sharply and are now more than double the national average. Vacancy rates in Brisbane, Sydney and Melbourne have risen by only the smallest of amounts, but rent inflation remains around a decade low.
Housing affordability has been on a structural decline as house price growth has eclipsed household income growth over the past two decades.
Credit growth has tightened. Macro-prudential measures introduced in late 2015 were temporarily successful in slowing investor borrowing. But investor appetite has returned, raising the possibility of further tightening by the Australian Prudential Regulation Authority and lenders taking direct action by lifting interest rates for this class of borrowing.
This leaves only one factor that currently supports the status quo of housing market conditions: record low interest rates. But the extent to which low rates can continue to support the market is expected to be limited.
Time to Re-Calibrate
Fundamentals are weakening. This weakness is occurring at a varying pace in each of the cities around our great nation. Investors should re-calibrate their thinking that the housing boom will continue indefinitely. Now is the time to check that your portfolio has the right level of property exposure.
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