The Greatest Article Of All Time

‘Impossible is just a big word thrown around by small men who find it easier to live in the world they’ve been given than to explore the power they have to change it.’ RIP Muhammad Ali 1942 – 2016

I was asked by a colleague yesterday how I saw the property market playing out over the next decade. Our role, and that of any diligent research organisation, is more about making a relative judgement on the merits of alternate investment opportunities rather than directly forecasting future performance. I do realise, however, that the question plays on the mind of many of you reading this now, and so deserves to be addressed:

Bubble Babble 

The first thing I’ll point out is that the Australian property market has a long history of steady performance (click here for more detail). For that perpetual talk of a bursting bubble to fall true we’d need no less than an economic meltdown, drastically higher interest rates, loss of jobs and an unprecedented evaporation of demand. The probability of one of these is unlikely, let alone all in unison.

Demand

While often noted that Australia’s population growth has been slowing in recent years, it is still the fastest in the OECD after Israel and Luxembourg, and considerably faster than other comparable advanced economies such as Canada, the United States and The United Kingdom. By 2031, it is estimated that more than 30 million people will call Australia home, six million more than 2016 levels. Over the 20 years to 2031, Australia’s four largest cities will need to accommodate an additional 5.9 million people.

Melbourne remains Australia’s fastest growing city and continues to record the highest levels of net inflows, averaging close to 2,000 additional residents each week for the last three financial years. Even in our least affordable market (Sydney for those of you that live under a rock), almost all locations within the inner, middle and outer rings are expected to have far stronger annual dwelling requirements over the next ten years than what was seen completed on average over the past five years. A demand cycle like this limits the probability of a protracted market correction, let alone a significant reduction in prices. (Read more here: http://www.planning.nsw.gov.au/Research-and-Demography/ Research/Housing-Monitor-Reports).

Follow the Jobs

Over the 12 months to November 2015, the strength of urban areas and diversified cities is apparent; 79% of all net Australian job gains occurred in Sydney, Melbourne, Brisbane and Perth.

Affordability is King

The middle rings of Brisbane and Melbourne offer a combination of connectivity to the city and value that position them well for strong demand over the coming decade. Although not exclusive to these locations, this combination can be found most acutely here, at least in the near term.

Interestingly, the price to income ratios of suburbs located within the middle ring of these cities tend to be markedly lower than those in the inner ring. For example, the price to (household) income ratio in Inner Melbourne’s Kew is 11 (i.e. the average priced home is 11 times annual household income) as at May 2016 and a comparatively lower 4.6 in middle ring Roxburgh Park. It goes without saying that the lower the ratio, all else equal, the higher the potential for growth given relatively high disposable income. Of course, affordability is not the singular driver for capital growth, but rather must coincide with a strong jobs market and population growth as I indicate above.

Australia’s property market is a resilient one; underpinned by strong population growth and a diversifying economy. In the medium term, we’re likely to see a period where prices steady in locations with relatively high price to income ratios (sorry, Sydney) and outperformance in those that more acutely possess the attributes I describe above. The silver lining? The recent property upswing, spearheaded by Sydney, has resulted in the city’s inner suburbs having levels of equity of more than $500,000 with the majority of inner, middle and outer ring locations having equity levels greater than $400,000!

I’ll leave you with this note; property booms are born on pessimism, grow on scepticism, mature on optimism and die of euphoria. Your role is simple: invest long term and capitalise on as many booms as possible.

 


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