Property Investment - Free Financial Advice for Australians

As financial advisers we are often asked to comment on the property market. Excluding your own home, I am not a fan (as many of you know) of residential property as an investment simply because you have more control and better returns from the stock market long term. The stock market also allows you more flexibility and diversification with your investments. The only reason property remains a favourite investment vehicle with some Australians is the gearing aspect and some tax benefits, but with rising interest rates this becomes far less attractive. Holding costs are far too high and the returns are likely to be negative.

Home owners in Australia who have a mortgage are now paying the highest repayments in the world. According to a recent survey in the magazine The Economist we are also the most overvalued residential property in the world.

In Australia we are seeing an increase in defaults, but will property prices fall in line with the US and the UK?

If we look at the US, house prices have decreased for the first quarter of this year by 7.7%, that's the biggest quarterly drop since records began. Houses in parts of Florida and California have dropped by 30%, which means if you bought property in Florida with Australian dollars over 12 months ago that's almost a 50% drop.

To put it another way, with the increase in the Australian dollar we can now buy properties in some parts of the US that are 50% cheaper than last year. So for example you can now buy a property in the US that was worth a million (US) dollars 12 months ago for less than the median Sydney house price of $500k. That's a massive drop, certainly much more than the recent stock market drop; who said shares were more volatile than property? The practice of using your home as an ATM that has become popular over the past few years is over. Many home owners in the US are experiencing negative equity (where you owe more money than your home is worth), and many more will experience this in the months to come. The slide in the US property market also means that investors who bought property as an investment vehicle using borrowed money will have suffered terrible losses.

As we know, all this has been fuelled by the US sub prime crisis.
If we look at property as a multiple of the average wage, Australian property prices are around 10-12 times the average wage, compared to say Britain where the average house price is 6 times the average wage. In the UK this is still higher than the historic average of around 4, which means in Australia we are extremely overvalued compared to the rest of the world.

However we read today that BIS Shrapnel are forecasting Sydney houses are 'Set to Soar' (SMH 16/6/08) - define soar!! If we read closely it's only a few percentage points that are being predicted, and these same commentators say that some easing is expected in 2010 and 2011. That's hardly soaring. It's always nice to get differing opinions and there are plenty of them when it comes to discussing property.

Are we headed for a property crash?

Speaking to real estate agents in Melbourne and Sydney the property market is dead. Sellers are on hold knowing they will not achieve the price they want and buyers are waiting for a further price drop. The first quarter results for 2008 showed Australian house prices were down 3% for the quarter. One real estate agent told me a unit that went for $327k 18 months ago in the northern beaches of Sydney sold last month for $230k. That's a big drop in 18 months.

Fortunately there are a few factors that will keep property prices stagnant rather than send them crashing. One factor is record employment levels, thanks to our resources boom, which means people can still make their mortgage repayments. The other is supply and demand. From the supply side, high interest rates mean a high cost of development so we're seeing low levels of home construction. Add to this the tightened lending conditions from the banks and it all helps to limit supply, which tends to hold up prices. However if any of the above factors change we could have a more severe down turn in the property market in Australia instead of a period of stagnation. I think the house you buy today will be the same price in 12 months or slightly cheaper. So for the above reasons I wouldn't be rushing out to buy an investment property or my first home any time soon.

Maybe you should consider buying a ski lodge / home in the US with a few mates. But then again, wait and it may be even cheaper next season.

To buy or sell - thoughts on property investment

Property: Should we be buying or selling now?

Are we headed for a property crash?

Article originally published in June 2008.

Venn Williams - Halogen Pty Ltd