Bank predicts a climate good for investors, bad for renters

Posted on 17/01/2008  

Market fundamentals will get better and better for investors (and tougher for tenants and wannabee home buyers) over the next two years, according to the latest Australian Property Outlook from the ANZ Bank.

The report says "a dramatic tightening" in the housing market will force already-soaring house prices and rents sharply higher. "By 2010 we project a record housing shortage of nearly 200,000 homes, which risks becoming an intractable imbalance as renters and first-home buyers become collateral damage in the Reserve Bank's ongoing war on inflation," it says.

It points out the national vacancy rate is now the lowest on record (even below the previous low of 1.5% in 1982) and that rental growth in the year to September was the highest in 17 years. It also suggests significant rent rises are in the system because "lags in rental adjustment can be quite long", partly because many tenants are on leases of six or 12 months.

"There is clear evidence that rental momentum is already firing on all cylinders with rentals on to let properties jumping between 18% in Brisbane and 35% in Perth over the past year," it says. "With vacancy rates set to break new records in the years ahead, this upward re-pricing of rentals will continue for a considerable time longer."

In another positive for property investors, the report says residential real estate has delivered "vastly superior" returns to all other asset classes. "Housing has continued to deliver remarkably strong and relatively stable investment returns," it says. "Since 1984, residential property has enjoyed an extraordinary compound annual total return of 13.4%, only slightly below equities and far above both commercial property and bonds.

"But in risk-adjusted terms, residential property has delivered vastly superior returns to all other broad asset classes."

It points out that while equities and commercial property have both been volatile, with significant falls in values at various times over the past two decades, house price have "virtually never fallen" (with isolated exceptions).

"In risk-adjusted terms, since 1984, residential property returns have more than tripled those of equities and more than doubled those of commercial property and government bonds.

"More recently, residential property returns have accelerated, underpinned by buoyant economic growth and tightening market fundamentals that are driving both rents and house prices sharply higher. Despite a meltdown in US sub-prime mortgages and a crisis in global credit markets, the economic outlook remains supportive."

ANZ says Australia's prospects are much more closely linked with Asia, where the growth outlook remains positive, than the US. "Asia growth has effectively de-coupled from the US and the outlook for China in particular remains very strong. While the US has slowed sharply, we believe appropriate policy action will avert recession and global growth will remain well above trend at 4.8% in 2008 and 4.7% in 2009."

The report says "remarkable growth" in international migration (178,000 in FY2007) and steady reductions in the number of people per household have boosted the underlying demand for housing to 185,000 in FY2008, while rising interest rates and excessive infrastructure charges continue to delay the required recovery in home building.

"By 2009-10 we project a record housing shortage of nearly 200,000 homes," the report says. "This is extremely bad news for both first-home buyers and renters. The necessary rebound in housing supply will be difficult to achieve and house prices are therefore unlikely to fall. Historically, we have never experienced a major upturn in home building without a significant fall in interest rates ... Developer sentiment remains very subdued and we are unlikely to get anything like the required pickup in development activity."

The ANZ says total returns over the year to September 2007 were 14.3% in residential property, similar to retail property and better than industrial property. It says Brisbane, Melbourne and Adelaide all achieved total returns well above 20% over 12 months.


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