Like in any market property price growth is primarily a function of the demand for and the supply of housing. The demand for housing is a product of its necessity and of the population size and forecast growth, currently at record levels both current and projected. It’s also influenced by government policy, incentives, consumer confidence and the unfortunately at times, the media!
The supply of housing is the sum of the existing stock of housing plus the level of new construction. In a perfect market an increase in demand stimulates an equal response in supply and prices are maintained at ‘equilibrium’ but Australia’s housing supply response is constrained by ‘structural’ issues that aren’t easily addressed in the short term.
The property market is also a misnomer. The housing market is made up of a number of different markets depending on the location, type and price. Like the economy, the housing market is travelling at a couple of different ‘speeds’ – some sectors struggling, some doing OK and some ‘booming’.
It has become more important to pick the right markets within the housing market, to not follow the crowd and to identify the ‘above average opportunities’, based on population growth, historical capital growth, median prices points, macro and micro drivers of the local economy, management options, your own ‘risk style’ and of course, the ease of exit when gains are to be realised.
Profit is ‘the return to risk’ but ‘bricks & mortar’ as an asset class is a relatively predictable, safe, reliable and attractive option:
- Inflation favours tangible assets
- Low volatility over time.
- Real estate ranks between fixed income and equities on the risk return scale
- The ‘power of leverage’. Being able to borrow up to 105% of the funds required to invest means that lenders are comfortable with property as an investment and you use other people’s money!
- Legislation that allows limited recourse borrowing within an SMSF for property is an endorsement of the strategy as a safeguard against the sudden erosion of retirement funds.
- Favourable tax treatment. Rather than ‘crowd out’ more efficient private sector activity, government provides tax incentives for individuals to invest thereby increasing the supply of available housing. New product in particular is encouraged because of the multiplier effect on the economy and employment specifically.
- Tax on any capital gain is deferred until the asset is sold
- Rental income is reliable, it isn’t subject to ‘management performance’, the returns are contracted in a tenancy agreement and are protected by Landlord Insurance
- Interest rate rises usually mean less people buy their own homes and therefore demand for rental properties rise. All things being equal this should translate into higher rents.
- Investment in property is socially beneficial. Private sector activity is encouraged through negative gearing and results in a more efficient allocation of resources.
- Risks can be mitigated further through insurances
In practice both supply and demand are fashioned in the wider context of economic growth, inflation, interest rates, government policy and employment prospects and of course consumer sentiment.