Surviving the Residential Property Market

By Peter Karvon – December 2015

How interesting are the moods and attitudes of the property pundits. When things are good they can never end and when things are bad they will only get worse.

Property can in many ways be treated like trading shares, with many losing all gains between down turns and up turns. This is certainly the case when considering property development, commercial or industrial properties.  The residential market should never be treated this way.  Residential property or should we say shelter (in economic terms) is considered a necessity in life and as such reacts considerably different to normal trading.  This trading is motivated by much more than making and losing money.

When looking back over the years I’m reminded of Tom, who always told me to – “wake up son they’re not making any more land”.   Simplistic and easy to sell to a young naive kid, until you realise that “they” are building more and more, making them smaller or more dense in the process.  So supply is not a limiting factor, we are going higher and higher to ensure that we don’t have to travel far to work. In fact today’s internet world we are able to move further and further away and take our work with us.

Housing is now coming in many forms and the belief that we will run out is absurd. Properties are becoming smaller with less emphasis on living your life in your home and more interest in living life outside the home. Having a property mortgage and commitment to ensure your future, is beginning to fade into an obscurity of the past. Enjoyment and flexibility with alternative investment opportunities are now becoming much more common in the modern world. Housing is now expected, in socially conscious countries, to be provided by rich landlords or the government. The tenant of today occupies a property with greater power over the possession of that property than ever before.

In Australia, as I have said, we have had an unhealthy appetite for property, which is surprising, considering the amount of land available. Our investment in property has seen returns dwindle and reliance shifted to capital gain. The residential real estate market in Australia is now one of the most expensive in the world. Given the size and state of our economy, a correction was always inevitable.  We have unwittingly become victims of the Global Financial Crisis (GFC) even though we appeared to survive its 2008 influence.

Australia had been a spectre of light and a financial safe haven for the rest of the world during the period since the GFC.    A sound balance of trade and strong economy (as a result of our mining industry) provided a platform to allow government intervention and stimulus that underpinned us through the world’s turbulent economic time throughout.   As a result we have attracted considerable overseas investment into the country in the form of property investment that fuelled the market to this point.

With changing Government policy and tightening finance both here and abroad, our Asian partners have retreated to their origins. China’s shadow banking system appears on the verge of adjustment and many economists and share markets throughout the world are monitoring this intently.

The unprecedented volume of residential development in Sydney and Melbourne is the most concerning aspect of a slowing market. Low interest rates make an appealing case for continued investment however; high volumes of supply suggest a weakening in returns.   Is a 2-3% return the new norm for residential investment in property.   If so, does this pose a greater strain on the negative gearing cycle for the government tax system?  This level of development should be providing the basis of a stronger economy, yet the economic data to date is suggesting an alternative view.   Unemployment figures are questioned daily with many choosing to ignore government numbers.

Our population is growing at a greater rate than expected. Or is it?   Sydney into the third millennium a publication that was prepared by (the then) Department of Planning provided the blueprint which suggested a greater Sydney population of 4.5 million by 2011.   Sydney is very close to that – mark no surprises here. So this construction boom for our unexpected population boom has always been expected.   These figures have been extrapolated from an estimated annual growth of 50-60,000 suggesting that the purported 150-200,000 annual number may be over stated.

 As information and predictions are being correlated the content will always be questionable as much of the information gathering is inconstant.  A combination of local forces, external interests, government mismanagement, greed and the misinformation has created a melting pot of possibilities.  Be careful, watchful and sceptical as 2016 may have a lot of surprises.  I like the looks of the commercial and industrial property markets as an alternative.