- Australian housing remains expensive by global standards with a ratio of house prices to median household income roughly double that in the US.
- Despite strong growth in rents, rental yields remain low. Gross rental yields of around 5% are well below the 7% plus net rental yields available on directly held commercial property, the 10% distribution yields on listed property trusts and a grossed up dividend yield of 7% from Australian shares.
Secondly, the improvement in affordability has mainly been driven by lower mortgage rates and hence could vanish pretty quickly if interest rates go back up again, leaving many of those who got in recently somewhat vulnerable. This contrasts with the US and UK where a surge in affordability has been mainly driven by the collapse in house prices.
Thirdly, while less of a threat than feared unemployment is still trending up and poses a constraint on house prices. Historically, rising unemployment has been associated with falls in real house prices. See next chart.
Finally, the ending of the first home owners boost from December will also act as a dampener on the lower end of the housing market. These considerations suggest that while a US style collapse has been averted, house prices are unlikely to just go back into boom territory. The more likely scenario is that house prices grow but at a rate below that of nominal incomes such that the ratio of house prices to incomes gradually continues to decline.
That said, given Australia's history with house price bubbles and that much of this can be traced to restrictive land release policies, the risk of another unsustainable surge cannot be ignored. The downside though is that, having dodged a bullet this time, given Australia's very high household debt to income ratio, it would leave Australia very vulnerable to the next global economic downturn.
Housing as an investment
History suggests that once proper allowance is made for costs, residential investment property and shares generate a similar long-term return. This is illustrated in the next chart, which shows an estimate of the long-term return from housing, shares, bonds and cash since 1926.
Over the long-term, the returns from housing and shares tend to cycle around each other at similar levels. In fact, both have returned an average of 11.5% pa over the last 80 years or so.
While housing is less volatile than shares and for many seems safer, it offers a lower level of liquidity and a low level of diversification. The bottom line is that once the similar returns of housing and shares are allowed for, and these characteristics are traded off, there is a case for both in investors' portfolios over the long-term.
Right now after the second worst bear market in the Australia's share market history and with the yield on shares running well above the yield on housing property, shares are arguably a better short-term bet.
Thanks to a housing shortage, less problems with credit quality and a far milder than expected economic downturn, Australian house prices have proven to be pretty resilient.
While they now appear to be on the way up again, a return to boom time conditions seems unlikely. Over the very long-term residential investment and shares have provided similar returns and so there is a role for both in an investment portfolio.
Shane Oliver is head of investment strategy and chief economist at AMP Capital Investors.
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