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Why you should be wary of the Residential Property market over the longer term

At every backyard BBQ and every dinner party the subject of property prices is never far from people’s conversation. I read a very good article by Shane Oliver, Chief Economist at AMP Capital and have enclosed the link

Essentially, he contends as I do that property is significantly overpriced and in the longer term there are going to be problems. Like every asset class that quickly increases, “reversion to the mean” always cuts in over the longer term, meaning the longer term returns can be negligible, while the asset class catches up. Secondly, people make poor behaviour finance decisions based on FOMO (fear of missing out) which I have written about in previous missives, leading to long term consequences for their wealth creation.

I would suggest to you that the increases to property prices that we have seen and are seeing are completely unsustainable – trees simply do not grow to the sky! Sydney property prices which were outrageously high pre COVID-19, have now increased by a further 14% – the biggest increase in 30 years. Here’s why.

It’s been driven by low interest rates, easy money and government incentives to build both at a Federal and a State level.  The easy money is coming to an end as APRA moves to further tighten up lending controls particularly as the market is now being driven by Investors NOT first home buyers. We may see some reforms similar to what New Zealand has experienced with lending criteria becoming more onerous and more costs and charges. Secondly the Federal stimulus – Homebuilder – has now ended and the smaller state government incentives will start to be wound back. Further, longer term interest rates (which I wrote about previously) are coming to an end. Most loans are currently being fixed and we are definitely seeing an increase in the variable rate.

Immigration which is a key driver of housing prices will not get back to where it was for a number of years. The zero immigration has seen the need for new housing reduce by 100,000 dwellings per annum, but the building is still going on. So as in every bubble, there is going to be a unit/apartment overbuild and that will surface in the next couple of years, once the noise abates.

Remote working and the desire to not have to work in a densely populated capital city can only continue and will act as a driver for demand in outer urban and rural areas.

As I mentioned, for a deeper dive, read Shane Oliver’s article. The key learning is be cautious and keep your level of gearing low.

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