Australians love real estate. That’s a fact but what does it mean from an investment perspective?
In reality it’s just another asset class like stocks or government or corporate bonds.
Ultimately the price of property is determined by the market. However, the behaviour of the property market is compromised by a range of factors. For example, Government tax policy – the Federal Government provides tax breaks and the State and Territory Governments exorbitant duty when property’s change hands and sometimes annual taxes. In addition government planning laws often charge high fees to build essential infrastructure costs and restrict new developments.
In relation to housing we can’t ignore the emotional pull many of us feel about owning our home.
According to Shane Oliver from AMP Capital the value of Australian residential housing has, on average, been above its long-term trend for more than 10 years.
The United States and parts of Europe during the GFC had significant asset price corrections in their property markets.
We haven’t been immune. The Melbourne property market has had two enormous corrections. One occurred in the 1830s and the other in the 1880s and 1890s. Both were classic cases of massive asset price bubbles bursting.
The best book on the second correction is “The Land Boomers” by Michael Cannon first published almost fifty years ago and is still in print.
Victoria had been made rich by the gold rush and had a growing population. Because of rapid development its capital city became known as ‘Marvellous Melbourne’. Business and banking boomed and money poured in from overseas. “Thousands of acres of suburban land were subdivided and resold many times, each time at a higher price … anyone, it seemed, could make a fortune in this incredible economy,” writes Cannon.
At its height most of Melbourne was involved in property speculation. Everyone “grasped at the chance of quick wealth and invested their savings. Many borrowed widely to invest more than their assets were worth, and later formed a pitiful kite-tail to the catalogue of insolvencies”, Cannon wrote. They thought they had found eternal prosperity.
Dodgy selling practises from property developers together with lax lending standards created the initial property bubble. In the mid-1880s the banks saw trouble ahead and began to increase interest rates on loans. To fill the void “land banks” were created and the bubble continued.
In 1888 one newspaper said the land boom was over but there was no need to “fear the terrible” outcomes some were predicting.
By the early 1890s every land development company was in liquidation. Unable to face the ignominy of financial failure many prominent businessmen committed suicide in various ways.
With shares on the decline, some well known and trusted company directors falsified balance sheets, paid dividends from non-existent profits and published misleading forecasts. They also sent out dummy bids for their own shares to temporarily prop up the share price while they sold their personal holdings.
In April 1893 the Victorian Government shut the banks for a whole week although two banks ignored the moratorium.
This all begs the question about our current residential property market and whether it’s wildly over-valued?
With any investment, property’s value fluctuates in unpredictable ways. In real estate’s favour is the lack of sufficient housing developments to soak up demand, an increasing population, some interest from overseas buyers, record low interest rates and Federal Government tax incentives.
All markets – when not unduly affected by external factors such as Government subsidies or controls – will ultimately deliver the right price. However this doesn’t mean that the market will always be right. The price you can sell an asset is rarely precisely at fair value.
Wiser heads than me are happy to offer their erudite views on the current state of the property market. As soon as the gurus begin saying that “this time it’s different” or “there is no likelihood of a correction anytime soon” then I know an adjustment is around the corner. The problem is predicting its timing and severity.
Tony Negline is author of The Essential SMSF Guide 2014/15 - http://www.thomsonreuters.com.au/the-essential-smsf-guide-2014-15/productdetail/122289
He may be contacted by email at: firstname.lastname@example.org