AMP Capital’s chief economist, Shane Oliver, says residential property is still a solid choice for investors, but places it second to the share market in predicted medium-term (five-year) returns.
Oliver says that, for the past five years, bonds and cash have been ‘the place to be’ and that while yields on bank deposits have been single digit, they’ve still been higher than returns from both shares and residential property.
Now, Oliver says, things have changed, signalling good news for those working in the property market.
“Going forward, shares and to a lesser degree property, are likely to be a better option for investors (depending, of course, on their individual risk tolerance) as global recovery supports growth assets and low yields hamper the returns from bonds and cash.”
Oliver says residential property and shares already offer higher yields than cash and bonds and will benefit as economic growth improves.
“House and apartment yields are running around 3.7% and 4.8% respectively, which are well up from their lows last decade. With mortgage rates well off their highs and likely to fall further the residential property market appears to have bottomed out after falling since mid-2010, with a mild cyclical recovery likely over the next 12 months.”
However, Oliver warns that short-term gains are likely to be restricted to around 5-7% as buyers remain cautious about taking on excessive debt, particularly as job insecurity remains high.
“More broadly, capital growth in residential real estate is likely to be constrained over the next five to 10 years by still very high property prices relative to incomes and rents and house prices still above their long term trends. This suggests that a cyclical rebound in real estate prices over the next year should be seen as part of a broad range-bound market for property prices in real terms as the market continues to work off the excesses that built up over the property boom that started in the mid-1990’s and continued into last decade.”
Oliver says that while ‘good quality properties in sought after locations will no doubt do well, medium term back drop for property returns is likely to remain constrained, though still better than cash and bonds.
“There are two risks for property. The main downside risk is that China has a hard landing with the hit to export earnings, resulting in sharply higher unemployment, forced sales and hence lower house prices…The other risk is on the upside. There is always a concern that the old housing bubble is reignited by the latest collapse in mortgage rates…This seems unlikely though, given Australians have developed a more cautious approach to debt since the global financial crisis.”