Property may become “the worst investment”

by Miklos Bolza18 Oct 2016
Forecasts of plummeting apartment prices and increases in official interest rates have created the perfect storm for real estate, according to Chris Richardson, economist at Deloitte Access Economics.
“There's an increasing risk that [property] becomes the worst investment in the next few decades. That might happen fast or slow. But every policy maker should pray that it happens slow,” he told the Australian Financial Review.
Although the strategy of betting “double or nothing” on property had worked successfully for now, Richardson said that this couldn’t last forever.
“There comes a point where past performance starts to become a guarantee of an unwinding of future performance,” he said.
These comments came a day before the release of Deloitte Access Economics’ latest Business Outlook which warns that aspects such as the rising home prices in cities such as Sydney and Melbourne leave Australia open to risks later on down the track.
“Interest rates have been too low for too long, and bubbles are bubbling. Yet today’s cheap money will linger,” Deloitte’s analysts wrote. “In cutting rates of late, the RBA has had to ignore solid growth, falling unemployment, eye watering household debt, and housing prices that are more pumped than an ’80s East German Olympic sprinter.”
The fact that apartment developments continue to surge actually creates perverse incentives for developers, Richardson said.
“If you are building apartments now you want to sprint, absolutely get across that finish line and flog yours as fast as you can, leaving problems for those coming down the track.”
He rejected claims that present housing price gains are being driven by increased demand or weak supply, instead saying that the most critical driver was low borrowing costs.
“As the cost of money has gone increasingly close to zero, the cost of housing has increasingly gone atmospheric,” he said.
“At some stage, interest rates will be a chunk higher than they are today. That does mean housing prices in Australia have to live through a very long period of headwinds.”
Richardson warned against assuming the current price gains and low interest rates would continue forever.
“People should not think that current conditions are normal in financial markets,” he said. “And every time you price that into the house you buy or business plans you make, there's more risk in that than is widely recognised.”