What Next For Bricks and Mortar Investment?

Housing is the traditional major investment for Australians and over time it has served them very well.

According to the School of Economics the discussion paper A History of Housing Prices in Australia 1880-2010 by the University of New South Wales Australian School of Business, over this period and especially since 1955 housing prices have consistently risen far above inflation and have proved to be good investments. 

Recent price rises throughout Australia and, in particular, the major capital cities have been spectacular with houses almost doubling in price in only a few years. Astute investors have been handsomely rewarded.

In fact, the last 10 years residential investment has provided returns of over 8% with very low interest rates increasing affordability(1). 

It should be remembered that the housing structure will depreciate whilst the land value increases. However increasing building costs somewhat negate the depreciating house asset. Apartment buyers should be aware that they only own a small proportion of the appreciating land value. 

In October 2016 the Reserve Bank of Australia predicted that 16,000 apartments were expected to be completed in the next two years, with 12,000 in Brisbane and 10,000 in Sydney alone. With the likelihood of future increased interest rates, buyers should select investments carefully. 

Investors may need to hold properties long term to make significant increases on purchase prices. 

Despite this, we feel property has a long term proven record of being a good investment in Australia. And, with increasing population, demand remain strong in capital cities.

So, what does this all mean? The glut of new dwellings being constructed across the nation as well as the prospect of interest rate rises in the future are re-shaping market demand. For lenders, this market pressure and tightened regulation suggest more caution will be needed in approving applications.

For investors, changing market demand will mean they need to select investments carefully and think long-term. In short - investing in the Australian property market has become more difficult.
 

(1) Russell Investments 2016 Long-Term Investing Report