There are a great many reasons for property having such a strong long-term outlook. Many of the reasons are driven by factors of supply and demand.
The Australian property market is as stable and resilient as a blacksmiths anvil, always taking hits but standing as firm as ever. If we look back over the past, since the early seventies the median house price has doubled every seven or eight years. Even going back a hundred years, that same rate of increase still applies.
Now a smart investor should be asking questions such as, ‘Why should this trend continue?’ or ‘Why are property prices rising again, even before the slowdown is over?’ Ultimately the question is ‘Why is the outlook for property so positive in Australia?’
To answer that question we need to consider the following points:
1. The starting point is the current shortage of 200,000 homes that are needed but haven’t been built yet, because the land hasn’t been developed, held back and strangled by local government bureaucracy.
2. This backlog is increasing at the rate of about 30,000 homes a year. That’s 82 new houses every single day of the year.
3. No surprises then that this led to increased competition to buy and rent available housing stock. Rental vacancies are around 1.5 per cent. When put the other way, rental occupancies are at 98.5 per cent! In addition, seven out of ten houses are selling at auction on a consistent basis. These factors serve to push up prices.
4. The demand for housing will continue to increase due to;
- The increase in the natural population growth rate, for example an additional 150,000 people in 2008 (birth rate less deaths),
- Increased immigration to meet the shortage of skills and to support economic growth. Last year 250,000 more people arrived in Australia than left;
- Changes in social conditions, where a higher divorce rate leads to more houses being required. The average household size has fallen from 4.5 people per household in 1911 to 3.6 people per household in 1954 and 2.7 people per household in 2008.
5. The reduction in the supply of housing has had an impact on developers and builders, with many being cautious as a result of the high costs associated with construction, government charges, and the impact of the economic slowdown.
6. The Australian economy punches above its weight, and is among the best in the developed world.
7. The huge potential of China and its demand for resources. The buzz word today is Liquefied Natural Gas, or LNG. We are among the top exporters of LNG to China, ultimately trying to satisfy the demand for clean fuel, creating the next wave of a resource-led recovery.
8. The federal government actively promotes the investment property concept through tax deductions and the amortization of buildings. Over 10 per cent of Australians already make use of this concept to grow their wealth and save tax.
9. Housing construction costs will continue to increase ahead of the inflation rate. This applies to the cost of new materials as well as labour costs. Building homes is a very labour intensive process. Just think of how many trades are involved. All of these tradespeople are looking to maintain or improve their own standard of living, and the cost of labour will rise accordingly, particularly if there are skills shortages in the future.
10. The price of developed land can only increase due to high development costs and the inability of state governments to absorb them.
CEO McCarthy Group