Property set to become ‘worst investment’

IF YOU were hoping to join the property investment boom, you may be too late to the party as warnings of a downturn increase.

IF YOU were hoping to join the property investment boom, you may be too late to the party.

The latest expert to warn of a downturn in the property market was economist Chris Richardson of Deloitte Access Economics, who said property was set to become the “worst investment” over coming decades.

Mr Richardson told AFR that a looming bust in apartment prices and the fact that official interest rates won’t stay low forever could lead to a shake-out.

His comments follow a Reserve Bank of Australia warning on Friday about a possible oversupply of inner-city apartments.

It all adds up to a difficult time ahead but Nigel Stapledon of the UNSW Business School said he didn’t think the scariest of scenarios would happen.

Dr Stapledon said it was possible real estate could become the “worst investment” but a rise in interest rates would also impact other investments including the bond market.

“The fact that interest rates are low means that returns (in general) are going to be low,” he said.

Even if interest rates didn’t go up, Dr Stapledon said it was unlikely people would see huge gains like before.

“More recently we’ve experienced people doing very well out of housing but that’s in part because of low interest rates driving asset prices up,” he said. “That’s a one-off and that’s not going to be repeated.”

Without the boost from interest rate changes, property price growth will rely on rent growth, which Dr Stapledon said was likely to be 1-2 per cent per annum. This means capital growth would likely be restrained in the medium to long term.

If interest rates did jump up, this would put pressure on housing prices to fall but this could be counterbalanced by growth in cities that increases demand for housing.

However, prices could also be impacted by the construction of apartments and Dr Stapledon said people sometimes forgot about the cyclic risks.

He said the apartment market was unique because there was such a long lag time between planning approval, the start of construction and completion.

“Quite a high number of units are under construction and will be fed into the market in the next year or two, so there’s a pipeline of work which is unusual,” Dr Stapledon said.

In its warning released on Friday, the Reserve Bank of Australia noted about 16,000 apartments were expected to be completed in Melbourne over the next two years, 12,000 in Brisbane and 10,000 in Sydney.

New apartments are being built in capital cities and could see housing prices drop.

Dr Stapledon said in some respects the apartment pipeline was good, as it was a supply response to the shortage of housing and would take the heat off upward pressure on prices.

“It’s going to flatten out prices, which is a good thing,” he said.

He said Sydney had already gone through a period between 2004 and 2011 when the market wasn’t particularly good but the big falls didn’t happen as predicted.

While this had been helped by the resources boom, Dr Stapledon said there shouldn’t be huge falls this time if immigration was kept at reasonable levels.

“We’ve had periods of pretty flat performance pretty frequently,” he said.

“It’s a good story for affordability issues, these things tend to balance out and we want some adjustment.

“Prices can get ahead of themselves but when you talk about prices falling 30-40 per cent, that doesn’t look particularly plausible to me, those scary scenarios.

“It’s still going to be profitable to go in and some people will still do OK in the real estate market but it’s going to be harder.”