How Good A Bet Are Australian Properties?

I recently bought two houses in Australia. One was an apartment with sea view in St Kilda. Another a townhouse in Tingalpa.

Melbourne, St Kilda

The reasons that I bought this apartment:

1. Foreigners are only allowed to buy new properties. You have to be very careful and compare against the surrounding EXISTING properties. Many of the properties marketed in Singapore are 30 - 40% above the existing properties. How on earth are you going to make a profit when you buy NEW at 35% higher and sell to locals? You'd probably need to wait 7 years to breakeven!

2. I bought this project because the surrounding area's median apartment prices are around AUD550k or 650 psf. The ranges are from 430k - 700k, or 550 psf - 750 psf. Those with sea views are around 600 - 700k. I bought mine at 630k. This is at a 15% premium to surrounding existing projects and at about the same price as the existing ones facing the sea.... I did not pay a huge premium for my house.

3. I wanted to buy an apartment at Caulfield North, near Monash Caulfield campus. The price for 2 beds 2 baths were around 600k, same price. But the rent in Caulfield is around 380 per week, translating into 3.3%, while in St Kilda, it is around 550pw, translating into 4.5% gross yield. I agree that Caulfield is a better location because it has less supply, being further away from the CBD where it's over supplied. St Kilda is 7 km from CBD, while Caulfield North is around 10km. Caulfield's tenant market is university students, while St Kilda's target market is executives who want a beach life and party life.

4. My project is a small project that is medium density. There around less than 120 units in the project and no swimming pool or expensive gym equipment to maintain. There is a carpark allocated. It makes my body corp fees lower and when the project is completed at least there won't be massive competition for tenants or in the resale market.

5. The downside is around 70% of residents in St Kilda are tenants / investors. The ideal mix is 50/50.



View from the fifth floor. Expected sea view

View towards the CBD

10 minutes' walk from the beach. Seriously! I've walked the site

Pubs and Nice Restaurants In St Kilda

Brisbane, Townhouse in Tingalpa

This is an interesting project. I bought it by researching on the internet. I didn't want another stupid condo or apartment that Asians love to buy, within the CBD. I wanted a land and house package or townhouses. Here's why I bought in Tingalpa

1. It is low density housing. Just 40 townhouses in a project overlooking a nature reserve. You should know by now that I have never bought in a huge, spanking new project because I believe the fewer competitors the better. Demand vs supply duh...

2. 70% of residents in the suburb are owner-occupiers. This is a good blend because investors tend to go for higher yields and thus are price sensitive. Owner-occupiers buy more for emotional reasons. E.g. near good schools, amenities, near workplace, good area / neighbours.

3. Huge land area of around 2000 sf. It is however strata titled so I cannot make external alterations to the house to add value.

4. Two parking lots, one of which is an internal garage.

5. Near several good primary schools and pre-schools.

6. At AUD398k, for 3 bed 2 baths and 2 carparks, and on 1600 sf of built up area, the price is well below the median price in Brisbane. The surrounding townhouses in the suburb go for around AUD330 - 370k. With the median at AUD350k. I'm paying around 12% premium which is not ideal but tolerable for me. The houses are asking for between AUD420 - 600k

5. The downsides are: a) 13 km from the CDB, b) no public transport, c) still searching for that elusive house in established suburbs.

My Prognosis

1. It is not easy to invest in Australian properties for foreigners. We are only allowed to invest in off plan properties and sell them to locals. Most of the off plan properties marketed in Singapore are marked up by 20 - 50%, with commissions to agents from 3% - 10%! You will not breakeven until 7 - 10 years later.

2. Because of the FIRB ruling, foreigners are not free to choose suburbs that are established and mature. I wanted to buy a house but those eligible for foreigners are in far flung areas like Myrnda, or in poorer suburbs like Maribyrnong.

3. Of the capital cities, Sydney, Brisbane and Melbourne appear most promising. The mining sector is consolidating, and into the production phase, making Perth and Darwin dangerous places to invest.

4. The supply- demand dynamics favours Sydney the most, particularly houses. There is simply insufficient supply of houses in the major capital cities. 2/3 of dwelling approvals are for units (townhouses and apartments).

5. Sydney will each supply-demand equilibrium in 2016 for units, but not for houses. In Perth, there is already an oversupply of units. In Melbourne, the oversupply is already happening in the CBD, with silly Asians snapping up units that will remain unoccupied. Brisbane also will have oversupply in units.

6. I am not overly bullish on Australian properties, coupled with the foreigner restrictions, I would be very cautious. I'm expecting my St Kilda apartment will achieve only 3-4% per annum of capital appreciation and another 4 to 5% of gross rental yield for the next five years. However, from 2019 onwards, when all the newbuilds are finished, St Kilda will become a mature area. The oversupply in the CBD area will also be 70% absorbed. I believe capital appreciation from 2019 onwards will rise to 5-6% per annum with another 4.5 - 5.5% gross rental yield. If you have a house in St Kilda, I reckon the capital returns will double, but the rental yields halve of units. But remember, it is capital gains that make you rich!

7. Tingalpa will appreciate faster, around 4 - 5% of capital appreciation and 4.5 - 5.5% gross yield. This is because my entry point is lower than St Kilda's. There is no public transport, which is the only flaw in the area. So eventually if the city becomes more dense and the public transport network expands, Tingalpa will be a beneficiary. Remember, the closest suburb, Clarindale's townhouses are going for 420 - 500k!

Is property a good investment? | Dr. Shane Oliver

• Michael Yardney
• Michael Yardney's Commentary, Property Investment, Where to buy investment property
• September 27, 2014

---

In his latest update Dr. Shane Oliver Head of Investment Strategy and Chief Economist at AMP Capital, discussed whether property is a good investment and the current state of play in the Australian residential property market.
Obviously a very relevant question for the 1.7 million property investors in Australia.

His key points were:

The Australian housing sector is doing its part in helping the economy rebalance as mining investment slows.

• Thanks largely to a persistent undersupply of new homes, Australian housing remains overvalued. Negative gearing, foreign and SMSF buying are just a sideshow to the supply shortage.
• The home buyer market is still not seeing the bubble conditions of a decade ago, but the market is too hot in parts and the risks have grown.
  Expect increasing jawboning from the RBA with a rising likelihood of credit growth restrictions for investors if it doesn’t slow soon.
• The medium term return outlook for residential property is likely to be very constrained.

More details:

As the mining investment boom deflates, in order for Australia to rebalance its economy, a pick-up in demand for homes and house prices in response to lower interest rates, sending a signal to home builders to build more homes was essential. Fortunately, it’s occurred.
The RBA (belatedly in my view) got rates down, home buyers returned, home prices rose and we are now in the midst of a dwelling construction boom.
The housing sector is doing its part!
But it seems that there is nothing that gets Australians going more than what’s happening with house prices. Are they in a bubble? Is negative gearing to blame? Or is it foreign buying? Will it burst? Should the Reserve Bank slow it down?
Is housing a good investment? This note looks at the current state of play in the Australian residential property market.

Australian housing remains overvalued

Australian housing remains overvalued on most measures. But then again this has been an issue for more than a decade. For example, while a bit more extreme than my own view at the time, the OECD estimated that Australian house prices in 2004 were 51.8% overvalued.
This compared to just 1.8% for US housing and 32.8% for the UK. While real house price weakness through 2010 to 2012 saw the degree of overvaluation diminish, the problem is returning with a vengeance:

• According to the 2014 Demographia Housing Affordability Survey the median multiple of house prices to household income in Australia is 5.5 times versus 3.4 in the US.
• On the basis of the ratio of house prices to rents adjusted for inflation relative to its long term average, Australian houses are 30% overvalued and units 17% overvalued.
• The ratios of house prices to incomes and rents in Australia are 23.5% and 40.9% above their long term averages respectively, which is at the higher end of OECD countries.
  This contrasts with the US, which is near the lower end in the OECD.

Source: OECD, AMP Capital

• And on my favourite measure, real house prices have been running above trend since 2003.

Source: ABS, AMP Capital

What’s to blame for high house prices?

There are two main drivers of the surge in house prices over the last two decades. The first was the shift to low interest rates.
Lower rates enabled Australian’s to borrow more for a given level of income and so pay each other more for homes.
As can be seen the shift in house prices from below trend to above (as derived from the last chart) has gone hand in hand with an increase in the ratio of household debt to income.

Source: ABS, RBA, AMP Capital
The trouble is that the shift to low interest rates occurred in many other countries and most did not have anywhere near the surge in house prices or household debt Australia had, implying a heavy speculative element in driving prices higher as well.
I have long thought this surge in household debt and relative house prices represents Australia’s Achilles’ heal. Should anything go wrong with the ability of households to service their debt Australia would be at risk. Fortunately it’s hard to see the trigger for this in anything but a small way.
The second reason is a lack of supply. While the US saw a property price surge into 2006 matched by a supply surge, supply in Australia has been subdued due to restrictive land supply policies and high stamp duty and infrastructure charges.
The National Housing Supply Council estimated a few years ago that since 2001 Australia had a cumulative net shortfall of over 200,000 dwellings. Reflecting this, residential vacancy rates remain relatively low.

Source: REIA, AMP Capital
Given the supply shortfall, most of the scapegoats that various commentators have come up with to explain high home prices are a sideshow.
Foreign and SMSF buying is no doubt playing a role in some areas but looks to be small.
Negative gearing is more contentious, but it’s likely that curtailing access to it when stamp duty remains very high will have a negative impact on the supply of property to the extent that it will have the effect of reducing the after tax return to property investment.
Restricting negative gearing for property would also distort the investment market as it would still be available for other investments.

Rising risks

Our assessment is that the Australian property market is not at the bubble extreme it was at a decade ago: the overvaluation is a bit more modest; annual housing credit growth for owner occupiers and investors is running at around one third the pace seen in 2003; Australians don’t seem to be using their houses as ATMs against which debt can be drawn suggesting they are less comfortable regarding the outlook and debt; and the home price gains now have been over a shorter period and are concentrated in just Sydney & Melbourne. However, danger signs are emerging:

• After a cooler period during the first half of the year the property market seems to be hotting up again. National average home prices rose at an annualised 16.8% pace over the 3 months to August according to RP Data and auction clearance rates are at or above last year’s highs.

Source: Australian Property Monitors, AMP Capital

• The proportion of housing finance commitments going to investors is now back to around the 50% high seen a decade ago, suggesting that the market is becoming more speculative.
  And there are signs that home buyers are starting to extrapolate recent strong price gains into the future which is very dangerous.
• The proportion of housing finance commitments going to investors is now back to around the 50% high seen a decade ago, suggesting that the market is becoming more speculative.
  And there are signs that home buyers are starting to extrapolate recent strong price gains into the future which is very dangerous.

Taken together these indicators warn that the housing market is getting a bit too hot.

Policy implications

The heat in the home buyer market is clearly starting to concern the Reserve Bank with its Financial Stability Review indicating that it’s becoming concerned about speculative activity in the property market and the risks this poses to the broader economy when the property cycle eventually turns down.

Normally with the property market hotting up the RBA would start to think about raising interest rates but right now it’s loath to do this given uncertainty regarding the rest of the economy and the risk a rate hike would put upwards pressure on the still too high $A.
As a result APRA is more closely monitoring the banks and the RBA and APRA are now discussing steps that could be taken to ensure sound lending practices are maintained with a focus on investors.
The latter would involve the use of macro-prudential controls to slow the housing market – which is really just a fancy term for the old fashioned credit rationing that used to be applied prior to the 1980s.
This could involve limits on loan to valuation ratios, forcing banks to put aside more capital or forcing banks to impose tougher tests when granting loans.
Such approaches all have problems: they tend to work against first home buyers; if they target investors as looks likely they work against a group of lower risk borrowers; people can start to find their way around them; and their impact is hard to gauge.
The best approach is for the RBA to first ramp up its efforts to warn home buyers of the need to be cautious. But if that fails in quickly cooling the property market, expect an announcement from APRA and the RBA on lending restrictions likely targeting investors in the next few months.

Housing as an investment

Notwithstanding the rising risk of macro prudential controls, in the short term further gains in house prices are likely until the RBA starts to raise interest rates probably around mid-next year, soon after which another 5 to 10% property price down cycle is likely to start.
Beyond the short term it’s worth noting residential property has provided a similar long term return as Australian shares, with both returning around 11 to 11.5% pa since the 1920s.
They are also complimentary to each in terms of risk and liquidity and are lowly correlated.
All of which means there is a case for investors to have exposure to both.
At present though, housing looks somewhat less attractive as a medium term investment.
The gross rental yield on housing is around 3.2% and for units is around 4.4% giving an average of just 3.8%. After costs this is just below 2%.
Shares & commercial property both offer much higher yields.
Medium term capital growth is also likely to be limited, with the overvaluation likely to see real house prices stuck in a 10% or so range around a broadly flat trend.
This is consistent with the 10-20 year pattern of alternating secular bull and bear phases evident in the second chart in this note.
Taken together this suggests that a realistic expectation for total returns from residential property over the medium term is just around 4 to 5% pa.
Source: Oliver’s Insight

Challenges Facing Retail / Office Spaces

This article summarises what worried me for some time. I believe the following trends are already happening:

1. Number of shopping malls will consolidate, as internet shopping takes away more and more market share. Already, my family orders baby things, groceries, furniture online. They are around 20 - 30% cheaper. Only F&B outlets and shops that provide services, e.g. mobile phone repairs, will survive.

2. Office space demand will slow down as companies increasingly allow employees to work from home. It saves the company money. Already some banks encourage "hot desking", which is the sharing of desks.

3. Warehousing and logistics demand will increase at the expense of retail space. Online shops need an unglamorous place to store goods. Sing Post, DHL and UPS will benefit because instead of consumers travelling to malls, the goods are delivered to homes.

4. Residential homes will always be in short supply as people work at home increasingly. Houses with outdoor spaces, and in Singapore, large apartments with 1500 sf, with ample communal facilities will become rarer.



http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2014/09/19/3-trends-could-affect-these-real-estate-investments

3 Trends Could Affect These Real Estate Investments

Telecommuting and online shopping are changing real estate investments.

What is the future of shopping malls and how will it affect REITs?

By Peter Miller Sept. 19, 2014 | 9:48 a.m. EDT + More

Real estate investment trusts, or REITs, have been around for more than half of a century, but given fundamental changes in the national economy, you have to wonder if REITs can evolve and catch the latest trends.
REITs were first authorized under the Cigar Excise Tax Extension of 1960. In basic terms, there are equity REITs, which own large properties such as malls, office towers and apartment projects and get their money largely from rent, and mortgage REITs, which hold mortgages and mortgage-backed securities. Most REITs are equity REITs.
REITs are shareholder-owned. As with any investment, share values can rise and fall. Unlike listed companies, however, special rules apply to REITs. According to the National Association of Real Estate Investment Trusts, “at least 75 percent of a REIT’s total assets must be invested in real estate; and at least 75 percent of gross income must be derived from real estate sources, such as rents from real property, interest from mortgages on real property or sales of real estate investments. REITs also must be widely held, with more than 100 shareholders and no fewer than five individuals owning more than 50 percent of their stock.”
What REITs really do is give small investors the chance to own big real estate properties, properties with economies-of-scale normally off limits to all but the rich and famous. The catch is that the traditional assumptions which power such investments are now in flux and so one has to ask: Can REITs evolve with the times?

Shopping Malls. Depending on who you ask, shopping malls are either on the way out or on the verge of a massive rebirth. In either case there will be fewer of them. According to Jeff Macke, host of Yahoo! Finance's "Breakout," and a former hedge fund manager, “a decade ago there were more than 1,100 enclosed shopping malls in the U.S. Since then, more than 400 have either been 'repurposed' or closed outright.” Macke estimates that in 20 years the number of shopping malls will be halved.
For REITs, the challenge is obvious: If malls are closed and abandoned, then where are the rents? Or, are malls closures a good thing, a chance to create new revenue streams by building town centers, community colleges, mixed-use properties and other hubs?
Online shopping. Today, online revenues represent about 6.5 percent of all retail sales, and for an example, it's hard to miss Amazon, a company which racked up nearly $75 billion in online sales in 2013. In theory, it's money that may have once have gone to malls and strip centers, money those malls certainly could have used. However, blaming the demise of shopping malls on online shopping alone is not right.
First, the real issue represented by online retailers is choice. You can go to the mall today, see and touch whatever you want, then check prices with a cell phone (a practice known as showrooming) and have items delivered to your front door – often with no charges for shipping or taxes. Or, you can simply skip the mall, save gas and avoid parking hassles by shopping online.
For REITs, the question is where the new opportunities created by online commerce can be found, an area sure to grow. For instance, if REITs can own malls then why not fulfillment centers and server farms? Maybe the property mix should be changed to include more strip centers, places where people can pick up both milk and online orders. Or perhaps the highest and best use of today's shopping centers is not as a mall at all, but as a something different, such as a mixed-use development.
Second, a bigger problem than eCommerce is the changing retail mix. Over time, many department stores have disappeared – think of Filenes, Bullock's, Thalhimer's, Strawbridge's, Hecht's, Woodward & Lothrop, I Magnin, Wanamaker, Jordan March, Marshall Field's, Daytons, Sterns, Garfinklel's and J.M Fields. These stores had enormous footprints and were crucial anchors for many malls but as they have merged or gone out of business, the necessity for such vast spaces has declined.
Even on a smaller level, the squeeze is on. Office Depot and Office Max have merged. Radio Shack is closing more than 1,000 outlets and Staples has announced plans to close 225 stores.
Mall foot traffic is down nearly 15 percent during last year's holiday shopping season, according to the research firm ShopperTrak, and you can see the results in food courts: Sbarro, the pizza chain, is closing 155 outlets while Hot Dog on a Stick filed for bankruptcy in February and was sold for $12.2 million in August. Translation: If stores close, there's less reason to go to a mall, and with less foot traffic, food courts feel the impact.
For REITs, online shopping presents a host of unknowns. It's here, it has wallop and yet it also represents potential opportunities. How can local retail outlets best harness the Internet? We don't know yet, in part because the retail arena remains in flux.
Telecommuting. There was a space for “work” and a space for “home,” but now the two are increasingly intertwined. More employees bring their work home while remote homeworkers may never see the inside of an office tower. In both cases, the idea of a 9-to-5 workday has become both quaint and outmoded: curiosities from a vanishing era.
What we know about telecommuting is that the use of traditional workspace is eroding. The United States Census Bureau tell us that in 1997, 9.2 million people out of 132 million in the workforce labored from home at least one day a week. By 2010, we had 142 million people in the workforce and 13.4 million worked from home at least some of the time.
In other words, over a period of 13 years, the workforce increased by 10 million people. Of this increase, 42 percent are not going to an office park or downtown tower on a daily basis, if at all. In fact, it's increasingly routine for remote workers to have never met co-workers or visited company offices, people and places who may be thousands of miles away.
Today's office space has a valuation of roughly $1.25 trillion nationwide, so even small changes can represent big dollar shifts. According to Tim Wang, director and head of investment research for Clarion Partners, an investment firm, in article for CoStar Group, a producer of real estate research, the ideal amount of space set aside per employee has gone from 250 square feet to 195 square feet. The implications are enormous.
First, fewer office workers also mean fewer commuters and less road wear, which is positive for many metro areas and something local governments have reason to encourage. Second, with shared space and remote workers, companies need less commercial footage.
What are office-owning REITs to do in the face of such trends? Should they transform existing structures with good locations into residential properties? Should they upgrade office spaces for greater efficiency? Could they sell off office assets and invest funds elsewhere? There's no one answer and certainly there's no universally “right” response.
In the end, REITs are tied to big real estate and big real estate is in a period of transition. It's a moment of opportunity, but what is the opportunity? Time will tell.
Peter Miller is a nationally-syndicated real estate columnist and the author of six books published originally by Harper & Row. He blogs regularly at OurBroker.com. He is also a contributor to Auction.com. 

Why Stock Markets Won't Collapse From Now Until End 2015

1. ECB has just launched LTRO. It is lending cheap cash to banks which in turn have to lend it to SMEs. This will boost the Euro economy.

2. ECB has not finished easing yet. I reckon the central bank could engage in QE for another year as even "core European" countries are falling into a recession.

3. Europe's valuations of 17x historical is not cheap. But earnings are likely to be 15 - 30% at the inflexion point in 2014 and stabilise to 7 - 14% thereafter. I expect the stock markets can give around 10 - 20% return in 2015.

4. The US is recovering. QE is ending. we will see a long period of interest rates staying flat, until perhaps mid 2015. The most important signal by Janet Yellen is that overnight rates will end up at 1.35% end 2015. This is a 1.10% climb in interest rates. The S&P500 will grow by around 5 - 15% in 2015 because PE multiples are already at the 1 standard deviation above median mark. Anything beyond that would be a bubble and I would exit, which I haven't.

5. China is a big worry, as it tries to balance between stimulating the economy and preventing a bubble. There is a lot of infrastructure spending required in Inner China. But in coastal China, most of the infrastructure is world class. In fact, too many homes are already built. Because construction accounts for around 40% of GDP, I expect China's GDP to actually, REALLY grow by between 4 - 7%. The SHCOMP should rise by around 15 - 25%, driven by PE multiple expansion because it is 1 standard deviation below median, and earnings growth should come in at between 8 - 15%.

6. As the pace of construction slows down, Australia and other mining countries' exports will surely be hit. The AUDUSD is projected to fall to 0.85 according to RBA. I expect USDSGD to push up to 1.33. If I assume a range of 1.26 and 1.33 USDSGD, AUDSGD will range between 1.07 and 1.1305.  If I take the mid point of the range, which is 1.10, AUDSGD has another 2 - 4% to fall.

7. The bond market will not unravel in early 2015. the interest rate differentials with Eurobonds will still prevent US Treasuries from climbing to high. When ECB ends its easing, we could finally see long term rates sky rocket. Perhaps the 10-yr UST will reach 2.6 - 3.0% in mid 2015, 3.0 - 3.9% in end 2015, and 4.0 - 5.5% in 2016. The SGD bond market will start to unravel in 2H2014 as retail investors stupidly bought low yielding bonds and leveraged to the hilt.

8. Real estate in Singapore will see no respite. Some policies might be rolled back in 2015, but the plunge in rents, rise in mortgage rates will offset the positive policies.

my money is in continental European properties first, followed by US properties. London properties will start to fall slightly from 2H 2015 onwards because of higher mortgage rates. Melbourne, Sydney and Brisbane will peak in end 2015 as fresh supply hits markets. Malaysia will plunge at a sharper pace than Singapore's as higher mortgage rates cause investors to dump properties.

All assets that blew to record high valuations (low yields), due to unnaturally low interest rates will start to unravel. I'm thinking real estate and investment grade bonds.

I believe disasters related to Global Warming, e.g. food supplies, water and sea levels, will hit the headlines more often from 2015 onwards.

Stocks vs Property

According to John Edwards, there is room for both. Stocks can give you superior gains if you cap your leverage at 50% and hold it for less than 2 years. This is because transaction costs are low. But if you hold beyond two years, volatility often causes margin calls and returns disappear.

Property usually have large transaction costs (agent fees of 1%, stamp duties of 3%, legal fees etc of 1%). But you can leverage at 80% safely with little margin call risks as long as you service your mortgages faithfully. If you hold it beyond 5 years, property will beat stocks.

Moral of the story: My stock returns are around 10% per year. With leverage, I'd probably achieve 18.5% max per year. For property, my returns are close to 30% per year. In fact my returns are around 40% IRR over last 8 years and that even beats Quantedge, a top 20 hedge fund in the world!

What is the best investment?

by John Edwards
Founder of Residex Pty Ltd and Consultant to Onthehouse.com.au.
There is an age old question that never seems to get answered in an honest way:
What is the best investment; Houses or Shares?
This newsletter is aimed at giving you an honest, unbiased answer. The question is complex, so I will provide a simple answer here, and then a detailed analysis in the next quarterly State Market Report. Let’s first look at housing market performance in the last month.

In Table 1 – July Market Performance, the outcome for all capital cities and country state data is provided. The market is essentially behaving as we expected, and there is a general slowing or plateau in most markets.
However, the Sydney market is beginning to defy logic; there is again evidence of a resurgence of stronger growth. I say ‘defy logic’, because the median value of a house is now worth a considerable $839,500. Further, the percentage of the median household’s income (after tax) that is being used to service that debt, is 53 per cent. This high level of commitment has caused the market to correct.
Table 1

The consequence of this high level of un-affordability is a surge of growth in the unit market, as units are more affordable. The growth in the house and land market for the year is a high 18 per cent, while the unit market only recorded 14 per cent. However, in recent months, the unit market has started to outperform the growth in the house and land market. In Graph 1 – Sydney Trends, we provide the trend growth rates for these two markets.
Graph 1

The data is a rolling quarterly trend data set. Consequently, it somewhat hides the very recent, stronger growth in the house and land market. In May and June, growth was sub 0.5 per cent, but in July the growth rate was 1.7 per cent. Growth in the unit market was even stronger at 2.35 per cent.
This market does need to slow a little, to avoid potential problems in the future. With luck, the strong growth in July will not be repeated in August.
While I know we are all pleased to see our asset values increase, continuation of growth at this pace may result in some future adjustments. Steady, moderate growth is best for everyone but the trader – but a housing asset is not the asset class to trade in.
This brings us to our topic: Is housing a better investment than shares?
First some obvious points:

• Assets which are ‘must have’ assets usually have higher levels of growth due to constant demand. Housing is a ‘must have’ asset;
• It is unique in that we are all users of housing of some form;
• It is generally thought to be understood by most. Most think it is a very safe asset to own;
• Housing has a slightly negative correlation with other asset sectors. That is, there is a slight tendency for housing to rise in value when other asset sectors fall in value;
• There can be few lies about a property. It can be personally audited by inspection and other professionally employed people. This is in contrast to a share purchase where you are dependant on the company directors telling the truth, and behaving in terms of law and corporate regulations;
• Housing is rarely worth nothing. Shares however, can leave an investor with no value;
• Bankers typically lend more against the housing asset, and at a lower interest rate;
• The housing market by value is very substantial. It is estimated that the total value of all residential property in Australia is approximately $5 trillion, while the stock market is estimated to be around $1.5 trillion; and
• Today the housing market is an asset class in which there is significant information about its performance and characteristics.

It would be unbalanced to present the positives without considering the negatives of a housing investment. There are a few very important considerations:

• Housing Investment is relatively illiquid. That is, you can’t decide on a particular day that you need to dispose of a property. It can take many months to sell;
• It is not easy to identify its market value;
• Any investment in housing is a large investment. Today it will be in the hundreds of thousands; and
• It is difficult to diversify and spread your risk across many markets simply because of the cost of each housing investment.

Overall, investment in housing is probably a lower risk than share investment. This can be proven, and will be explored in some detail in our October report. Perhaps the more important question is; is an investment in housing likely to provide a better total return than an investment in shares?
I have read many reports that indicate the share market is the better performer. However, this is only true some of the time. Reports achieve this notion by considering particular time frames which happen to favour the share market. Equally, these reports do not take account of the higher level of risks in the shares.
Quality analysis involves examining, over the long term, a large number of different investment periods being made at all possible times. Then the median outcome, with respect to each time period, should be drawn from this.
Analysis should also take into account all potential income streams of the assets, and allow for leveraging and taxation.
Graph 2 – Shares vs Property, provides the outcome of such analysis. Again, the assumptions and details of the analysis will be provided in the next State Market Report.
Graph 2

To understand graph 2, explanation follows:
We have taken share and house price data for Sydney for a period going back to 1978. This gives us about 36 years of data. Then, on a quarterly basis, we have made all the possible time based individual investments we can, in both assets, at every quarter during the 36 years. That is, at each quarter we have made a number of different investments for the shortest to the longest time period we can, provided the longest period does not exceed 20 years.
This means that there are a very large number of investment periods for each time period which covers both good and bad time frames for both houses and shares. We then found the median total rate of return the investment achieved at each time period, at each quarter, which ranges from one quarter through to eighty quarters.
Looking at the graph, the investment time period is on the x axis. This means, for example, when you look at number 20 on the x axis, you are looking at the median outcome of all investments made at each possible time period for 20 periods over 36 years.
The plotted returns on the y axis are real, total rates of return. That is, in the case of property, rent plus capital growth and tax benefits less inflation. In the case of shares, dividends are assumed to be fully franked plus capital growth plus any other tax benefits resulting from leverage.
What does the graph tell us?

• Once we get past making an investment for about 24 periods at any point in time over the last 36 years, the most likely outcome is that a housing investment in Sydney would have outperformed the share market (ASX top 200 index). The leverage allowed was 50 per cent for shares, and 80 per cent for houses, as this is basically the leverage that the market, or banks, would allow;
• Short term investments in shares are far better than short term investments in houses. The reason is simple; State Governments have their hand out, and take unfairly from purchases of houses (Conveyancing Duty);
• A housing investment should probably never be made for a period of less than six years;
• Shares are assets which are best traded. If traded well, the returns may be very high. However, this trading should be left to the professional as the risk can be very high.

I have used Sydney as the base case, as it was the market which has performed most poorly over the last decade. Hence, there should not be any discussion as to being selective to achieve a positive outcome for investing in residential property.
So there you have it. If you are looking for more analysis and detail, then it will be available with the next edition of the State Market Report.
Until next time, happy investing and searching for that spectacular investment property.
John Edwards.
Founder of Residex and Consultant to Onthehouse.com.au.

Scotland Stays... Rates Rises Will Hit Properties

I'm done buying properties for this year unless something fantastic comes along. The following could happen in 2015:

1. Real estate: Singapore OCR to fall a further 20%, RCR 15% and CCR 10%. I don't care what people say about pent up money on sidelines. I'm just very sure when interest rates rise, rental prices fall, mayhem comes.

Malaysia: a basket case in Iskandar and KL. At least Singapore's average rental yields is 3% vs mortgage of 1.8%. KL and Iskandar's yield is around 5% vs mortgage rate of 4.5%. The margin is so fine. Many suckers bought condos with zero downpayment.

London: flattish return as MMR bites. Australia: slight rise in melbourne and Brisbane. Houses outperform units. 

2. Investment grade bonds will fall. Yields are so low that silly retail clients chasing after familiar names on leverage will be crushed.

3. Stocks could prove to be the winner.... Especially dividend growers, or companies that pay higher than 4% yields and growing it above 5% per year.

4. Next year promises to be exciting. I'm not sure if the mining industry has turned around. But I believe it may not be the same as in 2014, where every asset class pretty much perform the same as in previous years....

 

Independent Scotland: What would happen next?

Catherine Boyle | @cboylecnbc

Tuesday, 9 Sep 2014 | 4:27 AM ETCNBC.com

244

SHARES

26

COMMENTSJoin the Discussion

Archive Photos | Moviepix | Getty Images

The prospect of Scottish independence, discounted by the markets for months, has all of a sudden become so worrying it might drive traders to a wee dram of Scottish whisky.
Much of the concern has been focused on the potential impact on sterling and Scottish-based U.K. companies.
It's not in anyone in the U.K. government's interest to have an economically crippled Scotland, so a "velvet divorce," with concessions to continuing support of the country's banks, is more likely than the threatened currency upheaval. Yet, with a "basic failure to prepare for the economic and constitutional consequences of an independent Scotland" (according to Oliver Harvey, currency strategist at Deutsche Bank), the U.K.'s elite has been caught napping.
Here, we take a look at the likely consequences from the economics and business perspective.

Scotland: Do the Ayes have it?

UK politics
This is what is really panicking markets – the potential derailment of the established order in the U.K.
The Labour and Conservative (Tory) Party have traded power for decades, and as both have become more centrist in recent decades, there has been general political stability.
With Labour's 40 Scottish MPs out of the picture, the Tories should be guaranteed dominance for generations. Yet this might make it more likely that the U.K. leaves the European Union, a policy increasingly popular with the party's grass roots. Prime Minister David Cameron's personal standing would also be damaged by his government's failure to win this referendum.
With Labour a spent force, the increase in support for the U.K. Independence Party, which appeals to some of the older Labour supporters, might take off.
The general election planned for May 2015 could be shelved until after Scottish independence, expected in March 2016.

Central bank challenge for independent Scotland

Currency
The argument over whether an independent Scotland could keep the pound has been raging for months. Despite U.K. government protests to the contrary, a currency union with fiscal links to the Bank of England is being talked about. The big risk with this option is that both the rest of the U.K. and Scotland are still vulnerable to each other's economic weaknesses, much as Germany was with Greece during the euro zone crisis.
Scotland could also bring in its own currency, pegged to the pound, after a period using sterling but not having its own central bank.
Sterling has risen in recent months as traders bet that the Bank of England would become the first major central bank to raise rates. Scottish independence could derail that, with Nomura forecasting a potential 15 percent plunge in sterling against the dollar in the months following a Yes vote.

Companies
U.K. equities might actually benefit from stronger foreign sales if a Yes vote leads to weaker currency, as close to 75 percent of sales/revenue for U.K.-listed companies comes from abroad, analysts at Citi have pointed out.
There is likely to be a pause in investment in Scotland while the details of independence are thrashed out in Westminster.

Scotland independence: Widnae it work?

Tax
This is one of the areas where the Yes campaign has made a strong economic case. Scotland could cut corporation tax to attract more investment from the kind of companies who have been relocating to Ireland for tax purposes. With the similar attractions of a population which is English-speaking, well-educated but cheaper to employ than Londoners, a lower tax rate might make companies do a double Scotch rather than Irish.

Balancing the books
An independent Scotland would start life with a deficit of 6.4 percent of GDP, if some of its biggest companies followed through their threats to relocate, according to the Centre for Economics and Business Research, a London-based think tank. This contrasts to 4.4 percent for the U.K. as a whole last year.
However, it would benefit from a projected 90 percent of the tax take from North Sea oil and gas revenues – although this is a rapidly declining resource.
There are also early signs that unemployment figures could be affected in Scotland, with recruitment agency Manpower reporting that fewer businesses are looking to hire north of the border.

EU ruffles Scottish feathers in independence warning

To EU or not to EU?
An independent Scotland would have to re-apply to join the EU ahead of divorce from the U.K. in March 2016, so would have to meet the same criteria as other states. This would be one of the key priorities of the 17-month gap between a Yes vote and actually leaving the U.K. Scotland may face opposition from Spain, facing similar problems in its Catalonia region.

What Scottish independence means for US investors

Bank downgrades
Both Lloyds (which bought the former Halifax Bank of Scotland) and Royal Bank of Scotland, the banks bailed out by the U.K. taxpayer, are Scotland-based at the moment – and transferring those liabilities to a new Scottish government would be crippling. However, this alarming prospect has already been dismissed through gritted teeth by the U.K. government, and the Bank of England will likely have to continue to provide liquidity to these banks.
Still, both banks were amongst the biggest fallers in London Monday, on concerns about greater uncertainty in the U.K. generally. On closer inspection, the picture may improve. The cost of lost earnings and changing their tax domicile to London for Lloyds and RBS should be just 2.5 to 4 percent on the stocks, according to Bernstein.

William and wife Kate thrilled at second baby news

Rule Britannia
The Queen would stay as Scotland's head of state – but, if there was a groundswell of anti-monarchical feeling following the country's secession, retaining her as the head of state could be put to the vote.
- By CNBC's Catherine Boyle. Twitter: @cboylecnbc