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.
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!
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.
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| View from the fifth floor. Expected sea view |
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| View towards the CBD |
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| 10 minutes' walk from the beach. Seriously! I've walked the site |
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| 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
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.
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.
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:
Source: OECD, AMP Capital
Source: ABS, AMP Capital
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.
Source: Australian Property Monitors, AMP Capital
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.
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
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.
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.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
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