The upside case for residential property?

In my articles and posts to date I've probably given a few hints that I'm a property 'bear'. Mind you, the term 'bear' has never really made a lot of sense to me. The performance of one asset is relative to the performance of another (often AUD cash). If you think cash returns are likely to outperform property returns why does that make you 'bearish property' and not 'bullish cash'?

I'm also not of the doom and gloom 'imminent house price crash' mindset. Whilst I agree with the thesis that property is overvalued I don't see this automatically translating to a house price crash. The speed of any house price correction will ultimately depend on liquidity. If banks have trouble rolling their funding— watch out house prices. If the banks keep on rolling their funding (and lending), the property market will probably keep on muddling along sideways, with a slightly downward drift—with the cost of strengthening our banking system continuing to be worn by borrowers through higher margins (sorry retailers).

The simple problem I have with property (other than the fact it is expensive on all known valuation measures) is that I can't see a case for upside. And whenever I can't make an upside case for an asset I view it as an automatic sell.

So this week's blog post takes the form of another open question – Is there a residential property upside case?

We've probably all heard the arguments about demand outstripping supply. The problem I have with this argument is that the analysis seems to consist largely of stating over and over again that 'demand outstrips supply'. I am generally happy to let such analysis pass through to the keeper.

When I look at the major factors likely to impact property prices it seems they already sit heavily in property's favour (in other words, it's all downside from here):

1. Liquidity – the banks are loaded up on housing risk, variable interest rates are near record lows and lending requirements remain loose by historical standards. Sure, we might see a return to circa-2006/7 lending standard craziness. But this seems unlikely with anaemic global growth and Basel III tightening up capital requirements. In fact everything seems to suggest liquidity is only going to get tougher – a big negative for property prices.
2. Interest rates – this partly contributes to liquidity and partly to affordability. But the basic point is that interest rates are near the low end of the range. Again, they may move lower. But this is only likely to be in response to more serious economic problems. We are unlikely to see a resurgence in economic growth and lower interest rates – no upside for property here.
3. Employment – can the unemployment rate get any lower? Is it possible that dual income families might become triple income families? (Tough luck if you're the oldest kid) Could the cost of Indian and Chinese labour take an exponential path upwards – pushing up Australian wage rates (and increasing affordability)? Is Mars about to take over from China in driving universal growth?

I'm trying but I just can't see the story.

To be honest I find the idea of property investing quite romantic. It has emotional appeal. It is something tangible, visible and useful. After all, the kids can't live in a numerical CHESS holding when they go to uni.

But when it's all downside, and no visible upside, the reality of yield, growth and/or capital preservation has to take precedence.

Is there enlightenment to be found?

PS For all the property developers out there (some of whom are friends) I put this in a different category to 'property investing' (aka buy a property, give it a Michael Caton inspired make-over, and watch the price skyrocket). Developing will always make sense if you pre-sell something for far greater than you bought it for. It is those who buy something they think (or hope) they can sell for more who come unstuck.